2016
2016 Annual Report to Stockholders
NYSE: CRY
www.cryolife.com
1655 Roberts Boulevard, NW
Kennesaw, Georgia 30144
PHONE: 770-419-3355
FAX: 770-429-5250
E-Mail: info@cryolife.com
www.cryolife.com
FORM 10-K
NEW YORK STOCK EXCHANGE ANNUAL
CEO CERTIFICATION
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, 2016, 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:
Corporate Secretary
CryoLife, Inc.
1655 Roberts Boulevard, NW
Kennesaw, GA 30144
STOCKHOLDER COMMUNICATIONS
Directors may be contacted by mail,
addressed c/o Corporate Secretary 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.
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
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
Phone: 800-937-5449
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP
Suite 1000
55 Ivan Allen Jr. Boulevard
Atlanta, GA 30308
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:95)
(cid:133)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
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
Name of each exchange on which registered
Common Stock, $.01 par value
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:95)
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:95) No (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated 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)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Non-accelerated filer (cid:134) Smaller reporting company (cid:134)
Accelerated filer (cid:95)
Yes (cid:134) No (cid:95)
As of June 30, 2016 the aggregate market value of the voting stock of the Registrant held by non-affiliates of the
registrant was $360,993,140 computed using the closing price of $11.81 per share of Common Stock on June 30, 2016, 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 10, 2017 the number of outstanding shares of Common Stock of the registrant was 32,980,754.
Document
Proxy Statement for the Annual Meeting of Stockholders
to be filed within 120 days after December 31, 2016.
Documents Incorporated By Reference
Parts Into Which Incorporated
Part III
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 4A.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-4
F-6
F-7
F-8
F-9
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Forward-Looking Statements
We have made forward-looking statements in this Form 10-K as defined in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act. Forward-looking statements give our 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 forward-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. 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) Our beliefs and estimates regarding the potential benefits and additional applications of our surgical adhesives,
sealants, hemostats, CardioGenesis cardiac laser therapy, On-X heart valves, and PhotoFix products;
(cid:120) Our estimates regarding specific country and worldwide market opportunities for certain types of procedures and
products, and our products and tissues;
(cid:120) Our beliefs and estimates regarding our competitors in various geographic, procedure, and product markets,
including non-profit competitors, and our beliefs regarding how our products and services will compete with
competitors’ products and services;
(cid:120) Our beliefs regarding the potential for competitive products and services to affect the market for our products and
services;
(cid:120) Our beliefs regarding the enhanced efficacy of certain procedures provided by using our surgical sealants;
(cid:120) Our plans, costs, and expected timeline regarding regulatory approval for PerClot in the U.S. and additional
international markets and the distribution of PerClot in those markets after the requisite regulatory approvals are
obtained; and the Company’s expectation that it will terminate its minimum purchase requirements after regulatory
approval of PerClot;
(cid:120) Our expectations regarding the benefits of the Company’s marketing, educational and technical support efforts;
(cid:120) Our beliefs regarding the advantages of the human tissues, heart valves, and other products we preserve and
distribute;
(cid:120) The anticipated effect of suppliers’/sources’ inability to deliver critical raw materials or tissues and/or us having to
source supply from an alternate supplier;
(cid:120) Our beliefs regarding the importance of, and competitive advantages associated with, our relationships with tissue
procurement organizations;
(cid:120) Our belief regarding our compliance with The National Organ Transplant Act of 1984, or “NOTA”, state licensing
requirements, and environmental laws and regulations;
(cid:120) Our belief that countries in which we distribute our products and tissue may perform inspections of our facilities to
ensure compliance with local country regulations;
(cid:120) Our plans to continue to ship tissues to Germany under a special access program, which is subject to continued
support from German authorities;
(cid:120) Our potential attempt to license certain products to corporate partners for further development or seek funding from
outside sources to continue commercial development when additional applications for such products are identified,
and our potential attempt to acquire or license additional technologies from third-parties to supplement our product
lines;
(cid:120) Our plans and expectations regarding research and development of new technologies and products;
(cid:120) Our plans and expectations regarding clinical trials;
(cid:120) Our beliefs regarding the adequacy of, and competitive advantages conferred by, our intellectual property
protections;
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(cid:120) Management’s beliefs regarding the state of relations with our employees;
(cid:120) Our expectations regarding the impact that U.S. and international healthcare policy and regulatory changes may
have on our business;
(cid:120) The potential impact of the FDA’s classification of CryoValve SGPV as a class III device;
(cid:120) Our expectations regarding the limitations on the recoverability of our acquired net operating loss carryforwards in
future periods;
(cid:120) Our plans regarding acquisition and investment opportunities of complementary product lines and companies;
(cid:120) Our assessment of the effects of adopting new accounting standards regarding the recognition of revenue from
contracts with customers, the simplified measurement of inventory, and the balance sheet classification of deferred
taxes;
(cid:120) Our estimates regarding yields for tissues in process and in quarantine and the portion of tissues that will ultimately
become implantable;
(cid:120) Our potential plan to pursue expanded U.S. indications for BioGlue and our beliefs regarding the international
growth opportunities that would be provided by obtaining regulatory approval for BioGlue in China;
(cid:120) Our beliefs regarding the growth rate for On-X products due to a larger, realigned sales force as they undertake
additional training and become more experienced with selling On-X products, driving sales and opening additional
hospitals to using On-X products;
(cid:120) Our plans to improve tissue processing throughput and reduce costs;
(cid:120) Our plans to pursue new and previous vascular tissue customers to broaden our revenue base for vascular
preservation services, and our belief that we now have sufficient vascular tissue supply;
(cid:120) Our expectations about the amount and timing of the final release of funds from escrow for the Bard acquisition of
all outstanding shares of Medafor common stock;
(cid:120) Our beliefs regarding the seasonal nature of the demand for some of our products and services;
(cid:120) The adequacy of our financial resources and our belief that we will have sufficient cash to meet our operational
liquidity needs for at least the next twelve months;
(cid:120) The anticipated impact on cash flows of us undertaking significant business development activities in 2017 and the
potential need to obtain additional borrowing capacity or financing;
Issues that may affect our future financial performance and cash flows;
(cid:120) The future cash requirements that we anticipate may have a significant effect on our cash flows during 2017;
(cid:120)
(cid:120) Our plans to transfer the manufacturing of PhotoFix from GBI to our facility in Kennesaw, Georgia; and
(cid:120) Other statements regarding future plans and strategies, anticipated events, or trends.
These forward-looking statements are based on certain of our assumptions and analyses in light of our experience and
our perception of historical trends, current conditions, and expected future developments as well as other factors we believe
are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations
and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from
our 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 our control. 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 us will be realized or, even if substantially realized, that
they will have the expected consequences to, or effects on, our business or operations. We assume no obligation to update
publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise.
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PART I
Item 1. Business.
Overview
CryoLife, Inc. (“CryoLife,” the “Company,” “we,” or “us”), incorporated in 1984 in Florida, is a leader in medical
device manufacturing, processing, and distribution of medical devices and implantable human tissues used in cardiac surgical
procedures. CryoLife’s medical devices include: BioGlue® Surgical Adhesive (“BioGlue”); BioFoam® Surgical Matrix
(“BioFoam”); On-X valves and surgical products; CardioGenesis cardiac laser therapy product line, which includes a laser
console system and single-use, fiber-optic handpieces, that are used for the treatment of coronary artery disease in patients
with severe angina; PerClot®, an absorbable powdered hemostat, which the Company distributes internationally for Starch
Medical, Inc. (“SMI”); and PhotoFixTM, a bovine pericardial patch stabilized using a dye-mediated photo-fixation process
that requires no glutaraldehyde. The cardiac and vascular human tissues distributed by CryoLife include the CryoValve® SG
pulmonary heart valve (“CryoValve SGPV”) and the CryoPatch® SG pulmonary cardiac patch (“CryoPatch SG”), both of
which are processed using CryoLife’s proprietary SynerGraft® technology.
Corporate Structure
CryoLife’s main operating subsidiaries include On-X Life Technologies Holdings, Inc. (“On-X”), an Austin, Texas-
based, mechanical heart valve company acquired on January 20, 2016; CryoLife Europa Ltd. (“Europa”), established in 2000
to provide marketing and distribution support in the European Economic Area (“EEA”), the Middle East, and Africa
(collectively “EMEA”); CryoLife France, SAS (“CryoLife France”), established in 2015 to provide direct sales operations in
France; and CryoLife Asia Pacific, Pte. Ltd. (“CryoLife Asia Pacific”), established in Singapore in 2013 to provide sales and
marketing support for the Asia Pacific region.
Segments and Geographic Information
CryoLife has two reportable segments organized according to its products and services: Medical Devices and
Preservation Services. The Medical Devices segment includes external revenues from product sales of BioGlue; BioFoam;
On-X products; CardioGenesis cardiac laser therapy; PerClot; PhotoFix, Hemodialysis Reliable Outflow Graft (“HeRO®
Graft”) through the second quarter of 2016; and ProCol® Vascular Bioprosthesis (“ProCol”) through the date of the sale of
the ProCol product line in the first quarter of 2016. The Preservation Services segment includes external services revenues
from the preservation of cardiac and vascular tissues. See also Part II, Item 8, Note 20 of the “Notes to Consolidated
Financial Statements” for further information on the Company’s segments and for the Company’s geographic information.
Strategy
The Company’s strategic plan is focused on four growth vectors in the cardiac surgery space, which are expected to drive
the Company’s business expansion in the near term. These growth vectors and their key elements are described below:
(cid:120) New Products – Drive growth through new products including the On-X heart valve;
(cid:120) New Indications – Broaden the reach of certain of the Company’s products, including the On-X heart valve,
BioGlue, and PerClot, with new or expanded approvals and indications in the U.S. or in international markets;
(cid:120) Global Expansion – Expand the Company’s current products and services into new markets, including emerging
markets, and accelerate growth by developing new direct sales territories overseas; and
(cid:120) Business Development – Selectively pursue potential acquisition, licensing, or distribution rights of companies or
technologies that complement CryoLife’s existing products, services, and infrastructure and expand our footprint in
the cardiac surgery space, such as the recent acquisition of On-X, divestitures of certain of our non-cardiac surgery
product lines, such as the HeRO Graft in 2016, and licensing of products developed internally with non-cardiac
indications. To the extent the Company identifies new non-core products or additional applications for its core
products, the Company may attempt to license these products to corporate partners for further development or seek
funding from outside sources to continue commercial development.
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Products, Services, Markets, and Competition
The Company’s products and preservation services are used to treat a variety of medical conditions. A discussion of
each market in which the Company competes and a description of the Company’s products and/or services that compete
within each market are discussed below.
The Company faces competition from several domestic and international medical device, pharmaceutical, and
biopharmaceutical companies and from both for profit and non-profit tissue banks. Many of the Company’s current and
potential competitors have substantially greater financial and personnel resources than the Company. These competitors may
also have greater experience in developing products, procuring tissues, conducting clinical trials, and obtaining regulatory
approvals and may have large contracts with hospitals under which they can impose purchase requirements that place the
Company’s products at a disadvantage. Certain of these competitors may obtain patent protection or approval or clearance by
the FDA or foreign regulators earlier than the Company. The Company may also compete with companies that have superior
manufacturing efficiency, tissue processing capacity, and/or marketing capabilities. Additional competitive products may be
under development which could compete with the Company’s products or services in the future. There can be no assurance
that the Company’s current or future competitors will not succeed in developing alternative technologies, products, or
services that have significant advantages over those that have been, or are being, developed by the Company or that would
render the Company’s products or technology obsolete and non-competitive. Any of these competitive disadvantages could
materially, adversely affect the Company. Specific competitive products currently on the market are discussed in the sections
below.
Surgical Sealants
Closing internal wounds effectively following surgical procedures is critical to the restoration of the function of tissue
and to the ultimate success of the surgical procedure. Failure to seal surgical wounds effectively can result in leakage of
blood in cardiac surgeries, air in lung surgeries, cerebrospinal fluid in neurosurgeries, and gastrointestinal contents in
abdominal surgeries. Fluid, air, and content leakage resulting from surgical procedures can lead to prolonged hospitalization,
higher levels of post-operative pain, higher costs, and a higher mortality rate.
Sutures and staples facilitate healing by joining wound edges to allow the body to heal naturally. However, sutures and
staples cannot consistently eliminate air and fluid leakage at the wound site, particularly when 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, it can be difficult and time consuming for the physician to apply sutures and staples in
minimally invasive surgical procedures where the physician must operate through small access openings. 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 protein hydrogel technology (“PHT”) platform. The PHT platform
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 somewhat 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. CryoLife developed and currently markets the surgical sealants BioGlue and
BioFoam from its PHT platform.
BioGlue
CryoLife’s proprietary product, BioGlue, is a polymer consisting of bovine blood protein and an agent for cross-linking
proteins, which was developed for use in cardiac, vascular, pulmonary, and general surgical applications. BioGlue has a
tensile strength that is four to five times that of fibrin sealants, and it is stronger than other cardiovascular 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 a disposable syringe, which may be used with, or without, a multi-use delivery
device, and various applicator tips. BioGlue is pre-filled in 2ml, 5ml, and 10ml volumes. Applicator tips are available in
standard size, 12mm and 16mm spreader tips, 10cm and 27cm flexible extender tips, and 10cm, 27cm, and 35cm delivery tip
extenders.
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 Mark product certification (“CE Mark”) in the EEA for
repair of soft tissues (which include cardiac, vascular, pulmonary, and additional soft tissues). CryoLife also distributes
BioGlue in Japan which is indicated for adhesion and support of hemostasis for aortotomy closure sites, suture/anastomosis
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sites (including aortic dissection and anastomosis sites with use of a prosthetic graft), and suture sites on the heart.
Additional marketing approvals have been granted for specified applications in several other countries throughout the world.
CryoLife distributes BioGlue throughout the U.S. and in approximately 80 other countries. Revenues from BioGlue
represented 35%, 40%, and 43% of total Company revenues in 2016, 2015, and 2014, respectively.
The Company’s BioGlue product competes primarily with sealants from Baxter International, Inc., Ethicon, Inc. (a
Johnson & Johnson Company), Integra LifeSciences Holdings Corporation, C.R. Bard, Inc. (“Bard”), and Mallinckrodt PLC.
The Company’s BioGlue competes with these products based on its benefits and features, such as strength and ease of use.
BioFoam
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 develops pores for the blood to enter,
leading to cellular aggregation and enhanced hemostasis. BioFoam was developed to seal organs, such as the liver, rapidly
and for use in cardiovascular surgeries, and may provide hemostasis in penetrating wounds and trauma. It is easily applied
and could potentially be used intra-operatively to control internal organ hemorrhage, limit blood loss, and reduce the need for
future re-operations in liver resections.
CryoLife distributes BioFoam in Europe under a CE Mark for use as an adjunct in the sealing of abdominal parenchymal
tissues (liver and spleen) and as an adjunct to hemostasis in cardiovascular surgery when cessation of bleeding by ligature or
other conventional methods is ineffective or impractical.
CryoLife distributes BioFoam in approximately 45 countries, primarily in Europe. Revenues from BioFoam represented
less than 1% of total Company revenues in each of 2016, 2015, and 2014.
The Company’s BioFoam product competes with sealants from Pfizer, Inc., Baxter International, Inc., Ethicon, Inc.,
Bard, and Orthovita, Inc. The Company’s BioFoam product competes on the basis of its clinical efficacy and ease of use.
Cardiac Repair and Reconstruction
Patients with congenital cardiac defects such as Tetralogy of Fallot, Truncus Arteriosis, and Pulmonary Atresia can
require complex cardiac reconstructive surgery to repair the defect. Patients with heart disease can experience valve
insufficiency, regurgitation, or stenosis that may require heart valve repair or replacement surgery. Cardiac surgery can
include the implantation of mechanical heart valves, bioprosthetic (animal-derived or xenograft) tissues, synthetic tissues, or
donated human tissues.
Mechanical heart valves are durable and are often a solution that will last for the remainder of a patient’s life without
replacement. Mechanical valves are readily available and are a relatively inexpensive solution for those requiring a valve
replacement. These valves contain a synthetic sewing ring to facilitate implantation. Patients who receive mechanical heart
valves are required to undergo long-term blood thinning or anticoagulation drug therapy to minimize the risk of
complications from blood clots.
Bioprosthetic tissues, including bovine, equine, or porcine tissue values, are available in heart valves and surgical
patches. Bioprosthetic valves are readily available and are a relatively inexpensive solution for those requiring a valve
replacement. Bioprosthetic heart valves usually have a life of 7 to 20 years, after which a degenerating valve must be
replaced, which can be a significant concern for younger patient populations. Bioprosthetic tissues are typically processed
with glutaraldehyde, which may result in progressive calcification, or hardening of the tissue over time. These valves often
contain a synthetic sewing ring to facilitate implantation. Patients receiving a bioprosthetic heart valve may not require long-
term anticoagulation drug therapy, although certain of these patients may require anticoagulation drug therapy for other heart
or vascular conditions.
Synthetic surgical patches are available for use in cardiac repair and synthetic materials are used in sewing rings for
mechanical and bioprosthetic heart valves. These synthetic sewing rings may harbor bacteria and lead to endocarditis, which
can be difficult to treat with antibiotics. Patients with an infected mechanical or bioprosthetic valve may require valve
replacement.
Human heart valves are available for use in valve replacement procedures. Human heart valves allow for more normal
blood flow and often provide higher cardiac output than mechanical and bioprosthetic heart valves. Human tissue responds
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better to treatment for infections, such as endocarditis and is not as susceptible to progressive calcification as glutaraldehyde-
fixed bioprosthetic tissues. Human heart valves do not require anticoagulation drug therapy, as do mechanical valves.
Human tissue patches are also available for use in cardiac repair and human vascular tissues are used in cardiac bypass
surgery. However, the transplant of any human tissue that has not been preserved must be accomplished within extremely
short time limits. Cryopreservation, or cooling and storing at extremely cold temperatures, expands the treatment options
available by extending these timelines.
The 2013 Society of Thoracic Surgeons Guidelines, (the “Guidelines”) as published in the Annals of Thoracic Surgery,
have increased the indication (from Class II to Class I) and broadened the scope for using a human heart valve during aortic
valve replacement surgery due to endocarditis. This means that when endocarditis has functionally destroyed the aortic valve
annulus, an aortic homograft is the recommended course of treatment. Previously, the Guidelines’ indication for aortic
homograft use was Class II, which meant only that it was an acceptable course of treatment. Consequently, for many
physicians, human heart valves are the preferred alternative to animal-derived and mechanical valves for patients who have,
or are at risk to contract, endocarditis.
CryoLife currently markets the On-X aortic and mitral mechanical heart valves for valve replacement procedures and
PhotoFix for cardiac repair. CryoLife also markets its cardiac preservation services, including its CryoValve and CryoValve
SG tissues for heart valve replacement surgeries and its CryoPatch and CryoPatch SG tissues for cardiac repair procedures.
On-X Heart Valves
The On-X catalogue of products includes the On-X prosthetic aortic and mitral heart valve and the On-X ascending
aortic prosthesis (“AAP”). The Company also distributes CarbonAid CO2 diffusion catheters, manufactures Chord-X ePTFE
sutures for mitral chordal replacement, and offers pyrolytic carbon coating services to other medical device manufacturers as
part of the On-X family of products.
The On-X heart valve is a bileaflet mechanical valve composed of a graphite substrate coated with On-X’s pyrolytic
carbon coating. The On-X heart valve is available for both aortic and mitral indications and with a variety of sewing ring
options to suit physician’s preferences. The On-X AAP is an On-X aortic valve combined with a Vascutek Gelweave
ValsalvaTM Graft to allow physicians to more conveniently treat patients requiring both an aortic valve replacement and an
aortic graft.
As discussed above, all mechanical valve patients require anticoagulation therapy with warfarin, which creates a risk of
harmful bleeding. The On-X aortic heart valve is the only mechanical valve U.S. Food and Drug Administration (“FDA”)
approved to be marketed as, and clinically proven to be, safer with use by the patient of less warfarin. In a prospective
randomized clinical trial comparing reduced warfarin to standard warfarin dose in On-X aortic heart valve patients, the
reduced warfarin dose group had 65% fewer harmful bleeding events without an increase in stroke risk.
The On-X heart valve is FDA approved for the replacement of diseased, damaged, or malfunctioning native or prosthetic
heart valves in the aortic and mitral positions, and is classified as a Class III medical device. On-X distributes the On-X heart
valve under CE Mark in the EEA. Additional marketing approvals have been granted in several other countries throughout
the world.
CryoLife began distribution of On-X heart valves throughout the U.S. and in approximately 95 other countries in January
2016 when it acquired On-X. Revenues from On-X products represented 19% of total Company revenues in 2016.
The Company’s On-X heart valves compete primarily with mechanical valves from Abbott Laboratories, Medtronic,
Inc., and LivaNova PLC based on the On-X heart valves’ benefits and features, such as the lower warfarin requirement for
aortic valves and low turbulence and increased thromboresistance.
PhotoFix
In 2014 CryoLife entered into an exclusive supply and distribution agreement with Genesee Biomedical, Inc. (“GBI”) to
acquire the distribution rights to PhotoFix, a bovine pericardial patch stabilized using a dye-mediated photo-fixation process
that requires no glutaraldehyde. On April 13, 2016 the Company exercised its right to acquire the PhotoFix technology from
GBI and is in the process of transferring manufacturing of PhotoFix to the Company’s headquarters facilities. PhotoFix has
FDA 510(k) clearance and is indicated for use in intracardiac repair, including ventricular repair and atrial repair, great vessel
repair and suture line buttressing, and pericardial closure.
8
In January 2015 the Company received its initial shipments and launched its distribution of PhotoFix in the U.S.
Revenues from PhotoFix represented approximately 1% of total Company revenues in each of 2016 and 2015.
Cardiac Preservation Services
The Company’s proprietary preservation process involves dissection, processing, preservation, and storage of tissues by
the Company, until they are shipped to an implanting physician. The cardiac tissues currently preserved by the Company
include aortic and pulmonary heart valves and cardiac patches in three primary anatomic configurations: pulmonary hemi-
artery, pulmonary trunk, and pulmonary branch. Each of these tissues maintains a structure which more closely resembles
and simulates the performance of the patient’s own tissue compared to non-human tissue alternatives. The Company’s
cardiac tissues have been used in a variety of valve replacement and cardiac reconstruction surgeries. Management believes
the human tissues it distributes offer specific advantages over mechanical, synthetic, and bioprosthetic alternatives.
Depending on the alternative, the advantages of the Company’s heart valves include more natural blood flow properties, the
ability to use the valve with patients who have 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’s cardiac tissues include the CryoValve SGPV and the CryoPatch SG, both processed with the Company’s
proprietary SynerGraft decellularization technology. A multi-center study showed that at 10 years, patients with the
Company’s proprietary SynerGraft valves had a 17 percent re-operation rate, as compared to a 40 percent re-operation rate
for patients with non-SynerGraft valves. CryoLife uses the SynerGraft technology for a significant portion of its pulmonary
valve and pulmonary cardiac patch tissue processing.
CryoLife distributes human cardiac tissues to implanting institutions throughout the U.S. The Company’s CryoValve
SGPV and CryoPatch SG are distributed under 510(k) clearance from the FDA. CryoLife also distributes tissues in Canada
and has limited distribution through a special access program in Germany.
Revenues from cardiac tissue preservation services accounted for 17%, 19%, and 20% of total Company revenues in
2016, 2015, and 2014, respectively.
Management believes that at least one domestic tissue bank, LifeNet Health, Inc. (“LifeNet”), offers preserved human
heart valves and patches in competition with the Company. Alternatives to human heart valves processed by the Company
include valve repair and valve replacement with bioprosthetic valves or mechanical valves. The Company competes with
bioprosthetic or mechanical valves from companies including Medtronic, Inc., Edwards Life Sciences, Inc., LivaNova, and
Abbott Laboratories. Alternatives to the Company’s human cardiac patches include xenograft small intestine submucosa
(“SIS”) and glutaraldehyde fixed bovine pericardial patches. The Company competes with xenograft and SIS products from
companies including CorMatrix Cardiovascular, Inc., Edwards Life Sciences, Inc., Admedus, Inc., Abbott Laboratories, and
Synovis Surgical Innovations.
Management believes that the human heart valves preserved by the Company compare favorably with bioprosthetic and
mechanical valves, for certain indications and patient populations, and that the human cardiac patches preserved by the
Company compare favorably with xenograft SIS and glutaraldehyde fixed bovine pericardial patches, due to the benefits of
human tissue discussed above. In addition, human tissue is the preferred replacement alternative with respect to certain
medical conditions, such as pediatric cardiac reconstruction, congenital cardiac defect repair, valve replacements for women
in their child-bearing years, and valve replacements for patients with endocarditis. In addition, implantation of the
SynerGraft treated cardiac tissue reduces the risk for induction of class I and class II alloantibodies, based on Panel Reactive
Antibody (“PRA”) measured at up to one year, compared to standard processed cardiac tissues. The Company believes that
this may provide a competitive advantage for CryoValve SGPV and CryoPatch SG for patients that may later require a whole
organ transplant, as an increased PRA can decrease the number of possible donors for subsequent organ transplants and
increase time on transplant waiting lists.
Management believes that it competes with other entities that preserve human tissue on the basis of the preference of
surgeons, documented clinical data, technology, customer service, and quality assurance. Management believes the
Company offers advantages in the areas of clinical data and customer service, particularly with respect to the capabilities of
our field representatives, as compared to other human tissue processors.
Vascular Repair and Reconstruction
Patients with peripheral vascular disease can experience reduced blood flow, usually in the arms and legs. This can
result in poor circulation, pain, and sores that do not heal. Failure to achieve revascularization of an obstructed vessel may
9
result in the loss of a limb or even death of the patient. When patients require peripheral bypass surgery, the surgeon’s first
choice generally is a graft of the patient’s own tissue (autograft). However, in cases of advanced vascular disease, patients
may not have suitable vascular tissue for transplantation. Other artery and vascular repair procedures include infected
abdominal aortic grafts, insufficient vascular access, carotid endarterectomy, or vessel repair. These procedures may include
the use of bioprosthetic patches, synthetic grafts or patches, or donated human vascular tissues. Alternative treatments may
include the repair, partial removal, or complete removal of the damaged tissue.
Bioprosthetic vascular grafts and patches, including those made of bovine or porcine tissue, can be used for a variety of
vascular repair procedures. Bioprosthetic grafts are readily available and are a relatively inexpensive solution for those
requiring a vascular repair procedure. Bioprosthetic tissues are typically processed with glutaraldehyde, which may result in
progressive calcification, or hardening of the tissue over time.
Synthetic vascular grafts and patches can be used for a variety of vascular repair procedures. Synthetic grafts are readily
available and are a relatively inexpensive solution for those requiring a vascular repair procedure. However, synthetic grafts
and patches are generally not suitable for use in infected areas because they may harbor bacteria and are difficult to treat with
antibiotics. Synthetic vascular grafts have a tendency to obstruct over time, particularly in below-the-knee surgeries.
Human vascular tissues tend to respond better to treatment for infection and remain open and accessible for longer
periods of time and, as such, are used in indications where synthetic grafts typically fail, such as in infected areas and for
below-the-knee surgeries. Human vascular and arterial tissues are also used in a variety of other reconstruction procedures
such as cardiac bypass surgery and as vascular access grafts for hemodialysis. The transplant of human tissue that has not
been preserved must be accomplished within extremely short time limits. Cryopreservation, or cooling and storing at
extremely cold temperatures, expands the treatment options available by extending these timelines.
CryoLife currently markets its vascular preservation services, including its CryoVein® and CryoArtery® tissues for
vascular reconstruction surgeries.
Vascular Preservation Services
The Company’s proprietary preservation process involves dissection, processing, preservation, and storage of tissues by
the Company, until they are shipped to an implanting physician. The vascular tissues currently preserved by the Company
include saphenous veins, aortoilliac arteries, and femoral veins and arteries. Each of these tissues maintains a structure,
which more closely resembles and simulates the performance of the patient’s own tissue compared to non-human tissue
alternatives. The Company’s vascular tissues have been used to treat a variety of vascular reconstructions, such as peripheral
bypass, hemodialysis access, and aortic infections, which have saved the lives and limbs of patients. Management believes
the human tissues it distributes offer specific advantages over mechanical, synthetic, and bioprosthesis alternatives.
CryoLife distributes human vascular tissues to implanting institutions throughout the U.S. CryoLife also distributes
tissues in Canada and has limited distribution through a special access program in Germany.
Revenues from vascular preservation services accounted for 20%, 24%, and 23% of total Company revenues in 2016,
2015, and 2014, respectively.
Management believes that at a small number of domestic tissue banks, including LifeNet, LeMaitre Vascular, Inc.
(“LeMaitre”), and Vascular Transplant Services, offer vascular tissue in competition with the Company. There are also a
number of providers of synthetic alternatives to veins preserved by the Company and those alternatives are available
primarily in medium and large diameters. The Company’s vascular tissues compete with products from Gore, Bard,
Artegraft, Inc., LeMaitre, and Maquet, Inc.
Management believes that it competes with other entities that preserve human tissue on the basis of the preference of
surgeons, documented clinical data, technology, and customer service. Management believes the Company offers advantages
in the areas of clinical data and customer service, particularly with respect to the capabilities of our field representatives, as
compared to the sales organizations of other human tissue processors.
Angina Treatment
Angina consists of pressure, discomfort, and/or pain in the chest typically due to narrowed or blocked arteries, resulting
in ischemic heart disease. Patients with severe angina are often treated with surgical procedures including angioplasty or
coronary artery bypass or with medications such as aspirin, nitrates, beta-blockers, statins, or calcium channel blockers. Pain
10
may be chronic or may become pronounced with exercise. Angina can also be treated with Transmyocardial
Revascularization (“TMR”), a procedure that can be performed as an open surgical procedure or through a minimally
invasive surgery either as a stand-alone procedure or concurrently with coronary artery bypass. During TMR, the surgeon
uses a disposable handpiece to deliver precise bursts of laser energy directly to an area of heart muscle that is suffering from
ischemic heart disease through a small incision or small ports with the patient under general anesthesia and without stopping
the heart. TMR is typically performed with a CO2 or Holmium: YAG laser. It takes approximately 6 to 10 pulses of the laser
to traverse the myocardium and create channels of one millimeter in diameter. During a typical procedure, approximately 20
to 40 channels are made in the heart muscle. The external openings seal with little blood loss. Angina usually subsides with
improved oxygen supply to the targeted areas of the damaged heart muscle. CryoLife currently sells the CardioGenesis
cardiac laser therapy product line to perform TMR.
CardioGenesis Cardiac Laser Therapy
CryoLife’s CardioGenesis cardiac laser therapy product line consists of Holmium: YAG laser consoles, related service
and maintenance, and single-use, fiber-optic handpieces, which are used in TMR to treat patients with severe angina resulting
from diffuse coronary artery disease. Patients undergoing TMR treatment with CardioGenesis products have been shown to
have angina reduction, longer event-free survival, reduction in cardiac related hospitalizations, and increased exercise
tolerance. CryoLife’s SolarGen 2100s Console (“Console”) uses the solid-state technology of the Holmium: YAG laser
system to provide a stable and reliable energy platform that is designed to deliver precise energy output. The Console has an
advanced electronic and cooling system technology, which allows for a smaller and lighter system, while providing 115V
power capability. The Company also provides service plan options to ensure that the Console is operating within the critical
factory specifications. CryoLife distributes the SoloGrip® III disposable handpieces, which consist of multiple, fine fiber-
optic strands in a one millimeter diameter bundle and are designed to work with the Console. The SoloGrip III handpiece has
an ergonomic design and is pre-calibrated in the factory to provide easy and convenient access for treating all regions of the
left ventricle.
The CardioGenesis cardiac laser therapy product line is FDA approved for treating patients with severe angina that is not
responsive to conventional therapy. CryoLife began distributing the CardioGenesis cardiac laser therapy product line,
primarily in the U.S., in May 2011 when it completed the acquisition of Cardiogenesis Corporation. Although the
CardioGenesis cardiac laser therapy product line has a CE Mark allowing commercial distribution into the EEA, CryoLife
does not actively market the product line internationally.
CryoLife distributes handpieces and CardioGenesis laser consoles primarily in the U.S. Revenues from CardioGenesis
cardiac laser therapy represented 5%, 6%, and 6% of total Company revenues in 2016, 2015, and 2014, respectively.
The Company’s CardioGenesis cardiac laser therapy competes with other methods for the treatment of coronary artery
disease, including drug therapy, percutaneous coronary intervention, coronary artery bypass surgery, and enhanced external
counterpulsation. Currently, the only directly competitive laser technology for the performance of TMR is the CO2 Heart
Laser System manufactured by Novadaq Technologies, Inc. The Company’s revascularization technology competes on the
basis of its ease of use, versatility, size of laser console, and improved access to the treatment area with a smaller fiber-optic
system.
Hemostats
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 may
reduce operating room time and decrease the number of blood transfusions required in surgical procedures. Hemostatic
agents are available in various forms including pads, sponges, liquids, and powders. CryoLife currently markets the
hemostatic agent PerClot.
PerClot
PerClot is an absorbable powdered hemostat, consisting of plant starch modified into ultra-hydrophilic, adhesive-forming
hemostatic polymers. PerClot granules are biocompatible, absorbable polysaccharides containing no animal or human
components. The purified plant source material helps to minimize the risks of infection and bleeding-related complications
during surgery. PerClot granules have a molecular structure that rapidly absorbs water, forming a gelled adhesive matrix that
provides a mechanical barrier to any further bleeding and results in the accumulation of platelets, red blood cells, and
coagulation proteins (thrombin, fibrinogen, etc.) at the site of application. This gelled adhesive matrix promotes the normal
physiological clotting cascade. PerClot does not require additional operating room preparation or special storage conditions
11
and is easy to apply. PerClot is readily dissolved by saline irrigation and is totally absorbed by the body within several days.
PerClot is currently available in 1 gram, 3 gram, and 5 gram configurations with a 100mm or 200mm applicator tip for
certain sizes. PerClot Laparoscopic is available in a 3 gram configuration with a 380mm applicator tip. In September 2010
CryoLife entered into a distribution agreement and a license and manufacturing agreement with SMI, which allows CryoLife
to distribute PerClot worldwide, except in China, Hong Kong, Macau, Taiwan, North Korea, Iran, and Syria.
PerClot has a CE Mark allowing commercial distribution into the EEA and other markets. PerClot is indicated for use in
surgical procedures, including cardiac, vascular, orthopaedic, neurological, gynecological, ENT, and trauma surgery as an
adjunct hemostat when control of bleeding from capillary, venular, or arteriolar vessels by pressure, ligature, and other
conventional means is either ineffective or impractical. CryoLife distributes PerClot in Europe and other international
countries.
CryoLife has received approval to begin clinical trials for the purpose of obtaining FDA Premarket Approval (“PMA”)
to distribute PerClot in the U.S., as discussed further in “Research and Development and Clinical Research” below.
CryoLife distributes PerClot in approximately 60 countries. Revenues from PerClot represented 2%, 3%, and 3% of
total Company revenues in 2016, 2015, and 2014, respectively.
The Company’s PerClot product competes with various hemostats including thrombin products from Pfizer, Inc.,
Mallinckrodt PLC, and Ethicon, Inc., and surgical hemostats from Pfizer, Inc., Bard, Baxter International, Inc., Ethicon, Inc.,
and BioCer Entwicklungs-GmbH. 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. The
Company’s PerClot Topical product competes with many of the same products listed above, but also competes with products
from Medtronic, Inc., Polyganics B.V., and Hemostasis, LLC, as well as gauze and chemical cauterization. The Company’s
PerClot product competes on the basis of safety, clinical efficacy, absorption rates, and ease of use.
Vascular Access
ESRD refers to the stage of renal disease when the kidneys do not work well enough for the patient to live without
dialysis or transplant. Patients with ESRD often undergo hemodialysis through an access site. CryoLife markets its
CryoVein femoral vein and CryoArtery femoral artery vascular preservation services for vascular access and previously
marketed the HeRO Graft and ProCol for vascular access.
HeRO Graft and ProCol
CryoLife began distributing the HeRO Graft in the U.S. in May 2012 when it acquired Hemosphere, Inc. and distributed
the product until the Company divested the product line in February 2016. CryoLife distributed the HeRO Graft in the U.S.
and approximately 40 other countries. Revenues from the HeRO Graft represented 1%, 5%, and 5% of total Company
revenues in 2016, 2015, and 2014, respectively.
CryoLife began distributing ProCol in the U.S. in March 2014 under a distribution agreement with Hancock Jaffe and
distributed the product until the Company divested the product line in March 2016. Revenues from ProCol represented less
than 1% of total Company revenues in each of 2016, 2015, and 2014.
Marketing and Distribution
In the U.S. the Company markets its products and preservation services primarily to physicians, and distributes its
products through its direct sales team to hospitals and other healthcare facilities. The Company also has a team of region
managers, national accounts manager, and sales and marketing management. Through its field representatives, the Company
conducts field training for surgeons regarding the surgical applications of its products and tissues.
