Item 1A. Risk Factors.
Risks Relating To Our Business
We
may not realize all of the anticipated benefits of the JOTEC Acquisition.
On December 1, 2017 we acquired JOTEC AG, a Swiss
entity that we converted to JOTEC GmbH and subsequently merged with our Swiss acquisition entity, Jolly Buyer Acquisition GmbH (JOTEC), and its subsidiaries (the JOTEC Acquisition) for $169.1 million in cash and
2,682,754 shares of CryoLife common stock with a value of $53.1 million on the date of closing, for a total purchase price of approximately $222.2 million, including debt and cash acquired on the date of closing. We paid part of the cash
portion of the purchase price using available cash on hand and financed the remainder of the cash portion of the purchase price and related expenses and refinanced our then existing approximately $69.0 million term loan, with a new
$255.0 million senior secured credit facility, consisting of a $225.0 million secured term loan facility and a $30.0 million undrawn secured revolving credit facility.
Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits of the JOTEC
Acquisition depends on a number of factors including:
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The continued growth of the global market for stent grafts used in endovascular and open repair of aortic
disease;
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Our ability to leverage our global infrastructure, including in the markets in which JOTEC is already direct;
minimize difficulties and costs associated with transitioning away from distributors in key markets; and accelerate our ability to go direct in Europe in developed markets with the CryoLife and JOTEC product portfolios;
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Our ability to foster cross-selling opportunities between the CryoLife and JOTEC product portfolios;
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Our ability to bring JOTEC products to the U.S. market;
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Our ability to harness the JOTEC new product pipeline and R&D capabilities to drive long-term growth,
including our ability to obtain Conformité Européene Mark product certification (CE Mark) for pipeline products;
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Our ability to drive gross margin expansion;
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Our ability to successfully integrate the JOTEC business with ours, including integrating the combined European
sales force;
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Our ability to compete effectively;
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Our ability to carry, service, and manage significantly more debt and repayment obligations; and
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Our ability to manage the unforeseen risks and uncertainties related to JOTECs business, including any
related to intellectual property rights.
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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. 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.
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 and certain of our subsidiaries, including (subject in each case to certain exceptions) restrictions or prohibitions on our and certain of our subsidiaries 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, including repurchasing or redeeming
capital stock or make other restricted payments, including restricted junior payments;
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Enter into agreements that restrict our subsidiaries ability to pay dividends to us, repay debt owed to us
or our subsidiaries, or make loans or advances to us or our other subsidiaries;
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Comply with certain financial ratios set forth in the agreement;
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Enter into any transaction or merger or consolidation, liquidation,
winding-up,
or dissolution; convey, sell, lease, exchange, transfer or otherwise dispose of all or any part of our business, assets or property; or sell, assign, or otherwise dispose of any capital stock of
any subsidiary;
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Create liens on certain assets;
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Enter into certain transactions with our affiliates;
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Enter into certain rate swap transactions, basis swaps, credit derivative transactions, and other similar
transactions, whether relating to interest rates, commodities, investments, securities, currencies, or any other relevant measure, or transactions of any kind subject to any form of master purchase agreement governed by the International Swaps and
Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement;
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Amend, supplement, waive, or otherwise modify our organizational documents or the organizational documents of a
subsidiary in a manner that would be materially adverse to the interests of the lenders, or change or amend the terms of documentation regarding junior financing in a manner that would be materially adverse to the interests of the lenders;
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Change the Companys, or permit a subsidiary to change its, fiscal year without notice to the administrative
agent under the agreement;
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Enter into agreements which restrict our ability to incur liens;
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Engage in any line of business substantially different from that in which we are currently engaged; and
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Make certain investments, including strategic acquisitions or joint ventures.
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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 U.S. assets as collateral under our
existing credit agreement. If we default on the terms of such credit 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.
A failure to comply with the covenants contained in our existing credit 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:
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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.
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 some 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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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 24% and 36% of revenues in the three months ended September 30, 2018 and 2017, 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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Some companies have launched competitive products and others may pursue regulatory approval for competitive
products in the future. These companies may have greater financial, technical, manufacturing, and marketing resources than we do and may be better established in their markets;
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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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Changes to components in the BioGlue product, including in the delivery system require regulatory approval, which
if delayed, could cause prolonged disruptions to our ability to supply BioGlue.
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We are significantly dependent on our revenues
from JOTEC and are subject to a variety of risks affecting them.
JOTEC is now a significant source of our revenues, representing
23% of revenues in the three months ended September 30, 2018. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:
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Our ability to achieve anticipated JOTEC revenue in international markets outside the U.S.;
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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 develop innovative and
in-demand
products in the aortic
surgery space; and
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Our ability to contend with enhanced regulatory enforcement activities.
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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 30% and 39% of revenues in the three months ended
September 30, 2018 and 2017, 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-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 we may be unable to capitalize on our clinical advantage
or 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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National Organ Transplant Act, (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; and
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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.
