SEC Filing | Artivion, Inc.

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aort-20230930

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, 2023

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 27, 2023
Common Stock, $0.01 par value						41,048,608

Table of Contents

TABLE OF CONTENTS


Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.			3
Condensed Consolidated Statements of Operations and Comprehensive Loss			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.			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			39
Item 4. Controls and Procedures.			40

Part II – OTHER INFORMATION			41

Item 1. Legal Proceedings.			41
Item 1A. Risk Factors.			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			56
Item 3. Defaults Upon Senior Securities.			56
Item 4. Mine Safety Disclosures.			56
Item 5. Other Information.			56
Item 6. Exhibits.			57
Signatures			58

Table of Contents

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Artivion, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

In Thousands, Except Per Share Data

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Products	$	63,747	$	55,248	$	192,041	$	171,726
Preservation services	24,107		21,590		68,293		62,665
Total revenues	87,854		76,838		260,334		234,391

Cost of products and preservation services:
Products	21,574		17,743		62,084		53,381
Preservation services	10,010		10,351		30,169		29,375
Total cost of products and preservation services	31,584		28,094		92,253		82,756

Gross margin	56,270		48,744		168,081		151,635

Operating expenses:
General, administrative, and marketing	51,093		41,051		158,699		118,989
Research and development	6,421		11,799		21,062		30,575
Total operating expenses	57,514		52,850		179,761		149,564
Gain from sale of non-financial assets	—		—		(14,250)		—
Operating (loss) income	(1,244)		(4,106)		2,570		2,071

Interest expense	6,603		4,805		19,055		12,854
Interest income	(339)		(40)		(679)		(86)
Other expense, net	1,911		3,661		5,189		7,564

Loss before income taxes	(9,419)		(12,532)		(20,995)		(18,261)
Income tax expense	382		1,181		5,720		3,100

Net loss	$	(9,801)	$	(13,713)	$	(26,715)	$	(21,361)

Loss per share:
Basic	$	(0.24)	$	(0.34)	$	(0.65)	$	(0.53)
Diluted	$	(0.24)	$	(0.34)	$	(0.65)	$	(0.53)

Weighted-average common shares outstanding:
Basic	40,881		40,115		40,691		39,999
Diluted	40,881		40,115		40,691		39,999

Net loss	$	(9,801)	$	(13,713)	$	(26,715)	$	(21,361)
Other comprehensive loss:
Foreign currency translation adjustments	(5,010)		(16,895)		432		(35,466)
Comprehensive loss	$	(14,811)	$	(30,608)	$	(26,283)	$	(56,827)

See accompanying Notes to Condensed Consolidated Financial Statements

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Artivion, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

In Thousands


	September 30, 2023		December 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	53,481	$	39,351
Trade receivables, net	64,277		61,820
Other receivables	3,993		7,764
Inventories, net	78,792		74,478
Deferred preservation costs, net	49,391		46,371
Prepaid expenses and other	17,175		17,550
Total current assets	267,109		247,334

Goodwill	242,936		243,631
Acquired technology, net	142,675		151,263
Operating lease right-of-use assets, net	43,345		41,859
Property and equipment, net	37,428		38,674
Other intangibles, net	29,398		31,384
Deferred income taxes	3,705		1,314
Other assets	8,191		7,339
Total assets	$	774,787	$	762,798

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	10,819	$	12,004
Accrued compensation	13,861		13,810
Accrued expenses	9,930		12,374
Taxes payable	9,390		2,635
Current maturities of operating leases	3,940		3,308
Accrued procurement fees	1,860		2,111
Current portion of long-term debt	1,552		1,608
Other liabilities	3,607		1,825
Total current liabilities	54,959		49,675

Long-term debt	305,877		306,499
Contingent consideration	62,300		40,400
Non-current maturities of operating leases	42,862		41,257
Deferred income taxes	19,514		24,499
Deferred compensation liability	6,460		5,468
Non-current finance lease obligation	3,272		3,644
Other liabilities	7,568		7,027
Total liabilities	$	502,812	$	478,469

Commitments and contingencies

Shareholders' equity:
Preferred stock	—		—
Common stock (75,000 shares authorized, 42,537 and 41,830 shares issued and outstanding in 2023 and 2022, respectively)	425		418
Additional paid-in capital	351,307		337,385
Retained deficit	(43,932)		(17,217)
Accumulated other comprehensive loss	(21,177)		(21,609)
Treasury stock, at cost, 1,487 shares as of September 30, 2023 and December 31, 2022	(14,648)		(14,648)
Total shareholders' equity	271,975		284,329

Total liabilities and shareholders' equity	$	774,787	$	762,798

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,
	2023		2022
Net cash flows from operating activities:
Net loss	$	(26,715)	$	(21,361)

Adjustments to reconcile net loss to net cash from operating activities:
Change in fair value of contingent consideration	21,900		(4,600)
Depreciation and amortization	17,260		17,016
Non-cash compensation	10,466		9,189
Non-cash lease expense	5,467		5,656
Fair value adjustment of long-term loan	5,000		—
Write-down of inventories and deferred preservation costs	3,726		3,116
Deferred income taxes	(7,250)		5,097
Gain from sale of non-financial assets	(14,250)		—
Other	2,325		1,523
Changes in operating assets and liabilities:
Receivables	765		(10,900)
Accounts payable, accrued expenses, and other liabilities	412		(2,103)
Prepaid expenses and other assets	(527)		(1,788)
Inventories and deferred preservation costs	(10,592)		(5,781)
Net cash flows provided by (used in) operating activities	7,987		(4,936)

Net cash flows from investing activities:
Proceeds from sale of non-financial assets, net	14,250		—
Payments for Endospan Agreement	(5,000)		—
Capital expenditures	(5,503)		(6,924)
Other	(1,580)		(1,123)
Net cash flows provided by (used in) investing activities	2,167		(8,047)