CryoLife’s physician relations and education staff, clinical research staff, and field representatives assist physicians by
providing educational materials, seminars, and clinics on methods for using Company products and implanting tissue
preserved by the Company. The Company sponsors programs where surgeons train other surgeons in best-demonstrated
techniques. In addition, the Company hosts several workshops throughout the year including On-X Training Workshops,
Chord-X Training Workshops, Aortic Allograft Workshops, Aortic Valve and Root Bootcamp, Ross Master Course and
TMR Workshops. These workshops aim to provide didactic and hands-on training to surgeons. The Company also produces
educational videos for physicians and coordinates peer-to-peer training at various medical institutions. Management believes
that these activities enhance the medical community’s acceptance of the products and tissues offered by the Company and
12
help to differentiate the Company from other medical device companies and tissue processors. To assist organ and tissue
procurement organizations (“OTPOs”), the Company provides educational materials and training on procurement, dissection,
packaging, and shipping techniques. The Company produces educational videos and coordinates laboratory sessions for
OTPO personnel to improve their recovery techniques and increase the yield of usable tissue. The Company also maintains a
staff 24 hours per day, 365 days per year for OTPO support.
The Company markets its products in the EMEA region through its European subsidiary, Europa, based in Guildford,
England. Europa employs direct field service representatives in the U.K., Germany, Austria, Switzerland, and Ireland and
manages relationships with other independent distributors in the EMEA region. The Company employs direct field service
representatives to market its products in France through its French subsidiary, CryoLife France. Europa and CryoLife France
provide customer service, logistics, marketing, and clinical support to cardiac, vascular, thoracic, and general surgeons
throughout the EMEA region.
The Company markets and distributes its products in other international markets through independent distributors in
Canada, Asia Pacific, and the Americas. The Company’s Singapore subsidiary, CryoLife Asia Pacific, provides sales and
marketing support for the Asia Pacific region.
Suppliers, Sources, and Availability of Raw Materials and Tissues
The Company obtains many of its raw materials and supplies from a small group of suppliers or a single-source supplier.
CryoLife also distributes various products through distribution agreements with the manufacturers. Certain raw materials and
components used in the Company’s products and tissue processing have stringent specifications. Supply interruptions or
supplier quality, financial, or operational issues could cause the Company to have to temporarily reduce, temporarily halt, or
permanently halt manufacturing, processing, or distribution activities. Qualifying alternative suppliers could result in
additional costs or lengthy delays, or may not be possible. Any of these adverse outcomes could have a material, adverse
effect on the Company’s revenues or profitability. Supplies of materials are discussed for each of the Company’s main
products and services below. See also Part I, Item 1A, “Risk Factors.”
The Company’s BioGlue and BioFoam products have three main product components: bovine protein, a cross linker,
and a molded plastic resin delivery device. The bovine protein and cross linker are obtained from a small number of
qualified suppliers. The delivery devices are manufactured by a single supplier, using resin supplied by a single resin
supplier. The Company maintains a significant inventory of finished delivery devices to help mitigate the effects of a
potential supply interruption.
The Company purchases grafts for its On-X AAP from a single supplier. The Company maintains an inventory of grafts
to help mitigate the effects of a potential supply interruption.
The Company purchases laser consoles and handpieces for its CardioGenesis cardiac laser therapy product line each
from a separate single-source contract manufacturer. Using a secondary supplier for the laser consoles may be difficult
because of certain of this manufacturer’s patent rights. In addition, these manufacturers obtain certain laser and fiber-optic
components and subassemblies from single sources. CryoLife’s business is subject to interruption if either of these contract
manufacturers or their suppliers became unable or unwilling to do business with CryoLife.
The Company purchases PerClot from SMI pursuant to a distribution agreement. The Company maintains an inventory
of PerClot purchased from SMI and places orders for additional product. CryoLife’s business may be subject to interruption
if SMI were unable or became unwilling to supply PerClot to CryoLife for a sustained period of time.
The Company’s preservation services business and its ability to supply needed tissues is dependent upon donation of
tissues from human donors by donor families. Donated human tissue is procured from deceased human donors by OTPOs.
The Company must rely on the OTPOs that it works with to educate the public on the need for donation, to foster a
willingness to donate tissue, to follow CryoLife’s donor screening and procurement procedures, and to send donated tissue to
CryoLife. Since 1984 the Company has received tissue from over 142,000 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 also uses various raw materials, including medicines and solutions in its
processing. Some of these raw materials are manufactured by single suppliers or by a small group of suppliers. All of these
factors subject CryoLife to risk of supply interruption.
13
Operations, Manufacturing, and Tissue Preservation
The Company maintains a facility, which contains its corporate headquarters and laboratory space, and an additional off-
site warehouse both located in Kennesaw, Georgia. The Company manufactures BioGlue and BioFoam and processes tissues
at the Company’s headquarters facility. The Company is also beginning to manufacture PerClot for use in the U.S. clinical
trial, and is transferring manufacturing of PhotoFix to the Company’s headquarters facility. The Company’s corporate
headquarters also includes a CardioGenesis cardiac laser therapy maintenance and evaluation laboratory space. The
Company’s On-X facility consists of combined manufacturing, warehouse, and office space in Austin, Texas, where On-X
products, including On-X heart valves and AAPs are manufactured. The Company maintains a facility of combined
manufacturing and office space in Atlanta, Georgia, which is available for future manufacturing operations, and additional
office space in Kennesaw, Georgia, which the Company currently sublets to a third party. The Company’s European
subsidiary, Europa, leases office space in Guildford, England, and shared warehousing space through its third-party shipper.
See also Part I, Item 2, “Properties.”
In all of the Company’s facilities, the Company is subject to regulatory standards for good manufacturing practices,
including current Quality System Regulations, which are the FDA regulatory requirements for medical device manufacturers,
and current Good Tissue Practices (“cGTPs”), which are the FDA regulatory requirements for the processing of human
tissue. 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. The Company works with two Notified Bodies that are officially recognized by the EU to perform assessments
of compliance with ISO 13485 and the Medical Device Directive. LNE/G-Med (“G-Med”) acts as the Company’s Notified
Body for the On-X product line, and Lloyd’s Register Quality Assurance Limited (“LRQA”) acts as the Company’s Notified
Body for the Company’s other product lines. LRQA and G-Med perform periodic on-site inspections to review
independently the Company’s compliance with systems and regulatory requirements. The Medical Device Directive is the
governing document for the EEA that details requirements for safety and risk. G-Med and LRQA also performs assessments
of compliance with the Canadian Medical Devices Conformity Assessment System (“CMDCAS”).
The Company employs a comprehensive quality assurance program in its product manufacturing and tissue preservation
activities. Materials, solutions, and components utilized in the Company’s manufacturing and tissue processing are received
and inspected by trained quality control personnel according to written specifications and standard operating procedures, and
those items found to comply with Company standards are utilized in the Company’s operations. Materials, components, sub-
assemblies, and tissues are documented throughout manufacturing or processing to assure traceability.
The Company evaluates and inspects both its manufactured and distributed products to ensure conformity to product
specifications. Processes are validated to produce products meeting the Company’s specifications. Each process is
documented along with 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 maintains controls over its tissue processing to ensure conformity with Company procedures. OTPOs
must follow the Company’s policies related to tissue recovery practices, and are subject to periodic audits to confirm
compliance. Samples are taken from donated tissue for microbiological testing, and tissue must be shown to be free of
certain detectable microbial contaminants before being released for distribution. Tissue processing records and donor
information is reviewed to identify characteristics that would disqualify the tissue for processing or implantation. Once tissue
is released for distribution, it is moved from quarantine to an implantable status. Tissue is stored by the Company until it is
shipped to a hospital, where the tissue is thawed and implanted immediately or held in a liquid nitrogen freezer pending
implantation.
Government Regulation
Medical devices and human tissues are subject to a number of regulations from various government bodies including in
the U.S., federal, state, and local governments, as well as various regulatory bodies internationally. Government regulations
are continually evolving, and requirements may change with or without notice. Changes in government regulations or
changes in the enforcement of existing government regulations could have a material, adverse impact on the Company. See
also Part I, Item 1A, “Risk Factors.”
14
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. Medical devices
may receive such approval or clearance through either a 510(k) process or an investigational device exemption (“IDE”) and
PMA process.
Under a Section 510(k) process, a medical device 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. To
be found substantially equivalent to a predicate device, the device must be for the same intended use and 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.
FDA regulations require approval through the IDE/PMA process for all Class III medical devices and for medical
devices not deemed substantially equivalent to a predicate device. An IDE authorizes distribution of devices that lack PMA
or 510(k) clearance for clinical evaluation purposes. After a product is subjected to clinical testing under an IDE, the
Company may file a PMA application. 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.
Marketing of the device may begin when the FDA has approved the PMA.
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 they distribute commercially. FDCA also requires manufacturers of medical
devices to comply with labeling requirements and to manufacture devices in accordance with Quality System Regulations,
which require that companies manufacture their products and maintain their documents in compliance with good
manufacturing practices, including: design, document production, process, labeling and packaging controls, process
validation, and other applicable 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 periodically inspects Company facilities to review Company
compliance with these and other regulations 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.
The following Company products are, or would, upon approval, be classified as Class III medical devices: BioGlue,
BioFoam, On-X heart valve, On-X AAP, PerClot, ProCol, and CardioGenesis cardiac laser therapy. CryoPatch SG and
HeRO Graft are classified as Class II medical devices. CryoLife obtained 510(k) clearance from the FDA to market the
CryoValve SGPV; however, these tissues are not officially classified as Class II or III medical devices.
In October 2014 the FDA convened an advisory committee meeting to consider the FDA’s recommendation to reclassify
more than minimally manipulated (“MMM”) allograft heart valves from an unclassified medical device to a Class III medical
device. The class of MMM allograft heart valves includes our CryoValve SGPV. At the meeting, a majority of the advisory
committee panel recommended to the FDA that MMM allograft heart valves be re-classified as a Class III product. If the
FDA issues a proposal for reclassification of MMM allograft heart valves, it will be subject to a public comment period
before finalization. After publication of the reclassification rule, the Company expects to have thirty months to submit for a
PMA, after which the FDA will determine if, and for how long, the Company may continue to provide these tissues to
customers. To date, the FDA has not issued a proposed reclassification for MMM allograft heart valves. See also Part I,
Item 1A, “Risk Factors—Risks Relating To Our Business— Reclassification by the FDA of CryoValve SGPV may make it
commercially infeasible to continue processing the CryoValve SGPV”.
U.S. Federal Regulation of Human Tissue
The FDA regulates human tissues pursuant to Section 361 of the Public Health Services Act, which in turn provides the
regulatory framework for regulation of human cellular and tissue products. The FDA regulations focus on donor screening
and testing to prevent the introduction, transmission, and spread of HIV-1 and -2, Hepatitis B and C, and other communicable
diseases and disease agents. 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
15
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, product listing, testing, and screening for risks of communicable diseases. The FDA
periodically audits the Company’s tissue preservation facilities for compliance with its requirements and has the authority to
enjoin, force a recall, or require the destruction of tissues that do not meet its requirements.
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.
State Licensing Requirements
Some states have enacted statutes and regulations governing the manufacture, sale, or distribution of medical devices,
and the Company believes it is in compliance with such applicable state laws and regulations.
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, and Oregon 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.
Certain employees of the Company have obtained other required state licenses. The regulatory bodies of states may
perform inspections of the Company’s facilities as required to ensure compliance with state laws and regulations.
International Approval Requirements
Sales of medical devices and shipments of human tissues outside the U.S. are subject to international regulatory
requirements that vary widely from country to country. Approval of a product by comparable regulatory authorities of other
countries must be obtained and compliance with applicable regulations for tissues must be met prior to commercial
distribution of the products or human tissues in those countries. The time required to obtain these approvals may be longer or
shorter than that required for FDA approval. Countries in which CryoLife distributes products and tissue may perform
inspections of the Company facilities to ensure compliance with local country regulations.
The EEA recognizes a single medical device approval, called a CE Mark, which allows for distribution of an approved
product throughout the EEA 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. LRQA and G-Med perform periodic on-site inspections
to review independently the Company’s compliance with systems and regulatory requirements. 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, BioFoam, On-X heart valve, On-X AAP, and CardioGenesis
cardiac laser therapy consoles and handpieces. See Certifications, Accreditations, and Inspections below for further
discussion of the On-X AAP CE Mark. Additionally, PerClot, which the Company distributes, has a CE Mark.
The EU Tissue and Cells Directives (“EUTCD”) established an approach to the regulation of tissues and cells across
Europe. Pursuant to the EUTCD, each country in the EEA has responsibility for regulating tissues and cells and the
procurement and distribution of tissues and cells for use in humans through a Competent Authority. The Competent
Authority in the U.K. is the Human Tissue Authority (“HTA”). Europa was a “Licensed Establishment” under HTA
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Directions. In 2013 the HTA temporarily suspended Europa’s licenses but shortly thereafter reinstated them subject to
certain conditions, which allowed Europa to continue importing tissues into Europe. Subsequently, the HTA imposed certain
additional tissue processing requirements for tissues imported into Europe through the HTA license. Management did not
believe those requirements were necessary in order to ensure the safety of the processed tissue, and, as a result, Europa
ceased importing tissues into Europe through the HTA licenses as of March 31, 2014.
CryoLife currently distributes tissues through a special access program in Germany. In the first half of 2015 Germany’s
regulatory authorities and Europa were in discussions regarding requirements to allow Europa to market tissue in Germany.
Europa was unable to reach a satisfactory agreement with the German authorities regarding those requirements, and although
nominal shipments under the special access program have continued in 2016, there can be no assurance that the German
authorities will continue to allow shipments of tissues under this program in the future.
Recent Regulatory Approvals
New country listings were obtained during 2016 to allow additional distribution of certain products into international
markets, including PerClot and Cardiogenesis cardiac laser therapy products.
Certifications, Accreditations, and Inspections
In April 2016 the Korea Food & Drug Administration conducted a routine inspection of the Company. No observations
were identified.
In August 2016 the American Association of Tissue Banks conducted an on-site inspection as part of their routine
recertification process. Any minor nonconformities identified during the audit were subsequently resolved.
In September and October 2016 LRQA conducted a routine surveillance assessment to ISO 13485:2003 and Canadian
CMDCAS requirements. Any minor nonconformities identified during the audit were subsequently resolved.
In November 2016 the Company received a notice from G-Med that it was suspending the CE Mark for the On-X AAP
in the EEA until a previously submitted and approved remediation plan for this device was completed. The Company is in
the process of completing the requirements of the remediation plan. See also Part I, Item 1A, “Risk Factors—Risks Relating
To Our Business—Our revenues for the On-X AAP in Europe may be adversely affected by a temporary suspension of the
On-X AAP’s CE-Mark” for further discussion of the On-X AAPs European regulatory status.
All other registrations, licensures, certifications, and accreditations were renewed or continued, and no regulatory actions
are pending from state inspections.
Backlog
The Company currently does not have a backlog of orders related to BioGlue, BioFoam, On-X heart valves, On-X AAPs,
CardioGenesis cardiac laser therapy, PerClot, or PhotoFix. The limited supply of certain types or sizes of preserved tissue
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 of human tissue of more than $4
million consists mostly of pediatric tissues that have limited availability. The Company’s backlog is generally not considered
firm and must be confirmed with the customer before shipment.
Research and Development and Clinical Research
The Company uses its technical and scientific expertise to identify market opportunities for new products or services or
to expand the use of its current products and services, through expanded indications or product or tissue enhancements. The
Company’s research and development strategy is to allocate most of its available resources among the Company’s core
market areas based on the potential market size, estimated development time and cost, and the expected efficacy for any
potential product or service offering. To the extent the Company identifies new non-core products or additional applications
for its core products, the Company may attempt to license these products to corporate partners for further development or
seek funding from outside sources to continue commercial development. The Company may also attempt to acquire or
license additional strategically complementary products or technologies from third parties to supplement its product lines.
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, under the supervision of the Company’s medical and
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scientific advisory board. The Company also conducts preclinical and clinical studies at universities, medical centers,
hospitals, and other third-party locations under contract with the Company. Research is inherently risky, and any potential
products or tissues under development ultimately may not be deemed safe or effective or worth commercializing for other
reasons and, therefore, may not generate a return on investment for the Company. The Company’s clinical research
department also collects and maintains clinical data on the use and effectiveness of its products and services. The Company
uses this data to inform third parties on the benefits of the Company’s products and services and to help direct its continuing
improvement efforts.
In 2016, 2015, and 2014 the Company spent approximately $13.4 million, $10.4 million, and $8.7 million, respectively,
on research and development activities on new and existing products. These amounts represented approximately 7%, 7%,
and 6% of the Company’s revenues for each of 2016, 2015, and 2014, respectively.
CryoLife is in the process of developing or investigating several new products and technologies, as well as changes and
enhancements to its existing products and services. The Company’s strategies for driving growth include new product
approvals, new product indications, global expansion, and business development. These activities will likely require
additional research, new clinical studies, and/or compilation of clinical data.
The Company is currently seeking regulatory approval for BioGlue in China. The Company is currently working with
the Chinese regulatory authorities and its consulting partners to develop clinical protocols to pursue this approval. Study
sites have been selected and enrollment is expected to begin in 2017.
The Company is currently conducting clinical trials on the safety and efficacy of additional sizes of On-X aortic and
mitral heart valves. These studies are ongoing and enrollment is expected to continue throughout 2017.
The Company is currently conducting a clinical trial to assess reduced levels of required anticoagulation or warfarin for
its On-X mitral heart valves. This study is ongoing and enrollment is expected to continue throughout 2017.
The Company is currently conducting a 50 plus patient, first in man, single arm clinical study to evaluate NeoPatchTM
outcomes in a real world population of diabetic foot ulcers. NeoPatch is an allograft derived from human amniotic tissue that
can be used, among other things, as a covering in advanced wound care to treat diabetic foot ulcers and venous leg ulcers. The
12-week follow-up on this initial series is expected to be completed in May 2017.
At the FDA’s request, the Company is conducting a post-approval study to collect long-term clinical data for the On-X
aortic heart valve with reduced warfarin therapy. This study is ongoing and data collection is expected to continue throughout
2017.
The Company is conducting its pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in
the U.S. The Company began enrollment in the trial in the second quarter of 2015 but later suspended enrollment pending
consultation with the FDA regarding the trial protocol. These discussions resulted in two amendments to the trial protocol,
the last of which was approved by the FDA in July 2016. The Company is in the process of conducting site start-up activities
and resumed enrollment into the trial in the fourth quarter of 2016 with the goal of receiving PMA from the FDA in the first
half of 2019. See also Part I, Item 1A, “Risk Factors—Risks Relating To Our Business—Our investment in PerClot is
subject to significant risks, and our ability to fully realize our investment is dependent on our ability to obtain FDA approval
and to successfully commercialize PerClot in the U.S.”
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 has also obtained additional rights through license and distribution agreements for additional products and
technologies, including PerClot. The Company owns or has licensed rights to 38 U.S. patents and 11 foreign patents,
including patents that relate to its technology for BioGlue and BioFoam, PHT, On-X heart valves, CardioGenesis cardiac
laser therapy, PerClot, cardiac and vascular tissue preservation, and decellularization of tissue. The Company has 15 pending
U.S. patent applications and 8 pending foreign applications that relate to the Company’s products and services. There can be
no assurance that any patent applications pending will ultimately be issued as patents.
The remaining duration of the Company’s issued patents range from 2 months to 14 years. The main patent for BioGlue
expired in mid-2012 in the U.S. and expired in mid-2013 in the majority of the rest of the world. Although the patent for
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BioGlue has expired, this technology is still protected by trade secrets and manufacturing know-how, as well as the time and
expense to obtain regulatory approvals.
The Company has 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
the Company’s employees 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.
See Part I, Item 1A, “Risk Factors” for a discussion of risks related to the Company’s patents, licenses, and other
proprietary rights.
Seasonality
See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Seasonality,” regarding seasonality of the Company’s products and services.
Employees
As of December 31, 2016 CryoLife and its subsidiaries had approximately 665 employees. 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.
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, the Georgia Department of
Natural Resources, Environmental Protection Division, and the Texas Commission on Environmental Quality, the failure by
the Company, or the companies with which it contracts, to comply fully with any such regulations could result in an
imposition of penalties, fines, or sanctions, which could materially, adversely affect the Company’s business.
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.
Available Information
It is the Company’s policy to make all of its filings with the Securities and Exchange Commission, 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, available free of
charge on the Company’s website, www.cryolife.com, on the day of filing. All such filings made on or after November 15,
2002 have been made available on this website.
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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 them.
BioGlue® Surgical Adhesive (“BioGlue”) is a significant source of our revenues, representing approximately 35% and
40% of revenues in the twelve months ended December 31, 2016 and 2015, respectively. The following could materially,
adversely affect our revenues, financial condition, profitability, and cash flows:
(cid:120) BioGlue is a mature product, our U.S. Patent for BioGlue expired in mid-2012, and our patents in most of the rest of
the world for BioGlue expired in mid-2013. Other companies may use the inventions disclosed in the expired
patents to develop and make competing products;
(cid:120) One other company has launched competitive products in 2016 and one other is in the process of doing so. These
companies have greater financial, technical, manufacturing, and marketing resources than we do and are well
established in their markets. Companies other than these may also pursue regulatory approval for competitive
products;
(cid:120) We may be unable to obtain regulatory approvals to commercialize BioGlue in certain countries other than the U.S.
at the same rate as our competitors or at all. We also may not be able to capitalize on new regulatory approvals we
obtain for BioGlue in countries other than the U.S., including approvals for new indications;
(cid:120) BioGlue contains a bovine blood protein. Animal-based products are increasingly subject to scrutiny from the
public and regulators, who may have concerns about the use of animal-based products or concerns about the
transmission of disease from animals to humans. These concerns could lead to additional regulations or product
bans in certain countries; and
(cid:120) BioGlue is subject to potential adverse developments with regard to its safety, efficacy, or reimbursement practices.
We are significantly dependent on our revenues from tissue preservation services and are subject to a variety of risks
affecting them.
Tissue preservation services are a significant source of our revenues, representing 37% and 43% of revenues in the
twelve months ended December 31, 2016 and 2015, respectively. The following could materially, adversely affect our
revenues, financial condition, profitability, and cash flows, if we are unable to:
(cid:120) Source sufficient quantities of some tissue types from human donors or address potential excess supply of other
tissue types. 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. Factors beyond
our control such as supply, regulatory changes, negative publicity concerning methods of tissue recovery or disease
transmission from donated tissue, or public opinion of the donor process as well as our own reputation in the
industry can negatively impact the supply of tissue;
(cid:120) Process donated tissue cost effectively or at all due to factors such as employee turnover, ineffective or inefficient
operations, or an insufficiently skilled workforce;
(cid:120) Compete effectively in tissue preservation services, as our competitors may have advantages over us in terms of cost
structure, pricing, back-office automation, marketing and sourcing tissue; or
(cid:120) Mitigate sufficiently the risk that processed tissue cannot be sterilized and hence carries an inherent risk of infection
or disease transmission; there is no assurance that our quality controls will be adequate to mitigate such risk.
In addition, U.S. and foreign governments and regulatory agencies have adopted restrictive laws, regulations, and rules
that apply to our tissue preservation services. These include but are not limited to:
(cid:120) The National Organ Transplant Act of 1984 or “NOTA”, which prohibits the acquisition or transfer of human organs
for valuable consideration for use in human transplantation, but allows for the payment of reasonable expenses
associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of
human organs;
(cid:120) 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; and
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(cid:120) European Union directives, called the EUCTD, which require that countries in the European Economic Area take
responsibility for regulating tissues and cells through a Competent Authority.
Any of these laws, regulations, and rules or others could change, or the U.S., state, or foreign governments and
regulatory agencies could adopt more restrictive laws or regulations in the future regarding tissue preservation services that
could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
We may not realize all of the anticipated benefits of the On-X acquisition.
On January 20, 2016, we acquired On-X, at a price of $128.2 million, subject to certain adjustments, which is the largest
acquisition we have ever made. Pursuant to the acquisition, we borrowed $75.0 million through a senior secured credit
facility, subject to certain restrictions on our business, and we issued shares of common stock worth, at the time,
approximately $34.6 million.
Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits
of the On-X acquisition continues to depend on a number of factors including:
(cid:120) The success of our integration of the direct sales forces of On-X and CryoLife into a single sales force to sell, with
limited exception, the entire suite of products of the combined businesses;
(cid:120) Our ability to successfully manage independent sales representatives and distributor relationships, particularly
internationally;
(cid:120) The success of moving to a direct sales model with the On-X products in certain international markets;
(cid:120) Our ability to resolve unanticipated or undisclosed pre-existing On-X liabilities including any regulatory or quality
issues;
(cid:120) Our ability to execute on existing On-X clinical trials in a timely and cost effective manner;
(cid:120) Our ability to retain existing customers and obtain new customers for On-X products; and
(cid:120) Unforeseen negative economic or market conditions impacting the On-X business.
Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues
and diversion of management’s time and energy, which could materially, adversely impact our business, financial condition,
profitability, and cash flows. As a result of these or other factors, we may not realize the full benefits of the acquisition,
including achieving anticipated sales, capitalizing on the FDA’s approved reduced international normalized ratio (“INR”)
indication and other growth opportunities, capturing market share from major competitors, all of whom are substantially
larger and better resourced than CryoLife, or realizing expected synergies and costs savings. These benefits may not be
achieved within the anticipated time frame or at all. Any of these factors could negatively impact our earnings per share,
decrease or delay the expected accretive effect of the acquisition, and negatively impact the price of our common stock. In
addition, if we fail to realize the anticipated benefits of the acquisition, we could experience an interruption or loss of
momentum in our existing business activities, which could adversely affect our revenues, financial condition, profitability,
and cash flows.
We are significantly dependent on our revenues from On-X and are subject to a variety of risks affecting them.
On-X is a significant source of our revenues, representing 19% of revenues in the twelve months ended December 31,
2016. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:
(cid:120) Our ability to achieve anticipated sales of On-X products;
(cid:120) Our ability to capitalize on the FDA’s approved reduced INR indication;
(cid:120) Our ability to overcome high levels of inventory in certain markets;
(cid:120) Our ability to compete effectively with our major competitors, as they may have advantages over us in terms of cost
structure, pricing, sales force footprint, and brand recognition;
(cid:120) Our ability to manage the risks associated with less favorable contract terms for On-X products on consignments at
hospitals with more bargaining power; and
(cid:120) Changes in technology that may impact the market for mechanical heart valve and transcatheter aortic valve
replacement, or TAVR devices.
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Our revenues for the On-X AAP in Europe may be adversely affected by a temporary suspension of the On-X AAP’s CE-
Mark.
On November 22, 2016, the Company received a letter from G-Med, indicating that it was temporarily suspending the
CE Mark for the On-X AAP in the EEA, due to an allegedly untimely plan by the Company to address certain technical
documentation issues found by G-Med during a review and renewal of the design examination certificate for the On-X AAP.
Failure to timely lift this suspension could have an adverse effect on On-X AAP revenue in 2017.
Our investment in PerClot is subject to significant risks, and our ability to fully realize our investment is dependent on our
ability to obtain FDA approval and to successfully commercialize PerClot in the U.S.
In 2010 and 2011, we entered into various agreements with SMI pursuant to which, among other things, we (a) may
distribute PerClot in certain international markets and are licensed to manufacture PerClot in the U.S.; (b) acquired the
technology to produce the key component in the manufacture of PerClot; and (c) obtained the exclusive right to pursue,
obtain, and maintain FDA Premarket Approval (“PMA”) for PerClot. The initial consideration under those SMI agreements
was approximately $8.0 million paid in cash and stock. We made additional payments of $1.75 million through 2016 and
may pay contingent amounts of up to an additional $1.0 million if certain U.S. regulatory and other commercial milestones
are achieved. We may also pay SMI, subject to certain offsets, royalties on our future sales of PerClot that we manufacture.
In March 2014, we received approval of our investigational device exemption (“IDE”) for PerClot from the FDA,
pursuant to which we began, in the first half of 2015, our pivotal clinical trial for surgical indications in the U.S.
The Company began enrollment in the trial in the second quarter of 2015 but later suspended enrollment pending consultation
with the FDA regarding the trial protocol. These discussions resulted in two amendments to the trial protocol, the last of
which was approved by the FDA in July 2016. The Company is in the process of conducting site start-up activities and
resumed the enrollment process into the trial in the fourth quarter of 2016 with the goal of receiving PMA from the FDA in
the first half of 2019. Under our agreements with SMI, SMI may seek to terminate our exclusive license to pursue, obtain,
and maintain the PMA if we do not secure such approval for PerClot by October of 2017 and if the parties are unable to
modify this provision of the agreement through contractually required negotiations. Even though the FDA has approved the
revised protocol, we may not be able to continue, or may elect to discontinue, the PerClot IDE. Finally, under the terms of
our resolution with Medafor, we are precluded from marketing, selling or distributing PerClot in the U.S. until February 8,
2019, even if we obtain FDA Premarket Approval for PerClot before that date.
We will not be able to sell PerClot for surgical indications in the U.S. in future years unless, and until, we obtain FDA
approval and only after the Medafor injunction has expired on February 8, 2019. Failure to obtain FDA approval could
materially, adversely affect our financial condition, anticipated future revenues, and profitability. There is no guarantee that
we will obtain FDA approval when anticipated, or at all. The estimated timing of regulatory approval for PerClot is based on
factors beyond our control, including but not limited to, the pace of enrollment in the IDE and the approval process may be
delayed because of unforeseen scheduling difficulties and unfavorable results at various stages in the IDE or the process.
Management may also decide to delay or terminate our pursuit of U.S. regulatory approval for PerClot at any time due to
changing conditions in our Company, in the marketplace, or in the economy in general.
Finally, even if we receive FDA PMA for PerClot, we may be unsuccessful in selling PerClot in the U.S. as competing
products may have penetrated the market by the time we receive FDA approval and have substantial market share or
significant market protections due to contracts, among other things. We may also be unsuccessful in selling in countries
other than the U.S. due, in part, to a proliferation in other countries of multiple generic competitors, SMI’s breach of its
contractual obligations, or the lack of adequate intellectual property protection or enforcement. Any of these occurrences
could materially, adversely affect our future revenues, financial condition, profitability, and cash flows.
Reclassification by the FDA of CryoValve® SGPV may make it commercially infeasible to continue processing the
CryoValve SGPV.
In October 2014 the FDA convened an advisory committee meeting to consider the FDA’s recommendation to re-
classify more than minimally manipulated (“MMM”) allograft heart valves from an unclassified medical device to a Class III
medical device. The class of MMM allograft heart valves includes our CryoValve SG pulmonary heart valve (“CryoValve
SGPV”). At the meeting, a majority of the advisory committee panel recommended to the FDA that MMM allograft heart
valves be re-classified as a Class III product. We expect that the FDA will issue a proposal for reclassification of MMM
allograft heart valves, which will be subject to a public comment period before finalization. After publication of the
reclassification rule, we expect to have thirty months to submit for an FDA Premarket Approval, after which the FDA will
22
determine if, and for how long, we may continue to provide these tissues to customers. To date, the FDA has not issued a
proposed reclassification for MMM allograft heart valves.
We have continued to process and ship our CryoValve SGPV tissues. However, if the FDA ultimately classifies our
CryoValve SGPV as a Class III medical device, we anticipate requesting a meeting with the FDA to determine the specific
requirements to file for and obtain a Premarket Approval, and we will determine an appropriate course of action in light of
those requirements. If there are delays in obtaining the Premarket Approval, if we are unsuccessful in obtaining the
Premarket Approval, or if the costs associated with these activities are significant, this could materially, adversely affect our
revenues, financial condition, profitability, and/or cash flows in future periods. In addition, we could decide that the
requirements for obtaining a Premarket Approval make continued processing of the CryoValve SGPV infeasible,
necessitating that we discontinue distribution of these tissues.
Our investment in PhotoFix is subject to a variety of risks.
In April 2016 we exercised our option and acquired the PhotoFix product line from GBI. We began distribution of
PhotoFix in the first quarter of 2015 and have continued to sell PhotoFix after the acquisition.
Simultaneously with our acquisition of the PhotoFix product line, we entered into a Transition Supply Agreement with
GBI, pursuant to which GBI will continue to manufacture product for us until we have completed the transfer of
manufacturing operations to us (the “Transition Period”). During the Transition Period, we are reliant on GBI to produce
quality products in the quantities we and our customers require. If GBI experiences quality, supply, or production challenges,
its products could be subject to recall or other quality action; its business operations and/or its facilities that make the
products could be shut down temporarily or permanently, whether by government order, natural disaster, or otherwise; and
there may not be sufficient product to enable us to meet demand. Even though we have acquired PhotoFix, we may be
unable to continue the manufacturing, marketing, or distribution of the product consistent with our current projections or
within the time frame anticipated. Further, we may be unable to secure anticipated approvals from the FDA or international
regulatory bodies to remove certain labelling restrictions or to be able to commercialize PhotoFix in key international
markets, such as Europe. Any of these occurrences or actions could materially, adversely affect our revenues, financial
condition, profitability, and cash flows.
Our products and tissues are highly regulated and subject to significant quality and regulatory risks.
The manufacture and sale of medical devices and processing, preservation, and distribution of human tissues are highly
complex and subject to significant quality and regulatory risks. Any of the following could materially, adversely affect our
revenues, financial condition, profitability, and cash flows:
(cid:120) Our products and tissues may be recalled or placed on hold by us, the FDA, or other regulatory bodies. For
example, in 2002 the FDA issued an order related to our cardiac patch, vascular, and orthopaedic tissues processed
from October of 2001 until August of 2002 and, pursuant to that order, we recalled these tissues or placed them on
quarantine hold. We no longer process orthopaedic tissues due, in part, to this recall;
(cid:120) Our products and tissues allegedly have caused, and may in the future cause, injury to patients, which has exposed,
and could in the future expose, us to product and tissue processing liability claims, and such claims could lead to
additional regulatory scrutiny and inspections;
(cid:120) Our manufacturing and tissue processing operations are subject to regulatory scrutiny and inspections, including by
the FDA and foreign regulatory agencies, and these agencies could require us to change or modify our
manufacturing operations, processes, and procedures;
(cid:120) Regulatory agencies could reclassify, reevaluate, or suspend our clearances and approvals to sell our products and
distribute tissues, and European Notified Bodies have recently engaged in more rigorous regulatory enforcement
activities and may continue to do so; and
(cid:120) Adverse publicity associated with our products or processed tissues or our industry could lead to a decreased use of
our products or tissues, additional regulatory scrutiny, and/or product or tissue processing liability lawsuits.
As an example of these risks, in January 2013 we received a warning letter from the FDA related to the manufacture of
our products and our processing, preservation, and distribution of human tissue, as well as a subsequent 2014 Form 483, after
a re-inspection by the FDA related to the warning letter that included observations concerning design and process validations,
environmental monitoring, product controls and handling, corrective and preventive actions, and employee training. Despite
an FDA re-inspection in the first quarter of 2015, after which the FDA closed out the warning letter issued in 2013, we
remain subject to further inspections and oversight by the FDA and, if the FDA is not satisfied with our quality and
23
regulatory compliance, it could institute a wide variety of enforcement actions, ranging from issuing additional Form 483s or
warning letters, to more severe sanctions such as fines; injunctions; civil penalties; recalls of our products and/or tissues;
operating restrictions; suspension of production; non-approval or withdrawal of approvals or clearances for new products or
existing products; and criminal prosecution. Any further Form 483s, warning letters, recalls, holds, or other adverse action
from the FDA may decrease demand for our products or tissues or cause us to write down our inventories or deferred
preservation costs and could materially, adversely affect our revenues, financial condition, profitability, and cash flows.
The outcome of the 2016 U.S. Presidential and Congressional elections might result in material changes to governmental
regulation of various aspects of our business and operations or cause disruptions to our business.
The outcome of the 2016 U.S. Presidential and Congressional election might result in material changes to governmental
regulation of various aspects of our business and operations. We devote significant operational and managerial resources to
comply with existing laws and regulations. Different interpretations and enforcement policies of existing laws and
regulations, the possible repeal of existing laws and regulations, as well as the enactment of new laws and regulations, could
require additional operational and managerial resources and could subject our current practices to allegations of impropriety
or illegality or could require us to make significant changes to our products and operations.
We may be subject to fines, penalties, injunctions and other sanctions if we are deemed to be promoting the use of our
products for unapproved, or off-label, uses.
Our business and future growth depend on the continued use of our products for specific approved uses. Generally,
unless the products are approved or cleared by FDA for the alternative uses, the FDA contends that we may not make claims
about the safety or effectiveness of our products for such uses. Such limitations present a risk that FDA or other federal or
state law enforcement authorities could determine that the nature and scope of our sales, marketing, and/or support activities,
though designed to comply with all FDA requirements, constitute the promotion of our products for an unapproved use in
violation of the FDCA. We also face the risk that the FDA or other governmental authorities might pursue enforcement
based on past activities that we have discontinued or changed, including sales activities, arrangements with institutions and
doctors, educational and training programs and other activities. Investigations concerning the promotion of unapproved uses
and related issues, are typically expensive, disruptive, and burdensome and generate negative publicity. If our promotional
activities are found to be in violation of the law, we may face significant fines and penalties and may be required to change
substantially our sales, promotion, grant, and educational activities. There is also a possibility that we could be enjoined
from selling some or all of our products for any unapproved use. In addition, as a result of an enforcement action against us
or our executive officers, we could be excluded from participation in government healthcare programs such as Medicare and
Medicaid.
We are heavily dependent on our suppliers to provide quality materials and supplies.
