2010
2010 Annual Report to Stockholders
NYSE: CRY
www.cryolife.com
1655 Roberts Boulevard, NW
Kennesaw, Georgia 30144
PHONE: 770-419-3355
FAX: 770-426-0031
E-Mail: info@cryolife.com
www.cryolife.com
FORM 10-K
Included in this Annual Report to
Stockholders is a copy of the Company’s Annual
Report on Form 10-K for the fiscal year ended
December 31, 2010, including certifications by
the Chief Executive Officer and Chief Financial
Officer, but excluding additional exhibits, as filed
with the Securities and Exchange Commission.
Additional copies of this Annual Report and the
Form 10-K, without exhibits, are available at no
charge. Please send requests to:
Ms. Suzanne K. Gabbert
Corporate Secretary
CryoLife, Inc.
1655 Roberts Boulevard, NW
Kennesaw, GA 30144
STOCKHOLDER COMMUNICATIONS
Directors may be contacted by mail,
addressed c/o Ms. Gabbert at the address
provided above for requesting copies of the
Form 10-K.
STOCK LISTINGS
CryoLife, Inc. Common Stock is traded on
the New York Stock Exchange under the symbol
CRY.
NEW YORK STOCK EXCHANGE ANNUAL
CEO CERTIFICATION
The Chief Executive Officer of CryoLife,
Inc. provided the New York Stock Exchange with
an unqualified Annual CEO Certification last
year.
TRANSFER AGENT
Communications regarding change of
address, transfer of stock ownership, or lost stock
certificates should be directed to:
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
Phone: 800-937-5449
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche LLP
Suite 1500
191 Peachtree Street NE
Atlanta, GA 30303-1924
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
(cid:133)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13165
CRYOLIFE, INC.
(Exact name of registrant as specified in its charter)
Florida
(State or other jurisdiction of incorporation or organization)
59-2417093
(I.R.S. Employer Identification No.)
1655 Roberts Boulevard N.W., Kennesaw, GA 30144
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code (770) 419-3355
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value
Preferred Share Purchase Rights
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:134) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes (cid:134) No (cid:95)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K Section 229.405 of this
chapter is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes (cid:134) No (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a
smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer (cid:134) Accelerated filer (cid:95)
Non-accelerated filer (cid:134) Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:134) No (cid:95)
As of June 30, 2010, the aggregate market value of the voting stock of the Registrant held by non-affiliates of the
registrant was $141,686,892, computed using the closing price of $5.39 per share of Common Stock on June 30, 2010, the
last trading day of the registrant’s most recently completed second fiscal quarter, as reported by the New York Stock
Exchange, based on management’s belief that Registrant has no affiliates other than its directors and executive officers.
As of February 11, 2011 the number of outstanding shares of Common Stock of the registrant was 27,704,394.
Document
Proxy Statement for the Annual Meeting of Stockholders
to be filed within 120 days after December 31, 2010.
Documents Incorporated By Reference
Parts Into Which Incorporated
Part III
PART I
Item 1. Business.
Overview
CryoLife, Inc. (“CryoLife”, the “Company”, “we”, or “us”), incorporated in 1984 in Florida, preserves and distributes
human tissues and develops, manufactures, and commercializes medical devices for cardiac and vascular transplant
applications. The human tissues distributed by CryoLife include the CryoValve® SG pulmonary heart valve (“CryoValve
SGPV”) and the CryoPatch® SG pulmonary cardiac patch tissue (“CryoPatch SG”), both processed using CryoLife’s
proprietary SynerGraft® technology. CryoLife’s medical devices consist primarily of surgical adhesives, sealants, and
hemostats including BioGlue® Surgical Adhesive (“BioGlue”), BioFoam® Surgical Matrix (“BioFoam”), PerClot® , which the
Company began distributing for Starch Medical, Inc. (“SMI”) in October of 2010, and HemoStase®, which the Company
currently distributes for Medafor, Inc. (“Medafor”), although CryoLife expects to discontinue sales of HemoStase in late
March 2011 because Medafor terminated the HemoStase distribution agreement. The Company’s international revenues
were 17% of total revenues in 2010.
Preservation Services and Products
Tissue Preservation Services. CryoLife distributes preserved human cardiac and vascular tissue to implanting
institutions throughout the U.S., Canada, and Europe. CryoLife processes and preserves cardiac and vascular tissue using
proprietary processing and freezing techniques, or cryopreservation. Management believes the human tissues it distributes
offer specific advantages over mechanical, synthetic, and animal-derived alternatives. Depending on the alternative, the
advantages of the Company’s heart valves include more natural blood flow properties, the ability to treat endocarditis, the
elimination of a need for long-term drug therapy to prevent excessive blood clotting, and a reduced risk of catastrophic
failure, thromboembolism (stroke), or calcification. The Company received a Section 510(k) (“510(k)”) clearance from the
U.S. Food and Drug Administration (“FDA”) in February 2008 for its CryoValve SGPV, and in August 2009 the Company
received 510(k) clearance from the FDA for its CryoPatch SG, both processed with the Company’s proprietary SynerGraft
technology. CryoLife uses the SynerGraft technology for a portion of its pulmonary valve and pulmonary cardiac patch
tissue processing.
Surgical Adhesives, Sealants, and Hemostats. CryoLife’s proprietary product BioGlue, designed for cardiac, vascular,
pulmonary, and general surgical applications, is a polymer based on bovine blood protein and an agent for cross-linking
proteins. CryoLife distributes BioGlue throughout the U.S. and in more than 75 other countries for designated applications.
In the U.S. BioGlue is FDA approved as an adjunct to sutures and staples for use in adult patients in open surgical repair of
large vessels. CryoLife distributes BioGlue for repair of soft tissues (which include cardiac, vascular, pulmonary, and
additional soft tissues) in the European Economic Area (“EEA”) under Conformité Européene Mark product certification
(“CE Mark”). In October of 2010 CryoLife announced that BioGlue had received Shonin approval from the Japanese Ministry
of Health, Labor, and Welfare (“MHLW”) for use in the repair of aortic dissections. Additional marketing approvals have been
granted for specified applications in several other countries throughout the world, including Canada and Australia.
CryoLife’s proprietary product, BioFoam, is a protein hydrogel biomaterial with an expansion agent which generates a
mixed-cell foam. The foam creates a mechanical barrier to decrease blood flow and pores for the blood to enter, leading to
cellular aggregation and enhanced hemostasis. BioFoam contains a foaming agent, which has the potential to rapidly seal
organs, such as the liver, and may provide hemostasis in penetrating wounds and trauma. CryoLife distributes BioFoam
under CE Mark certification for use as an adjunct in the sealing of liver and spleen when cessation of bleeding by ligature or
conventional methods is ineffective or impractical. BioFoam has approval by the FDA for an investigational device exemption
(“IDE”) to conduct a human clinical trial with BioFoam to determine its safety and effectiveness in sealing liver tissues in
patients for whom cessation of bleeding by ligature or other conventional methods is ineffective or impractical.
On September 28, 2010 CryoLife entered into a worldwide distribution agreement and a license and manufacturing
agreement with SMI of San Jose, California for PerClot, a polysaccharide hemostatic agent used in surgery. PerClot is an
absorbable powder hemostat that has CE Mark designation allowing commercial distribution into the European Community
and other markets. It is indicated for use in surgical procedures, including cardiac, vascular, orthopaedic, spinal,
neurological, gynecological, ENT, and trauma surgery as an adjunct hemostat when control of bleeding from capillary,
2
venous, or arteriolar vessels by pressure, ligature, and other conventional means is either ineffective or impractical. CryoLife
plans to file an IDE in 2011 with the FDA to begin clinical trials for the purpose of obtaining Premarket Approval (“PMA”)
to distribute PerClot in the U.S.
CryoLife has been distributing HemoStase under a private label exclusive distribution agreement with Medafor, (“EDA”)
since 2008. On September 27 2010 Medafor sent the Company a letter stating that Medafor was "fully, finally and immediately
terminating" the EDA. CryoLife believes this termination was wrongful. CryoLife expects to continue to ship HemoStase
through late March 2011. HemoStase is a microporous polysaccharide hemostatic agent (coagulant). The product is a plant-
based, flowable powder engineered to rapidly dehydrate blood, enhancing clotting on contact. Pursuant to the EDA with
Medafor, CryoLife was the exclusive distributor in the U.S. for cardiac and vascular surgery (excluding Department of Defense
(“DOD”) hospitals) and the exclusive distributor internationally (excluding China and Japan) for cardiac, vascular, and general
surgery subject to certain exclusions. Distribution of HemoStase began in the U.S., Canada, United Kingdom, Germany, and
France in 2008. CryoLife began distribution in other international markets in 2009. CryoLife is currently in litigation with
Medafor related to the EDA, discussed further below in Part I, Item 3, “Legal Proceedings.”
Research and Development
Through its continuing research and development activities, CryoLife uses its expertise in protein chemistry,
biochemistry, and cell biology, and its understanding of the cardiac and vascular surgery medical specialties to develop
useful technologies, services, and products. In addition, CryoLife uses this expertise to acquire and license supplemental and
complimentary products and technologies. CryoLife seeks to identify market areas that can benefit from preserved tissues,
medical devices, and other related technologies, to develop innovative techniques and products within these areas, to secure
their commercial protection, to establish their efficacy, and then to market these techniques and products. In order to expand
CryoLife’s service and product offerings, the Company is in the process of developing or investigating several technologies
and products. Some of the products in development have not been subject to completed clinical trials and have not received
FDA or other regulatory approval, so CryoLife may not derive any revenues from them. CryoLife generally performs
significant research and development work before offering its services and products, building on either existing proprietary
and non-proprietary knowledge or acquired technology and know-how. The Company’s current tissue preservation services
were developed internally. The Company developed its BioGlue and BioFoam products from a technology originally
developed by a third party and acquired by CryoLife. The Company purchased the rights to distribute and manufacture
PerClot from a third party and is in the process of obtaining FDA approval to distribute PerClot in the U.S.
Risk Factors
CryoLife’s business is subject to a number of risks. See Part I, Item 1A, “Risk Factors” below for a discussion of these
and other risk factors.
Recent Events
BioGlue Japan
In October of 2010 CryoLife announced that BioGlue Surgical Adhesive had received Shonin approval from the
Japanese MHLW for use in the repair of aortic dissections. CryoLife's partner, Century Medical, Inc. (“CMI”), will
distribute BioGlue in Japan for use in this subset of cardiac surgery. Prior to distribution, MHLW will need to complete
certain additional steps, most notably review of CryoLife’s quality management system and product reimbursement
paperwork for Japanese authorities. As a result, the Company estimates that distribution in Japan will begin in the first half
of 2011. CryoLife is the exclusive supplier of BioGlue to CMI. The Company estimates that the annual Japanese market for
the use of surgical adhesives in the repair of aortic dissection is approximately $10 million, and the total annual market for
the use of adhesives and sealants in Japan is approximately $150 million.
Strategy
The key elements of the Company’s strategy relate to growing its business and leveraging its strengths and expertise in its
core marketplaces in order to generate revenue and earnings growth. These key elements are described below:
3
(cid:120)
(cid:120)
Identify and Evaluate Acquisition Opportunities of Complementary Product Lines and Companies. Leverage the
Company’s current distribution channel and its expertise in the cardiac and vascular medical specialties by selectively
pursuing the potential acquisition, licensing, or distribution rights of additional technologies that complement existing
services and products.
Expand Core Business. Expand the Company’s core business in cardiac and vascular medical specialties by expanding
the market penetration of heart valves, cardiac patch tissues, vascular tissues, BioGlue, and BioFoam.
(cid:120) Develop the Company’s Pipeline of Services and Products. Develop the Company’s technologies and intellectual
property for additional service and product offerings and commercialization of new services and products.
(cid:120)
(cid:120)
License Company Technology to Third Parties for Non-Competing Uses. Leverage the Company’s current technology
platforms, including its protein hydrogel technology (“PHT”) platform and SynerGraft technology, in medical
specialties other than cardiac and vascular surgery through strategic alliances, licenses, or distribution arrangements for
additional indications or product line extensions. The Company considers licensing or distribution opportunities for
existing products or for products in its research and development pipeline if the Company determines that licensing or
distribution opportunities could enhance shareholder value.
Analyze and Identify Underperforming Assets for Potential Sale or Disposal. Continue to analyze and identify
underperforming assets not complementary to the strategies identified above for potential sale or disposal.
Services and Products
Preservation Services
The Company’s proprietary preservation process involves the recovery of tissue from deceased human donors by tissue
banks and organ procurement organizations (“OTPOs”), the timely and controlled delivery of such tissue to the Company,
the screening, dissection, disinfection, processing, and preservation of the tissue by the Company, the storage and shipment
of the preserved tissue, and the controlled thawing of the tissue. Thereafter, the tissue is surgically implanted by a surgeon
into a human recipient.
The transplant of human tissue that has not been preserved must be accomplished within extremely short time limits.
Prior to the advent of human tissue cryopreservation, these time constraints resulted in the inability to use much of the tissue
donated for transplantation. The application of the Company’s cryopreservation technologies to donated tissue expands the
amount of human tissue available to physicians for transplantation. Cryopreservation also expands the treatment options
available to physicians and their patients by offering alternatives to implantable mechanical, synthetic, and animal-derived
devices. The tissues currently preserved by the Company include heart valves, cardiac patch tissues, and vascular tissues.
CryoLife collects and maintains clinical data on the use and effectiveness of implanted human tissues that it has
preserved and shares this data with implanting physicians and the OTPOs from which it receives tissue. The Company also
uses this data to help direct its continuing efforts to improve its preservation services through ongoing research and
development. Its physician relations and education staff, clinical research staff, and field representatives assist physicians by
providing educational materials, seminars, and clinics on methods for handling and implanting the tissue preserved by the
Company and the clinical advantages, indications, and applications for those tissues. The Company has ongoing efforts to
train and educate physicians on the indications for, and uses of, the human tissues preserved by the Company. In addition,
the Company sponsors programs where surgeons train other surgeons in best-demonstrated techniques. The Company also
assists OTPOs through training and development of protocols and provides materials to improve their tissue recovery
techniques and, thereby, increase the yield of usable tissue.
Cardiac Tissue. The human heart valves and cardiac patch tissues preserved by the Company are used in cardiac
reconstruction and heart valve replacement surgeries. CryoLife shipped approximately 74,600 heart valves and cardiac patch
tissues from 1984 through 2010, including approximately 3,100 shipments in 2010. Revenues from cardiac tissue
preservation services accounted for 24%, 23%, and 24% of total Company revenues in 2010, 2009, and 2008, respectively.
Based on CryoLife’s records of documented implants, management believes that the acceptance of the Company’s heart
valves is due in part to physicians’ recognition of the longevity and natural functionality of the Company’s cardiac tissues,
the Company’s documented clinical data, and the support of the Company’s physician relations and education staff, clinical
research staff, customer service department, and field representatives. Management believes the Company offers advantages
in the areas of clinical data and field services as compared to other human tissue processors and that the Company’s tissues
4
offer advantages in certain areas over mechanical, porcine, and bovine heart valve alternatives. The Company currently
preserves human aortic and pulmonary heart valves for implantation by cardiac surgeons. In addition, the Company
preserves human cardiac patches for surgeons who wish to perform certain specialized cardiac repair procedures. The
Company currently preserves human cardiac patches in three primarily anatomic configurations: pulmonary hemi-artery,
pulmonary trunk, and pulmonary branch. Each of these preserved cardiac tissues maintains a structure which more closely
resembles and more closely simulates the performance of the patient’s own tissue compared to non-human tissue alternatives.
In 2008 CryoLife received 510(k) clearance from the FDA for its CryoValve SGPV, and in 2009 CryoLife received
510(k) clearance from the FDA for its CryoPatch SG, both processed with the Company's proprietary SynerGraft technology.
CryoLife uses the SynerGraft technology for a portion of its pulmonary valve and cardiac patch processing. In June and
August 2010 CryoLife received 510(k) clearance from the FDA for a five-year shelf-life on its CryoValve SGPV and its
CryoPatch SG, respectively. In 2010 56% of pulmonary valves and 19% of cardiac patch tissues shipped by CryoLife were
processed with the SynerGraft technology.
The Company estimates that in 2010 the total annual heart valve replacement and cardiac patch market in the U.S. was
approximately $700 million. Management believes that of the $700 million, approximately $525 million or 75% of the
procedures were for aortic, pulmonary, and tricuspid valve replacements for which the Company’s tissues can be used. The
Company believes that approximately 89,000 aortic, pulmonary, and tricuspid valve replacement surgeries were conducted in
the U.S. in 2010.
Management believes preserved human heart valves and cardiac patch tissues have characteristics that make them the
preferred replacement option for many patients. Specifically, human heart valves, such as those preserved by the Company,
allow for more normal blood flow and provide higher cardiac output than stented porcine, bovine, and mechanical heart
valves. Human heart valves are not as susceptible to progressive calcification, or hardening, as are traditional
glutaraldehyde-fixed porcine and bovine heart valves, and do not require anti-coagulation drug therapy, as do mechanical
valves. The synthetic sewing rings contained in mechanical and stented porcine and bovine valves may harbor bacteria and
lead to endocarditis. Furthermore, prosthetic valve endocarditis can be difficult to treat with antibiotics, and this usually
necessitates the surgical removal of these valves at considerable cost, morbidity, and risk of mortality. Consequently, for
many physicians, human heart valves are the preferred alternative to mechanical and animal-derived tissue valves for patients
who have or are at risk to contract endocarditis.
Vascular Tissue. The Company preserves small diameter human saphenous vein conduits (3mm to 6mm) for use in
peripheral vascular reconstructions and coronary bypass surgery. Failure to achieve revascularization of an obstructed vessel
may result in the loss of a limb or even death of the patient. When patients require bypass surgery, the surgeon’s first choice
generally is the patient’s own vein tissue. However, in cases of advanced vascular disease, 30% of patients have unsuitable
vein tissue for transplantation, and the surgeon must consider using synthetic grafts or preserved human vascular tissue.
Small diameter synthetic vascular grafts are generally not optimal for below-the-knee surgeries because they have a tendency
to obstruct over time. Preserved human vascular tissues tend to remain open longer and as such are used in indications where
synthetics typically fail. In addition, synthetic grafts are not suitable for use in infected areas since they may harbor bacteria
and are difficult to treat with antibiotics. Preserved human vascular tissues are ideal grafts for patients with previously
infected graft sites. The Company also preserves femoral veins and arteries and aortoiliac arteries for bypass or
reconstruction within infected surgical areas.
The Company shipped approximately 61,500 human vascular tissues from 1986 through 2010, including approximately
4,400 shipments in 2010. Revenues from vascular preservation services accounted for 27%, 27%, and 26% of total Company
revenues in 2010, 2009, and 2008, respectively. The Company estimates the aggregate U.S. vascular surgical graft market
was approximately $142 million in 2010. Management believes that of the $142 million, approximately $100 million or
88,000 procedures were for peripheral vascular reconstruction, coronary artery bypass surgeries, and abdominal aortic
reconstruction for which the Company’s tissues can be used. The Company also believes the lower limb bypass market was
approximately 42,000 procedures in 2010 and of these 15,000 were below-the-knee bypasses.
5
Surgical Adhesives, Sealants, and Hemostats
PHT Platform
The effective closure of internal wounds following surgical procedures is critical to the restoration of the function of
tissue and to the ultimate success of the surgical procedure. Failure to effectively seal surgical wounds can result in leakage
of blood in cardiac surgeries, air in lung surgeries, cerebral spinal fluid in neurosurgeries, and gastrointestinal contents in
abdominal surgeries. Air and fluid leaks resulting from surgical procedures can lead to significant post-operative morbidity
resulting in prolonged hospitalization, higher levels of post-operative pain, higher costs, and a higher mortality rate.
Sutures and staples facilitate healing by joining wound edges and allowing the body to heal naturally. However, because
sutures and staples do not have inherent sealing capabilities, they cannot consistently eliminate air and fluid leakage at the
wound site. This is particularly the case when sutures and staples are used to close tissues containing air or fluids under
pressure, such as in blood vessels, the lobes of the lung, the dural membrane surrounding the brain and spinal cord, and the
gastrointestinal tract. In some cases, the tissues may be friable, which complicates the ability to achieve closure. In addition,
in minimally invasive surgical procedures where the physician must operate through small access devices, it can be difficult
and time consuming for the physician to apply sutures and staples. The Company believes that the use of surgical adhesives
and sealants with or without sutures and staples could enhance the efficacy of these procedures through more effective and
rapid wound closure. In order to address the inherent limitations of sutures and staples, the Company developed and
commercialized its PHT. PHT is based on a bovine protein that mirrors an array of amino acids that perform complex
functions in the human body. Together with a cross-linker, the protein forms a hydrogel, a water-based biomaterial in some
ways similar to human tissue. Materials and implantable replacement devices created with PHT may have the potential to
provide structure, form, and function similar to certain human tissues.
BioGlue. BioGlue is the first product to be developed from the Company’s PHT platform. BioGlue is a polymeric
surgical adhesive based on bovine blood protein and an agent for cross-linking proteins. BioGlue has a tensile strength that is
four to five times that of fibrin sealants. BioGlue begins to polymerize within 20 to 30 seconds and reaches its bonding
strength within two minutes. BioGlue is dispensed by a controlled delivery system that consists of either a reusable delivery
device and disposable syringe or a disposable syringe alone. Both systems use an assortment of applicator tips (standard size
tips, 12mm and 16mm spreader tips, and 10cm and 27cm extender tips). BioGlue is pre-filled in 2ml, 5ml, and 10ml
volumes.
CryoLife is authorized to distribute BioGlue throughout the U.S. and in more than 75 other countries for designated
applications. In the U.S., BioGlue is FDA approved as an adjunct to sutures and staples for use in adult patients in open
surgical repair of large vessels. The Company estimates that aggregate U.S. sales for surgical internal tissue sealants were
approximately $260 million in 2010.
CryoLife distributes BioGlue under CE Mark product certification in the EEA for repair of soft tissues (which include
cardiac, vascular, pulmonary, and additional soft tissues). CryoLife has also received approval and distributes BioGlue for
soft tissue repairs in Canada and Australia. As discussed in “Recent Events” above, CryoLife received approval in October
2010 to distribute BioGlue in Japan for use in the repair of aortic dissections. Additional marketing approvals have been
granted for specified applications in several other countries throughout the world.
Revenues from BioGlue represented 41%, 43%, and 46% of total Company revenues in 2010, 2009, and 2008,
respectively.
BioFoam. BioFoam is the second product to be developed from the Company’s PHT platform. BioFoam is a protein
hydrogel biomaterial with an expansion agent which generates a mixed-cell foam. The foam creates a mechanical barrier to
decrease blood flow and pores for the blood to enter, leading to cellular aggregation and enhanced hemostasis. It is easily
applied and could potentially be used intraoperatively to control internal organ hemorrhage, limit blood loss, and reduce the
need for future re-operations in liver resections.
BioFoam received CE Mark certification in August 2009 and initial approval by the FDA in October 2009 for an IDE to
conduct a human clinical trial with BioFoam to help seal liver tissue in patients for whom cessation of bleeding by ligature or
other conventional methods is ineffective or impractical. Since receiving initial FDA approval, CryoLife continued to work
with the FDA to make additional protocol refinements. CryoLife received approval by the DOD in April 2010 to move
6
forward with obtaining necessary Internal Review Board (“IRB”) approvals using the FDA approved protocol. The DOD
granted approval for the initial clinical trial investigation site in September 2010 and patient enrollment was initiated in
October 2010.
CryoLife began a controlled launch of BioFoam at three clinical centers in Europe in 2009 and in 2010 began
distribution of BioFoam in Europe. CryoLife plans to begin distribution of BioFoam in other international markets as
required regulatory approvals are obtained. In the fourth quarter of 2010 the Company began screening patients for
enrollment into the BioFoam IDE clinical trial in the U.S. for the sealing of parenchymal liver tissue. This feasibility trial
will involve 20 patients at two centers in the U.S. Upon successful completion of the feasibility study, a follow-on multi-
center, randomized, and controlled pivotal study will be conducted. The Company expects that this clinical trial will be
funded by grants from the U.S. DOD. The Company estimates that the aggregate European market opportunity for BioFoam
is approximately $30 million and approximately $100 million worldwide. Revenues from BioFoam represented less than 1%
of total Company revenues in 2010.
Hemostatic Agents
Hemostatic agents are frequently utilized as an adjunct to sutures and staples to control inter-operative bleeding.
Hemostatic agents prevent excess blood loss and can help maintain good visibility of the operative site. These products can,
in many instances, reduce operating room time and decrease the number of blood transfusions required in surgical
procedures. Hemostatic agents are available in various forms from pad or sponge form to liquids and powders.
PerClot. PerClot is an absorbable, powdered hemostatic agent used in surgery. The PerClot technology modifies plant
starch into ultra-hydrophilic adhesive forming hemostatic polymers. PerClot particles are biocompatible, absorbable
polysaccharides containing no animal or human components. Utilizing this purified plant source material aids in minimizing
the risks of infection and bleeding-related complications during surgery. PerClot particles have a molecular structure that
rapidly absorbs water from blood, creating a high concentration of platelets, red blood cells, and coagulation proteins at the
bleeding site, which accelerates the physiologic clotting cascade. Upon contact with blood, PerClot rapidly produces a gelled
matrix that adheres to and forms a mechanical barrier with the bleeding tissue. Easy to apply, PerClot does not require
additional operating room preparation or special storage conditions. PerClot is readily dissolved by saline irrigation and is
totally absorbed within several days. PerClot is currently available in 1 gram and 3 gram sizes with a 100mm or 200mm
applicator tip and is expected to be available in a 5 gram size in the first quarter of 2011. PerClot Laparoscopic is available in
1 gram and 3 gram sizes with a 380mm applicator tip.
On September 28, 2010 CryoLife entered into a worldwide distribution agreement and a license and manufacturing
agreement with SMI for PerClot, which has CE Mark designation allowing commercial distribution into the European
Community and other markets. It is indicated for use in surgical procedures, including cardiac, vascular, orthopaedic, spinal,
neurological, gynecological, ENT, and trauma surgery as an adjunct hemostat when control of bleeding from capillary,
venous, or arteriolar vessels by pressure, ligature, and other conventional means is either ineffective or impractical. CryoLife
plans to file an IDE with the FDA in early 2011 to begin clinical trials for the purpose of obtaining PMA to distribute PerClot
in the U.S. The Company estimates that aggregate U.S. sales for hemostatic agents were approximately $730 million in 2010.
CryoLife began distributing PerClot in Europe in the fourth quarter of 2010. Revenues for PerClot represented less than
1% of total Company revenues in 2010. CryoLife plans to begin distribution of PerClot in other international markets as
required regulatory approvals are obtained.
HemoStase. HemoStase is a plant-based, flowable powder engineered to rapidly dehydrate blood, enhancing clotting on
contact. The Company was the exclusive distributor of Medafor’s microporous polysaccharide hemostatic agent under the
private label HemoStase for cardiac and vascular surgeries in the U.S. and for cardiac, vascular, and general surgeries in the rest
of the world (excluding Japan and China) subject to certain exclusions. On September 27, 2010 Medafor sent the Company a
letter stating that Medafor was "fully, finally and immediately terminating" the EDA. CryoLife believes this termination was
wrongful. CryoLife expects to continue to ship HemoStase through late March 2011. HemoStase is currently available in 1
gram, 3 gram, and 5 gram sizes. Revenues for HemoStase represented 8%, 5%, and 1% of total Company revenues in 2010,
2009, and 2008, respectively. See Part I, Item 3, “Legal Proceedings.”
7
Other Medical Devices
ProPatch Soft Tissue Repair Matrix (“ProPatch”). ProPatch, manufactured from bovine pericardial tissue and treated with
the SynerGraft decellularization technology process, is used to reinforce weakened soft tissues and provides a resorbable
scaffold that is replaced by the patient's own soft tissue. ProPatch is intended to be used for implantation to reinforce defects of
the abdominal and thoracic wall, muscle flap reinforcement, rectal and vaginal prolapse, reconstruction of the pelvic floor,
hernias, suture-line reinforcement, and reconstructive procedures.
In late 2006 CryoLife received 510(k) clearance from the FDA for its ProPatch. CryoLife is planning the first in human
implants in early 2011. Additionally, CryoLife is implementing modifications to the manufacturing process that will
streamline the process but will not result in any change to the product’s effectiveness or indications for use. These
modifications will result in a submission of a new 510(k), which is expected to occur in 2011. CryoLife is seeking
commercialization for ProPatch, which may include partnering with one or more third parties as well as obtaining clinical data to
support applications to be marketed directly.
Seasonality and Segment Information
See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Seasonality”, regarding seasonality of the Company’s preservation services and products.
See Part II, Item 8, “Note 16 of the Notes to Consolidated Financial Statements” regarding segment and geographic
information.
Procurement, Distribution, and Marketing
Preservation Services
CryoLife markets its preservation services to OTPOs, implanting physicians, and prospective tissue recipients. The
Company works with OTPOs to ensure consistent and continued availability of donated human tissue for transplant and
educates physicians and prospective tissue recipients with respect to the benefits of preserved human tissues.
Procurement of Tissue. Donated human tissue is procured from deceased human donors by OTPOs. After procurement,
the tissue is packed and shipped, together with certain information about the tissue and its donor, to the Company in
accordance with the Company’s protocols. The tissue is transported to the Company’s laboratory facilities via commercial
airlines pursuant to arrangements with qualified courier services. Timely receipt of procured tissue is important, as tissue that
is not received promptly cannot be cryopreserved successfully. The OTPOs are reimbursed by the Company for costs
associated with these procurement services. The procurement fee, together with the charges for the preservation services of
the Company, is ultimately paid to the Company by the hospital or healthcare facility with which the implanting physician is
associated.
Since 1984 the Company has received tissue from over 110,000 donors. The Company has active relationships with
approximately 50 OTPOs throughout the U.S. Management believes these relationships are critical in the preservation
services industry and that the breadth of these existing relationships provides the Company with a significant advantage over
potential new entrants to this market. The Company employs approximately 35 individuals in donor services and donor
quality assurance to work with OTPOs. This includes three account managers who are stationed throughout the country to
work directly with the OTPOs. The Company’s central office for procurement relations is staffed 24 hours per day, 365 days
per year.
Preservation of Tissue. Upon receiving tissue, a Company technician completes the documentation control for the tissue
prepared by the OTPO and gives it a control number. The documentation identifies, among other things, donor age and cause
of death. A trained technician then removes the portion or portions of the delivered tissue that will be processed. The
Company’s cardiac and vascular tissues are preserved in a proprietary freezing process conducted according to Company
protocols. After the preservation process, the tissues are transferred to liquid nitrogen freezers for long-term storage at
temperatures at or below -135(cid:113)C. The entire preservation process is controlled by guidelines established by the Company
and are conducted under aseptic conditions in clean rooms.
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At the same time the tissue is processed, samples are taken from the donated tissue and subjected to the Company’s
quality assurance program. This program, which includes review of the donor and tissue charts by CryoLife’s tissue quality
assurance department and its medical directors, may identify characteristics which would disqualify the tissue for
preservation or implantation. Once the tissue is approved, it is moved from quarantine to an implantable status. Tissue that
does not pass testing is discarded as appropriate or used for research or other purposes if the donor’s family has consented.
Distribution of Tissue to Implanting Physicians. After the tissue has cleared quality control assurance and the tissue is
moved to an implantable status, the tissue is stored by the Company or is delivered directly to hospitals at the implanting
physician’s request. Cryopreserved tissue must be transported under stringent handling conditions and maintained within
specific temperature tolerances at all times. Cryopreserved tissue is packaged for shipment using the Company’s proprietary
processes. After the Company transports the tissue to the hospital, the Company invoices the institution for its services,
which include procurement, preservation, and transportation. At the hospital, the tissue is thawed and implanted immediately
or is held in a liquid nitrogen freezer according to Company protocols pending implantation. The Company provides a
detailed protocol for thawing the cryopreserved tissue. The Company also makes its field personnel available by phone or in
person to answer questions.
The Company provides Company-owned liquid nitrogen freezers to certain client hospitals. The Company currently has
approximately 290 of these freezers installed at hospitals throughout the U.S. Participating hospitals generally pay the cost of
liquid nitrogen and routine maintenance. The availability of on-site freezers makes it easier for a hospital’s physicians to
utilize the Company’s tissues by making the tissue more readily available. Because fees for the Company’s preservation
services become due upon the shipment of tissue to the hospital, the use of such on-site freezers also reduces the Company’s
working capital needs.
Marketing, Educational, and Technical Support. The Company has records of over 1,400 cardiac and vascular surgeons
who implanted tissues preserved by the Company during 2010. The Company works to maintain relationships with and
market to surgeons within these medical specialties. Because the Company markets its preservation services directly to
physicians, an important aspect of increasing the distribution of the Company’s preservation services is educating physicians
on the use of preserved human tissue and on proper implantation techniques. The Company’s trained medical relations and
education staff and field support personnel provide support to implanting institutions and surgeons. In the U.S., the Company
has 12 cardiac specialists who focus primarily on cardiac surgeons, approximately 30 field service representatives who focus
primarily on vascular surgeons, and six region managers. A small number of these positions are open, and the Company is
actively recruiting for these positions.
The Company sponsors training seminars where physicians teach other physicians the proper technique for handling and
implanting preserved human tissue. The Company also produces educational videos for physicians and coordinates peer-to-
peer training at various medical institutions. In addition, the Company coordinates laboratory sessions to demonstrate
surgical techniques. Management believes that these activities improve the medical community’s acceptance of the tissue
preserved by the Company and help to differentiate the Company from other allograft processors. In October 2010 CryoLife
hosted the third annual Ross Summit at CryoLife’s Corporate Headquarters with 88 cardiac surgeons and cardiologists from
21 countries in attendance. The primary goal of the meeting was to facilitate and encourage the use of the Ross Procedure.
The Ross Procedure is an operation in which a patient’s defective aortic valve is removed and replaced with his own
pulmonary valve, and then a replacement pulmonary valve (typically a valve from a human donor) is surgically implanted to
replace the removed native pulmonary valve.
To assist OTPOs, the Company provides educational materials and training on procurement, dissection, packaging, and
shipping techniques. The Company also produces educational videos and coordinates laboratory sessions on procurement
techniques for OTPO personnel. To supplement its educational activities, the Company employs a full-time technical trainer,
who provides technical information and assistance and maintains a staff 24 hours per day, 365 days per year for OTPO
support.
Surgical Adhesives, Sealants, and Hemostats
In the U.S., the Company markets its products to physicians and distributes its products through its field service
representatives and cardiac specialists. The Company markets and distributes its products in international markets through
direct field representatives employed by the Company’s wholly owned European subsidiary, CryoLife Europa, Ltd.
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(“Europa”), and other independent distributors. Through its field representatives and distributors, the Company conducts
field training for implanting surgeons regarding the application of its products.
European Operations
The Company markets its products in the EEA, the Middle East, and Africa (“EMEA”) region through its European
subsidiary, Europa, based in Guildford, England. Europa, with its team of approximately 25 employees, provides customer
service, logistics, marketing, and clinical support to cardiac, vascular, thoracic, and general surgeons throughout the EMEA
region. Europa markets and distributes the Company’s complete range of products and services through its direct sales
representatives in the United Kingdom, Germany, and Austria and a network of independent distributors in the rest of the
EMEA region. Europa also distributes tissue to certain hospitals in the EMEA region.
Backlog
The limited supply of certain types of donated tissue, primarily for tissues used in pediatric surgeries, that are available
for preservation can result in a backlog of orders for these tissues. The amount of backlog fluctuates based on the tissues
available for shipment and varies based on the surgical needs of specific cases. The Company’s backlog is generally not
considered firm and must be confirmed with the customer before shipment. The Company currently does not have a backlog
of orders related to BioGlue, BioFoam, PerClot, or HemoStase.
Competition
Preservation Services
The Company currently faces competition from at least two non-profit tissue banks that preserve and distribute human
cardiac heart valves, cardiac patch tissues, and vascular tissues, as well as from several companies that market mechanical,
porcine, and bovine heart valves, and synthetic vascular grafts for implantation. Many established companies, some with
financial and personnel resources greater than those of the Company, are engaged in manufacturing, marketing, and selling
alternatives to preserved human tissue. These competitors may also have greater experience in developing products,
conducting clinical trials, and obtaining regulatory approvals. Certain of these competitors may obtain patent protection,
approval, or clearance by the FDA or foreign countries earlier than the Company. The Company may also compete with
companies that have superior manufacturing efficiency and marketing capabilities. Any of these competitive disadvantages
could materially adversely affect the Company. Companies offering mechanical, synthetic, bovine, porcine, or allograft
products may enter this market in the future. Any newly developed treatments may also compete with the use of cardiac
tissue preserved by the Company. Management believes that it competes with other entities that preserve human tissue on
the basis of technology, customer service, and quality assurance.
Heart Valves. Alternatives to human heart valves preserved by the Company include valve repair and valve replacement
with mechanical valves, porcine valves, or valves constructed from bovine pericardium. St. Jude Medical, Inc. is the leading
supplier of mechanical heart valves. Medtronic, Inc. is the leading supplier of porcine heart valves. Edwards Life Sciences,
Inc. is the leading supplier of bovine pericardial heart valves. The Company is aware of at least six companies that offer
porcine, bovine, and mechanical heart valves. In addition, management believes that at least two domestic tissue banks offer
preserved human heart valves in competition with the Company.
Management believes that the human heart valves preserved by the Company, as compared to mechanical, porcine, and
bovine heart valves, compete on the factors set forth above, as well as by providing a tissue that is the preferred replacement
alternative with respect to certain medical conditions, such as pediatric cardiac reconstruction, valve replacements for women
in their child-bearing years, and valve replacements for patients with endocarditis. The Company believes the CryoValve
SGPV enables the Company to compete with other valves by providing a valve processed with a technology designed to
remove donor cells and cellular remnants from the valve without compromising the integrity of the underlying collagen
matrix. The Company also believes that the CryoValve SGPV and the CryoValve SG aortic heart valve (“CryoValve
SGAV”) are important to patient management issues for potential whole organ transplant recipients. Implantation of the
SynerGraft treated cardiac tissue reduces the risk for induction of HLA class I and class II alloantibodies, based on Panel
Reactive Antibody (“PRA”) measured at up to one year, compared to standard processed cardiac tissues. Avoiding elevated
PRA is important for patients receiving SynerGraft cardiac tissues as some of these patients may ultimately require a heart
transplant. While the link between immune response and allograft tissue performance is still being debated, there is evidence
10
that an elevated PRA poses a significant risk to future organ transplant patients. In these patients, an increased PRA can
decrease the number of possible donors for subsequent organ transplants, and increase time on transplant waiting lists.
Cardiac Patches. Alternatives to human cardiac patches preserved by the Company include cardiac repair and
reconstruction with small intestine submucosa (“SIS”) or patches constructed from bovine pericardium. CorMatrix
Cardiovascular, Inc. is the leading supplier of SIS for cardiac repair and reconstruction with its CorMatrix ECM technology.
There are several suppliers of bovine pericardial patches targeted for cardiac repair and reconstruction, including Edwards
Life Sciences, Inc., Neovasc, Inc., and St. Jude Medical. Management believes that at least two domestic tissue banks offer
preserved human cardiac patches in competition with the Company, including LifeNet Health, Inc. which processes allograft
patches using its Matracell technology.
Management believes that the human cardiac patches preserved by the Company, as compared to SIS, bovine, or other
allograft patches, compete on the factors set forth above, and that these tissues are the preferred repair and reconstruction
alternative with respect to processing for defects such as Tetralogy of Fallot, Truncus Arteriosis, Pulmonary Atresia, and
more. The Company believes the CryoPatch SG enables the Company to compete with other patches by providing a patch
processed with a technology designed to remove donor cells and cellular remnants from the patch without compromising the
integrity of the underlying collagen matrix. As discussed above for the CryoValve SGPV and CryoValve SGAV, the
Company also believes that the CryoPatch SG is important to patient management issues for potential whole organ transplant
recipients.
Vascular Tissue. There are a number of providers of synthetic alternatives to veins preserved by the Company and those
alternatives are available primarily in medium and large diameters. Two primary synthetic grafts that compete with the
Company’s vascular tissue for below-the-knee surgery are W.L. Gore & Associates’ Propaten and C.R. Bard, Inc.’s Distaflo.
Maquet, Inc.’s Hemashield woven grafts can be used for aortoiliac aneurysm surgery. Currently, management believes that
there are at least two other non-profit tissue banks that preserve and distribute human vascular tissue in competition with the
Company.
Generally, for each procedure that may utilize vascular human tissue that the Company preserves, there are alternative
treatments. Often, in the case of veins, these alternatives include the repair, partial removal, or complete removal of the
damaged tissue and may utilize other tissues from the patients themselves or synthetic products. The attending physician, in
consultation with the patient, makes the selection of treatment choices. Any newly developed treatments may also compete
with the use of vascular tissue preserved by the Company.
