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 34% of revenues in the three months ended June 30, 2017 and 2016,
respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:
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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;
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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;
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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;
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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
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BioGlue is subject to potential adverse developments with regard to its safety, efficacy, or reimbursement practices.
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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 36% of revenues in the three months ended
June 30, 2017 and 2016, respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows, if we are unable to:
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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-
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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;
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Process donated tissue cost effectively or at all due to factors such as employee turnover, ineffective or inefficient operations, or an insufficiently skilled workforce;
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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
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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.
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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:
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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;
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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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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.
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Any of these laws, regulations, and rules or others could change, our interpretation of them could be challenged by U.S., state, or foreign
governments and regulatory agencies, or these 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:
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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;
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Our ability to successfully manage independent sales representatives and distributor relationships, particularly internationally;
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The success of moving to a direct sales model with the
On-X
products in certain international markets;
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Our ability to resolve unanticipated or undisclosed
pre-existing
On-X
liabilities including any regulatory or quality issues;
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Our ability to execute on existing
On-X
clinical trials in a timely and cost effective manner;
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Our ability to retain existing customers and obtain new customers for
On-X
products; and
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Unforeseen negative economic or market conditions impacting the
On-X
business.
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Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues, and diversion of
managements 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 FDAs 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
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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 21% and 20% of revenues in the three months ended June 30, 2017 and 2016, respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:
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Our ability to achieve anticipated
On-X
revenues;
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Our ability to capitalize on the FDAs approved reduced INR indication;
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Our ability to overcome high levels of inventory in certain markets;
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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;
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Our ability to manage the risks associated with less favorable contract terms for
On-X
products on consignment at hospitals with more bargaining power;
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Changes in technology that may impact the market for mechanical heart valve and transcatheter aortic valve replacement, or TAVR devices; and
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Enhanced regulatory enforcement activities that could cause interruption in our ability to sell
On-X
products in certain markets.
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Our revenues for the
On-X
ascending aortic prosthesis (AAP) in Europe may continue to be adversely
affected by regulatory enforcement activities regarding the
On-X
AAPs CE Mark.
On
November 22, 2016, we received a letter from
LNE/G-Med
(G-Med),
which acts as our Notified Body for the
On-X
product line, indicating that it was temporarily suspending the CE Mark for the
On-X
AAP in the European Economic Area (EEA), due to an allegedly untimely and allegedly deficient plan by us 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. On April 13, 2017,
we received another letter from
G-Med,
indicating that it had reviewed our responses to its requests and that the CE Mark suspension will remain in effect pending
G-Meds
review of additional information. Our discussions with
G-Med
over the CE Mark suspension are ongoing. Failure to lift this suspension of the CE Mark for the
On-X
AAP in the EEA could have a material adverse effect on EEA revenues in 2017 and beyond.
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. either directly or indirectly.
In 2010 and 2011, we entered into various agreements with Starch Medical, Inc. (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 some technology to assist in the production of a potentially 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. We 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.
We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. We resumed
enrollment into the PerClot U.S. clinical trial in the fourth quarter of 2016, and assuming enrollment proceeds as anticipated, we could receive PMA from the FDA in 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 pivotal clinical trial. Finally, we are subject to the terms of our resolution with Medafor, which resulted from an April 28, 2014 declaratory
judgment lawsuit regarding our manufacture, use, offer for sale, and sale of PerClot in the U.S. and Medafors U.S. Patent No. 6,060,461. Under the
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terms of the 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 PMA for PerClot before that
date.
We cannot 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 pivotal clinical trial and the approval process may
be delayed because of unforeseen scheduling difficulties and unfavorable results at various stages in the pivotal clinical trial 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 at CryoLife, 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 competitors may 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, SMIs 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 FDAs 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 PMA, after which the FDA will 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 PMA, and we will determine an appropriate course of action in light of those requirements. If there are
delays in obtaining the PMA, if we are unsuccessful in obtaining the PMA, or if the costs associated with these activities are significant, 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 PMA 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 Genesee Biomedical, Inc. (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. During this
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.
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
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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 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.
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:
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Our products and tissues may be recalled or placed on hold by us, the FDA, or other regulatory bodies;
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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;
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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;
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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
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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.
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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 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.
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:
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The sale of mechanical, synthetic, and animal-based tissue valves for implantation;
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The sale of synthetic and animal-based patches for implantation;
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The sale of surgical adhesives, surgical sealants, and hemostatic agents; and
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The processing and preservation of human tissue.