The materials and supplies used in our product manufacturing and our tissue processing are subject to stringent quality
standards and requirements, and many of these materials and supplies are subject to significant regulatory oversight and
action. If materials or supplies used in our processes fail to meet these standards and requirements or are subject to recall or
other quality action, an outcome could be the rejection or recall of our products or tissues and/or the immediate expense of
the costs of the manufacturing or preservation. In addition, if these materials and supplies are recalled or the related suppliers
and/or their facilities are shut down temporarily or permanently, whether by government order, natural disaster, or otherwise,
there may not be sufficient materials or supplies available for purchase to allow us to manufacture our products or process
tissues. Any of these occurrences or actions could materially, adversely affect our revenues, financial condition, profitability,
and cash flows.
We are dependent on sole source suppliers and single facilities.
Certain of the materials, supplies, and services that are key components of our product manufacturing or our tissue
processing are sourced from single vendors. As a result, our ability to negotiate favorable terms with those vendors may be
limited, and if those vendors experience operational, financial, quality, or regulatory difficulties, or those vendors and/or their
facilities cease operations temporarily or permanently, we could be forced to cease product manufacturing or tissue
processing until the vendors resume operations or alternative vendors could be identified and qualified. We could also be
forced to purchase alternative materials, supplies, or services with unfavorable terms due to diminished bargaining power.
We also conduct substantially all of our operations at two facilities—Austin, Texas for our On-X product line, and
Kennesaw, Georgia for all of our other products. If one of these facilities ceases operations temporarily or permanently, due
to natural disaster or other reason, our business could be substantially disrupted.
24
Our existing insurance coverage may be insufficient, and we may be unable to obtain insurance in the future.
Our products and tissues allegedly have caused, and may in the future cause, injury to patients using our products or
tissues, and we have been, and may be, exposed to product and tissue processing liability claims. We maintain claims-made
insurance policies to mitigate our financial exposure to product and tissue processing 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. In addition, our product and tissue processing liability insurance policies do not include coverage for any
punitive damages. Although we have insurance for product and tissue processing liabilities, securities, property, and general
liabilities, it is possible that:
(cid:120) We could be exposed to product and tissue processing liability claims and security claims greater than the amount
that we have insured;
(cid:120) We may be unable to obtain future insurance policies in an amount sufficient to cover our anticipated claims at a
reasonable cost or at all; or
(cid:120) Because we are not insured against all potential losses, natural disasters or other catastrophes could adversely impact
our business.
Any product liability claim, with or without merit, could result in an increase in our product insurance rates or our
inability to secure coverage on reasonable terms, if at all. Even in the absence of a claim, our insurance rates may rise in the
future. Any product liability claim, even a meritless or unsuccessful one, would be time-consuming and expensive to defend
and could result in the diversion of our management’s attention from our business and result in adverse publicity, withdrawal
of clinical trial participants, injury to our reputation and loss of revenue.
If we are unsuccessful in arranging acceptable settlements of future product or tissue processing liability claims or future
securities class action or derivative claims, we may not have sufficient insurance coverage and liquid assets to meet these
obligations. If we are unable to obtain satisfactory insurance coverage in the future, we may be subject to additional future
exposure from product or tissue processing liability or securities claims. Additionally, if one or more claims with respect to
which we may become, in the future, a defendant should result in 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 affect our financial condition,
profitability, and cash flows. Further, although we have an estimated reserve for our unreported product and tissue
processing liability claims for which we do expect that we will obtain recovery under our insurance policies, these costs
could exceed our current estimates. Finally, our facilities could be materially damaged by tornadoes, flooding, other natural
disasters, or catastrophic circumstances, for which we are not fully covered by business interruption and disaster insurance,
and, even with such coverage, we could suffer substantial losses in our inventory and operational capacity, along with a
potential adverse impact on our customers and opportunity costs for which our insurance would not compensate us.
Any of these events could have a material, adverse impact on our revenues, financial condition, profitability, and cash
flows.
We operate in highly competitive market segments, face competition from large, well-established medical device
companies with significant resources and may not be able to compete effectively.
The market for our products and services is intensely competitive and significantly affected by new product introductions
and activities of other industry participants. We face intense competition from other companies engaged in the following
lines of business:
(cid:120) The sale of mechanical, synthetic, and animal-based tissue valves for implantation;
(cid:120) The sale of synthetic and animal-based patches for implantation;
(cid:120) The sale of surgical adhesives, surgical sealants, and hemostatic agents; and
(cid:120) The processing and preservation of human tissue.
A significant percentage of market revenues from these products was generated by Baxter International Inc., Ethicon (a
Johnson & Johnson Company), Medtronic, Inc., Abbott Laboratories, LivaNova PLC, Edwards Life Sciences Corp., C.R.
Bard, Inc., Integra Life Sciences Holdings, or LifeNet. Several of our competitors enjoy competitive advantages over us,
including:
(cid:120) Greater financial and other resources for product research and development, sales and marketing, acquisitions, and
patent litigation;
25
(cid:120) Enhanced experience in, and resources for, launching, marketing, distributing, and selling products;
(cid:120) Greater name recognition as well as more recognizable trademarks for products similar to the products that we sell;
(cid:120) More established record of obtaining and maintaining FDA and other regulatory clearances or approvals for
products and product enhancements;
(cid:120) More established relationships with healthcare providers and payors;
(cid:120) Lower cost of goods sold or preservation costs;
(cid:120) Advanced systems for back office automation, product development and manufacturing, which may provide certain
cost advantages; and
(cid:120) Larger direct sales forces and more established distribution networks.
Our competitors may develop services, products or processes with significant advantages over the products, services and
processes that we offer or are seeking to develop, and our products and tissues may not be able to compete successfully. If
we are unable to successfully market and sell innovative and in-demand products and services, our competitors may gain
competitive advantages that may be difficult to overcome. In addition, consolidation among our competitors may make it
more difficult for us to compete effectively. If we fail to compete effectively, this could materially, adversely affect our
revenues, financial condition, profitability, and cash flows.
If we experience decreasing prices for our goods and services and we are unable to reduce our expenses, our results of
operations will suffer.
We may experience decreasing prices for our goods and services due to pricing pressure experienced by our customers
from managed care organizations and other third-party payers, increased market power of our customers as the medical
device industry consolidates, and increased competition among medical engineering and manufacturing services providers. If
the prices for our goods and services decrease and we are unable to reduce our expenses, our results of operations will be
adversely affected.
Certain of our products and technologies are subject to significant intellectual property risks and uncertainty.
We own 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 we believe 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 or license.
We have obtained licenses from third parties for certain patents and patent application rights, including rights related to
our PerClot technologies. These licenses allow us to use intellectual property rights owned by or licensed to these third
parties. We do not control the maintenance, prosecution, enforcement or strategy for many of these patents or patent
application rights and as such are dependent in part on the owners of the intellectual property rights to maintain their
viability. Their failure to do so could significantly impair our ability to exploit those technologies.
Furthermore, competitors may independently develop similar technologies or duplicate our technologies or design
around the patented aspects of such technologies. In addition, our technologies or products or services could infringe patents
or other rights owned by others, or others could infringe our patents. If we become involved in a patent dispute, the costs of
the dispute could be expensive, and if we were to lose or decide to settle the dispute, the amounts or effects of the settlement
or award by a tribunal could be costly. For example, in 2015 we resolved a patent infringement case with Medafor related to
technology we licensed from SMI. The settlement of that patent infringement case resulted in the continuation of an
injunction prohibiting us from marketing, selling, or distributing PerClot in the U.S. until February 8, 2019. We incurred
substantial attorneys’ fees and costs in pursuing and defending that case, and only a portion of those fees and costs are subject
to recovery through indemnification. Should we be forced to sue a potential infringer, if we are unsuccessful in prohibiting
infringements of our patents, should the validity of our patents be successfully challenged by others, or if we are sued by
another party for alleged infringement (whether we ultimately prevail or not), our revenues, financial condition, profitability,
and cash flows could be materially, adversely affected.
We may be subject to damages resulting from claims that we, our employees, or our independent contractors have
wrongfully used or disclosed alleged trade secrets of others.
Some of our employees were previously employed at other medical device or tissue companies. We may also hire
additional employees who are currently employed at other medical device or tissue companies, including our competitors.
Additionally, consultants or other independent agents with which we may contract may be or have been in a contractual
arrangement with one or more of our competitors. Although no claims against us are currently pending, we may be subject to
26
claims that these employees or independent contractors have used or disclosed any party's trade secrets or other proprietary
information. Litigation may be necessary to defend against these claims. Even if we are successful in defending against
these claims, litigation could result in substantial costs and be a distraction to management. If we fail to defend such claims,
in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key
personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely
harm our business.
Our key growth vectors may not generate anticipated benefits.
Our strategic plan is focused on four growth vectors, primarily in the cardiac surgery segment, which are expected to
drive our business in the near term. These growth vectors and their key elements are described below:
(cid:120) New Products – Drive growth through new products including the On-X heart valve;
(cid:120) New Indications – Broaden the reach of certain of the Company’s products, including the On-X heart valve and
BioGlue, with new or expanded approvals and indications in the U.S. or in international markets;
(cid:120) Global Expansion – Expand the Company’s current products and services into new markets, including emerging
markets, and accelerate growth by developing new direct sales territories overseas; and
(cid:120) Business Development – Selectively pursue potential acquisition, licensing, or distribution rights of companies or
technologies that complement CryoLife’s existing products, services, and infrastructure and expand our footprint in
the cardiac surgery space, such as the recent acquisition of On-X, as well as divestitures of certain of our non-
cardiac surgery product lines, such as the HeRO Graft in 2016, and licensing of products developed internally with
non-cardiac applications. To the extent the Company identifies new non-core products or additional applications for
its core products, the Company may attempt to license these products to corporate partners for further development
or seek funding from outside sources to continue commercial development.
Although management continues to implement these strategies, we cannot be certain that they will ultimately drive
business expansion and enhance shareholder value.
We continue to evaluate expansion through acquisitions of, or licenses with, investments in, and distribution
arrangements with, other companies or technologies, which may carry significant risks.
One of our growth strategies is to selectively pursue potential acquisition, licensing, or distribution rights of companies
or technologies that complement CryoLife’s existing products, services, and infrastructure. In connection with one or more
of the acquisition transactions, we may:
Issue additional equity securities that would dilute our stockholders’ ownership interest in us;
(cid:120)
(cid:120) Use cash that we may need in the future to operate our business;
(cid:120)
(cid:120) Structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not
Incur debt, including on terms that could be unfavorable to us or debt that we might be unable to repay;
permit a step-up in the tax basis for the assets acquired;
(cid:120) Be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional
sales;
(cid:120) Be unable to integrate, upgrade, or replace the purchasing, accounting, financial, sales, billing, employee benefits,
payroll, and regulatory compliance functions of an acquisition target;
(cid:120) Be unable to secure or retain the services of key employees related to the acquisition;
(cid:120) Be unable to succeed in the marketplace with the acquisition; or
(cid:120) Assume material unknown liabilities associated with the acquired business.
As an example of these risks, we recently acquired On-X, which we financed by incurring further debt, using cash on
hand, and issuing additional equity securities. This acquisition poses many of the same risks as set forth above.
Any of the above risks, should they occur, could materially, adversely affect our revenues, financial condition, profitability,
and cash flows, including the inability to recover our investment or cause a write down or write off of such investment,
associated goodwill, or assets.
27
Our charges to earnings resulting from acquisition, restructuring and integration costs may materially adversely affect the
market value of our common stock.
We account for the completion of our acquisitions using the purchase method of accounting. We allocate the total
estimated purchase prices to net tangible assets, amortizable intangible assets and indefinite-lived intangible assets, and based
on their fair values as of the date of completion of the acquisitions, record the excess of the purchase price over those fair
values as goodwill. Our financial results, including earnings per share, could be adversely affected by a number of financial
adjustments required in purchase accounting including the following:
(cid:120) We will incur additional amortization expense over the estimated useful lives of certain of the intangible assets
acquired in connection with acquisitions during such estimated useful lives;
(cid:120) We will incur additional depreciation expense as a result of recording purchased tangible assets;
(cid:120) To the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material
charges relating to the impairment of those assets;
(cid:120) Cost of sales may increase temporarily following an acquisition as a result of acquired inventory being recorded at
its fair market value;
(cid:120) Earnings may be affected by changes in estimates of future contingent consideration to be paid when an earn-out is
part of the consideration; or
(cid:120) Earnings may be affected by transaction and implementation costs, which are expensed immediately.
Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability
to react to changes in the economy or our industry.
Our current and future levels of indebtedness could:
(cid:120) Limit our ability to borrow money for our working capital, capital expenditures, development projects, strategic
initiatives, or other purposes;
(cid:120) Require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness,
thereby reducing funds available to us for other purposes;
(cid:120) Limit our flexibility in planning for, or reacting to, changes in our operations or business;
(cid:120) Make us more vulnerable to downturns in our business, the economy, or the industry in which we operate;
(cid:120) Restrict us from making strategic acquisitions, introducing new technologies, or exploiting business opportunities;
and
(cid:120) Expose us to the risk of increased interest rates as most of our borrowings are at a variable rate of interest.
The agreements governing our indebtedness contain restrictions that limit our flexibility in operating our business.
The agreements governing our indebtedness contain, and any instruments governing future indebtedness of ours may
contain, covenants that impose significant operating and financial restrictions on us, including restrictions or prohibitions on
our ability to, among other things:
Incur or guarantee additional debt;
(cid:120)
(cid:120) Pay dividends on or make distributions in respect of our share capital or make other restricted payments;
(cid:120) Repurchase or redeem capital stock or subordinated indebtedness;
(cid:120) Transfer or sell certain assets;
(cid:120) Create liens on certain assets;
(cid:120) Consolidate or merge with, or sell or otherwise dispose of all, or substantially all, of our assets to other companies;
(cid:120) Enter into certain transactions with our affiliates;
(cid:120) Pledge the capital stock of any of our subsidiaries;
(cid:120) Enter into agreements which restrict our ability to pay dividends or incur liens;
(cid:120) Make material changes in our equity capital structure;
(cid:120) Engage in any line of business substantially different than that in which we are currently engaged; and
(cid:120) Make certain investments, including strategic acquisitions.
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to
engage in favorable business activities or finance future operations or capital needs.
28
We have pledged substantially all of our assets as collateral under our existing debt agreement. If we default on the terms
of such debt agreements and the holders of our indebtedness accelerate the repayment of such indebtedness, there can be
no assurance that we will have sufficient assets to repay our indebtedness.
Under our existing credit agreement, we are required to satisfy and maintain specified financial ratios including a
maximum consolidated leverage ratio and a minimum interest coverage ratio. Our ability to meet those financial ratios can
be affected by events beyond our control, and there can be no assurance that we will meet those ratios. A failure to comply
with the covenants contained in our existing debt agreement could result in an event of default under such agreements, which,
if not cured or waived, could have a material, adverse effect on our business, financial condition, and profitability. In the
event of any default under our existing debt agreement, the holders of our indebtedness thereunder:
(cid:120) Will not be required to lend any additional amounts to us;
(cid:120) Could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and
payable and terminate all commitments to extend further credit, if applicable; or
(cid:120) Could require us to apply all of our available cash to repay such indebtedness.
If we are unable to repay those amounts, the holders of our secured indebtedness could proceed against the collateral
granted to them to secure that indebtedness. If the indebtedness under our existing debt agreements were to be accelerated,
there can be no assurance that our assets would be sufficient to repay such indebtedness in full.
We are subject to a variety of risks as we seek to expand our business globally.
The expansion of our international operations is subject to a number of risks, which may vary significantly from the risks
we face in our U.S. operations, including:
(cid:120) Difficulties and costs associated with staffing and managing foreign operations, including foreign distributor
relationships and developing direct sales operations in key foreign countries;
(cid:120) Expanded compliance obligations, including obligations associated with the Foreign Corrupt Practices Act, the U.K.
Bribery Law, local anti-corruption laws, and Office of Foreign Asset Control administered sanction programs;
(cid:120) Broader exposure to corruption;
(cid:120) Overlapping and potentially conflicting international legal and regulatory requirements, as well as unexpected
changes in international legal and regulatory requirements or reimbursement policies and programs;
(cid:120) Longer accounts receivable collection cycles in certain foreign countries and additional cost of collection of those
receivables;
(cid:120) Diminished protection for intellectual property and the presence of a growing number of generic or smaller
competitors in some countries;
(cid:120) Changes in currency exchange rates, particularly fluctuations in the British Pound and Euro as compared to the U.S.
Dollar, including any fluctuations in exchange rates due to the exit of the U.K. from the European Union;
(cid:120) Differing local product preferences and product requirements;
(cid:120) Adverse economic or political changes or political instability;
(cid:120) Potential trade restrictions, exchange controls, and import and export licensing requirements including tariffs; and
(cid:120) Potential adverse tax consequences of overlapping tax structures.
Our failure to address adequately these risks 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
personnel, including qualified personnel with medical device and tissue processing experience, and senior management with
experience in the medical device or tissue processing space, many of whom would be difficult to replace. Our business and
future operating results, including production at our manufacturing and tissue processing facilities, also depend in significant
part upon our ability to attract and retain qualified management, operations, processing, marketing, sales, and support
personnel for our operations. Our main facilities are in the Atlanta, Georgia area and Austin, Texas, where the local supply
of qualified personnel in the medical device and tissue processing industries is limited. Competition for such personnel is
intense, and we cannot ensure that we will be successful in attracting and retaining such personnel. If we lose any key
29
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.
Continued fluctuation of foreign currencies relative to the U.S. Dollar could materially, adversely affect our business.
The majority of our foreign product and tissue processing 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
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.
Significant disruptions of information technology systems or breaches of information security could adversely affect our
business.
We rely upon a combination of sophisticated information technology systems and traditional recordkeeping to operate
our business. In the ordinary course of business, we collect, store, and transmit large amounts of confidential information
(including, but not limited to, personal information, intellectual property and, in some instances, patient data). We have also
outsourced elements of our operations to third parties, including elements of our information technology infrastructure and,
as a result, we manage a number of independent vendor relationships with third parties who may or could have access to our
confidential information. Our information technology and information security systems and records are potentially
vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees or
vendors. Our information technology and information security systems are also potentially vulnerable to malicious attacks
by third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a
wide range of motives (including, but not limited to, industrial espionage and market manipulation) and expertise. While we
have invested significantly in the protection of data and information technology, there can be no assurance that our efforts
will prevent service interruptions or security breaches. For example, although we have taken security precautions and are
assessing additional precautions to provide greater data security, certain data may be vulnerable to loss in a catastrophic
event. We have only limited cyber-insurance coverage that will not cover a number of the events described above and this
insurance is subject to deductibles and coverage limitations, and we may not be able to maintain this insurance. We thus
have no insurance for most of the claims that could be raised and, for those where we have coverage, those claims could
exceed the limits of our coverage. Any interruption or breach in our systems could adversely affect our business operations
and/or result in the loss of critical or sensitive confidential information or intellectual property, and could result in financial,
legal, business and reputational harm to us or allow third parties to gain material, inside information that they may use to
trade in our securities.
Health care policy changes, including U.S. health care reform legislation signed in 2010, may have a material, adverse
effect 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 payers to control these costs and, more generally, to
reform the U.S. health care system. Certain of these proposals could limit the prices we are able to charge for our products or
the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. The
adoption of some or all of these proposals could have a material, adverse effect on our financial condition and profitability.
The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of
2010 imposed significant new taxes on medical device makers in the form of a 2.3 percent excise tax on all U.S. medical
device sales that commenced in January 2013. While this tax has been suspended for 2016 and 2017, and while the
underlying legislation might be repealed or replaced as a result of the 2016 U.S. Presidential and Congressional election,
there is no guarantee that the excise tax will not be reinstated. Most recently, on January 20, 2017, President Trump issued
an executive order titled “Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending
Repeal.” The impact of this executive order and the future of the Patient Protection and Affordable Care Act are unclear.
There are many programs and requirements for which the details have not yet been fully established or the consequences are
not fully understood. These proposals may affect aspects of our business. We cannot predict what further reform proposals,
if any, will be adopted, when they will be adopted, or what impact they may have on us. However, any changes that lower
reimbursement for our products or reduce medical procedure volumes could adversely affect our business and profitability.
30
Our sales are affected by challenging domestic and international economic conditions and their constraining effect on
hospital budgets, and demand for our products and tissue preservation services could decrease in the future, which could
materially, adversely affect our business.
The demand for our products and tissue preservation services can fluctuate from time to time. In challenging economic
environments, hospitals attempt to control costs by reducing spending on consumable and capital items, which can result in
reduced demand for some of our products and services. If demand for our products or tissue preservation services decreases
significantly in the future, our revenues, profitability, and cash flows would likely decrease, possibly materially. In addition,
the manufacturing throughput of our products and the processing throughput of our preservation services would necessarily
decrease, which would likely adversely impact our margins and, therefore, our profitability, possibly materially. Further, if
demand for our products and/or tissue preservation services materially decreases in the future, we may not be able to ship our
products and/or tissues before they expire, which would cause us to write down our inventories and/or deferred preservation
costs.
Our sales may also be affected by challenging economic conditions in countries around the world, in addition to the U.S.,
particularly in countries where we have significant BioGlue or On-X heart valve sales or where BioGlue or the On-X heart
valve is still in a growth phase. These factors could materially, adversely affect our revenues, financial condition, and
profitability.
We may not be successful in obtaining necessary clinical results and regulatory approvals for products and services in
development, and our new products and services may not achieve market acceptance.
Our growth and profitability will depend, in part, upon our ability to complete development of, and successfully
introduce, new products and services, or expand upon existing indications, which requires that we invest significant time and
resources to obtain required regulatory approvals, including significant investment of time and resources into clinical trials.
Although we have conducted clinical studies on certain products and services under development, which indicate that such
products and services may be effective in a particular application, we cannot be certain that we will be able to successfully
execute on these clinical trials or that the results we obtain from clinical studies will be sufficient for us to obtain any
required regulatory approvals or clearances.
As noted above, we are currently engaged in a Premarket Approval clinical trial for PerClot, as well as clinical trials in
China for BioGlue and in the United States for the On-X valve. Each of these trials is subject to the risks outlined herein.
We cannot give assurance that the relevant regulatory agencies will clear or approve these or any new products and services,
or new indications, on a timely basis, if ever, or that the new products and services, or new indications, will adequately meet
the requirements of the applicable market or achieve market acceptance. We may encounter delays or rejections during any
stage of the regulatory approval process if clinical or other data fails to demonstrate satisfactorily compliance with, or if the
service or product fails to meet, the regulatory agency’s requirements for safety, efficacy, and quality, or the regulatory
agency otherwise has concerns about our quality or regulatory compliance. Regulatory requirements for safety, efficacy, and
quality 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 or halted due to the following, among other factors:
(cid:120) Unanticipated side effects;
(cid:120) Lack of funding;
(cid:120)
(cid:120)
(cid:120) Redesign of clinical trial programs;
(cid:120)
Inability to locate or recruit clinical investigators;
Inability to locate, recruit, and qualify sufficient numbers of patients;
Inability to manufacture or acquire sufficient quantities of the product, tissues, or any other components required for
clinical trials;
(cid:120) Changes in development focus; or
(cid:120) Disclosure of trial results by competitors.
Our ability to complete the development of any of our products and services is subject to all of the risks associated with
the commercialization of new products and services based on innovative technologies. Such risks include unanticipated
technical or other problems, manufacturing, or processing 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 products
or services, or we may not be able to do so on a timely basis. These products and services may not meet price or
performance objectives and may not prove to be as effective as competing products and services.
31
If we are unable to successfully complete the development of a product, service, or application, or if we determine for
financial, technical, competitive, or other reasons not to complete development or obtain regulatory approval or clearance of
any product, service, or application, particularly in instances when we have expended significant capital, this could
materially, adversely affect our revenues, financial condition, profitability, and cash flows. Research and development
efforts are time consuming and expensive, and we cannot be certain that these efforts will lead to commercially successful
products or services. Even the successful commercialization of a new product or service in the medical industry can be
characterized by slow growth and high costs associated with marketing, under-utilized production capacity, and continuing
research and development and education costs. The introduction of new products or services may require significant
physician training and years of clinical evidence derived from follow-up studies on human patients in order to gain
acceptance in the medical community.
All of these could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
The success of certain of our products and preservation services depends upon relationships with healthcare
professionals.
If we fail to maintain our working relationships with healthcare professionals, many of our products and preservation
services may not be developed and marketed to appropriately meet the needs and expectations of the professionals who use
and support our products and preservation services. The research, development, marketing, and sales of many of our new
and improved products and preservation services are dependent upon our maintaining working relationships with healthcare
professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding our
products and preservation services. Healthcare professionals assist us as researchers, marketing and training consultants,
product consultants, and speakers. If we are unable to maintain our relationships with these professionals and do not
continue to receive their advice and input, the development and commercialization of our products and preservation services
could suffer, which could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
If healthcare providers are not adequately reimbursed for procedures conducted with our products, or if reimbursement
policies change adversely, we may not be successful in marketing and selling our products or preservation services.
Most of our customers, and the health care providers to whom our customers supply medical devices, rely on third-party
payers, including government programs and private health insurance plans, to reimburse some or all of the cost of the
procedures in which medical devices that incorporate components we manufacture or assemble are used. Healthcare
providers, facilities, and government agencies are unlikely to purchase our products or implant our tissues if they are not
adequately reimbursed for these procedures. Unless a sufficient amount of peer-reviewed clinical data about our products
and preservation services has been published, third-party payors, including insurance companies and government agencies,
may refuse to provide reimbursement. The continuing efforts of governmental authorities, insurance companies, and other
payers of health care costs to contain or reduce these costs could lead to patients being unable to obtain approval for payment
from these third-party payers. Furthermore, even if reimbursement is provided, it may not be adequate to fully compensate
the clinicians or hospitals. Some third-party payors may impose restrictions on the procedures for which they will provide
reimbursement. If healthcare providers cannot obtain sufficient reimbursement from third-party payors for our products or
preservation services or the screenings conducted with our products, we may not achieve significant market acceptance.
Acceptance of our products in international markets will depend upon the availability of adequate reimbursement or funding
within prevailing healthcare payment systems. Reimbursement, funding, and healthcare payment systems vary significantly
by country. We may not obtain approvals for reimbursement in a timely manner or at all.
We are subject to various federal and state anti-kickback, self-referral, false claims privacy, and transparency laws, and
similar laws, any breach of which could cause a material, adverse effect on our business, financial condition, and
profitability.
Our relationships with physicians, hospitals and other healthcare providers are subject to scrutiny under various federal
anti-kickback, self-referral, false claims, privacy and transparency laws and similar laws, often referred to collectively as
healthcare compliance laws. Healthcare compliance laws are broad, can be ambiguous and are complex, and even minor
inadvertent violations can give rise to claims that the relevant law has been violated. Possible sanctions for violation of these
healthcare compliance laws include monetary fines, civil and criminal penalties, exclusion from federal and state healthcare
programs, including Medicare, Medicaid, Veterans Administration health programs, workers’ compensation programs, and
TRICARE (the healthcare system administered by or on behalf of the U.S. Department of Defense for uniformed services
beneficiaries, including active duty and their dependents, retirees and their dependents), and forfeiture of amounts collected
in violation of such prohibitions. Any government investigation or a finding of a violation of these laws could result in a
material, adverse effect on our business, financial condition, and profitability.
32
Anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation, or receipt of any form
of remuneration in return for the referral of an individual or the ordering or recommending of the use of a product or service
for which payment may be made by Medicare, Medicaid, or other government-sponsored healthcare programs. We have
entered into consulting agreements, speaker agreements, research agreements, and product development agreements with
healthcare professionals, including some who may order our products or make decisions to use them. While these
transactions were structured with the intention of complying with all applicable laws, including state anti-referral laws and
other applicable anti-kickback laws, it is possible that regulatory or enforcement agencies or courts may in the future view
these transactions as prohibited arrangements that must be restructured or for which we would be subject to other significant
civil or criminal penalties. We have also adopted the AdvaMed Code of Conduct into our Code of Business Conduct, which
governs our relationships with healthcare professionals, including our payment of travel and lodging expenses, research and
educational grant procedures, and sponsorship of third-party conferences. In addition, we regularly conduct training sessions
on these principles. However, there can be no assurance that regulatory or enforcement authorities will view these
arrangements as being in compliance with applicable laws or that one or more of our employees or agents will not disregard
the rules we have established. Because our strategy relies on the involvement of healthcare professionals who consult with us
on the design of our products, perform clinical research on our behalf, or educate the market about the efficacy and uses of
our products, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial
relationships with healthcare professionals who refer, or order, our products to be in violation of applicable laws and
determine that we would be unable to achieve compliance with such applicable laws. This could harm our reputation and the
reputations of the healthcare professionals we engage to provide services on our behalf. In addition, the cost of
noncompliance with these laws could be substantial since we could be subject to monetary fines and civil or criminal
penalties, and we could also be excluded from federally funded healthcare programs, including Medicare and Medicaid, for
noncompliance.
The Federal False Claims Act (“FCA”) imposes civil liability on any person or entity that submits, or causes the
submission of, a false or fraudulent claim to the U.S. Government. Damages under the FCA can be significant and consist of
the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present
fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages.
The U.S. Department of Justice (“DOJ”) on behalf of the government has previously alleged that the marketing and
promotional practices of pharmaceutical and medical device manufacturers, including the off-label promotion of products or
the payment of prohibited kickbacks to doctors, violated the FCA, resulting in the submission of improper claims to federal
and state healthcare entitlement programs such as Medicaid. In certain cases, manufacturers have entered into criminal and
civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary
amounts, and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial
actions going forward.
The Physician Payments Sunshine Act and similar state laws require us to annually report in detail certain payments and
“transfer of value” from us to healthcare professionals, such as reimbursement for travel and meal expenses or compensation
for services provided such as training, consulting, and research and development. This information is then posted on the
website of the Center of Medicare and Medicaid Services (“CMS”). Certain states also prohibit some forms of these
payments, require adoption of marketing codes of conduct and regulate our relationships with physicians and other referral
sources.
The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the scarcity
of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities
will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a
material, adverse effect on our business, financial condition, and profitability. Any state or federal regulatory or enforcement
review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of
any changes in or interpretations of these laws, whether these changes will be retroactive or will have effect on a going-
forward basis only.
Consolidation in the health care industry could have an adverse effect on our revenues and results of operations.
Many health care industry companies, including health care systems, are consolidating to create new companies with
greater market power. As the health care industry consolidates, competition to provide goods and services to industry
participants will become more intense. These industry participants may try to use their market power to negotiate price
concessions or reductions for medical devices that incorporate components produced by us. If we are forced to reduce our
prices because of consolidation in the health care industry, our revenues would decrease and our consolidated earnings,
financial condition, and/or cash flows would suffer.
33
Our business could be negatively impacted as a result of shareholder activism.
In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists
frequently propose to involve themselves in the governance, strategic direction, and operations of the company. We may in
the future become subject to such shareholder activity and demands. Such demands may disrupt our business and divert the
attention of our management and employees, and any perceived uncertainties as to our future direction resulting from such a
situation could result in the loss of potential business opportunities, be exploited by our competitors, cause concern to our
current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of
which could adversely affect our business. In addition, actions of activist shareholders may cause significant fluctuations in
our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the
underlying fundamentals and prospects of our business.
Our acquired federal tax net operating loss and general business credit carryforwards will be limited or may expire, which
could result in greater future income tax expense and adversely impact future cash flows.
The Company’s federal tax net operating loss and general business credit carryforwards include acquired net operating
loss carryforwards. Such acquired net operating loss carryforwards will be limited in future periods due to a change in
control of the Company’s former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis Corporation
(“Cardiogenesis”), as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. The Company believes
that its acquisitions of these companies each constituted a change in control, and that prior to the Company’s acquisition,
Hemosphere had experienced other equity ownership changes that should be considered a change in control. The Company
also acquired net operating loss carryforwards in the acquisition of On-X Life Technologies that are limited under Section
382. However, the Company believes that such net operating loss carryforwards from On-X will be fully realizable prior to
expiration. The deferred tax assets recorded on the Company’s Consolidated Balance Sheets exclude amounts that it expects
will not be realizable due to these changes in control. A portion of the acquired net operating loss carryforwards is related to
state income taxes for which management believes it is more likely than not that these deferred tax assets will not be realized.
Therefore, the Company recorded a valuation allowance against these state net operating loss carryforwards. Limitations on
the Company’s federal tax net operating loss and general business credit carryforwards could result in greater future income
tax expense and adversely impact future cash flows.
Our operating results may fluctuate significantly on a quarterly or annual basis as a result of a variety of factors, many of
which are outside our control.
Fluctuations in our quarterly and annual financial results have resulted and will continue to result from numerous factors,
including:
(cid:120) Changes in demand for the products we sell;
(cid:120)
Increased product and price competition, due to the announcement or introduction of new products by our
competitors, market conditions, the regulatory landscape or other factors;
(cid:120) Changes in the mix of products we sell;
(cid:120) Availability of materials and supplies, including tissue used in preservation services;
(cid:120) Our pricing strategy with respect to different product lines;
(cid:120) Strategic actions by us, such as acquisitions of businesses, products, or technologies;
(cid:120) Effects of domestic and foreign economic conditions and exchange rates on our industry and/or customers;
(cid:120) The divestiture or discontinuation of a product line or other revenue generating activity;
(cid:120) The relocation and integration of manufacturing operations and other strategic restructuring;
(cid:120) Regulatory actions that may necessitate recalls of our products or warning letters that negatively affect the markets
for our products;
(cid:120) Failure of government and private health plans to adequately and timely reimburse the users of our products;
(cid:120) Our determination whether or not to pay cash dividends;
(cid:120) Costs incurred by us in connection with the termination of contractual and other relationships, including
distributorships;
(cid:120) Our ability to collect outstanding accounts receivable in selected countries outside of the United States;
(cid:120) The expiration or utilization of deferred tax assets such as net operating loss carry-forwards;
34
(cid:120) Market reception of our new or improved product offerings; and
(cid:120) The loss of any significant customer, especially in regard to any product that has a limited customer base.
We have based our current and future expense levels largely on our investment plans and estimates of future events,
although certain of our expense levels are, to a large extent, fixed. We may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenue relative to our planned
expenditures would have an immediate adverse effect on our business, results of operations and financial condition. Further,
as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service, or
marketing decisions that could have a material and adverse effect on our business, results of operations and financial
condition. Due to the foregoing factors, some of which are not within our control, the price of our common stock may
fluctuate substantially. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or
investors, our stock price could drop suddenly and significantly. We believe the quarterly comparisons of our financial
results are not always meaningful and should not be relied upon as an indication of our future performance.
We do not anticipate paying any dividends on our common stock for the foreseeable future.
Risks Related to Ownership of our Common Stock
In December 2015 our Board of Directors discontinued dividend payments on our common stock for the foreseeable
future. If we do not pay cash dividends, our shareholders may receive a return on their investment in our common stock only
if the market price of our common stock has increased when they sell shares of our common stock that they own. Future
dividends, if any, will be authorized by our Board of Directors and declared by us based upon a variety of factors deemed
relevant by our directors, including, among other things, our financial condition, liquidity, earnings projections and business
prospects. In addition, restrictions in our credit facility limit our ability to pay future dividends. We can provide no
assurance of our ability to pay cash dividends in the future.
Provisions of Florida law and anti-takeover provisions in our organizational documents may discourage or prevent a
change of control, even if an acquisition would be beneficial to shareholders, which could affect our share price adversely
and prevent attempts by shareholders to remove current management.
We are subject to the Florida affiliated transactions statute, which generally requires approval by the disinterested
directors or supermajority approval by shareholders for “affiliated transactions” between a corporation and an “interested
stockholder.” Additionally our organizational documents contain provisions restricting persons who may call shareholder
meetings and allowing the Board of Directors to fill vacancies and fix the number of directors. These provisions of Florida
law and our articles of incorporation and bylaws could prevent attempts by shareholders to remove current management,
prohibit or delay mergers or other changes of control transactions and discourage attempts by other companies to acquire us,
even if such a transaction would be beneficial to our shareholders.
Item 1B. Unresolved Staff Comments.
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, 2016 (the end of the fiscal year to which this Form 10-K relates).
Item 2. Properties.
The Company’s corporate headquarters and laboratory facilities consist of approximately 190,400 square feet of leased
manufacturing, administrative, laboratory, and warehouse space located on a 21.5-acre setting, with an additional 14,400
square feet of off-site warehouse space both located in Kennesaw, Georgia. The manufacturing and tissue processing space
includes approximately 20,000 square feet of class 10,000 clean rooms and 8,000 square feet of class 100,000 clean rooms.
This extensive clean room environment provides a controlled aseptic environment for manufacturing and tissue preservation.
Two back-up emergency generators assure continuity of Company manufacturing operations and liquid nitrogen freezers
maintain preserved tissue at or below –135(cid:113)C. The Company manufactures products from its Medical Devices segment,
including: BioGlue and BioFoam, and processes and preserves tissues from its Preservation Services segment at the
Company’s headquarters facility. The Company is also beginning to manufacture PerClot and is transferring manufacturing
of PhotoFix to the Company’s headquarters facility. The Company’s corporate headquarters also includes a CardioGenesis
cardiac laser therapy maintenance and evaluation laboratory space.
35
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 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.
The Company’s On-X facility consists of approximately 75,000 square feet of combined manufacturing, warehouse, and
office space leased in Austin, Texas.
The Company also leases a facility, which consists of 15,600 square feet of combined manufacturing and office space in
Atlanta, Georgia, which is available for future manufacturing operations, and a facility, which consists of approximately
25,000 square feet of additional office space in Kennesaw, Georgia, which the Company sublets to a third party.