Net cash flows from financing activities:
Proceeds from financing insurance premiums	3,558		—
Proceeds from exercise of stock options and issuance of common stock	3,467		3,344
Redemption and repurchase of stock to cover tax withholdings	(563)		(1,791)
Principal payments on short-term notes payable	(1,522)		—
Repayment of term loan	(2,063)		(2,033)
Other	(382)		(300)
Net cash flows provided by (used in) financing activities	2,495		(780)

Effect of exchange rate changes on cash and cash equivalents	1,481		(3,675)
Increase (decrease) in cash and cash equivalents	14,130		(17,438)

Cash and cash equivalents beginning of period	39,351		55,010
Cash and cash equivalents end of period	$	53,481	$	37,572

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, 2023	42,443	$	424	$	347,030	$	(34,131)	$	(16,167)	(1,487)	$	(14,648)	$	282,508
Net loss	—	—		—		(9,801)		—		—	—		(9,801)
Other comprehensive loss	—	—		—		—		(5,010)		—	—		(5,010)
Equity compensation	8	—		3,392		—		—		—	—		3,392
Employee stock purchase plan	86	1		885		—		—		—	—		886

Balance at September 30, 2023	42,537	$	425	$	351,307	$	(43,932)	$	(21,177)	(1,487)	$	(14,648)	$	271,975


	Common Stock			Additional Paid-In Capital		Retained Deficit		Accumulated Other Comprehensive Loss		Treasury Stock			Total Shareholders' Equity
	Shares	Amount								Shares	Amount
Balance at December 31, 2022	41,830	$	418	$	337,385	$	(17,217)	$	(21,609)	(1,487)	$	(14,648)	$	284,329
Net loss	—	—		—		(26,715)		—		—	—		(26,715)
Other comprehensive income	—	—		—		—		432		—	—		432
Equity compensation	409	4		11,021		—		—		—	—		11,025
Exercise of options	196	2		2,004		—		—		—	—		2,006
Employee stock purchase plan	142	2		1,459		—		—		—	—		1,461
Redemption and repurchase of stock to cover tax withholdings	(40)	(1)		(562)		—		—		—	—		(563)
Balance at September 30, 2023	42,537	$	425	$	351,307	$	(43,932)	$	(21,177)	(1,487)	$	(14,648)	$	271,975

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 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

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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 Consolidated Balance Sheet as of December 31, 2022 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, 2023 and 2022 have been prepared in accordance with (i) accounting principles generally accepted in the United States of America (“US GAAP”) 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 US GAAP 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, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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, 2022 filed with the SEC on February 23, 2023.

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, 2022. 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 US GAAP, which require us to make estimates and assumptions. We did not experience any significant changes during the three and nine months ended September 30, 2023 in any of our Significant Accounting Policies from those contained in our Form 10-K for the year ended December 31, 2022.

New Accounting Standards

Recently Adopted

In March 2020 the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“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. US GAAP requires 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. In January 2021 the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). The objective of the new reference rate reform standard is to clarify the scope of Topic 848 and provide explicit guidance to help companies applying optional expedients and exceptions. We adopted ASU 2020-04 and ASU 2021-01 on a prospective basis in fiscal year 2022. The adoption of ASU 2020-04 and ASU 2021-01 did not have a material impact on our financial condition or results of operations.

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2. Sale of PerClot

Overview

On July 28, 2021 we entered into an asset purchase agreement, Transitional Manufacturing and Supply Agreement (“TMSA”), 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 $54.5 million in consideration (we will receive up to $41.0 million and SMI will receive up to $13.5 million), consisting of (i) $25.0 million at closing, of which $6.0 million was paid to SMI; (ii) $18.8 million upon our receipt of Premarket Approval (“PMA”) from the US Food and Drug Administration (the “FDA”) for PerClot and our transfer of the PMA to Baxter, of which $4.5 million was paid to SMI; 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 services relating to the sale of SMI PerClot outside of the US. Within the terms of the TMSA, we will manufacture and supply PerClot for Baxter post PMA for a contractual period of 21 months, subject to short-term renewal provisions.

PerClot PMA

On May 23, 2023 the FDA granted PMA of PerClot for use to control bleeding in certain open and laparoscopic surgical procedures. Pursuant to the terms of the TMSA of the Baxter Transaction, we transferred the ownership of the PMA to Baxter following approval. In May 2023 we received a payment of $18.8 million from Baxter, of which $4.5 million was paid to SMI. As a result, we recorded a pre-tax gain of $14.3 million as the assets were derecognized upon closing of the Baxter Transaction in fiscal year 2021, included as Gain from sale of non-financial assets within the Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2023.

Following receipt of the PMA, under the terms of the TMSA, we began manufacturing and supplying PerClot for Baxter and recorded $2.0 million and $3.6 million of PerClot revenues on the Condensed Consolidated Statements of Operations and Comprehensive Loss during the three and nine months ended September 30, 2023, respectively.

The Company accounted for this TMSA in accordance with the provision of ASU 2016-02, Leases Topic 842 (“ASC 842”) by bifurcating the lease and non-lease components and recognizing each component based on ASC 842 and ASU 2014-09, Revenue from Contracts with Customers Topic 606. The amount of lease revenue was $87,000 and $101,000 for the three and nine months ended September 30, 2023, respectively.

3. Agreements with Endospan

Exclusive Distribution Agreement and Securities Purchase Option Agreement

On September 11, 2019 Artivion’s wholly owned subsidiary, JOTEC GmbH (“JOTEC”), entered into an exclusive distribution agreement with Endospan Ltd. (“Endospan”), an Israeli corporation, pursuant to which JOTEC obtained exclusive distribution rights for NEXUS and accessories in certain countries in Europe in exchange for a fixed distribution fee of $9.0 million paid in September 2019.