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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 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 18% and 19% of revenues in the three months
ended September 30, 2018 and 2017, 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
revenue in international markets
outside the U.S.;
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Our ability to capitalize on the U.S. Food and Drug Administration (FDA)s approved reduced
International Normalized Ratio (INR) indication;
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Our ability to compete effectively with some of 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 valves, such as transcatheter aortic valve
replacement, or TAVR devices;
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Enhanced regulatory enforcement activities or failure to receive renewed certifications that could cause
interruption in our ability to sell
On-X
products in certain markets; and
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Our ability to execute and complete the FDA mandated post-approval study to assess the occurrence of adverse
events with the
On-X
Aortic Prosthetic Heart Valve when targeted at an INR level of 1.8
(1.5-2.0
range) during a
5-year
follow-up.
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Our revenues for the
On-X
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
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
ascending aortic prosthesis (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 July 26, 2017, we received a letter from
G-Med
indicating that it was continuing the suspension of the CE Mark for the AAP product
for a period of up to 18 months pending further assessment. We have since withdrawn our application from
G-Med
for certification of the AAP product and are currently pursuing another pathway to CE Mark for the
AAP. Failure to obtain CE Mark for the
On-X
AAP in the EEA could have a material adverse effect on EEA revenues for the remainder of 2018 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 (i) may distribute PerClot
in certain international markets and are licensed to
manufacture PerClot in the U.S.; (ii) acquired some technology to assist in the production of a potentially key component in PerClot; and (iii) obtained the exclusive right to pursue, obtain, and maintain FDA
Pre-Market
Approval (PMA) for PerClot. We are currently conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S., and assuming enrollment
proceeds as anticipated, we could receive PMA from the FDA in
mid-year
of 2020. There is no guarantee, however, 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. We 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.
Further, even if we receive FDA PMA for PerClot, we may be unsuccessful in selling PerClot in the U.S. By the time we
secure approvals, 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.
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PerClot sold in the EEA has a CE Mark that is owned by a third party, and that expired in the
second quarter of 2018. If that CE Mark is not timely renewed, we may be unable to purchase additional PerClot to distribute in the EEA and other countries that recognize the CE Mark after our distributors inventories of approved PerClot are
depleted, which could materially, adversely affect our future revenues.
Reclassification by the FDA of CryoValve
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SG pulmonary heart valve (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 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. 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 key growth areas may not generate anticipated benefits.
Our strategic plan is focused on four growth areas, primarily in the cardiac and vascular surgery segment, which are expected to drive our
business in the near term. These growth areas and their key elements are described below:
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New Products
Drive growth through new products, including JOTEC and
On-X
products;
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New Indications
Drive growth by broadening the reach of some of our products and services,
including the JOTEC,
On-X,
and BioGlue products, and preserved cardiac and vascular tissues, with new or expanded approvals and indications in the U.S. or in international markets;
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Global Expansion
Drive growth by expanding our current products and services into new markets,
including emerging markets, and developing new direct sales territories overseas; and
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Business Development
Drive growth through business development by selectively pursuing potential
acquisitions, licensing, or distribution rights of companies or technologies that complement our existing products, services, and infrastructure and expand our footprint in the cardiac and vascular surgery space, as we did with the recent
acquisitions of JOTEC and
On-X;
and licensing of products developed internally with
non-cardiac
indications. 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.
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Although we continue to implement these strategies, we cannot be certain that they will
ultimately drive business expansion and enhance shareholder value.
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 an Investigational Device Exemption clinical trial for
PerClot, as well as clinical trials in China for BioGlue and in the U.S. for the
On-X
valve. We also anticipate commencing efforts in 2018 to initiate future U.S. clinical trials for certain JOTEC products.
Each of these trials is subject to the risks outlined herein.
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We cannot give assurance that the relevant regulatory agencies will clear or approve these, or
any new products and services or new indications, in 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, quality, and the conduct of clinical trials 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 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.
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, establishing and maintaining internal controls, 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 adequately address these risks could have a material, adverse impact on our revenues, financial condition, profitability, and
cash flows.
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 our 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, in December 2017 we acquired JOTEC, 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.
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 or changes to them do not receive regulatory
approval or 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 single and sole source suppliers and single facilities.