The Company’s European subsidiary, Europa, maintains a leased facility located in Guildford, England, which contains
approximately 6,500 square feet of office space. In addition, Europa leases shared warehousing space through its third-party
shipper.
Item 3. Legal Proceedings.
There are no material legal proceedings pending, or known by the Company to be contemplated, to which the Company
is a party or to which any of its property is subject, that is required to be disclosed.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 4A. Executive Officers of the Registrant.
The following table lists the executive officers of CryoLife as of December 31, 2016 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 or her earlier removal by the Board of Directors or his or her
resignation.
Name
J. Patrick Mackin
Scott B. Capps
John E. Davis
David C. Gale, Ph.D.
Jean F. Holloway
Amy D. Horton, CPA
D. Ashley Lee, CPA
William R. Matthews
Jim McDermid
Service as
Executive
Since 2014
Since 2007
Since 2015
Since 2012
Since 2015
Since 2006
Since 2000
Since 2015
Since 2016
Age
50
50
52
49
59
46
52
62
57
Position
Chairman, President, and Chief Executive Officer
Vice President, Clinical Research
Senior Vice President, Global Sales and Marketing
Vice President, Research and Development
Senior Vice President, General Counsel, Chief Compliance Officer,
and Secretary
Vice President and Chief Accounting Officer
Executive Vice President, Chief Operating Officer, and
Chief Financial Officer
Senior Vice President, Operations, Regulatory, and Quality
Senior Vice President, Chief Human Resources Officer
J. Patrick Mackin assumed the position of President and Chief Executive Officer in September 2014, was appointed to the
Board of Directors in October 2014 and was appointed Chairman in May 2015. Mr. Mackin has more than 20 years of
experience in the medical device industry. Prior to joining CryoLife, Mr. Mackin served as President of Cardiac Rhythm
Disease Management, the largest operating division of Medtronic, Inc. At Medtronic, he previously held the positions of
Vice President, Vascular, Western Europe and Vice President and General Manager, Endovascular Business Unit. Prior to
joining Medtronic in 2002, Mr. Mackin worked for six years at Genzyme, Inc. serving as Senior Vice President and General
36
Manager for the Cardiovascular Surgery Business Unit and as Director of Sales, Surgical Products division. Before joining
Genzyme, Mr. Mackin spent four years at Deknatel/Snowden-Pencer, Inc. in various roles and three years as a First
Lieutenant in the U.S. Army. Mr. Mackin received an MBA from Northwestern University’s Kellogg Graduate School of
Management and is a graduate of the U.S. Military Academy at West Point.
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 U.K. 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.
John E. Davis was appointed to the position of Senior Vice President, Global Sales and Marketing in September 2015. He
has over 20 years of experience in Sales and Marketing and Executive Leadership. Prior to joining CryoLife, he served as
Executive Vice President of Sales and Marketing at CorMatrix, a privately held medical device company creating innovative
biomaterial devices to repair damaged heart tissue from March 2012 to September 2015. Prior to CorMatrix, he served for
four years as a Vice President of Sales in the Cardiac Rhythm Management Devices business at St. Jude Medical, now part of
Abbott Laboratories. Before St. Jude Medical, he served for 14 years with Medtronic in the Cardiac Rhythm Disease
Management division in senior sales leadership roles. In his early career he served with Roche Diagnostics and Ciba-Geigy
Corporation. Mr. Davis received a Bachelor’s degree from Western Carolina University.
David C. Gale, Ph.D. has served as Vice President, Research and Development since January 2012. Dr. Gale joined the
Company in August 2009 as the Director, Biomaterials and Product Development. He was promoted to Senior Director,
Biomaterials and Device Engineering in April 2011. Prior to joining CryoLife, Dr. Gale was with Sinexus, Inc., a start-up
medical device company, from January 2007 to August 2009. He joined Sinexus as their Vice President of Research and was
promoted to the position of Vice President, Research and Development in July 2007. Dr. Gale has 17 years of experience in
biomaterials and medical device product research and development including roles at Abbott Vascular and Guidant
Corporation. Dr. Gale is the inventor or co-inventor on over 70 issued U.S. patents related to the design and manufacture of
medical devices. He received his Ph.D. in Materials Science from the University of Alabama at Birmingham, his M.S. in
Chemical Engineering from Auburn University and has received both an M.Sc. in Instrumentation and Analysis and a B.Sc.
in Chemistry from Manchester University in the U.K.
Jean F. Holloway, Esq was appointed to the position of Senior Vice President, General Counsel, Secretary, and Chief
Compliance Officer in January 2016. She previously served as Vice President, General Counsel, and Secretary beginning in
April 2015 and was subsequently appointed to the additional position of Chief Compliance Officer in October 2015. Prior to
joining CryoLife, she held various positions, including Vice President, General Counsel and Secretary of C.R. Bard, Inc.,
Deputy General Counsel, Medtronic, Inc., Vice President, Litigation, Boston Scientific, Inc., and Deputy General Counsel,
Guidant Corporation. Ms. Holloway also spent nearly 15 years in private practice as a trial lawyer at Dorsey & Whitney,
Faegre & Benson and Sidley & Austin. She clerked for two years on the Seventh Circuit Court of Appeals for the Honorable
Luther M. Swygert. Ms. Holloway has a J.D./M.B.A. from the University of Chicago and two undergraduate degrees from
Yale University in engineering and political science.
Amy D. Horton, CPA was appointed to the position of Vice President and Chief Accounting Officer in January 2016 and
had previously served as Chief Accounting Officer of CryoLife since 2006. Ms. Horton has been with the Company since
January 1998, serving as Controller from April of 2000 to August 2006 and as Assistant Controller prior to that. From 1993
to 1998, Ms. Horton was employed as a Certified Public Accountant with Ernst & Young, LLP. She received her B.S. and
Master’s degrees in Accounting from Brigham Young University in Provo, Utah.
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.
37
William R. Matthews was appointed to the position of the Senior Vice President of Operations, Quality, and Regulatory in
May 2015. Before joining CryoLife, he was the Managing Partner at BioDevice Solutions, a Medical device consultancy
firm from 2002 to 2014, where he served as a Senior Operations, Quality, and Regulatory Consultant, recognized for his
experience in FDA compliance, manufacturing, new technology start-ups, and product submissions. Prior to that, he was
Vice President of Government Affairs and Quality Systems for Cardinal Health’s Viasys Healthcare, Executive Vice
President of Operations, Regulatory Affairs, and Quality Systems at Xylum Corporation, and the Corporate Director of
Regulatory, Quality, Manufacturing, and Engineering at Fresenius Medical Care (formerly Grace National Medical Care
division). Mr. Matthews obtained a Bachelor’s degree in Chemistry from St. Peter’s University and also attended the
Business Administration Programs at Rutgers University and Fairleigh Dickinson University.
Jim McDermid was appointed to the position of the Senior Vice President, Chief Human Resources Officer in September
2016. Mr. McDermid joined the company from Medtronic where he was Group Vice President of Human Resources for the
Cardiac and Vascular Group. Prior to joining the Cardiac and Vascular Group, Mr. McDermid was the Vice President of
Human Resources for Medtronic’s Spinal & Biologics Division, located in Memphis, TN. His other Medtronic positions
included HR Director, U.S. Cardiovascular and HR Director, Structural Heart. Prior to Medtronic, Mr. McDermid worked
for several Fortune 500 companies, including Rockwell International, Hudson Bay Company, Cooper Industries, and
International Paper. Mr. McDermid holds a bachelor’s from the University of Toronto and a Master of Arts from McMaster
University in Ontario.
38
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.
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2015
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
$
11.33
13.00
18.64
20.15
High
12.29
11.50
11.75
11.31
$
$
8.94
10.64
11.69
16.40
Low
9.60
9.50
9.41
9.59
As of February 10, 2017 the Company had 270 shareholders of record.
Dividends
The Company initiated a cash dividend in the third quarter of 2012 and paid the dividend quarterly until, in December
2015, the Company’s Board of Directors discontinued dividend payments for the foreseeable future.
On January 20, 2016 the Company entered into the Third Amended and Restated Credit Agreement (“Amended Debt
Agreement”) with Capital One, National Association; Healthcare Financial Solutions, LLC; Fifth Third Bank; and Citizens
Bank, National Association, collectively the (“Lending Parties”). The Amended Debt Agreement prohibits the payment of
cash dividends. See also Part II, Item 8, Note 13 of the “Notes to Consolidated Financial Statements” for further discussion
of the Company’s credit agreement.
39
Issuer Purchases of Equity Securities
The following table provides information about purchases by the Company during the quarter ended December 31, 2016
of equity securities that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934.
Issuer Purchases of Equity Securities
Common Stock
Period
10/01/16 - 10/31/16
11/01/16 - 11/30/16
12/01/16 - 12/31/16
Total
Total Number of
Common Shares
Purchased
--
5,630
--
5,630
$
Average Price
Paid per
Common Share
--
17.20
--
17.20
Total Number
of Common Shares
Purchased as
Part of Publicly
Announced
Plans or Programs
--
--
--
--
Dollar Value
of Common Shares
That May Yet Be
Purchased Under the
Plans or Programs
--
--
--
--
$
The common shares purchased during the quarter ended December 31, 2016 were tendered to the Company in payment
of taxes on stock compensation and were not part of a publicly announced plan or program.
Under the Company’s Amended Debt Agreement, the Company is prohibited from repurchasing its common stock,
except for the repurchase of stock from employees or directors of the Company when tendered in payment of taxes or the
exercise price of stock options, upon the satisfaction of certain requirements.
40
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
Operations
Revenues
Operating income
Net income2
Net income applicable to common shareholders -
diluted2
Research and development expense as a
percentage of revenues
Income Per Common Share2
Basic
Diluted
Dividend Declared Per Common Share
Year-End Financial Position
Total assets
Working capital
Long-term liabilities
Shareholders' equity
Current ratio3
2016 1
2015
December 31,
2014
2013
2012
$ 180,380
21,820
10,778
$ 145,898
5,354
4,005
$ 144,641
8,838
7,322
$ 140,763
13,820
16,172
$ 131,718
12,612
7,946
10,576
3,918
7,164
15,813
7,768
7%
7%
6%
6%
6%
$
$
$
0.33
0.32
$
$
0.14
0.14
$
$
0.26
0.25
$
$
0.59
0.57
$
$
0.29
0.28
--
$
0.120
$
0.118
$
0.108
$
0.050
$ 316,140
117,131
77,055
208,983
5:1
$ 181,179
90,058
6,323
155,251
6:1
$ 176,157
85,401
6,845
148,685
5:1
$ 174,683
85,605
9,214
144,747
5:1
$ 157,156
56,073
7,614
128,112
4:1
1
2
In January 2016 the Company completed its acquisition of On-X Life Technologies Holdings, Inc., which is being
operated as a wholly owned subsidiary of CryoLife. In 2016 the Company also sold its HeRO Graft product line and its
ProCol product line, and ceased sales of these products during 2016.
The 2013 net income and income per common share includes the favorable effect of a $12.7 million pre-tax gain on the
sale of an investment in the common stock of Medafor, Inc. as a result of C.R. Bard, Inc. completing its acquisition of
the outstanding common shares of Medafor, Inc.
3 Current assets divided by current liabilities.
41
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
CryoLife, Inc. (“CryoLife,” the “Company,” “we,” or “us”), incorporated in 1984 in Florida, is a leader in medical
device manufacturing, processing, and distribution of medical devices and implantable human tissues used in cardiac surgical
procedures. CryoLife’s medical devices include: BioGlue® Surgical Adhesive (“BioGlue”); BioFoam® Surgical Matrix
(“BioFoam”); On-X valves and surgical products; CardioGenesis cardiac laser therapy product line, which includes a laser
console system and single-use, fiber-optic handpieces, that are used for the treatment of coronary artery disease in patients
with severe angina; PerClot®, an absorbable powdered hemostat, which the Company distributes internationally for Starch
Medical, Inc. (“SMI”); and PhotoFix TM, a bovine pericardial patch stabilized using a dye-mediated photo-fixation process
that requires no glutaraldehyde. The cardiac and vascular human tissues distributed by CryoLife include the CryoValve® SG
pulmonary heart valve (“CryoValve SGPV”) and the CryoPatch® SG pulmonary cardiac patch (“CryoPatch SG”), both of
which are processed using CryoLife’s proprietary SynerGraft® technology.
For the year ended December 31, 2016 CryoLife reported record annual revenues of $180.4 million, increasing 24% over
the prior year, primarily due to the acquisition of On-X Life Technologies Holdings, Inc. (“On-X”) in January 2016. The
Company generated $19.7 million in cash flows from operations during 2016. See the “Results of Operations” section below
for additional analysis of the fourth quarter and full year 2016 results. See Part I, Item 1, “Business,” for further discussion
of the Company’s business and activities during 2016.
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 of operations and may involve a higher degree of judgment and complexity.
Fair Value Measurements
The Company records certain financial instruments at fair value, including: cash equivalents, certain marketable
securities, certain restricted securities, contingent consideration, and derivative instruments. 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, 2016 the Company has not chosen to make any such elections. Fair value financial instruments are recorded in
accordance with the fair value measurement framework.
The Company also measures certain non-financial assets at fair value on a non-recurring basis. These non-recurring
valuations include evaluating assets such as cost method investments, long-lived assets, and non-amortizing intangible assets
for impairment; allocating value to assets in an acquired asset group; applying accounting for business combinations; and
allocating goodwill to divested components of a business. The Company uses the fair value measurement framework to
value these assets and reports these fair values in the periods in which they are recorded or written down.
The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable
inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:
(cid:120) Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical
assets or liabilities;
(cid:120) 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
(cid:120) Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available.
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires
judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the
use of various cost, market, or income valuation methodologies applied to unobservable management estimates and
assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method
42
used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or
the weighting of various valuation methods. The Company may also engage external advisors to assist in determining fair
value, as appropriate.
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.
Deferred Preservation Costs
Deferred preservation costs includes costs of cardiac and vascular tissues available for shipment, tissues currently in
active processing, and tissues held in quarantine pending release to implantable status. By federal law, human tissues cannot
be bought or sold; therefore, the tissues the Company preserves are not held as inventory. The costs the Company incurs to
procure and process cardiac and vascular tissues are instead accumulated and deferred. Deferred preservation costs are stated
at the lower of cost or market value on a first-in, first-out basis and are deferred until revenue is recognized. Upon shipment
of tissue to an implanting facility, revenue is recognized and the related deferred preservation costs are expensed as cost of
preservation services. Cost of preservation services also includes, as applicable, lower of cost or market write-downs and
impairments for tissues not deemed to be recoverable, and includes, as incurred, idle facility expense, excessive spoilage,
extra freight, and rehandling costs.
The calculation of deferred preservation costs involves judgment and complexity and uses the same principles as
inventory costing. Donated human tissue is procured from deceased human donors by organ and tissue procurement
organizations (“OTPOs”), which consign the tissue to the Company for processing, preservation, and distribution. Deferred
preservation costs consist primarily of the procurement fees charged by the OTPOs, direct labor and materials (including
salary and fringe benefits, laboratory supplies and expenses, and freight-in charges), and indirect costs (including allocations
of costs from support departments and facility allocations). Fixed production overhead costs are allocated based on actual
tissue processing levels, to the extent that they are within the range of the facility’s normal capacity.
These costs are then allocated among the tissues processed during the period based on cost drivers, such as the number of
donors or number of tissues processed. 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 estimates quarantine yields based on its
experience and reevaluates these estimates periodically. Actual yields could differ significantly from the Company’s
estimates, which could result in a change in tissues available for shipment, and could increase or decrease the balance of
deferred preservation costs. These changes could result in additional cost of preservation services expense or could increase
per tissue preservation costs, which would impact gross margins on tissue preservation services in future periods.
The Company regularly evaluates its deferred preservation costs to determine if the costs are appropriately recorded at
the lower of cost or market value. The Company also evaluates its deferred preservation costs for costs not deemed to be
recoverable, including tissues not expected to ship prior to the expiration date of their packaging. Lower of cost or market
value write-downs are recorded if the tissue processing costs incurred exceed the estimated market value of the tissue
services, based on recent average service fees at the time of the evaluation. Impairment write-downs are recorded based on
the book value of tissues deemed to be impaired. Actual results may differ from these estimates. Write-downs of deferred
preservation costs are expensed as cost of preservation services, and these write-downs are permanent impairments that create
a new cost basis, which cannot be restored to its previous levels if the Company’s estimates change.
The Company recorded write-downs to its deferred preservation costs totaling $897,000, $483,000, and $540,000 for the
years ended December 31, 2016, 2015, and 2014, respectively, due primarily to tissues not expected to ship prior to the
expiration date of the packaging.
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 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 its deferred tax assets 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.
43
Assessing the recoverability of deferred tax assets involves judgment and complexity. Estimates and judgments used in
the determination of the need for a valuation allowance and in calculating the amount of a needed valuation allowance
include, but are not limited to, the following:
(cid:120) Projected future operating results;
(cid:120) Anticipated future state tax apportionment;
(cid:120) Timing and amounts of anticipated future taxable income;
(cid:120) Timing of the anticipated reversal of book/tax temporary differences;
(cid:120) Evaluation of statutory limits regarding usage of certain tax assets; and
(cid:120) Evaluation of the statutory periods over which certain tax assets can be utilized.
Significant changes in the factors above, or other factors, could affect the Company’s ability to use its deferred tax
assets. Such changes could have a material, adverse impact on the Company’s profitability, financial position, and cash
flows. The Company will continue to 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.
The Company believes that the realizability of its acquired net operating loss carryforwards will be limited in future
periods due to a change in control of its former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis
Corporation (“Cardiogenesis”), as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. The
Company believes that its acquisitions of these companies each constituted a change in control, and that prior to the
Company’s acquisition, Hemosphere had experienced other equity ownership changes that should be considered a change in
control. The Company also acquired net operating loss carryforwards in the acquisition of On-X that are limited under
Section 382. However, the Company believes that such net operating loss carryforwards from On-X will be fully realizable
prior to expiration. The deferred tax assets recorded on the Company’s Consolidated Balance Sheets exclude amounts that it
expects will not be realizable due to these changes in control. A portion of the acquired net operating loss carryforwards is
related to state income taxes for which management believes it is more likely than not that these deferred tax assets will not
be realized. Therefore, the Company recorded a valuation allowance against these state net operating loss carryforwards.
Valuation of Acquired Assets or Businesses
As part of its corporate strategy, the Company is seeking to identify and capitalize upon 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 using the acquisition
method. Under this method, the allocation of the purchase price is based on the fair value of the tangible and identifiable
intangible assets acquired and the liabilities assumed as of the date of the acquisition. The excess of the purchase price over
the estimated fair value of the tangible net assets and identifiable intangible assets is recorded as goodwill. Transaction costs
related to a business combination are expensed as incurred. In-process research and development acquired as part of a
business combination is accounted for as an indefinite-lived intangible asset until the related research and development
project gains regulatory approval or is discontinued.
The Company typically engages external advisors to assist in determining the fair value of acquired asset groups or
business combinations, using valuation methodologies such as: the excess earnings, the discounted cash flow, or the relief
from royalty methods. The determination of fair value in accordance with the fair value measurement framework requires
significant judgments and estimates, including, but not limited to: timing of product life cycles, estimates of future revenues,
estimates of profitability for new or acquired products, cost estimates for new or changed manufacturing processes, estimates
of the cost or timing of obtaining regulatory approvals, estimates of the success of competitive products, and discount rates.
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 or business
combinations 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. If the value of the liabilities assumed by the
44
Company, including contingent liabilities, is determined to be significantly different from the amounts previously recorded in
purchase accounting, the Company may need to record additional expenses or write-downs in future periods, which could
materially impact the Company’s financial position and profitability.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) amended its Accounting Standards Codification
and created a new Topic 842, Leases. The final guidance requires lessees to recognize a right-of-use asset and a lease
liability for all leases (with the exception of short-term leases) at the commencement date and recognize expenses on their
income statements similar to the current Topic 840, Leases. It is effective for fiscal years and interim periods beginning after
December 15, 2018, and early adoption is permitted. The Company is evaluating the impact the adoption of this standard
will have on its financial position, results of operations, and cash flows.
In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee
Share-Based Payment Accounting as part of its simplification initiative, which involves several aspects of accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The amendments in this update are effective for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. The Company expects that the allowed
change in accounting for forfeitures as they occur will not have a material impact on the Company’s results of operations
over time, as the Company believes that its estimated forfeiture rate approximates its actual forfeiture rate. However, the
Company believes that this could have a favorable or unfavorable impact in any given quarter due to the timing of actual
forfeitures. The Company believes that the change in accounting for excess tax benefits and the discontinuance of the APIC
pool could have a material impact on its results of operations, which could be favorable or unfavorable, depending on
movements in the Company’s stock price. The Company does not believe that the adoption of this standard will have a
material impact on its financial position and cash flows.
In May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. Since ASU 2014-09 was
issued, several additional ASUs have been issued to clarify various elements of the guidance. These standards provide
guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The
standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Adoption of the new standard is effective for reporting periods beginning after December 15, 2017, and early adoption is
permitted. The standard permits the use of either the full retrospective or modified retrospective transition method. The
Company is performing its initial evaluation of its standard arrangements with customers and its arrangements specific to
certain of the Company’s product lines or product offerings. The Company is continuing to evaluate the effect that ASU
2014-09 will have on its financial position, results of operations, cash flows, and related disclosures.
45
Results of Operations
(In thousands)
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
Revenues for the
Three Months Ended
December 31,
Revenues as a Percentage of
Total Revenues for the
Three Months Ended
December 31,
2016
2015
2016
2015
Products:
BioGlue and BioFoam
On-X
CardioGenesis cardiac laser therapy
PerClot
PhotoFix
HeRO Graft
ProCol
Total products
Preservation services:
Cardiac tissue
Vascular tissue
Total preservation services
$
15,982
9,073
2,367
1,038
465
--
--
28,925
7,442
8,662
16,104
$
16,488
--
3,487
1,096
437
2,008
397
23,913
6,970
8,955
15,925
36%
20%
5%
2%
1%
--%
--%
64%
17%
19%
36%
41%
--%
9%
3%
1%
5%
1%
60%
18%
22%
40%
Total
$
45,029
$
39,838
100%
100%
Revenues for the
Twelve Months Ended
December 31,
Revenues as a Percentage of
Total Revenues for the
Twelve Months Ended
December 31,
2016
2015
2016
2015
Products:
BioGlue and BioFoam
On-X
CardioGenesis cardiac laser therapy
PerClot
PhotoFix
HeRO Graft
ProCol
Total products
Preservation services:
Cardiac tissue
Vascular tissue
Total preservation services
$
63,461
34,232
7,864
4,021
1,871
2,325
218
113,992
29,697
36,691
66,388
$
59,332
--
9,419
4,083
1,396
7,546
1,305
83,081
28,059
34,758
62,817
35%
19%
5%
2%
1%
1%
--%
63%
17%
20%
37%
41%
--%
6%
3%
1%
5%
1%
57%
19%
24%
43%
Total
$
180,380
$
145,898
100%
100%
46
Revenues increased 13% and 24% for the three and twelve months ended December 31, 2016, respectively, as compared
to the three and twelve months ended December 31, 2015, respectively. A detailed discussion of the changes in product
revenues and preservation services revenues for the three and twelve months ended December 31, 2016 is presented below.
Products
Revenues from products increased 21% and 37% for the three and twelve months ended December 31, 2016,
respectively, as compared to the three and twelve months ended December 31, 2015, respectively. These increases were
primarily due to the acquisition of On-X during the first quarter of 2016. A detailed discussion of the changes in product
revenues for BioGlue and BioFoam; On-X; CardioGenesis cardiac laser therapy; PerClot; PhotoFix; Hemodialysis Reliable
Outflow Graft (“HeRO® Graft”); and ProCol® Vascular Bioprosthesis (“ProCol”) is presented below.
The Company’s sales of certain products through its direct sales force to U.K. hospitals are denominated in British
Pounds, and its sales to German, Austrian, French, and Irish hospitals and certain distributors are denominated in Euros and
are, therefore, subject to changes in foreign exchange rates. During 2015, the U.S. Dollar strengthened materially, as
compared to the British Pound and Euro and, as a result, the Company’s revenues denominated in these currencies decreased
when translated into U.S. Dollars. This trend continued during the twelve months ended December 31, 2016. Any further
change in these exchange rates could have a material, adverse effect on the Company’s revenues denominated in these
currencies. Additionally, the Company’s sales to many distributors around the world are denominated in U.S. Dollars and,
although these sales are not directly impacted by the strong U.S. Dollar, the Company believes that its distributors may be
delaying or reducing purchases of products in U.S. Dollars due to the relative price of these goods in their local currencies.
BioGlue and BioFoam
Revenues from the sale of surgical sealants, consisting of BioGlue and BioFoam, decreased 3% for the three months
ended December 31, 2016, as compared to the three months ended December 31, 2015. This decrease was primarily due to a
4% decrease in the volume of milliliters sold, which decreased revenues by 3%, and the unfavorable impact of foreign
exchange rates, which decreased revenues by 1%, partially offset by an increase in average sales prices, which increased
revenues by 1%.
Revenues from the sale of surgical sealants increased 7% for the twelve months ended December 31, 2016, as compared
to the twelve months ended December 31, 2015. This increase was primarily due to a 7% increase in the volume of
milliliters sold, which increased revenues by 7%.
The decrease in sales volume of surgical sealants for the three months ended December 31, 2016 was primarily due to a
decrease in sales of BioGlue in Japan, partially offset by an increase in BioGlue sales in domestic markets. The increase in
sales volume of surgical sealants for the twelve months ended December 31, 2016 was primarily due to sales of BioGlue in
France. In October 2015 the Company transitioned the French market from a distributor to a direct sales model, and as a
result, there were no shipments of BioGlue into France for the first three quarters of the comparable period in 2015. To a
lesser extent, BioGlue revenues in the twelve months ended December 31, 2016 were affected by an increase in sales volume
in Europe and domestic markets and a decrease in sales volume in Japan.
Sales of BioGlue in Japan decreased due to the timing of distributor ordering patterns. The Company is currently
seeking regulatory approval for BioGlue in China and, if this effort is successful, management believes this will provide an
additional international growth opportunity for BioGlue in future years.
Domestic BioGlue revenues accounted for 58% and 56% of total BioGlue revenues for the three and twelve months
ended December 31, 2016, respectively, and 55% and 58% of total BioGlue revenues for the three and twelve months ended
December 31, 2015, respectively. BioFoam sales accounted for less than 1% of surgical sealant sales for the three and twelve
months ended December 31, 2016 and 2015. BioFoam is currently approved for sale in certain international markets.
On-X
On January 20, 2016 CryoLife acquired On-X, an Austin, Texas-based, privately held mechanical heart valve company.
The On-X catalogue of products includes the On-X prosthetic aortic and mitral heart valves and the On-X ascending aortic
prosthesis (“AAP”). On-X product revenues also include revenues from the distribution of CarbonAid CO2 diffusion
catheters, the sale of Chord-X ePTFE sutures for mitral chordal replacement, and revenue from pyrolytic carbon coating
services to other medical device manufacturers. On-X products are distributed in both domestic and international markets.
47
On-X combined pre- and post-acquisition revenues for the three and twelve months ended December 31, 2016 increased
9% and 7%, respectively, when compared to On-X’s pre-acquisition revenues for the three and twelve months ended
December 31, 2015, respectively, despite disruptions in the sales channel caused by the transition to direct selling in various
domestic and international markets that On-X previously served through distributors.
Management believes that the growth rate for On-X products will accelerate in future years due to the selling efforts of the
Company’s larger, realigned sales force as they undertake additional training and become more experienced with selling On-X
products. The Company expects this sales force will drive an increase in implants and will open additional hospitals to using
On-X products.
CardioGenesis Cardiac Laser Therapy
Revenues from the Company’s CardioGenesis cardiac laser therapy product line consist primarily of sales of handpieces
and, in certain periods, revenues from the sale of laser consoles. Revenues from cardiac laser therapy decreased 32% for the
three months ended December 31, 2016 as compared to the three months ended December 31, 2015. Revenues from the sale
of laser consoles were $507,000 and $1.1 million for the three months ended December 31, 2016 and 2015, respectively.
Revenues from the sale of handpieces decreased 25% for the three months ended December 31, 2016 as compared to the
three months ended December 31, 2015. This decrease was primarily due to a 22% decrease in unit shipments of handpieces,
which decreased revenues by 23%, and a decrease in average sales prices, which decreased revenues by 2%.
Revenues from cardiac laser therapy decreased 17% for the twelve months ended December 31, 2016 as compared to the
twelve months ended December 31, 2015. Revenues from the sale of laser consoles were $507,000 and $1.2 million for the
twelve months ended December 31, 2016 and 2015, respectively. Revenues from the sale of handpieces decreased 13% for
the twelve months ended December 31, 2016 as compared to the twelve months ended December 31, 2015. This decrease
was primarily due to a 14% decrease in unit shipments of handpieces, which decreased revenues by 14%, partially offset by
an increase in average sales prices, which increased revenues by 1%.
The decrease in revenues from both handpiece and laser console sales was due in part to the deemphasizing of this
product line during 2016, during the On-X integration period and the realignment of the Company’s salesforce, and due to a
reduction in procedure volume, which can vary from quarter to quarter due to physician case volume and patient-specific
factors, which determine whether cardiac laser therapy can be used adjunctively with cardiac bypass surgery.
PerClot
Revenues from the sale of PerClot decreased 5% for the three months ended December 31, 2016 as compared to the
three months ended December 31, 2015. This decrease was primarily due to the unfavorable effect of foreign currency
exchange, which decreased revenues by 3%, a 5% decrease in the volume of grams sold, which decreased revenues by 1%,
and a decrease in average selling prices, which decreased revenues by 1%.
Revenues from the sale of PerClot decreased 2% for the twelve months ended December 31, 2016 as compared to the
twelve months ended December 31, 2015. This decrease was primarily due to a decrease in average selling prices, which
decreased revenues by 3% and the unfavorable effect of foreign currency exchange, which decreased revenues by 2%,
partially offset by favorable sales volume, which increased revenues by 3%.
The sales volume increase for the twelve months ended December 31, 2016 was primarily due to sales of PerClot in
France, due to our transition to a direct sales model in this market in October 2015. The decrease in average selling prices for
the twelve months ended December 31, 2016 was primarily due to price reductions to certain customers in Europe as a result
of pricing pressures from competitive products.
The Company is conducting its pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in
the U.S. The Company began enrollment in the trial in the second quarter of 2015 but later suspended enrollment pending
consultation with the FDA regarding the trial protocol. These discussions resulted in two amendments to the trial protocol,
the last of which was approved by the FDA in July 2016. The Company is in the process of conducting site start-up activities
and resumed enrollment into the trial in the fourth quarter of 2016 with the goal of receiving PMA from the FDA in the first
half of 2019.
48
PhotoFix
PhotoFix revenues increased 6% for the three months ended December 31, 2016, as compared to the three months ended
December 31, 2015. This increase was primarily due to an increase in units sold, which increased revenues by 6%. PhotoFix
revenues increased 34% for the twelve months ended December 31, 2016, as compared to the twelve months ended
December 31, 2015. This increase was primarily due to an increase in units sold, which increased revenues by 36%, partially
offset by a decrease in average sales prices, which decreased revenues by 2%. The increase in volume for both the three and
twelve months ended December 31, 2016 is primarily due to an increase in the number of implanting physicians when
compared to the prior year period, as the Company launched its distribution of PhotoFix in the first quarter of 2015.
HeRO Graft
On February 3, 2016 the Company sold its HeRO Graft product line to Merit Medical Systems, Inc. (“Merit”), and the
Company agreed to continue to manufacture the HeRO Graft for Merit for up to six months under a transition supply
agreement. Revenues from HeRO Grafts include revenues related to the sale of vascular grafts, venous outflow components,
and accessories, which are generally sold together as a kit. Revenues include sales to hospitals through February 3, 2016 and
to Merit from that date through the second quarter of 2016. The sales transfer to Merit was completed in the second quarter
of 2016, at which time the Company ceased sales of the HeRO Graft.
ProCol
On March 18, 2016 the Company sold its ProCol product line to LeMaitre Vascular, Inc. (“LeMaitre”), at which time the
Company ceased sales of these products.
Preservation Services
Revenues from preservation services increased 1% and 6% for the three and twelve months ended December 31, 2016,
respectively, as compared to the three and twelve months ended December 31, 2015, respectively. A detailed discussion of
the changes in cardiac and vascular preservation services revenues is presented below.
During 2014 the Company made significant changes to various tissue processing and quality procedures, which resulted
in a decrease in tissue processing throughput and an increase in the Company’s cost of processing tissues. These factors
adversely impacted revenues and costs during 2015 as the Company continued to ship tissues that were processed in 2014. In
2015 the Company reviewed and modified its procedures as part of its ongoing compliance efforts and in an effort to improve
tissue processing throughput and reduce costs. The Company continued these efforts during 2016 and expects to continue
these efforts as part of its ongoing commitments to quality and efficiency. As a result of these efforts, tissue availability
began to increase in the second half of 2015, particularly vascular tissue availability as discussed further below, and the cost
of tissue processing decreased.
Preservation services revenues, particularly revenues for certain high-demand cardiac tissues, can vary from quarter to
quarter and year to year due to a variety of factors including: quantity and type of incoming tissues, yields of tissue through
the preservation process, timing of receipt of donor information, timing of the release of tissues to an implantable status,
demand for certain tissue types due to the number and type of procedures being performed, and pressures from competing
products or services. See further discussion below of specific items affecting cardiac and vascular preservation services
revenues for the three and twelve months ended December 31, 2016.
Cardiac Preservation Services
Revenues from cardiac preservation services, consisting of revenues from the distribution of heart valves and cardiac
patch tissues increased 7% for the three months ended December 31, 2016 as compared to the three months ended December
31, 2015. This increase was primarily due to a 6% increase in unit shipments of cardiac tissues, which increased revenues by
4% and an increase in average service fees, which increased revenues by 3%.
Revenues from cardiac preservation services increased 6% for the twelve months ended December 31, 2016 as compared
to the twelve months ended December 31, 2015. This increase was primarily due to a 6% increase in unit shipments of
cardiac tissues, which increased revenues by 3% and an increase in average service fees, which increased revenues by 3%.
The increase in volume for the three months ended December 31, 2016 was primarily due to an increase in the volume of
cardiac valve and patch shipments. The increase in volume for the twelve months ended December 31, 2016 was primarily
49
due to an increase in the volume of cardiac patch shipments. The increase in average service fees for the three and twelve
months ended December 31, 2016 was primarily due to list fee increases in domestic markets and the routine negotiation of
pricing contracts with certain customers.
The Company’s cardiac valves are primarily used in cardiac replacement and reconstruction surgeries, including the
Ross procedure, for patients with endocarditis or congenital heart defects. The Company’s cardiac tissues are primarily
distributed in domestic markets.
Vascular Preservation Services
Revenues from vascular preservation services decreased 3% for the three months ended December 31, 2016 as compared
to the three months ended December 31, 2015. This decrease was primarily due to a 2% decrease in unit shipments of
vascular tissues, which decreased revenues by 4%, partially offset by an increase in average service fees, which increased
revenues by 1%.
Revenues from vascular preservation services increased 6% for the twelve months ended December 31, 2016 as
compared to the twelve months ended December 31, 2015. This increase was primarily due to an increase in average service
fees, which increased revenues by 3%, and the combined effect of favorable tissue mix and a 3% decrease in unit shipments
of vascular tissues, which in the aggregate increased revenues by 3%.
The Company’s vascular preservation services revenues benefited in the second half of 2015 and the first half of 2016
from an increase in vascular tissue availability, due to factors discussed above. The Company used this increase in available
tissue to meet the previously unmet demand from its existing vascular tissue customers. Although the Company’s vascular
tissue customers continue to receive tissue shipments, the volume of these requests has normalized. The decrease in
shipments of vascular tissues for the three and twelve months ended December 31, 2016 was primarily due to these factors.
Now that the Company has a sufficient vascular tissue supply, it is beginning the process of pursuing new and previous
vascular tissue customers to broaden its revenue base for vascular preservation services.
The increase in average service fees for the three and twelve months ended December 31, 2016 was primarily due to fee
differences due to physical characteristics of vascular tissues, list fee increases in domestic markets, and the routine
negotiation of pricing contracts with certain customers.
The majority of the Company’s vascular preservation services revenues are related to shipments of saphenous veins,
which are mainly used in peripheral vascular reconstruction surgeries to avoid limb amputations. These tissues are primarily
distributed in domestic markets.
Cost of Products and Preservation Services
Cost of Products
Cost of products
$
6,734
$
5,108
$
Three Months Ended
December 31,
2016
2015
Twelve Months Ended
December 31,
2016
28,033
2015
18,663
$
Cost of products increased 32% and 50% for the three and twelve months ended December 31, 2016, respectively, as
compared to the three and twelve months ended December 31, 2015, respectively. Cost of products in 2016 and 2015
includes costs related to BioGlue, BioFoam, CardioGenesis cardiac laser therapy, PerClot, PhotoFix, HeRO Graft through the
second quarter of 2016, and ProCol through the first quarter of 2016. Cost of products in 2016 also includes costs related to
On-X.