Surgical Adhesives, Sealants, and Hemostats
The Company faces competition from several domestic and international medical device, pharmaceutical, and
biopharmaceutical companies in its surgical adhesives, sealants, and hemostats product lines. Many of the Company’s
current and potential competitors for surgical adhesives, sealants, and hemostats have substantially greater financial and
personnel resources than the Company. These competitors may also have greater experience in developing products,
conducting clinical trials, and obtaining regulatory approvals and may have large contracts with hospitals under which they
can impose purchase requirements that place our product at a disadvantage. Certain of these competitors may obtain patent
protection or approval or clearance by the FDA or foreign countries earlier than the Company. The Company may also
compete with companies that have superior manufacturing efficiency and marketing capabilities. Any of these competitive
disadvantages could materially adversely affect the Company.
BioGlue. The Company’s BioGlue products compete primarily with Baxter International, Inc.’s Tisseel, CoSeal, and
Tachosil; Ethicon, Inc.’s (a Johnson & Johnson Company) Evicel and Omnex; Covidien Ltd.’s U.S. Surgical Division’s
Duraseal product; NeoMend, Inc.’s ProGEL; and Tenaxis, Inc.’s (“Tenaxis”) ArterX. The Company currently competes with
these products based on BioGlue’s benefits and features, such as strength and ease of use. Additional competitive products
may be under development by other large medical device, pharmaceutical, and biopharmaceutical companies.
BioFoam. The Company’s BioFoam product competes with other surgical hemostatic agents that include Pfizer, Inc.’s
Gelfoam; Baxter International, Inc.’ FloSeal; Ethicon, Inc.’s Spongostan, Instat, Surgicel, and Surgicel Nu-Knit; C.R. Bard,
Inc.’s Avitene; Nycomed’s TachoSil; and Orthovita, Inc.’s Vitagel. Other medical device, pharmaceutical, and
biopharmaceutical companies may also develop competitive products. The Company’s BioFoam product competes on the
basis of its clinical efficacy and ease of use.
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PerClot and HemoStase. The Company’s PerClot and HemoStase products compete with thrombin products, including
King Pharmaceuticals, Inc.'s Thrombin JMI; ZymoGenetics, Inc.'s Recothrom; and Omrix Biopharmaceuticals, Inc.'s (a
Johnson & Johnson Company) Evithrom; and surgical hemostats, including Pfizer, Inc.'s Gelfoam; C.R. Bard, Inc.'s Avitene;
Baxter International, Inc.’s FloSeal; Ethicon, Inc.’s Surgicel, Surgiflo, and Surgifoam products; and Medafor’s Arista, which
CryoLife currently distributes under private label as HemoStase. Other competitive products may include argon beam
coagulators, which provide an electrical source of hemostasis. A number of companies have surgical hemostat products
under development. Other medical device, pharmaceutical, and biopharmaceutical companies may also develop competitive
products. The Company’s PerClot products compete on the basis of safety profile, clinical efficacy, absorption rates, and
ease of use. The Company’s HemoStase products, which the Company will discontinue selling at the end of March 2011,
compete on the basis of safety profile, clinical efficacy, and ease of use.
General
Other recently developed technologies or procedures are, or may in the future be, the basis of competitive products.
There can be no assurance that the Company’s current competitors or other parties will not succeed in developing alternative
technologies and products that are more effective, easier to use, or more economical than those which have been or are being
developed by the Company or that would render the Company’s technology and products obsolete and non-competitive in
these fields. In such event, the Company’s business, financial condition, profitability, and cash flows could be materially
adversely affected. See Part I, Item 1A, “Risk Factors—Risks Relating To Our Business—Rapid Technological Change
Could Cause Our Services And Products To Become Obsolete.”
Research and Development and Clinical Research
The Company uses its expertise in protein chemistry, biochemistry, engineering, and cell biology, and its understanding
of the needs of the cardiac and vascular surgery medical specialties to attempt to expand its preservation services and surgical
adhesives, sealants, and hemostats businesses and to develop or acquire products and technologies for these specialties. The
Company identifies market areas that can benefit from preserved tissues, medical devices, and other related technologies and
then attempts to develop innovative techniques, services, and products within these areas, to secure their commercial
protection, to establish their clinical efficacy, and then to market these techniques, services, and products. The Company
employs approximately 28 people in its research and development and clinical research departments, including five PhDs
with specialties in the fields of molecular biology, protein chemistry, biochemistry, bioengineering, biostatistics, and
zoology.
In order to expand the Company’s service and product offerings, the Company is currently in the process of obtaining
approvals, developing, or investigating several technologies and products, including technologies related to additional
applications of its SynerGraft technology, including the CryoValve SGAV and ProPatch, the PHT product platform used in
BioGlue, BioFoam, and other PHT derivatives, PerClot, and human tissue preservation.
To the extent the Company identifies additional applications for its products, the Company may attempt to license these
products to corporate partners for further development of such applications or seek funding from outside sources to continue
the commercial development of such technologies. The Company may also attempt to license additional technologies from
third parties to supplement its product lines.
The Company’s research and development strategy is to allocate available resources among the Company’s core market
areas of cardiac and vascular surgery, sealants, and hemostats, based on the size of the potential market for any specific
product candidate, the estimated development time and cost required to bring the product to market, and the expected
efficacy of the potential product. Research on these and other projects is conducted in the Company’s research and
development laboratory or at universities or clinics where the Company sponsors research projects. The Company’s medical
and scientific advisory board consults on various research and development programs. The Company’s preclinical studies
are conducted at universities and other locations outside the Company’s facilities by third parties under contract with the
Company. In addition to these efforts, the Company may pursue other research and development activities.
In 2010, 2009, and 2008 the Company spent approximately $5.9 million, $5.2 million, and $5.3 million, respectively, on
research and development activities on new and existing products. These amounts represented approximately 5% of the
Company’s revenues for each of the years 2010, 2009, and 2008. Of these amounts spent on research and development
activities, $490,000, $799,000, and $411,000 was funded by the DOD in 2010, 2009, and 2008, respectively.
12
CryoValve SGPV. At the FDA’s request, the Company has committed to conducting a post-clearance study to collect
long-term clinical data for the CryoValve SGPV. Data collected in this study will be compared to data from a defined control
group implanted with a standard processed human pulmonary heart valve. The Company believes the information obtained
from this study may help ascertain whether the SynerGraft process extends the long-term durability of pulmonary valves.
Additionally, explant analyses may help determine if the heart valve’s collagen matrix recellularizes with the recipient’s own
cells.
CryoValve SGAV. In September 2009 the FDA granted a Humanitarian Use Device (“HUD”) designation for the
CryoValve SGAV for aortic valve replacement in patients aged 0 to 21 years. An HUD is a medical device intended to
benefit patients in the treatment or diagnosis of a disease that affects fewer than 4,000 people in the U.S. per year. The HUD
designation is the first step in obtaining a Humanitarian Device Exemption (“HDE”), which if obtained would allow the
company to market the CryoValve SGAV in the U.S. market. The Company expects to submit the HDE application in the
second half of 2011. If approval is obtained, the CryoValve SGAV will be shipped to IRB sites approved to receive this
tissue. Additional jurisdictions for potential shipments of CryoValve SGAV also include Austria, United Kingdom, and
Israel.
BioFoam. In 2009 the Company received initial approval from the FDA for an IDE to conduct human clinical trials in
the U.S. with BioFoam, a product in the PHT platform, for use in liver resection surgery in patients for whom cessation of
bleeding by ligature or other conventional methods is ineffective or impractical. Since receiving initial FDA approval,
CryoLife continued to work with the FDA to make additional protocol refinements. CryoLife received approval by the DOD
in April 2010 to move forward with obtaining necessary IRB approvals using the FDA approved protocol. The DOD granted
approval for the initial clinical trial investigation site in September 2010. In the fourth quarter of 2010 the Company began
screening patients for enrollment into the BioFoam IDE clinical trial in the U.S. for the sealing of parenchymal liver tissue.
This feasibility trial will involve 20 patients at two centers in the U.S. Upon successful completion of the feasibility study, a
follow-on multi-center, randomized, and controlled pivotal study will be conducted. CryoLife has been awarded a total of
$5.4 million in funding allocated from U.S. Congress Defense Appropriations Conference Reports in 2005 through 2008 for
the continued development of PHT for use on the battlefield. The Company anticipates applying for additional funding under
this bill for the 2010 allocation. The Company expects that this clinical trial will be funded by grants from the DOD. The
Company continues to conduct preclinical research with BioFoam for use in wound sealing in trauma surgery and other
potential indications.
PerClot. On September 28, 2010 CryoLife entered into a worldwide distribution agreement and a license and
manufacturing agreement with SMI for PerClot, a polysaccharide hemostatic agent used in surgery. As part of the
consideration paid to SMI, the Company allocated $3.5 million to an intangible asset for PerClot distribution and
manufacturing rights in the U.S. and certain other countries which do not have current regulatory approvals. This $3.5
million is considered in-process research and development as it is dependant upon regulatory approvals which have not yet
been obtained. Therefore, CryoLife expensed the $3.5 million as in-process research and development upon acquisition.
CryoLife expects to file an IDE with the FDA in the first quarter of 2011 to begin clinical trials for the purpose of obtaining
PMA to distribute PerClot in the U.S.
ProPatch. In late 2006 CryoLife received 510(k) clearance from the FDA for its ProPatch. CryoLife is planning the first
in human implants in early 2011. Additionally, CryoLife is implementing modifications to the manufacturing process that
will streamline the process but will not result in any change to the product’s effectiveness or indications for use. These
modifications will result in a submission of a new 510(k), which is expected to occur in 2011. CryoLife is seeking
commercialization for ProPatch, which may include partnering with one or more third parties as well as obtaining clinical data to
support applications to be marketed directly. CryoLife is also researching other animal-based tissues that can be used in a wide
variety of surgical indications similar to ProPatch, using the SynerGraft technology.
Preservation, Manufacturing, and Operations
The Company’s corporate headquarters and laboratory facilities consist of approximately 200,000 square feet of leased
manufacturing, administrative, laboratory, and warehouse space located on a 21.5-acre setting in suburban Atlanta, Georgia,
with an additional 7,600 square feet of off-site warehouse space. Approximately 20,000 square feet are dedicated as class
10,000 clean rooms. An additional 5,500 square feet are dedicated as class 100,000 clean rooms. The extensive clean room
environment provides a controlled aseptic environment for tissue preservation, manufacturing, and packaging.
Approximately 55 liquid nitrogen freezers maintain preserved tissue at or below –135(cid:113)C. Two back-up emergency
13
generators assure continuity of Company manufacturing operations. Additionally, the Company’s corporate complex
includes the Ronald C. Elkins Learning Center, a 3,600 square foot auditorium that holds 225 participants, and a 1,500 square
foot training lab, both equipped with closed-circuit and satellite television broadcast capability allowing live surgery
broadcasts from and to anywhere in the world. The Elkins Learning Center provides visiting surgeons with a hands-on
training environment for surgical and implantation techniques for the Company’s technology platforms.
Tissue Preservation
The tissue processing laboratory is responsible for the processing and preservation of human cardiac and vascular tissue
for transplant. This laboratory contains approximately 15,600 square feet with a suite of seven clean rooms dedicated to
processing. Currently, there are approximately 53 technicians employed in this area, and the laboratory is staffed 24 hours
per day, 365 days per year. In 2010 the laboratory packaged approximately 11,300 tissues. The current processing level is
estimated to be at about 25% of total capacity. To produce at full capacity levels, the Company would have to increase the
amount of donated tissues, which the Company could attempt to do by revising its tissue acceptance criteria, increasing the
number of relationships with OTPOs, or working to increase donor awareness to increase tissue donation. Any attempt to
increase the amount of tissues processed could be constrained by the availability of donated tissues. If significant additional
donated tissues were obtained, the Company would need to increase the number of employees or increase the number of
hours worked by its employees.
BioGlue and BioFoam
BioGlue and BioFoam are presently manufactured at the Company’s headquarters facility. The laboratory contains
approximately 13,500 square feet, including a suite of six clean rooms. Currently, there are approximately 17 technicians
employed in this area. The laboratory has a potential annual capacity of approximately 2 million syringes of BioGlue and
BioFoam. The current processing level is about 5% of total capacity. To produce at full capacity levels, the Company would
need to increase the number of employees, add work shifts, and install automated filling and pouching equipment.
Other Medical Devices
The Company’s headquarters has additional laboratory space consisting of approximately 20,000 square feet with a suite
of six clean rooms. This laboratory space is expected to house the manufacturing of PerClot and ProPatch surgical mesh.
Europa
The Company’s European subsidiary, Europa, maintains a leased facility located in Guildford, England, which contains
approximately 3,400 square feet of office space. In addition, Europa leases shared warehousing space through its third party
shipper.
Quality Assurance
The Company’s operations encompass the preservation of human tissue and the manufacturing of medical devices. In all
of its facilities, the Company is subject to regulatory standards for good manufacturing practices, including current Good
Tissue Practices (“cGTPs”), which are the FDA regulatory requirements for processing of human tissue, and current Quality
System Regulations, which are the FDA regulatory requirements for medical device manufacturers. The FDA periodically
inspects Company facilities to review Company compliance with these and other regulations. The Company also operates
according to International Organization for Standardization (“ISO”) 13485 Quality System Requirements, an internationally
recognized voluntary system of quality management for companies that design, develop, manufacture, distribute, and service
medical devices. The Company maintains a Certification of Approval to the ISO 13485. Lloyd’s Register Quality Assurance
Limited (“LRQA”) issues this approval. LRQA is a Notified Body officially recognized by the European Union (“EU”) to
perform assessments of compliance with ISO 13485 and the Medical Device Directive. The Medical Device Directive is the
governing document for the EEA that details requirements for safety and risk. LRQA performs periodic on-site inspections,
generally at least annually, of the Company’s quality systems.
The Company’s quality assurance staff is comprised primarily of experienced professionals from the medical device
manufacturing industry. The quality assurance department, in conjunction with the Company’s research and development
department, routinely evaluates the Company’s processes and procedures.
14
Preservation Services
The Company employs a comprehensive quality assurance program in all of its tissue preservation activities. The
Company is subject to human cell and tissue regulations, including Donor Eligibility and cGTPs, as well as other FDA
Quality System Regulations, ISO 13485 requirements, and other specific country requirements. The Company’s quality
assurance program begins with the development and implementation of training policies and procedures for the employees of
OTPOs. To assure uniformity of procurement practices among the tissue recovery teams, the Company provides
procurement protocols, transport packages, and tissue transport liquids to the OTPOs. The Company periodically audits
OTPOs to ensure and enhance recovery practices.
Upon receipt by the Company, each incoming tissue is assigned a unique control number that provides traceability of
tissue from procurement through the preservation processes and, ultimately, to the tissue recipient. Samples from each tissue
donor are subjected to a variety of tests to screen and test for infectious diseases. Samples of some tissues are also provided
for pathology testing. Following dissection of the tissue to be preserved, the tissue is treated with a proprietary antimicrobial
solution and aseptically packaged. After antimicrobial treatment, each tissue must be shown to be free of detectable
microbial contaminants before being considered releasable for distribution.
The materials and solutions used by the Company in preserved tissue must meet the Company’s quality standards and be
approved by quality assurance personnel. Throughout the tissue preservation process, detailed records of the tissues,
materials, and processes used are maintained and reviewed by quality assurance personnel.
The FDA periodically audits the Company’s tissue preservation facilities for compliance with its requirements. The
States of California, Delaware, Florida, Georgia, Illinois, Maryland, New York, Oregon, and Pennsylvania license or register
the Company’s tissue preservation facilities as facilities that preserve, store, and distribute human tissue for implantation.
The regulatory bodies of these states may perform inspections of the Company’s facilities as required to ensure compliance
with state laws and regulations.
Medical Device Manufacturing
The Company employs a comprehensive quality assurance program in all of its manufacturing activities. The Company
is subject to Quality System Regulations, ISO 13485, and Medical Device Directive requirements.
All materials and components utilized in the production of the products manufactured by the Company are received and
inspected by trained quality control personnel according to written specifications and standard operating procedures. Only
materials and components found to comply with Company standards are accepted by quality control and utilized in
production.
Materials, components, and resulting sub-assemblies are documented throughout the manufacturing process to assure
traceability. Processes in manufacturing are validated to produce products meeting the Company’s specifications. The
Company maintains a quality assurance program to evaluate and inspect its own manufactured products and distributed
products to ensure conformity to product specifications. Each process is documented along with all inspection results,
including final finished product inspection and acceptance. Records are maintained as to the consignees of products to track
product performance and to facilitate product removals or corrections, if necessary.
The Company’s manufacturing facilities are subject to periodic inspection by the FDA and LRQA to independently
review the Company’s compliance with its systems and regulatory requirements.
Patents, Licenses, and Other Proprietary Rights
The Company relies on a combination of patents, trademarks, confidentiality agreements, and security procedures to
protect its proprietary products, preservation technology, trade secrets, and know-how. The Company believes that its
patents, trade secrets, trademarks, and technology licensing rights provide it with important competitive advantages. The
Company owns or has licensed rights to 32 U.S. patents and 119 foreign patents, including patents relating to its technology
for human cardiac and vascular tissue preservation, tissue preservation, decellularization, tissue revitalization prior to
freezing, tissue transport, tissue packing, BioGlue manufacturing, and PHT manufacturing. The Company has approximately
12 pending U.S. patent applications and 17 pending foreign applications that relate to the Company’s tissues, PHT, and other
15
areas. There can be no assurance that any patents pending will ultimately be issued. The remaining duration of the
Company’s issued patents ranges from 1 month to 13 years. The main patent for BioGlue expires in 2012 in the U.S. and in
2013 in the rest of the world. The Company has an agreement with a third party that calls for the payment of royalties based
on BioGlue revenues while the main BioGlue patent is in effect. The Company has an agreement with a third party for calls
for the payment of royalties based on revenues from SynerGraft processing. Once the Company begins to manufacture
PerClot, it will also be required to pay royalties based on revenues of PerClot manufactured by the Company. In addition, the
Company has distribution agreements with third parties for the distribution of PerClot and HemoStase, although the EDA for
HemoStase was terminated. These products have patent license rights and trade secrets that provide competitive advantages.
There can be no assurance that the claims allowed in any of the Company’s existing or future patents will provide
competitive advantages for the Company’s preserved tissues, products, and technologies or will not be successfully
challenged or circumvented by competitors. There can also be no assurances that the claims allowed in patents licensed or
owned by third parties for products distributed by the Company will not be successfully challenged or circumvented by
competitors. To the extent that any of the Company’s products, whether manufactured by the Company or distributed by it,
are not effectively patent protected, the Company’s business, financial condition, profitability, and cash flows could be
materially adversely affected. Under current law, patent applications in the U.S. and patent applications in foreign countries
are maintained in secrecy for a period after filing. The right to a patent in the U.S. is attributable to the first to invent, not the
first to file a patent application. The Company cannot be sure that products manufactured or distributed by it, or the
technologies developed by it, do not infringe patents that may be granted in the future pursuant to pending patent applications
or that they do not infringe any patents or proprietary rights of third parties. For example, the Company has filed suit in
Germany against Tenaxis because it believes Tenaxis is infringing its main BioGlue patent in Germany. Tenaxis filed a
separate nullity suit against this same BioGlue patent in Germany and the lower court ruled that the Company’s BioGlue
patent was nullified. The Company appealed this ruling and the nullification was stayed pending resolution of the
nullification case by the German Supreme Court, which will not likely occur until 2012. See Part I, Item 3, “Legal
Proceedings.”
The Company may incur substantial legal fees in defending against a patent infringement claim or in asserting claims
against third parties. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the
Company could be prevented from marketing certain of its products, could be required to obtain licenses from the owners of
such patents, or could be required to redesign its services or products to avoid infringement. There can be no assurance that
such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would
be successful in any attempt to redesign its services or products to avoid infringement. The Company’s failure to obtain
licenses or to redesign its services or products could have a material adverse impact on the Company’s business, financial
condition, profitability, and cash flows.
The Company has entered into confidentiality agreements with its employees, several of its consultants, and third-party
vendors to maintain the confidentiality of trade secrets and proprietary information. There can be no assurance that the
obligations of employees of the Company and third parties with whom the Company has entered into confidentiality
agreements will effectively prevent disclosure of the Company’s confidential information or provide meaningful protection
for the Company’s confidential information if there is unauthorized use or disclosure, or that the Company’s trade secrets or
proprietary information will not be independently developed by the Company’s competitors. Litigation may be necessary to
defend against claims of infringement, to enforce patents and trademarks of the Company, or to protect trade secrets and
could result in substantial cost to, and diversion of effort by, the Company. There can be no assurance that the Company
would prevail in any such litigation. In addition, the laws of some foreign countries do not protect the Company’s
proprietary rights to the same extent as do the laws of the U.S.
Suppliers, Sources, and Availability of Tissues and Raw Materials
The Company’s preservation services business and its ability to supply needed tissues is dependent upon donation of
tissues from human donors. The Company must rely on the OTPOs that it works with to educate the public on the need for
donation and to foster a willingness to donate tissue. The Company must also maintain good relationships with its OTPOs to
ensure that it will receive donated tissue. In addition, future regulations could reduce the availability of tissue available for
implantation.
The Company’s BioGlue and BioFoam products are comprised of bovine protein and a cross linker that is delivered to
the surgical site through a delivery device. The delivery devices are manufactured by a single supplier. Although the
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Company maintains an inventory of devices, if the single supplier was to cease producing devices for it for other than a short
period of time, this would have a material adverse affect on our ability to manufacture BioGlue and would materially
adversely affect the Company’s revenues.
PerClot is produced by SMI for the Company pursuant to a distribution agreement. If SMI was unable to obtain the
appropriate raw materials for PerClot in order to manufacture it for the Company, it would materially adversely affect the
Company’s ability to sell PerClot and could therefore have a material adverse impact on the Company’s revenues. In
addition, if SMI breached its distribution agreement or attempted to terminate the distribution agreement, it would materially
adversely affect the Company’s ability to sell PerClot and obtain revenue growth from the product.
The Company has been distributing HemoStase under the EDA with Medafor. As of September 27, 2010 the EDA was
terminated by Medafor and CryoLife has ceased receiving product from Medafor. The Company expects to continue to ship
HemoStase through late March 2011. The termination of the Medafor EDA is expected to have a material adverse affect on
the Company’s revenues in 2011 compared to revenues achieved in 2010. See Part I, Item 3, “Legal Proceedings.”
Government Regulation
U.S. Federal Regulation of Medical Devices
The Federal Food, Drug, and Cosmetic Act (“FDCA”) provides that, unless exempted by regulation, medical devices
may not be distributed in the U.S. unless they have been approved or cleared for marketing by the FDA. There are two
review procedures by which medical devices can receive such approval or clearance.
Some products may qualify for clearance to be marketed under a Section 510(k) process, in which the manufacturer
provides a premarket notification that it intends to begin marketing a product, and shows that the product is substantially
equivalent to another legally marketed predicate product. In order for the device to be found substantially equivalent to the
predicate device, the device must be 1) the same intended use and 2) have either the same technological characteristics or
different technological characteristics that do not raise new questions of safety or effectiveness. In some cases, the
submission must include data from clinical studies in order to demonstrate substantial equivalency to a predicate device.
Marketing may commence when the FDA issues a clearance letter finding such substantial equivalence.
If the product does not qualify for the 510(k) process it must be approved through the IDE/PMA process. This can be
required either because it is not substantially equivalent to a legally marketed 510(k) device or because it is a Class III device
required by the FDCA and implementing regulations to have an approved PMA.
The FDCA provides for an IDE which authorizes distribution for clinical evaluation of devices that lack a PMA or
510(k) clearance. Devices subject to an IDE are subject to various restrictions imposed by the FDA. The number of patients
that may be treated with the device is limited, as is the number of institutions at which the device may be used. Patients must
give informed consent to be treated with an investigational device, and review by an IRB is needed. The device must be
labeled that it is for investigational use, may not be advertised or otherwise promoted, and the price charged for the device
may be limited. Unexpected adverse events for devices sold under an IDE must be reported to the FDA. After a product is
subjected to clinical testing under an IDE, the Company may file a PMA application.
The FDA must approve a PMA application before marketing can begin. PMA applications must be supported by valid
scientific evidence to demonstrate the safety and effectiveness of the device for its intended use. A PMA application is
typically a complex submission, usually including the results of human clinical studies, and preparing an application is a
detailed and time-consuming process. Once a PMA application has been submitted, the FDA’s review may be lengthy and
may include requests for additional data, which may require the Company to undertake additional human clinical studies.
Under certain circumstances, the FDA may grant an HDE. The FDA grants HDE’s in an attempt to encourage the
development of medical devices for use in the treatment of rare conditions that affect small patient populations (less than
4,000). Such approval by the FDA exempts the device from full compliance with clinical study requirements for a PMA.
The FDCA requires all medical device manufacturers and distributors to register with the FDA annually and to provide
the FDA with a list of those medical devices that they distribute commercially. The FDCA also requires manufacturers of
medical devices to comply with labeling requirements and to manufacture devices in accordance with Quality System
17
Regulations, which require that companies manufacture their products and maintain their documents in a prescribed manner
with respect to good manufacturing practices, design, document production, process, labeling and packaging controls,
process validation, and other quality control activities. The FDA’s medical device reporting regulation requires that a device
manufacturer provide information to the FDA on death or serious injuries alleged to have been associated with the use of its
products, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction
were to recur. The FDA further requires that certain medical devices that may not be sold in the U.S. follow certain
procedures before they are exported.
The FDA inspects medical device manufacturers and distributors and has authority to seize non-complying medical
devices, enjoin and/or impose civil penalties on manufacturers and distributors marketing non-complying medical devices,
criminally prosecute violators, and order recalls in certain instances.
Heart Valves. On May 25, 2005, with the promulgation of the final rule for cGTPs, the FDA reclassified human heart
valves preserved on or after May 25, 2005 from medical devices to human tissue which is subject to that rule. However,
human tissues must meet certain criteria to be solely regulated as human tissue. These criteria include being processed in a
manner that is considered not to involve more than minimal manipulation of the tissue and being promoted for a clinical use
that is consistent with the same basic function that the tissue served in the donor. SynerGraft processing of cardiovascular
tissue was evaluated by the FDA to be more than minimal manipulation; therefore, the CryoValve SGPV falls under the
medical device regulations and has been deemed to be subject to the 510(k) process.
BioGlue. The FDA regulates BioGlue as a Class III medical device. In December 2001 the Company received an IDE-
PMA approval from the FDA for BioGlue as an adjunct to sutures and staples for use in adult patients in open surgical repair
of large vessels. Prior to this approval, the Company received an HDE in December 1999 for BioGlue for use as an adjunct
in repair of acute thoracic aortic dissections. BioGlue is Health Canada, Australia, and CE Mark approved for additional soft
tissue repair.
BioFoam. In October 2009 CryoLife was initially granted approval by the FDA for an IDE to conduct a human clinical
trial with BioFoam for use in liver resection surgery in patients for whom cessation of bleeding by ligature or other conventional
methods is ineffective or impractical. Since receiving initial FDA approval, CryoLife continued to work with the FDA to make
additional protocol refinements. As a requirement of the grant funding the Company received from the DOD, the Company is
required to have the DOD review and approve the BioFoam clinical trial prior to implementation. CryoLife received approval
by the DOD in April 2010 to move forward with obtaining necessary IRB approvals using the FDA approved protocol. The
DOD granted approval for the initial clinical trial investigation site in September 2010. In the fourth quarter of 2010 the
Company began screening patients for enrollment into the BioFoam IDE clinical trial in the U.S. for the sealing of parenchymal
liver tissue. If the Company receives PMA approval of BioFoam, it will be regulated by the FDA as a Class III medical
device. BioFoam currently has CE mark approval.
HemoStase. The FDA regulates HemoStase as a Class III medical device. In 2006 the manufacturer of HemoStase
received a PMA from the FDA for the product’s use in surgical procedures (except neurological, ophthalmic, and urological)
as an adjunctive hemostatic device to assist when control of capillary, venous, and arteriolar bleeding by pressure, ligature,
and other conventional procedures is ineffective or impractical. In addition, HemoStase has CE Mark approval and is Health
Canada approved for similar clinical uses.
PerClot. CryoLife plans to file an IDE in early 2011 with the FDA to begin clinical trials for the purpose of obtaining a
PMA to distribute PerClot in the U.S. PerClot would be regulated by the FDA as a Class III medical device. PerClot
currently has CE Mark approval.
ProPatch. The FDA regulates ProPatch as a Class II medical device. In late 2006 CryoLife received 510(k) clearance
from the FDA for its ProPatch. ProPatch is indicated for implantation to reinforce soft tissues where weakness exists
including, but not limited to: defects of the abdominal and thoracic wall, muscle flap reinforcement, rectal and vaginal
prolapse, reconstruction of the pelvic floor, hernias, suture-line reinforcement, and reconstructive procedures. ProPatch is
also indicated for the reinforcement of soft tissues repaired by sutures or by suture anchors during tendon repair surgery
including reinforcement of rotator cuff, patellar, Achilles, biceps, quadriceps, or other tendons.
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U.S. Federal Regulation of Human Tissue
The FDA regulates human tissues pursuant to Section 361 of the Public Health Services Act (“PHS Act”), which in turn
provides the regulatory framework for regulation of human cellular and tissue products. The FDA issued new regulations (21
C.F.R. Part 1270), in 1998, which focused on donor screening and testing to prevent the introduction, transmission, and
spread of HIV-1 and -2 and Hepatitis B and C. The regulations set minimum requirements to prevent the transmission of
communicable diseases from human tissue used for transplantation. The regulations define human tissue as any tissue
derived from a human body which is (i) intended for administration to another human for the diagnosis, cure, mitigation,
treatment, or prevention of any condition or disease and (ii) recovered, preserved, stored, or distributed by methods not
intended to change tissue function or characteristics. The FDA definition excludes, among other things, tissue that currently
is regulated as a human drug, biological product, or medical device, and it also excludes kidney, liver, heart, lung, pancreas,
or any other vascularized human organ. The current regulations applicable to human tissues include requirements for donor
suitability, processing standards, establishment registration, and product listing.
On January 19, 2001 the FDA published regulations that require human cells, tissue, and cellular and tissue-based
products establishments to register with the agency and list their human cells, tissues, and cellular and tissue-based products
(“HCT/Ps”). The final rule, 21 C.F.R. Parts 1271, became effective on April 4, 2001 for human tissues intended for
transplantation that are regulated under section 361 of the PHS Act as well as part 1270. It became effective for all other
HCT/Ps when the remaining parts of 21 C.F.R. Part 1271 were finalized.
In May 2004 the FDA published regulations governing the eligibility of donors of human cell and tissue products. This
rule expands previous requirements for testing and screening for risks of communicable diseases that could be spread by the
use of these tissues. In November 2004 the FDA published regulations governing the procedures and processes related to the
manufacture of human cell and tissue products under the cGTPs. Both the new donor eligibility rule and the cGTP rule
became effective on May 25, 2005 and designate human heart valves preserved on or after May 25, 2005 as human tissue
rather than medical devices.
It is likely that the FDA’s regulation of preserved human tissue will continue to evolve in the future. Complying with
FDA regulatory requirements or obtaining required FDA approvals or clearances may entail significant time delays and
expense or may not be possible, any of which could have a material adverse affect on the Company. For example, on
January 16, 2009 the FDA issued draft guidance for cGTPs and Additional Requirements for Manufacturers of HCT/Ps. This
guidance is subject to comment and change before being formally issued by the FDA.
Possible Other FDA Regulation
Other tissues and products under development by the Company are likely to be subject to regulation by the FDA. Some
may be classified as medical devices or human cells and tissue products, while others may be classified as drugs or biological
products, or may be subject to a regulatory process that the FDA may adopt in the future. Regulation of drugs and biological
products is substantially similar to regulation of Class III medical devices. Obtaining FDA approval to market these tissues
and products is likely to be a time consuming and expensive process, and there can be no assurance that any of these tissues
and products will ever receive FDA approval.
NOTA Regulation
The Company’s activities in preserving and transporting human hearts and certain other organs are also subject to federal
regulation under the National Organ Transplant Act (“NOTA”), which makes it unlawful for any person to knowingly
acquire, receive, or otherwise transfer any human organ for valuable consideration for use in human transplantation if the
transfer affects interstate commerce. NOTA excludes from the definition of “valuable consideration” reasonable payments
associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of a human
organ. The purpose of this statutory provision is to allow for compensation for legitimate services. The Company believes
that to the extent its activities are subject to NOTA, it meets this statutory provision relating to the reasonableness of its
charges. There can be no assurance, however, that restrictive interpretations of NOTA will not be adopted in the future that
would call into question one or more aspects of the Company’s methods of charging for its preservation services.
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State Licensing Requirements
Some states have enacted statutes and regulations governing the preservation, transportation, and storage of human
organs and tissues. The activities the Company engages in require it to be either licensed or registered as a clinical laboratory
or tissue bank under California, Delaware, Florida, Georgia, Illinois, Maryland, New York, Oregon, and Pennsylvania law.
The Company has such licenses or registrations, and the Company believes it is in compliance with applicable state laws and
regulations relating to clinical laboratories and tissue banks that store, preserve, and distribute human tissue designed to be
used for medical purposes in human beings. There can be no assurance, however, that more restrictive state laws or
regulations will not be adopted in the future that could materially adversely affect the Company’s operations. Certain
employees of the Company have obtained other required state licenses.
International Approval Requirements
Shipments of preserved human tissues and sales of medical devices outside the U.S. are subject to international
regulatory requirements that vary widely from country to country. Compliance with applicable regulations for tissues must
be met and approval of a product by comparable regulatory authorities of other countries must be obtained prior to
commercial distribution of the preserved human tissues or products in those countries. The time required to obtain these
approvals may be longer or shorter than that required for FDA approval.
The EEA recognizes a single medical device approval, called a CE Mark, which allows for distribution of an approved
product throughout the EEA (32 member state countries - 27 EU countries, 4 European Free Trade Association (“EFTA”)
countries, and Turkey) without additional general applications in each country. However, individual EEA members reserve
the right to require additional labeling or information to address particular patient safety issues prior to allowing marketing.
Third parties called Notified Bodies award the CE Mark. These Notified Bodies are approved and subject to review by the
competent authorities of their respective countries. A number of countries outside of the EEA accept the CE Mark in lieu of
marketing submissions as an addendum to that country’s application process. The Company has been issued CE Marks for
BioGlue and BioFoam, and has CE approval for the distribution of PerClot and HemoStase.
In addition, the distribution of CryoLife’s preserved human tissues in certain countries in Europe is subject to regulatory
approvals or requirements. CryoLife ships tissues into the United Kingdom, Germany, and Austria. In 2004 and 2006
through three separate directives the EU passed the European Union Tissue and Cells Directives (“EUTCD”) which
established an approach to the regulation of tissues and cells across Europe. The EUTCD set a benchmark for the standards
that must be met when carrying out any activity involving tissues and cells that would be implanted in humans. The EUTCD
also require that systems be put in place to ensure that all tissues and cells used in human application are traceable from
donor to recipient. Pursuant to the EUTCD, each country in the EEA has responsibility for regulating tissues and cells and
distribution and procurement of tissues and cells for use in humans through a “Competent Authority.” In the United
Kingdom, this Competent Authority is the Human Tissue Authority (“HTA”), which has promulgated various directives that
affect CryoLife’s shipment of tissues into the United Kingdom and Europa’s import of these tissues. Europa is a “Licensed
Establishment” under HTA directions, and both Europa and CryoLife are subject to certain regulatory requirements under
HTA Directions, including maintenance of records and tracing of shipments from donor to recipient. In Germany this
Competent Authority is the Paul-Erlich-Institute (“PEI”), which enforces various regulations passed by the regulatory
authorities in Germany. Europa has a provisional license in Germany and is awaiting PEI’s final approval of its license. In
addition, Europa ships tissue into Austria, which currently has no Competent Authority. Other countries in the EEA are in
the process of implementing the EUTCD, and if CryoLife chooses to ship tissues into these countries, it will likely need to
obtain licenses to do so. Each Competent Authority could modify its regulations, rules, directives, or directions, which could
impact the Company’s ability to send preserved tissues into Europe.
Environmental Matters
The Company’s tissue preservation activities generate some biomedical wastes, consisting primarily of human and
animal pathological and biological wastes, including human and animal tissue and body fluids removed during laboratory
procedures. The biomedical wastes generated by the Company are placed in appropriately constructed and labeled containers
and are segregated from other wastes generated by the Company. The Company contracts with third parties for transport,
treatment, and disposal of biomedical waste. Although the Company believes it is in compliance in the disposal of its waste
with applicable laws and regulations promulgated by the U.S. Environmental Protection Agency and the Georgia Department
of Natural Resources, Environmental Protection Division, the failure by the Company, or the companies with which it
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contracts, to comply fully with any such regulations could result in an imposition of penalties, fines, or sanctions, which
could have a material adverse affect on the Company’s business.
Employees
As of December 31, 2010 CryoLife and its subsidiaries had approximately 393 employees. These employees included
seven persons with Ph.D. degrees, three with M.D. degrees, and one with a D.O. degree. None of the Company’s employees
are represented by a labor organization or covered by a collective bargaining agreement, and the Company has never
experienced a work stoppage or interruption due to labor disputes. Management believes its relations with its employees are
good.
Available Information
It is the Company’s policy to make all of its filings with the SEC, including, without limitation, its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), available free of
charge on the Company’s website, www.cryolife.com, on the day of filing. All of such filings made on or after November 15,
2002 have been made available on the website.
21
Item 1A. Risk Factors.
Risks Relating To Our Business
We Are Significantly Dependent On Our Revenues From BioGlue And Are Subject To A Variety Of Risks Affecting
This Product.
BioGlue is a significant source of our revenues. Should the product be the subject of adverse developments with regard
to its safety, efficacy, or reimbursement practices, or our rights to manufacture and market this product are challenged, the
result could have a material adverse impact on our revenues, financial condition, profitability, and cash flows. In 2009 and
2010 competitors of BioGlue were able to obtain FDA approval for indications in which BioGlue had been used off-label.
The continued introduction of these or similar competitive products could have an irreversible adverse impact on our sales of
BioGlue and therefore our revenue, financial condition, profitability, and cash flow.
We have only two suppliers of bovine serum albumin, which is necessary for the manufacture of BioGlue. Furthermore,
we presently have only one supplier for our BioGlue syringe. If we lose one or more of these suppliers, our ability to
manufacture and sell BioGlue could be adversely impacted. We cannot be sure that we would be able to replace any such
loss on a timely basis, if at all.
Our U.S. patent for BioGlue expires in mid-2012, and our patents in the rest of the world for BioGlue expire in mid-
2013. Following expiration of these patents, competitors may utilize the inventions disclosed in the BioGlue patents in
competing products, which could materially reduce our revenues and income from BioGlue although any competing product
would have to be approved by the appropriate regulatory authority, such as the FDA or our notified body. For discussion of
the validity of our German patent see “Uncertainties Related To Patents And Protection Of Proprietary Technology May
Adversely Affect The Value Of Our Intellectual Property,” below. For a further discussion of the German patent nullity
action, see Part I, Item 3, “Legal Proceedings.”
Our Tissues And Products Allegedly Have Caused And May In The Future Cause Injury To Patients, And We Have
Been And May Be Exposed To Tissue Processing And Product Liability Claims And Additional Regulatory Scrutiny
As A Result.
The processing, preservation, and distribution of human tissue, and the manufacture and sale of medical devices entail
inherent risks, including the possibility of medical complications for patients, and have resulted and may result in tissue
processing and product liability claims against us and adverse publicity. From time to time various plaintiffs have asserted
that our tissues or medical devices have caused a variety of injuries, including death. We have been and may be sued and our
insurance coverage has been and may be inadequate. Adverse judgments and settlements in excess of our available insurance
coverage could materially adversely impact our financial position, profitability, and cash flows.
Because medical complications are alleged to have been caused by or occur in connection with medical procedures
involving our tissues or products, we have been and may be subject to additional FDA and other regulatory scrutiny,
inspections, and adverse publicity. For example, shortly after the FDA Order, the FDA posted a notice, now archived, on its
website stating its concerns regarding our heart valve tissues. As a result, some surgeons and hospitals decided not to use our
heart valves. Cautionary statements from the FDA or other regulators, adverse publicity, changes to our labeling, required
prominent warnings, or negative reviews from the FDA or other regulators of our processing and manufacturing facilities
have decreased and may in the future decrease demand for our tissues or products and could have a material adverse impact
on our revenues, financial condition, profitability, and cash flows.
In addition to the recall resulting from the FDA Order, we have in the past suspended or recalled, and in the future may
have to suspend the distribution of or recall particular types of tissues as a result of reported adverse events in connection
with our tissues. Suspension of the distribution of, or recall of, our tissues or products could have a material adverse impact
on our revenues, financial condition, profitability, and cash flows.
22
Demand For Our Tissues And Products Could Decrease In The Future, Which Could Have A Material Adverse
Impact On Our Business.
