Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Business
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, 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, CardioGenesis® cardiac laser therapy, and PerClot® hemostatic powder (prior to the sale to a subsidiary of Baxter International, Inc. (“Baxter”)).
Basis of Presentation and Principles of Consolidation
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The accompanying consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current year presentation.
Foreign Currencies
Our revenues and expenses transacted in foreign currencies are remeasured as they occur at exchange rates in effect at the time of each transaction. Realized and unrealized gains and losses on foreign currency transactions are recorded as a component of Other expense, net on our Consolidated Statements of Operations and Comprehensive Loss. Realized and unrealized gains and losses were a loss of $3.1 million, a loss of $5.5 million, and a gain of $1.8 million for the years ended December 31, 2022, 2021, and 2020, respectively. Our assets and liabilities denominated in foreign currencies are recognized at the exchange rate in effect at the time of each transaction. At period end, the assets and liabilities are translated at the exchange rate in effect as of the balance sheet date and are recorded as a separate component of Accumulated other comprehensive loss in the shareholders' equity section of our Consolidated Balance Sheets.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates and assumptions are used when accounting for allowance for doubtful accounts, inventory, deferred preservation costs, acquired assets or businesses, intangible assets, deferred income taxes, commitments and contingencies (including product and tissue processing liability claims, claims incurred but not reported, and amounts recoverable from insurance companies), stock based compensation, certain accrued liabilities (including accrued procurement fees, income taxes, and financial instruments including contingent consideration), and other items as appropriate.
Revenue Recognition
Contracts with Customers
We routinely enter into contracts with customers that include general commercial terms and conditions, notification requirements for price increases, shipping terms and, in most cases, prices for the products and services that we offer. These agreements, however, do not obligate us to provide goods or services to the customer, and there is no consideration promised to us at the onset of these arrangements. For customers without separate agreements, we have a standard list price established by geography and by currency for all products and services, and our invoices contain standard terms and conditions that are applicable to those customers where a separate agreement is not controlling. Our performance obligations are established when a customer submits a purchase order notification (in writing, electronically or verbally) for goods and services, and we accept the order. We identify performance obligations as the delivery of the requested product or service in appropriate quantities and to the location specified in the customer’s contract and/or purchase order. We generally recognize revenue upon the satisfaction of these criteria when control of the product or service has been transferred to the customer at which time we have an unconditional right to receive payment. Our prices are fixed and are not affected by contingent events that could impact the transaction price. We do not offer price concessions and do not accept payment that is less than the price stated when we accept the purchase order, except in rare credit related circumstances. We do not have any material performance obligations where we are acting as an agent for another entity.
Revenues for products, including: aortic stent grafts, surgical sealants, On-X products, and other medical devices, are typically recognized at the time the product is shipped, at which time the title passes to the customer, and there are no further performance obligations. Revenues from consignment are recognized when the medical device is implanted. We recognize revenues for preservation services when tissue is shipped to the customer.
Warranty
Our general product warranties do not extend beyond an assurance that the products or services delivered will be consistent with stated specifications and do not include separate performance obligations. Warranties included with our CardioGenesis cardiac laser products provide for annual maintenance services, which are priced separately and are recognized as revenues at the stand-alone price over the service period, whether invoiced separately or recognized based on our allocation of the transaction price.
Significant Judgments in the Application of the Guidance in ASC 606
There are no significant judgments associated with the satisfaction of our performance obligations. We generally satisfy performance obligations upon shipment of the product or service obligation to the customer. This is consistent with the time in which the customer obtains control of the product or service. Performance obligations are also generally settled quickly after the purchase order acceptance, other than as identified for E-xtra Design Engineering products, therefore, the value of unsatisfied performance obligations at the end of any reporting period is immaterial.
For performance obligations provided through our E-xtra Design Engineering product line, we determine the value of our enforceable right to payment based on the time required and costs incurred for design services and manufacture of the in-process device in relation to the total inputs required to complete the device.
We consider variable consideration in establishing the transaction price. Forms of variable consideration potentially applicable to our arrangements include sales returns, rebates, volume-based bonuses, and prompt pay discounts. We use historical information along with an analysis of the expected value to properly calculate and to consider the need to constrain estimates of variable consideration. Such amounts are included as a reduction to revenue from the sale of products and services in the periods in which the related revenue is recognized and adjusted in future periods as necessary.
Commissions and Contract Costs
Sales commissions are earned upon completion of each performance obligation, and therefore, are expensed when incurred. These costs are included in General, administrative, and marketing expenses in the Consolidated Statements of Operations and Comprehensive Loss. We generally do not incur incremental charges associated with securing agreements with customers which would require capitalization and recovery over the life of the agreement.
Practical Expedients
Our payment terms for sales direct to customers are substantially less than the one-year collection period that falls within the practical expedient in the determination of whether a significant financing component exists.
Shipping and Handling Charges
Fees charged to customers for shipping and handling of products and tissues are included in product and preservation service revenues. The costs for shipping and handling of products and tissues are included as a component of cost of products and cost of preservation services.
Taxes Collected from Customers
Taxes collected on the value of transaction revenue are excluded from product and service revenues and cost of sales and are accrued in current liabilities until remitted to governmental authorities.
Advertising Costs
The costs to develop, produce, and communicate our advertising are expensed as incurred and are classified as General, administrative, and marketing expenses. The total amount of advertising expense included in our Consolidated Statements of Operations and Comprehensive Loss was $1.6 million, $1.0 million, and $1.1 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Stock-Based Compensation
We have stock option and stock incentive plans for employees and non-employee directors that provide for grants of restricted stock awards (“RSA”s), restricted stock units (“RSU”s), performance stock units (“PSU”s), and options to purchase shares of our common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. We also maintain a shareholder approved Employee Stock Purchase Plan (the “ESPP”) for the benefit of our employees. The ESPP allows eligible employees the right to purchase common stock on a regular basis at the lower of 85% of the market price at the beginning or end of each offering period. The RSAs, RSUs, PSUs, and stock options granted by us typically vest over a one to three-year period. The stock options granted by us typically expire within seven years of the grant date.
We value our RSAs, RSUs, and PSUs based on the stock price on the date of grant. We expense the related compensation cost of RSAs and RSUs using the straight-line method over the vesting period. We expense the related compensation cost of PSUs based on the number of shares expected to be issued, if achievement of the performance component is probable, using a straight-line method over each vesting tranche of the award which results in accelerated recognition of expenses. The amount of compensation costs expensed related to PSUs is adjusted as needed if we deem that achievement of the performance component is no longer probable or if our expectation of the number of shares to be issued changes. We use a Black-Scholes model to value our stock option grants and expense the related compensation cost using the straight-line method over the vesting period. The fair value of our ESPP options is also determined using a Black-Scholes model and is expensed over the vesting period.
The fair value of stock options and ESPP options is determined on the grant date using assumptions for the expected term, volatility, dividend yield, and the risk-free interest rate. The expected term is primarily based on the contractual term of the option and our data related to historic exercise and post-vesting forfeiture patterns, which is adjusted based on our expectations of future results. Our anticipated volatility level is primarily based on the historic volatility of our common stock, adjusted to remove the effects of certain periods of unusual volatility not expected to recur, and adjusted based on our expectations of future volatility, for the life of the option or option group. Our model includes a zero-dividend yield assumption and we do not anticipate paying dividends in the future. The risk-free interest rate is based on recent US Treasury note auction results with a similar life to that of the option. Our model does not include a discount for post-vesting restrictions, as we have not issued awards with such restrictions.
The period expense for our stock compensation is determined based on the valuations discussed above and forfeitures are accounted for in the period awards are forfeited.
Income Per Common Share
Income per common share is computed using the two-class method, which requires us to include unvested RSAs that contain non-forfeitable rights to dividends (whether paid or unpaid) as participating securities in the income per common share calculation.
Under the two-class method, net income is allocated to the weighted-average number of common shares outstanding during the period and the weighted-average participating securities outstanding during the period. The portion of net income that is allocated to the participating securities is excluded from basic and dilutive net income per common share. Diluted net income per share is computed using the weighted-average number of common shares outstanding plus the dilutive effects of outstanding stock options and awards and other dilutive instruments as appropriate.
Financial Instruments
Our financial instruments include cash equivalents, accounts receivable, notes receivable, accounts payable, and debt obligations. The financial assets’ and liabilities’, such as receivables and accounts payable, carrying values approximate their fair value due to their short-term duration, and the carrying value of their debt obligations approximate fair value as they contain variable interest rates that approximate market values. Other financial instruments are recorded as discussed in the sections below.
Fair Value Measurements
We record certain financial instruments, including cash equivalents, at fair value on a recurring basis. We may make an irrevocable election to measure other financial instruments at fair value on an instrument-by-instrument basis. Fair value financial instruments are recorded in accordance with the fair value measurement framework.
We also measure certain assets and liabilities at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as certain financial assets, long-lived assets, and indefinite lived intangible assets for impairment, allocating value to assets in an acquired asset group, applying accounting for business combinations, and the initial recognition of liabilities such as contingent consideration. We use the fair value measurement framework to value these assets and liabilities and report these fair values in the periods in which they are recorded or written down.
The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:
•Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;
•Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and
•Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available.
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to our unobservable estimates and assumptions. Our assumptions could vary depending on the asset or liability value and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also engage external advisors to assist in determining fair value, as appropriate.
Although we believe that the recorded fair values of our financial instruments are appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments at the time of acquisition. The carrying value of cash equivalents approximates fair value. We maintain depository accounts with certain financial institutions. Although these depository accounts may exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions and determined the risk of material financial loss due to the exposure of such credit risk to be minimal.