We also entered into a securities purchase option agreement (“Endospan Option”) with Endospan for $1.0 million paid in September 2019. The Endospan Option provides Artivion the option to purchase all the outstanding securities of Endospan from Endospan’s securityholders at the time of acquisition, or the option to acquire all of Endospan’s assets, in each case, for a price between $350.0 and $450.0 million before, or within a certain period of time after FDA approval of NEXUS, with such option expiring if not exercised within 90 days after receiving notice that Endospan has received approval from the FDA for NEXUS.

Loan Agreement

Artivion and Endospan also entered into a loan agreement (“Endospan Loan”), dated September 11, 2019, in which Artivion agreed to provide Endospan a secured loan of up to $15.0 million to be funded in three tranches of $5.0 million each.

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The first tranche of the Endospan Loan was funded upon execution of the agreement in September 2019. In September 2020 we funded the second tranche payment of $5.0 million upon the certification of the NEXUS IDE from the FDA. In May 2023 we funded the third tranche payment of $5.0 million upon the certification of enrollment of 50% of the required number of patients in the primary arm of the FDA approved clinical trial for NEXUS.

We elected the fair value option for recording the Endospan Loan. We assess the fair value of the Endospan Loan based on quantitative and qualitative characteristics and adjust the amount recorded to its current fair market value at each reporting period. We performed an assessment of the fair value of the Endospan Loan, including the funding of the third tranche payment in May 2023. We determined that the loan had no fair value as of September 30, 2023 and recorded a $5.0 million expense included in Other expense, net within the Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2023.

4. Financial Instruments

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


September 30, 2023	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	22,548	$	—	$	—	$	22,548
Certificates of deposit	2,059		—		—		2,059
Total assets	$	24,607	$	—	$	—	$	24,607

Long-term liabilities:
Contingent consideration	—		—		(62,300)		(62,300)
Total liabilities	$	—	$	—	$	(62,300)	$	(62,300)


December 31, 2022	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	10,098	$	—	$	—	$	10,098
Total assets	$	10,098	$	—	$	—	$	10,098

Long-term liabilities:
Contingent consideration	—		—		(40,400)		(40,400)
Total liabilities	$	—	$	—	$	(40,400)	$	(40,400)

We used prices quoted from our investment advisors to determine the Level 1 valuation of our investments in money market funds and certificates of deposit. The estimated market value of all cash equivalents is equal to cost basis as there were no gross realized gains or losses on cash equivalents for the three and nine months ended September 30, 2023 and 2022.

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.

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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 7% and estimated future achievement of milestone dates between 2025 and 2026 to calculate the fair value of contingent consideration as of September 30, 2023. 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. 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 an expense of $6.2 million and $21.9 million for the three and nine months ended September 30, 2023, respectively, and an expense of $400,000 and income of $4.6 million for the three and nine months ended September 30, 2022, respectively, in General, administrative, and marketing expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss, 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, 2022	$	(40,400)
Change in valuation	(21,900)
Balance as of September 30, 2023	$	(62,300)

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Although we believe that the recorded fair values of our financial instruments are appropriate, these fair values may not be reflective of future fair values.

5. Inventories, net and Deferred Preservation Costs

Inventories, net at September 30, 2023 and December 31, 2022 were comprised of the following (in thousands):


	September 30, 2023		December 31, 2022
Raw materials and supplies	$	35,639	$	36,715
Work-in-process	13,042		10,476
Finished goods	30,111		27,287
Total inventories, net	$	78,792	$	74,478

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, 2023 we had $11.1 million in consignment inventory, with approximately 43% in domestic locations and 57% in international locations. As of December 31, 2022 we had $12.7 million in consignment inventory, with approximately 41% in domestic locations and 59% in international locations.

Total deferred preservation costs were $49.4 million and $46.4 million as of September 30, 2023 and December 31, 2022, respectively.

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Inventory and deferred preservation costs obsolescence reserves were $2.7 million and $2.2 million as of September 30, 2023 and December 31, 2022, respectively.

6. Goodwill and Other Intangible Assets

Indefinite Lived Intangible Assets

As of September 30, 2023 and December 31, 2022 the carrying values of our indefinite lived intangible assets were as follows (in thousands):


	September 30, 2023		December 31, 2022
Goodwill	$	242,936	$	243,631
In-process R&D	2,066		2,080
Procurement contracts and agreements	2,013		2,013

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, 2023. In-process research and development, procurement contracts and agreements are included in Other intangibles, net on the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022.

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 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, 2023 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, 2023 and December 31, 2022 the carrying value of goodwill, all of which is related to our Medical Devices segment, was as follows (in thousands):


	Medical Devices Segment
Balance as of December 31, 2022	$	243,631
Foreign currency translation	(695)
Balance as of September 30, 2023	$	242,936

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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, 2023 and December 31, 2022 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, 2023	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life (Years)
Acquired technology	$	197,768	$	55,093	$	142,675	18.2
Other intangibles:
Customer lists and relationships	28,648		9,973		18,675		21.6
Distribution and manufacturing rights and know-how	9,211		7,052		2,159		5.0
Patents	4,322		3,210		1,112		17.0
Other	6,684		3,311		3,373		5.0
Total other intangibles	$	48,865	$	23,546	$	25,319	10.3


December 31, 2022	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life (Years)
Acquired technology	$	198,420	$	47,157	$	151,263	18.2
Other intangibles:
Customer lists and relationships	31,030		11,100		19,930		20.5
Distribution and manufacturing rights and know-how	9,274		5,796		3,478		5.0
Patents	4,246		3,180		1,066		17.0
Other	5,360		2,543		2,817		4.4
Total other intangibles	$	49,910	$	22,619	$	27,291	10.3

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 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Amortization expense	$	3,766	$	3,686	$	11,453	$	11,675

As of September 30, 2023 scheduled amortization of intangible assets for the next five years is as follows (in thousands):


	Remainder of 2023		2024		2025		2026		2027		2028		Total
Amortization expense	$	3,720	$	14,700	$	12,848	$	12,617	$	12,511	$	12,313	$	68,709

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7. Income Taxes

Income Tax Expense

Our effective income tax rate was an expense of 4% and 27% for the three and nine months ended September 30, 2023, respectively, as compared to an expense of 9% and 17% for the three and nine months ended September 30, 2022, respectively. Our income tax rate for the three and nine months ended September 30, 2023 was primarily impacted by changes in pre-tax book loss, valuation allowance against our net deferred tax assets, non-deductible executive compensation, the foreign derived intangible income deduction, the research and development tax credit, return to provision adjustments in foreign jurisdictions, and changes in our uncertain tax position liabilities. Our income tax rate for the three and nine months ended September 30, 2022 was primarily impacted by changes in 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.

