SEC Filing | Artivion, Inc.

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aort-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 1-13165

ARTIVION, INC.

(Exact name of registrant as specified in its charter)


Delaware						59-2417093
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1655 Roberts Boulevard, NW, Kennesaw, Georgia						30144
(Address of principal executive offices)						(Zip Code)

(770) 419-3355

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	AORT	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Class						Outstanding at October 28, 2022
Common Stock, $0.01 par value						40,329,481

Table of Contents

TABLE OF CONTENTS


Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.			3
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income			3
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Cash Flows			5
Condensed Consolidated Statements of Shareholders’ Equity			6
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			36
Item 4. Controls and Procedures.			37

Part II - OTHER INFORMATION			38

Item 1. Legal Proceedings.			38
Item 1A. Risk Factors.			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			53
Item 3. Defaults Upon Senior Securities.			53
Item 4. Mine Safety Disclosures.			53
Item 5. Other Information.			53
Item 6. Exhibits.			54
Signatures			55

Table of Contents

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Artivion, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

In Thousands, Except Per Share Data

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Products	$	55,248	$	53,107	$	171,726	$	162,528
Preservation services	21,590		19,100		62,665		56,914
Total revenues	76,838		72,207		234,391		219,442

Cost of products and preservation services:
Products	17,743		15,503		53,381		46,592
Preservation services	10,351		8,915		29,375		26,710
Total cost of products and preservation services	28,094		24,418		82,756		73,302

Gross margin	48,744		47,789		151,635		146,140

Operating expenses:
General, administrative, and marketing	41,051		39,053		118,989		118,521
Research and development	11,799		9,972		30,575		26,086
Total operating expenses	52,850		49,025		149,564		144,607
Gain from sale of non-financial assets	—		(15,923)		—		(15,923)
Operating (loss) income	(4,106)		14,687		2,071		17,456

Interest expense	4,805		4,100		12,854		12,995
Interest income	(40)		(18)		(86)		(60)
Other expense, net	3,661		2,661		7,564		3,261

(Loss) income before income taxes	(12,532)		7,944		(18,261)		1,260
Income tax expense (benefit)	1,181		(2,638)		3,100		(4,006)

Net (loss) income	$	(13,713)	$	10,582	$	(21,361)	$	5,266

(Loss) income per share:
Basic	$	(0.34)	$	0.27	$	(0.53)	$	0.13
Diluted	$	(0.34)	$	0.26	$	(0.53)	$	0.13

Weighted-average common shares outstanding:
Basic	40,115		39,086		39,999		38,924
Diluted	40,115		44,453		39,999		39,496

Net (loss) income	$	(13,713)	$	10,582	$	(21,361)	$	5,266
Other comprehensive loss:
Foreign currency translation adjustments	(16,895)		(5,010)		(35,466)		(12,327)
Comprehensive (loss) income	$	(30,608)	$	5,572	$	(56,827)	$	(7,061)

See accompanying Notes to Condensed Consolidated Financial Statements

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Artivion, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

In Thousands


	September 30, 2022		December 31, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	37,572	$	55,010
Trade receivables, net	57,159		53,019
Other receivables	7,880		5,086
Inventories, net	73,044		76,971
Deferred preservation costs, net	45,483		42,863
Prepaid expenses and other	16,851		14,748
Total current assets	237,989		247,697

Goodwill	234,773		250,000
Acquired technology, net	148,060		166,994
Operating lease right-of-use assets, net	41,320		45,714
Property and equipment, net	36,286		37,521
Other intangibles, net	31,112		34,502
Deferred income taxes	6,103		2,357
Other assets	7,088		8,267
Total assets	$	742,731	$	793,052

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	10,721	$	10,395
Accrued compensation	11,079		13,163
Accrued expenses	10,088		7,687
Taxes payable	5,293		3,634
Accrued procurement fees	2,302		3,689
Current maturities of operating leases	3,061		3,149
Current portion of long-term debt	1,562		1,630
Other liabilities	1,886		1,606
Total current liabilities	45,992		44,953

Long-term debt	306,674		307,493
Contingent consideration	44,800		49,400
Non-current maturities of operating leases	40,915		44,869
Non-current finance lease obligation	3,450		4,374
Deferred income taxes	34,058		28,799
Deferred compensation liability	5,082		5,952
Other liabilities	6,652		6,484
Total liabilities	$	487,623	$	492,324