Cash Flow Supplemental Disclosures
Supplemental disclosures of cash flow information for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Cash paid during the year for: | | | | | |
| Interest | $ | 14,243 | | | $ | 14,407 | | | $ | 13,049 | |
| Income taxes | 9,244 | | | 5,483 | | | 4,122 | |
| | | | | |
| Non-cash investing and financing activities: | | | | | |
| Operating lease right-of-use assets | $ | 1,803 | | | $ | 31,726 | | | $ | 1,864 | |
| Issuance of common stock for Ascyrus Acquisition | — | | | — | | | 20,000 | |
| Issuance of common stock for contingent consideration | — | | | 10,000 | | | — | |
Accounts Receivable and Allowance for Doubtful Accounts
Our accounts receivable are primarily from hospitals and distributors that either use or distribute our products and tissues. We assess the likelihood of collection based on a number of factors, including past transaction history and the credit worthiness of the customer, as well as the potential increased risks related to international customers and large distributors. We determine the allowance for doubtful accounts based upon specific reserves for known collection issues, as well as a non-specific reserve based upon aging buckets. We charge off uncollectible amounts against the reserve in the period in which we determine they are uncollectible. Our accounts receivable balances are reported net of allowance for doubtful accounts of $1.3 million and $1.1 million as of December 31, 2022 and 2021, respectively.
Inventories, net
Inventories, net are comprised of finished goods for our product lines including: aortic stent grafts; surgical sealants; On-X products; CardioGenesis laser consoles, handpieces, and accessories; PhotoFix; other medical devices; work-in-process; and raw materials. Inventories for finished goods are valued at the lower of cost or net realizable value on a first-in, first-out basis and raw materials are valued on a moving average cost basis. Typically, upon shipment or upon implant of a medical device on consignment, revenue is recognized, and the related inventory costs are expensed as cost of products. Cost of products also includes, as applicable, lower of cost or net realizable value of write-downs and impairments for products not deemed to be recoverable and, as incurred, idle facility expense, excessive spoilage, extra freight, and re-handling costs.
Inventory costs for manufactured products consist primarily of direct labor and materials (including salary and fringe benefits, raw materials, and supplies) and indirect costs (including allocations of costs from departments that support manufacturing activities and facility allocations). The allocation of fixed production overhead costs is based on actual production levels, to the extent that they are within the range of the facility’s normal capacity. Inventory costs for products purchased for resale or manufactured under contract consist primarily of the purchase cost, freight-in charges, and indirect costs as appropriate.
We regularly evaluate our inventory to determine if the costs are appropriately recorded at the lower of cost or net realizable value. We also evaluate our inventory for costs not deemed to be recoverable, including inventory not expected to ship prior to its expiration. Lower of cost or net realizable value write-downs are recorded if the book value exceeds the estimated net realizable value of the inventory, based on recent sales prices at the time of the evaluation. Impairment write-downs are recorded based on the book value of inventory deemed to be impaired. Actual results may differ from these estimates. Write-downs of inventory are expensed as cost of products, and these write-downs are permanent impairments that create a new cost basis, which cannot be restored to its previous levels if our estimates change.
We recorded write-downs to our inventory totaling $4.0 million, $4.8 million, and $1.7 million for the years ended December 31, 2022, 2021, and 2020, respectively. The 2022 and 2021 write-downs were primarily related to aortic stent grafts inventory and On-X ascending aortic prosthesis (“AAP”) inventory. The 2020 write-down was primarily related to aortic stent grafts inventory, On-X AAP inventory, and BioGlue inventory not expected to ship prior to the expiration date.
Deferred Preservation Costs, net
Deferred preservation costs include costs of cardiac and vascular tissues available for shipment, tissues currently in active processing, and tissues held in quarantine pending release to implantable status. By federal law, human tissues cannot be bought or sold; therefore, the tissues we preserve are not held as inventory. The costs we incur to procure and process cardiac and vascular tissues are instead accumulated and deferred. Deferred preservation costs are stated at the lower of cost or net realizable value on a first-in, first-out basis and are deferred until revenue is recognized. Upon shipment of tissue to an implanting facility, revenue is recognized, and the related deferred preservation costs are expensed as cost of preservation services. Cost of preservation services also includes, as applicable, lower of cost or net realizable value write-downs and impairments for tissues not deemed to be recoverable, and includes, as incurred, idle facility expense, excessive spoilage, extra freight, and re-handling costs.
The calculation of deferred preservation costs involves judgment and complexity and uses the same principles as inventory costing. Donated human tissue is procured from deceased human donors by organ and tissue procurement organizations (“OPOs”) and tissue banks that provide the tissue to us for processing, preservation, and distribution. Deferred preservation costs consist primarily of the procurement fees charged by the OPOs and tissue banks, direct labor and materials (including salary and fringe benefits, laboratory supplies and expenses, and freight-in charges), and indirect costs (including allocations of costs from support departments and facility allocations). Fixed production overhead costs are allocated based on actual tissue processing levels, to the extent that they are within the range of the facility’s normal capacity.
These costs are then allocated among the tissues processed during the period based on cost drivers, such as the number of donors or number of tissues processed. We apply a yield estimate to all tissues in process and in quarantine to estimate the portion of tissues that will ultimately become implantable. We estimate quarantine and in process yields based on our experience and reevaluate these estimates periodically. Actual yields could differ significantly from our estimates, which could result in a change in tissues available for shipment and could increase or decrease the balance of deferred preservation costs. These changes could result in additional cost of preservation services expense or could increase per tissue preservation costs, which would impact gross margins on tissue preservation services in future periods.
We regularly evaluate our deferred preservation costs to determine if the costs are appropriately recorded at the lower of cost or net realizable value. We also evaluate our deferred preservation costs for costs not deemed to be recoverable, including tissues not expected to ship prior to the expiration date of their packaging. Lower of cost or net realizable value write-downs are recorded if the tissue processing costs incurred exceed the estimated market value of the tissue services, based on recent average service fees at the time of the evaluation. Impairment write-downs are recorded based on the book value of tissues deemed to be impaired. Actual results may differ from these estimates. Write-downs of deferred preservation costs are expensed as cost of preservation services, and these write-downs are permanent impairments that create a new cost basis, which cannot be restored to its previous levels if our estimates change.
We recorded write-downs to our deferred preservation costs totaling $369,000, $575,000, and $1.7 million for the years ended December 31, 2022, 2021, and 2020, respectively, primarily due to tissues not expected to ship prior to the expiration date of the packaging. In addition, write-offs during the year ended December 31, 2020 included $826,000 of non-conforming tissues resulting from contaminated saline solution.
Property and Equipment, net
Property and equipment, net is stated at cost less depreciation. Depreciation expense is recorded over the estimated useful lives of the assets, generally three to ten years, on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the remaining lease term at the time the assets are capitalized or the estimated useful lives of the assets, whichever is shorter.
Property and equipment, net balance for the years ended December 31 was as follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Equipment and software | $ | 72,480 | | | $ | 73,820 | |
| Leasehold improvements | 47,384 | | | 39,175 | |
| Furniture and fixtures | 7,148 | | | 6,668 | |
| Total property and equipment | 127,012 | | | 119,663 | |
| Less accumulated depreciation and amortization | (88,338) | | | (82,142) | |
| Property and equipment, net | $ | 38,674 | | | $ | 37,521 | |
Depreciation expense for the years ended December 31 was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Depreciation expense | $ | 7,132 | | | $ | 7,157 | | | $ | 6,948 | |
Goodwill and Other Intangible Assets
Our intangible assets consist of goodwill, acquired technology, customer lists and relationships, patents, trademarks, and other intangible assets, as discussed in Note 7. Our goodwill is attributable to a segment or segments of our business, as appropriate, as the related acquired business that generated the goodwill is integrated into our operations. Upon divestiture of a component of our business, the goodwill related to the segment is allocated to the divested business using the relative fair value allocation method.
We evaluate our goodwill and other indefinite lived 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 October 31, 2022 and 2021, our indefinite lived intangible assets consisted of goodwill, in-process research and development, acquired procurement contracts and agreements, and trademarks. We performed a valuation analysis of our indefinite lived intangible assets as of October 31, 2022 and determined that the fair value of the assets and the fair value of the segment more likely than not exceeded their associated carrying values and were, therefore, not impaired.
Our definite lived intangible assets consist of acquired technologies, customer lists and relationships, distribution and manufacturing rights and know-how, patents, and other intangible assets. We amortize our definite lived intangible assets over their expected useful lives using the straight-line method, which we believe approximates the period of economic benefits of the related assets. Our indefinite lived intangible assets do not amortize but are instead subject to periodic impairment testing as discussed in “Impairments of Long-Lived Assets and Indefinite Lived Intangible Assets” below.
Impairments of Long and Indefinite Lived Intangible Assets
Long-Lived Assets
We assess the potential impairment of our: (i) net property and equipment, (ii) amortizing intangible long-lived assets to be held and used and (iii) operating lease right-of-use assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include, but are not limited to, the following:
•Significant underperformance relative to expected historical or projected future operating results;
•Significant negative industry or economic trends;
•Significant decline in our stock price for a sustained period; or
•Significant decline in our market capitalization relative to net book value.
If we determine that an impairment review is necessary, we will evaluate the assets or asset groups by comparing their carrying values to the sum of the undiscounted future cash flows expected to result from their use and eventual disposition. If the carrying values exceed the future cash flows, then the asset or asset group is considered impaired, and we will write down the value of the asset or asset group to its concluded fair value. For the years ended December 31, 2022, 2021, and 2020 we did not record an impairment of our long-lived assets as there were no indicators of impairment or the sum of the undiscounted future cash flows exceeded the carrying value of the long-lived asset (asset group).
Accrued Procurement Fees
Donated tissue is procured from deceased human donors by OPOs and tissue banks that provide the tissue to us for processing, preservation, and distribution. We reimburse the OPOs and tissue banks for their costs to recover the tissue and include these costs as part of deferred preservation costs, as discussed above. We accrue estimated procurement fees due to the OPOs and tissue banks at the time tissues are received based on contractual agreements between us and the OPOs and tissue banks.