Deferred Income Taxes

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

We maintained a net deferred tax liability of $15.8 million and $23.2 million as of September 30, 2023 and December 31, 2022, respectively. Our valuation allowance against our deferred tax assets was $25.2 million and $17.9 million as of September 30, 2023 and December 31, 2022, respectively, primarily related to net operating loss carryforwards, disallowed excess interest carryforwards, and capitalized research and development expenses.

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.

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


Operating leases:	September 30, 2023		December 31, 2022
Operating lease right-of-use assets	$	59,975	$	56,061
Accumulated amortization	(16,630)		(14,202)
Operating lease right-of-use assets, net	$	43,345	$	41,859

Current maturities of operating leases	$	3,940	$	3,308
Non-current maturities of operating leases	42,862		41,257
Total operating lease liabilities	$	46,802	$	44,565

Finance leases:
Property and equipment, at cost	$	6,421	$	6,408
Accumulated amortization	(2,869)		(2,498)
Property and equipment, net	$	3,552	$	3,910

Current maturities of finance leases	$	529	$	513
Non-current maturities of finance leases	3,272		3,644
Total finance lease liabilities	$	3,801	$	4,157

Weighted average remaining lease term (in years):
Operating leases	10.7		11.9
Finance leases	7.1		7.8

Weighted average discount rate:
Operating leases	6.3%		5.9%
Finance leases	2.1%		2.1%

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 was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Amortization of property and equipment	$	136	$	127	$	400	$	395
Interest expense on finance leases	20		22		62		69
Total finance lease expense	156		149		462		464
Operating lease expense	1,836		1,853		5,467		5,656
Sublease income	(87)		(92)		(101)		(275)
Total lease expense	$	1,905	$	1,910	$	5,828	$	5,845

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


	Nine Months Ended September 30,
Cash paid for amounts included in the measurement of lease liabilities:	2023		2022
Operating cash flows for operating leases	$	5,422	$	4,939
Financing cash flows for finance leases	396		346
Operating cash flows for finance leases	62		62

Future minimum lease payments and sublease rental income are as follows (in thousands):


	Finance Leases		Operating Leases
Remainder of 2023	$	139	$	1,460
2024	606		6,119
2025	585		6,652
2026	567		6,162
2027	557		5,865
Thereafter	1,626		39,441
Total minimum lease payments	$	4,080	$	65,699
Less amount representing interest	(279)		(18,897)
Present value of net minimum lease payments	3,801		46,802
Less current maturities	(529)		(3,940)
Lease liabilities, less current maturities	$	3,272	$	42,862

9. Debt

Credit Agreement

On December 1, 2017 we entered into a credit and guaranty agreement for a $255.0 million senior secured credit facility, consisting of a $225.0 million secured term loan facility (the “Term Loan Facility”) and a $30.0 million secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Agreement”). We and each of our existing domestic subsidiaries (subject to certain exceptions and exclusions) guarantee the obligations under the Credit Agreement (the “Guarantors”). The Credit Agreement is secured by a security interest in substantially all existing and after-acquired real and personal property (subject to certain exceptions and exclusions) of us and the Guarantors.

On June 2, 2021 we entered into an amendment to our Credit Agreement to extend the maturity dates of both our Term Loan and Revolving Credit Facility. As part of the amendment, the maturity dates of both our Term Loan and Revolving Credit Facility were each extended by two and one-half years, until June 1, 2027 and June 1, 2025, respectively, subject to earlier springing maturities triggered if our 4.25% Convertible Senior Notes, described below, remain outstanding on April 1, 2025 and December 31, 2024, respectively. With respect to the Term Loan, if the Convertible Senior Notes remain outstanding on April 1, 2025, the Term Loan’s maturity date will be April 1, 2025, or, if the Convertible Senior Notes’ own maturity date has been extended, the earlier of (i) 91 days prior to the Convertible Senior Notes’ new maturity date and (ii) June 1, 2027. In the case of the Revolving Credit Facility, if the Convertible Senior Notes are still outstanding on December 31, 2024, the Revolving Credit Facility’s maturity date will be either December 31, 2024 or, if the Convertible Senior Notes’ own maturity date has been extended, the earlier of (i) 182 days prior to the Convertible Senior Notes’ new maturity date and (ii) June 1, 2025. Under the amendment, the Term Loan Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of 2.50%, or LIBOR, plus a margin of 3.50%. Prior to the amendment, the optional floating annual rate was equal to either the base rate plus a margin of 2.25%, or LIBOR, plus a margin of 3.25%. We paid debt issuance costs of $2.1 million, of which $1.8 million will be amortized over the life of the Term Loan Facility and included in current and long-term debt on the Condensed Consolidated Balance Sheets. The remaining $361,000 of debt issuance costs and $474,000 of non-cash debt extinguishment costs were recorded in Interest expense on the Condensed Consolidated Statements of Operations and Comprehensive Loss.

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As discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 the Credit Agreement contains certain customary affirmative and negative covenants, including covenants that limit our ability and the ability of our subsidiaries to, among other things, grant liens, incur debt, dispose of assets, make loans and investments, make acquisitions, make certain restricted payments (including cash dividends), merge or consolidate, change business or accounting or reporting practices, in each case subject to customary exceptions for a credit facility of this size and type. Beginning in 2021 if we repay borrowings under our Revolving Credit Facility to 25% or less, no financial maintenance covenants, including the minimum liquidity covenant and the maximum first lien net leverage ratio covenant, are applicable. No amounts are outstanding on the Revolving Credit Facility as of September 30, 2023. We are in compliance with our debt covenants as of September 30, 2023.