The demand for our tissues and BioGlue has fluctuated recently and may continue to fluctuate. We believe that our
tissues and products will continue to be in demand for the foreseeable future. However, if the economic crisis continues or
worsens, changes occur in healthcare policies that force or encourage our customers to limit their use of our tissues and
products, or if new competitive tissues or products are introduced, demand for our tissues and products could decrease in the
future. If demand for our tissues or products decreases significantly in the future, our revenues and cash flows would likely
decrease, possibly materially. In addition, our processing throughput of tissue and our manufacturing throughput of BioGlue
would necessarily need to decrease, which would likely adversely impact our margins, and therefore our profitability,
possibly materially. In addition, if demand for our tissues decreases in the future, we may not be able to ship our tissues
before they expire, which would cause us to write-down our deferred preservation costs. This could materially adversely
impact our financial condition and profitability.
We Expect Our HemoStase Sales To Cease In Late March 2011. Our Remaining Sales of HemoStase Will Likely Be
At A Discount From Our List Price And We May Be Required To Write-Down Our Remaining HemoStase Inventory,
Which May Have A Material Adverse Impact On Our Revenues And Profitability.
On September 27, 2010 Medafor sent the Company a letter stating that Medafor was "fully, finally and immediately
terminating" the EDA. We believe this termination was wrongful. We believe that we are entitled pursuant to the terms of
the EDA to continue selling our remaining HemoStase inventory through late March 2011, and we began selling HemoStase
at a discount to our list price in the fourth quarter of 2010 in order to expedite HemoStase sales. We will likely continue to
sell our HemoStase inventory at a discount, which may have a material adverse impact on our revenues and profitability in
2011. Also, while we believe that we are entitled to distribute our remaining inventory through late March 2011, Medafor
may file for an injunction in court to challenge our ability to continue to distribute the remaining inventory or otherwise
attempt to prevent further sales of HemoStase, even though they have not yet done so. Medafor may also attempt to sell
HemoStase in direct competition with us while we attempt to sell our remaining HemoStase inventory, which could further
materially adversely impact our ability to sell our remaining HemoStase inventory. Medafor’s actions have and will likely
continue to confuse the marketplace with respect to our rights to sell HemoStase, which could materially adversely impact
our revenues, financial condition, profitability, and cash flows.
In 2010 we wrote down $1.6 million of HemoStase inventory. As of December 31, 2010 we had approximately
$559,000 of HemoStase inventory for sale that had not been written-down. If we are not able to sell our remaining inventory
of HemoStase, we may be forced to write down our remaining HemoStase inventory in 2011.
Revenues from HemoStase were approximately $2.7 million and $8.8 million for the three months and year ended
December 31, 2010, respectively. We will not have any revenues from HemoStase after the first quarter of 2011, and our
anticipated 2011 revenues from HemoStase will be materially lower than our 2010 HemoStase revenues. The reduction in
HemoStase revenues is expected to materially adversely impact our revenues, financial condition, profitability, and cash
flows.
See Part I, Item 1, “Business,” for further information regarding the termination of the EDA with Medafor and Part I,
Item 3, “Legal Proceedings,” for further information regarding our litigation with Medafor.
We Are Currently Involved In Significant Litigation With Medafor And That Litigation Cost May Have A Material
Adverse Impact On Our Profitability.
We originally filed our lawsuit against Medafor in April of 2009 in the Northern District of Georgia. Written discovery
is ongoing and depositions have not started. The parties have numerous motions in front of the Court. No trial date has been
set by the Court, but is likely that any trial would not occur until 2012. The parties have been involved in other lawsuits in
other venues. We spent approximately $1.4 million in 2010 on these lawsuits. We expect that our costs in 2011 will
materially adversely impact our financial condition, profitability, and cash flows.
23
Our Investment In Medafor May Have Been Impaired Due To Medafor’s Termination Of The EDA , Which Could
Have A Material Adverse Impact On Our Financial Condition And Profitability.
In 2009 and in 2010, we purchased approximately 2.4 million shares of Medafor common stock. We were Medafor’s
largest distributor in 2009 and 2008, accounting for 19% and 15%, respectively, of Medafor’s total revenues. We do not
know what percentage of Medafor’s total revenues we generated in 2010. On September 27, 2010 Medafor sent the
Company a letter stating that Medafor was "fully, finally and immediately terminating" the EDA. We believe this
termination was wrongful.
Medafor’s decision to terminate the EDA may negatively impact Medafor’s revenues, profitability, and cash flows. In
accordance with accounting principles generally accepted in the U.S. (“GAAP”), we reviewed available information and
determined that as of September 30, 2010, factors were present, including Medafor’s termination of the EDA, indicating that
we should evaluate our investment in Medafor common stock for impairment. We recorded an impairment of $3.6 million in
the third quarter of 2010 to write-down our investment in Medafor common stock. The carrying value of our 2.4 million
shares of Medafor common stock after this write-down was $2.6 million as of December 31, 2010.
We will continue to evaluate the carrying value of this investment if changes to impairment factors or additional
impairment factors become known to us that indicate that we should evaluate our investment in Medafor common stock for
further impairment. If we subsequently determine that the value of our Medafor common stock has been impaired further or
if we decide to sell our Medafor common stock for less than the carrying value, the resulting impairment charge or realized
loss on sale of the investment in Medafor could be material. Also, Medafor could take future actions beyond our control that
could further impair the value of our investment. For example, on March 12, 2010, Medafor announced that they had entered
into a transaction with Magle Life Sciences in exchange for an undisclosed amount of cash and 1.8 million shares of Medafor
common stock. We believe Medafor’s transaction with Magle diluted our investment. Medafor could in the future issue
additional shares or take other actions which could further dilute our investment.
See Part I, Item 3, “Legal Proceedings,” for further information regarding our litigation with Medafor.
Medafor Has Filed Counter-Claims Against Us With Respect To Our Lawsuit Against Medafor, And If Medafor Is
Successful In Its Claims, Our Revenues And Profitability May Be Materially, Adversely Impacted.
We filed a lawsuit against Medafor in 2009, alleging claims for, among other things, breach of contract, fraud, and
negligent misrepresentation. The lawsuit arises out of the EDA that has recently been terminated by Medafor.
Medafor has filed counter-claims against us. We have disputed the validity of all of Medafor’s counter-claims and asked
the Court to dismiss all of their counter-claims, except the breach of contract claims, and intend to continue to vigorously
defend against all claims. However, if Medafor is successful in its pursuit of the counter-claims, and the Court rules in
Medafor’s favor, then we could be required to make substantial payments to Medafor as part of the judgment. While the
details of any judgment that may be rendered against us in such a scenario are uncertain, the possibility exists that a judgment
against us could have a material adverse impact on our financial condition, profitability, and cash flows.
See Part I, Item 3, “Legal Proceedings,” for further information regarding our litigation with Medafor.
We Are Subject To Stringent Domestic And Foreign Regulation Which May Impede The Approval Process Of Our
Tissues And Products, Hinder Our Development Activities And Manufacturing Processes, And, In Some Cases, Result
In The Recall Or Seizure Of Previously Cleared Or Approved Tissues And Products.
Our tissues, products, development activities, tissue processing, and manufacturing processes are subject to extensive
and rigorous regulations by the FDA, by comparable agencies in foreign countries, and by other regulatory agencies and
governing bodies. Under applicable law, processors of human tissues and manufacturers of medical devices must comply
with certain regulations that cover the composition, labeling, testing, clinical study, manufacturing, packaging, and
distribution of tissues and products. In addition, medical devices must receive FDA clearance or approval before they can be
commercially marketed in the U.S., and the FDA may require testing and surveillance programs to monitor the effects of
approved products that have been commercialized, and can prevent or limit further marketing of a product based on the
results of these post-marketing programs. The process of obtaining marketing approval or clearance can take a significant
period of time, require expenditure of substantial resources, and result in limitations on the indicated uses of the tissues and
24
products. Furthermore, most major markets for tissues and products outside of the U.S. require clearance, approval, or
compliance with certain standards before tissues and products can be commercially available. We cannot be certain that we
will receive these required clearances or approvals from the FDA and foreign regulatory agencies on a timely basis. The
failure to receive clearance or approval for significant new tissues and products on a timely basis could have a material
adverse impact on our revenues, financial condition, profitability, and cash flows.
The FDA may conduct periodic inspections to determine compliance with applicable tissue and product regulations for
any of the Company’s marketed tissues and products. Approvals by the FDA can be withdrawn due to failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial approval. The failure to comply with
regulatory standards or the discovery of previously unknown problems with a tissues or products could result in fines, delays
or suspensions of regulatory clearances, seizures or recalls of tissues or products (with the attendant expenses), the banning of
a particular device, operating restrictions and criminal prosecution, as well as decreased revenues as a result of negative
publicity and legal claims, and could have a material adverse impact on our revenues, financial condition, profitability, and
cash flows.
For example, in 2002 the FDA issued an order regarding our non-valved cardiac, vascular, and orthopaedic tissues
processed by the Company from October 3, 2001 until August 13, 2002 (the “FDA Order”). Pursuant to the FDA Order, we
recalled these tissues or placed them on quarantine hold. In addition to these recall related costs, the FDA Order subjected us
to intense FDA scrutiny and regulatory requirements. These challenges reduced our revenues, increased our costs to process
tissues and our operating costs, and strained management resources and available cash. We incurred losses and did not
produce cash from operations for many years.
Uncertainties Related To Patents And Protection Of Proprietary Technology May Adversely Impact The Value Of
Our Intellectual Property.
We own several patents, patent applications, and licenses relating to our technologies, which we believe provide us with
important competitive advantages. In addition, we have certain proprietary technologies and methods that provide us with
important competitive advantages. We cannot be certain that our pending patent applications will issue as patents or that no
one will challenge the validity or enforceability of any patent that we own. We also cannot be certain that if anyone does
make such a challenge, that we will be able to successfully defend that challenge. We may have to incur substantial litigation
costs to uphold the validity and prevent infringement of a patent or to protect our proprietary technologies and methods.
Furthermore, competitors may independently develop similar technologies or duplicate our technologies or design around the
patented aspects of such technologies. In addition, our proposed technologies could infringe patents or other rights owned by
others, or others could infringe our patents.
For example, we filed suit in Germany against Tenaxis, Inc. because we believe that Tenaxis is infringing our main
BioGlue patent in Germany. Tenaxis filed a separate suit to nullify this same BioGlue patent in Germany, and the Patent
Court issued an order nullifying this patent. We appealed the nullification, which means the patent stays in effect while the
appeal is pending; however, there can be no guarantee that we will succeed. The ultimate nullification of this patent, if it
occurs, will not prohibit us from selling BioGlue in Germany, but would allow Tenaxis and others to market competing
products based on the BioGlue technology. Tenaxis has been selling its competing product in Germany since at least 2009
and has been competing with our BioGlue product since that time. Should we be unsuccessful in our lawsuit regarding
infringement of our BioGlue patent, in our appeal of the nullification, or in prohibiting any other infringements of our
patents, or should the validity of our patents be successfully challenged by other third parties in Germany or other countries,
we may face increased competition from products based on the BioGlue technology, and our revenues, financial condition,
profitability, and cash flows could be materially, adversely impacted.
Intense Competition May Impact Our Ability To Operate Profitably.
We face competition from other companies engaged in the following lines of business:
(cid:120)
(cid:120)
(cid:120)
The processing and preservation of human tissue,
The marketing of mechanical, synthetic, and animal-based tissue valves for implantation, and
The marketing of surgical adhesives, surgical sealants, and hemostatic agents.
25
Management believes that at least two domestic tissue banks offer preserved human heart valves and many companies
offer porcine, bovine, and mechanical heart valves, including St. Jude Medical, Inc., Medtronic, Inc., and Edwards Life
Sciences.
Our BioGlue product competes with other surgical adhesives and surgical sealants, including Baxter International, Inc.’s
Tisseel, CoSeal, and TachoSil; Ethicon, Inc.’s, (a Johnson & Johnson Company), Evicel and Omnex; Covidien, Ltd.’s U.S.
Surgical Division’s Duraseal product; Tenaxis’s ArterX; and Neomend, Inc.’s ProGel. Other large medical device,
pharmaceutical, and biopharmaceutical companies may also be developing competitive products. Our BioGlue product
competes on the basis of its high tensile strength and ease of use.
Our BioFoam product competes with other surgical hemostatic agents that include Pfizer, Inc.’s Gelfoam; Baxter
International, Inc.’s FloSeal; Ethicon, Inc.’s Spongostan, Instat, Surgicel, and Surgicel Nu-Knit; C.R. Bard, Inc.’s Avitene;
Nycomed’s TachoSil; and Orthovita, Inc.’s Vitagel. Other medical device, pharmaceutical, and biopharmaceutical companies
may also develop competitive products. Our BioFoam product competes on the basis of its clinical efficacy and ease of use.
Our PerClot product competes with thrombin products, including King Pharmaceuticals, Inc.'s Thrombin JMI;
ZymoGenetics, Inc.'s Recothrom; and Omrix Biopharmaceuticals, Inc.'s, (a Johnson & Johnson Company), Evithrom; and
surgical hemostats, including Pfizer, Inc.'s Gelfoam; C.R. Bard, Inc.'s Avitene; Baxter International, Inc.’s FloSeal; Ethicon,
Inc.’s Surgicel, Surgiflo, and Surgifoam; and Medafor’s Arista. We are also aware that a few companies have surgical
hemostat products under development. Other medical device, pharmaceutical, and biopharmaceutical companies may also be
developing competitive products. Our PerClot product competes on the basis of its safety profile, clinical efficacy,
absorption rates, and ease of use.
Many of our competitors have greater financial, technical, manufacturing, and marketing resources than we do and are
well established in their markets. We have increased fees and prices on some of our international services and products since
January 1, 2011. This increase may provide an opportunity for our competitors to gain market share. If we are unable to
continue to increase prices as planned and retain or improve our market share, our ability to grow revenues and profits may
be materially adversely impacted.
We cannot give assurance that our tissues and products will be able to compete successfully. Any products that we
develop that gain regulatory clearance or approval will have to compete for market acceptance and market share. In addition,
our competitors may gain competitive advantages that may be difficult to overcome. If we fail to compete effectively, this
could have a material adverse impact on our revenues, financial condition, profitability, and cash flows.
We May Not Be Successful In Obtaining Necessary Clinical Results And Regulatory Approvals For Services And
Products In Development, And Our New Services And Products May Not Achieve Market Acceptance.
Our growth and profitability will depend, in part, upon our ability to complete development of and successfully introduce
new services and products. We are uncertain whether we can develop commercially acceptable new services and products.
We must also expend significant time and money to obtain the required regulatory approvals. Although we have conducted
preclinical studies on certain services and products under development which indicate that such services and products may be
effective in a particular application, we cannot be certain that the results we obtain from expanded clinical studies will be
consistent with earlier trial results or be sufficient for us to obtain any required regulatory approvals or clearances. We
cannot give assurance that we will not experience difficulties that could delay or prevent us from successfully developing,
introducing, and marketing new services and products. We also cannot give assurance that the regulatory agencies will clear
or approve these or any new services and products on a timely basis, if ever, or that the new services and products will
adequately meet the requirements of the applicable market or achieve market acceptance.
Our ability to complete the development of any of our services and products is subject to all of the risks associated with
the commercialization of new services and products based on innovative technologies. Such risks include unanticipated
technical or other problems, processing or manufacturing difficulties, and the possibility that we have allocated insufficient
funds to complete such development. Consequently, we may not be able to successfully introduce and market our services or
products which are under development, or we may not do so on a timely basis. These services and products may not meet
price or performance objectives and may not prove to be as effective as competing services and products.
26
If we are unable to successfully complete the development of a service, product, or application, or if we determine for
financial, technical, or other reasons not to complete development or obtain regulatory approval or clearance of any service,
product, or application, particularly in instances when we have expended significant capital, this could have a material
adverse impact on our revenues, financial condition, profitability, and cash flows. Research and development efforts are time
consuming and expensive, and we cannot be sure that these efforts will lead to commercially successful services or products.
Even the successful commercialization of a new service or product in the medical industry can be characterized by slow
growth and high costs associated with marketing, under-utilized production capacity, and continuing research and
development and education costs. The introduction of new services or products may require significant physician training
and years of clinical evidence derived from follow-up studies on human implant recipients in order to gain acceptance in the
medical community. The Company’s potential new services or products currently under development include the following:
(cid:120)
(cid:120)
(cid:120)
PerClot in the U.S. and other jurisdictions,
CryoValve SGAV,
BioFoam in the U.S.,
ProPatch,
(cid:120)
(cid:120) New indications for BioGlue, and
SynerGraft processed tissues.
(cid:120)
If We Are Not Successful In Expanding Our Business Activities In International Markets, We May Be Unable To
Increase Our Revenues.
Our international operations are subject to a number of risks which may vary from the risks we face in the U.S.,
including:
(cid:120) Difficulties and costs associated with staffing and managing foreign operations, including foreign distributor
relationships,
(cid:120)
Longer accounts receivable collection cycles in certain foreign countries and additional cost of collection of those
receivables,
(cid:120) More limited protection for intellectual property in some countries,
Changes in currency exchange rates,
(cid:120)
(cid:120) Adverse economic or political changes,
(cid:120) Unexpected changes in regulatory requirements and tariffs,
(cid:120)
(cid:120)
Potential trade restrictions, exchange controls, and import and export licensing requirements, and
Potentially adverse tax consequences of overlapping tax structures.
Our failure to adequately address these risks could have a material adverse impact on our revenues, financial condition,
profitability, and cash flows.
We Are Dependent On The Availability Of Sufficient Quantities Of Tissue From Human Donors.
The success of our tissue preservation services depends upon, among other factors, the availability of sufficient
quantities of tissue from human donors. We rely primarily upon the efforts of third party procurement organizations, tissue
banks, most of which are not-for-profit, and others to educate the public and foster a willingness to donate tissue. If the
supply of donated human tissue is materially reduced, this would restrict our growth and could have a material adverse
impact on our revenues, financial condition, profitability, and cash flows.
The Loss Of Any Of Our Sole-Source Suppliers Could Have A Material Adverse Impact On Our Revenues, Financial
Condition, Profitability, And Cash Flows.
We purchase certain supplies used in our processing of tissue and our manufacturing processes products from single
sources due to quality considerations, costs, or constraints resulting from regulatory requirements. Agreements with certain
27
suppliers are terminable by either party or may expire. Where a particular single-source supply relationship is terminated, we
may not be able to establish additional or replacement suppliers for certain components or materials quickly. This is largely
due to the FDA approval system, which mandates validation of materials prior to use in our tissue processing and product
manufacturing, and the complex nature of the manufacturing processes employed by many suppliers. In addition, we may
lose a sole-source supplier due to, among other things, the acquisition of such supplier by a competitor (which may cause the
supplier to stop selling its products to us) or the bankruptcy of such a supplier, which may cause the supplier to cease
operations. A reduction or interruption by a sole-source supplier of the supply of materials or key components used in our
tissue processing or our product manufacturing or an increase in the price of those materials or components could materially
adversely impact our revenues, financial condition, profitability, and cash flow.
We May Be Unsuccessful In Our Efforts To Market And Sell PerClot In The U.S. And Internationally.
Even if we are able to obtain FDA approval to distribute PerClot in the U.S. according to our estimated timeline, we may
be unsuccessful in our attempts to sell PerClot in the U.S. as other competing products may have penetrated the market by
that time. Also, while we do not believe Medafor would have a valid reason to do so, based on our past history with
Medafor, it is possible that Medafor may attempt to challenge the legality of our distribution of PerClot in both the U.S. and
international markets or file a patent infringement action against us. If we are ultimately unable to distribute PerClot in the
U.S., we would not be able to fully realize the benefit of our investment in PerClot.
Also, some level of confusion in the international marketplace may exist in the short-term as we transition to selling both
HemoStase and PerClot, and then to selling only PerClot. Any such confusion among our customers may lead to lower than
anticipated sales of PerClot in 2011. Further, Medafor may attempt to compete directly with us with respect to our current
HemoStase customers and convince them to purchase Medafor’s hemostatic agent instead of purchasing PerClot from us.
Our Short-Term Liquidity And Earnings In 2011 Will Be Impacted By Our Substantial Investment In Our
Distribution And License And Manufacturing Agreements With SMI, And We Will Not Fully Realize The Benefit Of
Our Investment In Future Years Unless We Are Able To Obtain FDA Approval For PerClot In The U.S., Which Will
Require An Additional Commitment Of Funds.
On September 28, 2010 we entered into a worldwide distribution agreement and a license and manufacturing agreement
with SMI, pursuant to which we distribute and will, ultimately, manufacture PerClot. We were also authorized to pursue,
obtain, and maintain regulatory approval for PerClot in the U.S. If this approval is not obtained prior to October 1, 2017,
SMI may terminate our rights with respect to U.S. regulatory approval and require us to negotiate a reasonable revision to the
agreement.
As part of the transaction, we paid SMI $6.75 million in cash, which includes $1.5 million in prepaid royalties, and $1.25
million in restricted CryoLife common stock. We will pay up to an additional $2.75 million to SMI if certain U.S. regulatory
and other commercial milestones are achieved and will also pay royalties on sales of PerClot manufactured by us. We
anticipate that we will spend between $5.0 million and $6.0 million to gain U.S. regulatory approval in the next several years,
most of which will be incurred in 2011 and 2012. We will incur additional costs to begin manufacturing PerClot and to begin
marketing PerClot in the U.S. Our costs may be greater than anticipated, as the costs to obtain FDA approval, begin
manufacturing PerClot from plant starch modified by SMI, and begin marketing PerClot are estimates and may ultimately be
greater than anticipated.
Our investment in our agreements with SMI will materially impact our short-term liquidity and earnings in 2011, and we
will not be able to fully realize the benefit of our investment in future years unless we are able to obtain the necessary
regulatory approvals in the U.S. to distribute PerClot, within the timetable anticipated or at all, and this failure would
materially adversely impact our anticipated future revenues and profitability. There is no guarantee that we will obtain this
approval when anticipated or at all.
Key Growth Strategies May Not Generate The Anticipated Benefits.
The key elements of our strategy related to growing our business and leveraging our strength and expertise in our core
marketplaces to generate revenue and earnings growth are to:
(cid:120)
Identify and evaluate acquisition opportunities of complementary product lines and companies,
28
(cid:120) Expand core business,
(cid:120) Develop our pipeline of services and products,
(cid:120) License company technology to third parties for non-competing uses, and
(cid:120) Analyze and identify underperforming assets for potential sale or disposal.
Although management has been implementing these strategies, we cannot be certain that they will ultimately enhance
shareholder value.
Investments In New Technologies And Acquisitions Of Products Or Distribution Rights May Not Be Successful.
We may invest in new technology licenses and acquire products or distribution rights that may not succeed in the
marketplace. In such cases we may be unable to recover our initial investment, which could include the cost of acquiring
license or distribution rights, acquiring products, or purchasing initial inventory. Inability to recover our initial investment
may materially adversely impact our financial condition and profitability.
We May Expand Through Acquisitions Or Licenses Of, Or Investments In, Other Companies Or Technologies,
Which May Result In Additional Dilution To Our Stockholders And Consume Resources That May Be Necessary To
Sustain Our Business.
One of our business strategies is to acquire technologies, products, and licenses to grow our business. In connection with
one or more of those transactions, we may:
(cid:120)
Issue additional equity securities that would dilute our stockholder’s value;
(cid:120) Use cash that we may need in the future to operate our business; and
(cid:120)
Incur debt that could have terms unfavorable to us or that we might be unable to repay.
Business acquisitions also involve the risk of unknown liabilities associated with the acquired business. In addition, we
may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring
unknown liabilities or the failure to realize the anticipated benefits of an acquisition could materially adversely impact our
business.
We May Find It Difficult To Integrate Recent Acquisitions Of Technology And Potential Future Acquisitions Of
Technology Or Business Combinations, Which Could Disrupt Our Business, Dilute Stockholder Value, And Adversely
Impact Our Operating Results.
In connection with possible future acquisitions, we may need to integrate operations that have different and unfamiliar
corporate cultures. Likewise, we may need to integrate disparate technologies and product offerings, as well as multiple
direct and indirect sales channels. These integration efforts may not succeed or may distract our management’s attention
from existing business operations. Our failure to successfully manage and integrate recent technology acquisitions and any
future acquisitions could materially adversely impact our business.
We May Not Realize The Anticipated Benefits From An Acquisition.
Acquisitions involve the integration of companies that have previously operated independently. We expect that future
acquisitions may result in financial and operational benefits, including increased revenue, cost savings, and other financial
and operating benefits. We cannot be certain, however, that we will be able to realize increased revenue, cost savings, or
other benefits from any acquisition, or to the extent such benefits are realized, that they are realized timely. Integration may
also be difficult, unpredictable, and subject to delay because of possible cultural conflicts and different opinions on product
roadmaps or other strategic matters. We may integrate or, in some cases, replace, numerous systems, including those
involving purchasing, accounting and finance, sales, billing, employee benefits, payroll, and regulatory compliance, many of
which may be dissimilar. Difficulties associated with integrating an acquisition’s service and product offering into ours, or
with integrating an acquisition’s operations into ours, could have a material adverse impact on the combined company and
the market price of our common stock.
29
Regulatory Action Outside Of The U.S. Has Affected Our Business In The Past And May Affect Our Business In The
Future.
After the FDA issued the FDA Order, discussed above, Health Canada also issued a recall of the same types of tissue. In
addition, other countries have made inquiries regarding the tissues that we export, although these inquiries are now, to our
knowledge, complete. In the event other countries raise additional regulatory concerns, we may be unable to export tissues to
those countries. Regulatory concerns could also be raised regarding the products we market internationally, including
BioGlue and PerClot. Revenue from international tissue preservation services was approximately $2.3 million, $1.6 million,
and $1.2 million for the years ended December 31, 2010, 2009, and 2008, respectively. International revenue from product
sales, which includes international BioGlue revenue, was approximately $17.3 million, $16.0 million, and $14.6 million for
the years ended December 31, 2010, 2009, and 2008, respectively. Loss of all or a material portion of our international
revenues would have a material adverse impact on our revenues, financial condition, profitability, and cash flows.
Extensive Government Regulation May Adversely Impact Our Ability To Develop And Market Services And
Products.
Government regulation in the U.S., Europe, and other jurisdictions can determine the success of our efforts and our
competitors’ efforts to market and develop services and products. Most of our services and products in development and
those of our competitors, if successfully developed, will require regulatory approvals from the FDA and perhaps other
regulatory authorities before they may be commercially distributed. The process of obtaining a PMA from the FDA normally
involves clinical trials as well as an extensive premarket approval application and often takes many years. In addition, the
510(k) notification process may also require clinical trials and take many years. For example the 510(k) clearance for the
CryoValve SGPV took four years. The process for approval or clearance from the FDA is expensive and can vary
significantly based on the type, complexity, and novelty of the product. We cannot give any assurance that any services and
products developed by us or our competitors, independently or in collaboration with others, will receive the required
approvals or clearances for processing or manufacturing and marketing.
Delays in obtaining U.S. or foreign approvals could result in substantial additional costs and adversely impact our
competitive position. The FDA may also place conditions on service or product approvals that could restrict commercial
applications of our tissues and products. The FDA may withdraw service and product marketing approvals or clearances if
we do not maintain compliance with regulatory standards, if problems occur following initial marketing, or based on the
results of post-market studies. Delays imposed by the governmental approval and clearance process may materially reduce
the period during which we have the exclusive right to commercialize patented services and products.
Delays or rejections may also be encountered by us during any stage of the regulatory approval process if clinical or
other data fails to satisfactorily demonstrate compliance with, or if the service or product fails to meet, the regulatory
agency’s requirements for safety, efficacy, and quality. Those requirements may become more stringent due to changes in
applicable laws, regulatory agency policies, or the adoption of new regulations. Clinical trials may also be delayed due to the
following:
(cid:120) Unanticipated side effects,
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Lack of funding,
Inability to locate or recruit clinical investigators,
Inability to locate, recruit, and qualify sufficient numbers of patients,
Redesign of clinical trial programs,
Inability to manufacture or acquire sufficient quantities of the particular tissue, product, or any other components
required for clinical trials,
Changes in development focus, and
(cid:120)
(cid:120) Disclosure of trial results by competitors.
Even if we or one of our competitors are able to obtain regulatory approval for any services or products offered, the
scope of the approval may significantly limit the indicated usage for which such services or products may be marketed. The
unapproved use of our tissues or products could adversely impact the reputation of our Company and our services and
30
products. Services or products marketed pursuant to FDA or foreign oversight or approvals are subject to continuing
regulation and periodic inspections. Labeling and promotional activities are also subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The export of devices and biologics is also subject to regulation and
may require FDA approval. From time to time, the FDA may modify such regulations, imposing additional or different
requirements. If we fail to comply with applicable FDA requirements, which may be ambiguous, we could face civil and
criminal enforcement actions, warnings, citations, product recalls or detentions, and other penalties. This could have a
material adverse impact on our revenues, financial condition, profitability, and cash flows.
In addition, the National Organ Transplant Act of 1984 (“NOTA”) prohibits the acquisition or transfer of human organs
for “valuable consideration” for use in human transplantation. NOTA permits the payment of reasonable expenses associated
with the removal, transportation, implantation, processing, preservation, quality control, and storage of human organs.
Congress could adopt more restrictive interpretations of NOTA in the future that challenge one or more aspects of industry
methods of charging for preservation services. Our laboratory operations and those of our competitors are subject to the U.S.
Department of Labor, Occupational Safety and Health Administration, and U.S. Environmental Protection Agency
requirements for prevention of occupational exposure to infectious agents and hazardous chemicals and protection of the
environment. Some states have enacted statutes and regulations which govern the processing, transportation, and storage of
human organs and tissue.
The EU has three separate directives called the EUCTD that establish a benchmark standard for the regulation of tissues
and cells to be implanted in humans. The EUCTD requires that countries in the European Economic Area take responsibility
for regulating tissue and cells through a Competent Authority. Although Europa, our subsidiary, has a license to ship tissue
into the United Kingdom and a provisional license to distribute tissue into Germany through those countries’ Competent
Authorities, these countries could change their regulations or processes, and thereby increase the cost to us of distribution, or
modify or eliminate our ability and Europa’s ability to distribute tissue into the United Kingdom and Germany. In addition,
Europa ships tissue into Austria, which currently has no Competent Authority. When Austria puts in place its Competent
Authority, it could cause the Company and Europa to cease distribution of tissue into Austria temporarily or permanently, or
increase the costs to do so materially.
In addition, U.S. and foreign governments and regulatory agencies may adopt more restrictive laws or regulations in the
future that could have a material adverse impact on our revenues, financial condition, profitability, and cash flows.
Healthcare Policy Changes, Including Recent Federal Legislation To Reform The U.S. Healthcare System, May Have
A Material Adverse Impact On Us.
In response to perceived increases in health care costs in recent years, there have been, and continue to be, proposals by
the federal government, state governments, regulators, and third-party payors to control these costs and, more generally, to
reform the U.S. healthcare system. Certain of these proposals could limit the fees we are able to charge for our services,
prices we are able to charge for our products, or the amounts of reimbursement available for our services or products and
could limit the acceptance and availability of our services and products. In addition, as discussed below, recent federal
legislation would impose significant new taxes on medical device makers such as us. The adoption of some or all of these
proposals, including the recent federal legislation, could have a material adverse impact on our revenues, financial position,
profitability, and cash flows.
On March 23, 2010 President Obama signed the Patient Protection and Affordable Care Act. This legislation imposes
significant new taxes on medical device makers starting in 2013. Under this legislation, the total cost to the medical device
industry would be approximately $20 billion in additional taxes over ten years. These taxes will result in a significant
increase in the tax burden on us and our industry, which could have a material adverse impact on our financial position,
profitability, and cash flows.
Consolidation In The Healthcare Industry Could Lead To Demands For Price Concessions, Limits On The Use Of
Our Tissues And Products, Or Eliminate Our Ability To Sell To Certain Of Our Significant Market Segments.
The cost of healthcare has risen significantly over the past decade and numerous initiatives and reforms initiated by
legislators, regulators, and third-party payors to curb these costs have resulted in a consolidation trend in the medical device
industry as well as among our customers, including healthcare providers. This in turn has resulted in greater pricing
pressures and limitations on our ability to sell to important market segments, as group purchasing organizations, independent
31
delivery networks, and large single accounts continue to consolidate purchasing decisions for some of our customers. We
expect that market demand, government regulation, third-party reimbursement policies, and societal pressures will continue
to change the worldwide healthcare industry, resulting in further business consolidations and alliances which may exert
further downward pressure on the fees charged for our tissues and prices for our products, which could materially adversely
impact our revenues, financial condition, profitability, and cash flows.
The Success Of Many Of Our Tissues And Products Depends Upon Strong Relationships With Physicians.
If we fail to maintain our working relationships with physicians, many of our tissues and products may not be developed
and marketed in line with the needs and expectations of the professionals who use and support our tissues and products. The
research, development, marketing, and sales of many of our new and improved tissues and products is dependent upon our
maintaining working relationships with physicians. We rely on these professionals to provide us with considerable
knowledge and experience regarding our tissues and products and their marketing. Physicians assist us as researchers,
marketing consultants, product consultants, and as public speakers.
Certain states have begun to regulate interactions with physicians and other healthcare professionals. There is existing
legislation and regulation that govern interaction with physicians and healthcare professionals, and there is proposed
legislation and regulations that govern interactions with physicians and other healthcare professionals that is currently before
state legislatures and the U.S. Congress. These existing and proposed regulations and legislation currently impact our ability
to maintain strong relationships with physicians, and the proposed regulations and legislation, if passed, may impact our
ability to maintain strong relationships with physicians in the future. If we are unable to maintain our strong relationships
with these professionals and do not continue to receive their advice and input, the development and marketing of our products
could suffer, which could have a material adverse impact on our revenues, financial condition, profitability, and cash flows.
Our CryoValve SGPV Post-Clearance Study May Not Provide Expected Results.
At the FDA’s request, we are conducting a post-clearance study to seek evidence for the potential and implied long-term
benefits of the SynerGraft process used to process the CryoValve SGPV. The data to be collected includes long-term
information on safety, hemodynamic function, immune response, and explant analysis. Although we believe that this
information may help us ascertain whether the SynerGraft process reduces the immune response of the transplanted human
heart valve and allows for the collagen matrix to recellularize with the recipient’s own cells, it is possible that the results of
the study will not be as expected. If this study shows that the SynerGraft process does not reduce immune response and/or
cause the collagen matrix to recellularize with the recipient’s cells, we may be unable to realize some or all of the long-term
benefits that we anticipated for the use of this process, and the Company may not be able to continue to process a portion of
its human pulmonary valves and cardiac patch tissues with the SynerGraft technology.
See Part I, Item 1, “Research and Development” for further information regarding our past CryoValve SGPV study.
Our Existing Insurance Policies May Not Be Sufficient To Cover Our Actual Claims Liability.
Our tissues and products allegedly have caused and may in the future cause injury to patients using our tissues or
products, and we have been and may be exposed to tissue processing and product liability claims.
We maintain claims-made insurance policies to mitigate our financial exposure to tissue processing and product liability
claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the
insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for
claims, and incidents that have been incurred but not reported to the insurance carrier during the policy period.
Our December 31, 2010 Consolidated Balance Sheet reflects a $2.6 million liability for the estimated cost of resolving
unreported tissue processing and product liability claims. We believe that the liability could be estimated to be as high as
$4.7 million, after including a reasonable margin for statistical fluctuations. Based on an actuarial valuation, we estimated
that as of December 31, 2010, $1.1 million of the accrual for unreported liability claims would be recoverable under our
insurance policies. These amounts represent management’s estimate of the probable losses and anticipated recoveries for
unreported liability claims related to services performed and products sold prior to December 31, 2010. Actual results may
differ from this estimate. Our tissue processing and product liability insurance policies do not include coverage for any
punitive damages.
32
If we are unsuccessful in arranging acceptable settlements of future tissue processing or product liability claims or future
securities class action or derivative claims, we may not have sufficient insurance coverage and liquid assets to meet these
obligations. Additionally, if one or more claims in which we become hereafter a defendant, should be tried with a substantial
verdict rendered in favor of the plaintiff(s), such verdict(s) could exceed our available insurance coverage and liquid assets.
If we are unable to meet required future cash payments to resolve any outstanding or any future claims, this will materially
adversely impact our financial position, profitability, and cash flows. Further, if the costs of pending or incurred but
unreported tissue processing and product liability claims exceed our current estimates, our financial position, profitability,
and cash flows may be materially adversely impacted. If we do not have sufficient resources to pay any future verdicts
rendered against us, we may be forced to cease operations or seek protection under applicable bankruptcy laws.
We May Be Unable To Obtain Adequate Insurance At A Reasonable Cost, If At All.
If we are unable to obtain satisfactory insurance coverage in the future, we may be subject to additional future exposure
from tissue processing and product liability claims. Additionally, insurance rates may be significantly higher than in the past,
and insurers may provide less coverage, which may materially adversely impact our financial condition, profitability, and
cash flows. In addition, should we be subject to liability, whether imposed by a court or due to a settlement that results in a
large insurance claim, our insurance rates could increase significantly. Our current tissue processing and product liability
insurance policy is an eight-year claims-made policy covering claims incurred during the period April 1, 2003 through March
31, 2011 and reported during the period April 1, 2010 through March 31, 2011. Claims incurred prior to April 1, 2003 that
have not been reported are uninsured. Any punitive damage components of claims are also uninsured.
We Are Not Insured Against All Potential Losses. Natural Disasters Or Other Catastrophes Could Adversely Impact
Our Business, Financial Condition, And Profitability.
Our facilities could be materially damaged by tornadoes, flooding, other natural disasters, or catastrophic circumstances.
For example, our current facility in Kennesaw, Georgia, is the central location for all of our tissue processing and most of our
BioGlue manufacturing. If this facility were to be materially damaged by a natural disaster it would cause a loss of
processing and production and additional expenses to us to the extent any such damage is not fully covered by our natural
disaster and business interruption insurance.
Even with insurance coverage, natural disasters or other catastrophic events could cause us to suffer substantial losses in
our operational capacity and could also lead to a loss of opportunity and to a potential adverse impact on our relationships
with our existing customers resulting from our inability to process tissues or produce products for them, for which we would
not be compensated by existing insurance. This in turn could have a material adverse impact on our revenues, financial
condition, profitability, and cash flows.
Our Credit Facility Which Expires In March Of 2011 Limits Our Ability To Pursue Significant Acquisitions.
Our credit facility, which expires in March of 2011, prohibits mergers and acquisitions other than certain permitted
acquisitions. Permitted acquisitions include certain stock acquisitions and non-hostile acquisitions that have been approved
by the Board of Directors and/or the stockholders of the target company, if after giving effect to the acquisition, there is no
event of default under the credit facility and there is still at least $1.5 million available to be borrowed under the credit
facility. The total consideration that we pay or are obligated to pay for all acquisitions consummated during the term of the
credit facility, less the portion of any such consideration funded by the issuance of common or preferred stock, may not
exceed an aggregate of $15.0 million. As a result, our ability to consummate acquisitions and fully realize our growth
strategy may be materially adversely impacted while this credit facility remains in effect. Any credit facility we subsequently
enter into may have similar or more stringent restrictions on our ability to pursue significant acquisitions.
Our Ability To Borrow Under Our Credit Facility Which Expires In March 2011 May Be Limited.
Our credit facility contains a number of affirmative covenants that we must satisfy before we can borrow. For example,
we must satisfy specified leverage ratios, and there are also increasing levels of adjusted earnings before interest, taxes,
depreciation, and amortization under the credit facility that we have covenanted to maintain during the term of the credit
facility. Failure to satisfy any of these requirements could limit our borrowing ability and materially adversely impact our
liquidity.
33
We May Not Be Able To Enter Into A New Credit Facility After Our Current Credit Facility Expires In March 2011.
Our credit facility expires in March of 2011. Although we anticipate entering into a new credit facility, we may not be
able to do so. The inability to enter into a new credit facility may restrict our ability to fund acquisitions of new products or
technologies, or to enter into new licenses to further our strategy of growing our business if we cannot fund these activities
with existing cash. Any new credit facility may also have restrictions on our ability to merge or acquire companies that may
be as restrictive on even more restrictive than our current credit facility. Any new credit facility may also have any number
of covenants that restrict our ability to borrow, which could be as restrictive or more restrictive than our current credit
facility. Failure to satisfy any of these requirements could limit our borrowing ability and materially adversely impact our
liquidity.
Continued Fluctuation Of Foreign Currencies Relative To The U.S. Dollar Could Materially Adversely Impact Our
Business.
The majority of our foreign tissue and product revenues are denominated in British Pounds and Euros, and as such are
sensitive to changes in exchange rates. In addition, a portion of our dollar-denominated product sales are made to customers
in other countries who must convert local currencies into U.S. dollars in order to purchase these products. We also have
balances, such as cash, accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These
foreign currency transactions and balances are sensitive to changes in exchange rates. Fluctuations in exchange rates of
British Pounds and Euros or other local currencies in relation to the U.S. Dollar could materially reduce our 2011 product
revenue or could result in a material decrease in future revenues as compared to the comparable prior periods. Should this
occur, it could have a material adverse impact on our revenues, financial condition, profitability, and cash flows.