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, as discussed in Note 9. Certain of our leases contain escalation clauses, rent concessions, and renewal options for additional periods.
We exercise judgment in the determination of whether a financial arrangement includes a lease and in determining the appropriate discount rates to be applied to leases based on our general collateralized credit standing and the geographical market considerations impacting lease rates across all locations. When available, we use the implicit discount rate in the lease contract to discount lease payments to present value. If an implicit discount rate is not available in the lease contract, we use our incremental borrowing rate. We elected the package of practical expedients that allow us to omit leases with initial terms of 12 months or less from our balance sheet, which are expensed on a straight-line basis over the life of the lease. We have elected not to separate lease and non-lease components for future leases.
Our leases do not include terms or conditions which would result in variable lease payments other than for small office equipment leases with an additional charge for volume of usage. These incremental payments are excluded from our calculation of lease liability and the related right-of-use asset. We do not include option terms in the determination of lease liabilities and the related right-of-use assets unless we determine at lease commencement that the exercise of the option is reasonably certain. Our leases do not contain residual value guarantee provisions or other restrictions or financial covenant provisions.
Debt Issuance Costs
Debt issuance costs related to our term loan and line of credit are capitalized and reported net of the current and long-term debt or as a prepaid asset when there are no outstanding borrowings. If there are unamortized debt issuance costs related to our line of credit but only borrowings on the term loan, these debt issuance costs will be combined with the debt issuance costs related to the term loan and reported net of the current and long-term debt for the term loan. We amortize debt issuance costs to interest expense on our term loan using the effective interest method over the life of the debt agreement. We amortize debt issuance costs to interest expense on our line of credit on a straight-line basis over the life of the debt agreement. Debt issuance costs related to our convertible debt agreement are amortized using the effective interest rate method as a direct deduction from the recorded debt issuance costs allocated to debt.
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. Thus, a claims-made policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. Any punitive damage components of claims are uninsured.
We engage external advisors to assist us in estimating our liability and any related amount recoverable under our insurance policies as of each balance sheet date. We use a frequency-severity approach to estimate our unreported product and tissue processing liability claims, whereby projected losses are calculated by multiplying the estimated number of claims by the estimated average cost per claim. The estimated claims are determined based on the reported claim development method and the Bornhuetter-Ferguson method using a blend of our historical claim experience and industry data. The estimated cost per claim is calculated using a lognormal claims model blending our historical average cost per claim with industry claims data. We use a number of assumptions in order to estimate the unreported loss liability including: the future claim reporting time lag, the frequency of reported claims, the average cost per claim, and the maximum liability per claim. We believe that the assumptions we use provide a reasonable basis for our calculation. However, the accuracy of the estimates is limited by various factors, including, but not limited to, our specific conditions, uncertainties surrounding the assumptions used, and the scarcity of industry data directly relevant to our business activities. Due to these factors, actual results may differ significantly from our assumptions and from the amounts accrued.
We accrue our estimate of unreported product and tissue processing liability claims as a component of Other long-term liabilities and record the related recoverable insurance amounts as a component of Other long-term assets. The amounts recorded represent our estimate of the probable losses and anticipated recoveries for unreported claims related to products sold and services performed prior to the balance sheet date.
Legal Contingencies
We accrue losses from a legal contingency when the loss is both probable and reasonably estimable. The accuracy of our estimates of losses for legal contingencies is limited by uncertainties surrounding litigation. Therefore, actual results may differ significantly from the amounts accrued, if any. We accrue for legal contingencies as a component of accrued expenses and/or other long-term liabilities on our Consolidated Balance Sheets. Gains from legal contingencies are recorded when the contingency is resolved.
Uncertain Tax Positions
We periodically assess our uncertain tax positions and recognize tax benefits if they are “more-likely-than-not” to be upheld upon review by the appropriate taxing authority. We measure the tax benefit by determining the maximum amount that has a “greater than 50 percent likelihood” of ultimately being realized. We reverse previously accrued liabilities for uncertain tax positions when audits are concluded, statutes expire, administrative practices dictate that a liability is no longer warranted, or in other circumstances, as deemed necessary. These assessments can be complex, and we often obtain assistance from external advisors to make these assessments. We recognize interest and penalties related to uncertain tax positions in interest expense, net on our Consolidated Statements of Operations and Comprehensive Loss. See Note 8 for further discussion of our liabilities for uncertain tax positions.
Deferred Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. We assess the recoverability of our deferred tax assets and provide a valuation allowance against our deferred tax assets when, as a result of this analysis, we believe it is more likely than not that some portion or all of our deferred tax assets will not be realized.
Assessing the recoverability of deferred tax assets involves judgment and complexity including the consideration of prudent and feasible tax planning. Estimates and judgments used in the determination of the need for a valuation allowance and in calculating the amount of a needed valuation allowance include, but are not limited to, the following:
•The ability to carry back deferred tax asset attributes to a prior tax year;
•Timing of the anticipated reversal of book/tax temporary differences;
•Projected future operating results;
•Anticipated future state tax apportionment;
•Timing and amounts of anticipated future taxable income;
•Evaluation of statutory limits regarding usage of certain tax assets; and
•Evaluation of the statutory periods over which certain tax assets can be utilized.
Significant changes in the factors above, or other factors, could affect our ability to use our deferred tax assets. Such changes could have a material, adverse impact on our profitability, financial position, and cash flows. We will continue to assess the recoverability of our deferred tax assets, as necessary, when we experience changes that could materially affect our prior determination of the recoverability of our deferred tax assets.
Valuation of Acquired Assets or Businesses
As part of our corporate strategy, we are seeking to identify and capitalize upon acquisition opportunities of complementary product lines and companies. We evaluate and account for acquired patents, licenses, distribution rights, and other tangible or intangible assets as the purchase of an asset or asset group, or as a business combination, as appropriate. The determination of whether the purchase of a group of assets should be accounted for as an asset group or as a business combination requires judgment based on the weight of available evidence.
For the purchase of an asset group, we allocate the cost of the asset group, including transaction costs, to the individual assets purchased based on their relative estimated fair values. In-process research and development acquired as part of an asset group is expensed upon acquisition.
We account for business combinations using the acquisition method. Under this method, the allocation of the purchase price is based on the fair value of the tangible and identifiable intangible assets acquired and the liabilities assumed as of the date of the acquisition. The excess of the purchase price over the estimated fair value of the tangible net assets and identifiable intangible assets is recorded as goodwill. The identifiable intangible assets typically consist of developed technology, customer relationships, and in-process research and development costs. Transaction costs related to business combinations are expensed as incurred. In-process research and development acquired as part of a business combination is accounted for as an indefinite-lived intangible asset until the related research and development project gains regulatory approval or is discontinued.
We typically engage external advisors to assist us in determining the fair value of acquired asset groups or business combinations, using valuation methodologies such as: the excess earnings, the discounted cash flow, Monte Carlo, or the relief from royalty methods. The determination of fair value in accordance with the fair value measurement framework requires significant judgments and estimates, including, but not limited to: timing of product life cycles, estimates of future revenues, estimates of profitability for new or acquired products, cost estimates for new or changed manufacturing processes, estimates of the cost or timing of obtaining regulatory approvals, estimates of the success of competitive products, and discount rates and represent Level 3 measurements. We, in consultation with our advisors, make these estimates based on our prior experiences and industry knowledge. We believe that our estimates are reasonable, but actual results could differ significantly from our estimates. A significant change in our estimates used to value acquired asset groups or business combinations could result in future write-downs of tangible or intangible assets acquired by us and, therefore, could materially impact our financial position and profitability. If the value of the liabilities assumed by us, including contingent liabilities, is determined to be significantly different from the amounts previously recorded in purchase accounting, we may need to record additional expenses or write-downs in future periods, which could materially impact our financial position and profitability.
New Accounting Pronouncements
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.
In August 2020 the FASB issued 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 and recorded $20.4 million to increase long-term debt, $3.2 million to reduce retained earnings, and $16.4 million to reduce additional paid-in capital included on the Consolidated Balance Sheets. See Note 10 for further discussion of convertible debt.
In December 2019 the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify accounting principles generally accepted in the United States of America (“GAAP”) for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for public entities in fiscal years beginning after December 15, 2020 including interim periods within those fiscal years. We adopted ASU 2019-12 on January 1, 2021 and the adoption did not have a material impact on our financial condition or results of operations.
As of January 1, 2020 we adopted the Accounting Standards Codification (“ASC”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The purpose of Update No. 2016-13 is to replace the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. Update No. 2016-13 is effective for annual periods beginning after December 15, 2019. The adoption of ASU 2016-13 did not result in a material effect on the Company’s financial condition, results of operations, or cash flows.
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 to 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 would pay an aggregate of up to $60.8 million in consideration (we would receive up to $45.8 million and SMI would 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”) 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 if PMA approval is delayed beyond December 31, 2022; 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 the transfer of our PerClot manufacturing equipment. Under the terms of the Baxter Transaction, we will continue to provide to Baxter certain transition, 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 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 Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2021. The PerClot product line was included as part of our Medical Devices segment.
3. Acquisition of Ascyrus
Overview
On September 2, 2020 we entered into a Securities Purchase Agreement (the “Ascyrus 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.