Commitments and contingencies

Shareholders' equity:
Preferred stock	—		—
Common stock (issued shares of 41,816 in 2022 and 41,397 in 2021)	418		414
Additional paid-in capital	334,077		322,874
Retained (deficit) earnings	(19,386)		1,975
Accumulated other comprehensive loss	(45,353)		(9,887)
Treasury stock, at cost, 1,487 shares as of September 30, 2022 and December 31, 2021	(14,648)		(14,648)
Total shareholders' equity	255,108		300,728

Total liabilities and shareholders' equity	$	742,731	$	793,052

See accompanying Notes to Condensed Consolidated Financial Statements

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Artivion, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

In Thousands

(Unaudited)


	Nine Months Ended September 30,
	2022		2021
Net cash flows from operating activities:
Net (loss) income	$	(21,361)	$	5,266

Adjustments to reconcile net (loss) income to net cash from operating activities:
Depreciation and amortization	17,016		18,008
Non-cash compensation	9,189		7,471
Non-cash lease expense	5,656		5,566
Deferred income taxes	5,097		(8,128)
Write-down of inventories and deferred preservation costs	3,116		3,987
Non-cash interest expense	1,372		2,025
Change in fair value of contingent consideration	(4,600)		4,970
Gain from sale of non-financial assets	—		(15,923)
Other	151		678
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(1,788)		(2,268)
Accounts payable, accrued expenses, and other liabilities	(2,103)		65
Inventories and deferred preservation costs	(5,781)		(16,986)
Receivables	(10,900)		(8,032)
Net cash flows used in operating activities	(4,936)		(3,301)

Net cash flows from investing activities:
Acquisition of intangible assets	(1,123)		(726)
Capital expenditures	(6,924)		(10,524)
Proceeds from sale of non-financial assets, net	—		19,000
Other	—		722
Net cash flows (used in) provided by investing activities	(8,047)		8,472

Net cash flows from financing activities:
Proceeds from exercise of stock options and issuance of common stock	3,344		3,531
Redemption and repurchase of stock to cover tax withholdings	(1,791)		(1,898)
Repayment of term loan	(2,033)		(2,397)
Payment of debt issuance costs	—		(2,219)
Other	(300)		(439)
Net cash flows used in financing activities	(780)		(3,422)

Effect of exchange rate changes on cash and cash equivalents	(3,675)		1,418
(Decrease) increase in cash and cash equivalents	(17,438)		3,167

Cash and cash equivalents beginning of period	55,010		61,958
Cash and cash equivalents end of period	$	37,572	$	65,125

See accompanying Notes to Condensed Consolidated Financial Statements

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Artivion, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

In Thousands

(Unaudited)


	Common Stock			Additional Paid-In Capital		Retained Deficit		Accumulated Other Comprehensive Loss		Treasury Stock			Total Shareholders' Equity
	Shares	Amount								Shares	Amount
Balance at June 30, 2022	41,744	$	417	$	329,871	$	(5,673)	$	(28,458)	(1,487)	$	(14,648)	$	281,509
Net loss	—	—		—		(13,713)		—		—	—		(13,713)
Other comprehensive loss	—	—		—		—		(16,895)		—	—		(16,895)
Equity compensation	7	—		3,233		—		—		—	—		3,233
Exercise of options	9	—		85		—		—		—	—		85
Employee stock purchase plan	58	1		940		—		—		—	—		941
Redemption and repurchase of stock to cover tax withholdings	(2)	—		(52)		—		—		—	—		(52)
Balance at September 30, 2022	41,816	$	418	$	334,077	$	(19,386)	$	(45,353)	(1,487)	$	(14,648)	$	255,108


	Common Stock			Additional Paid-In Capital		Retained Earnings (Deficit)		Accumulated Other Comprehensive Loss		Treasury Stock			Total Shareholders' Equity
	Shares	Amount								Shares	Amount
Balance at December 31, 2021	41,397	$	414	$	322,874	$	1,975	$	(9,887)	(1,487)	$	(14,648)	$	300,728
Net loss	—	—		—		(21,361)		—		—	—		(21,361)
Other comprehensive loss	—	—		—		—		(35,466)		—	—		(35,466)
Equity compensation	269	2		9,652		—		—		—	—		9,654
Exercise of options	149	2		1,763		—		—		—	—		1,765
Employee stock purchase plan	95	1		1,578		—		—		—	—		1,579
Redemption and repurchase of stock to cover tax withholdings	(94)	(1)		(1,790)		—		—		—	—		(1,791)
Balance at September 30, 2022	41,816	$	418	$	334,077	$	(19,386)	$	(45,353)	(1,487)	$	(14,648)	$	255,108