Rapid Technological Change Could Cause Our Services And Products To Become Obsolete.
The technologies underlying our services and products are subject to rapid and profound technological change.
Competition intensifies as technical advances in each field are made and become more widely known. We can give no
assurance that others will not develop services, products, or processes with significant advantages over the services, products,
and processes that we offer or are seeking to develop. Any such occurrence could have a material adverse impact on our
revenues, financial condition, profitability, and cash flows.
We Are Dependent On Our Key Personnel.
Our business and future operating results depend in significant part upon the continued contributions of our key field
personnel and senior management, many of whom would be difficult to replace, including our CEO, Steven G. Anderson,
whose employment agreement expires in December 2012. Our business and future operating results also depend in
significant part upon our ability to attract and retain qualified management, processing, marketing, sales, and support
personnel for our operations. Competition for such personnel is intense, and we cannot ensure that we will be successful in
attracting and retaining such personnel. We do not have key life insurance policies on any of our key personnel. If we lose
any key employees, if any of our key employees fail to perform adequately, or if we are unable to attract and retain skilled
employees as needed, this could have a material adverse impact on our revenues, financial condition, profitability, and cash
flows.
Risks Related To Our Common Stock
Trading Prices For Our Common Stock, And For The Securities Of Biotechnology Companies In General, Have
Been, And May Continue To Be, Volatile.
The trading price of our common stock has been subject to wide fluctuations and may continue to be volatile in the
future. Trading price fluctuations can be caused by a variety of factors, many of which are beyond our control, including:
(cid:120) Governmental regulatory acts,
Regulatory actions such as adverse FDA activity,
(cid:120)
(cid:120) Other actions taken by government regulators,
(cid:120) General conditions in the medical device or service industries,
34
(cid:120) Announcement of technological innovations or new products by us or our competitors,
Tissue processing and product liability claims,
(cid:120)
(cid:120) Developments with respect to patents or proprietary rights,
(cid:120) Variations in operating results, and
(cid:120)
Changes in earnings estimates by securities analysts.
If our revenues or operating results in future quarters fall below the expectations of securities analysts and investors, the
price of our common stock would likely decline, perhaps substantially. If our share prices do not meet the requirements of
the New York Stock Exchange, our shares may be delisted. The closing price of our common stock has ranged from a high
of $16.35 to a low of $2.99 in the period from January 1, 2006 to December 31, 2010.
In addition, changes in the trading price of our common stock may bear no relation to our actual operational or financial
results. The market prices of the securities of biotechnology companies have been highly volatile and are likely to remain
highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies.
In the past, companies that experienced volatility in the market price of their securities have often faced securities class-
action litigation. Moreover, market prices for stocks of biotechnology and technology companies frequently reach levels that
bear no relationship to the operating performance of these companies. These market prices generally are not sustainable and
are highly volatile. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our
management’s attention and resources, and materially adversely impact our financial position, profitability, and cash flows.
Anti-Takeover Provisions May Discourage Or Make More Difficult An Attempt To Obtain Control Of Us.
Our Articles of Incorporation and Bylaws contain provisions that may discourage or make more difficult any attempt by
a person or group to obtain control of our company, including provisions authorizing the issuance of preferred stock without
shareholder approval, restricting the persons who may call a special meeting of the shareholders, and prohibiting shareholders
from taking action by written consent. In addition, we are subject to certain provisions of Florida law that may discourage or
make more difficult takeover attempts or acquisitions of substantial amounts of our common stock. Further, pursuant to the
terms of a shareholder rights plan adopted in 1995 and amended in 2005, each outstanding share of common stock has one
attached right. The rights will cause substantial dilution of the ownership of a person or group that attempts to acquire our
company on terms not approved by the Board of Directors and may deter hostile takeover attempts. These provisions could
potentially deprive our stockholders of opportunities to sell shares of our stock at above-market prices.
We Have Not Paid Cash Dividends On Our Common Stock And May Be Unable To Do So Due To Legal Or
Contractual Restrictions.
We have not paid cash dividends on our common stock. In addition, our credit agreement prohibits us from paying cash
dividends, and under Florida law we may not be able to pay cash dividends on our capital stock. Under Florida law, no
distribution may be paid on our capital stock, if after giving it effect:
(cid:120) We would not be able to pay our debts as they become due in the usual course of business, or
(cid:120) Our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were
to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of any preferred
shareholders whose preferential rights are superior to those receiving the distribution.
The terms of any future financing arrangements that we may enter into may also restrict our ability to pay dividends.
35
Forward-Looking Statements
This Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Exchange Act. Forward-looking statements give the Company’s current expectations or
forecasts of future events. The words “could,” “may,” “might,” “will,” “would,” “shall,” “should,” “pro forma,” “potential,”
“pending,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “future,” and other similar expressions generally
identify forwarding-looking statements. These forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-
looking statements, which are made as of the date of this Form 10-K. Such forward-looking statements reflect the views of
management at the time such statements are made and are subject to a number of risks, uncertainties, estimates, and
assumptions, including, without limitation, in addition to those identified in the text surrounding such statements, those
identified under Part I, Item 1A. “Risk Factors” and elsewhere in this Form 10-K.
All statements, other than statements of historical facts, included herein that address activities, events or developments
that the Company expects or anticipates will or may occur in the future, are forward-looking statements, including statements
regarding:
(cid:120)(cid:3) The Company’s belief that the current balance of its deferred preservation costs along with its ongoing preservation
service activities is sufficient to support its current and projected revenues;
(cid:120)(cid:3) The timing of the discontinuance of HemoStase sales and shipments;
(cid:120)(cid:3) The expected impact of the termination of the Medafor EDA;
(cid:120)(cid:3) Plans and costs related to regulatory approval for the distribution of PerClot in the U.S. and international markets;
(cid:120)(cid:3) Plans and expectations regarding research and development of new technologies and products;
(cid:120)(cid:3) Plans regarding the distribution of BioGlue in Japan, and our estimates regarding the Japanese market for related
products and uses;
(cid:120)(cid:3) Strategies to pursue potential acquisition, licensing, or distribution rights of additional technologies that complement
our existing services and products;
(cid:120)(cid:3) Plans to expand our core business, develop our pipeline of services and products, and license our technology;
(cid:120)(cid:3) Plans to begin distribution of BioFoam in other international markets, estimates of the aggregate European market
opportunity for BioFoam, and expectations regarding clinical trials for BioFoam;
(cid:120)(cid:3) Expected results of the CryoValve SGPV post-clearance study;
(cid:120)(cid:3) Expectations regarding regulatory approval and subsequent shipments of the CryoValve SGAV;
The Company’s plans to apply for further federal funding for the development of BioFoam;
(cid:120)
(cid:120)(cid:3) The Company’s expectations regarding the timing of court rulings in its legal proceedings;
(cid:120)(cid:3) The Company’s intentions with respect to lawsuits and the expected impact of current litigation;
(cid:120)(cid:3) Expected benefits of acquisitions;
(cid:120)(cid:3) Anticipated future demand for our tissues and products;
(cid:120)(cid:3) Expectations regarding the impact of healthcare legislation;
(cid:120)(cid:3) The Company’s estimated future liability for existing tissue processing and product liability lawsuits and for claims
incurred but not yet reported;
Expectations regarding minimum purchase requirements related to PerClot;
(cid:120)(cid:3) Expectations regarding a new credit facility;
(cid:120)(cid:3) Beliefs regarding growth of BioGlue revenues and the factors affecting such growth;
(cid:120)(cid:3) Expectations regarding revenues from PerClot and HemoStase;
(cid:120)
(cid:120)(cid:3) The impact of additional HemoStase write-downs or discounts on HemoStase sales;
(cid:120)(cid:3) The impact of expenses associated with lawsuits and business development opportunities;
(cid:120)(cid:3) Management’s beliefs that current cardiac and vascular procurement levels are sufficient to support future demand;
(cid:120)(cid:3) The Company’s beliefs regarding the seasonal nature of the demand for some of its products and services;
36
(cid:120)(cid:3) The Company’s beliefs regarding the rate of decrease of its deferred preservation cost balances;
(cid:120)(cid:3) The adequacy of the Company’s financial resources;
(cid:120)(cid:3) The Company’s belief that it will have sufficient cash to meet its operational liquidity needs for at least the next
twelve months;
(cid:120)(cid:3) The Company’s expectations regarding the source of any future payments related to any unreported tissue
processing or product liability claims;
(cid:120)(cid:3) Anticipated impact of changes in interest rates and foreign currency exchange rates;
(cid:120)(cid:3) The Company’s expectations regarding the renewal of certain contracts;
(cid:120)(cid:3) Expectations regarding the impact of new accounting pronouncements;
Issues that may impact the Company’s future financial performance and cash flows; and
(cid:120)(cid:3)
(cid:120)(cid:3) Other statements regarding future plans and strategies, anticipated events, or trends.
These statements are based on certain assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions, and expected future developments as well as other factors it believes are
appropriate in the circumstances. However, whether actual results and developments will conform with the Company’s
expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ
materially from the Company’s expectations, including, without limitation, in addition to those specified in the text
surrounding such statements, the risk factors discussed in Item 1A of this Form 10-K and other factors, many of which are
beyond the control of CryoLife. Consequently, all of the forward-looking statements made in this Form 10-K are qualified
by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the
Company or its business or operations. The Company assumes no obligation to update publicly any such forward-looking
statements, whether as a result of new information, future events, or otherwise.
37
Item 1B. Unresolved Staff Comments.
The Company has no unresolved written comments received from the staff of the Securities and Exchange Commission
regarding its periodic or current reports under the Securities Exchange Act of 1934 not less than 180 days before December
31, 2010 (the end of the fiscal year to which this Form 10-K relates).
Item 2. Properties.
The Company’s facilities are located in suburban Atlanta, Georgia, and in Guildford, England. The corporate
headquarters in Atlanta consists of approximately 200,000 square feet of leased manufacturing, administrative, laboratory,
and warehouse space with an additional 7,600 square feet of off-site warehouse space. Approximately 26,000 square feet are
dedicated to clean room work areas. The primary facility has six main laboratory facilities: human tissue preservation,
BioGlue manufacturing, bioprosthesis manufacturing, research and development, microbiology, and pathology. Each of
these areas consists of a general technician work area and adjoining “clean rooms” for work with human tissue and for
aseptic processing. The clean rooms are supplied with highly filtered air that provides a near-sterile environment. The
human tissue preservation laboratory contains approximately 15,600 square feet with a suite of seven clean rooms. The
current processing level is estimated to be at about 25% of total capacity. To increase the current processing levels, the
Company could increase the number of employees and expand its second and third shift. The BioGlue manufacturing
laboratory contains approximately 13,500 square feet with a suite of six clean rooms. The current processing level is about
5% of total capacity. To produce at full capacity levels, the Company would need to increase the number of employees, add
work shifts, and install automated filling and pouching equipment. The bioprosthesis manufacturing laboratory contains
approximately 20,000 square feet with a suite of six clean rooms. The research and development laboratory is approximately
10,500 square feet with a suite of five clean rooms. The microbiology laboratory is approximately 8,000 square feet with a
suite of five clean rooms. The pathology laboratory is approximately 1,100 square feet. The Europa facility located in
Guildford, United Kingdom contains approximately 3,400 square feet of leased office and warehousing space. In addition,
Europa has shared warehousing space utilized by its third party shipper.
Item 3. Legal Proceedings.
Medafor
Overview of CryoLife’s Claims
On April 29, 2009 the Company filed a lawsuit against Medafor in the U.S. District Court for the Northern District of
Georgia (the “Court”) alleging claims for, among other things, breach of contract, fraud, negligent misrepresentation, and
violations of Georgia’s Racketeer Influenced and Corrupt Organizations Act (“Georgia RICO”). The claims arise out of the
Company’s exclusive distribution agreement with Medafor (the “EDA”), pursuant to which the Company had the right to
distribute a product manufactured by Medafor (the “Product”) under the name HemoStase. The EDA gave the Company
exclusive rights to market and distribute the Product in all applications in cardiac and vascular surgery in most of the U.S.
and for all cardiac and vascular surgeries and most other types of general surgery applications in much of the rest of the
world. On March 18, 2010 Medafor sent the Company a letter stating that it was terminating the EDA based on an allegation
that CryoLife had repudiated the agreement. On September 27, 2010 Medafor sent the Company a letter stating that Medafor
was "fully, finally and immediately terminating" the EDA. CryoLife believes this termination was wrongful.
There have been a number of motions filed with the Court by both parties. On March 8, 2010 the Company filed its
Third Amended Complaint, and on August 9, 2010, the Court dismissed the Company’s Georgia RICO claim. On October
20, 2010—after Medafor had terminated the EDA—the Company filed supplemental claims in the lawsuit against Medafor
for additional breaches of the EDA, including claims that Medafor’s termination of that contract was wrongful. On
November 10, 2010 Medafor filed its First Amended Answer and Counterclaim, discussed more fully below. On December
6, 2010 the Company filed a motion to dismiss most of Medafor’s counterclaim. Medafor filed a response to the Company’s
motion to dismiss on December 23, 2010, and the Company filed a reply brief in support of the motion on January 10, 2011.
On December 21, 2010 the Company filed a motion for partial summary judgment based on its contention that Medafor’s
termination of the EDA was wrongful, and Medafor filed a response brief on January 19, 2011. The Company’s reply brief
in support of the motion was filed on February 7, 2011. On February 4, 2011 Medafor filed a motion for partial summary
38
judgment based on its contention that CryoLife had failed to pay Medafor approximately $1.3 million plus prejudgment
interest for product Medafor shipped to CryoLife. CryoLife will file a response brief opposing Medafor’s motion. The Court
has not set a date for a hearing on any of these motions and will likely rule on each of these motions without a hearing. The
Court may rule at any time in the future.
The Company’s lawsuit alleges that Medafor unlawfully terminated the EDA, and that contrary to Medafor’s
representations in the EDA, it had numerous distribution agreements regarding the Product with other distributors in the U.S.
and internationally, allowing these distributors to market and distribute the Product in the territory and field given exclusively
to the Company. Medafor is alleged to have knowingly and purposefully withheld from the Company disclosure that these
competing agreements existed at the time the EDA became operational and to have intentionally misrepresented to the
Company that no such contracts existed, or that their termination had been arranged. The lawsuit also alleges that Medafor
failed to take reasonable steps to prevent other distributors from distributing the Product in the Company’s exclusive field
within its exclusive territory, and that Medafor failed to take necessary actions to ensure the value of CryoLife’s
distributorship. Medafor denies these allegations.
The Company alleges that it brought these transgressions to Medafor’s attention on numerous occasions and attempted to
work with Medafor to secure its compliance with the terms of the parties’ agreement, but Medafor refused to follow the terms
of the EDA. Medafor’s actions are alleged to have deprived the Company of significant sales volume and to have impaired
and delayed the Company’s development of relationships with customers in its exclusive field and territory. Medafor denies
these allegations.
Potential Damages
The Company seeks to recover its damages from Medafor, punitive damages, and reimbursement of its attorneys’ fees.
In addition, the Company is seeking damages related to Medafor’s wrongful termination of the EDA, which will be based
upon the Company’s lost profits for the period of time during which the EDA would have continued in effect but for
Medafor’s wrongful termination of it. The amount of these damages will be determined through discovery in the lawsuit. No
trial date has been set, although CryoLife believes that a trial is not likely until 2012.
Medafor’s Termination of the EDA
As referenced above, on March 18, 2010 Medafor notified the Company of its contention that the Company had
repudiated the EDA, thereby entitling Medafor to terminate the contract. Medafor asserted that it had made a valid statutory
demand, in a February 10, 2010 letter to CryoLife, for “adequate assurances” of CryoLife’s future performance under the
EDA, and that CryoLife had repudiated the EDA by failing to respond in a timely manner. CryoLife filed a motion for
preliminary injunction, on March 29, 2010, asking the Court to enjoin Medafor from proceeding with its termination of the
EDA. After two hearings, the Court, on September 20, 2010, issued an order denying CryoLife's request for a preliminary
injunction against Medafor. Although the order denied the preliminary injunction, it did not address the merits of the parties’
respective positions on the underlying issue of whether Medafor’s termination of the EDA was wrongful. The Court stated
that it viewed this question as more appropriately addressed at summary judgment. On September 27, 2010 Medafor sent the
Company a letter stating that Medafor was "fully, finally and immediately terminating" the EDA. CryoLife believes this
termination was wrongful.
Medafor’s Counterclaims
As discussed above, on November 10, 2010 Medafor filed its First Amended Answer and Counterclaim, alleging claims
for, among other things, breach of contract, breach of the implied duty of good faith and fair dealing, violation of the Georgia
Trade Secrets Act, tortious interference with business relationships, libel, violation of the Lanham Act, violation of Georgia’s
Uniform Deceptive Trade Practices Act, fraud and negligent misrepresentation, and conversion. In addition, Medafor
requested that the Court grant a declaratory judgment that CryoLife repudiated the EDA pursuant to the provisions of the
Georgia Uniform Commercial Code. On December 6, 2010 CryoLife filed a Motion to Dismiss and for More Definite
Statement, seeking dismissal of all of Medafor’s claims except for its breach of contract claim and its request for declaratory
judgment. Medafor filed a response brief opposing the motion on December 23, 2010. On January 10, 2011 CryoLife filed a
reply brief in support of its motion. The Court has not ruled on CryoLife’s Motion to Dismiss and for More Definitive
Statement. As discussed above, Medafor filed a motion for partial summary judgment requesting that the Court order
39
CryoLife to pay approximately $1.3 million plus prejudgment interest that CryoLife withheld for product sold to CryoLife
that CryoLife believes it may not be able to sell.
Summary of Medafor’s Potential Damages Claims
Pursuant to its counterclaims, Medafor seeks to recover its alleged damages from CryoLife, including from the alleged
repudiation of the EDA, injunctive relief, prejudgment interest, punitive damages, and attorneys’ fees and expenses. Until
such time as the Court rules on Medafor’s counterclaims and discovery in the lawsuit has finished, assessing the potential or
likelihood that Medafor could prevail and the amount of damages that could be awarded to Medafor if it were to prevail will
be difficult. No trial date has been set, although a trial is not likely until 2012. CryoLife intends to vigorously prosecute the
case, defend itself, and contest the matter.
Written Discovery Has Commenced
Written discovery began on October 8, 2010. The parties have not exchanged any documents other than responses to
written discovery. No depositions have been set. The Court has set an eight month discovery period.
Tenaxis
On October 1, 2008 Tenaxis, Inc. filed a nullity action against CryoLife’s main BioGlue patent in Federal Patent Court in
the State of Bavaria in the Federal Republic of Germany that seeks to invalidate this patent in Germany. The Federal Patent
Court held a hearing on the nullity action on November 24, 2009. On April 22, 2010 the Federal Patent Court in Munich
issued a judgment declaring the German part of this BioGlue patent as void. CryoLife has filed an appeal against this
judgment with the German Supreme Court. Until the decision on the appeal, the patent formally remains in force. It is likely
that the appeal will not be heard until 2012.
On October 30, 2008 the Company filed a patent infringement action in a Patent Court in the State of North Rhein-
Westphalia in Düsseldorf in the Federal Republic of Germany. This complaint alleges that Tenaxis is infringing the
Company’s main BioGlue patent by selling a surgical adhesive made up of a mixture of among other things, bovine serum
albumin, and glutaraldehyde. The Company is seeking an injunction, damages, and a list of customers to which Tenaxis has
sold or is planning to sell its products. The District Court has stayed the proceedings pending the issuance of judgment of the
German Supreme Court in the nullity appeal proceeding.
Item 4. Removed and Reserved.
Item 4A. Executive Officers of the Registrant.
The following table lists the executive officers of CryoLife and their ages, positions with CryoLife, and the dates from
which they have continually served as executive officers with CryoLife. Each of the executive officers of CryoLife was elected
by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual meeting of
shareholders or until his earlier removal by the Board of Directors or his resignation.
Name
Service as
Executive Age
Position
Steven G. Anderson .......... Since 1984
Jeffrey W. Burris............... Since 2010
Scott B. Capps................... Since 2007
David M. Fronk................. Since 1998
Albert E. Heacox, Ph.D..... Since 1989
D. Ashley Lee, CPA.......... Since 2000
72 President, Chief Executive Officer, and Chairman
39 Vice President and General Counsel
44 Vice President, Clinical Research
47 Vice President, Regulatory Affairs and Quality Assurance
60 Senior Vice President, Research and Development
46 Executive Vice President, Chief Operating Officer, and
Gerald B. Seery ................. Since 2005
54 Senior Vice President Sales and Marketing
Chief Financial Officer
40
Steven G. Anderson, a founder of CryoLife, has served as CryoLife’s President, Chief Executive Officer, and Chairman of the
Board of Directors since its inception. Mr. Anderson has more than 35 years of experience in the implantable medical device
industry. Prior to founding CryoLife, Mr. Anderson was Senior Executive Vice President and Vice President, Marketing, from
1976 until 1983 of Intermedics, Inc. (now Boston Scientific Corp.), a manufacturer and distributor of pacemakers and other
medical devices. Mr. Anderson is a graduate of the University of Minnesota.
Jeffrey W. Burris was appointed to the position of Vice President and General Counsel in February 2010. Mr. Burris has
been with the Company since February 2008, serving as General Counsel from February of 2008 until February 2010. From
2003 to 2008, Mr. Burris served as Senior Legal Counsel and Legal Counsel for Waste Management, where he was the
responsible attorney for acquisitions and divestitures for Waste Management’s Southern Group. From 1997 to 2003, Mr.
Burris was an associate with the law firm Arnall Golden Gregory, LLP, focusing on biotechnology and mergers and
acquisitions. Mr. Burris received his B.A. from the University of Tennessee and his J.D. from the University of Chicago Law
School.
Scott B. Capps was appointed to the position of Vice President of Clinical Research in November 2007. Prior to this
position, Mr. Capps served as Vice President, General Manager of CryoLife Europa, Ltd. in the United Kingdom from
February 2005 to November 2007 and Director, European Clinical Affairs from April 2003 to January 2005. Mr. Capps
joined CryoLife in 1995 as Project Engineer for the allograft heart valve program and was promoted to Director, Clinical
Research in 1999. Mr. Capps is responsible for overseeing and implementing clinical trials to achieve FDA and International
approval of CryoLife’s medical products in cardiac, vascular, and orthopaedic clinical areas. Before joining CryoLife, Mr.
Capps was a Research Assistant in the Department of Bioengineering at Clemson University working to develop a
computerized database and radiographic image analysis system for total knee replacement. Mr. Capps received his Bachelor
of Industrial Engineering from the Georgia Institute of Technology and his M.S. in Bioengineering from Clemson University.
David M. Fronk was appointed to the position of Vice President of Regulatory Affairs and Quality Assurance in April 2005 and
has been with the Company since 1992, serving as Vice President of Clinical Research from December 1998 to April 2005 and
Director of Clinical Research from December 1997 until December 1998. Mr. Fronk is responsible for developing and
implementing improved safety processes and procedures for new and existing medical products. Prior to joining the Company,
Mr. Fronk held engineering positions with Zimmer, Inc. from 1986 until 1988 and Baxter Healthcare Corporation from 1988
until 1991. Mr. Fronk served as a market manager with Baxter Healthcare Corporation from 1991 until 1992. Mr. Fronk
received his B.S. in Mechanical Engineering from the Ohio State University in 1985 and his M.S. in Biomedical Engineering
from the Ohio State University in 1986.
Albert E. Heacox, Ph.D., was appointed to the position of Senior Vice President of Research and Development in December
2004. Dr. Heacox has been with the Company since June 1985 and served as Vice President of Laboratory Operations from
June 1989 to December 2004. Dr. Heacox was promoted to Senior Vice President in December of 2000. Dr. Heacox has been
responsible for developing protocols and procedures for cardiac, vascular, and connective tissues, implementing upgrades in
procedures in conjunction with the Company’s quality assurance programs, and overseeing all processing and production
activities of the Company’s laboratories. Dr. Heacox is now responsible for the continued development of the Company’s
current products as well as the evaluation of new technologies. Prior to joining the Company, Dr. Heacox worked as a
researcher with the U.S. Department of Agriculture and North Dakota State University, developing methods for the preservation
of cells and animal germ plasma storage. Dr. Heacox received his B.A. and M.S. in Biology from Adelphi University, received
his Ph.D. in Zoology from Washington State University, and completed his post-doctorate training in cell biology at the
University of Cologne, West Germany.
D. Ashley Lee, CPA, has served as Executive Vice President, Chief Operating Officer, and Chief Financial Officer since
November 2004. Mr. Lee has been with the Company since December 1994 serving as Vice President of Finance, Chief
Financial Officer, and Treasurer from December 2002 to November 2004; as Vice President Finance and Chief Financial Officer
from April 2000 to December 2002; and as Controller of the Company from December 1994 until April 2000. From 1993 to
1994, Mr. Lee served as the Assistant Director of Finance for Compass Retail, Inc., a wholly-owned subsidiary of Equitable
Real Estate. From 1987 to 1993, Mr. Lee was employed as a certified public accountant with Ernst & Young, LLP. Mr. Lee
received his B.S. in Accounting from the University of Mississippi.
Gerald B. Seery has served as Senior Vice President of Sales and Marketing since October 2005. Mr. Seery has been with
the Company since July 1993 serving as Vice President of International Operations from July 2005 to October 2005,
President of CryoLife Europa from April 2002 to July 2005, President of AuraZyme from March 2001 to April 2002, and
41
Vice President of Marketing from August 1995 to March 2001. Mr. Seery is responsible for developing and implementing
the Company's sales and marketing plans and supervising all tissue procurement activities. Prior to joining the Company,
Mr. Seery held senior marketing management positions with Meadox Medicals from 1982 until 1985, Electro Catheter
Corporation from 1985 until 1989 and Daig Corporation from 1992 until 1993, accumulating fifteen years of specialized
marketing experience in cardiac medical devices. Mr. Seery received his B.A. in International Economics at The Catholic
University of America in Washington, D.C. in 1978 and completed his M.B.A. at Columbia University in New York in 1980.
42
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities.
Market Price of Common Stock
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CRY.” The
following table sets forth, for the periods indicated, the intra-day high and low sale prices per share of common stock on the
NYSE.
2010
First quarter
Second quarter
Third quarter
Fourth quarter
2009
First quarter
Second quarter
Third quarter
Fourth quarter
High
$
7.45
6.75
6.28
6.79
High
$
9.79
6.21
8.87
8.25
$
$
Low
6.02
4.80
5.05
5.25
Low
3.93
4.50
4.95
5.52
As of February 11, 2011 the Company had 414 shareholders of record.
The Company has never declared or paid any cash dividends on its common stock, and its credit agreement with General
Electric Capital Corporation (“GE Capital”) prohibits payment of cash dividends on the Company’s common stock without GE
Capital’s consent. If the Company chooses to issue preferred stock, the holders of shares of that preferred stock could have a
preference as to the payment of dividends over the holders of common stock.
Issuer Purchases of Equity Securities
The following table provides information about purchases of equity securities by the Company during the quarter ended
December 31, 2010 that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934.
Common Stock
Period
10/01/10 – 10/31/10
11/01/10 – 11/30/10
12/01/10 – 12/31/10
Total
Total Number of
Common Shares
Purchased
40,854
94,650
135,597
271,101
Average Price
Paid per
Common Share
6.26
$
5.84
5.53
5.75
Total Number
of Common Shares
Purchased as
Part of Publicly
Announced
Plans or Programs
40,854
87,000
135,597
263,451
Dollar Value
of Common Shares
That May Yet Be
Purchased Under the
Plans or Programs
10,493,156
9,989,903
9,239,905
9,239,905
On June 1, 2010 the Company publicly announced that its Board of Directors authorized the purchase of up to $15.0
million of its common stock over the course of the following two years. The purchase of shares may be made from time to
time in the open market or through privately negotiated transactions on such terms as management deems appropriate and
will be dependant upon various factors, including price, regulatory requirements, and other market conditions. As of
December 31, 2010 the Company has purchased 1.0 million shares of its common stock for an aggregate purchase price of
$5.8 million.
43
Item 6. Selected Financial Data.
The following Selected Financial Data should be read in conjunction with the Company’s consolidated financial
statements and notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
and other financial information included elsewhere in this report.
(in thousands, except percentages, current ratio, and per share data)
Selected Financial Data
2010
2009
December 31,
2008
2007
2006
Operations
Revenues
Operating income
Net income
Net income (loss) applicable to common shareholders
Research and development expense as a
$ 116,645 $ 111,685 $ 105,059 $
14,496
8,679
8,679
13,654
31,950
31,950
9,868
3,944
3,944
94,763 $ 81,311
1,418
365
(608)
8,299
7,201
6,958
percentage of revenues
5.1%
4.7%
5.1%
4.7%
4.4%
Income (Loss) Per Common Share
Basic
Diluted
Year-End Financial Position
Total assets
Working capital
Long-term liabilities
Convertible preferred stock
Shareholders’ equity
Current ratio1
Shareholders’ equity per diluted common share
1 Current assets divided by current liabilities.
$
$
0.14 $
0.14 $
0.31 $
0.31 $
1.15 $
1.13 $
0.26 $
0.26 $
(0.02)
(0.02)
$ 137,438 $ 133,859 $ 125,037 $
76,312
4,197
--
110,446
5:1
3.90 $
82,162
4,168
--
113,942
5:1
4.03 $
59,370
5,672
--
98,368
4:1
3.47 $
$
92,684 $ 79,865
26,472
40,750
4,864
5,355
3
--
52,088
62,627
2:1
3:1
2.10
2.32 $
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
CryoLife, Inc. (“CryoLife”, the “Company”, “we”, or “us”), incorporated January 19, 1984 in Florida, preserves and
distributes human tissues and develops, manufactures, and commercializes medical devices for cardiac and vascular
transplant applications. The human tissues distributed by CryoLife include the CryoValve® SG pulmonary heart valve
(“CryoValve SGPV”) and the CryoPatch® SG pulmonary cardiac patch tissue (“CryoPatch SG”), both processed using
CryoLife’s proprietary SynerGraft® technology. CryoLife’s medical devices consist primarily of surgical adhesives, sealants,
and hemostats including BioGlue® Surgical Adhesive (“BioGlue”), BioFoam® Surgical Matrix (“BioFoam”), PerClot®, which
the Company began distributing for Starch Medical, Inc. (“SMI”) in October of 2010, and HemoStase®, which the Company
currently distributes for Medafor, Inc. (“Medafor”), although CryoLife expects to discontinue sales of HemoStase in late
March 2011 because Medafor terminated the HemoStase distribution agreement.
For the year ended December 31, 2010 CryoLife achieved record revenues, surpassing $116.0 million in revenues. In
addition, CryoLife generated $20.8 million in cash from operations, the largest yearly inflow of cash from operations in
Company history. CryoLife used a portion of this cash to purchase assets from SMI, common stock of Medafor, and to
repurchase CryoLife common stock.
As a result of the transaction with SMI, CryoLife recorded $4.5 million for prepaid royalties and intangible assets, and
expensed $3.5 million allocated to acquired in-process research and development. CryoLife’s operating income and net
income for the year ended December 31, 2010 was negatively impacted by the expense of the SMI acquired in-process
research and development as well as a write-down of HemoStase inventory and legal expenses related to its lawsuit and other
dealings with Medafor. CryoLife’s net income for the year ended December 31, 2010 was also negatively impacted by the
44
write-down of the Company’s investment in Medafor common stock. See the “Results of Operations” section below for
additional analysis of the fourth quarter and full year 2010 results. See Part I, Item 1, “Business,” for further discussion of
the Company’s business and activities during 2010.
Recent Events
On September 28, 2010 CryoLife entered into a worldwide distribution agreement and a license and manufacturing
agreement with SMI of San Jose, California for PerClot, a polysaccharide hemostatic agent used in surgery. In October 2010
CryoLife announced that it had begun European distribution of PerClot. CryoLife plans to file an Investigational Device
Exemption in 2011 with the U.S. Food and Drug Administration (“FDA”) to begin clinical trials for the purpose of obtaining
Premarket Approval to distribute PerClot in the U.S.
On October 7, 2010 CryoLife announced that BioGlue had received Shonin approval from the Japanese Ministry of
Health, Labor, and Welfare (“MHLW”) for use in the repair of aortic dissections. CryoLife’s partner, Century Medical, Inc.,
(“CMI”) will distribute BioGlue in Japan. Management estimates that distribution in Japan will begin in the first half of
2011.
Critical Accounting Policies
A summary of the Company’s significant accounting policies is included in Part II, Item 8, “Note 1 of the Notes to
Consolidated Financial Statements.” Management believes that the consistent application of these policies enables the
Company to provide users of the financial statements with useful and reliable information about the Company’s operating
results and financial condition. The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the U.S. which require the Company to make estimates and assumptions. The following are accounting
policies that management believes are most important to the portrayal of the Company’s financial condition and results and
may involve a higher degree of judgment and complexity.
Deferred Preservation Costs: By federal law, human tissues cannot be bought or sold. Therefore, the tissues the
Company preserves and processes are not held as inventory. Donated human tissue is procured from deceased human donors
by tissue banks and organ procurement organizations (“OTPOs”), which consign the tissue to the Company for processing,
preservation, and distribution. Although the Company cannot own human tissue, the preservation process is a manufacturing
process that is accounted for using the same principles as inventory costing. Preservation costs consist primarily of direct labor
and materials (including salary and fringe benefits, laboratory expenses, tissue procurement fees, and freight-in charges) and
indirect costs (including allocations of costs from departments that support processing and preservation activities and facility
allocations).
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 the tissue to an implanting facility. The allocation of fixed production overhead costs is based on
actual production levels, to the extent that they are within the range of the facility’s normal capacity. Cost of preservation
services also includes as incurred idle facility expense, excessive spoilage, extra freight, and rehandling costs.
The calculation of deferred preservation costs involves a high degree of judgment and complexity. The costs included in
deferred preservation costs contain several estimates due to the timing differences between the occurrence of the cost and
receipt of final bills for services. Costs that contain estimates include tissue procurement fees, which are estimated based on
the Company’s contracts with independent OTPOs, and freight-in charges, which are estimated based on the Company’s
prior experiences with these charges. These costs are adjusted for differences between estimated and actual fees when
invoices for these services are received. Management believes that its estimates approximate the actual costs of these
services, but estimates could differ from actual costs. Total deferred preservation costs are then allocated among the different
tissues processed during the period based on specific cost drivers such as the number of donors and the number of tissues
processed. At each balance sheet date, a portion of the deferred preservation costs relates to tissues currently in active
processing or held in quarantine pending release to implantable status. The Company applies a yield estimate to all tissues in
process and in quarantine to estimate the portion of tissues that will ultimately become implantable. Management determines
this estimate of quarantine yields based on its experience in prior periods and reevaluates this estimate periodically. Due to
the nature of this estimate and the length of the processing times experienced by the Company, actual yields could differ from
the Company’s estimates. A significant change in quarantine yields could result in an adjustment to or write-down of
deferred preservation costs and, therefore, materially impact the amount of deferred preservation costs on the Company’s
Consolidated Balance Sheets and the cost of preservation services on the Company’s Consolidated Statements of Operations.
45
As a part of the normal course of business, the Company regularly evaluates its deferred preservation costs to determine
if the costs are appropriately recorded at the lower of cost or market value or if there is any impairment to the costs for tissues
not expected to ship prior to the expiration date of its packaging. CryoLife records a charge to cost of preservation services
to write-down the amount of deferred preservation costs not deemed to be recoverable. Typically lower of cost or market
value write-downs are primarily due to excess tissue processing costs incurred during the write-down period that exceed the
estimated market value of the tissue, based on then recent average service fees. Impairment write-downs are recorded based
on the book value of the impaired tissues. Actual results may differ from these estimates. These write-downs are permanent
impairments that create a new cost basis, which cannot be restored to its previous levels if the market value of tissues
increase or when tissues are shipped or become available for shipment.
The Company recorded write-downs to its deferred preservation costs totaling $187,000, $91,000, and $276,000 for the
twelve months ended December 31, 2010, 2009, and 2008, respectively.
As of December 31, 2010 deferred preservation costs consisted of $12.0 million for heart valves, $2.5 million for cardiac
patch tissues, and $17.1 million for vascular tissues. As of December 31, 2009 deferred preservation costs consisted of $13.8
million for heart valves, $2.6 million for cardiac patch tissues, and $20.0 million for vascular tissues.
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. The Company generated deferred
tax assets primarily as a result of write-downs of deferred preservation costs, accruals for tissue processing and product
liability claims, and operating losses.
The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company
experiences changes that could materially affect its determination of the recoverability of its deferred tax assets.
Management provides a valuation allowance against the deferred tax asset when, as a result of this analysis, management
believes it is more likely than not that some portion or all of its deferred tax assets will not be realized. During the period
from 2003 through the third quarter of 2008, CryoLife maintained a valuation allowance on the majority of its deferred tax
assets. At each quarterly period during this time, the Company concluded that, based on its analysis, a valuation allowance
was needed on its deferred tax assets.
The Company reassessed its determination of the recoverability of its deferred tax assets and the appropriate levels of the
valuation allowance as of December 31, 2008. In conducting this assessment, management considered a variety of factors
including the Company’s operating profits for the years ended December 31, 2008 and 2007, the reasons for the Company’s
operating losses in prior years, management’s judgment as to the likelihood of continued profitability and expectations of
future performance, and other factors. Based on this analysis, as of December 31, 2008 the Company determined that
maintaining a full valuation on its deferred tax assets was no longer appropriate. As a result, on December 31, 2008 the
Company recorded a tax benefit of $19.1 million on its Consolidated Statement of Operations to reverse substantially all of
the valuation allowance on its deferred tax assets. The Company continued to maintain valuation allowances on a portion of
its deferred tax assets, primarily related to state tax net operating loss carryforwards that the Company does not believe it will
be able to utilize based on its projections of profitability in certain states and state carryforward rules and limitations. In
future periods the Company will assess the recoverability of its deferred tax assets as necessary when the Company
experiences changes that could materially affect its prior determination of the recoverability of its deferred tax assets.
As of December 31, 2010 the Company had a total of $1.8 million in valuation allowances against deferred tax assets,
related to state net operating loss carryforwards, and a net deferred tax asset of $15.3 million. As of December 31, 2009 the
Company had a total of $1.8 million in valuation allowances against deferred tax assets, primarily related to state net
operating loss carryforwards, and a net deferred tax asset of $13.8 million.
The tax years 2007 through 2010 generally remain open to examination by the major taxing jurisdictions to which the
Company is subject. However, certain returns from years prior to 2007 in which net operating losses and tax credits have
arisen are still open for examination by the tax authorities.
Liability Claims: In the normal course of business the Company is made aware of adverse events involving its tissues
and products. Any adverse event could ultimately give rise to a lawsuit against the Company. In addition, tissue processing
and product liability claims may be asserted against the Company in the future based on events it is not aware of at the
present time. The Company maintains claims-made insurance policies to mitigate its financial exposure to tissue processing and
product liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are
reported to the insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer
46
of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. Any
punitive damage components of claims are uninsured.
The Company estimates its liability for and any related recoverable under the Company's insurance policies as of each
balance sheet date. The Company uses a frequency-severity approach to estimate its unreported tissue processing and product
liability claims, whereby, projected losses are calculated by multiplying the estimated number of claims by the estimated
average cost per claim. The estimated claims are determined based on the reported claim development method and the
Bornhuetter-Ferguson method using a blend of the Company's historical claim experience and industry data. The estimated cost
per claim is calculated using a lognormal claims model blending the Company's historical average cost per claim with industry
claims data. The Company uses a number of assumptions in order to estimate the unreported loss liability including:
(cid:120) A ceiling of $5.0 million was selected for actuarial purposes in determining the liability per claim given the uncertainty
in projecting claim losses in excess of $5.0 million,
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
The future claim reporting lag time would be a blend of the Company's experiences and industry data,
The frequency of unreported claims included with respect to accident years 2001 through 2010 would be lower than the
Company’s experience in the 2002/2003 policy year, during which the Company experienced unusually high claim
volumes, but higher than the Company's historical claim frequency prior to the 2002/2003 policy year,
The average cost per claim would be lower than the Company’s experience since the 2002/2003 policy year, during
which the Company experienced an unusually high average cost per claim, but higher than the Company's historical
cost per claim prior to the 2002/2003 policy year,
The average cost per BioGlue claim would be consistent with the Company's overall historical exposures until adequate
historical data is available on this product line, and
The number of BioGlue claims per million dollars of BioGlue revenue would be 60% lower than non-BioGlue claims
per million dollars of revenue. The 60% factor was selected based on BioGlue claims experience to date and
consultation with the actuary.
The Company believes that the assumptions it uses to determine its unreported loss liability provide a reasonable basis for
its calculation. However, the accuracy of the estimates is limited by the general uncertainty that exists for any estimate of future
activity due to uncertainties surrounding the assumptions used and due to Company specific conditions and the scarcity of
industry data directly relevant to the Company's business activities. Due to these factors, actual results may differ significantly
from the assumptions used and amounts accrued.