Some of the materials, supplies, and services that are key components of our product manufacturing or our tissue processing, as well as some
of our products, are sourced from single or sole source suppliers. As a result, our ability to negotiate favorable terms with those suppliers may be limited, and if those suppliers experience operational, financial, quality, or regulatory
difficulties, or those suppliers and/or their facilities refuse to supply us or cease operations temporarily or permanently, we could be forced to cease product manufacturing or tissue processing until the suppliers resume operations, until
alternative suppliers could be identified and qualified, or permanently if the suppliers do not resume operations and no alternative suppliers could be identified and qualified. We could also be forced to purchase alternative materials, supplies, or
services with unfavorable terms
39
due to diminished bargaining power. We also conduct substantially all of our operations at three facilities: Austin, Texas for our
On-X
product line,
Hechingen, Germany for our JOTEC 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;
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European Notified Bodies have recently engaged in more rigorous regulatory enforcement activities and may
continue to do so. For example, our Notified Body for the
On-X
product line temporarily suspended the CE Mark for the On-X AAP in the EEA. See the risk factor above entitled Our revenues for the
On-X
AAP in Europe may continue to be adversely affected by regulatory enforcement activities regarding the
On-X
AAPs CE Mark for further discussion;
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The European Union has adopted a new Medical Device Regulation (MDR 2017/745), which could result in product
reclassifications or more stringent commercialization requirements that adversely impact our clearances and approvals; 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
another 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. After an
FDA
re-inspection
in the first quarter of 2015, the FDA closed out the warning letter issued in 2013. Nevertheless, any future adverse action from the FDA, or other regulatory bodies, 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 endovascular and surgical stents;
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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, Ethicon (a Johnson & Johnson Company),
Medtronic, Inc., Abbott Laboratories, LivaNova PLC, Edwards Life Sciences Corp., BD, Integra Life Sciences Holdings, LifeNet, Admedus, Inc., Aziyo Biologics, Cook Medical, Gore, Terumo Corp., Endologix, Antegraft, Inc., LeMaitre, Maquet, Inc.,
Vascutek, Novadaq Technologies, Inc., Pfizer, Inc., and BioCer Entwicklungs-GmbH. 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 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, Austin, Texas, and Hechingen, Germany, 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.
Tax reform could have a
material adverse effect on us.
The December 2017 tax reform legislation known as the H.R. 1, commonly referred to as the
Tax Cuts and Jobs Act (the Tax Act) made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21% from 35% and changing the U.S. taxation of our
non-U.S.
business activities. We may be adversely affected by these changes in U.S. tax laws and regulations, and it is possible that governmental authorities in the U.S. and/or other countries could further
amend tax laws that would adversely affect us. In addition, we are required to evaluate the impact of the Tax Act on our operations and financial statements, and to the extent we initially do so inaccurately, we may not provide investors or the
public with advance notice of any adverse effect. Currently, we have accounted for the effects of the Tax Act using reasonable estimates based on currently available information and our interpretations thereof. This accounting may change due to,
among other things, changes in interpretations we have made and the issuance of new tax or accounting guidance.
Certain changes in tax
law implemented by the Tax Act will be partially effective in the current 2018 fiscal year and fully effective in the 2019 fiscal year. The primary impacts to us include repeal of the alternative minimum tax regime, decrease of the corporate income
tax rate structure, net operating loss limitations, and changes to the limits on executive compensation deductions. These changes will have a material impact to the value of deferred tax assets and liabilities, and our future taxable income and
effective tax rate. Although we currently anticipate the enacted changes in the corporate tax rate and calculation of taxable income will have a favorable effect on our financial condition, profitability, and/or cash flows, we are still
analyzing the Tax Act with our professional advisers and we are still awaiting guidance from the U.S. Department of Treasury. Until such analysis is complete and verified, and until we receive additional guidance, the full impact of the Tax Act on
us in future periods is uncertain, and no assurances can be made by us that it will not have any negative impacts on us.
41
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.
The implementation of the General Data Protection Regulation in the EEA
in May 2018 could adversely affect our business.
The European Commission has approved a data protection regulation, known as the
General Data Protection Regulation (GDPR), which took effect in May 2018. GDPR includes significant new requirements for companies that receive or process the personal data of residents of the European Union (including company
employees), which increase our operating costs and require significant management time and energy. GDPR also includes significant penalties for noncompliance. Any GDPR related government enforcement activities, may be costly to comply with, result
in negative publicity and subject us to significant penalties, any of which could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.
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 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,
On-X
product, or JOTEC
product sales or where BioGlue,
On-X
products, or JOTEC products are still in a growth phase. These factors could materially, adversely affect our revenues, financial condition, and profitability.
42
The success of some 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 or the patients who receive them.
The research, development, marketing, and sales of many of our new and improved products and preservation services are dependent upon us
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 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, (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 substantially change 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 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 and Cardiogenesis, as mandated by
Section 382 of the Internal Revenue Code of 1986, as amended (Section 382). 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
that are limited under Section 382. We believe,
however, that such net operating loss carryforwards from
On-X
will be fully realizable prior to expiration. The deferred tax assets recorded on
43
our Consolidated Balance Sheets exclude amounts that we expect 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 we believe 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.
We are subject to various federal and state anti-kickback, false claims privacy, 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.
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. There can be
no assurance, however, 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 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.
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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. Some 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% excise tax on all U.S. medical device sales that commenced in January 2013. While this tax was suspended for 2016 and 2017,
and just recently suspended again for 2018 and 2019 the excise tax may be reinstated.
Efforts to repeal and replace the ACA altogether
have been ongoing since the 2016 election, but it is unclear if these efforts will be successful. 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. In addition, as part of the Tax Act, the individual mandate, which required individuals to purchase insurance, was repealed. The impact of the executive order and the repeal of the individual mandate, as
well as the future of the ACA itself, 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. Any changes that lower reimbursement for our products or reduce medical procedure volumes, however,
could adversely affect our business and profitability.
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 some 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, 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
45
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.
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 Euros and British Pounds 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 Euros and British Pounds 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.
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.
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
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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.
Some 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, 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 us. 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 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 activism 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.
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
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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.