See accompanying Notes to Condensed Consolidated Financial Statements

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Artivion, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (continued)

In Thousands

(Unaudited)


	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Total Shareholders' Equity
	Shares	Amount								Shares	Amount
Balance at June 30, 2021	40,742	$	407	$	305,157	$	11,493	$	(574)	(1,487)	$	(14,648)	$	301,835
Net income	—	—		—		10,582		—		—	—		10,582
Other comprehensive loss	—	—		—		—		(5,010)		—	—		(5,010)
Equity compensation	8	1		2,990		—		—		—	—		2,991
Exercise of options	18	—		191		—		—		—	—		191
Employee stock purchase plan	50	—		1,019		—		—		—	—		1,019
Redemption and repurchase of stock to cover tax withholdings	(2)	—		(67)		—		—		—	—		(67)
Balance at September 30, 2021	40,816	$	408	$	309,290	$	22,075	$	(5,584)	(1,487)	$	(14,648)	$	311,541


	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock			Total Shareholders' Equity
	Shares	Amount								Shares	Amount
Balance at December 31, 2020	40,394	$	404	$	316,192	$	20,022	$	6,743	(1,487)	$	(14,648)	$	328,713
Net income	—	—		—		5,266		—		—	—		5,266
Other comprehensive loss	—	—		—		—		(12,327)		—	—		(12,327)
Impact of adoption of ASU 2020-06	—	—		(16,426)		(3,213)		—		—	—		(19,639)
Equity compensation	252	3		7,892		—		—		—	—		7,895
Exercise of options	158	1		1,921		—		—		—	—		1,922
Employee stock purchase plan	87	1		1,608		—		—		—	—		1,609
Redemption and repurchase of stock to cover tax withholdings	(75)	(1)		(1,897)		—		—		—	—		(1,898)
Balance at September 30, 2021	40,816	$	408	$	309,290	$	22,075	$	(5,584)	(1,487)	$	(14,648)	$	311,541

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Artivion, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Overview

The accompanying Condensed Consolidated Financial Statements include the accounts of Artivion, Inc. and its subsidiaries (“Artivion,” the “Company,” “we,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2021 has been derived from audited financial statements. The accompanying unaudited Condensed Consolidated Financial Statements as of, and for the three and nine months ended, September 30, 2022 and 2021 have been prepared in accordance with (i) accounting principles generally accepted in the US for interim financial information and (ii) the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the US Securities and Exchange Commission (the “SEC”). Accordingly, such statements do not include all the information and disclosures that are required by accounting principles generally accepted in the US for a complete presentation of financial statements. In the opinion of management, all adjustments (including those of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes included in Artivion’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 22, 2022.

Significant Accounting Policies

A summary of our significant accounting policies is included in Note 1 of the “Notes to Consolidated Financial Statements” contained in our Form 10-K for the year ended December 31, 2021. Management believes that the consistent application of these policies enables us to provide users of the financial statements with useful and reliable information about our operating results and financial condition. The Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the US, which require us to make estimates and assumptions. We did not experience any significant changes during the three and nine months ended September 30, 2022 in any of our Significant Accounting Policies from those contained in our Form 10-K for the year ended December 31, 2021.

New Accounting Standards

Recently Adopted

In August 2020 the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). The update simplifies the accounting for convertible instruments by eliminating two accounting models (i.e., the cash conversion model and beneficial conversion feature model) and reducing the number of embedded conversion features that could be recognized separately from the host contract. ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. On January 1, 2021 we adopted ASU 2020-06 using the modified retrospective approach. See Note 9 for further discussion of convertible debt.

Not Yet Effective

In March 2020 the FASB issued ASU 2020-04, Reference Rate Reform Topic 848 (“ASC 848”). The amendments in this ASU were put forth in response to the market transition from the LIBOR and other interbank offered rates to alternative reference rates. Accounting principles generally accepted in the United States of America require entities to evaluate whether a contract modification, such as the replacement or change of a reference rate, results in the establishment of a new contract or continuation of an existing contract. ASC 848 allows an entity to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform. The standard provides this temporary election through December 31, 2022 and cannot be applied to contract modifications that occur after December 31, 2022. We are in the process of evaluating the effect that the adoption of this standard will have on our financial position and results of operations.