The Company accrues its estimate of unreported tissue processing and product liability claims as components of accrued
expenses and other long-term liabilities and records the related recoverable insurance amounts as a component of receivables
and other long-term assets. The amounts recorded represent management's estimate of the probable losses and anticipated
recoveries for unreported claims related to services performed and products sold prior to the balance sheet date.
At December 31, 2010 and 2009 the short-term and long-term portions of the unreported loss liability and any related
recoverable insurance amounts are as follows (in thousands):
Short-term liability
Long-term liability
Total liability
Short-term recoverable
Long-term recoverable
Total recoverable
Total net unreported loss liability
$
2010
2009
$
1,310
1,310
2,620
500
550
1,050
1,890
1,790
3,680
660
680
1,340
$
1,570
$
2,340
Further analysis indicated that the liability as of December 31, 2010 could be estimated to be as high as $4.7 million,
after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques.
On March 31, 2010 the Company bound liability coverage for the 2010/2011 insurance policy year. This policy is an
eight-year claims-made insurance policy, i.e. claims incurred during the period April 1, 2003 through March 31, 2011 and
47
reported during the period April 1, 2010 through March 31, 2011 are covered by this policy. Claims incurred prior to April 1,
2003 that have not been reported are uninsured.
As of February 11, 2011 there were no pending tissue processing or product liability lawsuits filed against the Company.
Valuation of Acquired Assets or Businesses: As part of its corporate strategy, the Company is seeking to identify and
evaluate acquisition opportunities of complementary product lines and companies. The Company evaluates and accounts 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 significant judgment based on the weight of available evidence.
For the purchase of an asset group, the Company allocates 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. The Company accounts for business combinations by allocating the
purchase price to the assets and liabilities acquired at their estimated fair value. 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.
The Company engages external advisors to assist it in determining the fair value of acquired asset groups or business
combinations, using cost, market, or income valuation methodologies, as appropriate, including: the excess earnings, the
discounted cash flow, or the relief from royalty methods. The determination of fair value 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. Management, in
consultation with its advisor(s), makes these estimates based on its prior experiences and industry knowledge. Management
believes that its estimates are reasonable, but actual results could differ significantly from the Company’s estimates. A
significant change in management’s estimates used to value acquired asset groups could result in future write-downs of
tangible or intangible assets acquired by the Company and, therefore, could materially impact the Company’s financial
position and profitability.
New Accounting Pronouncements
The Company is required to adopt FASB Accounting Standards Update 2010-6 (“ASU 2010-6”), “Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” effective for interim
and annual reporting periods beginning after December 15, 2010. ASU 2010-6 requires reporting entities to make new
disclosures about recurring or non-recurring fair value measurements including (i) significant transfers into and out of Level
1 and Level 2 fair value measurements and (ii) information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair value measurements. ASU 2010-6 will not have an effect on the Company’s financial
position, profitability, or cash flows upon adoption.
48
Results of Operations
(In thousands)
Revenues
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Preservation services:
Cardiac tissue
Vascular tissue
Orthopaedic tissue
Total preservation services
Products:
BioGlue and BioFoam
PerClot
HemoStase
Other medical devices
Total products
Other
Total
Preservation services:
Cardiac tissue
Vascular tissue
Orthopaedic tissue
Total preservation services
Products:
BioGlue and BioFoam
PerClot
HemoStase
Other medical devices
Total products
Other
Total
Revenues for the
Three Months Ended
December 31,
2010
2009
Revenues as a Percentage of
Total Revenues for the
Three Months Ended
December 31,
2010
2009
$
$
7,044
6,981
--
14,025
12,164
264
2,666
--
15,094
103
29,222
$
$
6,697
7,054
33
13,784
12,583
--
1,869
41
14,493
338
28,615
Revenues for the
Twelve Months Ended
December 31,
2010
2009
$
$
27,997
31,727
--
59,724
47,383
264
8,793
(70)
56,370
551
116,645
$
$
26,074
30,201
181
56,456
47,906
--
6,008
248
54,162
1,067
111,685
24%
24%
--%
48%
42%
1%
9%
--%
52%
--%
100%
23%
25%
--%
48%
44%
--%
7%
--%
51%
1%
100%
Revenues as a Percentage of
Total Revenues for the
Twelve Months Ended
December 31,
2010
2009
24%
27%
--%
51%
41%
--%
8%
--%
49%
--%
100%
24%
27%
--%
51%
43%
--%
5%
--%
48%
1%
100%
Revenues increased 2% for the three months and 4% for the twelve months ended December 31, 2010 as compared to
the three and twelve months ended December 31, 2009, respectively. A detailed discussion of the changes in preservation
services revenues, product revenues, and other revenues for the three and twelve months ended December 31, 2010 is
presented below.
Preservation Services
Revenues from preservation services increased 2% for the three months and 6% for the twelve months ended December
31, 2010 as compared to the three and twelve months ended December 31, 2009, respectively. The increase for the three
months ended December 31, 2010 was primarily due to an increase in cardiac preservation service revenues. The increase for
the twelve months ended December 31, 2010 was due to an increase in both cardiac and vascular preservation services
revenues. See further discussion of cardiac and vascular preservation services revenues below.
49
Cardiac Preservation Services
Revenues from cardiac preservation services (consisting of revenues from the distribution of heart valves, cardiac patch
tissues, and minimally processed tissues that are distributed to a third party tissue processor) increased 5% for the three
months ended December 31, 2010 as compared to the three months ended December 31, 2009, primarily due to the impact of
a 4% increase in shipments of heart valves and cardiac patch tissues and favorable tissue mix.
Revenues from cardiac preservation services increased 7% for the twelve months ended December 31, 2010 as compared
to the twelve months ended December 31, 2009, primarily due to the aggregate impact of favorable tissue mix and a 4%
increase in shipments of heart valves and cardiac patch tissues.
For the three and twelve months ended December 31, 2010, shipments of CryoValve SGPV, CryoPatch SG, and aortic
valves increased, partially offset by a decrease in traditionally processed cardiac patch tissues and pulmonary valves. The
favorable tissue mix in the three and twelve months ended December 31, 2010 was primarily due to the favorable impact of
SynerGraft tissues including the CryoValve SGPV and CryoPatch SG, which command a premium fee over standard
processed tissues.
In both the three and twelve months ended December 31, 2010, the decrease in revenues from traditionally processed
pulmonary valves was more than offset by an increase in revenues related to the CryoValve SGPV, as hospitals continue to
transition to the SynerGraft processed product, particularly after the Company received FDA clearance to extend the shelf-
life of the CryoValve SGPV to five years in the second quarter of 2010. In the three and twelve months ended December 31,
2010 the decrease in revenues from traditionally processed cardiac patch tissues was not fully offset by increases in revenues
from the CryoPatch SG. The Company believes that these revenues were unfavorably impacted by increasing competitive
pressures and by a reduced supply of certain patch tissues available for shipment during the period as the Company works to
achieve an optimal balance among its offered tissues.
Revenues from SynerGraft processed tissues, including the CryoValve SGPV and CryoPatch SG, accounted for 40% and
35% of total cardiac preservation services revenues for the three and twelve months ended December 31, 2010, respectively,
and 33% and 26% of total cardiac preservation services revenues for the three and twelve months ended December 31, 2009,
respectively. Domestic revenues accounted for 91% and 93% of total cardiac preservation services revenues for the three and
twelve months ended December 31, 2010, respectively, and 93% and 94% of total cardiac preservation services revenues for
the three and twelve months ended December 31, 2009, respectively.
Vascular Preservation Services
Revenues from vascular preservation services decreased 1% for the three months ended December 31, 2010 as compared
to the three months ended December 31, 2009, primarily due to a 5% decrease in unit shipments of vascular tissues, which
decreased revenues by 4%, largely offset by an increase in average service fees, which increased revenues by 3%.
Revenues from vascular preservation services increased 5% for the twelve months ended December 31, 2010 as
compared to the twelve months ended December 31, 2009, primarily due to a 2% increase in unit shipments of vascular
tissues, which increased revenues by 3% and an increase in average service fees, which increased revenues by 2%.
The decrease in vascular volume for the three months ended December 31, 2010 was primarily due to decreases in
shipments of femoral veins and arteries. CryoLife believes that vascular revenues in the fourth quarter of 2010 were lower
due to increasing pressure from lower cost competitive products, which may continue into 2011. The increase in vascular
volume for the twelve months ended December 31, 2010 was primarily due to increases in shipments of saphenous veins,
resulting from the strong demand for these tissues in domestic markets, primarily for use in peripheral vascular reconstruction
surgeries to avoid limb amputations.
The increase in average service fees for the three and twelve months ended December 31, 2010 was due in part to list fee
increases on certain vascular preservation services, fee differences due to vascular tissue characteristics, and due to the
negotiation of pricing contracts with certain customers.
Products
Revenues from products increased 4% for both the three and twelve months ended December 31, 2010 as compared to
the three and twelve months ended December 31, 2009, respectively. These increases were primarily due to an increase in
50
HemoStase revenues and, to a lesser extent, PerClot revenues. See further discussions of BioGlue, BioFoam, PerClot, and
HemoStase revenues below.
BioGlue and BioFoam
Revenues from the sale of BioGlue and BioFoam decreased 3% for the three months ended December 31, 2010 as
compared to the three months ended December 31, 2009. This decrease was primarily due to a 6% decrease in the volume of
milliliters sold, which decreased revenues by 7% and the unfavorable impact of foreign exchange, which decreased revenues
by 1%, partially offset by an increase in average selling prices, which increased revenues by 5%.
Revenues from the sale of BioGlue and BioFoam decreased 1% for the twelve months ended December 31, 2010 as
compared to the twelve months ended December 31, 2009. The revenues were impacted by a 6% decrease in the volume of
milliliters sold, which decreased revenues by 5% and the unfavorable impact of foreign exchange, which decreased revenues
by 1%, largely offset by an increase in average selling prices, which increased revenues by 5%.
The decrease in sales volume for BioGlue and BioFoam for the three and twelve months ended December 31, 2010 was
primarily due to a decrease in shipments of BioGlue in domestic markets, particularly in the northeast region of the U.S.
Management believes that the decrease in domestic BioGlue shipments is a result of various factors, including: the U.S.
market introduction of sealant products with approved indications for use in clinical applications in which BioGlue has been
used previously; poor economic conditions and their constraining effect on hospital budgets; the resulting attempts by
hospitals to control costs by reducing spending on consumable items such as BioGlue; and the efforts of some large
competitors in imposing and enforcing contract purchasing requirements for competing non-CryoLife products.
The impact of foreign exchange for the three months ended December 31, 2010 was due to changes in the exchange rates
in the three and twelve months ended December 31, 2010 as compared to the respective periods in 2009 between the U.S.
Dollar and the Euro and, to a lesser extent, between the U.S. Dollar and the British Pound. The Company’s sales of BioGlue
and BioFoam to German hospitals, Austrian hospitals, and certain distributors are denominated in Euros, and its sales through
its direct sales force to United Kingdom hospitals are denominated in British Pounds.
The increase in average selling prices for the three and twelve months ended December 31, 2010 was primarily due to
list price increases on certain BioGlue products that went into effect during 2009 and 2010 and the negotiation of pricing
contracts with certain customers. The Company does not expect to see a similar level of benefit from price increases in 2011
as it did in 2010.
Sales of BioGlue and BioFoam for the three and twelve months ended December 31, 2010 included international sales of
BioFoam following receipt of the CE Mark approval during the third quarter of 2009. BioFoam sales accounted for less than
1% of total BioGlue and BioFoam sales for the three and twelve months ended December 31, 2010 and 2009. Domestic
revenues accounted for 66% and 68% of total BioGlue and BioFoam revenues for the three and twelve months ended
December 31, 2010, respectively, and 69% and 70% of total BioGlue and BioFoam revenues for the three and twelve months
ended December 31, 2009.
BioGlue has reached a level of market maturity in the U.S. and is experiencing increasing competitive pressures while
continuing to achieve higher levels of growth and penetration in international markets due to its expanded clinical
indications. Management believes that as economic conditions begin to improve, growth of BioGlue revenues in future
periods would most likely be due to price increases and smaller volume increases or expansions into new markets. The
Company expects a decrease in usage of BioGlue in the U.S. in those clinical applications for which new sealant products
have FDA approval, partially offset by volume growth of BioGlue due to increases in cardiac and vascular surgical procedure
volumes where BioGlue is used. The Company anticipates that it will begin shipping BioGlue to Japan in the first half of
2011, as BioGlue was recently approved in Japan for use in the repair of aortic dissections.
PerClot and HemoStase
Revenues from the sale of PerClot and HemoStase increased 57% for the three months ended December 31, 2010 as
compared to the three months ended December 31, 2009. This increase was primarily due to a 94% increase in the volume of
grams sold, which increased revenues by 65%, partially offset by a decrease in average selling prices, which decreased
revenues by 8%.
51
Revenues from the sale of PerClot and HemoStase increased 51% for the twelve months ended December 31, 2010 as
compared to the twelve months ended December 31, 2009. This increase was primarily due to a 66% increase in the volume
of grams sold, which increased revenues by 52%.
The increase in sales volume for the three and twelve months ended December 31, 2010 was primarily due to an increase
in shipments of HemoStase in domestic markets and to a lesser extent shipments of PerClot and HemoStase in international
markets. CryoLife began commercial distribution of PerClot in international markets in the fourth quarter of 2010.
Management believes that the Company lost additional sales of HemoStase during the third and fourth quarters of 2010
due to uncertainty in the market as to whether the Company had authority to market HemoStase and as to whether it would be
able to continue to supply the product in the future. Management believes that third and fourth quarter HemoStase sales were
also adversely impacted by continued sales by Medafor of Medafor’s product into the Company’s exclusive territory in
violation of the private label exclusive distribution agreement between the parties (“EDA”).
The decrease in average selling prices for the three months ended December 31, 2010 was primarily due to discounting
of HemoStase inventory in an attempt to sell off the Company’s remaining inventory balances prior to the Company’s
planned cessation of HemoStase sales in late March 2011, as discussed further below.
Domestic revenues accounted for 71% and 74% of total PerClot and HemoStase revenues for the three and twelve
months ended December 31, 2010, respectively, and 77% of total HemoStase revenues for both the three and twelve months
ended December 31, 2009.
As discussed in “–Recent Events” above, on September 28, 2010 CryoLife entered into a worldwide distribution
agreement and a license and manufacturing agreement with SMI for PerClot, an absorbable powder hemostat that has CE
Mark designation allowing commercial distribution into the European Community and other markets. As discussed in Part
II, Item 8, “Note 4 of the Notes to Consolidated Financial Statements,” CryoLife expects to continue to sell HemoStase until
late March 2011, six months from the date Medafor sent the September 27, 2010 notice of termination of the EDA between
the companies.
As a result of the items discussed above, CryoLife expects that revenues from the distribution of PerClot will increase in
2011 as the Company transitions its international customers to PerClot and expands distribution into additional international
territories. CryoLife expects HemoStase revenues during the first quarter of 2011 to decline from the level of revenues
experienced for the three months ended December 31, 2010 and that no HemoStase revenues will be recorded after first
quarter 2011. Although it is difficult to determine, CryoLife’s HemoStase revenues could be significantly negatively
impacted during the first quarter of 2011 by confusion in the marketplace, continued competition from Medafor and other
Medafor distributors selling into the Company’s markets, and by discounts that the Company has offered and expects to
continue to offer to its existing HemoStase customers during the period. The Company’s anticipated discontinuation of sales
of HemoStase in late March 2011 will materially and adversely decrease revenues in 2011 as compared to 2010. See also
“Cost of Products” below, Part I, Item 1A, “Risk Factors,” and Part I, Item 3, “Legal Proceedings.”
Other Revenues
Other revenues for the three and twelve months ended December 31, 2010 and 2009 included revenues related to funding
allocated from U.S. Congress Defense Appropriations Conference Reports in 2005 through 2008, collectively the (“DOD
Grants”). As of December 31, 2010 CryoLife had been awarded and had received a total of $5.4 million for the development
of protein hydrogel technology (“PHT”), which the Company is currently developing for use in organ sealing. At December
31, 2010 CryoLife had $2.1 million of deferred income on the Company’s Consolidated Balance Sheet from the DOD
Grants, of which $1.7 million remains in unspent cash advances recorded as cash and cash equivalents. As of December 31,
2009 the Company had $2.6 million remaining in unspent cash advances recorded as cash and cash equivalents and deferred
income on the Company’s Consolidated Balance Sheet.
52
Cost of Preservation Services and Products
Cost of Preservation Services
Cost of preservation services
Cost of preservation services as a percentage
$
Three Months Ended
December 31,
2010
2009
Twelve Months Ended
December 31,
2010
2009
8,546
$
8,346
$
35,868
$
32,767
of preservation services revenues
61%
61%
60%
58%
Cost of preservation services increased 2% and 9% for the three and twelve months ended December 31, 2010,
respectively, as compared to the respective periods in 2009.
Cost of preservation services in the three months ended December 31, 2010 was primarily impacted by an increase in the
per unit cost of processing tissues and due to an increase is cardiac tissues shipped, partially offset by a decrease in vascular
tissues shipped, as discussed above. The increase in cost of preservation services in the twelve months ended December 31,
2010 was primarily due to an increase in the per unit cost of processing tissues, and to a lesser extent due to an increase in
cardiac and vascular tissues shipped, as discussed above.
The increase in cost of preservation services as a percentage of preservation services revenues for the twelve months
ended December 31, 2010 was primarily due to the increase in the per unit cost of processing tissues. The increase in the per
unit cost of processing tissues in 2010, was largely a result of decreased processing and packaging throughput due to changes
implemented in the second half of 2009.
Cost of Products
Cost of products
Cost of products as a percentage
of product revenues
Three Months Ended
December 31,
2010
2009
Twelve Months Ended
December 31,
2010
2009
$
3,091
$
2,672
$
12,409
$
9,150
20%
18%
22%
17%
Cost of products increased 16% and 36% for the three and twelve months ended December 31, 2010, respectively, as
compared to the respective periods in 2009.
The increase in cost of products for the three months ended December 31, 2010 was primarily due to the increase in
shipments of PerClot and HemoStase, as discussed above. The increase in cost of products for the twelve months ended
December 31, 2010 was primarily due to a $1.6 million write-down of HemoStase inventory in the third quarter of 2010 and
an increase in shipments of PerClot and HemoStase, as discussed above. To a lesser extent the increase in the twelve months
ended December 31, 2010 was due to a slight increase in the per unit cost of manufacturing BioGlue.
The write-down of HemoStase inventory was based on the Company’s review of its inventory balances after Medafor’s
September 27, 2010 termination of the EDA. Per the Company’s review of the EDA, the Company expects to continue to
sell HemoStase through late March 2011. Based on this review, the Company determined that the carrying value of the
HemoStase inventory was impaired and increased its cost of products by $1.6 million to write down HemoStase inventory in
the third quarter of 2010. See also “Revenues” above, Part I, Item 1A, “Risk Factors,” and Part I, Item 3, “Legal
Proceedings.”
The amount of this write-down reflects management’s estimate based on information currently available. Management
will continue to evaluate the recoverability of its HemoStase inventory as more information becomes available and may
record additional write-downs if it becomes clear that additional impairments have occurred. The write-down creates a new
cost basis which cannot be written back up if the inventory becomes saleable. The cost of products in future periods may be
favorably impacted if the Company is able to sell more HemoStase than the amounts estimated as discussed above.
The increase in cost of products as a percentage of product revenues for the three months ended December 31, 2010 was
primarily due to increasing sales volume of PerClot and HemoStase, which have a lower profit margin than BioGlue. The
increase in cost of products as a percentage of product revenues for the twelve months ended December 31, 2010 was
53
primarily due to a $1.6 million write-down of HemoStase inventory and increasing revenues from PerClot and HemoStase,
which have a lower profit margin than BioGlue, and to a lesser extent a slight increase in the per unit cost of manufacturing
BioGlue.
The Company believes that cost of products and cost of products as a percentage of product revenues will be negatively
impacted in the first quarter of 2011 by discounts on sales of HemoStase that the Company has offered and expects to
continue to offer, and may be impacted by additional write-downs of HemoStase inventory. At December 31, 2010 the
Company had a remaining balance of $559,000 in HemoStase inventory that had not previously been written down. The
Company does not expect that any additional write-downs of HemoStase inventory recorded in the first quarter of 2011
would be material.
Operating Expenses
General, Administrative, and Marketing Expenses
General, administrative, and
marketing expenses
General, administrative, and marketing
expenses as a percentage
of total revenues
Three Months Ended
December 31,
2010
2009
Twelve Months Ended
December 31,
2010
2009
$
12,201
$
12,585
$
49,064
$
50,025
42%
44%
42%
45%
General, administrative, and marketing expenses decreased 3% and 2% for the three and twelve months ended December
31, 2010, respectively, as compared to the three and twelve months ended December 31, 2009.
The decrease in general, administrative, and marketing expenses for the three and twelve months ended December 31,
2010 was primarily due to a decrease in marketing expenses, including personnel costs and spending on marketing materials,
partially offset by an increase in spending on legal and professional fees and marketing expenses for the Ross Summit, which
were incurred in the fourth quarter of 2010, while comparable marketing expenses for the 2009 Ross Summit were incurred
in the third quarter of 2009.
Expenses in the three months ended December 31, 2010 included approximately $268,000 in costs associated with
litigation with Medafor and $474,000 in business development costs. Expenses in the twelve months ended December 31,
2010 included $729,000 in previously capitalized legal fees associated with BioGlue patent litigation in Germany,
approximately $1.4 million in costs associated with litigation with Medafor, and approximately $1.0 million in business
development costs. The Company’s business development costs in 2010 were associated with the Company’s proposal to
acquire Medafor, the license of technology and purchase of assets from SMI, and other business development activities.
The Company’s general, administrative, and marketing expenses included $611,000 and $566,000 for the three months
ended December 31, 2010 and 2009, respectively, and $2.3 million and $2.2 million for the twelve months ended December
31, 2010 and 2009, respectively, related to the grant of stock options, restricted stock awards, and restricted stock units.
General, administrative, and marketing expenses for 2009 included $377,000 in costs related to a reduction in workforce
implemented during the fourth quarter of 2009.
The Company believes that expenses associated with lawsuits, including lawsuits with Medafor, and business
development opportunities, including costs associated with potential acquisitions, may materially impact the Company’s
general, administrative, and marketing expenses during 2011.
Research and Development Expenses
Research and development expenses
Research and development expenses as
a percentage of total revenue
Three Months Ended
December 31,
2010
2009
Twelve Months Ended
December 31,
2010
2009
$
1,801
$
1,393
$
5,923
$
5,247
6%
5%
5%
5%
54
Research and development spending in 2010 and 2009 was primarily focused on the Company’s BioGlue family of
products, including: BioGlue and BioFoam, and SynerGraft tissues and products, including: CryoValve SGPV, CryoValve
SG aortic heart valves, CryoPatch SG, and xenograft SynerGraft tissue products, including ProPatch. Research and
development spending in the three months ended December 31, 2010 also included spending on PerClot, which is expected to
increase in 2011.
Acquired In-Process Research and Development
On September 28, 2010 CryoLife entered into a worldwide distribution agreement and a license and manufacturing
agreement with SMI for PerClot. As part of the consideration paid to SMI in the third quarter of 2010, the Company
allocated $3.5 million to an intangible asset for PerClot distribution and manufacturing rights in the U.S. and certain other
countries which do not have current regulatory approvals. This $3.5 million is considered in-process research and
development as it is dependant upon regulatory approvals which have not yet been obtained. Therefore, CryoLife expensed
the $3.5 million as in-process research and development upon acquisition.
Other Income and Expenses
Interest expense was $35,000 and ($85,000) for the three months ended December 31, 2010 and 2009, respectively, and
$180,000 and $83,000 for the twelve months ended December 31, 2010 and 2009, respectively. Interest expense for the three
and twelve months ended December 31, 2010 and 2009 included interest incurred related to the Company’s debt and interest
related to uncertain tax positions. The decrease in interest expense in 2009 was primarily due to a reversal of interest expense
related to the Company’s uncertain tax positions in the fourth quarter of 2009.
Interest income was $7,000 and $3,000 for the three months ended December 31, 2010 and 2009, respectively, and
$23,000 and $76,000 for the twelve months ended December 31, 2010 and 2009, respectively. Interest income for the three
and twelve months ended December 31, 2010 and 2009 was primarily due to interest earned on the Company’s cash, cash
equivalents, and restricted securities. The decrease in interest income in 2010 was primarily due to a decline in interest rates
paid on the Company’s cash and cash equivalents, partially offset by an increase in the balance in these accounts.
Other than temporary investment impairment was $3.6 million for the twelve months ended December 31, 2010, due to
the impairment of the Company’s investment in Medafor common stock during the third quarter of 2010. The Company
determined that no additional impairment of the value of Medafor common stock had occurred in the fourth quarter of 2010.
The carrying value of the Company’s investment in Medafor common stock after this write-down was $2.6 million or $1.09
per share as of September 30, 2010 and December 31, 2010. The Company will continue to evaluate the carrying value of this
investment as appropriate. If the Company subsequently determines that the value of its Medafor common stock has been
impaired further or if the Company decides to sell its Medafor common stock for less than the carrying value, the resulting
impairment charge or realized loss on sale of the investment in Medafor could be material.
The gain on valuation of derivative was zero and $1.3 million for the three and twelve months ended December 31,
2010, respectively. During the fourth quarter of 2009 and during 2010, the Company made several purchases of Medafor
common stock that contained purchase price make-whole provisions, which the Company accounted for as embedded
derivatives. The decrease in the value of the liability for these embedded derivatives, largely resulting from a significant
decrease in the likelihood of a triggering event occurring, resulted in a non-cash gain for the twelve months ended December
31, 2010. CryoLife believes that the likelihood of a triggering event occurring was substantially reduced in the first quarter
of 2010 and was zero as of December 31, 2010.
Earnings
Three Months Ended
December 31,
2010
2009
Income before income taxes
Income tax expense
Net income
Diluted common shares outstanding
Diluted income per common share
$
$
$
3,458
1,343
2,115
28,030
0.08
3,672
1,306
2,366
28,473
0.08
$
$
$
55
Twelve Months Ended
December 31,
2010
2009
$
$
$
7,277
3,333
3,944
28,274
0.14
$
$
$
14,354
5,675
8,679
28,310
0.31
Income before income taxes decreased for the three months and the twelve months ended December 31, 2010 as
compared to the three and twelve months ended December 31, 2009. Income before income taxes for the three and twelve
months ended December 31, 2010 was negatively impacted primarily by acquired in-process research and development
expense, the other than temporary investment impairment, and the write-down of HemoStase inventory, as discussed above.
These effects were partially offset by the gain on valuation of derivative for the twelve months ended December 31, 2010.
The Company’s effective income tax rate was 39% and 46% for the three and twelve months ended December 31, 2010,
respectively, as compared to 36% and 40% for the three and twelve months ended December 31, 2009. The Company’s income
tax rate for the twelve months ended December 31, 2010 was negatively impacted by the write-downs and expenses discussed
above, which reduced income before income taxes.
Net income and diluted income per common share for the three and twelve months ended December 31, 2010 decreased
compared to the corresponding periods in 2009 due to the decrease in income before income taxes and income taxes as
discussed above. Basic and diluted income per common share will be impacted in future periods unfavorably by the issuance
of common stock to SMI and favorably by the Company’s repurchase of its common stock. Stock repurchases are impacted
by many factors, including stock price, available funds, and competing demands for such funds, and as a result, may be
suspended or discontinued at any time.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
Revenues for the
Three Months Ended
December 31,
2009
2008
Revenues as a Percentage of
Total Revenues for the
Three Months Ended
December 31,
2009
2008
Preservation services:
Cardiac tissue
Vascular tissue
Orthopaedic tissue
Total preservation services
Products:
BioGlue and related products
HemoStase
Other medical devices
Total products
Other
Total
$
$
6,697
7,054
33
13,784
12,583
1,869
41
14,493
338
28,615
$
$
5,894
6,362
63
12,319
12,088
806
100
12,994
219
25,532
23%
25%
--%
48%
44%
7%
--%
51%
1%
100%
23%
25%
--%
48%
48%
3%
--%
51%
1%
100%
Preservation services:
Cardiac tissue
Vascular tissue
Orthopaedic tissue
Total preservation services
Products:
BioGlue and related products
HemoStase
Other medical devices
Total products
Other
Total
Revenues for the
Twelve Months Ended
December 31,
2009
2008
Revenues as a Percentage of
Total Revenues for the
Twelve Months Ended
December 31,
2009
2008
$
$
26,074
30,201
181
56,456
47,906
6,008
248
54,162
1,067
111,685
25,514
27,417
725
53,656
48,570
1,532
391
50,493
910
105,059
$
$
56
24%
27%
--%
51%
43%
5%
--%
48%
1%
100%
24%
26%
1%
51%
46%
2%
--%
48%
1%
100%
Revenues increased 12% for the three months and 6% for the twelve months ended December 31, 2009 as compared to
the three and twelve months ended December 31, 2008, respectively. A detailed discussion of the changes in preservation
services revenues, product revenues, and other revenues for the three and twelve months ended December 31, 2009 is
presented below.
Cardiac Preservation Services
Revenues from cardiac preservation services increased 14% for the three months ended December 31, 2009 as compared
to the three months ended December 31, 2008. This increase was primarily due to the aggregate impact of volume and tissue
mix, which together increased revenues by 12%, an increase in average service fees, which increased revenues by 1%, and
the favorable impact of foreign exchange, which increased revenues by 1%.
Revenues from cardiac preservation services increased 2% for the twelve months ended December 31, 2009 as compared
to the twelve months ended December 31, 2008. This increase was primarily due to the aggregate impact of volume and
tissue mix, which increased revenues by 2%.
The Company’s cardiac revenues consist of revenues from the distribution of heart valves, cardiac patch tissues, and
minimally processed tissues that are distributed to a third party tissue processor.
The 12% increase in revenues from the net effect of volume and tissue mix for the three months ended December 31,
2009 was primarily due to a 10% increase in shipments of heart valves and cardiac patch tissues. The revenue increase was
primarily in CryoPatch SG, CryoValve SGPV, and standard processed pulmonary valves. The Company believes that the
increase in shipments of cardiac tissues in the three months ended December 31, 2009 was primarily due to increased demand
in part due to a return to more normal purchasing patterns as compared to the prior year period when hospitals were cutting
purchasing and reducing the level of tissues kept on hand as a result of the deteriorating economic conditions. This increase
was also due to the Company’s physician training efforts, including the Ross Summit and monthly Aortic Allograft
Workshops, which have resulted in additional physicians implanting the Company’s tissues, and the efforts of the Company’s
new cardiac tissue focused sales force, the cardiac specialist program, which was implemented throughout the second half of
2008 and the beginning of 2009.
The 2% increase in revenues from the net effect of volume and tissue mix for the twelve months ended December 31,
2009 was primarily due to favorable tissue mix due to sales of SynerGraft processed cardiac tissues, partially offset by a 1%
decrease in shipments of heart valves and cardiac patch tissues. Revenues increased due to shipments of the CryoPatch SG,
CryoValve SGPV, and aortic valves. These increases were largely offset by decreases in standard processed pulmonary heart
valves and standard processed cardiac patch tissues. The Company believes that the decrease in shipments was primarily due
to the first quarter impact of hospitals decreasing the number of heart valves they keep on hand for urgent procedures as a
result of the deteriorating economic conditions and their constraining effect on hospital budgets, largely offset by increases in
second, third, and fourth quarter 2009 cardiac tissue shipments when compared to the corresponding periods in 2008.
The Company’s procurement of cardiac tissues decreased 8% for the three months and 13% for the twelve months ended
December 31, 2009 as compared to the three and twelve months ended December 31, 2008, respectively. As a part of the
normal course of business, CryoLife routinely adjusts its criteria for accepting incoming tissue based on certain variables.
These variables include changes in demand for certain types of tissues processed by the Company, the level of tissues
currently available for shipment, changes in incoming tissue availability, and the likelihood that certain tissues will pass the
Company’s quality controls and testing processes. The decrease in cardiac procurement for the three and twelve months
ended December 31, 2009 was primarily the result of changes in tissue acceptance criteria made during 2009 and 2008. The
Company may continue to make changes in incoming tissue acceptance criteria, and as a result, the Company’s level of
procurement may continue to vary from quarter-to-quarter and year-to-year.
Vascular Preservation Services
Revenues from vascular preservation services increased 11% for the three months ended December 31, 2009 as
compared to the three months ended December 31, 2008, primarily due to a 9% increase in unit shipments of vascular tissues,
which increased revenues by 9% and an increase in average service fees, which increased revenues by 2%. Revenues from
vascular preservation services increased 10% for the twelve months ended December 31, 2009 as compared to the twelve
months ended December 31, 2008, primarily due to a 10% increase in unit shipments of vascular tissues, which increased
revenues by 9% and an increase in average service fees, which increased revenues by 1%.
57
The increase in vascular volume for the three months ended December 31, 2009 was primarily due to increases in
shipments of saphenous veins and to a lesser extent an increase in femoral veins. The increase in vascular volume for the
twelve months ended December 31, 2009 was primarily due to increases in shipments of each type of vascular tissue
processed by the Company. The largest volume increases were in saphenous veins, which increased due to the strong
demand for these tissues, primarily for use in peripheral vascular reconstruction surgeries to avoid limb amputations.
The Company’s procurement of vascular tissues decreased 20% for the three months and 21% for the twelve months
ended December 31, 2009 as compared to the three and twelve months ended December 31, 2008, respectively. As a part of
the normal course of business, CryoLife routinely adjusts its criteria for accepting incoming tissue based on certain variables.
These variables include changes in demand for certain types of tissues processed by the Company, the level of tissues
currently available for shipment, changes in incoming tissue availability, and the likelihood that certain tissues will pass the
Company’s quality controls and testing processes. The decrease in vascular procurement for the three and twelve months
ended December 31, 2009 was primarily the result of changes in tissue acceptance criteria made during 2009 and 2008. The
Company may continue to make changes in incoming tissue acceptance criteria, and as a result, the Company’s level of
procurement may continue to vary from quarter-to-quarter and year-to-year.
BioGlue and Related Products
Revenues from the sale of BioGlue and related products increased 4% for the three months ended December 31, 2009 as
compared to the three months ended December 31, 2008. This increase was primarily due to an increase in average selling
prices, which increased revenues by 4% and the favorable impact of foreign exchange, which increased revenues by 1%,
partially offset by a 1% decrease in the volume of milliliters sold, which decreased revenues by 1%.
Revenues from the sale of BioGlue and related products decreased 1% for the twelve months ended December 31, 2009
as compared to the twelve months ended December 31, 2008. This decrease was primarily due to a 2% decrease in the
volume of milliliters sold, which decreased revenues by 4%, and the unfavorable impact of foreign exchange, which reduced
revenues by 1%, partially offset by an increase in average selling prices, which increased revenues by 4%.
Sales of BioGlue and related products for the three and twelve months ended December 31, 2009 included international
sales of BioFoam Surgical Matrix following receipt of the CE Mark approval during the third quarter of 2009. BioFoam
sales accounted for less than 1% of total BioGlue and related product sales during 2009.
The increase in average selling prices for the three and twelve months ended December 31, 2009 was primarily due to
list price increases on certain BioGlue products that went into effect during 2009 and the negotiation of pricing contracts with
certain customers.
The decrease in sales volume for BioGlue and related products for the three and twelve months ended December 31,
2009 was primarily due to a decrease in shipments of BioGlue in domestic markets, as a result of the deteriorating economic
conditions and their constraining effect on hospital budgets. Management believes that hospitals are attempting to control
costs by reducing spending on items, such as BioGlue, that are consumed during surgical procedures. The Company has also
seen some of its large competitors attempting to enforce purchasing requirements in their contracts, to the detriment of
BioGlue. In addition, management believes that BioGlue sales were negatively impacted as a result of changes to the
alignment of the Company’s sales force during 2009, including the introduction of the cardiac specialist program.
The impact of foreign exchange for the three and twelve months ended December 31, 2009 was due to changes in the
exchange rates between the U.S. Dollar and both the British Pound and the Euro in the three and twelve months ended
December 31, 2009 as compared to the respective periods in 2008. The Company’s sales of BioGlue and related products
through its direct sales force to United Kingdom hospitals are denominated in British Pounds, and its sales to German
hospitals and certain distributors are denominated in Euros.
Domestic revenues accounted for 69% and 71% of total BioGlue revenues in the three months ended December 31, 2009
and 2008, respectively. Domestic revenues accounted for 70% and 71% of total BioGlue revenues in the twelve months
ended December 31, 2009 and 2008, respectively.
HemoStase
Revenues from the sale of HemoStase increased 132% for the three months and 292% for the twelve months ended
December 31, 2009 as compared to the three and twelve months ended December 31, 2008, respectively. HemoStase
58
revenues for the three and twelve months ended December 31, 2009 increased in both domestic and international markets.
CryoLife began marketing and distribution of HemoStase under the EDA with Medafor in the second quarter of 2008.
Other Revenues
Other revenues for the three and twelve months ended December 31, 2009 and 2008 included revenues from research
grants. Other revenues for the twelve months ended December 31, 2008 included revenues related to the licensing of the
Company’s technology to a third party.
As of December 31, 2009 CryoLife has been awarded a total of $5.4 million in funding allocated from U.S. Congress
Defense Appropriations Conference Reports in 2005 through 2008, collectively the (“DOD Grants”), which includes $1.7
million awarded in March of 2009. The DOD Grants were awarded to CryoLife for the development of PHT, which the
Company is currently developing for use in organ sealing. Grant revenues in 2009 and 2008 are related to funding under the
DOD Grants.
Through December 31, 2009 CryoLife has received a total $5.4 million, representing all awarded funds under the DOD
Grants. As of December 31, 2009 the Company had $2.6 million remaining in unspent cash advances recorded as cash and
cash equivalents and deferred income on the Company’s Consolidated Balance Sheet.
Cost of Preservation Services and Products
Cost of Preservation Services
Cost of preservation services
Cost of preservation services as a percentage
$
Three Months Ended
December 31,
2009
2008
Twelve Months Ended
December 31,
2009
2008
8,346
$
6,730
$
32,767
$
29,112
of preservation services revenues
61%
55%
58%
54%
Cost of preservation services increased 24% for the three months and 13% for the twelve months ended December 31,
2009, as compared to the three and twelve months ended December 31, 2008, respectively.
The increase in cost of preservation services in the three months ended December 31, 2009 was primarily due to an
increase in the per unit costs of processing tissues and an increase in cardiac and vascular tissues shipped, as discussed above.
The increase in cost of preservation services in the twelve months ended December 31, 2009 was primarily due to an increase
in the per unit costs of processing tissues and to a lesser extent, an increase in vascular tissues shipped, as discussed above.
The increase in the per unit costs of processing tissues in 2009 was largely a result of decreased processing and packaging
throughput.
The increase in cost of preservation services as a percentage of preservation services revenues for the three and twelve
months ended December 31, 2009 was primarily due to the increase in the per unit costs of processing tissues, partially offset
by an increase in average service fees, which has had a small favorable effect on margins.
Cost of Products
Cost of products
Cost of products as a percentage
of product revenues
Three Months Ended
December 31,
2009
2008
Twelve Months Ended
December 31,
2009
2008
$
2,672
$
2,293
$
9,150
$
8,153
18%
18%
17%
16%
Cost of products increased 17% for the three months and 12% for the twelve months ended December 31, 2009, as
compared to the three and twelve months ended December 31, 2008, respectively.
The increase in cost of products in the three and twelve months ended December 31, 2009 was primarily due to the
increase in shipments of HemoStase, which the Company began distributing in the second quarter of 2008. To a lesser
extent, the increase in cost of products was due to a slight increase in the per unit cost of BioGlue, largely offset by a
59
decrease in the per unit cost of HemoStase. The per unit cost of HemoStase decreased due to increased distribution of
HemoStase internationally, as international product has a reduced cost. Cost of products for the three and twelve months
ended December 31, 2008 was negatively impacted by the write-down of $277,000 and $1.5 million, respectively, in other
medical device inventory.
Cost of products as a percentage of product revenues for the three and twelve months ended December 31, 2009 was
comparable to the three and twelve months ended December 31, 2008, respectively. During these periods cost of products as
a percentage of product revenues increased due to increasing revenues from HemoStase, which has a lower profit margin than
BioGlue, as well as an increase in the per unit cost of BioGlue, largely offset by the favorable effect of the absence in the
current year of the product write-downs recorded during 2008 and an increase in BioGlue average selling prices, as discussed
above.
Operating Expenses
General, Administrative, and Marketing Expenses
General, administrative, and
marketing expenses
General, administrative, and marketing
expenses as a percentage
of total revenues
Three Months Ended
December 31,
2009
2008
Twelve Months Ended
December 31,
2009
2008
$
12,585
$
12,334
$
50,025
$
48,831
44%
48%
45%
46%
General, administrative, and marketing expenses increased 2% for both the three and twelve months ended December 31,
2009, as compared to the three and twelve months ended December 31, 2008, respectively.