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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:
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Greater financial and other resources for product research and development, sales and marketing, acquisitions, and patent litigation;
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Enhanced experience in, and resources for, launching, marketing, distributing, and selling products;
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Greater name recognition as well as more recognizable trademarks for products similar to the products that we sell;
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More established record of obtaining and maintaining FDA and other regulatory clearances or approvals for products and product enhancements;
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More established relationships with healthcare providers and payors;
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Lower cost of goods sold or preservation costs;
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Advanced systems for back office automation, product development, and manufacturing, which may provide certain cost advantages; and
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Larger direct sales forces and more established distribution networks.
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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.
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:
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Difficulties and costs associated with staffing and managing foreign operations, including foreign distributor relationships and developing direct sales operations in key foreign countries;
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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;
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Broader exposure to corruption;
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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;
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Longer accounts receivable collection cycles in certain foreign countries and additional cost of collection of those receivables;
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Diminished protection for intellectual property and the presence of a growing number of generic or smaller competitors in some countries;
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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;
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Differing local product preferences and product requirements;
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Adverse economic or political changes or political instability;
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Potential trade restrictions, exchange controls, and import and export licensing requirements including tariffs; and
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Potential adverse tax consequences of overlapping tax structures.
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Our failure to address
adequately these risks could have a material, adverse impact on 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
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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
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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 the FDA for the alternative uses, the FDA contends that we may not make claims about the safety or effectiveness of our products, or
promote them, for such uses. Such limitations present a risk that the 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 Federal Food, Drug, and Cosmetic Act. 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.
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:
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We could be exposed to product and tissue processing liability claims and security claims greater than the amount that we have insured;
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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
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Because we are not insured against all potential losses, uninsured losses due to natural disasters or other catastrophes could adversely impact our business.
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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 due to market, industry, or other factors. 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 managements 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.
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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 payors, 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 claims that these employees or independent contractors have used or disclosed any partys 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 and vascular surgery segment, which are expected to drive our
business in the near term. These growth vectors and their key elements are described below:
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New Products
Drive growth through new products including the
On-X
heart valve;
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New Indications
Broaden the reach of certain of our products, including the
On-X
heart valve and BioGlue, with new or expanded approvals and indications in the U.S.
or in international markets;
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Global Expansion
Expand our current products and services into new markets, including emerging markets, and accelerate growth by developing new direct sales territories overseas; and
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Business Development
Selectively pursue potential acquisition, licensing, or distribution rights of
companies or technologies that complement CryoLifes existing products, services, and infrastructure, and expand our footprint in the cardiac and vascular surgery space, such as the recent acquisition of
On-X,
as well as divestitures of certain of our non-
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core product lines, such as the HeRO Graft in 2016, and strategic licensing of certain products developed internally. To the extent we identify new
non-core
products or additional applications for our core products, we 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 CryoLifes existing products, services, and infrastructure. In connection with one or more of the acquisition
transactions, we may:
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Issue additional equity securities that would dilute our stockholders ownership interest in us;
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Use cash that we may need in the future to operate our business;
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Incur debt, including on terms that could be unfavorable to us or debt that we might be unable to repay;
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Structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit a
step-up
in the tax basis for the assets acquired;
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Be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional sales;
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Be unable to integrate, upgrade, or replace the purchasing, accounting, financial, sales, billing, employee benefits, payroll, and regulatory compliance functions of an acquisition target;
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Be unable to secure or retain the services of key employees related to the acquisition;
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Be unable to succeed in the marketplace with the acquisition; or
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Assume material unknown liabilities associated with the acquired business.
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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.
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:
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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;
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We will incur additional depreciation expense as a result of recording purchased tangible assets;
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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;
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Cost of sales may increase temporarily following an acquisition as a result of acquired inventory being recorded at its fair market value;
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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
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Earnings may be affected by transaction and implementation costs, which are expensed immediately.
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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:
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Limit our ability to borrow money for our working capital, capital expenditures, development projects, strategic initiatives, or other purposes;
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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;
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Limit our flexibility in planning for, or reacting to, changes in our operations or business;
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Make us more vulnerable to downturns in our business, the economy, or the industry in which we operate;
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Restrict us from making strategic acquisitions, introducing new technologies, or exploiting business opportunities; and
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Expose us to the risk of increased interest rates as most of our borrowings are at a variable rate of interest.
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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:
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Incur or guarantee additional debt;
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Pay dividends on or make distributions in respect of our share capital or make other restricted payments;
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Repurchase or redeem capital stock or subordinated indebtedness;
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Transfer or sell certain assets;
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Create liens on certain assets;
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Consolidate or merge with, or sell or otherwise dispose of all, or substantially all, of our assets to other companies;
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Enter into certain transactions with our affiliates;
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Pledge the capital stock of any of our subsidiaries;
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Enter into agreements which restrict our ability to pay dividends or incur liens;
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Make material changes in our equity capital structure;
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Engage in any line of business substantially different than that in which we are currently engaged; and
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Make certain investments, including strategic acquisitions.