Under the terms of the Ascyrus Agreement, we will pay an aggregate of up to $200.0 million in consideration, consisting of: (i) a cash payment of approximately $60.0 million and the issuance of $20.0 million in shares of Artivion common stock, in each case, that were delivered at the closing of the acquisition, (ii) a cash payment of $10.0 million and the issuance of $10.0 million in shares of Artivion common stock upon FDA approval of the Investigational Device Exemption (“IDE”) application for the AMDS in 2021, (iii) if the FDA approves PMA application submitted for the AMDS, a cash payment of $25.0 million, (iv) if regulatory approval of the AMDS is obtained in Japan on or before June 30, 2027, a cash payment of $10.0 million, (v) if regulatory approval of the AMDS is obtained in China on or before June 30, 2027, a cash payment of $10.0 million and (vi) a potential additional consideration cash payment capped at $55.0 million (or up to $65.0 million to $75.0 million if the Japanese or Chinese approvals are not secured on or before June 30, 2027 and those approval milestone payments are added to the potential additional consideration cash payment cap) calculated as two times the incremental worldwide sales of the AMDS (or any other acquired technology or derivatives of such acquired technology) outside of the European Union during the three-year period following the date the FDA approves a PMA application submitted for the AMDS.
Accounting for the Transaction
As part of the acquisition, we may be required to pay additional consideration in cash and equity up to $120.0 million to the former shareholders of Ascyrus upon the achievement of certain milestones and the sales-based additional earnout described above. On September 2, 2020 the fair value of the total potential purchase consideration of $200.0 million included the total purchase consideration, as well as the contingent consideration liability discussed below. Our allocation of the purchase consideration was allocated to Ascyrus’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of September 2, 2020.
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 presented in Note 5. We used a discount rate of approximately 12% and estimated future achievement of milestone dates between 2025 and 2026 to calculate the fair value of contingent consideration as of December 31, 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 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 $9.0 million and $9.5 million in fair value reductions for the years ended December 31, 2022 and 2021, respectively, in General, administrative, and marketing expenses on the Consolidated Statements of Operations and Comprehensive Loss, as a result of this assessment.
In December 2021 the FDA approved our IDE application for AMDS. Upon the approval, we funded a cash payment of $10.0 million and issued $10.0 million in shares of Artivion common stock pursuant to the Ascyrus Agreement. The contingent consideration liability of $40.4 million and $49.4 million is included in Other long-term liabilities as of December 31, 2022 and 2021, respectively, in the Consolidated Balance Sheets.
4. Agreements with Endospan
Exclusive Distribution Agreement and Securities Purchase Option Agreement
On September 11, 2019 Artivion’s wholly owned subsidiary, JOTEC, entered into an exclusive distribution agreement (“Endospan 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 Agreement 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 or 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.
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. The third tranche is required to be funded upon certification of enrollment of at least 50% of the required number of patients in the primary arm of the FDA approved clinical trial for NEXUS, in each case subject to Endospan’s continued compliance with the Endospan Loan and certain other conditions. If a termination fee becomes payable by Endospan under the Endospan Distribution Agreement, it will be added to the amount payable to Artivion under the Endospan Loan.
Variable Interest Entity
We consolidate the results of a variable interest entity ("VIE") when it is determined that we are the primary beneficiary. Based on our initial evaluation of Endospan and the related agreements with Endospan, we determined that Endospan is a VIE. Although the arrangement with Endospan resulted in our holding a variable interest, it did not empower us to direct those activities of Endospan that most significantly impact the VIE economic performance. Therefore, we are not the primary beneficiary, and we have not consolidated Endospan into our financial results. Our payments to Endospan in September 2019 totaled $15.0 million which included a $9.0 million distribution fee, a $1.0 million securities purchase option, and $5.0 million for the first tranche of the Endospan Loan. An additional $5.0 million was funded as part of the second tranche payment described above. We evaluated Endospan for VIE classification as of December 31, 2022 and determined that Endospan meets the criteria of a non-consolidating VIE. Our payments to date, including any loans, guarantees, and other subordinated financial support related to this VIE, totaled $20.0 million as of December 31, 2022, representing our maximum exposure to loss, and were not individually significant to our consolidated financial statements.
Valuation
The agreements with Endospan were entered into concurrently and had certain terms that are interrelated. In our evaluation of the initial relative fair value of each of the Endospan agreements to determine the amount to record, we utilized discounted cash flows to estimate the fair market value for the Endospan Loan and for the Endospan Distribution Agreement. We estimated the fair value of the Endospan Option utilizing the Monte Carlo simulation. Inputs in our valuation of the Endospan agreements included cash payments and anticipated payments based on the executed agreements with Endospan, projected discounted cash flows in connection with the Endospan transaction, our expected internal rate of return and discount rates, and our assessed probability and timing of receipt of certification of certain approvals and milestones in obtaining FDA approval. Based on the initial fair value of the Endospan Loan and the relative fair values of the Endospan Distribution Agreement and Endospan Option Agreement, we recorded the Endospan Loan value of $358,000 in Other long-term assets in the Consolidated Balance Sheets as of December 31, 2019. The value of the Endospan Distribution Agreement of $3.5 million and $5.5 million was included in Other Intangibles, net in the Consolidated Balance Sheets as of December 31, 2022, and 2021, respectively.
In the fourth quarter of December 31, 2021 we fully impaired the value of the Endospan Option primarily driven by a decrease in forecasted operating results. We recorded $4.9 million impairment expense included in General, administrative, and marketing expense on the Consolidated Statements of Operations and Comprehensive Loss as of December 31, 2021.
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 and determined that the loan fair value decreased and had no value as of December 31, 2022 and 2021. As a result of the fair value adjustment, we recorded an expense of $409,000 in Other Expense on the Consolidated Statements of Operations and Comprehensive Loss as of December 31, 2021.
5. Financial Instruments
A summary of financial instruments measured at fair value was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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. 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 years ended December 31, 2022, 2021, and 2020.
The fair value of the contingent consideration component of the Ascyrus acquisition was updated using Level 3 inputs. See Note 3 for further discussion of the Ascyrus acquisition. 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 | 9,000 | |
| Balance as of December 31, 2022 | $ | (40,400) | |
6. Inventories and Deferred Preservation Costs, net
Inventories, net at December 31, 2022 and 2021 were comprised of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Raw materials and supplies | $ | 36,715 | | | $ | 35,780 | |
| Work-in-process | 10,476 | | | 9,712 | |
| Finished goods | 27,287 | | | 31,479 | |
| Total inventories, net | $ | 74,478 | | | $ | 76,971 | |
Deferred preservation costs, net at December 31, 2022 and 2021 were comprised of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Cardiac tissues | $ | 21,799 | | | $ | 20,591 | |
| Vascular tissues | 24,572 | | | 22,272 |
| Total deferred preservation costs, net | $ | 46,371 | | | $ | 42,863 | |
To facilitate product usage, we maintain consignment inventory of our On-X heart valves at domestic hospital locations and On-X heart valves, aortic stent grafts, and AMDS products 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 December 31, 2022 we had $12.7 million in consignment inventory, with approximately 41% in domestic locations and 59% in foreign locations. As of December 31, 2021 we had $12.9 million in consignment inventory, with approximately 43% in domestic locations and 57% in foreign locations.
Inventory and deferred preservation costs obsolescence reserves were $2.2 million and $3.2 million as of December 31, 2022 and 2021, respectively.
7. Goodwill and Other Intangible Assets
Indefinite Lived Intangible Assets
As of December 31, 2022 and 2021 the carrying values of our indefinite lived intangible assets were as follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Goodwill | $ | 243,631 | | | $ | 250,000 | |
| In-process R&D | 2,080 | | | 2,208 | |
| Procurement contracts and agreements | 2,013 | | | 2,013 | |
| Trademarks | — | | | 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 evaluate our goodwill and indefinite lived 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. We did not record any impairment of indefinite lived intangible assets, including goodwill, during the twelve months ended December 31, 2022, 2021, and 2020. In-process research and development, procurement contracts and agreements are included in Other intangibles, net on the Consolidated Balance Sheets as of December 31, 2022 and 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.
As of December 31, 2022 and 2021 the value of our goodwill, all of which was related to our Medical Devices segment, was as follows (in thousands):
| | | | | | | | | | | |
| Medical Devices Segment |
| 2022 | | 2021 |
| Balance as of January 1, | $ | 250,000 | | | $ | 260,061 | |
| Ascyrus acquisition | — | | | (942) | |
| Foreign currency translation | (6,369) | | | (9,119) | |
| Balance as of December 31, | $ | 243,631 | | | $ | 250,000 | |
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 December 31, 2022 and 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
Amortization Expense
Amortization expense recorded in General, administrative, and marketing expenses on our Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31 was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Amortization expense | $ | 15,310 | | | $ | 16,820 | | | $ | 13,764 | |
As of December 31, 2022 scheduled amortization of intangible assets for the next five years is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Total |
| Amortization expense | $ | 14,935 | | | $ | 14,577 | | | $ | 12,680 | | | $ | 12,458 | | | $ | 12,360 | | | $ | 67,010 | |
8. Income Taxes
Income Tax Expense
Loss before income taxes consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Domestic | $ | (13,798) | | | $ | (10,263) | | | $ | (11,443) | |
| Foreign | (1,186) | | | (4,564) | | | (5,731) | |
| Loss before income taxes | $ | (14,984) | | | $ | (14,827) | | | $ | (17,174) | |
Income tax expense (benefit) consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | 1,606 | | | $ | 1,896 | | | $ | (2,460) | |
| State | 367 | | | 551 | | | 445 | |
| Foreign | 3,120 | | | 3,391 | | | 707 | |
| 5,093 | | | 5,838 | | | (1,308) | |
| Deferred: | | | | | |
| Federal | $ | 236 | | | $ | (2,801) | | | $ | 1,721 | |
| State | 234 | | | (307) | | | 384 | |
| Foreign | (1,355) | | | (2,723) | | | (1,289) | |
| (885) | | | (5,831) | | | 816 | |
| Income tax expense (benefit) | $ | 4,208 | | | $ | 7 | | | $ | (492) | |
Our income tax expense (benefit) in 2022, 2021, and 2020 included our federal, state, and foreign tax obligations. Our effective income tax rate was a tax expense of 28% for the year ended December 31, 2022. Our effective income tax rate was break-even for the year ended December 31, 2021. Our effective income tax rate was a tax benefit of 3% for the year ended December 31, 2020.