The increase in general, administrative, and marketing expenses for the three months ended December 31, 2009 was
primarily due to $377,000 in costs related to a reduction in workforce implemented during the quarter, the effect of a smaller
reduction in tissue processing and product liability accruals, and increased professional fees, partially offset by a decrease in
marketing expenses related to the Ross Summit, which took place in the third quarter of 2009 versus the fourth quarter of
2008. The reduction in workforce was part of a Company initiative to increase efficiencies and reduce costs through
manufacturing process improvements, expense control, and cost cutting measures.
The increase in general, administrative, and marketing expenses for the twelve months ended December 31, 2009 was
primarily due to increases in marketing expenses, including increased personnel costs, partially related to an increase in the
sales force, and other marketing expenses to support current revenue growth and the Company’s efforts to increase its
preservation service and product offerings. The increase was also due to the effect of a smaller reduction in tissue processing
and product liability accruals and an increase in stock based compensation over the prior year period.
The Company’s expenses related to the grant of stock options and restricted stock awards were $566,000 and $547,000
for the three months ended December 31, 2009 and 2008, respectively, and $2.2 million and $1.8 million for the twelve
months ended December 31, 2009 and 2008, respectively. The Company’s general, administrative, and marketing expenses
included a benefit for the reduction in tissue processing and product liability accruals of $165,000 and $530,000 for the three
months ended December 31, 2009 and 2008, respectively, and $570,000 and $980,000 for the twelve months ended
December 31, 2009 and 2008, respectively.
Research and Development Expenses
Research and development expenses
Research and development expenses as
a percentage of total revenue
Three Months Ended
December 31,
2009
2008
Twelve Months Ended
December 31,
2009
2008
$
1,393
$
1,371
$
5,247
$
5,309
5%
5%
5%
5%
Research and development spending in 2009 and 2008 was primarily focused on the Company’s tissue preservation,
SynerGraft products and tissues, and BioGlue and related products. SynerGraft products and tissues include the Company’s
60
CryoValve SGPV and CryoValve SG aortic heart valves, CryoPatch SG, and xenograft SynerGraft tissue products. BioGlue
related products include BioGlue, BioGlue Aesthetic, BioFoam, and BioDisc®.
Other Income and Expenses
Interest expense was ($85,000) and $62,000 for the three months ended December 31, 2009 and 2008, respectively, and
$83,000 and $263,000 for the twelve months ended December 31, 2009 and 2008, respectively. Interest expense for the three
and twelve months ended December 31, 2009 and 2008 included interest incurred related to the Company’s debt, capital
leases, and interest related to uncertain tax positions. The decrease in interest expense in 2009 was primarily due to a reversal
of interest expense related to the Company’s uncertain tax positions in the fourth quarter of 2009.
Interest income was $3,000 and $96,000 for the three months ended December 31, 2009 and 2008, respectively, and
$76,000 and $381,000 for the twelve months ended December 31, 2009 and 2008, respectively. Interest income for the three
and twelve months ended December 31, 2009 and 2008 was primarily due to interest earned on the Company’s cash, cash
equivalents, and restricted securities. The decrease in interest income in 2009 was primarily due to a decline in interest rates
paid on the Company’s cash and cash equivalents, partially offset by an increase in the balance in these accounts.
Earnings
Income before income taxes
Income tax expense (benefit)
Net income
Diluted common shares outstanding
Diluted income per common share
Three Months Ended
December 31,
Twelve Months Ended
December 31,
2009
3,672
1,306
2,366
28,473
0.08
$
$
$
2008
2,717
(19,024)
21,741
28,478
0.76
$
$
$
2009
14,354
5,675
8,679
28,310
0.31
$
$
$
2008
13,536
(18,414)
31,950
28,351
1.13
$
$
$
Income before income taxes increased 35% for the three months and 6% for the twelve months ended December 31,
2009 as compared to the three and twelve months ended December 31, 2008, respectively. Income before income taxes for
the three and twelve months ended December 31, 2009 increased primarily due to an increase in revenues and other factors as
discussed above.
The Company’s effective income tax rate was 36% and 40% for the three and twelve months ended December 31, 2009,
respectively, which included the effect of the Company’s federal, state, and foreign tax obligations. The Company’s income
tax benefit for the three and twelve months ended December 31, 2008 included $19.1 million in reversals of the Company’s
valuation allowance on its deferred tax assets. This reversal was partially offset by current tax expense including alternative
minimum tax on the Company’s taxable income that could not be offset by the Company’s net operating loss carryforwards,
state tax obligations, and foreign taxes on income of the Company’s wholly owned European subsidiary.
Net income and diluted earnings per common share decreased for the three and twelve months ended December 31, 2009
as compared to the corresponding periods in 2008 despite an increase in income before income taxes. This decrease was due
to income tax expense recorded in the 2009 periods as compared to the income tax benefit recorded in the corresponding
periods in 2008, as discussed above.
Seasonality
The Company believes the demand for its cardiac preservation services is seasonal, with peak demand generally
occurring in the third quarter. Management believes this trend for cardiac preservation services is primarily due to the high
number of surgeries scheduled during the summer months for school-aged patients, who drive the demand for a large
percentage of cardiac tissues processed by CryoLife.
The Company believes the demand for its vascular preservation services is seasonal, with lowest demand generally
occurring in the fourth quarter. Management believes this trend for vascular preservation services is primarily due to fewer
surgeries being scheduled during the winter holiday months.
The Company believes the demand for BioGlue is seasonal, with a decline in demand generally occurring in the third
quarter followed by stronger demand in the fourth quarter. Management believes that this trend for BioGlue may be due to
61
the summer holiday season in Europe and fewer surgeries being performed on adult patients in the summer months in the
U.S.
The Company is uncertain whether demand for PerClot will be seasonal. As PerClot is in a growth phase generally
associated with a recently introduced product that has not fully penetrated the marketplace, the nature of any seasonal trends
in PerClot sales may be obscured.
Liquidity and Capital Resources
Net Working Capital
At December 31, 2010 net working capital (current assets of $101.5 million less current liabilities of $19.3 million) was
$82.2 million, with a current ratio (current assets divided by current liabilities) of 5 to 1, compared to net working capital of
$76.3 million, with a current ratio of 5 to 1 at December 31, 2009.
Overall Liquidity and Capital Resources
The Company's primary cash requirements for the twelve months ended December 31, 2010 arose out of general
working capital needs, consideration paid for the transaction with SMI, the acquisition of Medafor common stock,
repurchases of the Company’s common stock, and the payment of legal and professional fees. Legal and professional fees
during the twelve months ended December 31, 2010 included costs associated with the Company’s litigation with Medafor
and business development costs, including costs for SMI, the Company’s attempt to purchase Medafor, and other business
development activities. The Company funded its cash requirements primarily through its operating activities, which
generated cash during the period.
During 2009 the Company analyzed its deferred preservation cost balances and their recent growth and began a series of
initiatives to reduce the growth of deferred preservation costs. As a result of these initiatives, the growth rate of the Company’s
deferred preservation costs slowed during 2009, and the balance of the Company’s deferred preservation costs decreased by $4.9
million during the twelve months ended December 31, 2010. The Company believes that the rate of decrease of its deferred
preservation cost balances may slow in future months. The Company will continue to manage its incoming tissue procurement
and other costs in an effort to manage its deferred preservation cost balances. However, the Company cannot predict its specific
deferred preservation cost balances in the future with certainty. The Company believes that the current balance of its deferred
preservation costs along with its ongoing preservation service activities is sufficient to support its current and projected
revenues.
CryoLife entered into a credit facility with GE Capital in March of 2008, as amended (the “GE Credit Agreement”) which
provides for up to $15.0 million in revolving credit for working capital, acquisitions, and other corporate purposes, of which
$14.8 million was available for borrowing as of December 31, 2010. As of December 31, 2010 the outstanding balance
under this agreement was zero. As required under the terms of the GE Credit Agreement, the Company is maintaining cash
and cash equivalents of at least $5.0 million in accounts in which GE Capital has a first priority perfected lien. As a result, these
funds will not be available to meet the Company’s liquidity needs during the term of the GE Credit Agreement, and as such,
have been recorded in restricted securities on the Company’s Consolidated Balance Sheet. Also, the GE Credit Agreement
requires that after giving effect to a stock repurchase the Company maintain liquidity, as defined, of at least $20.0 million. The
GE Credit Agreement will expire in late March 2011. CryoLife is currently reviewing its options on whether to extend the GE
Credit Agreement or enter into a new credit agreement or loan with GE Capital or another lender. CryoLife is also considering
possibly expanding its line of credit capacity to provide liquidity for growth, including potential acquisitions, although there is
no guarantee that a new or extended line of credit can be obtained.
The Company’s cash equivalents include advance funding received under the DOD Grants for the continued
development of PHT. As of December 31, 2010 $1.7 million of the cash equivalents recorded on the Company’s
Consolidated Balance Sheet were related to the DOD Grants. These funds must be used for the specified purposes.
The Company believes that its anticipated cash from operations and existing cash and cash equivalents will enable the
Company to meet its current operational liquidity needs for at least the next twelve months. The Company’s future cash
requirements may include cash for general working capital needs, to fund business development activities, including
acquisitions and attempted acquisitions, to purchase license agreements, to repurchase the Company’s common stock, to fund
the Medafor litigation, to fund clinical trials, and for other corporate purposes. The Company expects that these items will
have a significant affect on its cash flows in 2011. In addition, the Company believes that the anticipated material decrease in
HemoStase revenues in 2011 will have a material, adverse impact on the Company’s liquidity as compared to 2010. The
62
Company may seek additional borrowing capacity to fund these future cash requirements. The Company had net operating
loss carryforwards that it has been using to reduce otherwise required cash payments for federal and state income taxes for
the 2010 tax year. Cash payments for taxes will increase in 2011 as the Company’s federal net operating loss carryforwards
will be fully utilized in the 2010 tax year.
Liability Claims
As of December 31, 2010 the Company had accrued a total $2.6 million for the estimated costs of unreported tissue
processing and product liability claims related to services performed and products sold prior to December 31, 2010 and had
recorded a receivable of $1.1 million representing estimated amounts to be recoverable from the Company’s insurance
carriers with respect to such accrued liability. Further analysis indicated that the liability could be estimated to be as high as
$4.7 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques.
The $2.6 million accrual does not represent cash set aside. The timing of future payments related to the accrual is dependent
on when and if claims are asserted, judgments are rendered, and/or settlements are reached. Should payments related to the
accrual be required, these monies would have to be paid from insurance proceeds and liquid assets. Since the amount
accrued is based on actuarial estimates, actual amounts required could vary significantly from this estimate.
Net Cash from Operating Activities
Net cash provided by operating activities was $20.8 million for the twelve months ended December 31, 2010 as
compared to $16.6 million for the twelve months ended December 31, 2009.
The Company uses the indirect method to prepare its cash flow statement, and accordingly, the operating cash flows are
based on the Company’s net income, which is then adjusted to remove non-cash items and for changes in operating assets
and liabilities from the prior year end. For the twelve months ended December 31, 2010 these non-cash items included a
favorable $3.5 million for acquired in-process research and development expense as a result of the transaction with SMI, $3.6
million in other than temporary investment impairment, $3.9 million in depreciation and amortization expense, $2.6 million
in non-cash stock based compensation, and $2.1 million in write-downs of deferred preservation costs and inventory,
primarily HemoStase, partially offset by $1.5 million in deferred income taxes, $1.3 million in excess tax benefits related to
stock compensation, and $1.3 million in non-cash gain on valuation of derivative.
The Company’s working capital needs, or changes in operating assets and liabilities, also affected cash from operations.
For the twelve months ended December 31, 2010 these changes included a favorable $4.9 million due to decreases in
deferred preservation costs and a favorable $2.4 million due to the timing differences between the recording of accounts
payable, accrued expenses, and other current liabilities and the actual payment of cash, partially offset by an unfavorable $1.8
million increase in inventory balances, primarily HemoStase purchases prior to the non-cash write-down discussed above,
and an unfavorable $1.5 million due to the timing difference between making cash payments and the expensing of assets,
primarily prepaid royalties from the transaction with SMI.
Net Cash from Investing Activities
Net cash used in investing activities was $10.7 million for the twelve months ended December 31, 2010 as compared to
$4.4 million for the twelve months ended December 31, 2009. The current year cash used was primarily due to $5.4 million
in payments related to the transaction with SMI, $2.7 million in purchases of marketable securities and investments, largely
related to the purchase of Medafor common stock, and $2.1 million in capital expenditures.
Net Cash from Financing Activities
Net cash used in financing activities was $4.7 million for the twelve months ended December 31, 2010 as compared to
net cash provided of $707,000 for the twelve months ended December 31, 2009. The current year cash used was primarily
due to $5.9 million in purchases of treasury stock, related to the Company’s publicly announced stock repurchase plan, and
$1.2 million in principal payments on capital leases and short-term notes payable, partially offset by $1.2 million in proceeds
from the financing of insurance policies and a $1.3 million excess tax benefit related to stock compensation.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
63
Scheduled Contractual Obligations and Future Payments
Scheduled contractual obligations and the related future payments as of December 31, 2010 are as follows (in thousands):
Total
$
Operating leases
Purchase commitments
Research obligations
SMI contingent payments
Compensation payments
Total contractual obligations $
28,584 $
8,747
3,740
2,250
1,985
45,306 $
2011
2012
2013
2014
2,388 $
2,264
2,049
750
--
7,451 $
2,550 $
2,583
337
--
--
5,470 $
2,477 $
3,500
651
500
993
8,121 $
2,482 $
400
703
1,000
992
5,577 $
2015
Thereafter
2,519 $ 16,168
--
--
--
--
2,519 $ 16,168
--
--
--
--
The Company’s operating lease obligations result from the lease of land and buildings that comprise the Company’s
corporate headquarters and manufacturing facilities, leases related to additional office and warehouse space, leases on
Company vehicles, and leases on a variety of office equipment.
The Company’s purchase commitments include minimum purchase requirements for PerClot related to the Company’s
transaction with SMI. These minimum purchases are included through 2013, as that is when the Company expects to receive
FDA approval for PerClot. Upon FDA approval, the Company may terminate its minimum purchase requirements, which it
expects to do, but if the Company does not terminate this provision, it will have minimum purchases obligations in 2014 and
through the end of the contract term. The Company’s purchase commitments also include obligations from agreements with
suppliers to stock certain custom raw materials needed for the Company’s processing and production and contractual
payments for licensing computer software and telecommunication services, and other items as appropriate.
The Company’s research obligations represent commitments for ongoing studies and payments to support research and
development activities, a large portion of which will be funded by the advances received under the DOD Grants.
The obligation for SMI contingent payments represents the contingent milestone payments that the Company will pay if
certain FDA regulatory approvals and other commercial milestones are achieved, as discussed in “–Recent Events” above.
The schedule excludes one contingent milestone payment of $500,000, as the Company cannot make a reasonably reliable
estimate of timing of this future payment.
The Company’s compensation payment obligations represent estimated payments for post employment benefits for the
Company’s Chief Executive Officer (“CEO”). The timing of the CEO’s post employment benefits is based on the December
2012 expiration date of the CEO’s employment agreement. Payment of this benefit may be accelerated by a change in
control or by the voluntary retirement of the CEO.
The schedule of contractual obligations above excludes (i) obligations for estimated tissue processing and product
liability claims unless they are due as a result of a pending settlement agreement or other contractual obligation and (ii) any
estimated liability for uncertain tax positions and interest and penalties, currently estimated to be $1.4 million, because the
Company can not make a reasonably reliable estimate of the amount and period of related future payments as no specific
assessments have been made for specific litigation or by any taxing authorities.
Capital Expenditures
Capital expenditures for the twelve months ended December 31, 2010 were $2.1 million compared to $1.7 million for the
twelve months ended December 31, 2009. Capital expenditures in the twelve months ended December 31, 2010 were primarily
related to routine purchases of tissue processing, manufacturing, computer, and office equipment, computer software, and
renovations to the Company’s corporate headquarters needed to support the Company’s business.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The Company’s interest income and 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 the Company’s cash and cash equivalents of $35.5 million
and restricted money market funds of $5.0 million and interest paid on the Company’s variable rate line of credit as of
December 31, 2010. A 10% adverse change in interest rates as compared to the rates experienced by the Company in the
64
three months ended December 31, 2010, affecting the Company’s cash and cash equivalents, restricted money market funds,
and line of credit would not have a material impact on the Company’s financial position, profitability, or cash flows.
Foreign Currency Exchange Rate Risk
The Company has 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 the Company will receive
in payment for assets or that the Company would have to pay to settle liabilities. As a result, the Company could be required
to record these changes as gains or losses on foreign currency translation.
The Company has revenues and expenses that are denominated in foreign currencies. Specifically, a significant portion
of the Company’s international BioGlue revenues are denominated in British Pounds and Euros, and a portion of the
Company’s general, administrative, and marketing expenses are denominated in British Pounds and Euros. 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, the
Company could recognize a reduction in revenues or an increase in expenses related to a change in exchange rates.
Changes in exchange rates which occurred during the twelve months ended December 31, 2010 as well as any future
material adverse fluctuations in exchange rates could have a material and adverse impact on the Company’s revenues,
profitability, and cash flows. An additional 10% adverse change in exchange rates from the exchange rates in effect on
December 31, 2010 affecting the Company’s balances denominated in foreign currencies would not have had a material
impact on the Company’s financial position or cash flows. An additional 10% adverse change in exchange rates from the
exchange rates in effect on December 31, 2010 as compared to the weighted average exchange rates experienced by the
Company for the twelve months ended December 31, 2010 affecting the Company’s revenue and expense transactions
denominated in foreign currencies, would not have had a material impact on the Company’s financial position, profitability,
or cash flows.
Item 8. Financial Statements and Supplementary Data.
Our financial statements and supplementary data required by this item are submitted as a separate section of this annual
report on Form 10-K. See “Financial Statements” commencing on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Company maintains disclosure controls and procedures (“Disclosure Controls”) as such term is defined under Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934. These Disclosure Controls are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the
time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to
management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow
timely decisions regarding required disclosures.
The Company’s management, including the Company’s President and CEO and the Company’s Executive Vice President
of Finance, Chief Operating Officer, and CFO, does not expect that its Disclosure Controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
65
breakdown can occur because of simple error or mistake. The Company’s Disclosure Controls have been designed to provide
reasonable assurance.
Based upon the most recent Disclosure Controls evaluation, conducted by management with the participation of the CEO
and CFO, as of December 31, 2010 the CEO and CFO have concluded that the Company’s Disclosure Controls were effective at
the reasonable assurance level to satisfy their objectives and to ensure that the information required to be disclosed by the
Company in its periodic reports is accumulated and communicated to management, including the CEO and CFO, as appropriate
to allow timely decisions regarding disclosure and is recorded, processed, summarized, and reported within the time periods
specified in the U.S. Securities and Exchange Commission’s rules and forms.
During the quarter ended December 31, 2010, there were no changes in the Company’s internal control over financial
reporting that materially affected or that are reasonably likely to materially affect the Company’s internal control over financial
reporting.
The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to “Management’s Report on
Internal Control over Financial Reporting under Sarbanes-Oxley Section 404” on page F-1 of this report.
The attestation report called for by Item 308(b) of Regulation S-K is incorporated herein by reference to “Report of
Independent Registered Public Accounting Firm” on page F-2 of this report.
Item 9B. Other Information.
None.
66
PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
The response to Item 10 is incorporated herein by reference to the information to be set forth in the Proxy Statement for
the Annual Meeting of Stockholders to be filed with the Commission not later than April 30, 2011, with the exception of
information concerning executive officers, which is included in Part I, Item 4A, “Executive Officers of the Registrant” of this
Form 10-K.
Item 11. Executive Compensation.
The response to Item 11 is incorporated herein by reference to the information to be set forth in the Proxy Statement for
the Annual Meeting of Stockholders to be filed with the Commission not later than April 30, 2011.
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters.
The response to Item 12 is incorporated herein by reference to the information to be set forth in the Proxy Statement for
the Annual Meeting of Stockholders to be filed with the Commission not later than April 30, 2011.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The response to Item 13 is incorporated herein by reference to the information to be set forth in the Proxy Statement for
the Annual Meeting of Stockholders to be filed with the Commission not later than April 30, 2011.
Item 14. Principal Accounting Fees and Services.
The response to Item 14 is incorporated herein by reference to the information to be set forth in the Proxy Statement for
the Annual Meeting of Stockholders to be filed with the Commission not later than April 30, 2011.
67
PART IV
Item 15. Exhibits, Financial Statement Schedules.
The following are filed as part of this report:
(a)
1.
Consolidated Financial Statements begin on page F-1.
All financial statement schedules are omitted, as the required information is immaterial, not applicable, or the information is
presented in the consolidated financial statements or related notes.
(b)
Exhibits
The following exhibits are filed herewith or incorporated herein by reference:
Exhibit
Number
Description
2.1
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2+
10.2(a)
10.2(b)+
Reserved.
Amended and Restated Articles of Incorporation of the Company. (Incorporated herein by reference to Exhibit
3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007.)
Reserved.
Reserved.
Reserved.
Amended and Restated By-Laws. (Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K filed January 6, 2010.)
Reserved.
Form of Certificate for the Company’s Common Stock. (Incorporated herein by reference to Exhibit 4.2 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997.)
Reserved.
Reserved.
Reserved.
First Amended and Restated Rights Agreement, dated as of November 2, 2005, between CryoLife, Inc. and
American Stock Transfer & Trust Company. (Incorporated herein by reference to Exhibit 4.1 to Registrant’s
Current Report on Form 8-K filed November 3, 2005.)
Reserved.
Credit Agreement by and among CryoLife, Inc. and certain of its subsidiaries, as borrowers, General Electric
Capital Corporation, as lender, letter of credit issuer, and agent for all lenders, and GE Capital Markets, Inc. as
sole lead arranger and bookrunner. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.)
First Amendment, dated May 7, 2009, to the Credit Agreement by and among CryoLife, Inc. and certain of its
subsidiaries, as borrowers, General Electric Capital Corporation, as lender, letter of credit issuer, and agent for
all lenders, and GE Capital Markets, Inc. as sole lead arranger and bookrunner. (Incorporated herein by
reference to Exhibit 10.9(a) to the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2009.)
Second Amendment, dated November 9, 2009, to the Credit Agreement by and among CryoLife, Inc. and
certain of its subsidiaries, as borrowers, General Electric Capital Corporation, as lender, letter of credit issuer,
and agent for all lenders, and GE Capital Markets, Inc. as sole lead arranger and bookrunner. (Incorporated
herein by reference to Exhibit 10.9(a) to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2009.)
68
Exhibit
Number
10.2(c)+
10.2(d)
10.3
10.4
10.5+
10.6+
10.7
10.7(a)
10.7(b)
10.8
10.9(a)
10.9(b)
10.9(c)
10.9(d)
10.9(e)
10.10
10.11
Description
Third Amendment, dated January 12, 2010, to the Credit Agreement by and among CryoLife, Inc. and certain of
its subsidiaries, as borrowers, General Electric Capital Corporation, as lender, letter of credit issuer, and agent
for all lenders, and GE Capital Markets, Inc., as sole lead arranger and bookrunner. (Incorporated herein by
reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2010.)
Fourth Amendment, dated May 28, 2010, to the Credit Agreement by and among CryoLife, Inc. and certain of
its subsidiaries, as borrowers, General Electric Capital Corporation, as lender, letter of credit issuer, and agent
for all lenders, and GE Capital Markets, Inc., as sole lead arranger and bookrunner. (Incorporated herein by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2010.)
CryoLife, Inc. 2007 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.)
CryoLife, Inc. 1998 Long-Term Incentive Plan. (Incorporated herein by reference to Appendix 1 to the
Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 17, 1998.)
Exchange and Service Agreement, dated December 15, 2006, by and between CryoLife, Inc. and Regeneration
Technologies, Inc. and its affiliates RTI Donor Services, Inc. and Regeneration Technologies, Inc. –
Cardiovascular. (Incorporated herein by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2006.)
Agreement between CryoLife, Inc. and Medafor, Inc. dated April 18, 2008. (Incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.)
Form of 2009 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive
Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2009.)
Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2002 Employee Stock Incentive
Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
August 7, 2006.)
Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock
Incentive Plan. (Incorporated herein by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2007.)
Form of Incentive Stock Option Grant Agreement under the 1998 Long-Term Incentive Plan. (Incorporated
herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2007.)
Second Amended and Restated Employment Agreement by and between the Company and Steven G.
Anderson dated as of November 4, 2008, as amended December 31, 2009. (Incorporated herein by reference
to Exhibit 10.9(b) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009.)
Change of Control Agreement, by and between the Company and Albert E. Heacox, Ph.D., dated May 5, 2009.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 8,
2009.)
Change of Control Agreement, by and between the Company and David M. Fronk, dated May 5, 2009.
(Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 8,
2009.)
Change of Control Agreement, by and between the Company and D. Ashley Lee, dated October 24, 2008.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October
28, 2008.)
Change of Control Agreement, by and between the Company and Gerald B. Seery, dated November 2, 2008.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
November 3, 2008.)
Form of Secrecy and Noncompete Agreement, by and between the Company and its Officers. (Incorporated
herein by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (No. 33-56388).)
Form of Key Employee Secrecy and Noncompete Agreement, by and between the Company and its Officers
and Key Employees (Incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.).
69
Exhibit
Number
10.12*
10.13
10.14
10.15
10.16
10.16(a)
10.16(b)
10.16(c)
10.17
10.17(a)
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Description
Summary of Salaries for Named Executive Officers.
Form of Non-Qualified Stock Option Grant Agreement under 1998 Long-Term Incentive Plan. (Incorporated
herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2007.)
Amended and Restated Technology Acquisition Agreement between the Company and Nicholas Kowanko,
Ph.D., dated March 14, 1996. (Incorporated herein by reference to Exhibit 10.14 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2004.)
CryoLife, Inc. Non-Employee Directors Stock Option Plan, as amended. (Incorporated herein by reference to
Appendix 2 to the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission
on April 17, 1998.)
Lease Agreement between the Company and Amli Land Development—I Limited Partnership, dated April 18,
1995. (Incorporated herein by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2007.)
First Amendment to Lease Agreement, dated April 18, 1995, between the Company and Amli Land
Development—I Limited Partnership dated August 6, 1999. (Incorporated herein by reference to Exhibit
10.16(a) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)
Restatement and Amendment to Funding Agreement between the Company and Amli Land Development—I
Limited Partnership, dated August 6, 1999. (Incorporated herein by reference to Exhibit 10.16(b) to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)
Amended and Restated Lease Agreement between the Company and Amli Land Development – I Limited
Partnership, dated May 10, 2010. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.)
CryoLife, Inc. 2008 Non-Employee Directors Omnibus Stock Plan. (Incorporated herein by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.)
Form of Non-Employee Director Stock Grant Agreement pursuant to the CryoLife, Inc. 2008 Non-Employee
Directors Omnibus Stock Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008.)
Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term
Incentive Plan. (Incorporated herein by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2007.)
CryoLife, Inc. 2004 Employee Stock Incentive Plan, adopted on June 29, 2004. (Incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2004.)
Form of Incentive Stock Option Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February
25, 2008.)
Form of Non-Qualified Employee Stock Option Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock
Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-
K filed February 25, 2008.)
Technology License Agreement between the Company and Colorado State University Research Foundation
dated March 28, 1996. (Incorporated herein by reference to Exhibit 10.22 to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.)
Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004
Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004.)
Form of Incentive Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee
Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004.)
Form of Section 16 Officer Stock Option Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock
Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-
K filed February 27, 2006.)
70
Exhibit
Number
Description
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44*
Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive
Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
February 27, 2006.)
Grant of Incentive Stock Option to D. Ashley Lee, dated May 4, 2006. (Incorporated herein by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)
Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive
Plan. (Incorporated herein by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2006.)
Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term
Incentive Plan. (Incorporated herein by reference to Exhibit 10.30(a) to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2006.)
Form of Director Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-
Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.30(b) to the Registrant’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2006.)
Form of Non-Employee Directors Stock Option Agreement and Grant pursuant to the Amended and Restated
Non-Employee Directors Stock Option Plan. (Incorporated herein by reference to Exhibit 10.31 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)
Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.)
Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive
Plan. (Incorporated herein by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2006.)
Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.)
Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004
Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.35 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2006.)
Form of Grant of Non-Qualified Stock Option to Directors. (Incorporated herein by reference to Exhibit 10.36
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)
Grant of Incentive Stock Option to Steven G. Anderson, dated May 4, 2006. (Incorporated herein by reference
to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)
International Distribution Agreement, dated September 17, 1998, between the Company and Century Medical,
Inc. (Incorporated by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)
CryoLife, Inc. 2004 Non-Employee Directors Stock Option Plan, as amended, adopted on June 29, 2004.
(Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004.)
Form of Directors Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Non-Employee
Directors Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004.)
CryoLife, Inc. 2002 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
Settlement and Release Agreement, dated August 2, 2002, by and between Colorado State University Research
Foundation, the Company, and Dr. E. Christopher Orton. (Incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
Settlement Agreement and Release, dated September 25, 2006, by and between CryoLife, Inc. and St. Paul
Mercury Insurance Company. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2006.)
Summary of Compensation Arrangements with Non-Employee Directors.
71
Exhibit
Number
Description
10.45
10.46
10.47
10.48*
10.49
10.50+
10.51+
10.52*
21.1*
23.1*
31.1*
31.2*
32*
CryoLife, Inc. 2009 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
First Amendment to the CryoLife, Inc. 2004 Employee Stock Incentive Plan, dated October 27, 2009.
(Incorporated herein by reference to Exhibit 10.46 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2009.)
Form of 2010 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive
Incentive Plan entered into with each Named Executive Officer. (Incorporated herein by reference to Exhibit
10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.)
Correction of Form of 2010 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007
Executive Incentive Plan entered into with each Named Executive Officer.
Form of Non-Qualified Stock Option Grant Agreement pursuant to the CryoLife, Inc. 2009 Employee Stock
Incentive Plan entered into with each Named Executive Officer. (Incorporated herein by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.)
Distribution Agreement between the Company and Starch Medical, Inc., dated September 28, 2010.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2010.)
License Agreement between the Company and Starch Medical, Inc., dated September 28, 2010.
(Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2010.)
CryoLife, Inc. Executive Deferred Compensation Plan.
Subsidiaries of CryoLife, Inc.
Consent of Deloitte & Touche LLP.
Certification by Steven G. Anderson pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Certification by D. Ashley Lee pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002.
* Filed herewith.
+ The Registrant has requested confidential treatment for certain portions of this exhibit pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.
72
3. B. Executive Compensation Plans and Arrangements.
1. Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2002 Employee Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed August 7,
2006.)
2. Second Amended and Restated Employment Agreement by and between the Company and Steven G. Anderson
dated as of November 4, 2008, as amended December 31, 2009. (Incorporated herein by reference to Exhibit 10.9(b)
to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009.)
3. Change of Control Agreement, by and between the Company and Albert E. Heacox, Ph.D., dated May 5, 2009.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 8, 2009.)
4. Change of Control Agreement, by and between the Company and David M. Fronk, dated May 5, 2009. (Incorporated
herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 8, 2009.)
5. Change of Control Agreement, by and between the Company and D. Ashley Lee, dated October 24, 2008.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 28,
2008.)
6. Change of Control Agreement, by and between the Company and Gerald B. Seery, dated November 2, 2008.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 3,
2008.)
7. Form of Secrecy and Noncompete Agreement, by and between the Company and its Officers. (Incorporated herein
by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (No. 33-56388).)
8. Form of Key Employee Secrecy and Noncompete Agreement, by and between the Company and its Officers and
Key Employees. (Incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2006.)
9. CryoLife, Inc. Non-Employee Directors Stock Option Plan, as amended. (Incorporated herein by reference to
Appendix 2 to the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on
April 17, 1998.)
10. CryoLife, Inc. 1998 Long-Term Incentive Plan. (Incorporated herein by reference to Appendix 1 to the Registrant’s
Definitive Proxy Statement filed with the Securities and Exchange Commission on April 17, 1998.)
11. CryoLife, Inc. 2002 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
12. CryoLife, Inc. 2004 Employee Stock Incentive Plan, adopted on June 29, 2004. (Incorporated herein by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)
13. CryoLife, Inc. 2004 Non-Employee Directors Stock Option Plan, as amended, adopted on June 29, 2004.
(Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.)
14. CryoLife, Inc. 2007 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.)
15. Form of Directors Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Non-Employee Directors
Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2004.)
16. Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee
Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004.)
73
17. Form of Incentive Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee
Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004.)
18. Form of Section 16 Officer Stock Option Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive
Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed
February 27, 2006.)
19. Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 27,
2006.)
20. Grant of Incentive Stock Option to D. Ashley Lee, dated May 4, 2006. (Incorporated herein by reference to Exhibit
10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)
21. *Summary of Salaries for Named Executive Officers.
22. Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive
Plan. (Incorporated herein by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2006.)
23. Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term
Incentive Plan. (Incorporated herein by reference to Exhibit 10.30(a) to the Registrant’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2006.)
24. Form of Director Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term
Incentive Plan. (Incorporated herein by reference to Exhibit 10.30(b) to the Registrant’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2006.)
25. Form of Non-Employee Directors Stock Option Agreement and Grant pursuant to the Amended and Restated Non-
Employee Directors Stock Option Plan. (Incorporated herein by reference to Exhibit 10.31 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)
26. Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.)
27. Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive
Plan. (Incorporated herein by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2006.)
28. Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.)
29. Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee
Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2006.)
30. Form of Grant of Non-Qualified Stock Option to Directors. (Incorporated herein by reference to Exhibit 10.36 to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)
31. Grant of Incentive Stock Option to Steven G. Anderson, dated May 4, 2006. (Incorporated herein by reference to
Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)
32. Form of 2009 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive Incentive Plan.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009.)
74
33. Form of Incentive Stock Option Grant Agreement under the 1998 Long-Term Incentive Plan. (Incorporated herein
by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2007.)
34. Form of Non-Qualified Stock Option Grant Agreement under 1998 Long-Term Incentive Plan. (Incorporated herein
by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2007.)
35. Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive
Plan. (Incorporated herein by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2007.)
36. *Summary of Compensation Arrangements with Non-Employee Directors.
37. Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock
Incentive Plan. (Incorporated herein by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2007.)
38. CryoLife, Inc. 2008 Non-Employee Directors Omnibus Stock Plan. (Incorporated herein by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.)
39. Form of Non-Employee Director Stock Grant Agreement pursuant to the CryoLife, Inc. 2008 Non-Employee
Directors Omnibus Stock Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008.)
40. Form of Incentive Stock Option Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 25,
2008.)
41. CryoLife, Inc. 2009 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
42. First Amendment to the CryoLife, Inc. 2004 Employee Stock Incentive Plan, dated October 27, 2009. (Incorporated
herein by reference to Exhibit 10.46 to the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2009.)
43. Form of 2010 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive Incentive Plan
entered into with each Named Executive Officer. (Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.)
44. *Correction of Form of 2010 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive
Incentive Plan entered into with each Named Executive Officer.
45. Form of Non-Qualified Stock Option Grant Agreement pursuant to the CryoLife, Inc. 2009 Employee Stock
Incentive Plan entered into with each Named Executive Officer. (Incorporated herein by reference to Exhibit 10.2 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.)
46. *CryoLife, Inc. Executive Deferred Compensation Plan.
___________
*
Filed herewith.
75
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
February 22, 2011
By
CRYOLIFE, INC.
/s/ STEVEN G. ANDERSON
Steven G. Anderson
President, Chief Executive Officer, and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ STEVEN G. ANDERSON
Steven G. Anderson
/s/ D. ASHLEY LEE
D. Ashley Lee
/s/ AMY D. HORTON
Amy D. Horton
/s/ THOMAS F. ACKERMAN
Thomas F. Ackerman
/s/ JAMES S. BENSON
James S. Benson
/s/ DANIEL J. BEVEVINO
Daniel J. Bevevino
/s/ RONALD C. ELKINS, M.D.
Ronald C. Elkins, M.D.
/s/ RONALD D. MCCALL
Ronald D. McCall
/s/ HARVEY MORGAN
Harvey Morgan
February 22, 2011
February 22, 2011
February 22, 2011
February 22, 2011
February 22, 2011
February 22, 2011
February 22, 2011
February 22, 2011
February 22, 2011
President, Chief Executive Officer, and
Chairman of the Board of Directors
(Principal Executive Officer)
Executive Vice President,
Chief Operating Officer, and
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
76
Management’s Report on Internal Control over Financial Reporting under Sarbanes-Oxley Section 404.
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.
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,
2010. 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. Based on our assessment, we believe that, as of
December 31, 2010, the company’s internal control over financial reporting was effective based on those criteria.
CryoLife’s independent registered public accounting firm, Deloitte and Touche LLP, has issued an audit report on the
effectiveness of CryoLife’s internal control over financial reporting as of December 31, 2010.
CryoLife, Inc.
February 22, 2011
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CryoLife, Inc.
Kennesaw, Georgia
We have audited the internal control over financial reporting of CryoLife, Inc. and subsidiaries (the “Company”) as of
December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. 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 under Sarbanes-
Oxley Section 404. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). 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.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America. 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 accounting principles generally accepted in the
United States of America 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on
a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report
dated February 22, 2011 expressed an unqualified opinion on those financial statements.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 22, 2011
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CryoLife, Inc.
Kennesaw, Georgia
We have audited the accompanying consolidated balance sheets of CryoLife, Inc. and subsidiaries (the “Company”) as of
December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2010 based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 22, 2011 expressed an unqualified opinion on the Company’s internal control
over financial reporting.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 22, 2011
F-3
CRYOLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Restricted securities
Receivables:
Trade accounts, net
Other
Total receivables
Deferred preservation costs
Inventories
Deferred income taxes
Prepaid expenses and other assets
Total current assets
Property and equipment:
Equipment and software
Furniture and fixtures
Leasehold improvements
Total property and equipment
Less accumulated depreciation and amortization
Net property and equipment
Other assets:
Investment in equity securities
Restricted money market funds
Patents, less accumulated amortization of $2,603 in 2010 and $2,155 in 2009
Trademarks and other intangibles, less accumulated amortization of $397 in 2010 and
$871 in 2009
Deferred income taxes
Other
December 31,
2010
2009
$
35,497
5,309
$
30,121
--
13,724
589
14,313
31,570
6,429
6,096
2,276
13,709
927
14,636
36,445
6,446
5,694
2,186
101,490
95,528
20,622
3,837
29,111
53,570
40,484
13,086
2,594
--
3,282
5,601
9,182
2,203
19,722
3,735
29,000
52,457
38,148
14,309
3,221
5,000
4,248
2,724
8,075
754
Total assets
$
137,438
$
133,859
See accompanying Notes to Consolidated Financial Statements.
F-4
CRYOLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued compensation
Accrued procurement fees
Accrued expenses
Deferred income
Derivative liability
Other current liabilities
Total current liabilities
Line of credit
Other
Total liabilities
Commitments and contingencies
December 31,
2010
2009
$
$
4,243
3,357
3,081
4,434
2,095
--
2,118
2,954
3,361
3,228
4,182
2,646
725
2,120
19,328
19,216
--
4,168
315
3,882
23,496
23,413
Shareholders’ equity:
Preferred stock $0.01 par value per share, 5,000 shares authorized, no shares issued:
Series A Junior Participating Preferred Stock, 2,000 shares authorized, no shares issued
Convertible preferred stock, 460 shares authorized, no shares issued
Common stock $0.01 par value per share, 75,000 shares authorized,
29,950 shares issued in 2010 and 29,475 shares issued in 2009
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss
Treasury stock at cost, 2,049 shares in 2010 and 1,000 shares in 2009
--
--
300
133,845
(8,408)
(32)
(11,763)
--
--
295
128,427
(12,352)
(38)
(5,886)
Total shareholders’ equity
113,942
110,446
Total liabilities and shareholders’ equity
$
137,438
$
133,859
See accompanying Notes to Consolidated Financial Statements.