The increase in cost of products in the three and twelve months ended December 31, 2016 was primarily due to sales of
On-X products following the Company’s acquisition of On-X in January 2016, partially offset by a reduction in cost of
products following the sale of the HeRO Graft and ProCol product lines. Cost of products in the three and twelve months
ended December 31, 2016 includes $822,000 and $3.0 million, respectively, in acquisition inventory basis step-up expense,
related to the On-X inventory fair value adjustment recorded in purchase accounting. Cost of products in the twelve months
ended December 31, 2015 included the write-down of PerClot inventory manufactured for the U.S. market following the
Company’s cessation of marketing, sales, and distribution of PerClot in the U.S. during the first quarter of 2015.
50
Cost of Preservation Services
Cost of preservation services
$
7,100
$
8,214
$
Three Months Ended
December 31,
2016
2015
Twelve Months Ended
December 31,
2016
33,448
2015
36,516
$
Cost of preservation services decreased 14% and 8% for the three and twelve months ended December 31, 2016,
respectively, as compared to the three and twelve months ended December 31, 2015, respectively. Cost of preservation
services includes costs for cardiac and vascular tissue preservation services.
Cost of preservation services decreased in the three and twelve months ended December 31, 2016 primarily due to a
decrease in the per unit cost of processing tissues, as a result of processing changes implemented in 2015, as discussed in
“Preservation Services” above.
Gross Margin
Gross margin
Gross margin as a percentage of total revenues
Three Months Ended
December 31,
Twelve Months Ended
December 31,
$
2016
31,195
69%
$
2015
26,516
67%
2016
$ 118,899
66%
$
2015
90,719
62%
Gross margin increased 18% and 31% for the three and twelve months ended December 31, 2016, respectively, as
compared to the three and twelve months ended December 31, 2015, respectively. These increases were primarily due to the
addition of margins related to the On-X product line; increases in tissue margins due to a decrease in the per unit cost of
processing tissues; and, for the twelve months ended December 31, 2016, an increase in BioGlue margins due to increased
revenues. The increases were partially offset by decreases in margins for the divested HeRO Graft and ProCol product lines
and a decrease in margins for CardioGenesis cardiac laser therapy due to decreased revenues.
Gross margin as a percentage of total revenues increased in the three and twelve months ended December 31, 2016, as
compared to the three and twelve months ended December 31, 2015, respectively. These increases were primarily due to
increases in tissue margins, due to a decrease in the per unit cost of processing tissues, partially offset by the unfavorable
impact of the On-X acquisition inventory basis step-up expense discussed above. The gross margin and gross margin as a
percentage of total revenues for the twelve months ended December 31, 2015 were impacted by the write-down of PerClot
inventory, 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,
Twelve Months Ended
December 31,
2016
22,246
$
2015
19,139
$
2016
91,548
$
2015
74,929
$
49%
48%
51%
51%
General, administrative, and marketing expenses increased 16% and 22% for the three and twelve months ended
December 31, 2016, respectively, as compared to the three and twelve months ended December 31, 2015, respectively.
General, administrative, and marketing expenses for the three and twelve months ended December 31, 2016 included
$832,000 and $7.9 million, respectively, in business development costs primarily related to the acquisition of On-X in
January 2016, which include, among other costs, expenses related to the termination of international and domestic
distribution agreements. The Company also incurred additional general, administrative, and marketing expenses during 2016
related to the expanded sales force and the ongoing operations of On-X. General, administrative, and marketing expenses for
the twelve months ended December 31, 2015 included severance and termination benefits of approximately $3.0 million,
51
related to one-time expenses associated with certain employee departures, including the retirement of Mr. Anderson, the
Company’s former President, Chief Executive Officer, and Executive Chairman, in April 2015. General, administrative, and
marketing expenses included $1.1 million and $3.0 million for the three and twelve months ended December 31, 2015,
respectively, in business development expenses, primarily related to the acquisition of On-X.
Research and Development Expenses
Research and development expenses
Research and development expenses
as a percentage of total revenues
Three Months Ended
December 31,
2016
2015
$
3,844
$
2,540
$
Twelve Months Ended
December 31,
2016
13,446
2015
10,436
$
9%
6%
7%
7%
Research and development expenses increased 51% and 29% for the three and twelve months ended December 31, 2016,
respectively, as compared to the three and twelve months ended December 31, 2015, respectively. Research and
development spending in these periods was primarily focused on clinical work with respect to PerClot, the Company’s tissue
processing, On-X products, and BioGlue.
Gain from Sale of Business Components
Gain on sale of business components for the twelve months ended December 31, 2016 consisted of the net of an $8.8
million gain on the HeRO Sale and an $845,000 loss on the ProCol Sale. The Company sold its HeRO Graft and ProCol
product lines during the first quarter of 2016.
Gain on Sale of Medafor Investment
On October 1, 2013 Bard completed its acquisition of all outstanding shares of Medafor common stock. The Company
recorded gain on sale of investment of zero and $891,000 for the three and twelve months ended December 31, 2015,
respectively. The gain on the sale of Medafor investment in 2015 represents additional consideration received by the
Company in April 2015 related to the release of transaction consideration from escrow. The final release of funds from
escrow is expected to be received in October 2017 and is expected to be nominal.
Interest Expense
Interest expense was $787,000 and $3.0 million for the three and twelve months ended December 31, 2016, respectively,
and interest expense was a favorable $44,000 and $62,000 for the three and twelve months ended December 31, 2015,
respectively. Interest expense in the 2016 and 2015 periods included interest on debt and uncertain tax positions. The
increase in interest expense in 2016 was due to borrowings under the $75 million term loan the Company entered into in
January 2016 to finance, in part, the acquisition of On-X. In the three and twelve months ended December 31, 2015 interest
expense was favorable due to the reversal of interest on uncertain tax positions.
Earnings
Income before income taxes
Income tax expense
Net income
Diluted income per common share
Diluted weighted-average common shares outstanding
Three Months Ended
December 31,
Twelve Months Ended
December 31,
$
$
$
2016
3,759
862
2,897
0.09
33,443
$
$
$
2015
4,617
1,981
2,636
0.09
28,687
$
$
$
2016
18,412
7,634
10,778
0.32
32,822
$
$
$
2015
5,868
1,863
4,005
0.14
28,542
Income before income taxes decreased 19% and increased 214% for the three and twelve months ended December 31,
2016, respectively, as compared to the three and twelve months ended December 31, 2015, respectively. The decrease in
income before income taxes for the three months ended December 31, 2016 was due to an increase in operating expenses and
interest expense, partially offset by an increase in gross margins, as discussed above. The increase in income before income
52
taxes for the twelve months ended December 31, 2016 was primarily due to an increase in gross margins and the gain on sale
of business components, partially offset by increases in operating expenses and interest expense, as discussed above.
The Company’s effective income tax rate was 23% and 41% for the three and twelve months ended December 31, 2016,
respectively, as compared to 43% and 32% for the three and twelve months ended December 31, 2015, respectively. The
Company’s income tax rate for the three months ended December 31, 2016 was favorably affected by increases in pretax
book income and the tax deduction for domestic manufacturers as compared to prior estimates. The Company’s income tax
rate for the twelve months ended December 31, 2016 was unfavorably impacted by the tax treatment of certain expenses
related to the On-X acquisition, which had a larger impact on the tax rate in the first quarter of 2016, and by book/tax basis
differences related to the HeRO Sale.
The Company’s income tax rate for the twelve months ended December 31, 2015 was favorably affected by the reversal
of $869,000 in uncertain tax positions, primarily related to research and development tax credits for which the statute of
limitations has expired, partially offset by the expiration of certain state net operating losses and other permanent differences.
Net income increased for the three months ended December 31, 2016 as compared to the three months ended December
31, 2015, primarily due to a decrease in income tax expense, partially offset by an decrease in income before income taxes, as
discussed above. Net income and diluted income per common share increased for the twelve months ended December 31,
2016 as compared to the twelve months ended December 31, 2015, primarily due to the increase in income before income
taxes, partially offset by an increase in income tax expense, as discussed above.
Diluted income per common share could be affected in future periods by changes in the Company’s common stock
outstanding.
Revenues
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues for the
Three Months Ended
December 31,
Revenues as a Percentage of
Total Revenues for the
Three Months Ended
December 31,
2015
2014
2015
2014
Products:
BioGlue and BioFoam
PerClot
CardioGenesis cardiac laser therapy
HeRO Graft
ProCol
PhotoFix
Total products
Preservation services:
Cardiac tissue
Vascular tissue
Total preservation services
$
16,488
1,096
3,487
2,008
397
437
23,913
6,970
8,955
15,925
$
16,346
1,232
2,151
1,827
117
--
21,673
7,456
8,022
15,478
41%
3%
9%
5%
1%
1%
60%
18%
22%
40%
Total
$
39,838
$
37,151
100%
44%
3%
6%
5%
--%
--%
58%
20%
22%
42%
100%
53
Revenues for the
Twelve Months Ended
December 31,
Revenues as a Percentage of
Total Revenues for the
Twelve Months Ended
December 31,
2015
2014
2015
2014
Products:
BioGlue and BioFoam
PerClot
CardioGenesis cardiac laser therapy
HeRO Graft
ProCol
PhotoFix
Total products
Cardiac tissue
Vascular tissue
Total preservation services
$
59,332
4,083
9,419
7,546
1,305
1,396
83,081
28,059
34,758
62,817
$
62,091
4,289
8,225
7,131
147
--
81,883
29,437
33,321
62,758
41%
3%
6%
5%
1%
1%
57%
19%
24%
43%
43%
3%
6%
5%
--%
--%
57%
20%
23%
43%
Total
$
145,898
$
144,641
100%
100%
Revenues increased 7% and 1% for the three and twelve months ended December 31, 2015, respectively, as compared to
the three and twelve months ended December 31, 2014, respectively. A detailed discussion of the changes in product
revenues and preservation services revenues for the three and twelve months ended December 31, 2015 is presented below.
Products
Revenues from products increased 10% and 1% for the three and twelve months ended December 31, 2015, respectively,
as compared to the three and twelve months ended December 31, 2014, respectively. These increases were primarily due to
increases in CardioGenesis cardiac laser therapy, ProCol, and PhotoFix revenues. In the twelve months ended December 31,
2015, this increase was partially offset by a decrease in BioGlue revenues. A detailed discussion of the changes in product
revenues for BioGlue and BioFoam; PerClot; CardioGenesis cardiac laser therapy; HeRO Graft; and ProCol and PhotoFix is
presented below.
The Company’s sales of products through its direct sales force to U.K. hospitals are denominated in British Pounds, and
its sales to German, Austrian, and Irish hospitals and certain distributors are denominated in Euros and are, therefore, subject
to changes in foreign exchange rates. During 2015, the U.S. Dollar strengthened materially, as compared to the British
Pound and Euro and, as a result, the Company’s revenues denominated in these currencies decreased when translated into
U.S. Dollars. Any further change in these exchange rates could have a material, adverse effect on the Company’s revenues
denominated in these currencies. Additionally, the Company’s sales to many distributors around the world are denominated
in U.S. Dollars, and, although these sales are not directly impacted by the strong U.S. Dollar, the Company believed that its
distributors may be delaying or reducing purchases of products in U.S. Dollars due to the relative price of these goods in their
local currencies.
BioGlue and BioFoam
Revenues from the sale of surgical sealants, consisting of BioGlue and BioFoam, increased 1% for the three months
ended December 31, 2015, as compared to the three months ended December 31, 2014. This increase was primarily due to
an increase in average sales prices, which increased revenues by 4%, partially offset by the unfavorable impact of foreign
exchange rates, which decreased revenues by 2%, and unfavorable volume, which decreased revenues by 1%.
Revenues from the sale of surgical sealants decreased 4% for the twelve months ended December 31, 2015, as compared
to the twelve months ended December 31, 2014. This decrease was primarily due to a 4% decrease in the volume of
milliliters sold, which decreased revenues by 4% and the unfavorable impact of foreign exchange rates, which decreased
revenues by 2%, partially offset by an increase in average sales prices, which increased revenues by 2%.
54
The increase in average sales prices for the three and twelve months ended December 31, 2015 was primarily due to the
favorable impact of the transition to a direct sales model in France, list price increases in domestic markets, and the routine
negotiation of pricing contracts with certain customers.
The decrease in sales volume of surgical sealants for the twelve months ended December 31, 2015 was primarily due to a
lack of shipments of BioGlue to the Company’s French distributor during the first nine months of 2015, as the Company
transitioned this market from a distributor to a direct sales model effective October 1, 2015 and due to a reduction in
shipments to the Company’s distributor in Brazil, as a result of factors such as economic instability and local currency
devaluation in Brazil. To a lesser extent the decrease in volume was due to a decrease in sales in domestic markets primarily
due to declining procedure volume, as doctors are performing more minimally invasive procedures, and hospitals seeking to
control costs by reducing spending on consumable items such as BioGlue.
Revenues from shipments to Japan were $1.5 million and $5.5 million for the three and twelve months ended December
31, 2015, respectively, and $1.1 million and $5.0 million for the three and twelve months ended December 31, 2014,
respectively. The Company received an expanded indication for BioGlue in Japan in mid-2015.
Domestic revenues accounted for 55% and 58% of total BioGlue revenues for the three and twelve months ended
December 31, 2015, respectively, and 55% and 56% of total BioGlue revenues for the three and twelve months ended
December 31, 2014, respectively. BioFoam sales accounted for less than 1% of surgical sealant sales for the three and twelve
months ended December 31, 2015 and 2014. BioFoam is currently approved for sale in certain international markets.
PerClot
Revenues from the sale of PerClot decreased 11% for the three months ended December 31, 2015 as compared to the
three months ended December 31, 2014. This decrease was primarily due to an 11% decrease in the volume of grams sold,
which decreased revenues by 5%, the unfavorable effect of foreign currency exchange, which decreased revenues by 4%, and
a decrease in average selling prices, which decreased revenues by 2%.
Revenues from the sale of PerClot decreased 5% for the twelve months ended December 31, 2015 as compared to the
twelve months ended December 31, 2014. This decrease was primarily due to the unfavorable effect of foreign currency
exchange, which decreased revenues by 7%, and a decrease in average selling prices, which decreased revenues by 3%,
partially offset by favorable sales volume, which increased revenues by 5%.
Revenues during these three and twelve month periods were largely for sales in certain international markets, as PerClot
was only distributed domestically from August 2014 to March 2015 as discussed in Note 9 of the “Notes to Consolidated
Financial Statements.”
The decrease in revenues for the three months ended December 31, 2015 was primarily due to decreased sales in the
Company’s markets in Asia Pacific and Latin America, as large orders in the fourth quarter of 2014 did not recur in 2015.
The increase in revenues for the twelve months ended December 31, 2015 was primarily due to increased sales in the U.K.,
largely for use in gynecology procedures.
The decrease in average selling prices for the three and twelve months ended December 31, 2015 was primarily due to
price reductions to certain distributors in Europe, as a result of pricing pressures from competitive products and to offset the
relatively higher price of PerClot due to the strengthening of the U.S. Dollar. The effect of foreign exchange rate changes
discussed above had a larger impact on the Company’s PerClot revenues, as a larger percentage of these revenues are
denominated in foreign currencies than revenues from the Company’s other products.
CardioGenesis Cardiac Laser Therapy
Revenues from the Company’s CardioGenesis cardiac laser therapy product line consist primarily of sales of handpieces
and, in certain periods, revenues from the sale of laser consoles. Revenues from cardiac laser therapy increased 62% for the
three months ended December 31, 2015 as compared to the three months ended December 31, 2014. Revenues from the sale
of laser consoles were $1.1 million and $240,000 for the three months ended December 31, 2015 and 2014, respectively.
Revenues from the sale of handpieces increased 29% for the three months ended December 31, 2015 as compared to the three
months ended December 31, 2014. This increase was primarily due to a 23% increase in unit shipments of handpieces,
which increased revenues by 26%, and an increase in average sales prices, which increased revenues by 3%.
55
Revenues from cardiac laser therapy increased 15% for the twelve months ended December 31, 2015 as compared to the
twelve months ended December 31, 2014. Revenues from the sale of laser consoles were $1.2 million and $384,000 for the
twelve months ended December 31, 2015 and 2014, respectively. Revenues from the sale of handpieces increased 6% for the
twelve months ended December 31, 2015 as compared to the twelve months ended December 31, 2014. This increase was
primarily due to a 4% increase in unit shipments of handpieces, which increased revenues by 4%, and an increase in average
sales prices, which increased revenues by 2%.
Revenues from laser console sales increased for both the three and twelve months ended December 31, 2015 due
primarily to an increase in the average price paid per laser console and, to a lesser extent, due to an increase in the number of
laser consoles sold during the 2015 periods.
HeRO Graft
Revenues from HeRO Grafts include revenues related to the sale of vascular grafts, venous outflow components, and
accessories, which are generally sold together as a kit. HeRO Grafts were primarily distributed in domestic markets as a
solution for ESRD in certain hemodialysis patients. HeRO Graft revenues increased 10% for the three months ended
December 31, 2015, as compared to the three months ended December 31, 2014. This increase was primarily due to a 5%
increase in number of kits sold, which increased revenues by 5%, and an increase in average sales prices, which increased
revenues by 6%, partially offset by the unfavorable effect of foreign currency exchange, which decreased revenues by 1%.
HeRO Graft revenues increased 6% for the twelve months ended December 31, 2015, as compared to the twelve months
ended December 31, 2014. This increase was primarily due to a 4% increase in number of kits sold, which increased
revenues by 3% and an increase in average sales prices, which increased revenues by 4%, partially offset by the unfavorable
effect of foreign currency exchange, which decreased revenues by 1%.
The increase in HeRO Graft volume for the three months ended December 31, 2015 was primarily due to an increase in
the volume of kits sold in domestic markets due to the timing of surgical cases. The increase in HeRO Graft volume for the
twelve months ended December 31, 2015 was primarily due to an increase in the volume of kits sold in international markets
as a result of an increase in procedure volume and an increase in the number of implanting physicians, partially offset by a
decrease in domestic sales volume. As discussed above the Company divested its HeRO Graft business in February 2016.
ProCol and PhotoFix
In 2014 CryoLife acquired the exclusive worldwide distribution rights from Hancock Jaffe for ProCol, a biological graft
derived from a bovine mesenteric vein. ProCol is distributed in the U.S. to provide vascular access for ESRD hemodialysis
patients. The Company began limited distribution of ProCol in the second quarter of 2014 and began its full U.S. launch in
the fourth quarter of 2014.
In 2014 CryoLife acquired the distribution rights from GBI for PhotoFix, a bovine pericardial patch. PhotoFix is
distributed in the U.S. and is indicated for use in intracardiac repair, including ventricular repair and atrial repair, great vessel
repair and suture line buttressing, and pericardial closure. The Company launched its distribution of PhotoFix in the first
quarter of 2015.
Preservation Services
Revenues from preservation services increased 3% and less than 1% for the three and twelve months ended December
31, 2015, respectively, as compared to the three and twelve months ended December 31, 2014, respectively. The increase in
revenues for the three and twelve month periods was primarily due to an increase in vascular preservation services revenues,
partially offset by a decrease in cardiac preservation services revenues. See further discussion of cardiac and vascular
preservation services revenues below.
During 2014 the Company made significant changes to various tissue processing and quality procedures, which resulted
in a decrease in tissue processing throughput and an increase in the Company’s cost of processing tissues. Preservation
services revenues and costs were negatively impacted during 2014 due to these factors. These factors continued to impact
revenues and costs during 2015 as the Company continued to ship tissues that were processed in 2014. The Company
continues to review and modify its procedures as part of its ongoing compliance efforts and in an effort to improve tissue
processing throughput and reduce costs. These efforts have begun to increase tissue availability, particularly vascular tissue
availability as discussed further below, and have had begun to reduce costs.
56
Preservation services revenues, particularly revenues for certain high-demand cardiac tissues, can vary from quarter to
quarter and year to year due to a variety of factors including: quantity and type of incoming tissues, yields of tissue through
the preservation process, timing of receipt of donor information, timing of the release of tissues to an implantable status,
demand for certain tissue types due to the number and type of procedures being performed, and pressures from competing
products or services. See further discussion below of specific items affecting cardiac and vascular preservation services
revenues for the three and twelve months ended December 31, 2015.
Cardiac Preservation Services
Revenues from cardiac preservation services, consisting of revenues from the distribution of heart valves and cardiac
patch tissues, decreased 7% for the three months ended December 31, 2015 as compared to the three months ended December
31, 2014. This decrease was primarily due to a 13% decrease in unit shipments of cardiac tissues, which decreased revenues
by 10%, partially offset by an increase in average service fees, which increased revenues by 3%.
Revenues from cardiac preservation services decreased 5% for the twelve months ended December 31, 2015 as
compared to the twelve months ended December 31, 2014. This decrease was primarily due to an 11% decrease in unit
shipments of cardiac tissues, which decreased revenues by 9%, partially offset by an increase in average service fees, which
increased revenues by 4%.
The decrease in volume for the three and twelve months ended December 31, 2015 was primarily due to a decrease in the
volume of pulmonary valve and patch shipments. The Company believes that the decrease in cardiac tissue shipments during
these periods was due to increasing competition from lower cost bioprosthetic valves and patches.
The increase in average service fees for the three and twelve months ended December 31, 2015 was primarily due to list
fee increases in domestic markets and due to the routine negotiation of pricing contracts with certain customers.
Revenues from SynerGraft processed tissues, including the CryoValve SGPV and CryoPatch SG, accounted for 62% and
63% of total cardiac preservation services revenues for the three and twelve months ended December 31, 2015, respectively,
and 66% and 64% of total cardiac preservation services revenues for the three and twelve months ended December 31, 2014,
respectively.
The Company’s cardiac valves are primarily used in cardiac replacement and reconstruction surgeries, including the
Ross procedure, for patients with endocarditis or congenital heart defects. The Company’s cardiac tissues are primarily
distributed in domestic markets.
Vascular Preservation Services
Revenues from vascular preservation services increased 12% for the three months ended December 31, 2015 as
compared to the three months ended December 31, 2014. This increase was primarily due to an increase in average service
fees, which increased revenues by 6%, and favorable tissue volume, which increased revenues by 6%.
Revenues from vascular preservation services increased 4% for the twelve months ended December 31, 2015 as
compared to the twelve months ended December 31, 2014. This increase was primarily due to an increase in average service
fees, which increased revenues by 5%, partially offset by an unfavorable tissue volume, which decreased revenues by 1%.
The increase in average service fees for the three and twelve months ended December 31, 2015 was primarily due to list
fee increases in domestic markets, fee differences due to physical characteristics of vascular tissues, and the routine
negotiation of pricing contracts with certain customers.
The increase in vascular volume for the three months ended December 31, 2015 was primarily due to increases in
shipments of saphenous veins and aortoilliac arteries, due to improving tissue availability as discussed above.
The majority of the Company’s vascular preservation services revenues are related to shipments of saphenous veins,
which are mainly used in peripheral vascular reconstruction surgeries to avoid limb amputations. These tissues are primarily
distributed in domestic markets.
57
Cost of Products and Preservation Services
Cost of Products
Cost of products
$
5,108
$
5,068
$
Three Months Ended
December 31,
2015
2014
Twelve Months Ended
December 31,
2015
18,663
2014
17,167
$
Cost of products increased 1% and 9% for the three and twelve months ended December 31, 2015, respectively, as
compared to the three and twelve months ended December 31, 2014, respectively. Cost of products in 2015 and 2014
includes costs related to BioGlue, BioFoam, PerClot, CardioGenesis cardiac laser therapy, HeRO Grafts, and ProCol. Cost
of products in 2015 also includes costs related to PhotoFix.
The increase in cost of products was primarily due to sales of the Company’s new distributed products, PhotoFix and
ProCol, partially offset by a decrease in the per unit cost of manufacturing BioGlue. The increase in cost of products in the
twelve months ended December 31, 2015 was also affected by the write-down of PerClot inventory manufactured for the
U.S. market following the Company’s cessation of marketing, sales, and distribution of PerClot in the U.S.
Cost of Preservation Services
Cost of preservation services
$
8,214
$
9,448
$
Three Months Ended
December 31,
2015
2014
Twelve Months Ended
December 31,
2015
36,516
2014
36,183
$
Cost of preservation services decreased 13% and increased 1% for the three and twelve months ended December 31,
2015, respectively, as compared to the three and twelve months ended December 31, 2014, respectively. Cost of preservation
services includes costs for cardiac and vascular tissue preservation services.
Cost of preservation services decreased in the three months ended December 31, 2015 primarily due to a decrease in unit
shipments of cardiac tissues and due to a decrease in the per unit cost of processing tissues, as a result of processing changes
implemented in 2015. Cost of preservation services increased in the twelve months ended December 31, 2015 primarily due
to an increase in the per unit cost of processing tissues, as a result of lower processing throughput of tissues, increased
compliance and personnel costs, and an increase in the cost of materials for tissues processed in 2014 and in the beginning of
2015. This was partially offset by a decrease in the unit shipments of cardiac and vascular tissue for the twelve months ended
December 31, 2015. See “Preservation Services” above for a further discussion of the factors impacting tissue processing
costs.
Gross Margin
Gross margin
Gross margin as a percentage of total revenues
Three Months Ended
December 31,
Twelve Months Ended
December 31,
$
2015
26,516
67%
$
2014
22,635
61%
$
2015
90,719
62%
$
2014
91,291
63%
Gross margin increased 17% and decreased 1% for the three and twelve months ended December 31, 2015, respectively,
as compared to the three and twelve months ended December 31, 2014, respectively. Gross margin as a percentage of total
revenues increased in the three months ended December 31, 2015 as compared to the three months ended December 31,
2014, primarily due to decreases in the per unit cost of processing tissues and per unit cost of BioGlue. Gross margin as a
percentage of total revenues decreased in the twelve months ended December 31, 2015 as compared to the twelve months
ended December 31, 2014, primarily due to an increase in the per unit cost of processing tissues and due to the write-down of
PerClot inventory, as discussed above.
58
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,
Twelve Months Ended
December 31,
2015
19,139
$
2014
18,638
$
2015
74,929
$
2014
73,754
$
48%
50%
51%
51%
General, administrative, and marketing expenses increased 3% and 2% for the three and twelve months ended December
31, 2015, respectively, as compared to the three and twelve months ended December 31, 2014, respectively.
General, administrative, and marketing expenses for the twelve months ended December 31, 2015 included severance
and termination benefits of approximately $3.0 million, related to one-time expenses associated with certain employee
departures, including the retirement of Mr. Anderson, the Company’s former President, Chief Executive Officer (“CEO”),
and Executive Chairman, in April 2015. General, administrative, and marketing expenses included $1.1 million and $3.0
million for the three and twelve months ended December 31, 2015, respectively, in business development expenses, primarily
related to the acquisition of On-X. General, administrative, and marketing expenses included $565,000 and $2.0 million for
the three and twelve months ended December 31, 2014, respectively, in compensation charges related to personnel changes,
including the appointment of Mr. Mackin as President and CEO in the third quarter of 2014 and one-time expenses associated
with certain employee departures. The increase in general, administrative, and marketing expenses in the current year
periods was also due to higher expenses to support the Company’s increasing revenue base, international expansion, new
product offerings, and increasing employee headcount. The increase in expenses for the twelve months ended December 31,
2015 included the impairment of a PerClot Topical intangible asset and higher legal fees related to the litigation with
Medafor, Inc. (“Medafor”).
Research and Development Expenses
Research and development expenses
Research and development expenses
as a percentage of total revenues
Three Months Ended
December 31,
2015
2014
$
2,540
$
2,092
$
Twelve Months Ended
December 31,
2015
10,436
2014
$
8,699
6%
6%
7%
6%
Research and development expenses increased 21% and 20% for the three and twelve months ended December 31, 2015,
respectively, as compared to the three and twelve months ended December 31, 2014, respectively. Research and
development spending in these periods was primarily focused on clinical and pre-clinical work with respect to PerClot, the
Company’s tissue processing, and BioGlue and BioFoam.
Gain on Sale of Medafor Investment
On October 1, 2013 Bard completed its acquisition of all outstanding shares of Medafor common stock. The Company
recorded gain on sale of investment of zero and $891,000 for the three and twelve months ended December 31, 2015 and
$530,000 for the three and twelve months ended December 31, 2014. The gain on the sale of Medafor investment in 2015
represents additional consideration received by the Company in April 2015 related to the release of transaction consideration
from escrow.
59
Earnings
Income before income taxes
Income tax expense (benefit)
Net income
Diluted income per common share
Diluted weighted-average common shares outstanding
Three Months Ended
December 31,
Twelve Months Ended
December 31,
$
$
$
2015
4,617
1,981
2,636
0.09
28,687
$
$
$
2014
1,625
(151)
1,776
0.06
28,238
$
$
$
2015
5,868
1,863
4,005
0.14
28,542
$
$
$
2014
8,703
1,381
7,322
0.25
28,313
Income before income taxes increased 184% and decreased 33% for the three and twelve months ended December 31,
2015, respectively, as compared to the three and twelve months ended December 31, 2014, respectively. The increase in
income before income taxes for the three months ended December 31, 2015 was due to an increase in gross margins, partially
offset by an increase in operating expenses, as discussed above. The decrease in income before income taxes for the twelve
months ended December 31, 2015 was primarily due to an increase in operating expenses, as discussed above.
The Company’s effective income tax rate was 43% and 32% for the three and twelve months ended December 31, 2015,
respectively, as compared to a benefit of 9% and expense of 16% for the three and twelve months ended December 31, 2014,
respectively. The Company’s income tax rate for the twelve months ended December 31, 2015 was favorably affected by the
reversal of $869,000 in uncertain tax positions, primarily related to research and development tax credits for which the statute
of limitations has expired, partially offset by the expiration of certain state net operating losses and other permanent
differences.
The Company’s income tax rate for the three and twelve months ended December 31, 2014 was favorably affected by the
reduction in uncertain tax positions, nontaxable gains recorded as change in stock basis of subsidiary, and favorable
deductions taken on the Company’s 2013 federal tax return, which was filed in 2014.
Net income and diluted income per common share increased for the three months ended December 31, 2015 as compared
to the three months ended December 31, 2014, primarily due to the increase in income before income taxes, partially offset
by an increase in income tax expense, as discussed above. Net income and diluted income per common share decreased for
the twelve months ended December 31, 2015 as compared to the twelve months ended December 31, 2014, primarily due to
the decrease in income before income taxes, and by an increase in income tax expense, as discussed above.
Seasonality
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
the summer holiday seasons in Europe and the U.S. The Company believes that demand for BioGlue in Japan may continue
to be lowest in the second quarter of each year due to distributor ordering patterns driven by the slower summer holiday
season in Japan.
The Company is uncertain whether the demand for On-X products, PerClot, or PhotoFix will be seasonal, as these
products have not fully penetrated many markets and, therefore, the nature of any seasonal trends may be obscured.
The Company does not believe the demand for CardioGenesis cardiac laser therapy is seasonal, as the Company’s data
does not indicate a significant trend.
The Company’s demand for its cardiac preservation services has traditionally been seasonal, with peak demand generally
occurring in the third quarter. Management believes that this trend for cardiac preservation services is primarily due to the
high number of surgeries scheduled during the summer months for school-aged patients. Based on experience in recent
years, management believes that this trend is lessening as the Company is distributing a higher percentage of its tissues for
use in adult populations.
The Company’s 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 vascular surgeries
being scheduled during the winter holiday months.
60
Liquidity and Capital Resources
Net Working Capital
At December 31, 2016 net working capital (current assets of $147.2 million less current liabilities of $30.1 million) was
$117.1 million, with a current ratio (current assets divided by current liabilities) of 5 to 1, compared to net working capital of
$90.1 million and a current ratio of 6 to 1 at December 31, 2015.
Overall Liquidity and Capital Resources
The Company's largest cash requirement for the twelve months ended December 31, 2016 was cash used to fund the
acquisition of On-X. To a lesser extent, the Company’s cash requirements included capital expenditures for facilities and
equipment, debt issuance costs and principal payments on the Company’s borrowings, and to fund the purchase of the
PhotoFix Technology. The Company funded its cash requirements by issuing debt in the form of a new $75 million term
loan, discussed further below, through the sale of certain components of the Company’s business, the Company’s existing
cash reserves, and its operating activities, which generated cash during the period.
The Company believes that its 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 are
expected to include interest and principal payments under our debt agreement, expenditures for clinical trials, additional
research and development expenditures, general working capital needs, capital expenditures, and other corporate purposes
and may include cash to fund business development activities. These items may have a significant effect on the Company’s
cash flows during the next twelve months. Subject to the terms of its credit facility and other obligations of the Company, the
Company may seek additional borrowing capacity or financing, pursuant to its current or any future shelf registration
statement, for general corporate purposes or to fund other future cash requirements. If the Company undertakes any further
significant business development activity, it may need to finance such activities by drawing down monies under its credit
agreement, discussed below, obtaining additional debt financing, or using a registration statement to sell equities. There can
be no assurance that the Company will be able to obtain any additional debt or equity financing at the time needed or that
such financing will be available on terms that are favorable or acceptable to the Company.
Significant Sources and Uses of Liquidity
On January 20, 2016 the Company completed its acquisition of On-X, an Austin, Texas-based, privately held mechanical
heart valve company, which is being operated as a wholly owned subsidiary of CryoLife. The purchase price of the
transaction totaled approximately $128.2 million, consisting of cash of $93.6 million and 3,703,699 shares of CryoLife
common stock, with a value of $34.6 million as determined on the date of the closing.
In connection with the closing of the On-X acquisition, on January 20, 2016 the Company and certain of its subsidiaries
entered into the Third Amended and Restated Credit Agreement (“Amended Debt Agreement”) with Capital One, National
Association. Capital One Financial Corporation acquired GE Capital’s Healthcare Financial Services lending business in late
2015. The designated credit parties are Healthcare Financial Solutions, LLC; Fifth Third Bank; and Citizens Bank, National
Association, collectively the (“Lending Parties”). The Amended Debt Agreement amended and restated the GE Credit
Agreement and provides the Company with a senior secured credit facility in an aggregate principal amount of $95 million,
which includes a $75 million term loan and a $20 million revolving credit facility (including a $4 million letter of credit sub-
facility and a $3 million swing-line sub-facility). The $75 million term loan was used to finance, in part, the acquisition of
On-X and will mature on January 20, 2021. The Company and its domestic subsidiaries, subject to certain exceptions and
exclusions, have guaranteed the obligations of the Amended Debt Agreement. Borrowings under the Amended Debt
Agreement are secured by substantially all of the Company’s real and personal property.
On February 3, 2016 the Company sold its HeRO Graft product line to Merit for $18.5 million in cash, of which $17.8
million had been received by December 31, 2016. The remaining $740,000 was received in the first quarter of 2017. On
March 18, 2016 the Company sold its ProCol Vascular Bioprosthesis distribution rights and purchase option to LeMaitre for
$2.0 million in cash, all of which was received by December 31, 2016. The Company recorded a pre-tax gain of
approximately $8.8 million on the HeRO Sale and a pre-tax loss of approximately $845,000 on the ProCol Sale.
On April 13, 2016 the Company exercised its right to acquire the PhotoFix technology from GBI for approximately $2.3
million, of which $1.2 million was paid in cash. GBI will continue to manufacture PhotoFix until the Company is able to
establish manufacturing operations, which is expected to occur by mid-2017.
61
The Company is conducting its pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in
the U.S. The Company began enrollment in the trial in the second quarter of 2015 but later suspended enrollment pending
consultation with the FDA regarding the trial protocol. These discussions resulted in two amendments to the trial protocol,
the last of which was approved by the FDA in July 2016. The Company is in the process of conducting site start-up activities
and resumed enrollment into the trial in the fourth quarter of 2016 with the goal of receiving PMA from the FDA in the first
half of 2019. See also Part I, Item 1A, “Risk Factors—Risks Relating To Our Business—Our investment in PerClot is
subject to significant risks, and our ability to fully realize our investment is dependent on our ability to obtain FDA approval
and to successfully commercialize PerClot in the U.S.”
The Company acquired net operating loss carryforwards from its acquisitions of On-X, Hemosphere, Inc., and
Cardiogenesis Corporation that the Company believes will reduce required cash payments for federal income taxes by
approximately $6.6 million for the 2016 tax year.
As of December 31, 2016 approximately 4% of the Company’s cash and cash equivalents were held in foreign
jurisdictions.
Net Cash Flows from Operating Activities
Net cash provided by operating activities was $19.7 million for the twelve months ended December 31, 2016 as
compared to $11.4 million for the twelve months ended December 31, 2015.
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, items classified as investing and
financing cash flows, and for changes in operating assets and liabilities from the prior year end. For the twelve months ended
December 31, 2016 these items included $8.4 million in depreciation and amortization expenses and $6.3 million in non-cash
compensation, partially offset by $7.9 million in gain from sale of business components. The gain from sale of business
components is the gain on the HeRO Sale, partially offset by the loss on the ProCol Sale.
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, 2016 these changes included an unfavorable adjustment of $9.5 million due to
increases in inventory balances and deferred preservation costs, partially offset by a favorable effect of $4.7 million due to
timing differences between the recording of accounts payable and other current liabilities and the payment of cash and $4.1
million due to the timing difference between recording receivables and the receipt of cash.
Net Cash Flows from Investing Activities
Net cash used in investing activities was $73.9 million for the twelve months ended December 31, 2016 as compared to
$4.5 million for the twelve months ended December 31, 2015. The current year cash used was primarily due to $91.2 million
for the acquisition of On-X, net of cash acquired, and $6.2 million in capital expenditures, partially offset by $19.8 million in
proceeds from the sale of business components related to the HeRO Sale and the ProCol Sale and $5.0 million for the
decrease in restricted cash.