Our income tax rate for the year ended December 31, 2022 was primarily affected by an increase in the valuation allowance on current year items, nondeductible executive compensation expenses, and uncertain tax position expenses, partially offset by the research and development tax credit. Our income tax rate for the year ended December 31, 2021 was primarily affected by an increase in the valuation allowance on current year items, foreign expense items, nondeductible executive compensation expenses, and the recording of a tax reserve on prior year items, partially offset by the reduction of a valuation allowance on prior year items, the research and development tax credit, and releases of uncertain tax position liabilities. Our income tax rate for the year ended December 31, 2020 was primarily affected by changes in our uncertain tax position liabilities, research and development tax credits, and state income taxes, net of federal benefits, partially offset by an increase in the valuation allowance on current year items.
The income tax benefit amounts differ from the amounts computed by applying the US federal statutory income tax rate of 21% for the years ended December 31, 2022, 2021, and 2020 to pretax income as a result of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Tax benefit at statutory rate | $ | (3,147) | | | $ | (3,114) | | | $ | (3,606) | |
| | | | | |
| Increase (reduction) in income taxes resulting from: | | | | | |
| Valuation allowance change | 4,779 | | | 1,566 | | | 3,952 | |
| Nondeductible executive compensation | 878 | | | 1,075 | | | 580 | |
| Net change in uncertain tax positions | 527 | | | 762 | | | (1,115) | |
| State income taxes, net of federal benefit | 484 | | | 73 | | | (455) | |
| Equity compensation | 472 | | | (477) | | | (204) | |
| Foreign income taxes | 415 | | | 1,138 | | | 378 | |
| Provision to return adjustments | 336 | | | 63 | | | 531 | |
| Foreign interest disallowance | 151 | | | 307 | | | 298 | |
| Nondeductible entertainment expenses | 117 | | | 65 | | | 94 | |
| Foreign deferred items | (112) | | | 53 | | | (63) | |
| Research and development credit | (961) | | | (959) | | | (457) | |
| Other | 269 | | | (545) | | | (425) | |
| Total income tax expense (benefit) | $ | 4,208 | | | $ | 7 | | | $ | (492) | |
Deferred Taxes
We generate deferred tax assets primarily as a result of finance and operating leases, net operating losses, excess interest carryforward, accrued compensation, stock compensation, and capital leases. Our deferred tax liabilities are primarily comprised of intangible assets acquired in previous years, finance and operating leases, unrealized gains and losses, and capital leases.
The tax effects of temporary differences which give rise to deferred tax assets and liabilities at December 31 were as follows (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Finance and operating leases | $ | 12,581 | | | $ | 13,762 | |
| Loss carryforwards | 9,660 | | | 6,649 | |
| Excess interest carryforward | 5,559 | | | 3,547 | |
| Stock compensation | 2,463 | | | 2,007 | |
| Accrued expenses | 1,734 | | | 2,088 | |
| Deferred compensation | 1,317 | | | 1,535 | |
| Property | 1,310 | | | 1,356 | |
| Inventory and deferred preservation costs write-downs | 764 | | | 397 | |
| Credit carryforwards | 503 | | | 601 | |
| Other | 4,283 | | | 3,770 | |
| Less valuation allowance | (17,942) | | | (13,282) | |
| Total deferred tax assets, net | 22,232 | | | 22,430 | |
| | | |
| 2022 | | 2021 |
| Deferred tax liabilities: | | | |
| Inventory and deferred preservation costs write-downs | — | | | (105) | |
| Prepaid items | (323) | | | (395) | |
| Debt costs | (818) | | | (1,024) | |
| Unrealized gains and losses | (6,624) | | | (4,088) | |
| Finance and operating leases | (12,217) | | | (13,404) | |
| Intangible assets | (24,601) | | | (29,086) | |
| Other | (834) | | | (770) | |
| Total deferred tax liabilities | (45,417) | | | (48,872) | |
| | | |
| Total deferred tax liabilities, net | $ | (23,185) | | | $ | (26,442) | |
As of December 31, 2022 and 2021 we maintained a net deferred tax liability of $23.2 million and $26.4 million, respectively. As of December 31, 2022 and 2021 we maintained valuation allowances against our deferred tax assets of $17.9 million and $13.3 million, respectively, primarily related to net operating loss carryforwards and disallowed excess interest carryforwards.
As of December 31, 2022 we had approximately $1.6 million of federal net operating loss carryforwards related to the acquisitions of Cardiogenesis and Hemosphere that we anticipate partially utilizing before expiration, approximately $2.5 million of state net operating loss carryforwards that will begin to expire in 2023, approximately $5.6 million of foreign net operating loss carryforwards that will begin to expire in 2025, and approximately $483,000 in research and development tax credit carryforwards that will begin to expire in 2030, and approximately $93,000 in credits from other jurisdictions that mostly expire in 2027.
As of December 31, 2022 we had a deferred tax asset of $5.6 million of disallowed interest expense deduction carryforwards as a result of the interest deductibility rule imposed by the “Tax Cuts and Jobs Act” of 2017 (“Tax Act”), and later modified by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). This deferred tax asset can be carried forward indefinitely. This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income, modified to be 50% in 2021 by the CARES Act. For the years ended December 31, 2022 and 2021 our interest deduction was limited to $8.1 million and $11.7 million, respectively.
During the twelve months ended December 31, 2021 we corrected certain immaterial prior year errors primarily related to the release of a valuation allowance, reduction of income taxes payable, and an increase in the tax reserve. On correcting the errors, we recorded an income tax benefit of $2.1 million.
We believe that the realizability of our acquired net operating loss carryforwards will be limited in future periods due to a change in control of our former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis Corporation (“Cardiogenesis”), as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. We believe that our acquisitions of these companies each constituted a change in control as defined in Section 382 and that, prior to our acquisition, Hemosphere had experienced other equity ownership changes that should be considered such a change in control. The deferred tax assets recorded on our Consolidated Balance Sheets exclude amounts that we expect will not be realizable due to changes in control. A portion of the acquired net operating loss carryforwards is related to state income taxes for which we believe it is more likely than not that some will not be realized. Therefore, we recorded a valuation allowance against these state net operating loss carryforwards. In addition, during the year, the realizability of a portion of our net operating loss carryforwards and other deferred tax assets was limited. We recorded a valuation allowance against these deferred tax assets.
Reinvestment of Unremitted Earnings
We intend to reinvest substantially all of the unremitted earnings of our non-US subsidiaries to fund working capital, strategic investments, and debt repayment and postpone their remittance indefinitely. Accordingly, no provision for state and local taxes or foreign withholding taxes was recorded on these unremitted earnings in the accompanying Consolidated Statements of Operations and Comprehensive Loss. The Company is permanently reinvested with respect to the outside basis differences in its significant non-US subsidiaries. As of December 31, 2022 we had a deferred tax liability of zero for the tax effects of this outside basis difference in its Consolidated Statements of Operations and Comprehensive Loss.
Uncertain Tax Positions
A reconciliation of the beginning and ending balances of our uncertain tax position liability, excluding interest and penalties, was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 4,089 | | | $ | 2,574 | | | $ | 3,523 | |
| Increases related to current year tax positions | 847 | | | 1,661 | | | 473 | |
| Increases related to prior year tax positions | 20 | | | 386 | | | 420 | |
| Decreases related to prior year tax positions | (103) | | | (170) | | | (238) | |
| (Decreases) increases for foreign exchange differences | (145) | | | (121) | | | 99 | |
| Decreases due to the lapsing of statutes of limitations | (200) | | | (241) | | | (1,703) | |
| Ending balance | $ | 4,508 | | | $ | 4,089 | | | $ | 2,574 | |
We recorded non-current liabilities of $358,000 and $220,000 related to interest and penalties on uncertain tax positions on our Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively. We included expense of $145,000 for December 31, 2022, and income of $35,000 and $180,000 for December 31, 2021 and 2020, respectively, for interest and penalties related to unrecognized tax benefits in our Consolidated Statements of Operations and Comprehensive Loss.
As of December 31, 2022 our uncertain tax liability of $4.9 million, including interest and penalties, was recorded as a reduction to deferred tax assets of $100,000, and a non-current liability of $4.8 million on our Consolidated Balance Sheets. The amount of uncertain tax liabilities that are expected to affect our tax rate if recognized were $3.6 million, $3.2 million, and $2.6 million for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2021 our total uncertain tax liability, including interest and penalties of $4.3 million, was recorded as a reduction to deferred tax assets of $300,000 and as a non-current liability of $4.0 million on our Consolidated Balance Sheets.
We believe it is reasonably possible that approximately $112,000 of our uncertain tax liability will be recognized in 2023 due to the lapsing of various federal and state and foreign statutes of limitations, of which substantially all would affect the tax rate.
Other
Our tax years 2019 and forward generally remain open to examination by the major taxing jurisdictions to which we are subject. However, certain returns from years prior to 2019, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.
9. 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%.