F-5
CRYOLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2009
2008
2010
$
59,724
56,370
551
116,645
$
56,456
54,162
1,067
111,685
$
53,656
50,493
910
105,059
35,868
12,409
48,277
68,368
49,064
5,923
3,513
58,500
9,868
180
(23)
(1,345)
3,638
141
7,277
3,333
32,767
9,150
41,917
69,768
50,025
5,247
--
55,272
14,496
83
(76)
(24)
--
159
29,112
8,153
37,265
67,794
48,831
5,309
--
54,140
13,654
263
(381)
--
--
236
14,354
5,675
13,536
(18,414)
$
$
$
3,944
$
8,679
$
31,950
0.14
0.14
$
$
0.31
0.31
$
$
1.15
1.13
27,987
28,274
28,106
28,310
27,800
28,351
Revenues:
Preservation services
Products
Other
Total revenues
Cost of preservation services and products:
Preservation services
Products
Total cost of preservation services and products
Gross margin
Operating expenses:
General, administrative, and marketing
Research and development
Acquired in-process research and development
Total operating expenses
Operating income
Interest expense
Interest income
Gain on valuation of derivative
Other than temporary investment impairment
Other expense, net
Income before income taxes
Income tax expense (benefit)
Net income
Income per common share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
F-6
CRYOLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Net cash flows from operating activities:
Net income
Year Ended December 31,
2009
2008
2010
$
3,944
$
8,679
$
31,950
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
Other than temporary investment impairment
Acquired in-process research and development expense
Non-cash compensation
Write-down of deferred preservation costs and inventories
Write-down of intangible asset
Reversal of deferred income tax valuation allowance
Deferred income taxes
Gain on valuation of derivative
Excess tax benefit from stock based compensation
Other non-cash adjustments to income
Changes in operating assets and liabilities:
Receivables
Deferred preservation costs
Inventories
Prepaid expenses and other assets
Accounts payable, accrued expenses, and other liabilities
Net cash flows provided by operating activities
Net cash flows from investing activities:
Acquisition of SMI intangible assets
Capital expenditures
Purchases of restricted securities
Purchases of marketable securities and investments
Sales and maturities of marketable securities
Other
Net cash flows used in investing activities
Net cash flows from financing activities:
Principal payments on debt
Proceeds from financing of insurance policies and debt issuance
Principal payments on capital leases and short-term notes payable
Proceeds from exercise of stock options and issuance of common stock
Repurchases of common stock
Excess tax benefit from stock based compensation
Net cash flows (used in) provided by financing activities
Increase in cash and cash equivalents
Effect of exchange rate changes on cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
See accompanying Notes to Consolidated Financial Statements.
3,937
3,638
3,513
2,621
2,093
921
--
(1,509)
(1,345)
(1,275)
185
179
4,901
(1,803)
(1,539)
2,376
20,837
(5,411)
(2,121)
(300)
(2,405)
--
(497)
(10,734)
(315)
1,179
(1,222)
239
(5,877)
1,275
(4,721)
5,382
(6)
30,121
35,497
$
4,263
--
--
2,429
489
--
--
5,254
(24)
--
187
(745)
(1,839)
699
(353)
(2,467)
16,572
--
(1,690)
--
(3,036)
1,130
(783)
(4,379)
--
1,272
(1,328)
1,093
(330)
--
707
12,900
20
17,201
30,121
$
4,353
--
--
2,099
1,728
--
(19,147)
(7)
--
--
84
(841)
(8,286)
(2,922)
(21)
547
9,537
--
(1,738)
(5,000)
(1,118)
3,565
(46)
(4,337)
(4,588)
1,728
(1,343)
2,383
(611)
--
(2,431)
2,769
(28)
14,460
17,201
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S
CRYOLIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Business
CryoLife, Inc. (“CryoLife,” the “Company,” “we,” or “us”) preserves and distributes human tissues and develops,
manufactures, and commercializes medical devices for cardiac and vascular transplant applications. The human tissue
distributed by CryoLife includes the CryoValve® SG pulmonary heart valve (“CryoValve SGPV”) and the CryoPatch® SG
pulmonary cardiac patch tissue (“CryoPatch SG”), both processed using CryoLife’s proprietary SynerGraft® technology.
CryoLife’s medical devices consist primarily of surgical adhesives, sealants, and hemostats including BioGlue® Surgical
Adhesive (“BioGlue”), BioFoam® Surgical Matrix (“BioFoam”), PerClot® , which the Company began distributing for Starch
Medical, Inc. (“SMI”) in October of 2010, and HemoStase®, which the Company currently distributes for Medafor, Inc.
(“Medafor”), although CryoLife expects to discontinue sales of HemoStase in late March 2011 because Medafor terminated
the HemoStase distribution agreement.
CryoLife distributes preserved human cardiac and vascular tissues to implanting institutions throughout the U.S.,
Canada, and Europe. The Company received a Section 510(k) (“510(k)”) clearance from the U.S. Food and Drug
Administration (“FDA”) in February 2008 for its CryoValve SGPV and in August 2009 for its CryoPatch SG, both processed
with the Company’s proprietary SynerGraft technology. CryoLife distributes BioGlue throughout the U.S. and in more than
75 other countries for designated applications. In the U.S. BioGlue is FDA approved as an adjunct to sutures and staples for
use in adult patients in open surgical repair of large vessels. CryoLife distributes BioGlue under Conformité Européene
("CE") Mark product certification in the European Economic Area ("EEA") for repair of soft tissues (which include cardiac,
vascular, pulmonary, and additional soft tissues). Additional marketing approvals have been granted for specified
applications in several other countries throughout the world, including Canada, Australia, and Japan. CryoLife distributes
BioFoam under CE Mark certification and has approval by the FDA for an Investigational Device Exemption (“IDE”) to
conduct a human clinical trial with BioFoam to help seal liver tissues in patients for whom cessation of bleeding by ligature
or other conventional methods is ineffective or impractical.
CryoLife distributes PerClot under a worldwide distribution agreement with SMI. PerClot has CE Mark designation
allowing commercial distribution into the European Community and other markets. CryoLife plans to file an IDE in early
2011 with the FDA to begin clinical trials for the purpose of obtaining Premarket Approval to distribute PerClot in the U.S.
CryoLife has been distributing HemoStase under a private label exclusive distribution agreement with Medafor (“EDA”)
since 2008. On September 27, 2010 Medafor sent the Company a letter stating that Medafor was "fully, finally and
immediately terminating" the EDA. CryoLife believes this termination was wrongful. CryoLife expects to continue to ship
HemoStase through late March 2011.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Translation of Foreign Currencies
The Company’s revenues and expenses transacted in foreign currencies are translated as they occur at exchange rates in
effect at the time of each transaction. Realized gains and losses on foreign currency transactions are recorded as a component of
other (expense) income, net on the Company’s Consolidated Statement of Operations. Assets and liabilities of the Company
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) income in the shareholders' equity section of the Company’s
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 management 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
F-9
when accounting for valuation of investments, allowance for doubtful accounts, deferred preservation costs, valuation and lives
of long-lived tangible and intangible assets, deferred income taxes, valuation of deferred income taxes, commitments and
contingencies (including tissue processing and product liability claims, claims incurred but not reported, and amounts
recoverable from insurance companies), stock based compensation, and certain accrued liabilities, including accrued
procurement fees, income taxes, and financial instruments (including derivatives).
Revenue Recognition
The Company recognizes revenues for preservation services when services are completed and tissue is shipped to the
customer. Revenues for products are recognized at the time the product is shipped, at which time title passes to the customer,
and there are no further performance obligations. The Company assesses the likelihood of collection based on a number of
factors, including past transaction history with the customer and the credit-worthiness of the customer. Revenues from research
grants are recognized in the period the associated costs are incurred. Revenues from upfront licensing agreements are
recognized ratably over the period the Company expects to fulfill its obligations.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of tissues and products are included in preservation services revenues
and product revenues, respectively. The costs for shipping and handling of tissues and products are included as a component of
cost of preservation services and cost of products, respectively.
Advertising Costs
The costs to produce and communicate the Company’s advertising are expensed as incurred and are classified as general,
administrative, and marketing expenses. The Company records the cost of certain sales materials as a prepaid expense and
amortizes 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 the Company’s Consolidated Statements of Operations was $531,000, $1.2
million, and $1.5 million for the years ended December 31, 2010, 2009, and 2008, respectively.
Stock-Based Compensation
The Company has stock option and stock incentive plans for employees and non-employee Directors that provide for grants
of restricted stock awards (“RSA”s), restricted stock units (“RSU”s), and options to purchase shares of CryoLife common stock
at exercise prices generally equal to the fair values of such stock at the dates of grant. The Company also maintains a
shareholder approved Employee Stock Purchase Plan (the “ESPP”) for the benefit of its employees. The ESPP allows eligible
employees the right to purchase common stock on a regular basis at the lower of 85% of the market price at the beginning or end
of each offering period.
The Company recognizes the cost of all share-based payments in the financial statements using a fair-value based
measurement method. The Company values its RSAs and RSUs based on the stock price on the date of grant and expenses
the related compensation cost using the straight-line method over the vesting period. The Company uses a Black-Scholes
model to value its stock option grants and expenses the related compensation cost using the straight-line method over the
vesting period. The fair value of the Company’s ESPP options is also determined using a Black-Scholes model and is
expensed over the vesting period.
The fair value of stock options and ESPP options is determined on the grant date using assumptions for the expected
term, volatility, dividend yield, and the risk-free interest rate. The expected term is primarily based on the contractual term of
the option and Company data related to historic exercise and post-vesting forfeiture patterns, which is adjusted based on
management’s expectations of future results. The expected term is determined separately for options issued to the
Company’s directors and to employees. The Company’s anticipated volatility level is primarily based on the historic
volatility of the Company’s common stock, adjusted to remove the effects of certain periods of unusual volatility not
expected to recur, and adjusted based on management’s expectations of future volatility, for the life of the option or option
group. The Company’s model includes a zero dividend yield assumption in all periods, as the Company has not historically
paid nor does it anticipate paying dividends on its common stock. The risk-free interest rate is based on recent U.S. Treasury
note auction results with a similar life to that of the option. The Company’s model does not include a discount for post-
vesting restrictions, as the Company has not issued awards with such restrictions. The period expense is then determined
based on this valuation and, at that time, an estimated forfeiture rate is used to reduce the expense recorded. The Company’s
estimate of pre-vesting forfeitures is primarily based on the recent historical experience of the Company and is adjusted to
reflect actual forfeitures at each vesting date.
F-10
Income Per Common Share
Income per common share is computed on the basis of the weighted-average number of common shares outstanding plus, if
applicable, the dilutive effects of equity instruments including the effect of outstanding stock options, convertible preferred
stock, restricted stock awards, and restricted stock units.
Financial Instruments
The Company’s financial instruments include cash equivalents, marketable securities, restricted securities, accounts
receivable, accounts payable, debt obligations, and derivatives. The Company typically values financial assets and liabilities
such as receivables, accounts payable, and debt obligations at their carrying values, which approximate fair value due to their
generally short-term duration.
The Company records certain financial instruments at fair value, including cash equivalents, certain marketable securities,
certain restricted securities, and derivatives. These financial instruments are discussed in further detail in the sections below.
The Company may make an irrevocable election to measure other financial instruments at fair value on an instrument-by-
instrument basis, although as of December 31, 2010 the Company has not chosen to make any such elections. Fair value
financial instruments are recorded at fair value in accordance with the 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:
(cid:120)
(cid:120)
(cid:120)
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 on 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 require judgment.
Although the Company believes that the recorded fair value of its financial instruments is appropriate, these fair values may not
be indicative of net realizable value or reflective of future fair values.
A summary of financial instruments measured at fair value as of December 31, 2010 and 2009 is as follows (in thousands):
December 31, 2010
Cash equivalents:
U.S. Treasury money market funds
U.S. Treasury debt securities
Restricted securities:
Money market funds
U.S. Treasury debt securities
Total assets
December 31, 2009
Cash equivalents:
U.S. Treasury debt securities
U.S. Treasury money market funds
Restricted securities
Total assets
Derivative liability
Total liabilities
Net assets (liabilities)
Level 1
Level 2
Level 3
Total
$
$
$
$
--
14,099
--
5,000
19,099
8,999
--
--
8,999
--
--
8,999
$
$
$
$
2,056
--
309
--
2,365
--
18,754
5,000
23,754
--
--
23,754
$
$
$
$
--
--
--
--
--
--
--
--
--
(725)
(725)
(725)
$
$
$
$
2,056
14,099
309
5,000
21,464
8,999
18,754
5,000
32,753
(725)
(725)
32,028
F-11
Changes in fair value of level 3 liabilities are listed in the table below (in thousands). Refer to Note 4 for further discussion
of the derivative.
Balance as of December 31, 2008
Initial value of derivative issued
Total gains unrealized included in earnings
Balance as of December 31, 2009
Initial value of derivative issued
Total gains unrealized included in earnings
Balance as of December 31, 2010
Derivative
Liability
$
--
749
(24)
725
620
(1,345)
--
$
$
A summary of the non-financial assets measured at fair value on a non-recurring basis in the Company’s Consolidated
Balance Sheet as of December 31, 2010 follows (in thousands). Refer to Note 3 for further discussion of the assets acquired
from SMI and Note 4 for further discussion of the investment in Medafor common stock.
SMI assets:
Patent
Distribution and manufacturing rights
Investment in equity securities
Level 1
Level 2
Level 3
Total
$
$
--
--
--
$
--
--
--
$
327
2,560
2,594
327
2,560
2,594
In addition, the Company valued an in-process research and development asset acquired from SMI at $3.5 million using
level 3 inputs. This asset was expensed and was not included on the Company’s Consolidated Balance Sheet as of December
31, 2010.
The Company uses prices quoted from its investment management companies to determine the level 2 valuation of its
investments in money market funds and securities. See Note 3 below for a discussion of the inputs and methods used in the non-
recurring valuation of the Company’s assets acquired from SMI, and see Note 4 below for a discussion of the inputs and
methods used in the level 3 valuation of the Company’s derivative liability and the non-recurring valuation of the Company’s
investment in equity securities.
Cash and Cash Equivalents
Cash equivalents consist primarily of highly liquid investments with maturity dates of three months or less at the time of
acquisition. The carrying value of cash equivalents approximates fair value.
The Company’s cash equivalents include advance funding received under the U.S. Congress Defense Appropriations
Conference Reports in 2005 through 2008, collectively the (“DOD Grants”), for the continued development of protein
hydrogel technology. The advance funding is accounted for as deferred income on the Consolidated Balance Sheets. Such
revenue is recognized as expenses are incurred related to these grants. As of December 31, 2010 and 2009 $1.7 million and
$2.6 million, respectively, of cash equivalents was related to these grants. These funds must be used for the specified
purposes.
Supplemental disclosures of cash flow information for the years ended December 31 (in thousands):
Cash paid during the year for:
Interest
Income taxes
Non-cash investing and financing activities:
Issuance of common stock for acquisition of SMI
intangible assets
Initial value of derivative issued
2010
2009
2008
$
$
143
2,502
989
620
$
$
$
$
25
540
--
749
225
645
--
--
F-12
Marketable Securities and Other Investments
The Company typically invests in large, well-capitalized financial institutions, and the Company's policy excludes
investment in any securities rated less than "investment-grade" by national rating services, unless specifically approved by the
board of directors.
The Company determines the classification of its investments as trading, available-for-sale, or held-to-maturity at the time
of purchase and reevaluates such designations quarterly. Trading securities are securities that are acquired principally for the
purpose of generating a profit from short-term fluctuations in price. Debt securities are classified as held-to-maturity when the
Company has the intent and ability to hold the securities to maturity. Any securities not designated as trading or
held-to-maturity are considered available-for-sale.
The Company typically states its investments at their fair values; however, for held-to-maturity securities or when current
fair value information is not readily available, investments are recorded using the cost method. The cost of securities sold is
based on the specific identification method.
Under the fair value method, the Company uses quoted prices in active markets for each security. The Company adjusts
each investment to its quoted price and records the unrealized gains or losses in other income (expense), net for trading
securities, or accumulated other comprehensive income (loss), for available-for-sale securities. Interest, dividends, realized
gains and losses, and declines in value judged to be other than temporary are included in other income (expense), net.
Under the cost method, each investment is recorded at cost. Subsequent dividends received are recognized as income,
and the investment is reviewed for impairment if factors indicate that a decrease in the value of the investment has occurred.
Deferred Preservation Costs
By federal law, human tissues cannot be bought or sold. Therefore, the tissues the Company preserves and processes are
not held as inventory. Donated human tissue is procured from deceased human donors by tissue banks and organ procurement
organizations ("OTPOs"), which consign the tissue to the Company for processing, preservation, and distribution. Although the
Company cannot own human tissue, the preservation process is a manufacturing process that is accounted for using the same
principles as inventory costing. Preservation costs consist primarily of direct labor and materials (including salary and fringe
benefits, laboratory expenses, tissue procurement fees, and freight-in charges) and indirect costs (including allocations of costs
from departments that support processing and preservation activities and facility allocations).
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 the tissue to an implanting facility. The allocation of fixed production overhead costs is based on
actual production levels, to the extent that they are within the range of the facility’s normal capacity. Cost of preservation
services also includes, as incurred, idle facility expense, excessive spoilage, extra freight, and rehandling costs.
The calculation of deferred preservation costs involves a high degree of judgment and complexity. The costs included in
deferred preservation costs contain several estimates due to the timing differences between the occurrence of the cost and
receipt of final bills for services. Costs that contain estimates include tissue procurement fees, which are estimated based on
the Company’s contracts with independent OTPOs, and freight-in charges, which are estimated based on the Company’s
prior experiences with these charges. These costs are adjusted for differences between estimated and actual fees when
invoices for these services are received. Management believes that its estimates approximate the actual costs of these
services, but estimates could differ from actual costs. Total deferred preservation costs are then allocated among the different
tissues processed during the period based on specific cost drivers such as the number of donors and the number of tissues
processed. At each balance sheet date, a portion of the deferred preservation costs relates to tissues currently in active
processing or held in quarantine pending release to implantable status. The Company applies a yield estimate to all tissues in
process and in quarantine to estimate the portion of tissues that will ultimately become implantable. Management determines
this estimate of quarantine yields based on its experience in prior periods and reevaluates this estimate periodically. Due to
the nature of this estimate and the length of the processing times experienced by the Company, actual yields could differ from
the Company’s estimates. A significant change in quarantine yields could result in an adjustment to or write-down of
deferred preservation costs and, therefore, materially affect the amount of deferred preservation costs on the Company’s
Consolidated Balance Sheets and the cost of preservation services on the Company’s Consolidated Statements of Operations.
As a part of the normal course of business, the Company regularly evaluates its deferred preservation costs to determine
if the costs are appropriately recorded at the lower of cost or market value or if there is any impairment to the costs for tissues
not expected to ship prior to the expiration date of its packaging. CryoLife records a charge to cost of preservation services
F-13
to write-down the amount of deferred preservation costs not deemed to be recoverable. Typically, lower of cost or market
value write-downs are primarily due to excess tissue processing costs incurred that exceed the estimated market value of the
tissue, based on then recent average service fees. Impairment write-downs are recorded based on the book value of the
impaired tissues. Actual results may differ from these estimates. These write-downs are permanent impairments that create a
new cost basis, which cannot be restored to its previous levels if the market value of tissues increase or when tissues are
shipped or become available for shipment.
The Company recorded write-downs to its deferred preservation costs totaling $187,000, $91,000, and $276,000 for the
years ended December 31, 2010, 2009, and 2008, respectively.
As of December 31, 2010 deferred preservation costs consisted of $12.0 million for heart valves, $2.5 million for cardiac
patch tissues, and $17.1 million for vascular tissues. As of December 31, 2009 deferred preservation costs consisted of $13.8
million for heart valves, $2.6 million for cardiac patch tissues, and $20.0 million for vascular tissues.
Inventories
Inventories are comprised of BioGlue, BioFoam, PerClot, HemoStase, other medical devices, supplies, and raw materials.
Inventories are valued at the lower of cost or market on a first-in, first-out basis. Idle facility expense, excessive spoilage, extra
freight, and rehandling costs are expensed when incurred in cost of products and are not capitalized into inventories.
Allocation of fixed production overheads is based on the normal capacity of the production facilities.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided over the estimated useful lives of the assets, generally
three to ten years, on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the lease term or
the estimated useful lives of the assets, whichever is shorter.
Intangible Assets
The Company’s intangible assets consist of procurement contracts and agreements, trademarks, patents, customer lists, a
non-compete agreement, and distribution and manufacturing rights acquired in the SMI transaction discussed in Note 3.
The Company amortizes its definite lived intangible assets over their expected useful lives using the straight-line
method. As of December 31, 2010 and 2009 gross carrying values, accumulated amortization, and approximate amortization
periods of the Company’s definite lived intangible assets are as follows (dollars in thousands):
December 31, 2010
Patents
Distribution and manufacturing rights
Non-compete agreement
Customer lists
December 31, 2009
Patents
Customer lists
Non-compete agreement
Accumulated Amortization
Gross
Carrying
Value
$
$
Amortization
2,603
43
152
11
5,885
2,559
381
64
$
$
6,403
574
381
2,155
565
114
Period
17 Years
15 Years
10 Years
3 Years
17 Years
3 Years
10 Years
During the year ended December 31, 2010 CryoLife wrote off approximately $729,000 in previously capitalized legal
fees associated with BioGlue patent litigation in Germany, as the Company determined that it was no longer probable that it
would prevail in this patent defense litigation.
As of December 31, 2010 scheduled amortization of intangible assets for the next five years is as follows (in thousands):
Amortization expense
$
696
$
681
$
594
$
499
$
474 $
2,944
2011
2012
2013
2014
2015
Total
F-14
The Company’s indefinite lived intangible assets do not amortize, but are instead subject to periodic impairment testing
as discussed in “Impairments of Long-Lived Assets” below. Based on its prior experience with similar agreements, the
Company believes that its acquired contracts and procurement agreements have an indefinite useful life, as the Company
expects to continue to renew these contracts for the foreseeable future. The Company believes that its trademarks have an
indefinite useful life as the Company currently anticipates that these trademarks will contribute cash flows to the Company
indefinitely.
As of December 31, 2010 and 2009 the carrying values of the Company’s indefinite lived intangible assets are as follows
(in thousands):
Procurement contracts and agreements
Trademarks
Impairments of Long-Lived Assets
2010
2009
$
2,013
790
$
2,013
435
The Company assesses the potential impairment of its long-lived assets to be held and used whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review
include the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Significant underperformance relative to expected historical or projected future operating results,
Significant negative industry or economic trends,
Significant decline in the Company’s stock price for a sustained period, or
Significant decline in the Company’s market capitalization relative to net book value.
If CryoLife determines that an impairment review is necessary, the Company will evaluate its assets or asset groups by
comparing their carrying values to the sum of the undiscounted future cash flows expected to result from their use and
eventual disposition. If the carrying values exceed the future cash flows, then the asset or asset group is considered impaired,
and the Company will write-down the value of the asset or asset group. For the years ended December 31, 2010, 2009, and
2008 the Company did not experience any factors that indicated that an impairment review of its long-lived assets was
warranted.
CryoLife evaluates its non-amortizing intangible assets for impairment on an annual basis and, if necessary, during interim
periods if factors indicate that an impairment review is warranted. As of December 31, 2010 the Company’s non-amortizing
intangible assets consisted of trademarks and acquired procurement contracts and agreements. The Company performed an
analysis of its non-amortizing intangible assets as of December 31, 2010 and 2009, and determined that the fair value of the
assets exceeded their carrying value and were, therefore, not impaired. Management will continue to evaluate the recoverability
of these non-amortizing intangible assets on an annual basis.
Accrued Procurement Fees
Tissue is procured from deceased human donors by OTPOs, which consign the tissue to the Company for processing,
preservation, and distribution. The Company reimburses the OTPOs for their costs to recover the tissue and passes these costs
on to the customer when the tissue is shipped and the performance of the service is complete. The Company accrues estimated
procurement fees due to the OTPOs at the time tissues are received based on contractual agreements between the Company and
the OTPOs.
Liability Claims
In the normal course of business the Company is made aware of adverse events involving its tissues and products. Any
adverse event could ultimately give rise to a lawsuit against the Company. In addition, tissue processing and product liability
claims may be asserted against the Company in the future based on events it is not aware of at the present time. The
Company maintains claims-made insurance policies to mitigate its financial exposure to tissue processing and product liability
claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the
insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for
claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. Any punitive
damage components of claims are uninsured.
F-15
The Company estimates its liability for and any related recoverable under the Company's insurance policies as of each
balance sheet date. The Company uses a frequency-severity approach to estimate its unreported tissue processing and product
liability claims, whereby, projected losses are calculated by multiplying the estimated number of claims by the estimated
average cost per claim. The estimated claims are determined based on the reported claim development method and the
Bornhuetter-Ferguson method using a blend of the Company's historical claim experience and industry data. The estimated cost
per claim is calculated using a lognormal claims model blending the Company's historical average cost per claim with industry
claims data. The Company uses a number of assumptions in order to estimate the unreported loss liability including:
(cid:120) A ceiling of $5.0 million was selected for actuarial purposes in determining the liability per claim given the uncertainty
in projecting claim losses in excess of $5.0 million,
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
The future claim reporting lag time would be a blend of the Company's experiences and industry data,
The frequency of unreported claims included with respect to accident years 2001 through 2010 would be lower than the
Company’s experience in the 2002/2003 policy year, during which the Company experienced unusually high claim
volumes, but higher than the Company's historical claim frequency prior to the 2002/2003 policy year,
The average cost per claim would be lower than the Company’s experience since the 2002/2003 policy year, during
which the Company experienced an unusually high average cost per claim, but higher than the Company's historical
cost per claim prior to the 2002/2003 policy year,
The average cost per BioGlue claim would be consistent with the Company's overall historical exposures until adequate
historical data is available on this product line, and
The number of BioGlue claims per million dollars of BioGlue revenue would be 60% lower than non-BioGlue claims
per million dollars of revenue. The 60% factor was selected based on BioGlue claims experience to date and
consultation with the actuary.
The Company believes that the assumptions it uses to determine its unreported loss liability provide a reasonable basis for
its calculation. However, the accuracy of the estimates is limited by the general uncertainty that exists for any estimate of future
activity due to uncertainties surrounding the assumptions used and due to Company specific conditions and the scarcity of
industry data directly relevant to the Company's business activities. Due to these factors, actual results may differ significantly
from the assumptions used and amounts accrued.
The Company accrues its estimate of unreported tissue processing and product liability claims as components of accrued
expenses and other long-term liabilities and records the related recoverable insurance amounts as a component of receivables
and other long-term assets. The amounts recorded represent management's estimate of the probable losses and anticipated
recoveries for unreported claims related to services performed and products sold prior to the balance sheet date.
The Company expenses the costs of legal services, including legal services related to tissue processing and product liability
claims, as they are incurred.
Uncertain Tax Positions
The Company periodically assesses its uncertain tax positions and recognizes tax benefits if they are “more-likely-than-
not” to be upheld upon review by the appropriate taxing authority. The Company measures the tax benefit by determining
the maximum amount that has a “greater than 50 percent likelihood” of ultimately being realized. The Company reverses
previously accrued liabilities for uncertain tax positions when audits are concluded, statutes expire, administrative practices
dictate that a liability is no longer warranted, or in other circumstances as deemed necessary. These assessments can be
complex and the Company often obtains assistance from external advisors to make these assessments. The Company
recognizes interest and penalties related to uncertain tax positions in other income (expense) on its Consolidated Statement of
Operations. See Note 14 for further discussion of the Company’s liabilities for uncertain tax positions.
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. The Company generated deferred tax assets primarily as a
result of write-downs of deferred preservation costs and inventory, accruals for tissue processing and product liability claims,
asset impairments, and operating losses.
The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company
experiences changes that could materially affect its determination of the recoverability of its deferred tax assets.
F-16
Management provides a valuation allowance against the deferred tax asset when, as a result of this analysis, management
believes it is more likely than not that some portion or all of its deferred tax assets will not be realized. During the period
from 2003 through the third quarter of 2008, CryoLife maintained a valuation allowance on the majority of its deferred tax
assets.
The Company reassessed its determination of the recoverability of its deferred tax assets and the appropriate levels of the
valuation allowance, as of December 31, 2008. In conducting this assessment, management considered a variety of factors,
including the Company’s operating profits for the years ended December 31, 2008 and 2007, the reasons for the Company’s
operating losses in prior years, management’s judgment as to the likelihood of continued profitability and expectations of
future performance, and other factors. Based on this analysis, the Company determined that maintaining a full valuation on
its deferred tax assets as of December 31, 2008 was no longer appropriate. As a result, on December 31, 2008 the Company
recorded a tax benefit of $19.1 million on its Consolidated Statement of Operations to reverse substantially all of the
valuation allowance on its deferred tax assets. The Company continues to maintain valuation allowances on a portion of its
deferred tax assets, primarily related to state income tax net operating loss carryforwards that the Company does not believe
it will be able to utilize based on its projections of profitability in certain states and state carryforward rules and limitations.
The Company assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that
could materially affect the recoverability of its deferred tax assets.
As of December 31, 2010 the Company maintained a total of $1.8 million in valuation allowances against deferred tax
assets, related to state net operating loss carryforwards, and a net deferred tax asset of $15.3 million. As of December 31,
2009 the Company had a total of $1.8 million in valuation allowances against deferred tax assets, primarily related to state
net operating loss carryforwards, and a net deferred tax asset of $13.8 million.
The Company’s tax years 2007 through 2010 generally remain open to examination by the major taxing jurisdictions to
which the Company is subject. However, certain returns prior to 2007 from years in which net operating losses and tax
credits have arisen are still open for examination by the tax authorities.
Derivative Instruments
The Company determines the fair value of its stand-alone and embedded derivative instruments at issuance and records
any resulting asset or liability on the Company’s Consolidated Balance Sheets. Changes in the fair value of the derivative
instruments are recognized in the line item change in valuation of derivative on the Company’s Consolidated Statements of
Operations.
New Accounting Pronouncements
The Company is required to adopt FASB Accounting Standards Update 2010-6 (“ASU 2010-6”), “Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” effective for interim
and annual reporting periods beginning after December 15, 2010. ASU 2010-6 requires reporting entities to make new
disclosures about recurring or non-recurring fair value measurements including (i) significant transfers into and out of Level
1 and Level 2 fair value measurements and (ii) information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair value measurements. ASU 2010-6 will not have an effect on the Company’s financial
position, profitability, or cash flows upon adoption.
2. Cash Equivalents and Marketable Securities
The following is a summary of cash equivalents and marketable securities (in thousands):
December 31, 2010
Cash equivalents:
U.S. Treasury money market funds
U.S. Treasury debt securities
Restricted securities:
Money market funds
U.S. Treasury debt securities
Cost Basis
Unrealized
Holding
Gains
Estimated
Market
Value
$
2,056
14,099
$
309
5,000
--
--
--
--
$
2,056
14,099
309
5,000
F-17
December 31, 2009
Cash equivalents:
U.S. Treasury money market funds
U.S. Treasury debt securities
Restricted securities:
Cost Basis
Unrealized
Holding
Gains
Estimated
Market
Value
$
18,754
8,999
$
$
--
--
--
18,754
8,999
5,000
U.S. Treasury money market funds, long-term
5,000
As of December 31, 2010 $309,000 of the Company’s money market funds were designated as short-term restricted
securities due to a contractual commitment to hold the securities as pledged collateral relating to international tax obligations.
As of December 31, 2010 $5.0 million of the Company’s U.S. Treasury debt securities and as of December 31, 2009
$5.0 million of the Company’s U.S. Treasury money market funds were designated as long-term restricted money market
funds due to a financial covenant requirement under the Company’s credit agreement with General Electric Capital
Corporation (“GE Capital”) as discussed in Note 6.
There were no gross realized gains or losses on cash equivalents for the years ended December 31, 2010, 2009, and
2008. At December 31, 2010 $5.3 million of the Company’s restricted securities had a maturity date within three months. At
December 31, 2009 none of the Company’s restricted securities had a maturity date.
3. SMI Agreements
Overview
On September 28, 2010 CryoLife entered into a worldwide distribution agreement (the “Distribution Agreement”) and a
license and manufacturing agreement (the “License Agreement”) with SMI of San Jose, California for PerClot, a
polysaccharide hemostatic agent used in surgery. PerClot is an absorbable powder hemostat that has CE Mark designation
allowing commercial distribution into the European Community and other markets. It is indicated for use in surgical
procedures, including cardiac, vascular, orthopaedic, spinal, neurological, gynecological, ENT, and trauma surgery as an
adjunct hemostat when control of bleeding from capillary, venous, or arteriolar vessels by pressure, ligature, and other
conventional means is either ineffective or impractical. Under the terms of the agreements, CryoLife received the worldwide
rights, excluding China, Taiwan, Hong Kong, Macau, North Korea, Iran, and Syria, to commercialize PerClot for all
approved surgical indications and a license to manufacture the PerClot product, exclusive of rights to sell PerClot with an
endoscope. CryoLife also received an assignment of the PerClot trademark from SMI as part of the terms of the agreements.
CryoLife plans to file an IDE with the FDA to begin clinical trials for the purpose of obtaining Premarket Approval to
distribute PerClot in the U.S.
The Distribution Agreement contains certain minimum purchase requirements and has a term of 15 years. CryoLife
intends to begin manufacturing PerClot from plant starch modified by SMI under the terms of the License Agreement in
either late 2011 or 2012. Following the start of manufacturing and receipt of U.S. regulatory approval, CryoLife may
terminate the Distribution Agreement. CryoLife will pay royalties to SMI at stated rates on net revenues of products
manufactured under the License Agreement. In addition to allowing CryoLife to manufacture PerClot, the License
Agreement grants CryoLife a three-year option to purchase certain remaining related technology from SMI.
As part of the transaction, CryoLife paid SMI $6.75 million in cash, which includes $1.5 million in cash for prepaid
royalties, and approximately 209,000 shares of restricted CryoLife common stock. The common stock issued to SMI will be
held by CryoLife until March 31, 2012, when the restricted provisions of the stock lapse. CryoLife will pay additional
contingent amounts of up to $2.75 million to SMI if certain FDA regulatory and other commercial milestones are achieved.
The Company’s Distribution Agreement with SMI contains minimum purchase requirements for PerClot through the end
of the contract term. Upon FDA approval, the Company may terminate such minimum purchase requirements.
Accounting for the Transaction
CryoLife accounted for the agreements discussed above as an asset acquisition. The initial consideration aggregated
approximately $8.0 million, including $6.75 million in cash, restricted common stock valued at approximately $1.0 million,
and direct transaction costs. CryoLife recorded a non-current asset for the $1.5 million in prepaid royalties and a deferred tax
F-18
asset of $145,000, and allocated the remaining consideration to the individual intangible assets acquired based on their
relative fair values as determined by a valuation study. As a result, CryoLife recorded intangible assets of $327,000 for the
PerClot trademark, $2.6 million for the PerClot distribution and manufacturing rights in certain international countries, and
$3.5 million for the PerClot distribution and manufacturing rights in the U.S. and certain other countries which do not have
current regulatory approvals. This $3.5 million is considered in-process research and development as it is dependant upon
regulatory approvals which have not yet been obtained. Therefore, CryoLife expensed the $3.5 million as in-process research
and development upon acquisition. The PerClot trademark acquired by the Company has an indefinite useful life; therefore,
that asset will not be amortized, but will instead be subject to periodic impairment testing. The $2.6 million intangible asset
will be amortized over its useful life of 15 years. See additional disclosures in Note 1 above.
CryoLife expects to record future contingent payment amounts of up to $2.75 million initially as research and
development expense or, after FDA approval or issuance of a patent, as acquired intangible assets.
4. Medafor Matters
Overview
CryoLife began distributing HemoStase in 2008 for Medafor, a company incorporated in Minnesota, under the EDA. In
November 2009 and in 2010 the Company executed stock purchase agreements to purchase a total of approximately 2.4
million shares of common stock in Medafor for $4.9 million. The Company’s carrying value of this investment included the
purchase price and adjustments to record certain of the stock purchase agreements’ embedded derivative liabilities at the fair
market value on the purchase date, as discussed further below. As Medafor’s common stock is not actively traded on any
public stock exchange, as Medafor is a non-reporting company for which financial information is not readily available, and as
the Company does not exert significant influence over the operations of Medafor, the Company accounted for this investment
using the cost method and recorded it as the long-term asset, investment in equity securities, on the Company’s Consolidated
Balance Sheets.
Recent Events
On March 18, 2010 Medafor announced that it was treating the EDA as terminated and ceased shipments of HemoStase
to CryoLife. CryoLife thereafter moved to the U.S. District Court for the Northern District of Georgia, Atlanta Division (the
“Court”) to preliminarily enjoin Medafor from proceeding with its termination. Shortly thereafter, Medafor informed
CryoLife that, although Medafor had terminated the EDA, it would continue to act as if the EDA were in effect for a short
period of time. Medafor resumed shipments of HemoStase in late June of 2010. On September 20, 2010 the Court issued an
order denying CryoLife's request for the preliminary injunction. On September 27, 2010 Medafor sent the Company a letter
stating that Medafor was "fully, finally and immediately terminating" the EDA. CryoLife believes this termination was
wrongful.
Based on this communication and subsequent communications CryoLife has received from Medafor, CryoLife does not
believe that Medafor will make any further inventory shipments to CryoLife. CryoLife was Medafor’s largest distributor in
2009 and 2008. CryoLife believes it was Medafor’s largest distributor in 2010. See further discussion of these recent events
in “Legal Action” below.
On September 28, 2010 CryoLife entered into a worldwide distribution agreement and a license and manufacturing
agreement with SMI for PerClot, a competing hemostatic agent used in surgery, as discussed in Note 3 above.
Investment in Medafor Common Stock
During the quarter ended September 30, 2010 the Company reviewed available information, including the events
described in the paragraphs above, to determine if factors indicated that a decrease in value of the investment in Medafor
common stock had occurred. CryoLife determined that the available information, particularly Medafor’s termination of its
largest distributor, indicated that the Company should evaluate its investment in Medafor common stock for impairment.
CryoLife used a market based approach for the valuation, including comparing Medafor to a variety of comparable
publicly traded companies, recent merger targets, and company groups. CryoLife considered both qualitative and
quantitative factors that could effect the valuation of Medafor’s common stock. Based on its analysis, the Company believed
that its investment in Medafor was impaired and that this impairment was other than temporary. Therefore, CryoLife
recorded a non-operating expense, other than temporary investment impairment of $3.6 million to write-down its investment
F-19
in Medafor common stock. The carrying value of the Company’s 2.4 million shares of Medafor common stock after this
write-down was $2.6 million or $1.09 per share as of December 31, 2010.
The Company will continue to evaluate the carrying value of this investment if changes to the factors discussed above or
additional factors become known that indicate the Company should evaluate its investment in Medafor common stock for
further impairment. If the Company subsequently determines that the value of its Medafor common stock has been impaired
further or if the Company decides to sell its Medafor common stock for less than the carrying value, the resulting impairment
charge or realized loss on sale of the investment in Medafor could be material.
Medafor Derivative
Per the terms of certain of the stock purchase agreements for the Medafor shares discussed above, in the event that
CryoLife acquires more than 50% of the diluted outstanding stock of Medafor or merges with Medafor within a three-year
period from each respective agreement date (a “Triggering Event”), CryoLife is required to make a future per share payment
(the “Purchase Price Make-Whole Payment”) to such sellers. The payment would be equal to the difference between an
amount calculated using the average cost of any subsequent shares purchased, as defined in each respective agreement, and
the price of the shares purchased pursuant to each applicable stock purchase agreement. The Company was required to
account for these Purchase Price Make-Whole Payment provisions as embedded derivatives (collectively the “Medafor
Derivative”).
CryoLife performed a valuation of the Medafor Derivative using a Black-Scholes model to estimate the future value of
the shares on the purchase date. Management’s assumptions as to the likelihood of a Triggering Event occurring coupled
with the valuation of the Purchase Price Make-Whole Payment were then used to calculate the derivative liability. The fair
value of the Medafor Derivative was initially recorded as an increase to the investment in equity securities and a
corresponding derivative liability on the Company’s Consolidated Balance Sheet. The Medafor Derivative was revalued
quarterly, and any change in the value of the derivative subsequent to the purchase date was recorded in the Company’s
Consolidated Statement of Operations.
As of December 31, 2010 the Company believed that the likelihood of a Triggering Event was zero. As a result, the
Company recorded a non-cash gain on the change in the value of derivative on the Consolidated Statement of Operations of
$1.3 million for the year ended December 31, 2010. The gain on valuation of the Medafor Derivative was recorded as a
decrease in the derivative liability on the Consolidated Balance Sheet. This decrease in the liability was partially offset by an
increase of $620,000 related to additional purchases of Medafor common stock during the year ended December 31, 2010.
See also the disclosure of the change in fair value of the derivative liability in Note 1. The value of the Medafor Derivative
was zero and $725,000 as of December 31, 2010 and 2009, respectively.
HemoStase Inventory
Based on Medafor’s termination of the EDA in late September 2010 and the determination that Medafor would no longer
be shipping HemoStase to CryoLife, the Company performed a review of its HemoStase inventory to determine if the
carrying value of the inventory had been impaired.
Per its review of the EDA, the Company expects to continue to sell HemoStase for a six-month period following the
most recent termination of the EDA, which period concludes in late March 2011. As a result, the Company determined that
the carrying value of the HemoStase inventory was impaired and increased its cost of products by $1.6 million to write down
related finished goods inventory in the third quarter of 2010. The Company believed that the remaining value as of
September 30, 2010 of $1.7 million of HemoStase inventory after the write-down was recoverable over the six-month selling
period following the termination of the EDA. As of December 31, 2010, the remaining HemoStase inventory value was
$559,000.