On December 19, 2022 in accordance with adopting ASU 2020-04 and 2021-01, we entered into an amendment to our Credit Agreement to replace the LIBOR based benchmark interest rate with the Secured Overnight Financing Rate (“SOFR”) based benchmark interest rate for our Term Loan Facility and our Revolving Credit Facility. Based on historical analysis of the differences between the benchmark rates, SOFR is adjusted to arrive at a Term SOFR rate that serves as the replacement base rate for LIBOR under our amended credit facilities. Under this amendment, at the maturity of our existing LIBOR-based loan on December 30, 2022, the interest rate at the repricing of our Term Loan Facility was calculated as Term SOFR plus a fixed percentage credit spread of 3.50%. The loan under the Revolving Credit Facility bears interest at Term SOFR plus a margin of between 4.00% and 4.25%, depending on our consolidated leverage ratio. As of September 30, 2023 the aggregate interest rate of the Credit Agreement was 8.93% per annum.

Convertible Senior Notes

On June 18, 2020 we issued $100.0 million aggregate principal amount of 4.25% Convertible Senior Notes with a maturity date of July 1, 2025 (the “Convertible Senior Notes”). The net proceeds from this offering, after deducting initial purchasers’ discounts and costs directly related to this offering, were approximately $96.5 million. On January 1, 2021 we adopted ASU 2020-06 and adjusted the carrying balance of the Convertible Senior Notes to notional. The Convertible Senior Notes balance was $100.0 million recorded in Long-term debt on the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022. The Convertible Senior Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. The initial conversion rate of the Convertible Senior Notes is 42.6203 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $23.46 per share, subject to adjustments. We use the if-converted method for assumed conversion of the Convertible Senior Notes for the diluted earnings per share calculation. The fair value and the effective interest rate of the Convertible Senior Notes as of September 30, 2023 was approximately $101.6 million and 5.05%, respectively. The fair value was based on market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy.

The interest expense recognized on the Convertible Senior Notes includes $1.2 million and $3.7 million for the three and nine months ended September 30, 2023 and 2022, respectively, related to the aggregate of the contractual coupon interest and the amortization of the debt issuance costs. Interest on the Convertible Senior Notes began accruing upon issuance and is payable semi-annually. There were $1.3 million and $1.9 million of unamortized debt issuance costs related to Convertible Senior Notes as of September 30, 2023 and December 31, 2022, respectively.

Holders of the Convertible Senior Notes may convert their notes at their option at any time prior to January 1, 2025, but only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (iii) we give a notice of redemption with respect to any or all of the notes, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events. On or after January 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.

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We became eligible to redeem the Convertible Senior Notes beginning on July 5, 2023, following the expiration of their non-redemption period. We are able to redeem the Convertible Senior Notes in whole or in part, at our option, if the last reported sale price per share of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. We may redeem for cash all or part of the Convertible Senior Notes at a redemption price equal to 100% of the principal amount of the redeemable Convertible Senior Notes, plus accrued and unpaid interest to, but excluding, the redemption date. No principal payments are due on the Convertible Senior Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the Convertible Senior Notes do not contain any financial covenants and do not restrict us from conducting significant restructuring transactions or issuing or repurchasing any of its other securities.

Loan Balances

The short-term and long-term balances of our Term Loan and other long-term borrowings were as follows (in thousands):


	September 30, 2023		December 31, 2022
Term Loan balance	$	212,063	$	213,750
Convertible Senior Notes	100,000		100,000
2.45% Sparkasse Zollernalb (KFW Loan 1)	117		296
1.40% Sparkasse Zollernalb (KFW Loan 2)	530		733
Total loan balance	312,710		314,779
Less unamortized loan origination costs	(5,281)		(6,672)
Net borrowings	307,429		308,107
Less short-term loan balance	(1,552)		(1,608)
Long-term loan balance	$	305,877	$	306,499

Interest Expense

Interest expense was $6.6 million and $19.1 million for the three and nine months ended September 30, 2023, respectively, as compared to $4.8 million and $12.9 million for the three and nine months ended September 30, 2022, respectively. Interest expense includes interest on debt and uncertain tax positions in all periods.

10. Commitments and Contingencies

Liability Claims

In the normal course of business, we are made aware of adverse events involving our products and tissues. Future adverse events could ultimately give rise to a lawsuit against us, and liability claims may be asserted against us in the future based on past events that we are not aware of at the present time. 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. The amounts recorded in these Condensed Consolidated Financial Statements as of September 30, 2023 and the Consolidated Financial Statements as of December 31, 2022 represent our estimate of the probable losses and anticipated recoveries for incurred but not reported claims related to products sold and services performed prior to the balance sheet date.

11. Revenue Recognition

Sources of Revenue

We have identified the following revenues disaggregated by revenue source:

•Domestic hospitals – direct sales of products and preservation services.

•International hospitals – direct sales of products and preservation services.

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•International distributors – generally these contracts specify a geographic area that the distributor will service, terms and conditions of the relationship, and purchase targets for the next calendar year.

•Other – PerClot manufacturing and supply agreement with Baxter, sales of CardioGenesis cardiac laser therapy prior to business abandonment in June 2023 described below, and original equipment manufacturing sales of aortic stent grafts and On-X products.

For the three and nine months ended September 30, 2023 and 2022 the sources of revenue were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Domestic hospitals	$	43,794	$	40,710	$	126,764	$	116,512
International hospitals	24,481		23,655		80,543		78,368
International distributors	16,616		11,469		46,166		34,685
Other	2,963		1,004		6,861		4,826
Total sources of revenue	$	87,854	$	76,838	$	260,334	$	234,391

Also see segment disaggregation information in Note 14 below.