Information related to leases included in the Consolidated Balance Sheets was as follows (in thousands, except lease term and discount rate):
| | | | | | | | | | | |
| Operating leases: | December 31, 2022 | | December 31, 2021 |
| Operating lease right-of-use assets | $ | 56,061 | | | $ | 58,097 | |
| Accumulated amortization | (14,202) | | | (12,383) | |
| Operating lease right-of-use assets, net | $ | 41,859 | | | $ | 45,714 | |
| | | |
| Current maturities of operating leases | $ | 3,308 | | | $ | 3,149 | |
| Non-current maturities of operating leases | 41,257 | | | 44,869 | |
| Total operating lease liabilities | $ | 44,565 | | | $ | 48,018 | |
| | | |
| Finance leases: | | | |
| Property and equipment, at cost | $ | 6,408 | | | $ | 6,759 | |
| Accumulated amortization | (2,498) | | | (2,105) | |
| Property and equipment, net | $ | 3,910 | | | $ | 4,654 | |
| | | |
| Current maturities of finance leases | $ | 513 | | | $ | 528 | |
| Non-current maturities of finance leases | 3,644 | | | 4,374 | |
| Total finance lease liabilities | $ | 4,157 | | | $ | 4,902 | |
| | | |
| Weighted average remaining lease term (in years): | | | |
| Operating leases | 11.9 | | 12.5 |
| Finance leases | 7.8 | | 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 Consolidated Balance Sheets. A summary of lease expenses for our finance and operating leases included in General, administrative, and marketing expenses on our Consolidated Statements of Operations and Comprehensive Loss was as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Amortization of property and equipment | $ | 518 | | | $ | 596 | |
| Interest expense on finance leases | 89 | | | 110 | |
| Total finance lease expense | 607 | | | 706 | |
Operating lease expensea | 7,432 | | | 7,521 | |
| Sublease income | (306) | | | (399) | |
| Total lease expense | $ | 7,733 | | | $ | 7,828 | |
______________________
aTotal rental expense for operating leases was $7.1 million in 2020.
A summary of our cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | 2022 | | 2021 |
| Operating cash flows for operating leases | $ | 6,927 | | | $ | 6,061 | |
| Financing cash flows for finance leases | 507 | | | 557 | |
| Operating cash flows for finance leases | 90 | | | 105 | |
Future minimum lease payments and sublease rental income are as follows (in thousands):
| | | | | | | | | | | |
| Finance
Leases | | Operating
Leases |
| 2023 | $ | 583 | | | $ | 5,898 | |
| 2024 | 595 | | | 5,629 | |
| 2025 | 574 | | | 5,445 | |
| 2026 | 555 | | | 4,912 | |
| 2027 | 550 | | | 4,794 | |
| Thereafter | 1,637 | | | 36,955 | |
| Total minimum lease payments | $ | 4,494 | | | $ | 63,633 | |
| Less amount representing interest | (337) | | | (19,068) | |
| Present value of net minimum lease payments | 4,157 | | | 44,565 | |
| Less current maturities | (513) | | | (3,308) | |
| Lease obligations, less current maturities | $ | 3,644 | | | $ | 41,257 | |
10. 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 December 1, 2017 we borrowed the entire $225.0 million Term Loan Facility. The proceeds of the Term Loan Facility were used along with cash on hand and shares of Artivion common stock to (i) fund the acquisition of JOTEC and its subsidiaries (the “JOTEC Acquisition”), (ii) pay certain fees and expenses related to the JOTEC Acquisition and the Credit Agreement, and (iii) pay the outstanding balance of our prior credit facility. The Revolving Credit Facility may be used for working capital, capital expenditures, acquisitions permitted under the Credit Agreement, and other general corporate purposes pursuant to the terms of the Credit Agreement.
The loan under the Term Loan Facility is repayable on a quarterly basis according to the amortization provisions set forth in the Credit Agreement. We have the right to repay the loan under the Credit Agreement in whole or in part at any time. Amounts repaid in respect of the loan under the Term Loan Facility may not be reborrowed. Amounts repaid in respect of the loan under the Revolving Credit Facility may be reborrowed. All outstanding principal and interest in respect of (i) the Term Loan Facility must be repaid on or before December 1, 2024 and (ii) the Revolving Credit Facility must be repaid on or before December 1, 2022.
In October 2018 we finalized an amendment to the Credit Agreement to reprice interest rates, resulting in a reduction in the interest rate margins over base rates on the Term Loan Facility. The loan under the Term Loan Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of 2.25%, or LIBOR, plus a margin of 3.25%. Prior to the repricing, the optional floating annual rate was equal to either the base rate plus a margin of 3.00%, or LIBOR, plus a margin of 4.00%. The loan under the Revolving Credit Facility bears interest, at our option, at a floating annual rate equal to either the base rate, plus a margin of between 3.00% and 3.25%, depending on our consolidated leverage ratio, or LIBOR, plus a margin of between 4.00% and 4.25%, depending on our consolidated leverage ratio. While a payment event of default or bankruptcy event of default exists, we are obligated to pay a per annum default rate of interest of 2.00% in excess of the interest rate otherwise payable with respect to the overdue principal amount of any loans outstanding and overdue interest payments and other overdue fees and amounts. We are obligated to pay an unused commitment fee equal to 0.50% of the unutilized portion of the revolving loans. In addition, we are also obligated to pay other customary fees for a credit facility of this size and type.
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. In addition, with respect to the Revolving Credit Facility, when the principal amount of loans outstanding thereunder is in excess of 25% of the Revolving Credit Facility, the Credit Agreement requires us to comply with a specified maximum first lien net leverage ratio.
The Credit Agreement includes certain customary events of default that include, among other things, non-payment of principal, interest, or fees; inaccuracy of representations and warranties; breach of covenants; cross-default to certain material indebtedness; bankruptcy and insolvency; and change of control. Upon the occurrence and during the continuance of an event of default, the lenders may declare all outstanding principal and accrued but unpaid interest under the Credit Agreement immediately due and payable and may exercise the other rights and remedies provided under the Credit Agreement and related loan documents.
On April 29, 2020 we entered into an amendment to our Credit Agreement. As part of the amendment, we obtained a waiver of our maximum first lien net leverage ratio covenant through the end of 2020. In addition, the amendment to our Credit Agreement provides that EBITDA, for covenant testing purposes, in each quarter of 2020 will be deemed equal to a fixed value equal to our bank covenant EBITDA in the fourth quarter of 2019 when our first lien net leverage was 3.4x. As a result of these changes, we are subject to a new minimum liquidity covenant. We are also subject to restrictions on certain payments, including cash dividends. We are required to maintain a minimum liquidity of at least $12.0 million as of the last day of any month in 2020, and as of the last day of any quarter through the third quarter of 2021 when our Revolving Credit Facility is drawn in excess of 25% (or $7.5 million) of the amount available as of the last day of any fiscal quarter during that period. 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. We are in compliance with our debt covenants as of December 31, 2022.
On June 2, 2021 we entered into an amendment to our Credit Agreement to extend the maturity dates of both our Term Loan and its Revolving Credit Facility. As part of the amendment, the maturity dates of both our Term Loan and its 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 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 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 Consolidated Statements of Operations and Comprehensive Loss.
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 December 31, 2022 the aggregate interest rate of the Credit Agreement was 8.34% 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 Consolidated Balance Sheets as of 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 December 31, 2022 was approximately $87.6 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 approximately $4.9 million for the aggregate of the contractual coupon interest and the amortization of the debt issuance costs during the twelve months ended December 31, 2022 and 2021. The interest expense recognized on the Convertible Senior Notes includes approximately $4.2 million for the aggregate of the contractual coupon interest, the accretion of the debt discount, and the amortization of the debt issuance costs for the twelve months ended December 31, 2020. Interest on the Convertible Senior Notes began accruing upon issuance and is payable semi-annually. As of December 31, 2022 there were $1.9 million of unamortized debt issuance costs related to convertible senior notes.
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.
We cannot redeem the Convertible Senior Notes before July 5, 2023. We can redeem them on or after July 5, 2023, 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 our other securities. As of December 31, 2022 and 2021 we are not aware of any current events or market conditions that would allow holders to convert the Convertible Senior Notes.
Government Supported Bank Debt
In June 2015 JOTEC obtained two loans from Sparkasse Zollernalb, which are government sponsored by the Kreditanstalt für Wiederaufbau Bank (KFW). Both KFW loans have a term of nine years and the interest rates are 2.45% and 1.40%.
The short-term and long-term balances of our term loans were as follows (in thousands):
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Term loan balance | $ | 213,750 | | | $ | 216,000 | |
| Convertible senior notes | 100,000 | | | 100,000 | |
2.45% Sparkasse Zollernalb (KFW Loan 1) | 296 | | | 566 | |
1.40% Sparkasse Zollernalb (KFW Loan 2) | 733 | | | 1,061 | |
| Total loan balance | 314,779 | | | 317,627 | |
| Less unamortized loan origination costs | (6,672) | | | (8,504) | |
| Net borrowings | 308,107 | | | 309,123 | |
| Less short-term loan balance, net | (1,608) | | | (1,630) | |
| Long-term loan balance, net | $ | 306,499 | | | $ | 307,493 | |
At December 31, 2022 the aggregate maturities of long-term debt for the next five years are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| Maturities | $ | 2,754 | | $ | 2,576 | | $ | 102,450 | | $ | 2,250 | | $ | 204,749 | | $ | — | | $ | 314,779 |
Our aggregate maturity schedule is subject to change due to a provision within the Credit Agreement that requires us to make annual prepayments based on an excess cash flow calculation.
Interest Expense
Total interest expense was $18.2 million, $16.9 million, and $16.7 million in 2022, 2021, and 2020, respectively. Interest expense includes interest on debt and uncertain tax positions in all periods.
11. 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 Consolidated Financial Statements as of December 31, 2022 and 2021 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.
Employment Agreements
The employment agreement of our Chairman, President, and Chief Executive Officer (“CEO”), Mr. J. Patrick Mackin, provides for a severance payment, which would become payable upon the occurrence of certain employment termination events, including termination by us without cause.
PROACT Xa Clinical Trial Termination
On September 23, 2022 we announced that we were stopping the PROACT Xa clinical trial as recommended by the trial's independent Data and Safety Monitoring Board. The PROACT Xa clinical trial was a prospective, randomized, trial designed to determine if patients with On-X mechanical aortic valves could be maintained safely and effectively on apixaban rather than on warfarin. As a result of PROACT Xa's early termination, we recorded $4.5 million of termination and wind-down expenses that are included in Research and development operating expenses on the Consolidated Statements of Operations and Comprehensive Loss for the twelve months ended December 31, 2022. The majority of these costs include administrative costs, that we paid during the fourth quarter of 2022 and anticipate paying during the first quarter of 2023, as well as the estimated cost of clinical drugs purchased for patients participating in the study that are not expected to be recovered.