The amount of this write-down reflects management’s estimate based on information currently available. Management
continues to evaluate the recoverability of its HemoStase inventory as more information becomes available and may record
additional write-downs if it becomes clear that additional impairments have occurred. The write-down creates a new cost
basis which cannot be written back up if the inventory becomes saleable. The cost of products in future periods may be
favorably impacted if the Company is able to sell more HemoStase than the amounts estimated as discussed above.
F-20
Legal Action
Overview of CryoLife’s Claims
On April 29, 2009 the Company filed a lawsuit against Medafor in the U.S. District Court for the Northern District of
Georgia (the “Court”) alleging claims for, among other things, breach of contract, fraud, negligent misrepresentation, and
violations of Georgia’s Racketeer Influenced and Corrupt Organizations Act (“Georgia RICO”). The claims arise out of the
Company’s EDA with Medafor, pursuant to which the Company had the right to distribute a product manufactured by
Medafor (the “Product”) under the name HemoStase. The EDA gave the Company exclusive rights to market and distribute
the Product in all applications in cardiac and vascular surgery in most of the U.S. and for all cardiac and vascular surgeries
and most other types of general surgery applications in much of the rest of the world. On March 18, 2010 Medafor sent the
Company a letter stating that it was terminating the EDA based on an allegation that CryoLife had repudiated the agreement.
On September 27, 2010 Medafor sent the Company a letter stating that Medafor was "fully, finally and immediately
terminating" the EDA. CryoLife believes this termination was wrongful.
There have been a number of motions filed with the Court by both parties. On March 8, 2010 the Company filed its
Third Amended Complaint, and on August 9, 2010, the Court dismissed the Company’s Georgia RICO claim. On October
20, 2010—after Medafor had terminated the EDA—the Company filed supplemental claims in the lawsuit against Medafor
for additional breaches of the EDA, including claims that Medafor’s termination of that contract was wrongful. On
November 10, 2010 Medafor filed its First Amended Answer and Counterclaim, discussed more fully below. On December
6, 2010 the Company filed a motion to dismiss most of Medafor’s counterclaim. Medafor filed a response to the Company’s
motion to dismiss on December 23, 2010, and the Company filed a reply brief in support of the motion on January 10, 2011.
On December 21, 2010 the Company filed a motion for partial summary judgment based on its contention that Medafor’s
termination of the EDA was wrongful, and Medafor filed a response brief on January 19, 2011. The Company’s reply brief
in support of the motion was filed on February 7, 2011. On February 4, 2011 Medafor filed a motion for partial summary
judgment based on its contention that CryoLife had failed to pay Medafor approximately $1.3 million plus prejudgment
interest for product Medafor shipped to CryoLife. CryoLife will file a response brief opposing Medafor’s motion. The Court
has not set a date for a hearing on any of these motions and will likely rule on each of these motions without a hearing. The
Court may rule at any time in the future.
The Company’s lawsuit alleges that Medafor unlawfully terminated the EDA, and that contrary to Medafor’s
representations in the EDA, it had numerous distribution agreements regarding the Product with other distributors in the U.S.
and internationally, allowing these distributors to market and distribute the Product in the territory and field given exclusively
to the Company. Medafor is alleged to have knowingly and purposefully withheld from the Company disclosure that these
competing agreements existed at the time the EDA became operational and to have intentionally misrepresented to the
Company that no such contracts existed, or that their termination had been arranged. The lawsuit also alleges that Medafor
failed to take reasonable steps to prevent other distributors from distributing the Product in the Company’s exclusive field
within its exclusive territory, and that Medafor failed to take necessary actions to ensure the value of CryoLife’s
distributorship. Medafor denies these allegations.
The Company alleges that it brought these transgressions to Medafor’s attention on numerous occasions and attempted to
work with Medafor to secure its compliance with the terms of the parties’ agreement, but Medafor refused to follow the terms
of the EDA. Medafor’s actions are alleged to have deprived the Company of significant sales volume and to have impaired
and delayed the Company’s development of relationships with customers in its exclusive field and territory. Medafor denies
these allegations.
Potential Damages
The Company seeks to recover its damages from Medafor, punitive damages, and reimbursement of its attorneys’ fees.
In addition, the Company is seeking damages related to Medafor’s wrongful termination of the EDA, which will be based
upon the Company’s lost profits for the period of time during which the EDA would have continued in effect but for
Medafor’s wrongful termination of it. The amount of these damages will be determined through discovery in the lawsuit. No
trial date has been set, although CryoLife believes that a trial is not likely until 2012.
Medafor’s Termination of the EDA
As referenced above, on March 18, 2010 Medafor notified the Company of its contention that the Company had
repudiated the EDA, thereby entitling Medafor to terminate the contract. Medafor asserted that it had made a valid statutory
F-21
demand, in a February 10, 2010 letter to CryoLife, for “adequate assurances” of CryoLife’s future performance under the
EDA, and that CryoLife had repudiated the EDA by failing to respond in a timely manner. CryoLife filed a motion for
preliminary injunction, on March 29, 2010, asking the Court to enjoin Medafor from proceeding with its termination of the
EDA. After two hearings, the Court, on September 20, 2010, issued an order denying CryoLife's request for a preliminary
injunction against Medafor. Although the order denied the preliminary injunction, it did not address the merits of the parties’
respective positions on the underlying issue of whether Medafor’s termination of the EDA was wrongful. The Court stated
that it viewed this question as more appropriately addressed at summary judgment. On September 27, 2010 Medafor sent the
Company a letter stating that Medafor was "fully, finally and immediately terminating" the EDA. CryoLife believes this
termination was wrongful.
Medafor’s Counterclaims
As discussed above, on November 10, 2010 Medafor filed its First Amended Answer and Counterclaim, alleging claims
for, among other things, breach of contract, breach of the implied duty of good faith and fair dealing, violation of the Georgia
Trade Secrets Act, tortious interference with business relationships, libel, violation of the Lanham Act, violation of Georgia’s
Uniform Deceptive Trade Practices Act, fraud and negligent misrepresentation, and conversion. In addition, Medafor
requested that the Court grant a declaratory judgment that CryoLife repudiated the EDA pursuant to the provisions of the
Georgia Uniform Commercial Code. On December 6, 2010 CryoLife filed a Motion to Dismiss and for More Definite
Statement, seeking dismissal of all of Medafor’s claims except for its breach of contract claim and its request for declaratory
judgment. Medafor filed a response brief opposing the motion on December 23, 2010. On January 10, 2011 CryoLife filed a
reply brief in support of its motion. The Court has not ruled on CryoLife’s Motion to Dismiss and for More Definitive
Statement. As discussed above, Medafor filed a motion for partial summary judgment requesting that the Court order
CryoLife to pay approximately $1.3 million plus prejudgment interest that CryoLife withheld for product sold to CryoLife
that CryoLife believes it may not be able to sell.
Summary of Medafor’s Potential Damages Claims
Pursuant to its counterclaims, Medafor seeks to recover its alleged damages from CryoLife, including from the alleged
repudiation of the EDA, injunctive relief, prejudgment interest, punitive damages, and attorneys’ fees and expenses. Until
such time as the Court rules on Medafor’s counterclaims and discovery in the lawsuit has finished, assessing the potential or
likelihood that Medafor could prevail and the amount of damages that could be awarded to Medafor if it were to prevail will
be difficult. No trial date has been set, although a trial is not likely until 2012. CryoLife intends to vigorously prosecute the
case, defend itself, and contest the matter.
Written Discovery Has Commenced
Written discovery began on October 8, 2010. The parties have not exchanged any documents other than responses to
written discovery. No depositions have been set. The Court has set an eight month discovery period.
Contingency Related to the Lawsuit and Claims
CryoLife intends to vigorously defend itself and contest the matter. Given the early stage of this case, the Company does
not believe at this time that there is a reasonable probability that a loss will occur. Due to the early stage of the case,
CryoLife does not currently believe that it is possible to reasonably estimate the amount of loss or a range of losses on the
current counter-claims made by Medafor or any future additional counter-claims that may be made by Medafor. The parties
have not discussed settlement in any meaningful way.
5. Inventories
Inventories at December 31 are comprised of the following (in thousands):
Raw materials and supplies
Work-in-process
Finished goods
Total inventories
2010
2009
4,301
349
1,779
6,429
$
$
4,144
278
2,024
6,446
$
$
F-22
6. Debt
GE Credit Agreement
On March 26, 2008 CryoLife entered into a credit agreement with GE Capital as lender (the “GE Credit Agreement”). The
GE Credit Agreement provides for a revolving credit facility in an aggregate amount not to exceed the initial commitment of
$15.0 million (including a letter of credit subfacility). The initial commitment may be reduced or increased from time to time
pursuant to the terms of the GE Credit Agreement. In the second quarter of 2009, as requested by the German courts, the
Company obtained a letter of credit relating to the Company’s patent infringement legal proceeding against Tenaxis, Inc. in
Germany, which reduced the aggregate borrowing capacity to $14.8 million. The letter of credit had a one-year initial term and
automatically renews for additional one-year periods.
The GE Credit Agreement places limitations on the amount that the Company may borrow, and includes various affirmative
and negative covenants, including financial covenants such as a requirement that CryoLife (i) not exceed a defined leverage
ratio, (ii) maintain a minimum adjusted earnings subject to defined adjustments as of specified dates, and (iii) not make or
commit capital expenditures in excess of a defined limitation. Further, beginning April 15, 2008 as required under the terms of
the GE Credit Agreement, the Company is maintaining cash and cash equivalents of at least $5.0 million in accounts in which
GE Capital has a first priority perfected lien. These amounts are recorded as restricted securities and long-term restricted money
market funds as of December 31, 2010 and 2009, respectively, on the Company’s Consolidated Balance Sheets, as they are
restricted for the term of the GE Credit Agreement. Also, the GE Credit Agreement requires that after giving effect to a stock
repurchase the Company maintain liquidity, as defined, of at least $20.0 million. The GE Credit Agreement includes customary
conditions on incurring new indebtedness and prohibits payments of cash dividends on the Company’s common stock. There is
no restriction on the payment of stock dividends. Commitment fees are paid based on the unused portion of the facility. The GE
Credit Agreement expires on March 25, 2011, at which time any outstanding principal balance will be due. As of December 31,
2010 the Company was in compliance with the covenants of the GE Credit Agreement.
Amounts borrowed under the GE Credit Agreement are secured by substantially all of the tangible and intangible assets of
CryoLife and its subsidiaries and bear interest at LIBOR, with a minimum rate of 3%, or GE Capital’s base rate, with a
minimum rate of 4% each, plus the applicable margin. As of December 31, 2010 the outstanding balance of the GE Credit
Agreement was zero, the aggregate interest rate would have been 6.25%, and the remaining availability was $14.8 million. As
of December 31, 2009 the outstanding balance of the GE Credit Agreement was $315,000, the aggregate interest rate was
5.50%, and the remaining availability was $14.5 million.
Wells Fargo Credit Agreement
On February 8, 2005 CryoLife and its subsidiaries entered into a credit agreement with Wells Fargo Foothill, Inc.
(“Wells Fargo”) as lender which provided for a revolving credit facility in an aggregate amount equal to the lesser of $15.0
million or a borrowing base determined in accordance with the terms of the credit agreement. The credit agreement with
Wells Fargo expired on February 8, 2008 in accordance with its terms, at which time the outstanding principal balance of
$4.5 million was paid from cash on hand.
Other
The Company routinely enters into agreements to finance insurance premiums for periods not to exceed the terms of the
related insurance policies. In March 2010 the Company entered into an agreement to finance approximately $1.2 million in
insurance premiums at a 2.707% annual interest rate, which was payable in equal monthly payments over a nine-month
period. In April 2009 the Company entered into an agreement to finance approximately $1.3 million in insurance premiums
at a 3.695% annual interest rate, which was payable in equal monthly payments over a nine-month period. As of December
31, 2010 and 2009 the aggregate outstanding balances under these agreements were zero.
Total interest expense was $180,000, $83,000, and $263,000 in 2010, 2009, and 2008, respectively, which included interest
on debt, capital leases, and uncertain tax positions.
F-23
7. Commitments and Contingencies
Leases
The Company's operating lease obligations result from the lease of land and buildings that comprise the Company's
corporate headquarters and manufacturing facilities, leases related to additional office and warehouse space, leases on
Company vehicles, and leases on a variety of office equipment. In prior years, the Company's capital lease obligations resulted
from the financing of certain of the Company's equipment. As of December 31, 2010 the remaining obligations under the
Company’s capital leases was zero.
The term of the lease of the land and buildings that comprise the Company’s corporate headquarters was originally 15 years.
During the second quarter of 2010 the Company signed an amendment to the lease on its corporate headquarters extending the
lease until 2022. Certain leases contain escalation clauses, rent concessions, and renewal options for additional periods. Rent
expense is computed on the straight-line method over the lease term. The Company has a deferred rent accrual of $1.5 million
and $1.3 million as of December 31, 2010 and 2009, respectively, recorded in other long-term liabilities, primarily related to the
lease on its corporate headquarters. Total rental expense for operating leases was $2.6 million for both 2010 and 2009 and $2.5
million for 2008.
Future minimum operating lease payments under non-cancelable leases as of December 31, 2010 are as follows (in
thousands):
2011
2012
2013
2014
2015
Thereafter
Operating
Leases
$
2,388
2,550
2,477
2,482
2,519
16,168
28,584
Total minimum lease payments
$
Liability Claims
At December 31, 2010 and 2009 the short-term and long-term portions of the unreported loss liability and any related
recoverable insurance amounts are as follows (in thousands):
Short-term liability
Long-term liability
Total liability
Short-term recoverable
Long-term recoverable
Total recoverable
Total net unreported loss liability
$
2010
2009
$
1,310
1,310
2,620
500
550
1,050
1,890
1,790
3,680
660
680
1,340
$
1,570
$
2,340
Further analysis indicated that the total liability as of December 31, 2010 could be estimated to be as high as $4.7
million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques.
On March 31, 2010 the Company bound liability coverage for the 2010/2011 insurance policy year. This policy is an
eight-year claims-made insurance policy, i.e. claims incurred during the period April 1, 2003 through March 31, 2011 and
reported during the period April 1, 2010 through March 31, 2011 are covered by this policy. Claims incurred prior to April 1,
2003 that have not been reported are uninsured.
As of February 11, 2011 there were no pending tissue processing or product liability lawsuits filed against the Company.
F-24
Employment Agreement
The Company has an employment agreement with its Chief Executive Officer (“CEO”) that confers benefits which
become payable upon a change in control or upon certain termination events. As of both December 31, 2010 and 2009, the
Company has recorded $2.1 million in other current liabilities on the Consolidated Balance Sheets representing benefits
payable upon the CEO’s voluntary retirement.
8. Common Stock Repurchase
On June 1, 2010 the Company announced that its Board of Directors authorized the purchase of up to $15.0 million of its
common stock over the course of the following two years. The purchase of shares may be made from time to time in the
open market or through privately negotiated transactions on such terms as management deems appropriate, and will be
dependent upon various factors, including price, regulatory requirements, and other market conditions. As of December 31,
2010 the Company had purchased approximately 1.0 million shares of its common stock for an aggregate purchase price of
$5.8 million. These shares were accounted for as treasury stock, carried at cost, and reflected as a reduction of shareholders’
equity on the Company’s Consolidated Balance Sheet.
9. Stock Compensation
Overview
The Company has stock option and stock incentive plans for employees and non-employee Directors that provide for grants
of RSAs, RSUs, and options. The Company also maintains an ESPP for the benefit of its employees.
Under the Company’s plans, the Company is currently authorized to grant the following number of shares and the Company
has available for grant up to the following number of shares as of December 31, 2010 and 2009:
Plan
1996 Discounted Employee Stock Purchase Plan, as amended
2002 Stock Incentive Plan
2004 Employee Stock Incentive Plan
2008 Non-Employee Directors Stock Incentive Plan
2009 Employee Stock Incentive Plan
Total
Authorized
Shares
Available for Grant
2009
2010
1,900,000
974,000
2,000,000
300,000
2,000,000
7,174,000
981,000
243,000
26,000
119,000
1,560,000
2,929,000
32,000
219,000
194,000
182,000
2,000,000
2,627,000
During 2010 the Company amended the 1996 Discounted Employee Stock Purchase Plan to increase the authorized shares
under the plan by 1.0 million shares. Upon the exercise of stock options, the Company may issue the required shares out of
authorized but unissued common stock or out of treasury stock, at management’s discretion.
RSAs and RSUs
In 2010 the Compensation Committee of the Company’s Board of Directors authorized grants of RSAs and RSUs from
approved stock incentive plans to non-employee Directors and certain Company executives, officers, and employees totaling
278,000 shares of common stock, which had an aggregate market value of $1.7 million.
In 2009 the Compensation Committee of the Company’s Board of Directors authorized grants of RSAs from approved
stock incentive plans to non-employee Directors and certain Company executives and officers totaling 160,000 shares of
common stock, which had an aggregate market value of $1.1 million.
In 2008 the Compensation Committee of the Company’s Board of Directors authorized grants of RSAs from approved
stock incentive plans to non-employee Directors and certain Company executives and managers totaling 183,000 shares of
common stock, which had an aggregate market value of $1.8 million. These RSAs included 81,000 shares of common stock
valued at $786,000 issued as part of the 2007 performance-based bonus plans for certain Company executives, officers, and
managers. The Company recorded the expense related to the 2007 performance-based bonus plans during the year ended
December 31, 2007.
F-25
A summary of stock grant activity for the years ended December 31, 2010, 2009, and 2008 is as follows:
Unvested at December 31, 2007
RSAs
Granted
Vested
Unvested at December 31, 2008
Granted
Vested
Unvested at December 31, 2009
Granted
Vested
Unvested at December 31, 2010
RSUs
Outstanding at December 31, 2009
Granted
Outstanding at December 31, 2010
Vested and expected to vest
Stock Options
Weighted
Average
Grant Date
Fair Value
10.48
$
9.92
10.87
9.50
6.77
10.62
7.67
5.93
6.34
7.07
$
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
1.85
1.85
$
$
313,000
291,000
Shares
88,000
183,000
(119,000)
152,000
160,000
(45,000)
267,000
219,000
(122,000)
364,000
Shares
--
58,000
58,000
54,000
The Compensation Committee of the Company’s Board of Directors authorized grants of stock options from approved stock
incentive plans to certain Company executives and employees totaling 451,000, 438,000, and 403,000, shares in 2010, 2009, and
2008, respectively, with exercise prices equal to the stock prices on the respective grant dates.
A summary of the Company’s stock option activity for the years ended December 31, 2010, 2009, and 2008 follows:
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2008
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2009
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2010
Weighted
Average
Shares
$
1,859,000
403,000
(393,000)
(16,000)
(80,000)
1,773,000
438,000
(134,000)
(26,000)
(64,000)
1,987,000
451,000
(4,000)
(15,000)
(138,000)
2,281,000
Exercise Price
6.31
10.15
5.12
6.28
11.06
7.23
4.83
5.08
5.62
5.50
6.92
6.96
4.49
6.11
10.20
6.74
$
Weighted
Average
Remaining
Contractual
Term
3.19
Aggregate
Intrinsic
Value
$ 3,992,000
3.63
7,174,000
3.59
1,731,000
3.46
$
603,000
F-26
Vested and expected to vest
Exercisable at December 31, 2010
Weighted
Average
Shares
2,254,000
1,239,000
Exercise Price
6.75
6.93
$
$
Weighted
Average
Remaining
Contractual
Term
3.43
2.40
Aggregate
Intrinsic
Value
$
$
600,000
359,000
Other information concerning stock options for the years ended December 31 is as follows:
Weighted-average fair value of options granted
Intrinsic value of options exercised
2010
2009
2008
$
$
3.34
10,000
$
$
2.40
274,000
$
4.52
$ 2,429,000
Employees purchased common stock totaling 43,000, 79,000, and 48,000 shares in 2010, 2009, and 2008, respectively,
through the Company’s ESPP.
Stock Compensation Expense
The following weighted-average assumptions were used to determine the fair value of options:
2010
Expected life of options
Expected stock price volatility
Risk-free interest rate
Stock
Options
3.8 Years
.65
1.25%
ESPP
Options
.38 Years
.47
0.17%
2009
Stock
Options
4.0 Years
.65
1.51%
ESPP
Options
.25 Years
.75
0.14%
2008
Stock
Options
3.5 Years
.60
2.34%
ESPP
Options
.25 Years
.76
1.83%
The following table summarizes stock compensation expenses (in thousands):
RSA and RSU expense
Stock option expense
Total stock compensation expense
2010
2009
2008
$
$
970
1,950
2,920
$
$
899
1,780
2,679
$
$
788
1,311
2,099
Included in the total stock compensation expense were expenses related to RSAs, RSUs, and stock options issued in the
current year as well as those issued in prior years that continue to vest during the period, and compensation related to the
Company’s ESPP. These amounts were recorded as compensation expense and were subject to the Company’s normal
allocation of expenses to inventory and deferred preservation costs. The Company capitalized $299,000, $250,000, and
$145,000 in the years ended December 31, 2010, 2009, and 2008, respectively, of the stock compensation expense included
in the table above into its deferred preservation costs and inventory costs.
As of December 31, 2010 the Company had a total of $1.5 million in total unrecognized compensation costs related to
unvested RSAs and RSUs, before considering the effect of expected forfeitures. As of December 31, 2010 this expense is
expected to be recognized over a weighted-average period of 1.3 years for RSAs and 2.85 years for RSUs. As of December
31, 2010 there was approximately $1.8 million in total unrecognized compensation costs related to unvested stock options,
before considering the effect of expected forfeitures. As of December 31, 2010 this expense is expected to be recognized
over a weighted-average period of 1.3 years.
10. Shareholder Rights Plan
The Company has a shareholder rights agreement entered into in 1995 and amended in 2005. Under the rights agreement
each share of the Company's common stock outstanding on December 11, 1995 is entitled to one “Right,” as defined in, and
subject to, the terms of the rights agreement. A Right entitles the registered holder to purchase from the Company one one-
hundredth of a share of Series A Junior Participating Preferred Stock (“Series A Stock”) of the Company at $33.33 per one one-
hundredth of a Preferred Share, subject to adjustment. Additionally, each common share that has or shall become outstanding
after December 11, 1995 is also entitled to a Right, subject to the terms and conditions of the rights agreement. The Rights,
which expire on November 23, 2015, may be exercised only if certain conditions are met, such as the acquisition of 15% or
F-27
more of the Company's common stock by a person or affiliated group (together with its affiliates, associates, and transferees, an
"Acquiring Person"). Rights beneficially owned by an Acquiring Person become void from and after the time such persons
become Acquiring Persons, and Acquiring Persons have no rights whatsoever under the rights agreement.
Each share of Series A Stock purchasable upon exercise of a Right will be entitled, when, as, and if declared, to a minimum
preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the
dividend declared per share of common stock. In the event of liquidation each share of the Series A Stock will be entitled to a
minimum preferential liquidation payment of 100 times the payment made per share of common stock. Finally in the event of
any merger, consolidation, or other transaction in which shares of common stock are exchanged, each share of Series A Stock
will be entitled to receive 100 times the amount received per share of common stock. These rights are protected by customary
antidilution provisions.
In the event the Rights become exercisable, each Right will enable the owner, other than Acquiring Persons, to purchase
shares of the Company’s Series A Stock as described above. Alternatively, if the Rights become exercisable, the holder of a
Right may elect to receive, upon exercise of the Right and in lieu of receiving Series A Stock, that number of shares of common
stock of the Company having an exercise value of two times the exercise price of the Right. In the event that, after a person or
group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right will
thereafter have the right to receive, upon the exercise of a Right, and in lieu of Series A Stock of the Company, that number of
shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) that at
the time of such transaction will have a market value of two times the exercise price of the Right. In addition, after any person
or group becomes an Acquiring Person and prior to the acquisition by the person or group of 50% or more of the outstanding
common stock, the Board of Directors may elect to exchange all outstanding Rights at an exchange ratio of one share of
common stock (or fractional share of Series A Stock or other preferred shares) per Right (subject to adjustment).
11. Comprehensive Income
The following is a summary of comprehensive income (in thousands):
Net income
Change in unrealized loss on investments
Change in translation adjustment
Comprehensive income
2010
2009
2008
$
$
3,944
--
6
3,950
$
$
8,679
--
42
8,721
$
$
31,950
(3)
(77)
31,870
The tax effect on the change in unrealized loss on investments and the translation adjustment is zero for each period
presented. The accumulated other comprehensive loss of $32,000 and $38,000 as of December 31, 2010 and 2009,
respectively, consisted solely of currency translation adjustments.
12. Employee Benefit Plans
The Company has a 401(k) savings plan (the "Plan") providing retirement benefits to all employees who have completed at
least three months of service. In 2010 the Company made matching contributions to the plan of 20% of each participant’s
contribution for up to 5% of each participant’s salary. The Company made matching contributions of 50% of each participant's
contribution for up to 4% of each participant's salary in 2009 and 2008. Total Company contributions approximated $204,000,
$456,000, and $414,000 for the years ended December 31, 2010, 2009, and 2008, respectively. Additionally, the Company may
make discretionary contributions to the Plan that are allocated to each participant's account. No discretionary contributions were
made in any of the past three years.
F-28
13. Income Per Common Share
The following table sets forth the computation of basic and diluted income per common share (in thousands, except per
share data):
Basic income per common share:
Net income
Basic weighted-average common shares outstanding
Basic income per common share
Diluted income per common share:
Net income
Basic weighted-average common shares outstanding
Effect of dilutive stock options a
Effect of dilutive RSAs and RSUs
Diluted weighted-average common shares outstanding
Diluted income per common share
2010
2009
2008
$
$
$
$
3,944
27,987
0.14
3,944
27,987
133
154
28,274
0.14
$
$
$
$
8,679
28,106
0.31
8,679
28,106
116
88
28,310
0.31
$
$
$
$
31,950
27,800
1.15
31,950
27,800
498
53
28,351
1.13
a
The Company excluded stock options from the calculation of diluted weighted-average common shares outstanding if
the per share value, including the sum of (i) the exercise price of the options and (ii) the amount of the compensation cost
attributed to future services and not yet recognized, was greater than the average market price of the shares, because the
inclusion of these stock options would be antidilutive to income per common share. Accordingly, stock options to
purchase 1.5 million, 1.3 million, and 374,000, shares for the years ended December 31, 2010, 2009, and 2008,
respectively, were excluded from the calculation of diluted weighted-average common shares outstanding.
In future periods, basic and diluted income per common share are expected to be affected by the fluctuations in the fair
value of the Company’s common stock, the exercise and issuance of additional stock options, the issuance of additional
RSAs and RSUs, and stock repurchases as discussed in Note 8 above.
14. Income Taxes
Income Tax Expense
Income before income taxes consists of the following (in thousands):
2010
2009
2008
Domestic
Foreign
Income before income taxes
$
$
6,936
341
7,277
Income tax expense (benefit) consists of the following (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Income tax expense (benefit)
2010
4,415
255
46
4,716
(1,560)
158
19
(1,383)
3,333
$
$
$
$
$
$
14,158
196
14,354
2009
225
114
82
421
5,022
255
(23)
5,254
5,675
$
$
$
$
13,330
206
13,536
2008
391
273
69
733
(16,959)
(2,195)
7
(19,147)
(18,414)
The Company’s income tax expense in 2010 and 2009 included the Company’s federal, state, and foreign tax
obligations. The Company’s income tax benefit of $18.4 million in 2008 was primarily due to $19.1 million in reversals of
F-29
the Company’s valuation allowance on its deferred tax assets, partially offset by current tax expense including alternative
minimum tax on the Company’s taxable income that could not be offset by the Company’s net operating loss carryforwards,
state tax obligations, and foreign taxes on income of the Company’s wholly owned European subsidiary.
The income tax expense (benefit) amounts differ from the amounts computed by applying the U.S. federal statutory income
tax rate of 35% to pretax income as a result of the following (in thousands):
Tax expense at statutory rate
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit
Equity compensation
Non-deductible entertainment expenses
Foreign income taxes
Reversal of deferred tax valuation allowance
Other changes in deferred tax valuation allowance
Research and development credit
Other
Deferred Taxes
2010
2009
2008
$
2,547
$
5,024
$
4,738
347
334
129
28
--
--
(187)
135
3,333
$
321
334
129
26
--
(55)
(68)
(36)
5,675
$
592
232
134
52
(19,147)
(4,932)
(77)
(6)
(18,414)
$
The tax effects of temporary differences which give rise to deferred tax assets and liabilities at December 31 are as follows
(in thousands):
Deferred tax assets:
Allowance for bad debts
Deferred preservation costs and inventory reserves
Investment in equity securities
Property
Intangible assets
Accrued expenses
Loss carryforwards
Credit carryforwards
Stock compensation
Other
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Prepaid items
Intangible assets
Other
Total deferred tax liabilities
$
2010
2009
$
110
1,401
832
2,197
440
2,812
2,942
4,527
1,455
716
(1,771)
15,661
(377)
--
(6)
(383)
84
1,434
--
2,301
--
2,388
3,945
5,230
1,054
508
(1,771)
15,173
(364)
(1,040)
--
(1,404)
Total net deferred tax assets
$
15,278
$
13,769
As of December 31, 2010 the Company maintained a total of $1.8 million in valuation allowances against deferred tax
assets, related to state net operating loss carryforwards, and a net deferred tax asset of $15.3 million. As of December 31,
2009 the Company had a total of $1.8 million in valuation allowances against deferred tax assets, primarily related to state
net operating loss carryforwards, and a net deferred tax asset of $13.8 million.
As of December 31, 2010 the Company had approximately $2.9 million of tax effected state net operating loss
carryforwards that will begin to expire in 2011, $1.3 million in research and development tax credit carryforwards that will
begin to expire in 2022, and $180,000 in credits from the state of Texas that will fully expire by 2027. Additionally, at
December 31, 2010 the Company had $3.0 million in alternative minimum tax credit carryforwards that do not expire.
F-30
Uncertain Tax Positions
A reconciliation of the beginning and ending balances of the Company’s uncertain tax position liability, excluding
interest and penalties, is as follows (in thousands):
Beginning balance
Decreases related to prior year tax positions
Increases related to current year tax positions
Settlements
Ending balance
2010
2009
2008
1,742
(19)
99
--
1,822
$
$
1,799
(183)
136
(10)
1,742
$
$
1,736
--
63
--
1,799
$
$
A reconciliation of the beginning and ending balances of the Company’s liability for interest and penalties on uncertain
tax positions is as follows (in thousands):
Beginning balance
Accrual of interest and penalties
Decreases related to prior year tax positions
Ending balance
2010
2009
2008
342
49
--
391
$
$
431
83
(172)
342
$
$
347
84
--
431
$
$
As of December 31, 2010 the Company’s total uncertain tax liability including interest and penalties of $2.2 million was
recorded as a reduction to deferred tax assets of $850,000 and a non current liability of $1.4 million on the Company’s
Consolidated Balance Sheet. As of December 31, 2009 the Company’s total uncertain tax liability including interest and
penalties of $2.1 million was recorded as a reduction to deferred tax assets of $1.3 million and a non current liability of
$825,000 on the Company’s Consolidated Balance Sheet.
The Company’s tax years 2007 through 2010 generally remain open to examination by the major taxing jurisdictions to
which the Company is subject. However, certain returns from years prior to 2007 in which net operating losses and tax
credits have arisen are still open for examination by the tax authorities.
15. Transactions with Related Parties
The Company expensed $22,000, $99,000, and $142,000 in 2010, 2009, and 2008, respectively, relating to supplies for
clinical trials purchased from a company whose Chief Financial Officer is a member of the Company's Board of Directors and a
shareholder of the Company. The Company also expensed $5.0 million, $2.6 million, and $1.5 million in 2010, 2009, and 2008,
respectively, relating to purchases of HemoStase finished goods inventory from Medafor.
A member of the Company’s Board of Directors and a shareholder of the Company is a current employee of and the former
Chief of Thoracic Surgery of a university hospital that generated preservation services and product revenues of $390,000,
$439,000, and $452,000 with the Company in 2010, 2009, and 2008, respectively. Additionally, the son of this member of the
Company’s Board of Directors is employed by a medical center that generated preservation services and product revenues of
$178,000, $231,000, and $258,000 with the Company in 2010, 2009, and 2008, respectively.
A relative of the Company’s CEO is employed as a vice president of the Company. His compensation and benefits are
subject to review by the Compensation Committee of the Board of Directors.
16. Segment and Geographic Information
The Company has two reportable segments organized according to its services and products: Preservation Services and
Medical Devices. The Preservation Services segment includes external services revenues from the preservation of cardiac
and vascular tissues during 2010 and from shipments of previously preserved orthopaedic tissues during 2009 and 2008. The
Medical Devices segment includes external revenues from product sales of BioGlue, BioFoam, PerClot, and HemoStase, as
well as sales of other medical devices. There are no intersegment revenues.
F-31
The primary measure of segment performance, as viewed by the Company’s management, is segment gross margin, or
net external revenues less cost of preservation services and products. The Company does not segregate assets by segment;
therefore, asset information is excluded from the segment disclosures below.
The following table summarizes revenues, cost of preservation services and products, and gross margins for the
Company’s operating segments (in thousands):
Revenues:
Preservation services
Medical devices
Other a
Total revenues
Cost of preservation services and products:
Preservation services
Medical devices
Total cost of preservation services and products
Gross margin:
Preservation services
Medical devices
Other a
Total gross margin
2010
2009
2008
$
59,724
56,370
551
116,645
$
56,456
54,162
1,067
111,685
$
53,656
50,493
910
105,059
35,868
12,409
48,277
23,856
43,961
551
68,368
$
32,767
9,150
41,917
23,689
45,012
1,067
69,768
$
29,112
8,153
37,265
24,544
42,340
910
67,794
$
Net revenues by product for the years ended December 31, 2010, 2009, and 2008 were as follows (in thousands):
Preservation services:
Cardiac tissue
Vascular tissue
Orthopaedic tissue
Total preservation services
Products:
BioGlue and BioFoam
PerClot
HemoStase
Other medical devices
Total products
Other a
Total revenues
2010
2009
2008
$
$
27,997
31,727
--
59,724
47,383
264
8,793
(70)
56,370
$
26,074
30,201
181
56,456
47,906
--
6,008
248
54,162
25,514
27,417
725
53,656
48,570
--
1,532
391
50,493
551
116,645
$
1,067
111,685
910
105,059
$
$
a
For the year ended December 31, 2010 and 2009 the “Other” designation includes grant revenue. For the years ended
December 31, 2008, the “Other” designation includes 1) grant revenue and 2) revenues related to the licensing of the
Company’s technology to a third party.
Net revenues by geographic location attributed to countries based on the location of the customer for the years ended
December 31, 2010, 2009, and 2008 were as follows (in thousands):
U.S.
International
Total
2010
97,037
19,608
116,645
$
$
2009
94,094
17,591
111,685
$
$
2008
89,297
15,762
105,059
$
$
At December 31, 2010, and 2009, over 95% of the long-lived assets of the Company were held in the U.S., where all
Company manufacturing facilities and the corporate headquarters are located.
F-32
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
REVENUE:
2010
2009
2008
GROSS MARGIN:
2010
2009
2008
NET INCOME (LOSS):
2010
2009
2008
$
$
$
INCOME (LOSS) PER COMMON SHARE—DILUTED:
2010
2009
2008
$
$
$
$
$
29,717
26,688
25,568
17,792
17,235
16,258
1,934
1,949
2,765
0.07
0.07
0.10
29,263
28,163
27,155
17,769
17,895
17,866
2,926
2,502
3,888
0.10
0.09
0.14
$
$
$
$
28,443
28,219
26,804
29,222
28,615
25,532
15,222 * $
17,041
17,161
17,585
17,597
16,509
(3,031) * $
1,862
3,556
2,115
2,366
21,741 **
$
(0.11)* $
0.07
0.12
0.08
0.08
0.76 **
* The third quarter 2010 gross margin, net loss, and loss per share-diluted includes the unfavorable effect of a $1.6 million
write-down of HemoStase inventory as a result of Medafor, Inc.’s termination of the distribution agreement between the
parties. The third quarter net loss and loss per share-diluted includes the unfavorable effects of $3.5 million in acquired
in-process research and development expense, as a result of the transaction with Starch Medical, Inc., and $3.6 million
for the other than temporary impairment of the Company’s investment in Medafor common stock.
** The fourth quarter 2008 net income and income per common share–diluted includes the favorable effect of $19.1 million
for the reversal of the Company’s valuation allowance on its deferred tax assets.
F-33
SUBSIDIARIES OF CRYOLIFE, INC.
Subsidiary
CryoLife Acquisition Corp........................................................... Florida
CryoLife Europa, LTD. ................................................................ England and Wales
AuraZyme Pharmaceuticals, Inc. ................................................. Florida
CryoLife International, Inc. .......................................................... Florida
Jurisdiction
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-155549 of CryoLife, Inc. and
Subsidiaries (the “Company”) on Form S-3 and Registration Statement Nos. 333-167065, 333-159608, 333-150475, 333-
59849, 333-104637, and 333-119137 of CryoLife, Inc. on Form S-8 of our reports dated February 22, 2011, relating to the
consolidated financial statements of CryoLife, Inc. and the effectiveness of the Company’s internal control over financial
reporting, appearing in this Annual Report on Form 10-K of CryoLife, Inc. for the year ended December 31, 2010.
Exhibit 23.1
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 22, 2011
Exhibit 31.1
I, Steven G. Anderson, certify that:
1.
I have reviewed this annual report on Form 10-K of CryoLife, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: February 22, 2011
/s/ STEVEN G. ANDERSON
Chairman, President, and
Chief Executive Officer
Exhibit 31.2
I, D. Ashley Lee, certify that:
1.
I have reviewed this annual report on Form 10-K of CryoLife, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: February 22, 2011
/s/ D. ASHLEY LEE
Executive Vice President,
Chief Operating Officer, and
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of CryoLife, Inc. (the "Company") on Form 10-K for the year ending December 31, 2010,
as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of Steven G. Anderson, the
Chairman, President, and Chief Executive Officer of the Company, and D. Ashley Lee, the Executive Vice President, Chief
Operating Officer, and Chief Financial Officer of the Company, hereby certifies, pursuant to and for purposes of 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ STEVEN G. ANDERSON
STEVEN G. ANDERSON
Chairman, President, and
Chief Executive Officer
February 22, 2011
/s/ D. ASHLEY LEE
D. ASHLEY LEE
Executive Vice President,
Chief Operating Officer, and
Chief Financial Officer
February 22, 2011
BOARD OF DIRECTORS
Daniel J. Bevevino(1),(2)
Independent Consultant
Former Vice President and
Chief Financial Officer
Respironics, Inc.
(Medical devices for sleep and respiratory
disorders)
Murrysville, Pennsylvania
Ronald C. Elkins, M.D.(2),(4)
Professor Emeritus, Section of
Thoracic and Cardiovascular
Surgery
University of Oklahoma
Health Sciences Center
Oklahoma City, Oklahoma
Ronald D. McCall, Esq.(2),(3),(4),(5)
Attorney at Law
Tampa, Florida
Harvey Morgan(1),(3)
Managing Director
Bentley Associates, L.P.
(Investment banking firm)
New York, New York
Committee Members as of
February 11, 2011
(1) Audit Committee
(2) Compensation Committee
(3) Nominating and Corporate
Governance Committee
(4) Regulatory Affairs and Quality
Assurance Policy Committee
(5) Presiding Director
Steven G. Anderson
Chairman, President, and
Chief Executive Officer
CryoLife, Inc.
Kennesaw, Georgia
Thomas F. Ackerman(1)
Executive Vice President and
Chief Financial Officer
Charles River Laboratories
International, Inc.
(Research tools and services for
drug and medical device
development)
Wilmington, Massachusetts
James S. Benson(3),(4)
Retired
Former Executive Vice President
Advanced Medical Device
Association
(A health industry
manufacturers’ association)
Rockville, Maryland
The following graph compares the cumulative 5-year total return on an investment in CryoLife, Inc.’s common stock relative to the
cumulative total returns of investments in the Russell 2000 index and a customized peer group of three companies that includes: Endologix
Inc, Orthovita, Inc., and RTI Biologics, Inc. ATS Medical, Inc. was also included in the peer group in prior years, but has been removed from
this year’s performance graph for all periods shown because the company was acquired in August 2010. An investment of $100 (with
reinvestment of all dividends) is assumed to have been made in our common stock, in the Russell 2000 index, and in the peer group on
12/31/2005, and the relative performance of these investments is tracked through 12/31/2010.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among CryoLife, Inc., the Russell 2000 Index, and a Peer Group
$350
$300
$250
$200
$150
$100
$50
$0
12/05
12/06
12/07
12/08
12/09
12/10
CryoLife, Inc.
Russell 2000
Peer Group
* $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
CryoLife, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
229.04
118.37
73.28
238.02
116.51
79.94
290.72
77.15
48.41
192.22
98.11
74.32
162.28
124.46
65.41
12/05
12/06
12/07
12/08
12/09
12/10
The stock price performance included in this graph is not necessarily indicative of future stock price
performance.