Net Cash Flows from Financing Activities
Net cash provided by financing activities was $73.4 million for the twelve months ended December 31, 2016 as
compared to net cash used of $2.8 million for the twelve months ended December 31, 2015. The current year cash provided
was primarily due to $75.0 million in proceeds from the issuance of a term loan, which was used to finance, in part, the
acquisition of On-X, and $2.2 million in proceeds from the exercise of stock options and issuance of common stock under the
Company’s employee stock purchase plan, partially offset by $2.3 million in debt issuance costs and $1.4 million in debt
repayments.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
62
Scheduled Contractual Obligations and Future Payments
Scheduled contractual obligations and the related future payments as of December 31, 2016 are as follows (in
thousands):
Long-term debt obligations
Operating leases
Interest payments
Research obligations
Purchase commitments
Contingent payments
Other long-term liabilities
Total contractual obligations
$
Total
73,594
25,533
9,150
7,564
4,272
1,000
940
$ 122,053
$
2017
5,096
4,470
2,463
5,312
2,506
--
922
$ 20,769
$
2018
3,750
4,779
2,316
2,199
1,642
--
18
$ 14,704
$
2019
3,750
4,722
2,184
28
124
1,000
--
$ 11,808
$
2020
5,156
4,127
2,028
25
--
--
--
$ 11,336
2021
$ 55,842
3,647
159
--
--
--
--
$ 59,648
Thereafter
--
$
3,788
--
--
--
--
--
3,788
$
The Company’s long-term debt obligations result from scheduled principal payments and anticipated interest payments
related to the Company’s Amended Debt Agreement.
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 obligations from agreements with suppliers, one of which is the
minimum purchase requirements for PerClot under the Distribution Agreement. Pursuant to the terms of the Distribution
Agreement, the Company may terminate that agreement, including the minimum purchase requirements set forth in the
agreement for various reasons, one of which is if the Company obtains FDA approval for PerClot. These minimum
purchases are included in the table above through 2018, based on the assumption that CryoLife will not terminate the
Distribution Agreement before its target date for receiving FDA approval for PerClot in 2019. However, if the Company
does not obtain FDA approval for PerClot and chooses not to terminate the Distribution Agreement, CryoLife may have
minimum purchase obligations of up to $1.75 million per year through the end of the contract term in 2025.
The contingent payments obligation includes payments that the Company may make if certain U.S. regulatory approvals
and certain commercial milestones are achieved related to the Company’s transaction with SMI for PerClot.
The Company’s research obligations represent commitments for ongoing studies and payments to support research and
development activities.
The schedule of contractual obligations above excludes (i) obligations for estimated liability claims unless they are due
as a result of a settlement agreement or other contractual obligation, as no assessments have been made for specific litigation,
and (ii) any estimated liability for uncertain tax positions and interest and penalties, currently estimated to be $3.6 million, as
no specific assessments have been made by any taxing authorities.
Capital Expenditures
Capital expenditures for the twelve months ended December 31, 2016 and 2015 were $6.2 million and $3.5 million,
respectively. Capital expenditures in the twelve months ended December 31, 2016 were primarily related to the routine
purchases of computer software; manufacturing and tissue processing equipment; computer and office equipment;
CardioGenesis cardiac laser therapy laser consoles; and leasehold improvements 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 interest expense are sensitive to changes in the general level of U.S. interest rates.
In this regard, changes in U.S. interest rates affect the interest earned on the Company’s cash and cash equivalents of $56.6
million as of December 31, 2016, and interest paid on the outstanding balances, if any, of the Company’s variable rate line of
credit and $75 million term loan. A 10% adverse change in interest rates as compared to the rates experienced by the
63
Company in the twelve months ended December 31, 2016, affecting the Company’s cash and cash equivalents, restricted
cash and securities, $75 million term loan, and line of credit would not have had 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 portion of the
Company’s international BioGlue, On-X, and PerClot 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, Euros, Swiss Francs,
and Singapore Dollars. These foreign currency transactions are sensitive to changes in exchange rates. In this regard,
changes in exchange rates could cause a change in the U.S. Dollar equivalent of net income from transactions conducted in
other currencies. As a result, the Company could recognize a reduction in revenues or an increase in expenses related to a
change in exchange rates.
An additional 10% adverse change in exchange rates from the exchange rates in effect on December 31, 2016 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 weighted-average exchange rates
experienced by the Company for the twelve months ended December 31, 2016 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. Due to 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 breakdown can occur because of simple error or mistake. The Company’s Disclosure
Controls have been designed to provide reasonable assurance of achieving their objectives.
64
The Company’s management utilizes the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by
the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of its Disclosure
Controls over financial reporting. Based upon the most recent Disclosure Controls evaluation conducted by management
with the participation of the CEO and CFO, as of December 31, 2016, 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.
The Securities and Exchange Commission’s general guidance permits the exclusion of an assessment of the
effectiveness of a registrant’s disclosure controls and procedures as they relate to its internal control over financial reporting
for an acquired business during the first year following such acquisition if, among other circumstances and factors, there is
not adequate time between the acquisition date and the date of assessment. As previously noted in this Form 10-K, the
Company completed the acquisition of On-X Life Technologies Holdings, Inc. (“On-X”) during the first quarter of 2016.
Management’s assessment and conclusion on the effectiveness of the Company’s disclosure controls and procedures as of
December 31, 2016 excludes an assessment of the internal control over financial reporting of On-X. See Part II, Item 8, Note
4, “Notes to Consolidated Financial Statements” contained in this Form 10-K for a description of the significance of the
acquired business to the Company.
During the quarter ended December 31, 2016 there were no other 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.
65
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 definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after December 31,
2016, 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 definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after December 31,
2016.
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 definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after December 31,
2016.
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 definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after December 31,
2016.
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 definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after December 31,
2016.
66
PART IV
Item 15. Exhibits, Financial Statement Schedules.
The following are filed as part of this report:
(a)
1.
Financial Statements.
Consolidated Financial Statements begin on page F-1.
2.
Financial Statement Schedules.
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.
3.
Exhibits
The information required by this Item is set forth on the exhibit index that follows the signature page of this Annual
Report on Form 10-K.
67
SIGNATURES
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.
February 16, 2017
By
CRYOLIFE, INC.
/s/ J. PATRICK MACKIN
J. Patrick Mackin
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
/s/ J. PATRICK MACKIN
J. Patrick Mackin
/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/ JAMES W. BULLOCK
James W. Bullock
/s/ RONALD C. ELKINS, M.D.
Ronald C. Elkins, M.D.
/s/ RONALD D. MCCALL
Ronald D. McCall
/s/ HARVEY MORGAN
Harvey Morgan
/s/ JON W. SALVESON
Jon W. Salveson
Title
Date
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
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)
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
68
Exhibit
Number
2.1+
2.2
2.3
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1†
10.1(a)†
10.1(b)
10.2†
10.3†
10.3(a)†
10.3(b)†
Description
Series A Preferred Stock Purchase Agreement Among CryoLife, Inc., The Cleveland Clinic Foundation, and
ValveXchange, Inc. dated July 6, 2011. (Incorporated herein by reference to Exhibit 2.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.)
Agreement and Plan of Merger, dated May 14, 2012, by and among CryoLife, Inc., CL Crown, Inc.,
Hemosphere, Inc. and a Stockholder Representative. (Incorporated herein by reference to Exhibit 2.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.)
Agreement and Plan of Merger, dated as of December 22, 2015, by and among CryoLife, Inc., On-X Life
Technologies Holdings, Inc., Cast Acquisition Corporation, Fortis Advisors LLC and each of the security
holders who becomes a party thereto. (Incorporated herein by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K filed January 25, 2016.)
Amended and Restated Articles of Incorporation of CryoLife, Inc. (Incorporated herein by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed November 23, 2015.)
Amended and Restated By-Laws of CryoLife, Inc. (Incorporated herein by reference to Exhibit 3.2 to the
Registrant’s Current Report on Form 8-K filed March 1, 2016.)
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.)
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.)
Registration Rights Agreement, dated as of January 20, 2016, by and between CryoLife, Inc. and the
Investors party thereto. (Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report
on Form 8-K filed January 25, 2016.)
Form of Indenture for Senior Debt Securities (Incorporated herein by reference to Exhibit 4.7 to the
Registrant’s Registration Statement on Form S-3 filed August 5, 2015 (No. 333-206119).)
Form of Subordinated Indenture for Subordinated Debt Securities (Incorporated herein by reference to
Exhibit 4.9 to the Registrant’s Registration Statement on Form S-3 filed August 5, 2015 (No. 333-206119).)
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.)
First Amendment, dated July 24, 2012, to the CryoLife, Inc. 2007 Executive 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, 2012.)
CryoLife, Inc. Equity and Cash Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to
Registrant’s Quarterly Report on Form 10-Q filed July 28, 2015.)
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.)
Form of 2012 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive
Incentive Plan. (Incorporated herein by reference to Exhibit 10.7 to the Registrant’s Annual Report on 10-K
for the fiscal year ended December 31, 2012.)
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 May 2, 2007.)
69
Exhibit
Number
10.4†
10.5†
10.5(a)†
10.5(b)†
10.5(c)†
10.5(d)
Description
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
May 2, 2007.)
Employment Agreement, dated as of October 23, 2012, by and between the Company and Steven G.
Anderson. (Incorporated herein by reference to Exhibit 10.9 to the Registrant’s Annual Report on 10-K for
the fiscal year ended December 31, 2012.)
First Amendment, dated as of May 28, 2014, to the Employment Agreement, dated as of October 23, 2012,
by and between the Company and Steven G. Anderson. (Incorporated herein by reference to Exhibit 10.2 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.)
Second Amendment, dated as of September 3, 2014, to the Employment Agreement, dated as of October 23,
2012, by and between the Company and Steven G. Anderson. (Incorporated herein by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed September 9, 2014.)
Form of Change of Control Agreement (entered into with respect to Jeffrey W. Burris, David M. Fronk, and
Scott B. Capps). (Incorporated herein by reference to Exhibit 10.9(a) to the Registrant’s Annual Report on
10-K for the fiscal year ended December 31, 2012.)
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.)
10.5(e)†
Compensation Arrangement between CryoLife and David M. Fronk dated April 24, 2015. (Incorporated herein
by reference to Item 5.02 to Registrant’s Current Report on Form 8-K filed April 27, 2015.)
10.6
10.7
10.8†
10.8(a)†
10.8(b)†
10.8(c)†
10.8(d)†
10.8(e)†
10.8(f)†
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.).
Separation and Release Agreement, by and between the Company and Jeffrey W. Burris. (Incorporated
herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed October 28,
2014.)
Separation Agreement between CryoLife and Steven G. Anderson dated April 9, 2015. (Incorporated herein by
reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed April 10, 2015.)
Separation and Release Agreement between CryoLife and Bruce G. Anderson dated October 8, 2015.
(Incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed October
27, 2015.)
Separation and Release Agreement - Amended between CryoLife and David M. Fronk dated October 8, 2015.
(Incorporated herein by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed October
27, 2015.)
Change of Control Severance Agreement between CryoLife and Scott B. Capps dated November 21, 2016.
(Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed
November 22, 2016.)
Change of Control Severance Agreement between CryoLife and David C. Gale, Ph.D. dated November 21,
2016. (Incorporated herein by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed
November 22, 2016.)
Change of Control Severance Agreement between CryoLife and Jean F. Holloway dated November 21, 2016
(Incorporated herein by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed
November 22, 2016.)
70
Exhibit
Number
10.8(g)†
10.9†
10.10
10.10(a)
10.10(b)
10.10(c)
10.10(d)
10.11†
10.11(a)†
10.11(b)†
10.12†
10.13†
10.14
10.15†
10.16†
Description
Change of Control Severance Agreement between CryoLife and D. Ashley Lee dated November 21, 2016.
(Incorporated herein by reference to Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed
November 22, 2016.)
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 P&L Barrett, L.P., 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.)
Lease, dated October 23, 2014, by and between Roberts Boulevard, LLC, as Landlord, and CryoLife, Inc., as
Tenant. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
October 27, 2014.)
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.)
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.)
Second Amendment to the CryoLife, Inc. 2004 Employee Stock Incentive Plan, dated May 24, 2011.
(Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2011.)
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 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.)
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.)
71
Exhibit
Number
10.17†
10.18†
10.19†
10.20
10.21†
10.22
10.23
10.24†
Description
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 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.)
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. 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. (Incorporated by reference to
Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.)
10.24(a)*†
Summary of 2016 Compensation Arrangements with Non-Employee Directors.
10.25†
10.26†
10.27†
10.28+
10.28(a)
10.28(b)
10.29+
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.)
Form of 2013 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive
Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on 10-
Q for the quarter ended March 31, 2013.)
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 Current Report on Form 8-K filed
December 30, 2014.)
First Amendment to the Distribution Agreement between the Company and Starch Medical, Inc., dated May
18, 2011. (Incorporated herein by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-
Q for the quarter ended September 30, 2014.)
Second Amendment to the Distribution Agreement between the Company and Starch Medical, Inc., dated
September 20, 2013. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2013.)
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 Current Report on Form 8-K filed
December 30, 2014.)
72
Exhibit
Number
10.29(a)
10.30†
10.31†
10.32†
10.33++
10.33(a)
10.33(b)
10.34†
10.35†
10.35(a)†
10.35(b)†
10.35(c)†
10.35(d)†
10.35(e)†
10.36†
10.36(a)†
Description
Indemnification Agreement between the Company and Starch Medical, Inc., dated May 21, 2013.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2013.)
CryoLife, Inc. Executive Deferred Compensation Plan. (Incorporated herein by reference to Exhibit 10.52 to
the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010.)
Form of Non-Qualified Stock Option Grant Agreement pursuant to the 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 March 31, 2011.)
Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2009 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 March 31, 2011.)
Loan and Security Agreement by and between ValveXchange, Inc., and CryoLife, Inc. dated July 6, 2011.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2011.)
First Amendment to Loan and Security Agreement by and between ValveXchange, Inc., and CryoLife, Inc.
dated September 6, 2011. (Incorporated herein by reference to Exhibit 10.56(a) to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2011.)
Second Amendment, dated July 18, 2012, to the Loan and Security Agreement by and between
ValveXchange, Inc. and CryoLife, Inc. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.)
Form of Indemnification Agreement for Non-Employee Directors and Certain Officers. (Incorporated herein
by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed February 18, 2015.)
Form of Performance Share Agreement with Named Executive Officers. (Incorporated herein by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 22, 2012.)
First Amendment, dated July 23, 2012, to the 2012 Grant Agreement to Executive Officers pursuant to the
CryoLife, Inc. 2007 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10.4 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.)
Stock Option Grant Agreement, dated September 2, 2014, by and between CryoLife, Inc. and J. Patrick
Mackin. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-
Q filed October 28, 2014.)
Restricted Stock Award Agreement, dated September 2, 2014, by and between CryoLife, Inc. and J. Patrick
Mackin. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-
Q filed October 28, 2014.)
Form of Performance Share Agreement with Named Executive Officers pursuant to the Second Amended and
Restated CryoLife, Inc. 2009 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2
to Registrant’s Quarterly Report on Form 10-Q filed April 29, 2015.)
Form of Amendment to Performance Share Agreement with Named Executive Officers. (Incorporated herein
by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed July 28, 2015.)
Amended and Restated CryoLife, Inc. 2009 Stock Incentive Plan. (Incorporated herein by reference to
Exhibit 99.1 to the Registrant’s Form S-8 filed June 22, 2012.)
First Amendment, dated July 24, 2012, to the Amended and Restated CryoLife, Inc. 2009 Stock Incentive
Plan. (Incorporated herein by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2012.)
10.36(b)†
Second Amended and Restated CryoLife Inc. 2009 Stock Incentive Plan. (Incorporated herein by reference
to Appendix B to the Company’s Definitive Proxy Statement filed April 8, 2014.)
73
Exhibit
Number
10.37
10.38
10.39
10.40
10.41†
10.42†
10.43
10.44
10.45
10.46
14.1
21.1*
23.1*
31.1*
31.2*
32**
Description
Waiver Agreement, dated May 14, 2012, by and among CryoLife, Inc. and certain of its subsidiaries, as
borrowers, and General Electric Capital Corporation, as lender and administrative agent for all lenders, under
the Amended and Restated Credit Agreement between the parties, dated October 28, 2011. (Incorporated
herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2012.)
Final Settlement Agreement, dated June 28, 2012, by and among CryoLife, Inc. and Medafor, Inc.
(Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2012.)
Settlement Agreement, dated June 14, 2012, by and among CryoLife, Inc. and CardioFocus, Inc.
(Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2012.)
Exclusive Supply and Distribution Agreement, dated as of March 26, 2014, by and between CryoLife, Inc.
and Hancock Jaffe Laboratories, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.)
Employment Agreement dated as of July 7, 2014, between CryoLife, Inc. and J. Patrick Mackin.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July
11, 2014.)
Form of Non-Employee Directors Restricted Stock Award Agreement pursuant to the Second Amended and
Restated CryoLife, Inc. 2009 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit
10.42 to the Registrant’s Annual Report on Form 10-K filed February 16, 2016.)
Commitment Letter by and among CryoLife, Inc.; Capital One, National Association; Healthcare Financial
Solutions, LLC; Fifth Third Bank; and Citizens Bank, National Association, dated as of December 22, 2015.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
December 23, 2015.)
Third Amended and Restated Credit Agreement, dated as of January 20, 2016, by and among CryoLife, Inc.,
On-X Life Technologies Holdings, Inc., AuraZyme Pharmaceuticals, Inc., CryoLife International, Inc., On-X
Life Technologies, Inc., Valve Special Purpose Co., LLC, the lenders from time to time party thereto and
Healthcare Financial Solutions, LLC, as agent. (Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed January 25, 2016.)
Amended and Restated Guaranty and Security Agreement, dated as of January 20, 2016, by and among
CryoLife, Inc., AuraZyme Pharmaceuticals, Inc., CryoLife International, Inc., On-X Life Technologies
Holdings, Inc., On-X Life Technologies, Inc., Valve Special Purpose Co., LLC and each other grantor from
time to time party thereto in favor of Healthcare Financial Solutions, LLC, as Administrative Agent.
(Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed
January 25, 2016.)
Asset Purchase Agreement between Merit Medical System, Inc. and CryoLife, Inc., dated February 3, 2016.
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
February 8, 2016.)
Form of Code of Conduct, as amended (Incorporated herein by reference to Exhibit 14.1 to the Registrant’s
Current Report on Form 8-K filed November 23, 2015.)
Subsidiaries of CryoLife, Inc.
Consent of Ernst & Young LLP.
Certification by J. Patrick Mackin 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.
74
Exhibit
Number
Description
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
** Furnished herewith.
† Indicates management contract or compensatory plan or arrangement.
+ 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.
++ The Registrant has been granted confidential treatment for certain portions of this exhibit pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.
75
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.
On January 20, 2016 we completed the acquisition of 100% of the outstanding equity of On-X Life Technologies
Holdings, Inc. (“On-X”), a privately held company. As permitted by SEC guidance, we excluded On-X from management’s
assessment of internal control over financial reporting as of December 31, 2016. On-X, which is included in the 2016
consolidated financial statements of CryoLife, constituted $140.4 million of total assets as of December 31, 2016 and $34.2
million and $20.3 million of revenues and gross margin, respectively, for the year then ended. On-X will be included in
management’s assessment of the internal control over financial reporting as of December 31, 2017.
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, 2016. In making this assessment, we used the criteria set forth in the Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, we
have determined that, as of December 31, 2016, the company’s internal control over financial reporting was effective based
on those criteria.
CryoLife’s independent registered public accounting firm, Ernst & Young, LLP, has issued an audit report on the
effectiveness of CryoLife’s internal control over financial reporting as of December 31, 2016.
CryoLife, Inc.
February 16, 2017
F-1
Report of Independent Registered Public Accounting Firm on the Financial Statements
The Board of Directors and Shareholders of CryoLife, Inc.
We have audited the accompanying consolidated balance sheets of CryoLife, Inc. and subsidiaries as of December 31,
2016 and 2015, and the related consolidated statements of operations and comprehensive income, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these 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, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of CryoLife, Inc. and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), CryoLife, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) and our report dated February 16, 2017 expressed an unqualified opinion thereon.
Ernst & Young LLP
Atlanta, GA
February 16, 2017
F-2
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of CryoLife, Inc.
We have audited CryoLife, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). CryoLife, Inc. and subsidiaries’
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 to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of On-X Life Technologies Holdings, Inc., which is included in the 2016 consolidated financial statements of
CryoLife, Inc. and constituted $140.4 million of total assets as of December 31, 2016 and $34.2 million and $20.3 million of
revenues and gross margin, respectively, for the year then ended. Our audit of internal control over financial reporting of
CryoLife, Inc. also did not include an evaluation of the internal control over financial reporting of On-X Life Technologies
Holdings, Inc.
In our opinion, CryoLife, Inc. and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of CryoLife, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related
consolidated statements of operations and comprehensive income, cash flows and shareholders' equity for each of the three
years in the period ended December 31, 2016 of CryoLife, Inc. and subsidiaries and our report dated February 16, 2017
expressed an unqualified opinion thereon.
Ernst & Young, LLP
Atlanta, Georgia
February 16, 2017
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
Inventories
Deferred preservation costs
Prepaid expenses and other
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:
Restricted cash
Goodwill
Patents, less accumulated amortization of $2,702 in 2016 and $2,664 in 2015
Trademarks and other intangibles, less accumulated amortization of $10,733 in 2016
and $7,997 in 2015
Deferred income taxes
Other
Total assets
December 31,
2016
2015
$
56,642
699
$
37,588
830
27,769
2,327
30,096
26,293
30,688
2,815
23,419
3,253
26,672
14,643
24,741
5,189
147,233
109,663
37,086
4,670
31,981
73,737
55,235
18,502
--
78,294
1,008
65,633
--
5,470
28,608
4,483
30,902
63,993
52,509
11,484
5,000
11,365
1,417
18,480
18,188
5,582
$
316,140
$
181,179
F-4
CRYOLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued compensation
Accrued procurement fees
Accrued expenses
Current portion of long-term debt
Other
Total current liabilities
Long-term debt
Deferred compensation liability
Deferred rent obligations
Other
Total liabilities
Commitments and contingencies
December 31,
2016
2015
$
5,744
8,815
4,806
5,054
4,562
1,121
30,102
67,012
2,600
2,355
5,088
$
4,590
6,335
4,445
2,847
--
1,388
19,605
--
1,927
1,735
2,661
107,157
25,928
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 auth., no shares issued
Convertible preferred stock, 460 shares auth., no shares issued
Common stock $0.01 par value per share, 75,000 shares authorized,
34,230 shares issued in 2016 and 29,766 shares issued in 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost, 1,356 shares in 2016 and 1,265 shares in 2015
--
--
342
187,061
34,143
(429)
(12,134)
--
--
298
142,888
23,365
(76)
(11,224)
Total shareholders' equity
208,983
155,251
Total liabilities and shareholders' equity
$
316,140
$
181,179
See accompanying Notes to Consolidated Financial Statements.
F-5
CRYOLIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Revenues:
Products
Preservation services
Total revenues
Cost of products and preservation services:
Products
Preservation services
Total cost of products and preservation services
Gross margin
Operating expenses:
General, administrative, and marketing
Research and development
Total operating expenses
Gain from sale of business components
Operating income
Interest expense
Interest income
Gain on sale of Medafor investment
Other expense, net
Income before income taxes
Income tax expense
Net income
Income per common share:
Basic
Diluted
Dividends declared per common share
Weighted-average common shares outstanding:
Basic
Diluted
Net income
Other comprehensive (loss) income
Comprehensive income
Year Ended December 31,
2015
2016
$
$
113,992
66,388
180,380
$
83,081
62,817
145,898
2014
81,883
62,758
144,641
28,033
33,448
61,481
118,899
91,548
13,446
104,994
(7,915)
21,820
3,043
(72)
--
437
18,412
7,634
10,778
0.33
0.32
--
31,855
32,822
10,778
(353)
10,425
$
$
$
$
$
$
$
$
$
$
$
$
18,663
36,516
55,179
90,719
74,929
10,436
85,365
--
5,354
(62)
(45)
(891)
484
5,868
1,863
4,005
0.14
0.14
0.120
27,744
28,542
4,005
45
4,050
$
$
$
$
$
$
17,167
36,183
53,350
91,291
73,754
8,699
82,453
--
8,838
175
(50)
(530)
540
8,703
1,381
7,322
0.26
0.25
0.118
27,379
28,313
7,322
(128)
7,194
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
$
10,778
$
4,005
$
7,322
Adjustments to reconcile net income to net cash from operating activities:
Year Ended December 31,
2015
2016
2014
Gain from sale of business components
Gain on sale of Medafor investment
Depreciation and amortization
Non-cash compensation
Write-down of inventories and deferred preservation costs
Deferred income taxes
Other non-cash adjustments to income
Changes in operating assets and liabilities:
Receivables
Inventories and deferred preservation costs
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 On-X, net of cash acquired
Acquisition of PhotoFix technology
Acquisition of French distribution business
Capital expenditures
Proceeds from sale of business components
Proceeds from sale of Medafor investment
Decrease in restricted cash
Sales and maturities of restricted securities and investments
Purchases of restricted securities and investments
Other
Net cash flows used in investing activities
Net cash flows from financing activities:
Proceeds from issuance of term loan
Repayment of term loan
Payment of debt issuance costs
Proceeds from exercise of stock options and issuance of common stock
Cash dividends paid
Repurchases of common stock
Redemption and repurchase of stock to cover tax withholdings
Other
Net cash flows provided by (used in) financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
(7,915)
--
8,384
6,328
1,364
595
268
4,142
(9,460)
515
4,720
19,719
(91,152)
(1,226)
--
(6,198)
19,795
--
5,000
1,067
(1,014)
(126)
(73,854)
75,000
(1,406)
(2,289)
2,203
--
--
(697)
617
73,428
(239)
19,054
--
(891)
5,863
5,089
1,341
3,681
268
(3,809)
(2,262)
(1,187)
(656)
11,442
--
--
(1,349)
(3,490)
--
891
--
1,157
(1,085)
(610)
(4,486)
--
--
--
1,526
(3,408)
--
(1,386)
458
(2,810)
67
4,213
--
(530)
6,028
3,436
680
178
(474)
(4,556)
(1,131)
(2,771)
(64)
8,118
--
--
--
(4,310)
--
530
--
639
(1,208)
(1,004)
(5,353)
--
--
--
2,675
(3,295)
(5,588)
(1,483)
738
(6,953)
(80)
(4,268)
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
37,588
56,642
$
33,375
37,588
$
37,643
33,375
$
See accompanying Notes to Consolidated Financial Statements.
F-7
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-
F
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”), incorporated in 1984 in Florida, is a leader in medical
device manufacturing, processing, and distribution of medical devices and implantable human tissues used in cardiac surgical
procedures. CryoLife’s medical devices include: BioGlue® Surgical Adhesive (“BioGlue”); BioFoam® Surgical Matrix
(“BioFoam”); On-X valves and surgical products; the CardioGenesis cardiac laser therapy product line, which includes a
laser console system and single-use, fiber-optic handpieces, that are used for the treatment of coronary artery disease in
patients with severe angina; PerClot®, an absorbable powdered hemostat, which the Company distributes internationally for
Starch Medical, Inc. (“SMI”); and PhotoFix TM, a bovine pericardial patch stabilized using a dye-mediated photo-fixation
process that requires no glutaraldehyde. The cardiac and vascular human tissues distributed by CryoLife include the
CryoValve® SG pulmonary heart valve (“CryoValve SGPV”) and the CryoPatch® SG pulmonary cardiac patch (“CryoPatch
SG”), both of which are processed using CryoLife’s proprietary SynerGraft® technology.
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 (income) expense, net on the Company’s Consolidated Statements of Operations and Comprehensive Income.
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 income (loss) 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 when accounting for investments, allowance for doubtful accounts, inventory, deferred preservation
costs, acquired assets or businesses, long-lived tangible and intangible assets, deferred income taxes, commitments and
contingencies (including product and tissue processing liability claims, claims incurred but not reported, and amounts
recoverable from insurance companies), stock-based compensation, certain accrued liabilities (including accrued procurement
fees, income taxes, and financial instruments), contingent consideration liability, and other items as appropriate.
Revenue Recognition
Revenues for products, including: BioGlue, BioFoam, On-X products, CardioGenesis cardiac laser therapy handpieces
and accessories, PerClot, PhotoFix, and other medical devices, are typically recognized at the time the product is shipped, at
which time title passes to the customer, and there are no further performance obligations. Revenues from consignment are
recognized when the medical device is implanted. The Company recognizes revenues for preservation services when
services are completed and tissue is shipped to the customer. Revenues from upfront licensing agreements are recognized
ratably over the period the Company expects to fulfill its obligations.
Revenues from the sale of laser consoles are considered multiple element arrangements, and such revenues are allocated
to the elements of the sale. The Company allocates revenues based primarily on the revenue these individual elements would
generate if sold separately. Revenues from the sales of domestic laser consoles are typically recognized when the laser is
installed at a customer site and all materials for the laser console’s use are delivered. Revenues from the sales of laser
F-9
consoles to international distributors are evaluated individually based on the terms of the sale and collectability to determine
when revenue has been earned and can be recognized.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of products and tissues are included in product revenues and
preservation services revenues, respectively. The costs for shipping and handling of products and tissues are included as a
component of cost of products and cost of preservation services, respectively.
Advertising Costs
The costs to develop, 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 to print or copy 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 and Comprehensive Income was $384,000, $521,000, and $821,000 for the years ended December 31, 2016,
2015, and 2014, 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), performance stock awards (“PSA”s), restricted stock units (“RSU”s),
performance stock units (“PSU”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
RSAs, PSAs, RSUs, PSUs, and stock options granted by the Company typically vest over a one to three-year period. The
stock options granted by the Company typically expire within seven years of the grant date.
The Company values its RSAs, PSAs, RSUs, and PSUs based on the stock price on the date of grant. The Company
expenses the related compensation cost of RSAs, PSAs, and RSUs using the straight-line method over the vesting period.
The Company expenses the related compensation cost of PSUs based on the number of shares expected to be issued if
achievement of the performance component is probable using a straight-line method over each vesting tranche of the award.
The amount of compensation costs expensed related to PSUs is adjusted as needed if the Company deems that achievement
of the performance component is no longer probable, or if the Company’s expectation of the number of shares to be issued
changes. 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 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 included a zero dividend yield assumption when the Company’s quarterly dividends were
discontinued after the fourth quarter of 2015. 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 for the Company’s stock compensation is determined based on the valuations discussed above 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 later adjusted to reflect actual
forfeitures.
F-10
Income Per Common Share
Income per common share is computed using the two class method, which requires the Company to include unvested
RSAs and PSAs that contain non-forfeitable rights to dividends (whether paid or unpaid) as participating securities in the
income per common share calculation.
Under the two class method, net income is allocated to the weighted-average number of common shares outstanding
during the period and the weighted-average participating securities outstanding during the period. The portion of net income
that is allocated to the participating securities is excluded from basic and dilutive net income per common share. Diluted net
income per share is computed using the weighted-average number of common shares outstanding plus the dilutive effects of
outstanding stock options and awards and other dilutive instruments as appropriate.
Dividends
Cash dividends approved by the Company’s Board of Directors were paid every three months in the amount of $0.0275
per share in the first quarter of 2014 and $0.03 in the remainder of 2014 and in 2015. In December 2015 the Board of
Directors undertook a review of the Company’s dividend policy and determined that it would be in the best interest of the
shareholders to discontinue dividend payments for the foreseeable future. The Company did not pay quarterly dividends in
2016 and does not currently anticipate paying out further quarterly dividends.
Financial Instruments
The Company’s financial instruments include cash equivalents, marketable securities, restricted securities, accounts
receivable, notes receivable, accounts payable, debt obligations, contingent consideration, 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. Other financial instruments are recorded as
discussed in the sections below.
Fair Value Measurements
The Company records certain financial instruments at fair value, including: cash equivalents, certain marketable
securities, certain restricted securities, contingent consideration, and derivative instruments. 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, 2016 the Company has not chosen to make any such elections. Fair value financial instruments are recorded in
accordance with the fair value measurement framework.
The Company also measures certain non-financial assets at fair value on a non-recurring basis. These non-recurring
valuations include evaluating assets such as cost method investments, long-lived assets, and non-amortizing intangible assets
for impairment; allocating value to assets in an acquired asset group; applying accounting for business combinations; and
allocating goodwill to divested components of a business. The Company uses the fair value measurement framework to
value these assets and reports these fair values in the periods in which they are recorded or written down.
The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable
inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:
(cid:120) Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical
assets or liabilities;
(cid:120) 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
(cid:120) Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available.
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires
judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the
use of various cost, market, or income valuation methodologies applied to unobservable management estimates and
assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method
used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or
the weighting of various valuation methods. The Company may also engage external advisors to assist in determining fair
value, as appropriate.
F-11
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.
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.
Cash Flow Supplemental Disclosures
Supplemental disclosures of cash flow information for the years ended December 31 (in thousands):
Cash paid during the year for:
Interest
Income taxes
2016
2015
2014
$
2,446 $
2,501
1 $
145
34
3,450
Non-cash investing and financing activities:
Issuance of common stock for acquisition of On-X intangible assets
$
34,593 $
-- $
--
Marketable Securities and Other Investments
The Company typically invests its excess cash for short-term periods 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 sometimes makes longer term strategic investments in
medical device companies, and these investments must be 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 adjusts each investment to its market 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, investments are recorded at cost, with subsequent dividends
received recognized as income. Cost method investments are reviewed for impairment if factors indicate that a decrease in
the value of the investment has occurred.
The Company reviews its contracts to determine if they require any restrictions to cash or investments. If there is a
contractual agreement restricting the availability of the Company’s cash or investments, the Company will classify these
amounts as current or long-term restricted cash or investments.
Accounts and Notes Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable are primarily from hospitals and distributors that either use or distribute the
Company’s products and tissues. The Company assesses the likelihood of collection based on a number of factors, including
past transaction history and the credit worthiness of the customer, as well as the increased risks related to international
customers and large distributors. The Company determines the allowance for doubtful accounts based upon specific reserves
for known collection issues, as well as a non-specific reserve based upon aging buckets. The Company charges off
uncollectable amounts against the reserve in the period in which it determines they are uncollectible. The Company’s
accounts receivable balances were reported net of allowance for doubtful accounts of $503,000 and $232,000 as of December
31, 2016 and 2015, respectively.
F-12
The Company may lend money from time-to-time through a note receivable, which may be made in conjunction with a
longer term strategic investment in a medical device company, as approved by the Board of Directors. The Company
assesses the likelihood of collection of its notes receivable based on a number of factors, including past transaction history,
credit worthiness, and the liquidity position of the recipient as well as the expected value of any collateral. The Company’s
notes receivable balance was zero as of December 31, 2016 and 2015, respectively. See Note 8 for further discussion of the
Company’s note receivable from ValveXchange, Inc. (“ValveXchange”).
Inventories
Inventories are comprised of BioGlue; BioFoam; On-X; PerClot; CardioGenesis cardiac laser therapy laser consoles,
handpieces, and accessories; PhotoFix; other medical devices; supplies; and raw materials. In 2015, inventories also included
HeRO Grafts and ProCol. Inventories are valued at the lower of cost or market on a first-in, first-out basis. Typcially, upon
shipment, or upon implant of a medical device on consignment, revenue is recognized and the related inventory costs are
expensed as cost of products. Cost of products also includes, as applicable, lower of cost or market write-downs and
impairments for products not deemed to be recoverable and, as incurred, idle facility expense, excessive spoilage, extra
freight, and rehandling costs.
Inventory costs for manufactured products consist primarily of direct labor and materials (including salary and fringe
benefits, raw materials, and supplies) and indirect costs (including allocations of costs from departments that support
manufacturing activities and facility allocations). 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. Inventory costs for products
purchased for resale or manufactured under contract consist primarily of the purchase cost, freight-in charges, and indirect
costs as appropriate.
The Company regularly evaluates its inventory to determine if the costs are appropriately recorded at the lower of cost or
market value. The Company also evaluates its inventory for costs not deemed to be recoverable, including inventory not
expected to ship prior to its expiration. Lower of cost or market value write-downs are recorded if the book value exceeds the
estimated market value of the inventory, based on recent sales prices at the time of the evaluation. Impairment write-downs
are recorded based on the book value of inventory deemed to be impaired. Actual results may differ from these estimates.
Write-downs of inventory are expensed as cost of products, and these write-downs are permanent impairments that create a
new cost basis, which cannot be restored to its previous levels if the Company’s estimates change.
The Company recorded write-downs to its inventory totaling $467,000, $858,000, and $140,000 for the years ended
December 31, 2016, 2015, and 2014, respectively. The 2015 write-down is primarily related to the write-down of PerClot
Topical inventory following the Company’s cessation of marketing, sales, and distribution of PerClot Topical in the U.S. See
Note 9 for further discussion of PerClot Topical.
Deferred Preservation Costs
Deferred preservation costs includes costs of cardiac and vascular tissues available for shipment, tissues currently in
active processing, and tissues held in quarantine pending release to implantable status. By federal law, human tissues cannot
be bought or sold; therefore, the tissues the Company preserves are not held as inventory. The costs the Company incurs to
procure and process cardiac and vascular tissues are instead accumulated and deferred. Deferred preservation costs are stated
at the lower of cost or market value on a first-in, first-out basis and are deferred until revenue is recognized. Upon shipment
of tissue to an implanting facility, revenue is recognized and the related deferred preservation costs are expensed as cost of
preservation services. Cost of preservation services also includes, as applicable, lower of cost or market write-downs and
impairments for tissues not deemed to be recoverable, and includes, as incurred, idle facility expense, excessive spoilage,
extra freight, and rehandling costs.