12. Employee Benefit Plans
401(k) Plan
We have a 401(k) savings plan (“401(k) Plan”) providing retirement benefits to all US employees who have completed at least three months of service. We made matching contributions of each participant's contribution up to 4.0% of each participant’s salary in 2022, 2021 and 2020. Our contributions approximated $2.6 million, $2.1 million, and $1.9 million for the years ended 2022, 2021, and 2020, respectively. We may make discretionary contributions to the 401(k) Plan; however, no discretionary contributions were made in any of the past three years.
Deferred Compensation Plan
Our Deferred Compensation Plan (“Deferred Plan”) allows certain of our US employees to defer receipt of a portion of their salary and cash bonus. The Deferred Plan provides for tax-deferred growth of deferred compensation. Pursuant to the terms of the Deferred Plan, we agree to return the deferred amounts plus gains and losses, based on investment fund options chosen by each respective participant, to the plan participants upon distribution. All deferred amounts and deemed earnings thereon are vested at all times. We have no current plans to match any contributions. Amounts owed to plan participants are unsecured obligations of the Company. We have established a rabbi trust in which it will make contributions to fund our obligations under the Deferred Plan. Pursuant to the terms of the trust, we will be required to make contributions each year to fully match our obligations under the Deferred Plan. The trust’s funds are primarily invested in Company Owned Life Insurance (“COLI”), and we plan to hold the policies until the deaths of the insured.
Our deferred compensation liabilities are recorded as a component of Other current liabilities and long-term Deferred compensation liabilities, as appropriate, on the Consolidated Balance Sheets based on the anticipated distribution dates. We recorded $5.5 million in Long-term liabilities as of December 31, 2022 in the Consolidated Balance Sheets. We recorded $378,000 in Other current liabilities and $6.0 million in Long-term liabilities as of December 31, 2021 in the Consolidated Balance Sheets. The cash surrender value of COLI recorded in Other long-term assets on the Consolidated Balance Sheets was $5.5 million and $6.6 million as of December 31, 2022 and 2021, respectively. Changes in the value of participant accounts and changes in the cash surrender value of COLI are recorded as part of our operating expenses and are subject to our normal allocation of expenses to inventory and deferred preservation costs.
13. Revenue Recognition
Sources of Revenue
Revenues are disaggregated by following sources:
•Domestic Hospitals – direct sales of products and preservation services.
•International Hospitals – direct sales of products and preservation services.
•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.
•CardioGenesis Cardiac Laser Console Trials and Sales – CardioGenesis cardiac trialed laser consoles are delivered under separate agreements.
For the years ended December 31, 2022, 2021, and 2020 the sources of revenue were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Domestic hospitals | $ | 158,129 | | | $ | 150,301 | | | $ | 137,810 | |
| International hospitals | 105,072 | | | 106,639 | | | 80,524 | |
| International distributors | 47,604 | | | 41,046 | | | 34,429 | |
| CardioGenesis cardiac laser therapy | 2,984 | | | 850 | | | 464 | |
| Total sources of revenue | $ | 313,789 | | | $ | 298,836 | | | $ | 253,227 | |
Also see segment and geographic disclosure in Note 16 below.
14. Stock Compensation
Overview
We are currently authorized to grant and have available for grant the following number of shares under our stock plans as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | Authorized
Shares | | Available for Grant |
| Plan | | | 2022 | | 2021 |
| 1996 Discounted Employee Stock Purchase Plan, as amended | | 2,900,000 | | | 967,000 | | | 63,000 | |
| 2020 Equity and Cash Incentive Plan | | 4,105,000 | | | 999,000 | | | 3,310,000 | |
| Total | | 7,005,000 | | | 1,966,000 | | | 3,373,000 | |
During 2020 the Shareholders approved a new 2020 Equity and Cash Incentive Plan (“ECIP”) and funded it with 2.7 million of newly issuable shares. On August 11, 2020 4.1 million shares were registered under the 2020 ECIP, consisting of the newly issuable shares as well as 1.4 million of the shares that remained available for grant under the 2009 ECIP as of that date.
Stock Awards
In 2022 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, counting PSUs at target levels, together totaled 871,000 shares and had an aggregate grant date market value of $13.5 million. Two types of PSUs were granted in 2022, an annual grant with a one-year performance period (“Annual PSU”) and a special LTIP PSU grant (the “2022 LTIP PSU”) with a one-year performance period. If the highest performance threshold was met, the Annual PSU granted in 2022 represented the right to receive up to 150% of the target number of shares of common stock. The performance component of the Annual PSU granted in 2022 was based on attaining specified levels of revenue growth and specified levels of EBITDA, as defined in the PSU grant documents, for the 2022 calendar year. The Annual PSU granted in 2022 earned approximately 51% of the target number of shares and subsequently modified on February 13, 2023 to earn approximately 89% of the target number of shares. If the highest performance threshold was met, the Special 2022 LITP PSU grant represented a right to receive up to 200% of the target number of shares of common stock. The 2022 LTIP PSU grant earned approximately 140% of target number of shares.
During 2019, the Committee authorized, and we granted, an LTIP PSU (the "Original LTIP"), which has multiple performance periods over a five-year period. If the highest performance thresholds were met, the Original LTIP represents the right to receive up to 288%, and up to 192% for a certain key executive, of the target number of shares of common stock. The performance component of the Original LTIP was based on attaining specified levels of adjusted revenue growth and gross margin, as defined in the Original LTIP grant document, for the years 2019 through 2023. During 2020 we determined that the threshold performance under the first performance period (2019 through 2021) of the Original LTIP was unlikely to be achieved which resulted in a reversal of $1.9 million in expense in the fourth quarter of 2020. During 2022, the second performance period of the Original LTIP earned approximately 136% and 108% to a certain key executive of target number of shares of common stock.
In 2021 the Committee authorized awards from approved stock incentive plans of RSUs to certain employees, RSAs to non-employee Directors, and RSAs and PSUs to certain Company officers, which, counting PSUs at target levels, together totaled 500,000 shares and had an aggregate grant date market value of $12.6 million. Two types of PSUs were granted in 2021, an Annual PSU and a special LTIP PSU (the "2021 LTIP PSU"), each with a one-year performance period. If the highest performance threshold was met, the Annual PSU granted in 2021 represented the right to receive up to 150% of the target number of shares of common stock. The performance component of the Annual PSU granted in 2021 was based on attaining specified levels of revenue growth and certain non-financial metrics, as defined in the PSU grant documents, for the 2021 calendar year. The Annual PSU granted in 2021 earned approximately 110% of the target number of shares. If the highest performance threshold was met, the 2021 LTIP PSU grant in 2021 represented a right to receive up to 200% of the target number of shares of common stock. The 2021 LTIP PSU grant earned approximately 118% of target number of shares.
In 2020 the Committee authorized awards from approved stock incentive plans of RSUs to certain employees, RSAs to non-employee Directors, and RSAs and PSUs to certain Company officers, which, counting PSUs at target levels, together totaled 335,000 shares and had an aggregate grant date market value of $8.3 million. If the highest performance threshold was met, the PSU granted in 2020 represented the right to receive up to 150% of the target number of shares of common stock. The performance component of the PSU awards granted in 2020 was based on attaining specified levels of EBITDA, as defined in the PSU grant documents, for the 2020 calendar year. Our actual 2020 EBITDA performance was below the threshold required for any payouts under the 2020 PSU plan which resulted in a $1.1 million reversal of expense in the fourth quarter of 2020. In February 2021 the Committee used structured discretion to determine that the 2020 PSUs were earned and should be paid out at 100% of target resulting in a modification of the award which resulted in $1.3 million of compensation expense during the twelve months ended December 31, 2021 related to these performance awards. This modification resulted in a forfeiture and a subsequent grant of 70,000 PSU shares during the twelve months ended December 31, 2021.
A summary of stock grant activity for the years ended December 31, 2022, 2021, and 2020 for RSAs, RSUs, and PSUs, based on the target number of shares, was as follows:
| | | | | | | | | | | | | | |
| RSAs | | Shares | | Weighted
Average
Grant Date
Fair Value |
| Unvested at December 31, 2019 | | 243,000 | | | $ | 23.30 | |
| Granted | | 123,000 | | | 24.70 | |
| Vested | | (108,000) | | | 20.66 | |
| Unvested at December 31, 2020 | | 258,000 | | | 25.08 | |
| Granted | | 140,000 | | | 25.68 | |
| Vested | | (130,000) | | | 22.40 | |
| Forfeited | | (33,000) | | | 27.39 | |
| Unvested at December 31, 2021 | | 235,000 | | | 26.59 | |
| Granted | | 64,000 | | | 17.91 | |
| Vested | | (89,000) | | | 28.60 | |
| Unvested at December 31, 2022 | | 210,000 | | | 23.09 | |
| | | | | | | | | | | | | | | | | | | | |
| RSUs | | Shares | | Weighted
Average
Remaining
Contractual
Term in years | | Aggregate
Intrinsic
Value |
| Unvested at December 31, 2019 | | 226,000 | | | 0.93 | | $ | 6,131,000 | |
| Granted | | 141,000 | | | | | |
| Vested | | (118,000) | | | | | |
| Forfeited | | (37,000) | | | | | |
| Unvested at December 31, 2020 | | 212,000 | | | 1.02 | | 5,015,000 | |
| Granted | | 144,000 | | | | | |
| Vested | | (93,000) | | | | | |
| Forfeited | | (39,000) | | | | | |
| Unvested at December 31, 2021 | | 224,000 | | | 0.94 | | 4,558,000 | |
| Granted | | 643,000 | | | | | |
| Vested | | (100,000) | | | | | |
| Forfeited | | (33,000) | | | | | |
| Unvested at December 31, 2022 | | 734,000 | | | 2.02 | | 8,895,000 | |
| | | | | | |
| Vested and expected to vest | | 734,000 | | | 2.02 | | $ | 8,895,000 | |
| | | | | | | | | | | | | | | | | | | | |
| PSUs | | Shares | | Weighted
Average
Remaining
Contractual
Term in years | | Aggregate
Intrinsic
Value |
| Unvested at December 31, 2019 | | 347,000 | | | 2.33 | | $ | 9,400,000 | |
| Granted | | 70,000 | | | | | |
| Vested | | (55,000) | | | | | |
| Forfeited | | (31,000) | | | | | |
| Unvested at December 31, 2020 | | 331,000 | | | 1.64 | | 7,805,000 | |
| Granted | | 215,000 | | | | | |
| Vested | | (60,000) | | | | | |
| Forfeited | | (114,000) | | | | | |
| Unvested at December 31, 2021 | | 372,000 | | | 0.90 | | 7,579,000 | |
| Granted | | 182,000 | | | | | |
| Vested | | (117,000) | | | | | |
| Forfeited | | (97,000) | | | | | |
| Unvested at December 31, 2022 | | 340,000 | | | 0.67 | | 4,121,000 | |
| | | | | | | |
| Vested and expected to vest | | 340,000 | | | 0.67 | | $ | 4,121,000 | |
During the years ended December 31, 2022, 2021, and 2020 the total fair value of $5.8 million, $7.3 million, and $6.7 million, respectively, in combined RSAs, RSUs, and PSUs vested.