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2. Sale of PerClot

Overview

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

Accounting for the Transaction

Upon closing of the Baxter Transaction, we received $25.0 million from Baxter and paid $6.0 million to SMI. We derecognized intangible assets with a carrying value of $1.6 million and wrote-off $1.5 million of prepaid royalties previously recorded on our Condensed Consolidated Balance Sheets related to PerClot. Under the terms of the agreement, Baxter acquired intellectual property related to our development efforts for PerClot. We recorded a pre-tax gain of $15.9 million, included as Gain from sale of non-financial assets within the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021. The PerClot product line was included as part of our Medical Devices segment.

3. Financial Instruments

The following is a summary of our financial instruments measured at fair value on a recurring basis (in thousands):


September 30, 2022	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	10,051	$	—	$	—	$	10,051
Total assets	$	10,051	$	—	$	—	$	10,051

Long-term liabilities:
Contingent consideration	—		—		(44,800)		(44,800)
Total liabilities	$	—	$	—	$	(44,800)	$	(44,800)


December 31, 2021	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	10,015	$	—	$	—	$	10,015
Total assets	$	10,015	$	—	$	—	$	10,015

Long-term liabilities:
Contingent consideration	—		—		(49,400)		(49,400)
Total liabilities	$	—	$	—	$	(49,400)	$	(49,400)

We used prices quoted from our investment advisors to determine the Level 1 valuation of our investments in money market funds.

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On September 2, 2020 we entered into a Securities Purchase Agreement to acquire 100% of the outstanding equity interests of Ascyrus Medical LLC (“Ascyrus”). Ascyrus developed the AMDS, the world’s first aortic arch remodeling device for use in the treatment of acute Type A aortic dissections. As part of the acquisition, we may be required to pay additional consideration in cash of up to $100.0 million to the former shareholders of Ascyrus upon the achievement of certain milestones and the sales-based additional earn-out.

The contingent consideration represents the estimated fair value of future potential payments. The fair value of the contingent consideration liability was estimated by discounting to present value the contingent payments expected to be made based on a probability-weighted scenario approach. We applied a discount rate based on our unsecured credit spread and the term commensurate risk-free rate to the additional consideration to be paid, and then applied a risk-based estimate of the probability of achieving each scenario to calculate the fair value of the contingent consideration. This fair value measurement was based on unobservable inputs, including management estimates and assumptions about the future achievement of milestones and future estimate of revenues, and is, therefore, classified as Level 3 within the fair value hierarchy. We used a discount rate of approximately 13% and estimated future achievement of milestone dates between 2025 and 2026 to calculate the fair value of contingent consideration as of September 30, 2022. We will remeasure this liability at each reporting date and will record changes in the fair value of the contingent consideration in General, administrative, and marketing expenses on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. Increases or decreases in the fair value of the contingent consideration liability can result from changes in passage of time, discount rates, the timing and amount of our revenue estimates, and the timing and expectation of regulatory approvals.

We performed an assessment of the fair value of the contingent consideration and recorded expense of $400,000 and income of $4.6 million for the three and nine months ended September 30, 2022, respectively, and expense of $700,000 and $5.0 million for the three and nine months ended September 30, 2021, respectively, in General, administrative, and marketing expenses on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, as a result of this assessment.

The fair value of the contingent consideration component of the Ascyrus acquisition was updated using Level 3 inputs. Changes in fair value of Level 3 assets and liabilities are listed in the tables below (in thousands):


	Contingent Consideration
Balance as of December 31, 2021	$	(49,400)
Change in valuation	4,600
Balance as of September 30, 2022	$	(44,800)

4. Cash Equivalents

The following is a summary of cash equivalents (in thousands):


September 30, 2022	Cost Basis		Unrealized Holding Gains		Estimated Market Value
Cash equivalents:
Money market funds	$	10,051	$	—	$	10,051
Total assets	$	10,051	$	—	$	10,051


December 31, 2021	Cost Basis		Unrealized Holding Gains		Estimated Market Value
Cash equivalents:
Money market funds	$	10,015	$	—	$	10,015
Total assets	$	10,015	$	—	$	10,015

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There were no gross realized gains or losses on cash equivalents for the three and nine months ended September 30, 2022 and 2021.