The calculation of deferred preservation costs involves judgment and complexity and uses the same principles as
inventory costing. Donated human tissue is procured from deceased human donors by organ and tissue procurement
organizations (“OTPOs”), which consign the tissue to the Company for processing, preservation, and distribution. Deferred
preservation costs consist primarily of the procurement fees charged by the OTPOs, direct labor and materials (including
salary and fringe benefits, laboratory supplies and expenses, and freight-in charges), and indirect costs (including allocations
of costs from support departments and facility allocations). Fixed production overhead costs are allocated based on actual
tissue processing levels, to the extent that they are within the range of the facility’s normal capacity.
These costs are then allocated among the tissues processed during the period based on cost drivers, such as the number of
donors or number of tissues processed. The Company applies a yield estimate to all tissues in process and in quarantine to
F-13
estimate the portion of tissues that will ultimately become implantable. Management estimates quarantine yields based on its
experience and reevaluates these estimates periodically. Actual yields could differ significantly from the Company’s
estimates, which could result in a change in tissues available for shipment, and could increase or decrease the balance of
deferred preservation costs. These changes could result in additional cost of preservation services expense or could increase
per tissue preservation costs, which would impact gross margins on tissue preservation services in future periods.
The Company regularly evaluates its deferred preservation costs to determine if the costs are appropriately recorded at
the lower of cost or market value. The Company also evaluates its deferred preservation costs for costs not deemed to be
recoverable, including tissues not expected to ship prior to the expiration date of their packaging. Lower of cost or market
value write-downs are recorded if the tissue processing costs incurred exceed the estimated market value of the tissue
services, based on recent average service fees at the time of the evaluation. Impairment write-downs are recorded based on
the book value of tissues deemed to be impaired. Actual results may differ from these estimates. Write-downs of deferred
preservation costs are expensed as cost of preservation services, and these write-downs are permanent impairments that create
a new cost basis, which cannot be restored to its previous levels if the Company’s estimates change.
The Company recorded write-downs to its deferred preservation costs totaling $897,000, $483,000, and $540,000 for the
years ended December 31, 2016, 2015, and 2014, respectively, due primarily to tissues not expected to ship prior to the
expiration date of the packaging.
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 remaining
lease term at the time the assets are capitalized or the estimated useful lives of the assets, whichever is shorter.
Depreciation expense for the years ended December 31 is as follows (in thousands):
Depreciation expense
Goodwill and Other Intangible Assets
2016
2015
2014
$
3,958 $
3,728 $
4,001
The Company’s intangible assets consist of goodwill, patents, trademarks, and other intangible assets, as discussed in
Note 11. The Company’s goodwill is attributable to a segment or segments of the Company’s business, as appropriate, as the
related acquired business that generated the goodwill is integrated into the Company’s operations. Upon divestiture of a
component of the Company’s business, the goodwill related to the operating segment is allocated to the divested business
using the relative fair value allocation method.
The Company amortizes its definite lived intangible assets over their expected useful lives using the straight-line
method, which the Company believes approximates the period of economic benefits of the related assets. 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 and Non-Amortizing Intangible Assets” below.
Impairments of Long-Lived Assets and Non-Amortizing Intangible Assets
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, but are not limited to, the following:
(cid:120) Significant underperformance relative to expected historical or projected future operating results;
(cid:120) Significant negative industry or economic trends;
(cid:120) Significant decline in the Company’s stock price for a sustained period; or
(cid:120) 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,
F-14
and the Company will write down the value of the asset or asset group. For the years ended December 31, 2016, 2015, and
2014 the Company did not experience any factors that indicated that an impairment review of its long-lived assets was
warranted.
CryoLife evaluates its goodwill and other non-amortizing intangible assets for impairment on an annual basis as of
October 31 and, if necessary, during interim periods if factors indicate that an impairment review is warranted. As of
October 31, 2016 the Company’s non-amortizing intangible assets consisted of goodwill, acquired procurement contracts and
agreements, trademarks, and other acquired technology. The Company performed an analysis of its non-amortizing
intangible assets as of October 31, 2016 and 2015, and determined that the fair value of the assets and the fair value of the
reporting unit exceeded their associated carrying values and were, therefore, not impaired. Management will continue to
evaluate the recoverability of these non-amortizing intangible assets.
Accrued Procurement Fees
Donated 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
includes these costs as part of deferred preservation costs, as discussed above. 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.
Leases
The Company has operating lease obligations resulting from the lease of land and buildings that comprise the Company's
corporate headquarters and manufacturing facilities; leases related to additional manufacturing, office, and warehouse space;
leases on Company vehicles; and leases on a variety of office equipment, as discussed in Note 14. Certain of the Company’s
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 and the related liability is recorded as deferred rent obligations on the Company’s
Consolidated Balance Sheets.
Debt Issuance Costs
Debt issuance costs related to the Company’s term loan and line of credit are capitalized and reported net of the current
and long-term debt or as a prepaid asset when there are no outstanding borrowings. The Company amortizes debt issuance
costs to interest expense on its term loan using the effective interest method over the life of the debt agreement. The
Company amortizes debt issuance costs to interest expense on its line of credit on a straight line basis over the life of the debt
agreement.
Liability Claims
In the normal course of business, the Company is made aware of adverse events involving its products and tissues.
Future adverse events could ultimately give rise to a lawsuit against the Company, and liability claims may be asserted
against the Company in the future based on past events it is not aware of at the present time. The Company maintains
claims-made insurance policies to mitigate its financial exposure to product and tissue processing 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.
The Company engages external advisors to assist it in estimating its liability 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 product and tissue processing 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: the future claim reporting time lag, the frequency of reported claims, the
average cost per claim, and the maximum liability per claim. The Company believes that the assumptions it uses provide a
reasonable basis for its calculation. However, the accuracy of the estimates is limited by various factors, including, but not
limited to, Company specific conditions, uncertainties surrounding the assumptions used, and the scarcity of industry data
F-15
directly relevant to the Company's business activities. Due to these factors, actual results may differ significantly from the
Company’s assumptions and from the amounts accrued.
The Company accrues its estimate of unreported product and tissue processing liability claims as a component of other
long-term liabilities and records the related recoverable insurance amounts as a component of other long-term assets. The
amounts recorded represent management's estimate of the probable losses and anticipated recoveries for unreported claims
related to products sold and services performed prior to the balance sheet date.
Legal Contingencies
The Company accrues losses from a legal contingency when the loss is both probable and reasonably estimable. The
accuracy of the Company’s estimates of losses for legal contingencies is limited by uncertainties surrounding litigation.
Therefore, actual results may differ significantly from the amounts accrued, if any. The Company accrues for legal
contingencies as a component of accrued expenses and/or other long-term liabilities. Gains from legal contingencies are
recorded when the contingency is resolved.
Legal Fees
The Company expenses the costs of legal services, including legal services related to product and tissue processing
liability claims and legal contingencies, as they are incurred. Reimbursement of legal fees by an insurance company or other
third party is recorded as a reduction to legal expense.
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, net on its Consolidated
Statements of Operations and Comprehensive Income. See Note 12 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 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 its deferred tax assets 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.
Assessing the recoverability of deferred tax assets involves judgment and complexity. Estimates and judgments used in
the determination of the need for a valuation allowance and in calculating the amount of a needed valuation allowance
include, but are not limited to, the following:
(cid:120) Projected future operating results;
(cid:120) Anticipated future state tax apportionment;
(cid:120) Timing and amounts of anticipated future taxable income;
(cid:120) Timing of the anticipated reversal of book/tax temporary differences;
(cid:120) Evaluation of statutory limits regarding usage of certain tax assets; and
(cid:120) Evaluation of the statutory periods over which certain tax assets can be utilized.
Significant changes in the factors above, or other factors, could affect the Company’s ability to use its deferred tax
assets. Such changes could have a material, adverse impact on the Company’s profitability, financial position, and cash
F-16
flows. The Company will continue to 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.
The Company believes that the realizability of its acquired net operating loss carryforwards will be limited in future
periods due to a change in control of its former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis
Corporation (“Cardiogenesis”), as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. The
Company believes that its acquisitions of these companies each constituted a change in control, and that prior to the
Company’s acquisition, Hemosphere had experienced other equity ownership changes that should be considered a change in
control. The Company also acquired net operating loss carryforwards in the acquisition of On-X Life Technologies that are
limited under Section 382. However, the Company believes that such net operating loss carryforwards from On-X will be
fully realizable prior to expiration. The deferred tax assets recorded on the Company’s Consolidated Balance Sheets exclude
amounts that it expects will not be realizable due to these changes in control. A portion of the acquired net operating loss
carryforwards is related to state income taxes for which management believes it is more likely than not that these deferred tax
assets will not be realized. Therefore, the Company recorded a valuation allowance against these state net operating loss
carryforwards.
Valuation of Acquired Assets or Businesses
As part of its corporate strategy, the Company is seeking to identify and capitalize upon 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 using the acquisition
method. Under this method, the allocation of the purchase price is based on the fair value of the tangible and identifiable
intangible assets acquired and the liabilities assumed as of the date of the acquisition. The excess of the purchase price over
the estimated fair value of the tangible net assets and identifiable intangible assets is recorded as goodwill. Transaction costs
related to business combinations 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 typically engages external advisors to assist it in determining the fair value of acquired asset groups or
business combinations, using valuation methodologies such as: the excess earnings, the discounted cash flow, or the relief
from royalty methods. The determination of fair value in accordance with the fair value measurement framework requires
significant judgments and estimates, including, but not limited to: timing of product life cycles, estimates of future revenues,
estimates of profitability for new or acquired products, cost estimates for new or changed manufacturing processes, estimates
of the cost or timing of obtaining regulatory approvals, estimates of the success of competitive products, and discount rates.
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 or business
combinations 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. If the value of the liabilities assumed by the
Company, including contingent liabilities, is determined to be significantly different from the amounts previously recorded in
purchase accounting, the Company may need to record additional expenses or write-downs in future periods, which could
materially impact the Company’s financial position and profitability.
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 other (income) expense on the Company’s Consolidated Statements of Operations and
Comprehensive Income.
F-17
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) amended its Accounting Standards Codification
and created a new Topic 842, Leases. The final guidance requires lessees to recognize a right-of-use asset and a lease
liability for all leases (with the exception of short-term leases) at the commencement date and recognize expenses on their
income statements similar to the current Topic 840, Leases. It is effective for fiscal years and interim periods beginning after
December 15, 2018, and early adoption is permitted. The Company is evaluating the impact the adoption of this standard
will have on its financial position, results of operations, and cash flows.
In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee
Share-Based Payment Accounting as part of its simplification initiative, which involves several aspects of accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The amendments in this update are effective for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. The Company expects that the allowed
change in accounting for forfeitures as they occur will not have a material impact on the Company’s results of operations
over time, as the Company believes that its estimated forfeiture rate approximates its actual forfeiture rate. However, the
Company believes that this could have a favorable or unfavorable impact in any given quarter due to the timing of actual
forfeitures. The Company believes that the change in accounting for excess tax benefits and the discontinuance of the APIC
pool could have a material impact on its results of operations, which could be favorable or unfavorable, depending on
movements in the Company’s stock price. The Company does not believe the adoption of this standard will have a material
impact on its financial position and cash flows.
In May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. Since ASU 2014-09 was
issued, several additional ASUs have been issued to clarify various elements of the guidance. These standards provide
guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The
standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Adoption of the new standard is effective for reporting periods beginning after December 15, 2017, and early adoption is
permitted. The standard permits the use of either the full retrospective or modified retrospective transition method. The
Company is performing its initial evaluation of its standard arrangements with customers and its arrangements specific to
certain of the Company’s product lines or product offerings. The Company is continuing to evaluate the effect that ASU
2014-09 will have on its financial position, results of operations, cash flows, and related disclosures.
2. Financial Instruments
A summary of financial instruments measured at fair value is as follows (in thousands):
December 31, 2016
Cash equivalents:
Money market funds
Restricted securities:
Money market funds
Total assets
December 31, 2015
Cash equivalents:
Money market funds
Restricted securities:
Money market funds
Total assets
Level 1
Level 2
Level 3
Total
3,466 $
-- $
-- $
3,466
699
4,165 $
--
-- $
--
-- $
699
4,165
Level 1
Level 2
Level 3
Total
549 $
-- $
-- $
549
830
1,379 $
--
-- $
--
-- $
830
1,379
$
$
$
$
The Company used prices quoted from its investment management companies to determine the Level 1 valuation of its
investments in money market funds.
F-18
3. Cash Equivalents and Restricted Cash and Securities
The following is a summary of cash equivalents and marketable securities (in thousands):
December 31, 2016
Cash equivalents:
Money market funds
Restricted securities:
Money market funds
December 31, 2015
Cash equivalents:
Money market funds
Restricted cash and securities:
Cash
Money market funds
Cost Basis
Unrealized
Holding
Gains (Losses)
Estimated
Market
Value
$
3,466
$
699
--
--
$
3,466
699
Cost Basis
Unrealized
Holding
Gains (Losses)
Estimated
Market
Value
$
549
$
5,000
830
--
--
--
$
549
5,000
830
As of December 31, 2016 and 2015 $699,000 and $830,000, respectively, 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 primarily to international tax obligations. As of December 31, 2015 $5.0 million of the Company’s cash was
designated as long-term restricted cash due to a financial covenant requirement under the Company’s debt agreement. As of
December 31, 2016 the Company no longer had a financial covenant for restricted cash under the Company’s amended debt
agreement. See further discussion of the Company’s debt agreements in Note 13.
There were no gross realized gains or losses on cash equivalents or restricted securities for the years ended December 31,
2016, 2015, and 2014. As of December 31, 2015 $5.0 million of the Company’s restricted cash had no maturity date. As of
December 31, 2016 $490,000 of the Company’s restricted securities had a maturity date within three months and $209,000
had a maturity date between three months and one year. As of December 31, 2015 $595,000 of the Company’s restricted
securities had a maturity date within three months and $235,000 of the Company’s restricted securities had a maturity date
between three months and one year.
4. Acquisition of On-X Life Technologies
Overview
On December 22, 2015 the Company entered into an Agreement and Plan of Merger (“On-X Agreement”) to acquire
On-X Life Technologies Holdings, Inc. (“On-X”), an Austin, Texas-based, privately held mechanical heart valve company,
for approximately $130.0 million, subject to certain adjustments. The transaction closed on January 20, 2016, and On-X is
being operated as a wholly owned subsidiary of CryoLife.
The On-X catalogue of products includes the On-X prosthetic aortic and mitral heart valves and the On-X ascending
aortic prosthesis (“AAP”). On-X also distributes CarbonAid CO2 diffusion catheters, manufactures Chord-X ePTFE sutures
for mitral chordal replacement, and offers pyrolytic carbon coating services to other medical device manufacturers. CryoLife
believes that the On-X products fit well into its product portfolio of medical devices for cardiac surgery and that the
Company is capitalizing on the significant opportunity for CryoLife’s sales team to leverage their strong relationships with
cardiac surgeons to introduce and to expand utilization of the On-X valves in the U.S. and internationally.
Accounting for the Transaction
The purchase price of the On-X transaction totaled approximately $128.2 million, consisting of cash of $93.6 million and
3,703,699 shares of CryoLife common stock, with a value of $34.6 million as determined on the date of the closing. The
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Company recorded an allocation of the $128.2 million purchase price to On-X’s tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair values as of January 20, 2016. Goodwill was recorded based on
the amount by which the purchase price exceeds the fair value of the net assets acquired and is not deductible for tax
purposes. Goodwill from this transaction has been allocated to the Company’s Medical Devices segment.
The purchase price allocation as of December 31, 2016 is as follows (in thousands):
Cash and cash equivalents
Receivables
Inventories
Intangible assets
Goodwill
Other assets
Liabilities assumed
Total purchase price
Opening
Balance Sheet
2,472
6,826
12,889
53,950
68,229
6,891
(23,040)
128,217
$
$
CryoLife incurred transaction and integration costs of $7.4 million for the year ended December 31, 2016 related to the
acquisition, which include, among other costs, expenses related to the termination of international and domestic distribution
agreements. These costs were expensed as incurred and were primarily recorded as general, administrative, and marketing
expenses on the Company’s Consolidated Statements of Operations and Comprehensive Income.
The Company paid approximately $10 million of the purchase price into an escrow account upon closing of the On-X
transaction. The Company is currently negotiating with the shareholder representative of On-X concerning the resolution of
these escrow funds.
Pro Forma Results
On-X revenues of $34.2 million from the date of acquisition through December 31, 2016 are included in the
Consolidated Statements of Operations and Comprehensive Income. The Company’s pro forma results of operations for the
years ended December 31, 2016 and 2015, assuming the On-X acquisition had occurred as of January 1, 2015, are presented for
comparative purposes below. These amounts are based on available information of the results of operations of On-X prior to the
acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisition been
completed on January 1, 2014. This unaudited pro forma information does not project operating results post acquisition.
This pro forma information is as follows (in thousands, except per share amounts):
Total revenues
Net income (loss)
Pro forma income (loss) per common share - basic
Pro forma income (loss) per common share - diluted
Twelve Months Ended
December 31,
2016
182,007
17,692
0.54
0.53
$
$
$
2015
179,266
(4,787)
(0.15)
(0.15)
$
$
$
Pro forma net income (loss) was calculated using a normalized tax rate of approximately 38%.
5. Sales of Business Components
Acquisition and Divestiture of HeRO Graft Product Line
On May 16, 2012 CryoLife completed its acquisition of Hemosphere, a privately held company, and its Hemodialysis
Reliable Outflow Graft (“HeRO® Graft”) product line for a total purchase price of approximately $22.0 million, net of $3.2
million cash acquired. CryoLife used cash on hand to fund the transaction and operated Hemosphere as a wholly owned
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subsidiary until December 31, 2014, when it was merged into the CryoLife, Inc. parent entity. The HeRO Graft is a
proprietary graft-based solution for ESRD hemodialysis patients with limited access options and central venous obstruction.
As of the acquisition date, CryoLife recorded a contingent consideration liability of $1.8 million in long-term liabilities
on its Consolidated Balance Sheet, representing the estimated fair value of the contingent consideration expected to be paid
to the former shareholders of Hemosphere upon the achievement of certain revenue-based milestones. The acquisition
agreement provides for a maximum of $4.5 million in future consideration payments through December 2015 based on
specified sales targets.
The fair value of the contingent consideration liability was estimated by discounting to present value the contingent
payments expected to be made based on a probability-weighted scenario approach. The Company applied a risk-based
estimate of the probability of achieving each scenario and then applied a cost of debt based discount rate. This fair value
measurement was based on unobservable inputs, including management estimates and assumptions about future revenues,
and was, therefore, classified as Level 3 within the fair value hierarchy presented in Note 2. The Company remeasured this
liability at each reporting date and recorded changes in the fair value of the contingent consideration in other (income)
expense on the Company’s Consolidated Statements of Operations and Comprehensive Income. Increases or decreases in the
fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in
the timing and amount of Company revenue estimates. As of December 31, 2014 the Company reviewed the full year
revenue performance of Hemosphere for 2014 and 2013, and reviewed its 2015 annual budgets, which were updated in the
fourth quarter of 2014. As a result of this review, as of December 31, 2014 the Company believed that achievement of the
minimum revenue target to trigger payment was remote, and, therefore, estimated the fair value of the contingent
consideration to be zero.
The Company recorded gains of zero for the years ended December 31, 2016 and 2015 and $1.9 million during the year
ended December 31, 2014, on the remeasurement of the contingent consideration liability. The balance of the contingent
consideration liability was zero as of December 31, 2016 and 2015.
On February 3, 2016 the Company sold its HeRO Graft product line to Merit Medical Systems, Inc. (“Merit”) for $18.5
million in cash (“HeRO Sale”), of which $17.8 million had been received by December 31, 2016. The remaining $740,000
was received in the first quarter of 2017. Under terms of the agreement, Merit acquired the HeRO Graft product line,
including worldwide marketing rights, customer relationships, intellectual property, inventory, and certain property and
equipment. The Company continued to manufacture the HeRO Graft under a transition supply agreement until the sales
transfer to Merit was completed in the second quarter of 2016. The HeRO Graft product line was included as part of the
Company’s Medical Devices segment. The Company recorded a pre-tax gain of approximately $8.8 million on the HeRO
Sale.
ProCol Distribution Agreement and Divestiture of the ProCol Product Line
In 2014 CryoLife acquired the exclusive worldwide distribution rights to ProCol® Vascular Bioprosthesis (“ProCol”)
from Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe”). In accordance with the terms of the agreement with Hancock Jaffe,
CryoLife made payments to Hancock Jaffe of $1.7 million during 2014 and $576,000 in January 2015. In exchange for these
payments, CryoLife obtained the right to receive a designated amount of ProCol inventory for resale, portions of which the
Company received in 2014, 2015, and 2016. CryoLife made additional payments of $1.2 million in the aggregate during
2015 and the first quarter of 2016. As of March 18, 2016 CryoLife had made a total of $3.4 million in payments to Hancock
Jaffe and had received $1.7 million in inventory. The remaining $1.7 million in prepayments were settled as part of the
ProCol Sale, described below.
On March 18, 2016 the Company sold its ProCol® Vascular Bioprosthesis (“ProCol”) distribution rights and purchase
option to LeMaitre Vascular, Inc. (“LeMaitre”) for $2.0 million in cash (“ProCol Sale”), all of which was received by March
31, 2016. Under terms of the agreement, LeMaitre acquired the ProCol related assets, including inventory, customer lists,
related marketing assets, and the Company’s purchase option to acquire ProCol. LeMaitre exercised the option to acquire
ProCol from Hancock Jaffe Laboratories. The ProCol product was included as part of the Company’s Medical Devices
segment. The Company recorded a pre-tax loss of approximately $845,000 on the ProCol Sale.
Disclosure of the HeRO Sale and the ProCol Sale
Financial Accounting Standards Board (“FASB”) ASU 2014-08, Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity, defines the criteria for reporting discontinued operations and requires additional
disclosures about discontinued operations. The standard requires that an entity report as a discontinued operation only a
F-21
disposal that represents a strategic shift in operations that has a major effect on the Company’s operations and financial
results.
In the first quarter of 2016 the Company completed the HeRO Sale and the ProCol Sale. The Company received cash for
these transactions and recorded the results of these sales in March 2016. Therefore, as of March 31, 2016 both transactions
met the disposed of by sale criteria under discontinued operations.
The Company evaluated the impact of the HeRO Sale and the ProCol Sale on the Company’s business to determine
whether these disposals represent a strategic shift that has, or will have, a major effect on the Company’s financial position,
results of operations, or cash flows. As the HeRO Graft and ProCol product lines combined represented less than 10% of
total Company revenues for the year ended December 31, 2015 and the Company’s total assets as of December 31, 2015, the
Company believes that these transactions did not have a major effect on the Company’s operations and financial condition,
either individually or in the aggregate, and therefore the Company did not disclose these transactions as discontinued
operations. The combined net gain from the HeRO Sale and ProCol Sale was therefore reported as gain from sale of business
components on the Company’s Summary Consolidated Statements of Operations and Comprehensive Income.
6. PhotoFix Distribution Agreement and Acquisition
Overview
In 2014 CryoLife entered into an exclusive supply and distribution agreement with Genesee Biomedical, Inc. (“GBI”) to
acquire the distribution rights to PhotoFix TM, a bovine pericardial patch stabilized using a dye-mediated photo-fixation
process that requires no glutaraldehyde. PhotoFix has received U.S. Food and Drug Administration (“FDA”) 510(k)
clearance and is indicated for use in intracardiac repair, including ventricular repair and atrial repair, great vessel repair and
suture line buttressing, and pericardial closure. CryoLife believes that PhotoFix fits well into its product portfolio of medical
devices for cardiac surgery. In January 2015 the Company received its initial shipments and launched its distribution of
PhotoFix.
The agreement between CryoLife and GBI (the “GBI Agreement”) had an initial five-year term and was renewable for
two one-year periods at CryoLife’s option. Under the terms of the GBI Agreement, CryoLife purchased PhotoFix inventory
for resale at an agreed upon transfer price and had the option, which became effective in March 2015, to acquire the PhotoFix
product line from GBI.
Accounting for the Transaction
On April 13, 2016 the Company exercised its right to acquire the PhotoFix technology from GBI for approximately $2.3
million, of which $1.2 million was paid in cash at closing, approximately $600,000 was previously provided to GBI as an
advance under the distribution agreement, and approximately $400,000 is payable to GBI within 18 months of signing or
earlier, subject to certain conditions. The Company’s preliminary allocation of the purchase price to the tangible and
identifiable intangible assets acquired, based on their estimated fair values resulted in the allocation of the majority of the
purchase price to amortizable intangible assets. GBI will continue to manufacture PhotoFix until the Company is able to
establish manufacturing operations.
7. Direct Sales in France
In June 2015 CryoLife signed a Business Transfer Agreement with its French distribution partner to facilitate an orderly
transition of the Company to a direct sales model in France. In October 2015 the Company completed the acquisition of a
portion of the business of its French distribution partner. The Company acquired in the transaction certain intangible assets,
including commercial and business information, assignment of contracts, and a non-compete agreement with its former
French distribution partner for a purchase price of €1.2 million or $1.3 million. During the third quarter of 2015 the
Company established a wholly owned subsidiary in France, CryoLife France SAS, and certain members of the distributor’s
sales team who were responsible for selling the Company’s products in France became employees of the Company’s newly
created subsidiary.
F-22
8. Investment in ValveXchange
Preferred Stock Investment
In July 2011 the Company purchased shares of series A preferred stock of ValveXchange for approximately $3.5
million. ValveXchange was a private medical device company that was spun off from Cleveland Clinic to develop a lifetime
heart valve replacement technology platform featuring exchangeable bioprosthetic leaflets. As ValveXchange’s stock was
not actively traded on any public stock exchange, and as the Company’s investment was in preferred stock, the Company
initially accounted for this investment using the cost method as a long-term asset, investment in equity securities, on the
Company’s Consolidated Balance Sheet. The Company determined that its investment in ValveXchange was fully impaired
as of December 31, 2013, and the impairment was other than temporary. As of December 31, 2016 and 2015 the carrying
value of the Company’s investment in ValveXchange preferred stock was zero.
Loan Agreement
In July 2011 the Company entered into an agreement with ValveXchange, as amended, to make available to
ValveXchange up to $2.0 million in debt financing through a revolving credit facility (the “Loan”). The Loan included
various affirmative and negative covenants, including financial covenant requirements, and would have expired on July 30,
2018, unless terminated earlier. Amounts under the Loan earned interest at an 8% annual rate and were secured by
substantially all of the tangible and intangible assets of ValveXchange. The Company advanced $2.0 million to
ValveXchange under this loan in 2012.
During the quarter ended December 31, 2014 CryoLife became aware of various factors, including ValveXchange’s
inability to secure additional funding, its lack of capital to continue basic operations, and the likelihood of impending default
on the Loan. In December 2014 CryoLife notified ValveXchange that it was in breach of the Loan, and in January 2015,
after ValveXchange failed to cure this breach, CryoLife accelerated the amounts due under the Loan. In January 2015
ValveXchange informed CryoLife management of its intent to file for bankruptcy, which created substantial uncertainty
regarding the disposition of CryoLife’s claim for amounts it is owed under the Loan. Given these circumstances, CryoLife
believed that its Loan became fully impaired in the fourth quarter of 2014. As a result, during the three months ended
December 31, 2014 the Company recorded other non-operating expense of $2.0 million to write-down its long-term note
receivable from ValveXchange. ValveXchange was dissolved in June 2015. The net carrying value of the long-term note
receivable was zero as of December 31, 2016 and 2015.
9. Medafor Matters
Investment in Medafor Common Stock
In 2009 and 2010 CryoLife purchased shares of common stock in Medafor, a developer and supplier of plant based
hemostatic agents. The Company initially recorded its investment using the cost method as a long-term asset, investment in
equity securities, on the Company’s Consolidated Balance Sheets.
On October 1, 2013 C.R. Bard, Inc., a developer, manufacturer, and marketer of medical technologies in the fields of
vascular, urology, oncology, and surgical specialty products (“Bard”), and its subsidiaries completed its acquisition of all
outstanding shares of Medafor common stock. The Company received an initial payment of approximately $15.4 million in
2013, $530,000 in 2014, and $891,000 in 2015 for its 2.4 million shares of Medafor common stock.
The final release of transaction consideration from escrow is expected to be received in October 2017 and is expected to
be nominal. This subsequent payment will be recorded as an additional gain if, and when, received by the Company.
Legal Action
In April 2014 CryoLife filed a declaratory judgment lawsuit against Bard, and its subsidiaries Davol, Inc. (“Davol”) and
Medafor (collectively, “Defendants”), in the District Court for the District of Delaware (the “Court”). CryoLife requested
that the Court declare that CryoLife’s manufacture, use, offer for sale, and sale of PerClot in the U.S. does not, and would
not, infringe Bard’s U.S. Patent No. 6,060,461 (the “‘461 Patent”). In addition, CryoLife requested that the Court declare
that the claims of the ‘461 Patent are invalid. CryoLife also requested injunctive relief and an award of attorneys’ fees.
F-23
The lawsuit against the Defendants followed the receipt by CryoLife of a letter from Medafor in September 2012 stating
that PerClot, when introduced in the U.S., would infringe the ‘461 Patent when used in accordance with the method
published in CryoLife’s literature and with the instructions for use. CryoLife received FDA 510(k) clearance for the sale of
PerClot Topical in April 2014 and began distributing this product in August 2014. PerClot Topical is a version of the
Company’s PerClot product, which was manufactured by the Company at its headquarters and labeled for use in certain
topical indications. CryoLife also received investigational device exemption approval in March 2014 to begin clinical trials
for PerClot in certain surgical indications.
In August 2014 Medafor filed a counterclaim against CryoLife for infringement of the ‘461 Patent. In September 2014
Medafor filed a motion for a preliminary injunction, asking the Court to enjoin CryoLife’s marketing and sale of PerClot in
the U.S. In March 2015 the Court ruled that CryoLife’s declaratory judgment lawsuit against Medafor may proceed but
dismissed Bard and Davol from the lawsuit. The Court also granted Medafor’s motion for a preliminary injunction, which
prohibited CryoLife from marketing, selling, and distributing PerClot in the U.S. while the litigation proceeded. In March
2015 CryoLife ceased all marketing, sales, and distribution of PerClot in the U.S., including PerClot Topical, in accordance
with the Court’s order. In April 2015 CryoLife appealed the Court’s ruling on the preliminary injunction motion to the U.S.
Court of Appeals for the Federal Circuit. CryoLife dismissed this appeal in June 2015. On November 18, 2015, the lawsuit
was resolved by entry by the Court of the Parties’ Joint Stipulation for Dismissal, which resulted in the dismissal with
prejudice of all parties’ claims and counterclaims in the lawsuit, the continuation of the preliminary injunction prohibiting
CryoLife from marketing, selling and distributing PerClot in the U.S. until expiration of the ‘461 Patent on February 8, 2019,
each party bearing its own attorneys’ fees and costs associated with the lawsuit, and the continuation of the Court’s
jurisdiction over the parties to enforce the resolution.
10. Inventories and Deferred Preservation Costs
Inventories at December 31, 2016 and 2015 are comprised of the following (in thousands):
Raw materials and supplies
Work-in-process
Finished goods
Total inventories
2016
2015
$
$
9,321
3,321
13,651
26,293
$
$
8,590
633
5,420
14,643
Deferred preservation costs at December 31, 2016 and 2015 are comprised of the following (in thousands):
Cardiac tissues
Vascular tissues
Total deferred preservation costs
2016
15,768
14,920
30,688
$
$
2015
11,722
13,019
24,741
$
$
The Company maintains consignment inventory of its On-X heart valves at domestic and international hospital locations
to facilitate usage. The Company retains title to this consignment inventory until the valve is implanted, at which time the
Company invoices the hospital. As of December 31, 2016 the Company had $4.9 million in consignment inventory, with
approximately 80% in domestic locations and 20% in foreign locations.
11. Goodwill and Other Intangible Assets
Indefinite Lived Intangible Assets
As of December 31, 2016 and 2015 the carrying values of the Company’s indefinite lived intangible assets are as follows
(in thousands):
Goodwill
Procurement contracts and agreements
Trademarks
Total indefinite lived intangible assets
F-24
2016
2015
$
$
78,294
2,013
841
81,148
$
$
11,365
2,013
860
14,238
Based on its experience with similar agreements, the Company believes that its acquired procurement contracts and
agreements have indefinite useful lives, as the Company expects to continue to renew these contracts for the foreseeable
future. The Company believes that its trademarks have indefinite useful lives as the Company currently anticipates that these
trademarks will contribute to cash flows of the Company indefinitely.
As of December 31, 2016 and 2015 the value of the Company’s goodwill, all of which is related to its Medical Devices
segment, is as follows (in thousands):
Balance as of January 1,
Goodwill from On-X Acquisition
Goodwill allocated to sale of HeRO Graft product line
Goodwill allocated to sale of ProCol distribution rights and purchase option
Balance as of December 31,
Definite Lived Intangible Assets
2016
11,365
68,229
(1,200)
(100)
78,294
$
$
2015
11,365
--
--
--
11,365
$
$
As of December 31, 2016 and 2015 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, 2016
Acquired technology
Patents
Distribution and manufacturing rights and know-how
Customer lists and relationships
Non-compete agreement
Other
December 31, 2015
Acquired technology
Patents
Distribution and manufacturing rights and know-how
Customer lists and relationships
Non-compete agreement
Other
Gross Carrying
Value
$
38,478
3,710
4,059
29,140
381
1,262
Gross Carrying
Value
$
14,020
4,081
4,059
3,370
381
1,583
Accumulated
Amortization
5,956
2,702
1,532
2,141
381
531
$
Accumulated
Amortization
4,954
2,664
1,245
1,054
343
210
Amortization
Period
11 – 22 Years
17 Years
11 – 15 Years
13 – 22 Years
10 Years
3 Years
Amortization
Period
11 – 16 Years
17 Years
11 – 15 Years
13 – 17 Years
10 Years
3 – 5 Years
The increase in gross carrying value of the Company’s intangible assets as of December 31, 2016 when compared to
December 31, 2015 is primarily due to the Company’s acquisitions of On-X and PhotoFix, partially offset by reductions due
to the HeRO Sale and the ProCol Sale. See Note 4 for further discussion of the acquisition of On-X, Note 6 for further
discussion of the acquisition of PhotoFix, and Note 5 for further discussion of the HeRO Sale and the ProCol Sale.
Amortization Expense
Amortization expense recorded in general, administrative, and marketing expenses on the Company’s Consolidated
Statements of Operations and Comprehensive Income for the years ended December 31 is as follows (in thousands):
Amortization expense
2016
2015
2014
$
4,426
$
2,135
$
2,027
As of December 31, 2016 scheduled amortization of intangible assets for the next five years is as follows (in thousands):
Amortization expense
2017
4,566
$
2018
4,449
$
2019
4,107
$
2020
3,946
$
2021
3,925
$
Total
$ 20,993
F-25
12. Income Taxes
Income Tax Expense
Income before income taxes consists of the following (in thousands):
Domestic
Foreign
Income before income taxes
Income tax expense consists of the following (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Income tax expense
2016
17,874
538
18,412
2016
3,948
626
353
4,927
2,836
(9)
(120)
2,707
7,634
$
$
$
$
2015
5,701
167
5,868
2015
231
142
160
533
1,011
319
--
1,330
1,863
$
$
$
$
2014
8,350
353
8,703
2014
898
211
99
1,208
127
46
--
173
1,381
$
$
$
$
The Company’s income tax expense in 2016, 2015, and 2014 included the Company’s federal, state, and foreign tax
obligations. The Company’s effective income tax rate was approximately 41%, 32%, and 16% for the years ended December
31, 2016, 2015, and 2014, respectively. The Company’s income tax rate for the twelve months ended December 31, 2016
was unfavorably impacted by the tax treatment of certain expenses related to the On-X acquisition, which had a larger impact
on the tax rate in the first quarter of 2016, and by book/tax basis differences related to the HeRO Sale. The Company’s
income tax rate for the twelve months ended December 31, 2015 was favorably affected by the reversal of $869,000 in
uncertain tax positions, primarily related to research and development tax credits for which the statute of limitations has
expired, partially offset by the expiration of certain state net operating losses and other permanent differences. The
Company’s income tax rate for the twelve months ended December 31, 2014 was favorably affected by the reduction in
uncertain tax positions, nontaxable gains recorded as change in stock basis of subsidiary, and favorable deductions taken on
the Company’s 2013 federal tax return, which was filed in 2014.