In February 2023 our supplier of CardioGenesis cardiac laser therapy handpieces informed us that it was exiting the business and will no longer be supplying handpieces effective immediately because the sole-source manufacturer of tubing used in the handpiece assembly had gone out of business and a new supplier had yet to be identified and qualified. We evaluated the impact of this disruption on our CardioGenesis cardiac laser therapy business and possible avenues for resumption of supply including the evaluation of alternate suppliers and handpiece manufacturers. As of June 30, 2023 we were unable to identify an alternative source of supply or handpiece manufacturer and do not foresee a resumption of this business in the future. As a result, we wrote-off all of our CardioGenesis cardiac laser therapy assets and recorded an expense of $390,000 during the nine months ended September 30, 2023 on our Condensed Consolidated Statements of Operations and Comprehensive Loss.

Contract Balances

We may generate contract assets during the pre-delivery design and manufacturing stage of E-xtra Design Engineering product order fulfillment. We assess the balance related to any arrangements in process and determine if the enforceable right to payment creates a material contract asset requiring disclosure. No material arrangements in process existed as of September 30, 2023 and 2022.

We also incur contract obligations on general customer purchase orders that have been accepted but unfulfilled. Due to the short duration of time between order acceptance and delivery of the related product or service, we have determined that the balance related to these contract obligations is generally immaterial at any point in time. We monitor the value of orders accepted but unfulfilled at the close of each reporting period to determine if disclosure is appropriate. The value of orders accepted but unfulfilled as of September 30, 2023 and 2022 was not material.

12. Stock Compensation

Overview

We have stock option and stock incentive plans for employees and non-employee directors that provide for grants of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance stock units (“PSUs”), and options to purchase shares of our common stock at exercise prices generally equal to the fair value of such stock at the dates of grant. We also maintain a shareholder-approved Employee Stock Purchase Plan (“ESPP”) for the benefit of our employees. The ESPP allows eligible employees to purchase common stock on a regular basis at the lower of 85% of the market price at the beginning or end of each offering period.

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Equity Grants

During the nine months ended September 30, 2023 the Compensation Committee of our Board of Directors (the “Committee”) authorized awards from approved stock incentive plans of RSAs to non-employee directors and RSUs and PSUs to certain employees and company officers, which, assuming that performance under the PSUs will be achieved at target levels, together totaled 616,000 shares and had an aggregate grant date fair value of $8.5 million.

During the nine months ended September 30, 2022 the Committee authorized awards from approved stock incentive plans of RSAs to non-employee directors and RSUs and PSUs to certain employees and company officers, which, assuming that performance under the PSUs were to be achieved at target levels, together totaled 520,000 shares and had an aggregate grant date fair value of $9.7 million.

During the nine months ended September 30, 2023 and 2022 the Committee authorized, from approved stock incentive plans, grants of stock options to purchase a total of 16,000 and 314,000 shares, respectively, to certain company officers. The exercise prices of the options were equal to the closing stock prices on their respective grant dates.

Employees purchased common stock totaling 86,000 and 142,000 shares in the three and nine months ended September 30, 2023, respectively, as compared to 58,000 and 95,000 shares in the three and nine months ended September 30, 2022, respectively, through the ESPP.

Stock Compensation Expense

The following weighted-average assumptions were used to determine the fair value of options and shares purchased under the ESPP:

Three Months Ended
September 30, 2023

Nine Months Ended
September 30, 2023

Stock Options

ESPP

Stock Options

ESPP

Expected life

5.0 Years

0.5 Years

5.0 Years

0.5 Years

Expected stock price volatility

0.45

0.42

0.45

0.66

Risk-free interest rate

4.11%

5.47%

3.99%

4.77%

The following table summarizes total stock compensation expenses prior to the capitalization of amounts into Deferred preservation and Inventory costs (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
RSA, RSU, and PSU expense	$	2,647	$	2,622	$	8,685	$	7,860
Stock option and ESPP expense	745		611		2,340		1,794
Total stock compensation expense	$	3,392	$	3,233	$	11,025	$	9,654

Included in the total stock compensation expense, as applicable in each period, were expenses related to RSAs, RSUs, PSUs, and stock options issued in each respective year, as well as those issued in prior periods that continue to vest during the period, and compensation related to the ESPP. These amounts were recorded as stock compensation expense and were subject to our normal allocation of expenses to inventory costs and deferred preservation costs. We capitalized $205,000 and $559,000 for the three and nine months ended September 30, 2023, respectively, and $144,000 and $465,000 for the three and nine months ended September 30, 2022, respectively, of the stock compensation expense into our inventory costs and deferred preservation costs.

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13. Loss Per Common Share

The following table sets forth the computation of basic and diluted loss per common share (in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
Basic loss per common share	2023		2022		2023		2022
Net loss	$	(9,801)	$	(13,713)	$	(26,715)	$	(21,361)
Net loss allocated to participating securities	39		70		108		109
Net loss allocated to common shareholders	$	(9,762)	$	(13,643)	$	(26,607)	$	(21,252)

Basic weighted-average common shares outstanding	40,881		40,115		40,691		39,999
Basic loss per common share	$	(0.24)	$	(0.34)	$	(0.65)	$	(0.53)


	Three Months Ended September 30,				Nine Months Ended September 30,
Diluted loss per common share	2023		2022		2023		2022
Net loss	$	(9,801)	$	(13,713)	$	(26,715)	$	(21,361)
Net loss allocated to participating securities	39		70		108		109
Net loss allocated to common shareholders	$	(9,762)	$	(13,643)	$	(26,607)	$	(21,252)



Diluted weighted-average common shares outstanding	40,881		40,115		40,691		39,999
Diluted loss per common share	$	(0.24)	$	(0.34)	$	(0.65)	$	(0.53)

We excluded stock options from the calculation of diluted weighted-average common shares outstanding if the per share value, including the sum of (i) the exercise price of the options and (ii) the amount of the compensation cost attributed to future services and not yet recognized, was greater than the average market price of the shares because the inclusion of these stock options would be antidilutive to loss per common share. For the three and nine months ended September 30, 2023 and 2022 all stock options and awards were excluded from the calculation of diluted weighted-average common shares outstanding as these would be antidilutive due to the net loss.