5. Inventories, net and Deferred Preservation Costs

Inventories at September 30, 2022 and December 31, 2021 were comprised of the following (in thousands):


	September 30, 2022		December 31, 2021
Raw materials and supplies	$	35,206	$	35,780
Work-in-process	11,976		9,712
Finished goods	25,862		31,479
Total inventories, net	$	73,044	$	76,971

To facilitate product usage, we maintain consignment inventory of our On-X heart valves at domestic hospital locations and On-X heart valves and aortic stent grafts at international hospital locations. We retain title and control over this consignment inventory until the device is implanted, at which time we invoice the hospital and recognize revenue. As of September 30, 2022 we had $13.2 million in consignment inventory, with approximately 39% in domestic locations and 61% in international locations. As of December 31, 2021 we had $12.9 million in consignment inventory, with approximately 43% in domestic locations and 57% in international locations.

Total deferred preservation costs were $45.5 million and $42.9 million as of September 30, 2022 and December 31, 2021, respectively.

Inventory and deferred preservation costs obsolescence reserves were $1.9 million and $3.2 million as of September 30, 2022 and December 31, 2021, respectively.

6. Goodwill and Other Intangible Assets

Indefinite Lived Intangible Assets

As of September 30, 2022 and December 31, 2021 the carrying values of our indefinite lived intangible assets were as follows (in thousands):


	September 30, 2022		December 31, 2021
Goodwill	$	234,773	$	250,000
In-process R&D	1,901		2,208
Procurement contracts and agreements	2,013		2,013
Trademarks	247		66

We monitor the phases of development of our acquired in-process research and development projects, including the risks associated with further development and the amount and timing of benefits expected to be derived from the completed projects. Incremental costs associated with development are charged to expense as incurred. Capitalized costs are amortized over the estimated useful life of the developed asset once completed. Our in-process research and development projects are reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. We did not record any impairment of indefinite lived intangible assets during the three and nine months ended September 30, 2022. In-process research and development, procurement contracts and agreements, and trademarks are included in Other intangibles, net on the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021.

Based on our experience with similar agreements, we believe that our acquired procurement contracts and agreements have indefinite useful lives, as we expect to continue to renew these contracts for the foreseeable future. We believe that our trademarks have indefinite useful lives as we currently anticipate that our trademarks will contribute to our cash flows indefinitely.

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We evaluate our goodwill and non-amortizing intangible assets for impairment on an annual basis during the fourth quarter of the year, and, if necessary, during interim periods if factors indicate that an impairment review is warranted. As of September 30, 2022 we concluded that our assessment of current factors did not indicate that goodwill or non-amortizing intangible assets are more likely than not to be impaired. We will continue to evaluate the recoverability of these non-amortizing intangible assets in future periods as necessary.

As of September 30, 2022 and December 31, 2021 the carrying value of goodwill, all of which is related to our Medical devices segment, is as follows (in thousands):


	Medical Devices Segment
Balance as of December 31, 2021	$	250,000
Foreign currency translation	(15,227)
Balance as of September 30, 2022	$	234,773

Definite Lived Intangible Assets

The definite lived intangible assets balance includes balances related to acquired technology, customer relationships, distribution and manufacturing rights and know-how, patents, and other definite lived intangible assets. As of September 30, 2022 and December 31, 2021 the gross carrying values, accumulated amortization, and approximate amortization period of our definite lived intangible assets were as follows (in thousands, except weighted average useful life):


September 30, 2022	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life (Years)
Acquired technology	$	190,108	$	42,048	$	148,060	18.3
Other intangibles:
Customer lists and relationships	30,868		10,677		20,191		20.6
Distribution and manufacturing rights and know-how	8,476		4,900		3,576		5.0
Patents	4,171		3,168		1,003		17.0
Other	4,325		2,144		2,181		4.5
Total other intangibles	$	47,840	$	20,889	$	26,951	10.8


December 31, 2021	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life (Years)
Acquired technology	$	213,626	$	46,632	$	166,994	17.7
Other intangibles:
Customer lists and relationships	31,148		9,618		21,530		20.5
Distribution and manufacturing rights and know-how	9,847		4,308		5,539		5.0
Patents	4,083		3,144		939		17.0
Other	3,969		1,762		2,207		4.4
Total other intangibles	$	49,047	$	18,832	$	30,215	10.6

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Amortization Expense

The following is a summary of amortization expense as recorded in General, administrative, and marketing expenses on our Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Amortization expense	$	3,686	$	4,203	$	11,675	$	12,701