Stock Options
The Compensation Committee of our Board of Directors authorized grants of stock options from approved stock incentive plans to certain Company officers and employees totaling 1,031,000, 226,000, and 212,000 shares in 2022, 2021, and 2020, respectively, with exercise prices equal to the stock prices on the respective grant dates.
A summary of our stock option activity for the years ended December 31, 2022, 2021, and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual
Term in years | | Aggregate
Intrinsic
Value |
| Outstanding at December 31, 2019 | | 1,129,000 | | | $ | 16.14 | | | 3.67 | | $ | 12,763,000 | |
| Granted | | 212,000 | | | 26.24 | | | | | |
| Exercised | | (88,000) | | | 10.49 | | | | | |
| Forfeited | | (12,000) | | | 27.36 | | | | | |
| Outstanding at December 31, 2020 | | 1,241,000 | | | 18.16 | | | 3.38 | | 8,215,000 | |
| Granted | | 226,000 | | | 24.90 | | | | | |
| Exercised | | (179,000) | | | 12.02 | | | | | |
| Forfeited | | (42,000) | | | 26.00 | | | | | |
| Outstanding at December 31, 2021 | | 1,246,000 | | | 20.00 | | | 3.20 | | 4,039,000 | |
| Granted | | 1,031,000 | | | 13.29 | | | | | |
| Exercised | | (151,000) | | | 11.85 | | | | | |
| Forfeited | | (3,000) | | | 21.55 | | | | | |
| Outstanding at December 31, 2022 | | 2,123,000 | | | 17.31 | | | 4.56 | | 1,150,000 | |
| | | | | | | | |
| Vested and expected to vest | | 2,123,000 | | | $ | 17.31 | | | 4.56 | | $ | 1,150,000 | |
| Exercisable at December 31, 2022 | | 892,000 | | | $ | 20.18 | | | 2.11 | | $ | 368,000 | |
Other information concerning stock options for the years ended December 31 was as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Weighted-average fair value of options granted | $ | 5.31 | | | $ | 8.82 | | | $ | 8.64 | |
| Intrinsic value of options exercised | 1,120,000 | | | 2,716,000 | | | 1,267,000 | |
Employees purchased common stock totaling 95,000, 87,000, and 83,000 shares in 2022, 2021, and 2020, respectively, through our ESPP.
Stock Compensation Expense
The following weighted-average assumptions were used to determine the fair value of options:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Stock
Options | | ESPP
Options | | Stock
Options | | ESPP
Options | | Stock
Options | | ESPP
Options |
| Expected life of options | 5.00 Years | | 0.50 Years | | 5.00 Years | | 0.50 Years | | 5.00 Years | | 0.50 Years |
| Expected stock price volatility | 0.40 | | | 0.40 | | | 0.40 | | | 0.45 | | | 0.35 | | | 0.52 | |
| Risk-free interest rate | 3.58 | % | | 1.34 | % | | 0.57 | % | | 0.07 | % | | 1.41 | % | | 1.00 | % |
The following table summarizes stock compensation expense (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| RSA, RSU, and PSU expense | $ | 10,351 | | | $ | 9,023 | | | $ | 5,288 | |
| Stock option and ESPP option expense | 2,591 | | | 2,254 | | | 2,216 | |
| Total stock compensation expense | $ | 12,942 | | | $ | 11,277 | | | $ | 7,504 | |
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 our 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 $598,000, $566,000, and $592,000 in the years ended December 31, 2022, 2021, and 2020, respectively, of the stock compensation expense into our inventory costs and deferred preservation costs.
As of December 31, 2022 we had total unrecognized compensation expense of $11.3 million related to RSAs, RSUs, and PSUs and $5.4 million related to unvested stock options. As of December 31, 2022 this expense is expected to be recognized over a weighted-average period of 2.27 years for RSUs, 2.32 years for stock options, 0.66 years for RSAs, and 0.67 years for PSUs.
15. 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):
| | | | | | | | | | | | | | | | | | | | |
| Basic loss per common share | | 2022 | | 2021 | | 2020 |
| Net loss | | $ | (19,192) | | | $ | (14,834) | | | $ | (16,682) | |
| Net loss allocated to participating securities | | 98 | | | 94 | | | 111 | |
| Net loss allocated to common shareholders | | $ | (19,094) | | | $ | (14,740) | | | $ | (16,571) | |
| | | | | | |
| Basic weighted-average common shares outstanding | | 40,032 | | | 38,983 | | | 37,861 | |
| Basic loss per common share | | $ | (0.48) | | | $ | (0.38) | | | $ | (0.44) | |
| | | | | | |
| Diluted loss per common share | | 2022 | | 2021 | | 2020 |
| Net loss | | $ | (19,192) | | | $ | (14,834) | | | $ | (16,682) | |
| Net loss allocated to participating securities | | 98 | | | 94 | | | 111 | |
| Net loss allocated to common shareholders | | $ | (19,094) | | | $ | (14,740) | | | $ | (16,571) | |
| | | | | | |
| Basic weighted-average common shares outstanding | | 40,032 | | | 38,983 | | | 37,861 | |
Effect of dilutive options and awardsa | | — | | | — | | | — | |
| Diluted weighted-average common shares outstanding | | 40,032 | | | 38,983 | | | 37,861 | |
| Diluted loss per common share | | $ | (0.48) | | | $ | (0.38) | | | $ | (0.44) | |
_____________________
a 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 years ended December 31, 2022, 2021, and 2020 all stock options and awards were excluded from the calculation of diluted weighted-average common shares outstanding as these would be antidilutive to the net loss.
16. Segment and Geographic 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, surgical sealants, On-X, 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, E-vita Thoracic 3G, and E-nya 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 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.
The following table summarizes revenues, cost of products and preservation services, and gross margins for our reportable segments (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Revenues: | | | | | |
| Medical devices | $ | 230,353 | | | $ | 221,597 | | | $ | 179,299 | |
| Preservation services | 83,436 | | | 77,239 | | | 73,928 | |
| Total revenues | 313,789 | | | 298,836 | | | 253,227 | |
| | | | | |
| Cost of products and preservation services: | | | | | |
| Medical devices | 72,166 | | | 65,196 | | | 50,128 | |
| Preservation services | 39,100 | | | 36,126 | | | 35,315 | |
| Total cost of products and preservation services | 111,266 | | | 101,322 | | | 85,443 | |
| | | | | |
| Gross margin: | | | | | |
| Medical devices | 158,187 | | | 156,401 | | | 129,171 | |
| Preservation services | 44,336 | | | 41,113 | | | 38,613 | |
| Total gross margin | $ | 202,523 | | | $ | 197,514 | | | $ | 167,784 | |
Net revenues by product for the years ended December 31, 2022, 2021, and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Products: | | | | | |
| Aortic stent grafts | $ | 92,752 | | | $ | 85,387 | | | $ | 61,663 | |
| Surgical sealants | 65,379 | | | 70,714 | | | 62,068 | |
| On-X | 63,904 | | | 57,363 | | | 48,053 | |
| Other | 8,318 | | | 8,133 | | | 7,515 | |
| Total products | 230,353 | | | 221,597 | | | 179,299 | |
| | | | | |
| Preservation services: | 83,436 | | | 77,239 | | | 73,928 | |
| Total revenues | $ | 313,789 | | | $ | 298,836 | | | $ | 253,227 | |
Net revenues by geographic location attributed to countries based on the location of the customer for the years ended December 31, 2022, 2021, and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| US | $ | 161,113 | | | $ | 151,151 | | | $ | 138,274 | |
| International | 152,676 | | | 147,685 | | | 114,953 | |
| Total revenues | $ | 313,789 | | | $ | 298,836 | | | $ | 253,227 | |
Revenues attributed to customers in Germany accounted for 9% of total revenues for the year ended December 31, 2022 and 10% for the years ended December 31, 2021 and 2020.
At December 31, 2022 and 2021 46% and 45% of our long-lived assets were held in the US, respectively, where the corporate headquarters and a portion of our manufacturing facilities are located. Our long-lived international assets were $20.7 million and $20.6 million as of December 31, 2022 and 2021, respectively, of which 97% were located in Hechingen, Germany. At December 31, 2022 and 2021, $243.6 million and $250.0 million, respectively, of our goodwill was allocated entirely to our Medical Devices segment.
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