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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.
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:
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Will not be required to lend any additional amounts to us;
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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
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Could require us to apply all of our available cash to repay such indebtedness.
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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.
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We are dependent on our key personnel.
Our business and future operating results depend in significant part upon the continued contributions of our key personnel, including
qualified personnel with medical device and tissue processing experience, and senior management with experience in the medical device or tissue processing space, 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 on our ability to attract and retain qualified management, operations, processing, marketing, sales, and support personnel for our
operations. Our main facilities are in Kennesaw, Georgia 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 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.
Healthcare policy changes, including U.S. healthcare reform legislation signed in 2010, may have a material,
adverse effect on us.
In response to perceived increases in healthcare costs in recent years, there have been and continue to be
proposals by the federal government, state governments, regulators, and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the 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 (ACA) 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, there is no guarantee that the excise tax will not be reinstated and the underlying legislation might not be repealed or replaced despite the outcome of the 2016 U.S. Presidential and Congressional election. On January 20, 2017,
President Trump issued an executive order titled Minimizing the
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Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal. Congressional efforts to repeal and replace the ACA have been ongoing since the election, but it is unclear
whether Congress will be successful in its
repeal-and-replace
efforts. The impact of the executive order and the future of the ACA remain 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.
Our sales are affected by challenging domestic and international economic and geopolitical 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 and geopolitical 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 PMA clinical trial for PerClot, as well as clinical trials in China for BioGlue and in the U.S.
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 agencys 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:
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Unanticipated side effects;
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Inability to locate or recruit clinical investigators;
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Inability to locate, recruit, and qualify sufficient numbers of patients;
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Redesign of clinical trial programs;
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Inability to manufacture or acquire sufficient quantities of the products, tissues, or any other components required for clinical trials;
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Changes in development focus; or
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Disclosure of trial results by competitors.
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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
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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.
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 healthcare providers to whom our customers supply medical devices, rely on third-party payors, 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 payors of healthcare costs to contain or reduce these costs could lead to patients being unable to obtain approval for payment from these third-party payors. 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 and 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.
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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 have conducted 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 healthcare industry could have an adverse effect on our revenues and results of operations.
Many healthcare industry companies, including health care systems, are consolidating to create new companies with greater market power. As the
healthcare 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 healthcare industry, our revenues would decrease and our financial condition, profitability, and/or cash flows would suffer.
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
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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.
Our 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 our former subsidiaries Hemosphere, Inc. (Hemosphere) and Cardiogenesis Corporation, as mandated by Section 382 of the Internal Revenue
Code of 1986, as amended. We believe that our acquisitions of these companies each constituted a change in control, and that prior to our acquisition, Hemosphere had experienced other equity ownership changes that should be considered a change in
control. We also acquired net operating loss carryforwards in the acquisition of
On-X
Life Technologies that are limited under Section 382. However, we believe that such net operating loss carryforwards
from
On-X
will be fully realizable prior to expiration. The deferred tax assets recorded on our 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, we recorded a valuation
allowance against these state net operating loss carryforwards. Limitations on our 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:
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Changes in demand for the products we sell;
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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;
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Changes in the mix of products we sell;
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Availability of materials and supplies, including donated tissue used in preservation services;
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Our pricing strategy with respect to different product lines;
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Strategic actions by us, such as acquisitions of businesses, products, or technologies;
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Effects of domestic and foreign economic conditions and exchange rates on our industry and/or customers;
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The divestiture or discontinuation of a product line or other revenue generating activity;
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The relocation and integration of manufacturing operations and other strategic restructuring;
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Regulatory actions that may necessitate recalls of our products or warning letters that negatively affect the markets for our products;
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Failure of government and private health plans to adequately and timely reimburse the users of our products;
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Costs incurred by us in connection with the termination of contractual and other relationships, including distributorships;
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Our ability to collect outstanding accounts receivable in selected countries outside of the U.S.;
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The expiration or utilization of deferred tax assets such as net operating loss carryforwards;
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Market reception of our new or improved product offerings; and
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The loss of any significant customer, especially in regard to any product that has a limited customer base.
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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
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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.
Risks Related to Ownership of our Common Stock
We do not anticipate paying any dividends on our common stock for the foreseeable future.
In December 2015 our Board of Directors discontinued dividend payments on our common stock for the foreseeable future. If we do not pay cash
dividends, our shareholders may receive a return on their investment in our common stock only 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.