14. Segment Information

We have two reportable segments organized according to our products and services: Medical Devices and Preservation Services. The Medical Devices segment includes external revenues from product sales of aortic stent grafts, On-X, surgical sealants, and other product revenues. Aortic stent grafts include aortic arch stent grafts, abdominal stent grafts, and synthetic vascular grafts. Aortic arch stent grafts include our E-vita Open NEO, E-vita Open Plus, AMDS, NEXUS, NEXUS DUO, and E-vita Thoracic 3G. Abdominal stent grafts include our E-xtra Design Engineering, E-nside, E-tegra, E-ventus BX, and E-liac products. Surgical sealants include BioGlue Surgical Adhesive products. The Preservation Services segment includes external services revenues from the preservation of cardiac and vascular tissues. There are no intersegment revenues.

The primary measure of segment performance, as viewed by our management, is segment gross margin or net external revenues less cost of products and preservation services. We do not segregate assets by segment; therefore, asset information is excluded from the segment disclosures below.

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The following table summarizes revenues, cost of products and preservation services, and gross margins for our operating segments (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Medical devices	$	63,747	$	55,248	$	192,041	$	171,726
Preservation services	24,107		21,590		68,293		62,665
Total revenues	87,854		76,838		260,334		234,391

Cost of products and preservation services:
Medical devices	21,574		17,743		62,084		53,381
Preservation services	10,010		10,351		30,169		29,375
Total cost of products and preservation services	31,584		28,094		92,253		82,756

Gross margin:
Medical devices	42,173		37,505		129,957		118,345
Preservation services	14,097		11,239		38,124		33,290
Total gross margin	$	56,270	$	48,744	$	168,081	$	151,635

The following table summarizes net revenues by product and service (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Products:
Aortic stent grafts	$	25,523	$	19,674	$	80,032	$	69,013
On-X	18,744		16,456		54,346		47,082
Surgical sealants	16,234		17,374		49,503		49,022
Other	3,246		1,744		8,160		6,609
Total products	63,747		55,248		192,041		171,726

Preservation services	24,107		21,590		68,293		62,665
Total revenues	$	87,854	$	76,838	$	260,334	$	234,391

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Forward-Looking Statements

This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements give our expectations or forecasts of future events as of the date of this Form 10-Q. In some cases, words such as “could,” “may,” “might,” “will,” “would,” “shall,” “should,” “pro forma,” “potential,” “pending,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “future,” “assume,” and variations of these types of words or other similar expressions identify forward-looking statements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date of this Form 10-Q.

All statements included herein, other than statements of historical facts, that address activities, events, or developments that we expect or anticipate will or may occur in the future, or that reflect our beliefs about the future and/or expectations, are forward-looking statements, including statements about the following:

•Our belief that new products, new indications, global expansion, and business development are the four growth areas that will drive our business in the future;

•The potential impact the COVID-19 pandemic and the wars in Ukraine and the Gaza Strip may have on demand for and sales of our products and services, business operations, manufacturing operations, supply chain, cash flow, workforce, clinical and regulatory timelines, and our research and development projects;

•The potential impact general global, regional, or national economic downturns and macroeconomic trends, including heightened inflation, interest rate and currency fluctuations, as well as general or localized economic slowdowns or recessions may have on demand for and sales of our products and services, including ordering trends for international distributors based on currency fluctuation against the US dollar, and our business operations, manufacturing operations, supply chain, and workforce;

•Our beliefs about the robustness of our global supply chain in light of current global and macroeconomic conditions and about the potential impact of supply chain disruptions, particularly disruptions to single and sole source suppliers and third-party manufacturing partners;

•Our beliefs about our R&D and product pipeline, including our beliefs about the timing of our clinical trials and product launches;

•Our beliefs and anticipation regarding the favorable attributes, benefits, and clinical advantages of our products and services, the basis on which our products and services compete, the benefits of our physician education activities, and the advantages of our relationships with organ and tissue procurement organizations and tissue banks;

•Our beliefs about the future regulatory status of our medical devices, our compliance with applicable laws and regulations, and our ability to make timely transitions to our Notified Bodies and obtain renewals for our Conformité Européene Mark product certification impacted by Brexit and the transition to the Medical Device Regulation in Europe, and the impact these transitions, renewals, and related processes may have on our business, including any impact on our customers’ ordering patterns and our ability to supply products;

•Our beliefs regarding our global expansion efforts, including the international growth opportunity that would be provided by obtaining regulatory approval for BioGlue in China;

•Our beliefs regarding the impact lower INR anticoagulation therapy and transcatheter heart valve replacement may have on the number of patients choosing On-X mechanical heart valves;

•Our beliefs about the advantages of our intellectual property and its significance to our segments and our business as a whole, and our beliefs about the present value and potential impairment of our intangible assets and leases;

•Our beliefs about our workforce, including our ability to attract and retain talent at all levels, and about our relationship with our workforce, including our works council in Germany and union in Brazil;

•Our beliefs about potential information security vulnerabilities, and the associated potential adverse effects on our business;

•The dependencies affecting our ability to realize the anticipated business opportunities, growth prospects, synergies, and other benefits of the agreements with Endospan and Baxter and our acquisition of Ascyrus, and our beliefs about the costs and timelines for certain regulatory approvals and clinical trial milestones;

•Our beliefs regarding the fair value of our acquisitions, divestitures, and other business development activities and the estimates and assumptions about the future achievements of milestones and future revenues and cash flows related to those business development activities, including our ability to achieve the milestones in the Baxter Transaction;