As of September 30, 2022 scheduled amortization of intangible assets for the next five years is as follows (in thousands):


	Remainder of 2022		2023	2024	2025	2026	2027	Total
Amortization expense	$	3,593	14,174	13,822	12,070	11,842	11,748	$	67,249

7. Income Taxes

Income Tax Expense

Our effective income tax rate was an expense of 9% and 17% for the three and nine months ended September 30, 2022, respectively, as compared to a benefit of 33% and 318% for the three and nine months ended September 30, 2021, respectively. Our income tax rate for the three and nine months ended September 30, 2022 was primarily impacted by changes in our valuation allowance against our net deferred tax assets, non-deductible executive compensation, the foreign derived intangible income deduction, the research and development tax credit, changes in our uncertain tax position liabilities, and tax shortfalls on stock compensation. Our income tax rate for the three and nine months ended September 30, 2021 was primarily impacted by non-deductible executive compensation, changes in our valuation allowance against our net deferred tax assets, changes in our uncertain tax position liabilities, the research and development tax credit, and excess tax benefits on stock compensation.

Deferred Income Taxes

We generate deferred tax assets primarily as a result of finance leases, net operating losses, amortization of research and development expenses, excess interest carryforward, stock compensation, and accrued compensation. Our deferred tax liabilities are primarily made up of intangible assets acquired in previous years, finance leases, and unrealized gains and losses.

We maintained a net deferred tax liability of $28.0 million and $26.4 million as of September 30, 2022 and December 31, 2021, respectively. Our valuation allowance against our deferred tax assets was $17.8 million and $13.3 million as of September 30, 2022 and December 31, 2021, respectively, primarily related to net operating loss carryforwards and disallowed excess interest carryforwards.

8. Leases

We have operating and finance lease obligations resulting from the lease of land and buildings that comprise our corporate headquarters and various manufacturing facilities; leases related to additional manufacturing, office, and warehouse space; leases on company vehicles; and leases on a variety of office and other equipment.

On January 6, 2021 we executed a modification to extend the lease of our headquarters located in Kennesaw, Georgia. This modification resulted in an increase in the present value of future lease obligations and corresponding right-of-use asset of $23.3 million, using a discount rate of 6.41%.

On June 1, 2021 we began occupancy of the newly constructed addition to our leased international headquarters located in Hechingen, Germany. This lease resulted in an increase in the present value of future lease obligations and corresponding right-of-use asset of $9.8 million, using a discount rate of 5.46%.

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Information related to leases included in the Condensed Consolidated Balance Sheets is as follows (in thousands, except lease term and discount rate):


Operating leases:	September 30, 2022		December 31, 2021
Operating lease right-of-use assets	$	55,405	$	58,097
Accumulated amortization	(14,085)		(12,383)
Operating lease right-of-use assets, net	$	41,320	$	45,714

Current maturities of operating leases	$	3,061	$	3,149
Non-current maturities of operating leases	40,915		44,869
Total operating lease liabilities	$	43,976	$	48,018

Finance leases:
Property and equipment, at cost	$	5,861	$	6,759
Accumulated amortization	(2,166)		(2,105)
Property and equipment, net	$	3,695	$	4,654

Current maturities of finance leases	$	469	$	528
Non-current maturities of finance leases	3,450		4,374
Total finance lease liabilities	$	3,919	$	4,902

Weighted average remaining lease term (in years):
Operating leases	12.2		12.5
Finance leases	8.1		8.8

Weighted average discount rate:
Operating leases	5.9%		5.8%
Finance leases	2.1%		2.0%

Current maturities of finance leases are included as a component of Other current liabilities on our Condensed Consolidated Balance Sheets. A summary of lease expenses for our finance and operating leases included in General, administrative, and marketing expenses on our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Amortization of property and equipment	$	127	$	190	$	395	$	500
Interest expense on finance leases	22		27		69		85
Total finance lease expense	149		217		464		585
Operating lease expense	1,853		1,989		5,656		5,566
Sublease income	(92)		(92)		(275)		(308)
Total lease expense	$	1,910	$	2,114	$	5,845	$	5,843

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A summary of our cash flow information related to leases is as follows (in thousands):


	Nine Months Ended September 30,
Cash paid for amounts included in the measurement of lease liabilities:	2022		2021
Operating cash flows for operating leases	$	4,939	$	4,536
Financing cash flows for finance leases	346		446
Operating cash flows for finance leases	62