F-26
The income tax expense amounts differ from the amounts computed by applying the U.S. federal statutory income tax
rate of 35% for the year ended December 31, 2016 and 34% for the years ended December 31, 2015 and 2014 to pretax
income as a result of the following (in thousands):
Tax expense at statutory rate
Increase (reduction) in income taxes resulting from:
Non-Deductible transaction costs
State income taxes, net of federal benefit
Non-deductible loss on unit disposals
Non-deductible entertainment expenses
Equity compensation
Foreign income taxes
Provision to return adjustments
Non-deductible change in stock basis of subsidiary
Domestic production activities deduction
Research and development credit
Net change in uncertain tax positions
State valuation allowance adjustment
Other
Total Income tax expense
Deferred Taxes
2016
2015
2014
$
6,444
$
1,995
$
2,959
908
531
455
221
135
130
29
--
(456)
(296)
(153)
(84)
(230)
7,634
$
--
499
--
184
144
118
122
--
(87)
(281)
(869)
(19)
57
1,863
--
220
--
218
63
69
(321)
(641)
(153)
(237)
(781)
83
(98)
1,381
$
$
The Company generates deferred tax assets primarily as a result of write-downs of inventory and deferred preservation
costs; accruals for product and tissue processing liability claims; investment and asset impairments; and, in prior periods, due
to operating losses. The Company acquired significant deferred tax assets, primarily net operating loss carryforwards, from
its acquisitions of On-X in 2016, Hemosphere in 2012, and Cardiogenesis in 2011. The Company recorded significant
deferred tax liabilities in 2016 related to the intangible assets acquired in the On-X acquisition.
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
Inventory and deferred preservation costs write-downs
Investment in equity securities
Property
Intangible assets
Accrued expenses
Loss carryforwards
Credit carryforwards
Stock compensation
Transaction costs
Deferred compensation
UNICAP
Tax benefit of tax reserves
Other
Less valuation allowance
Total deferred tax assets
$
2016
2015
208
708
58
1,780
2,034
4,215
8,760
1,001
3,678
122
973
371
333
409
(2,157)
22,493
$
142
536
58
2,987
591
3,276
12,262
616
2,546
1,048
957
55
53
382
(2,109)
23,400
F-27
Deferred tax liabilities:
Prepaid items
Intangible assets
Other
Total deferred tax liabilities
2016
2015
(436)
(21,665)
(399)
(22,500)
(471)
(4,400)
(341)
(5,212)
Total net deferred tax (liabilities) assets
$
(7)
$
18,188
As of December 31, 2016 the Company maintained a total of $2.2 million in valuation allowances against deferred tax
assets, related to state net operating loss carryforwards, and a net deferred tax liability of $7,000. As of December 31, 2015
the Company maintained a total of $2.1 million in valuation allowances against deferred tax assets, related to state net
operating loss carryforwards, and a net deferred tax asset of $18.2 million.
As of December 31, 2016 the Company had approximately $6.3 million tax-effected federal net operating loss
carryforwards related to the acquisitions of Cardiogenesis and Hemosphere that will begin to expire in 2017, $2.4 million of
tax-effected state net operating loss carryforwards that began to expire in 2016, $702,000 in research and development tax
credit carryforwards that will begin to expire in 2022, and $150,000 in credits from the state of Texas that will fully expire by
2027.
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
Increases related to current year tax positions
Increases related to prior year tax positions
Decreases related to prior year tax positions
Decreases related to settlements
Decreases due to the lapsing of statutes of limitations
Ending balance
2016
2015
2014
$
$
969
86
2,668
(40)
(66)
(227)
3,390
$
$
1,437
103
403
(70)
--
(904)
969
$
$
2,100
92
--
(265)
--
(490)
1,437
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
2016
2015
2014
$
$
210
92
(94)
208
$
$
366
50
(206)
210
$
$
422
91
(147)
366
As of December 31, 2016 the Company’s uncertain tax liability, including interest and penalties, of $3.6 million, was
recorded as a reduction to deferred tax assets of $234,000, and a non-current liability of $3.4 million on the Company’s
Consolidated Balance Sheets, all of which, except for the portion related to interest and penalties, is expected to impact the
Company’s tax rate when recognized. The uncertain tax position increase related to prior year tax positions is primarily due
to positions taken by On-X on tax returns in prior years. As of December 31, 2015 the Company’s total uncertain tax
liability, including interest and penalties of $1.2 million, was recorded as a reduction to deferred tax assets of $104,000, and a
non-current liability of $1.1 million on the Company’s Consolidated Balance Sheets, all of which, except for the portion
related to interest and penalties, is expected to impact the Company’s tax rate when recognized.
The Company believes it is reasonably possible that approximately $235,000 of its uncertain tax liability will be
recognized in 2017 due to the lapsing of various federal and state statutes of limitations.
F-28
Other
The Company’s tax years 2013 through 2015 generally remain open to examination by the major taxing jurisdictions to
which the Company is subject. However, certain returns from years prior to 2013, in which net operating losses and tax
credits have arisen, are still open for examination by the tax authorities.
13. Debt
GE Credit Agreement
On September 26, 2014 the Company amended and restated its credit agreement with GE Capital, extending the
expiration date and amending other terms, which are discussed further below. CryoLife’s second amended and restated credit
agreement with GE Capital (the “GE Credit Agreement”) provided revolving credit for working capital, permitted
acquisitions, and general corporate purposes. The GE Credit Agreement had aggregate commitments of $20.0 million for
revolving loans, including swing loans, subject to a sublimit, and letters of credit, and was due to mature on September 26,
2019.
Amounts borrowed under the GE Credit Agreement were secured by substantially all of the tangible and intangible
assets of CryoLife and its subsidiaries. Commitment fees were paid based on the unused portion of the facility. As of
December 31, 2015 the aggregate interest rate was 4.75%. As of December 31, 2015 the outstanding balance of the GE
Credit Agreement was zero, and the remaining availability was $20.0 million.
The GE Credit Agreement placed limitations on the amount that the Company may borrow and included various
affirmative and negative covenants, including financial covenants such as a requirement that CryoLife (i) not exceed a
defined leverage ratio and (ii) maintain minimum earnings subject to defined adjustments as of specified dates. The
agreement also (i) limited the payment of cash dividends, up to specified maximums and subject to satisfaction of specified
conditions, (ii) required that, after giving effect to a stock repurchase, the Company maintain liquidity, as defined within the
agreement, of at least $20.0 million, (iii) limited acquisitions or mergers except for certain permitted acquisitions, (iv) set
specified limits on the amount the Company can pay to purchase or redeem CryoLife common stock pursuant to a stock
repurchase program and to fund estimated tax liabilities incurred by officers, directors, and employees as a result of awards of
stock or stock equivalents, and (v) included customary conditions on incurring new indebtedness.
As required under the terms of the GE Credit Agreement, the Company maintained cash and cash equivalents of at least
$5.0 million in accounts in which GE Capital had a first priority perfected lien. These amounts were recorded as long-term
restricted cash as of December 31, 2015 on the Company’s Consolidated Balance Sheet, as they were restricted for the term
of the GE Credit Agreement.
Amended Debt Agreement
In connection with the closing of the On-X acquisition, discussed above in Note 4, on January 20, 2016 the Company
and certain of its subsidiaries entered into the Third Amended and Restated Credit Agreement (“Amended Debt Agreement”)
with Capital One, National Association, who acquired GE Capital’s Healthcare Financial Services lending business in late
2015. The designated credit parties are Healthcare Financial Solutions, LLC; Fifth Third Bank; and Citizens Bank, National
Association, collectively the (“Lending Parties”). The Amended Debt Agreement amended and restated the GE Credit
Agreement discussed above and provides the Company with a senior secured credit facility in an aggregate principal amount
of $95 million, which includes a $75 million term loan and a $20 million revolving credit facility (including a $4 million
letter of credit sub-facility and a $3 million swing-line sub-facility). The $75 million term loan was used to finance, in part,
the acquisition of On-X and will mature on January 20, 2021.
The Company and its domestic subsidiaries, subject to certain exceptions and exclusions, have guaranteed the
obligations of the Amended Debt Agreement. Borrowings under the Amended Debt Agreement are secured by substantially
all of the Company’s real and personal property.
The loans under the Amended Debt Agreement (other than the swing-line loans) bear interest, at the Company’s option,
at either a floating rate equal to the base rate, as defined in the Amended Debt Agreement, plus a margin of between 1.75%
and 2.75%, depending on the Company’s consolidated leverage ratio, or a per annum rate equal to LIBOR plus a margin of
between 2.75% and 3.75%, depending on the Company’s consolidated leverage ratio. As of December 31, 2016 the
aggregate interest rate was 3.50%. Swing-line loans shall bear interest at a floating rate equal to the base rate plus a margin
F-29
of between 1.75% and 2.75%, depending on the Company’s consolidated leverage ratio. The Company is obligated to pay an
unused commitment fee equal to 0.50% of the un-utilized portion of the revolving loans. In addition, the Company is also
obligated to pay other customary fees for a credit facility of this size and type. If and while a bankruptcy or insolvency event
of default exists or a payment event of default exists, the Company is obligated to pay a per annum default rate of interest of
2.00% above the applicable interest rate on the past due principal amount of the loans outstanding.
Interest is due and payable, with respect to base rate loans, on a quarterly basis. Interest is due and payable, with respect
to LIBOR loans, on the last day of the applicable interest period, if the interest is shorter than six months, or on the last day
of each three month interval, if the interest period is six months or greater.
The Amended Debt Agreement prohibits the Company from exceeding a maximum consolidated leverage ratio during
the term of the Amended Debt Agreement and requires the Company to maintain a minimum interest coverage ratio. In
addition, the Amended Debt Agreement contains certain customary affirmative and negative covenants, including covenants
that limit the ability of the Company and its subsidiaries which are parties to the loan agreement to, among other things, grant
liens; incur debt; dispose of assets; make loans and investments; make acquisitions; make certain restricted payments; merge
or consolidate; and change their business and accounting or reporting practices, in each case subject to customary exceptions
for a credit facility of this size and type. As of December 31, 2016 the Company was in compliance with the covenants of the
Amended Debt Agreement.
The Amended Debt Agreement includes certain customary events of default that include, among other things, non-
payment of principal, interest or fees; inaccuracy of representations and warranties; violation of covenants; cross-default to
certain other indebtedness; bankruptcy and insolvency; and change of control. Upon the occurrence and during the
continuance of an event of default, the lenders may declare all outstanding principal and accrued but unpaid interest under the
Amended Debt Agreement immediately due and payable and may exercise the other rights and remedies provided for under
the Amended Debt Agreement and related loan documents.
The short-term and long-term balances of the Company’s term loan are as follows (in thousands):
Term loan balance
Less unamortized loan origination costs
Total borrowed
Less short-term loan balance
Long-term loan balance
As of December 31,
2016
2015
$
$
73,594
(2,020)
71,574
(4,562)
67,012
$
$
--
--
--
--
--
At December 31, 2016 the aggregate maturities of long-term debt for the next five years is as follows (in thousands):
Maturities
2017
5,096
$
2018
3,750
$
2019
3,750
$
2020
5,156
$
2021
$ 55,842
Total
$ 73,594
The Company’s aggregate maturity schedule is subject to change due to a provision within the Amended Debt
Agreement that requires the Company to make annual prepayments based on an excess cash flow calculation.
Interest
Total interest expense was $3.0 million in 2016 a favorable $62,000 in 2015 and $175,000 in 2014. Interest expense was
favorable in 2015 due to the reversal of accrued interest on uncertain tax positions as discussed in Note 12 above. Interest
expense includes interest on debt and uncertain tax positions in all periods.
F-30
14. 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 manufacturing, office, and warehouse space,
leases on Company vehicles, and leases on a variety of office equipment.
The Company had deferred rent obligations of $2.4 million and $1.7 million as of December 31, 2016 and 2015,
respectively, primarily related to the lease on its corporate headquarters, which expires in 2022. Total rental expense for
operating leases was $4.3 million in 2016, $3.4 million in 2015, and $3.0 million in 2014. The increase in rent expense in
2016 is due to the acquisition of On-X and its lease for manufacturing, warehouse, and office space in Austin, TX. The
increase in rent expense in 2015 is due to a lease the Company entered into for additional office space in Kennesaw, GA.
The Company began subleasing some of its additional office space late in December 2016 and earned nominal sublease
income in 2016. Future minimum lease payments and sublease rental income are as follows (in thousands):
Operating
Leases
Sublease
Income
2017
2018
2019
2020
2021
Thereafter
$
4,470 $
4,779
4,722
4,127
3,647
3,788
Total minimum lease payments
$
25,533 $
Liability Claims
375
512
525
538
552
--
2,502
At December 31, 2016 and 2015 the Company’s unreported loss liability was $1.5 million and $1.4 million, respectively.
As of December 31, 2016 and 2015, the related insurance recoverable amounts were $626,000 and $600,000, respectively.
The Company accrues its estimate of unreported product and tissue processing liability claims as other long-term liabilities
and records the related recoverable insurance amounts as other long-term assets. Further analysis indicated that the liability
as of December 31, 2016 could be estimated to be as high as $2.8 million, after including a reasonable margin for statistical
fluctuations calculated based on actuarial simulation techniques.
Employment Agreements
In July 2014 the Company’s Board of Directors appointed Mr. James P. Mackin as President and Chief Executive
Officer (“CEO”), and the Company and Mr. Mackin entered into an employment agreement, which became effective
September 2, 2014. The employment agreement has an initial three-year term. Beginning on the second anniversary of the
effective date, and subject to earlier termination pursuant to the agreement, the employment term will, on a daily basis,
automatically extend by one day. In accordance with the agreement, on September 2, 2014, Mr. Mackin received a one-time
signing bonus of $200,000, a grant of 400,000 stock options, and a performance stock award grant of 250,000 shares. The
agreement also provides for a severance payment, which would become payable upon the occurrence of certain employment
termination events, including termination by the Company without cause.
The employment agreement of the Company’s former President, CEO, and Executive Chairman, Mr. Steven G.
Anderson, conferred certain benefits on Mr. Anderson upon his retirement or termination of employment in conjunction with
certain change in control events. On April 9, 2015 Mr. Anderson retired from service as an employee of the Company and
Chair of its Board of Directors, and entered into a separation agreement with the Company. The Company recorded expense
of approximately $1.4 million related to Mr. Anderson’s separation agreement in the second quarter of 2015. The Company
had remaining obligations due under Mr. Anderson’s separation agreement of $83,000 and $93,000 as of December 31, 2016
and December 31, 2015, respectively.
PerClot Technology
On September 28, 2010 the Company entered into a worldwide distribution agreement (the “Distribution Agreement”)
and a license and manufacturing agreement (the “License Agreement”) with Starch Medical, Inc. (“SMI”), for PerClot, a
F-31
polysaccharide hemostatic agent used in surgery. The Distribution Agreement has a term of 15 years, but can be terminated
for any reason before the expiration date by CryoLife by providing 180 days’ notice. The Distribution Agreement also
contains minimum purchase requirements that expire upon the termination of the Distribution Agreement or following U.S.
regulatory approval for PerClot. Separate and apart from the terms of the Distribution Agreement, pursuant to the License
Agreement, as amended by a September 2, 2011 technology transfer agreement, CryoLife can manufacture and sell PerClot,
assuming appropriate regulatory approvals, in the U.S. and certain other jurisdictions and may be required to pay royalties to
SMI at certain rates on net revenues of products.
CryoLife paid $500,000 to SMI in January 2015 related to the achievement of a contingent milestone. The Company
may make additional contingent payments to SMI of up to $1.0 million if certain U.S. regulatory and certain commercial
milestones are achieved.
The Company is conducting its pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in
the U.S. The Company began enrollment in the trial in the second quarter of 2015 but later suspended enrollment pending
consultation with the FDA regarding the trial protocol. These discussions resulted in two amendments to the trial protocol,
the last of which was approved by the FDA in July 2016. The Company is in the process of conducting site start-up activities
and resumed enrollment into the trial in the fourth quarter of 2016 with the goal of receiving PMA from the FDA in the first
half of 2019.
As of December 31, 2016 the Company had $1.5 million in prepaid royalties, $2.9 million in net intangible assets, and
$1.2 million in property and equipment, net on the Company’s Consolidated Balance Sheets related to the PerClot product
line. If the Company does not ultimately pursue or receive FDA approval to commercialize PerClot in the U.S., these assets
could be materially impaired in future periods.
15. Shareholders’ Equity
Cash Dividends
The Company initiated a cash dividend in the third quarter of 2012 and paid the dividend quarterly until the Company’s
Board of Directors discontinued dividend payments for the foreseeable future in December 2015. The Company paid
dividend payments from cash on hand of $3.4 million for the year ended December 31, 2015. The dividend payments were
recorded as a reduction to retained earnings on the Company’s Consolidated Balance Sheet.
Shareholder Rights Plan
The Company had 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 was entitled to one “Right,” as
defined in, and subject to, the terms of the rights agreement. A Right entitled 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 became
outstanding after December 11, 1995 was also entitled to a Right, subject to the terms and conditions of the rights agreement.
The shareholder rights agreement expired on November 23, 2015.
16. Employee Benefit Plans
401(k) Plan
The Company has a 401(k) savings plan (“401(k) Plan”) providing retirement benefits to all employees who have
completed at least three months of service. The Company made matching contributions of 40% of each participant's
contribution for up to 5% of each participant’s salary in 2016, 2015, and 2014. Total Company contributions approximated
$750,000, $573,000, and $553,000 for the years ended December 31, 2016, 2015, and 2014, respectively. The increase in
expenses in 2016 was due, in part, to the addition of participants related to the acquisition of On-X. Additionally, the
Company may make discretionary contributions to the 401(k) Plan; however, no discretionary contributions were made in
any of the past three years.
F-32
Deferred Compensation Plan
On January 1, 2011 the Company initiated a nonqualified Deferred Compensation Plan (“Deferred Plan”). The Deferred
Plan allows certain employees of CryoLife to defer receipt of a portion of their salary and cash bonus. The Deferred Plan
provides for tax-deferred growth of deferred compensation. Pursuant to the terms of the Deferred Plan, the Company agrees
to return the deferred amounts plus gains and losses, based on investment fund options chosen by each respective participant,
to the plan participants upon distribution. All deferred amounts and deemed earnings thereon are vested at all times. The
Company has no current plans to match any contributions. Amounts owed to plan participants are unsecured obligations of
the Company. CryoLife has established a rabbi trust in which it will make contributions to fund its obligations under the
Deferred Plan. Pursuant to the terms of the trust, the Company will be required to make contributions each year to fully
match its obligations under the Deferred Plan. The trust’s funds are primarily invested in Company Owned Life Insurance
(“COLI”), and the Company plans to hold the policies until the deaths of the insured.
The Company’s deferred compensation liabilities are recorded as a component of other current liabilities or long-term
deferred compensation liabilities, as appropriate, based on anticipated distribution dates. The cash surrender value of COLI
is recorded in other long-term assets. Changes in the value of participant accounts and changes in the cash surrender value of
COLI are recorded as part of the Company’s operating expenses and are subject to the Company’s normal allocation of
expenses to inventory and deferred preservation costs.
17. Stock Compensation
Overview
The Company is currently authorized to grant and has available for grant the following number of shares under the
Company’s stock plans as of December 31, 2016 and 2015:
1996 Discounted Employee Stock Purchase Plan, as amended
2009 Employee Stock Incentive Plan
Plan
Total
Authorized
Shares
1,900,000
7,100,000
9,000,000
Available for Grant
2015
2016
560,000
469,000
3,361,000
2,194,000
3,921,000
2,663,000
Upon the exercise of stock options or grants of RSAs, PSAs, RSUs, or PSUs, the Company may issue the required shares
out of authorized but unissued common stock or out of treasury stock, at management’s discretion.
Stock Awards
In 2016 the Compensation Committee of the Company’s Board of Directors (the “Committee”) authorized awards from
approved stock incentive plans of RSAs to non-employee directors, RSUs to certain employees, and RSAs and PSUs to
certain Company officers, which, counting PSUs at target levels, together totaled 490,000 shares and had an aggregate grant
date market value of $5.5 million. The PSUs granted in 2016 represented the right to receive from 60% to 150% of the target
number of shares of common stock. The performance component of PSU awards granted in 2016 was based on attaining
specified levels of adjusted EBITDA, adjusted inventory levels, and adjusted trade accounts receivable days’ sales
outstanding, each as defined in the PSU grant documents, for the 2016 calendar year. The PSUs granted in 2016 earned
142% of the target number of shares.
In 2015 the Committee authorized awards from approved stock incentive plans of RSAs to non-employee Directors,
RSUs to certain employees, and RSAs and PSUs to certain Company officers, which, counting PSUs at target levels, together
totaled 405,000 shares of common stock and had an aggregate grant date market value of $4.3 million. The PSUs granted in
2015 earned approximately 127% of the target number of shares.
In 2014 the Committee authorized awards from approved stock incentive plans of RSAs to non-employee Directors,
RSUs to certain employees, and RSAs, PSAs, and PSUs to certain Company officers, which, counting PSUs at target levels,
together totaled 655,000 shares of common stock and had an aggregate market value of $6.6 million. The PSUs granted in
2014 earned approximately 50% of the target number of shares.
F-33
A summary of stock grant activity for the years ended December 31, 2016, 2015, and 2014 for RSAs, PSAs, RSUs, and
PSUs, based on the target number of shares, is as follows:
Unvested at December 31, 2013
RSAs
Granted
Vested
Forfeited
Unvested at December 31, 2014
Granted
Vested
Forfeited
Unvested at December 31, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2016
Unvested at December 31, 2013
PSAs
Granted
Vested
Forfeited
Unvested at December 31, 2014
Granted
Vested
Forfeited
Unvested at December 31, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2016
$
$
Weighted
Average
Grant Date
Fair Value
5.62
9.97
5.55
7.22
7.65
10.33
8.10
8.49
9.31
10.84
7.92
--
10.64
Weighted
Average
Grant Date
Fair Value
--
10.18
--
--
10.18
--
--
--
10.18
--
--
--
10.18
Shares
622,000
232,000
(324,000)
(35,000)
495,000
207,000
(278,000)
(110,000)
314,000
216,000
(138,000)
--
392,000
Shares
--
250,000
--
--
250,000
--
--
--
250,000
--
--
--
250,000
F-34
RSUs
Outstanding at December 31, 2013
Granted
Vested
Forfeited
Outstanding at December 31, 2014
Granted
Vested
Forfeited
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Vested and expected to vest
PSUs
Outstanding at December 31, 2013
Granted
Vested
Forfeited
Outstanding at December 31, 2014
Granted
Vested
Forfeited
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Vested and expected to vest
Weighted
Average
Remaining
Contractual
Term in years
1.56
$
Aggregate
Intrinsic
Value
1,425,000
1.21
687,000
1.17
1,110,000
1.24
3,405,000
1.23
$
3,132,000
Weighted
Average
Remaining
Contractual
Term in years
0.81
$
Aggregate
Intrinsic
Value
2,612,000
0.73
2,907,000
0.74
1,455,000
0.77
3,603,000
0.73
$
3,412,000
Shares
129,000
5,000
(52,000)
(21,000)
61,000
88,000
(36,000)
(10,000)
103,000
146,000
(44,000)
(27,000)
178,000
164,000
Shares
236,000
185,000
(143,000)
(21,000)
257,000
125,000
(139,000)
(108,000)
135,000
144,000
(83,000)
(8,000)
188,000
178,000
During the years ended December 31, 2016, 2015, and 2014, the total fair value of $2.9 million, $4.8 million, and $5.0
million, respectively, in combined RSAs, PSAs, RSUs, and PSUs vested.
Stock Options
The Compensation Committee of the Company’s Board of Directors authorized grants of stock options from approved
stock incentive plans to certain Company officers and employees totaling 387,000, 328,000, and 562,000 shares in 2016,
2015, and 2014, respectively, with exercise prices equal to the stock prices on the respective grant dates.
F-35
A summary of the Company’s stock option activity for the years ended December 31, 2016, 2015, and 2014 is as
follows:
Outstanding at December 31, 2013
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2014
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2016
Vested and expected to vest
Exercisable at December 31, 2016
$
Weighted
Average
Exercise Price
6.57
10.12
7.26
7.97
7.34
7.43
10.83
7.42
9.93
12.08
7.65
10.34
5.60
--
--
8.59
Weighted
Average
Remaining
Contractual
Term in years
3.31
$
Aggregate
Intrinsic
Value
8,274,000
3.54
8,021,000
3.31
5,992,000
3.55
20,179,000
8.55
7.50
3.51
2.33
19,843,000
13,904,000
Shares
1,794,000
562,000
(297,000)
(23,000)
(15,000)
2,021,000
328,000
(248,000)
(112,000)
(93,000)
1,896,000
387,000
(372,000)
--
--
1,911,000
1,872,000
1,193,000
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
2016
2015
3.68
$
2,422,000
$
3.82
761,000
$
2014
4.14
918,000
Employees purchased common stock totaling 90,000, 78,000, and 111,000 shares in 2016, 2015, and 2014, respectively,
through the Company’s ESPP.
Stock Compensation Expense
The following weighted-average assumptions were used to determine the fair value of options:
Expected life of options
Expected stock price volatility
Dividend yield
Risk-free interest rate
2016
2015
2014
Stock
Options
4.75 Years
0.40
--%
1.20%
ESPP
Options
0.5 Years
0.30
--%
0.43%
Stock
Options
4.5 Years
0.44
1.12%
1.41%
ESPP
Options
0.5 Years
0.32
1.06%
0.12%
Stock
Options
4.2 Years
0.55
1.16%
1.34%
ESPP
Options
0.5 Years
0.36
1.12%
0.08%
The following table summarizes stock compensation expense (in thousands):
RSA, PSA, RSU, and PSU expense
Stock option and ESPP option expense
Total stock compensation expense
2016
4,966
1,636
6,602
$
$
2015
3,955
1,371
5,326
$
$
2014
2,855
842
3,697
$
$
F-36
Included in the total stock compensation expense, as applicable in each period, were expenses related to RSAs, PSAs,
RSUs, PSUs, and stock options issued in each respective year, as well as those issued in prior periods that continue to vest
during the period, and compensation related to the Company’s ESPP. These amounts were recorded as stock compensation
expense and were subject to the Company’s normal allocation of expenses to inventory costs and deferred preservation costs.
The Company capitalized $274,000, $237,000 and $261,000 in the years ended December 31, 2016, 2015, and 2014,
respectively, of the stock compensation expense into its inventory costs and deferred preservation costs.
As of December 31, 2016 the Company had total unrecognized compensation costs of $5.1 million related to RSAs,
PSAs, RSUs, and PSUs and $1.8 million related to unvested stock options, before considering the effect of expected
forfeitures. As of December 31, 2016 this expense is expected to be recognized over a weighted-average period of 2.1 years
for RSUs, 1.6 years for stock options, 1.3 years for RSAs, 0.8 years for PSUs, and 0.7 years for PSAs.
18. 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
Net income allocated to participating securities
Net income allocated to common shareholders
Basic weighted-average common shares outstanding
Basic income per common share
Diluted income per common share
Net income
Net income allocated to participating securities
Net income allocated to common shareholders
Basic weighted-average common shares outstanding
Effect of dilutive options and awardsa
Diluted weighted-average common shares outstanding
Diluted income per common share
2016
10,778
(208)
10,570
31,855
0.33
2016
10,778
(202)
10,576
31,855
967
32,822
0.32
$
$
$
$
$
$
2015
2014
$
$
$
$
$
$
4,005
(87)
3,918
27,744
0.14
2015
4,005
(87)
3,918
27,744
798
28,542
0.14
$
$
$
$
$
$
7,322
(161)
7,161
27,379
0.26
2014
7,322
(158)
7,164
27,379
934
28,313
0.25
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
1,000, 710,000, and 335,000 shares for the years ended December 31, 2016, 2015, and 2014, respectively, were excluded
from the calculation of diluted weighted-average common shares outstanding.
19. Transactions with Related Parties
A member of the Company’s Board of Directors and a shareholder of the Company is an employee of an investment
banking services company. On January 20, 2016 CryoLife acquired On-X. The investment banking company represented
On-X in that acquisition, for which they earned $3.0 million in fees upon the close of the acquisition. CryoLife paid these
fees directly to the investment banking company on behalf of On-X out of the proceeds of the acquisition. The Company
made stock repurchases of $5.6 million 2014 which includes the cost of stock and commissions of less than 1% to that
investment banking services company. The Company did not make any stock repurchases in 2015 or 2016.
A member of the Company’s Board of Directors and a shareholder of the Company was the former Chief of Thoracic
Surgery of a university hospital that generated product and preservation services revenues of $316,000, $329,000, and
$273,000 for the Company in 2016, 2015, and 2014, respectively. Additionally, the son of this member of the Company’s
Board of Directors receives a retainer for performing heart and lung transplants from a medical center that generated product
and preservation services revenues of $479,000, $617,000, and $616,000 for the Company in 2016, 2015, and 2014,
respectively.
F-37
The Company expensed $39,000, $35,000, and $45,000 in 2016, 2015, and 2014, respectively, relating to supplies for
clinical trials purchased from a company whose former Chief Financial Officer is a member of the Company's Board of
Directors and a shareholder of the Company.
The Company expensed $44,000 and $43,000 in 2016 and 2015, respectively, relating to membership fees to a medical
device trade association where the Company’s President and CEO is a current member of the Board of Directors.
20. Segment and Geographic Information
The Company has two reportable segments organized according to its products and services: Medical Devices and
Preservation Services. The Medical Devices segment includes external revenues from product sales of BioGlue, BioFoam,
On-X products, CardioGenesis cardiac laser therapy, PerClot, PhotoFix, HeRO Graft through the second quarter of 2016, and
ProCol through the date of the sale of the ProCol product line in the first quarter of 2016. The Preservation Services segment
includes external services revenues from the preservation of cardiac and vascular tissues. There are no intersegment
revenues.
The primary measure of segment performance, as viewed by the Company’s management, is segment gross margin, or
net external revenues less cost of products and preservation services. 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 products and preservation services, and gross margins for the
Company’s operating segments (in thousands):
Revenues:
Medical devices
Preservation services
Total revenues
Cost of products and preservation services:
Medical devices
Preservation services
Total cost of products and preservation services
Gross margin:
Medical devices
Preservation services
Total gross margin
2016
2015
2014
$ 113,992
66,388
180,380
$
83,081
62,817
145,898
$
81,883
62,758
144,641
28,033
33,448
61,481
18,663
36,516
55,179
17,167
36,183
53,350
85,959
32,940
$ 118,899
64,418
26,301
90,719
$
64,716
26,575
91,291
$
F-38
Net revenues by product for the years ended December 31, 2016, 2015, and 2014 were as follows (in thousands):
Products:
BioGlue and BioFoam
On-X
CardioGenesis cardiac laser therapy
PerClot
PhotoFix
HeRO Graft
ProCol
Total products
Preservation services:
Cardiac tissue
Vascular tissue
Total preservation services
2016
2015
2014
$
63,461
34,232
7,864
4,021
1,871
2,325
218
113,992
29,697
36,691
66,388
$
59,332
--
9,419
4,083
1,396
7,546
1,305
83,081
28,059
34,758
62,817
$
62,091
--
8,225
4,289
--
7,131
147
81,883
29,437
33,321
62,758
Total revenues
$ 180,380
$ 145,898
$ 144,641
Net revenues by geographic location attributed to countries based on the location of the customer for the years ended
December 31, 2016, 2015, and 2014 were as follows (in thousands):
U.S.
International
Total revenues
2016
$ 131,727
48,653
$ 180,380
2015
$ 114,978
30,920
$ 145,898
2014
$ 110,533
34,108
$ 144,641
At December 31, 2016 and 2015 over 99% of the long-lived assets of the Company were held in the U.S., where all of
the Company’s manufacturing facilities and the corporate headquarters are located. At December 31, 2016 and 2015 the
Company’s $78.3 million and $11.4 million, respectively of goodwill was allocated entirely to its Medical Devices segment.
F-39
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
REVENUE:
2016
2015
2014
GROSS MARGIN:
2016
2015
2014
NET INCOME (LOSS):
2016
2015
2014
INCOME (LOSS) PER COMMON SHARE—DILUTED:
2016
2015
2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
43,016 *
33,831
35,731
27,621 *
19,667
22,473
2,541 *
(274)
1,059
0.08 *
(0.01)
0.04
$
$
$
$
47,083 *
35,526
34,690
30,301 *
21,554
22,384
2,347 *
(502)
2,161
0.07 *
(0.02)
0.08
$
$
$
$
45,252 *
36,703
37,069
29,782 *
22,982
23,799
2,993 *
2,145
2,326
0.09 *
0.07
0.08
$
$
$
$
45,029 *
39,838
37,151
31,195 *
26,516
22,635
2,897 *
2,636
1,776
0.09 *
0.09
0.06
*
In January 2016 the Company completed its acquisition of On-X Life Technologies Holdings, Inc., which is being
operated as a wholly owned subsidiary of CryoLife. In 2016 the Company also sold its HeRO Graft product line and its
ProCol product line, and ceased sales of these products during 2016.
F-40
Exhibit 21.1
SUBSIDIARIES OF CRYOLIFE, INC.
Subsidiary
CryoLife Europa, LTD. ............................................................
AuraZyme Pharmaceuticals, Inc. .............................................
CryoLife International, Inc. .....................................................
CryoLife Asia Pacific, Pte. LTD. ............................................
CryoLife France, SAS. .............................................................
On-X Life Technologies Holdings, Inc. ...................................
Jurisdiction
England and Wales
Florida
Florida
Singapore
France
Delaware
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement No. 333-197545 on Form S-8 pertaining to the Second Amended and Restated CryoLife,
Inc. 2009 Stock Incentive Plan,
(2) Registration Statement No. 333-182296 on Form S-8 pertaining to the Amended and Restated CryoLife, Inc.
2009 Stock Incentive Plan,
(3) Registration Statement No. 333-182297 on Form S-4 filed on June 22, 2012,
(4) Registration Statement No. 333-206119 on Form S-3 filed on August 5, 2015, as amended on August 21, 2015,
(5) Registration Statement No. 333-167065 on Form S-8 pertaining to the CryoLife, Inc. Employee Stock
Purchase Plan,
(6) Registration Statement No. 333-159608 on Form S-8 pertaining to the CryoLife, Inc. 2009 Employee Stock
Incentive Plan,
(7) Registration Statement No. 333-104637 on Form S-8 pertaining to the CryoLife, Inc. 2002 Stock Incentive
Plan,
(8) Registration Statement No. 333-119137 on Form S-8 pertaining to the CryoLife, Inc. 2004 Employee Stock
Incentive Plan,
of our reports dated February 16, 2017, with respect to the consolidated financial statements of CryoLife, Inc. and
subsidiaries and the effectiveness of internal control over financial reporting of CryoLife, Inc. and subsidiaries
included in this Annual Report (Form 10-K) for the year ended December 31, 2016, filed with the Securities and
Exchange Commission.
Ernst & Young LLP
Atlanta, Georgia
February 16, 2017
Exhibit 31.1
I, J. Patrick Mackin, certify that:
1.
I have reviewed this annual report on Form 10-K of CryoLife, Inc. (the “registrant”);
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 16, 2017
/s/ J. PATRICK MACKIN
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. (the “registrant”);
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 16, 2017
/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, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each
of J. Patrick Mackin, 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/ J. PATRICK MACKIN
J. PATRICK MACKIN
Chairman, President, and
Chief Executive Officer
February 16, 2017
/s/ D. ASHLEY LEE
D. ASHLEY LEE
Executive Vice President,
Chief Operating Officer, and
Chief Financial Officer
February 16, 2017
BOARD OF DIRECTORS
James W. Bullock(3)
President and Chief Executive Officer
Zyga Technology, Inc.
(Medical devices for minimally invasive treatment of
the lumbar spine)
Minnetonka, Minnesota
Ronald C. Elkins, M.D.(2),(4)
Professor Emeritus, Section of
Thoracic and Cardiovascular Surgery
University of Oklahoma
Health Sciences Center
Oklahoma City, Oklahoma
J. Patrick Mackin
President, Chief Executive Officer, and Chairman
CryoLife, Inc.
Kennesaw, Georgia
Ronald D. McCall, Esq.(2),(3),(5)
Attorney at Law
Tampa, Florida
Harvey Morgan(1),(4)
Retired
Former Managing Director
Bentley Associates, L.P.
(Investment banking firm)
New York, New York
Jon W. Salveson(3),(4)
Vice Chairman Investment Banking and
Chairman of the Healthcare Investment
Banking Group at Piper Jaffray Companies
(Investment banking firm)
Minneapolis, Minnesota
Committee Members as of
February 16, 2017
(1) Audit Committee
(2) Compensation Committee
(3) Corporate Governance Committee
(4) Compliance Committee
(5) Presiding Director
Thomas F. Ackerman(1),(2)
Senior Financial Advisor
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
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
The graph below matches the cumulative 5-Year total return of holders of CryoLife, Inc.’s common stock with the cumulative total returns
of the Russell 2000 index and the NASDAQ Medical Equipment index. The graph assumes that the value of the investment in our common
stock and in each index (including reinvestment of dividends) was $100 on 12/31/2011 and tracks it through 12/31/2016.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among CryoLife, Inc., the Russell 2000 Index,
and the NASDAQ Medical Equipment Index
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/11
12/12
12/13
12/14
12/15
12/16
CryoLife, Inc.
Russell 2000
NASDAQ Medical Equipment
*$100 invested on 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2017 Russell Investment Group. All rights reserved.
CryoLife, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russell 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Medical Equipment
. . . . . . . . . . . . . . . . . . . . . . . . .
12/11
100.00
100.00
100.00
12/12
130.92
116.35
109.53
12/13
236.69
161.52
131.61
12/14
244.75
169.43
152.86
12/15
235.57
161.95
168.58
12/16
418.48
196.45
180.31
The stock price performance included in this graph is not necessarily indicative of future stock price performance.