•Our beliefs about the anticipated benefits from our corporate reincorporation and rebranding and the risks posed by the same;

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•Our belief that revenues for preservation services, particularly revenues for certain high-demand cardiac tissues, can vary from quarter-to-quarter and year-to-year due to a variety of factors including: quantity and type of incoming tissues, yields of tissue through the preservation process, timing of receipt of donor information, staffing levels, timing of the release of tissues to an implantable status, demand for certain tissue types due to the number and type of procedures being performed, and pressures from competing products or services;

•Our beliefs regarding the seasonal nature of the demand for some of our products and services and the reasons for such seasonality, if any, and regarding the impact of consignment inventory on product sales, if any;

•Our belief that our cash from operations and existing cash and cash equivalents will enable us to meet our current operational liquidity needs for at least the next twelve months, our expectations regarding future cash requirements, and the impact that our cash requirements might have on our cash flows for the next twelve months;

•Our expectation regarding the impact on cash flows of undertaking significant business development activities and the potential need to obtain additional debt financing or equity financing;

•Our belief that we will incur expenses for research and development projects, including for clinical research projects to gain regulatory approvals for products or indications, including On-X, aortic stent grafts, and BioGlue products, and for new products and technologies which will likely require additional investment, research, and new clinical studies or data;

•Our beliefs about pending and potential legal or other governmental or regulatory proceedings;

•Our expectations regarding the timing and impact of clinical research work and regulatory approvals for certain products or indications, including On-X, aortic stent grafts, and BioGlue products, and CryoValve SG pulmonary heart valve if the US Food and Drug Administration reclassifies allograft heart valves as Class III medical devices;

•Our beliefs and expectations regarding the utilization of net operating loss carryforwards from our acquisitions of JOTEC, On-X, Hemosphere, Inc., and Cardiogenesis Corporation;

•Our beliefs about our operating results which may fluctuate significantly on a periodic basis as a result of internal and external factors, including reduced demand for our products, the potential impact of GLP-1 drugs, healthcare workforce trends and labor disputes, availability of products, materials, and supplies, strategic actions we take such as acquisitions or divestitures, unanticipated costs and expenses, market reception of our new or improved product offerings, and interest rate and currency fluctuations; and

•Other statements regarding projections of future financial and business performance; anticipated growth and trends in our business and the markets relevant to our business, including as our growth relates to our competitors; the robustness and reliability of our workforce and supply chain; future production capacity and product supply; the availability and benefits of our products in the future; and the expected timing and impact of our strategic initiatives.

These and other forward-looking statements reflect the views of management at the time and such statements are originally made based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, and expected future developments as well as other factors we believe are appropriate in the circumstances and are subject to a number of risks, uncertainties, estimates, and assumptions. Whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially and adversely from our expectations, including, without limitation, in addition to those specified in the text surrounding such statements, the risks described in Part II, Item 1A, “Risk Factors” in this Form 10-Q and elsewhere throughout this report, the risks described in our other filings with the Securities and Exchange Commission including the risks described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 and elsewhere throughout that report, and other risks which we may not be able to identify in advance, many of which are beyond our control. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. We assume no obligation, and expressly disclaim any duty, to update publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise.

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Part I – FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Artivion, Inc. (“Artivion,” the “Company,” “we,” or “us”), is a leader in the manufacturing, processing, and distribution of medical devices and implantable human tissues used in cardiac and vascular surgical procedures for patients with aortic disease. We have four major product families: aortic stent grafts, surgical sealants, On-X® mechanical heart valves and related surgical products, and implantable cardiac and vascular human tissues. Aortic stent grafts include aortic arch stent grafts, abdominal stent grafts, and synthetic vascular grafts. Aortic arch stent grafts include our E-vita Open NEO, E-vita Open Plus, AMDS, NEXUS, NEXUS DUO, and E-vita Thoracic 3G products. Abdominal stent grafts include our E-xtra Design Engineering, E-nside, E-tegra, E-ventus BX, and E-liac products. Surgical sealants include BioGlue® Surgical Adhesive (“BioGlue”) products. In addition to these four major product families, we sell or distribute PhotoFix® bovine surgical patches and CardioGenesis® cardiac laser therapy (prior to our abandonment of the business as of June 30, 2023). We began to manufacture and supply PerClot® hemostatic powder during the second quarter of 2023 (as part of the Transitional Manufacturing and Supply Agreement (“TMSA”) of the Baxter Transaction, described below).

We reported quarterly revenues of $87.9 million for the three months ended September 30, 2023, a 14% increase from the three months ended September 30, 2022. The increase in revenues for the three months ended September 30, 2023 was due to an increase in revenues from aortic stent grafts, preservation services, On-X products, and other products, partially offset by a decrease in revenues from surgical sealants. Constant currency revenues, as defined below, increased 12% for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

See the “Results of Operations” section below for additional analysis of the three and nine months ended September 30, 2023.

Presentation

In addition to the corresponding measures under generally accepted accounting principles (“US GAAP”), management uses non-GAAP measures in reviewing and disclosing our financial results. The foreign exchange neutral revenues (“constant currency revenues”) discussed below are non-GAAP financial measures and are not in accordance with, or an alternative to, measures prepared in accordance with US GAAP. Accordingly, the constant currency information appearing in the following discussion of our results of operations should be read in conjunction with the information provided in “Non-GAAP Measures of Financial Performance” below, which includes a reconciliation of constant currency financial measures to the most directly comparable US GAAP measure.

Effects of COVID-19 and Macroeconomic Uncertainties

The COVID-19 pandemic had wide-ranging and unpredictable impacts on global economic conditions, our operations, and our financial results. The effects of the pandemic may continue to or again adversely impact aspects of our business and the global markets, including our workforce, supply chain, and operations, and the workforce and operations of our customers, suppliers, and business partners.

Although the global healthcare system continues to recover from challenges resulting from the COVID-19 pand