Artivion(AORT) - 2024 Q1 - Quarterly Report

Part I – FINANCIAL INFORMATION Item 1. Financial Statements Artivion, Inc.'s unaudited condensed consolidated financial statements for Q1 2024 and 2023 are presented, covering operations, balance sheets, cash flows, equity, and detailed notes Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) The company achieved a significant turnaround from net loss to net income in Q1 2024, driven by increased revenues, gross margin, and positive operating income | Metric (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Revenues | $97,431 | $83,229 | 17.0% | | Gross Margin | $62,946 | $53,727 | 17.2% | | Operating Income (Loss) | $25,311 | $(3,861) | N/A | | Net Income (Loss) | $7,533 | $(13,532) | N/A | | Basic EPS | $0.18 | $(0.33) | N/A | | Diluted EPS | $0.18 | $(0.33) | N/A | Condensed Consolidated Balance Sheets Total assets slightly decreased, total liabilities reduced, and total shareholders' equity increased as of March 31, 2024, compared to December 31, 2023 | Metric (in Thousands) | March 31, 2024 | December 31, 2023 | Change (%) | | :-------------------- | :------------- | :---------------- | :--------- | | Total Assets | $784,007 | $792,397 | -1.1% | | Total Liabilities | $489,022 | $510,617 | -4.2% | | Total Shareholders' Equity | $294,985 | $281,780 | 4.7% | | Cash and Cash Equivalents | $51,118 | $58,940 | -13.27% | Condensed Consolidated Statements of Cash Flows Operating cash usage decreased, investing cash usage increased, and financing activities provided less cash, leading to an overall decrease in cash and cash equivalents | Cash Flow Activity (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (YoY) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net cash flows from operating activities | $(5,493) | $(6,154) | 10.89% | | Net cash flows from investing activities | $(3,611) | $(2,843) | -26.99% | | Net cash flows from financing activities | $737 | $1,171 | -37.06% | | Decrease in cash and cash equivalents | $(7,822) | $(8,578) | 8.81% | | Cash and cash equivalents end of period | $51,118 | $30,773 | 66.13% | Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity increased due to net income and equity compensation, partially offset by other comprehensive loss, compared to December 31, 2023 | Metric (in Thousands) | March 31, 2024 | December 31, 2023 | Change | | :-------------------- | :------------- | :---------------- | :----- | | Total Shareholders' Equity | $294,985 | $281,780 | +$13,205 | | Net Income (Loss) | $7,533 | $(47,907) (Retained Deficit) | N/A | | Equity Compensation | $3,672 | N/A | N/A | Notes to Condensed Consolidated Financial Statements Detailed notes cover accounting policies, financial instruments, inventory, intangibles, income taxes, leases, debt, revenue, stock compensation, and segment performance 1. Basis of Presentation and Summary of Significant Accounting Policies Interim financial statements adhere to US GAAP with no significant accounting policy changes, while new income tax and segment reporting standards are under evaluation - No significant changes in accounting policies were experienced during the three months ended March 31, 2024, compared to the Form 10-K for December 31, 2023[23] - The company is evaluating the impacts of new accounting standards: ASU 2023-09 (Income Taxes) effective for fiscal years beginning after December 15, 2024, and ASU 2023-07 (Segment Reporting) effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024[24][25] 2. Financial Instruments Contingent consideration for the Ascyrus acquisition saw a $17.5 million fair value reduction in Q1 2024, driven by increased credit risk from new facilities | Financial Instrument (in Thousands) | March 31, 2024 | December 31, 2023 | | :---------------------------------- | :------------- | :---------------- | | Money Market Funds | $23,958 | $22,802 | | Certificates of Deposit | $3,884 | $3,968 | | Contingent Consideration (Liability) | $(46,420) | $(63,890) | - A fair value reduction of $17.5 million was recorded for contingent consideration in Q1 2024, compared to a $4.8 million increase in Q1 2023. This reduction was mainly due to an increased credit risk spread from newly issued Credit Facilities[33] 3. Inventories, net and Deferred Preservation Costs Total inventories remained stable, with minor changes in consignment inventory, deferred preservation costs, and unchanged obsolescence reserves | Inventory Category (in Thousands) | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Raw materials and supplies | $36,567 | $36,907 | | Work-in-process | $12,940 | $12,687 | | Finished goods | $32,209 | $32,382 | | Total Inventories, net | $81,716 | $81,976 | | Consignment Inventory | $10,400 | $10,700 | | Total Deferred Preservation Costs | $50,151 | $49,804 | | Obsolescence Reserves | $3,000 | $3,000 | 4. Goodwill and Other Intangible Assets Goodwill slightly decreased due to foreign currency translation, while definite-lived intangibles and amortization expense remained largely consistent | Intangible Asset (in Thousands) | March 31, 2024 | December 31, 2023 | | :------------------------------ | :------------- | :---------------- | | Goodwill | $245,030 | $247,337 | | In-process R&D | $2,108 | $2,154 | | Acquired Technology, net | $138,474 | $142,593 | | Other Intangibles, net | $25,385 | $25,471 | | Amortization Expense (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Amortization expense | $3,867 | $3,882 | - Goodwill decreased by $2.3 million, primarily due to foreign currency translation adjustments[44] 5. Income Taxes The effective income tax rate decreased in Q1 2024, influenced by pre-tax profit changes and a reduced valuation allowance against deferred tax assets | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | | Effective Income Tax Rate | 41% (expense) | 52% (expense) | | Metric (in Millions) | March 31, 2024 | December 31, 2023 | | :------------------- | :------------- | :---------------- | | Net Deferred Tax Liability | $21.7 | $20.8 | | Valuation Allowance | $28.2 | $32.9 | 6. Leases Operating and finance lease liabilities and ROU assets saw minor reductions, with stable total lease expense and slightly increased operating lease cash flows | Lease Metric (in Thousands) | March 31, 2024 | December 31, 2023 | | :-------------------------- | :------------- | :---------------- | | Operating Lease ROU Assets, net | $42,492 | $43,822 | | Total Operating Lease Liabilities | $46,075 | $47,372 | | Total Finance Lease Liabilities | $3,858 | $3,987 | | Weighted Average Remaining Operating Lease Term | 10.2 years | 10.4 years | | Weighted Average Remaining Finance Lease Term | 6.5 years | 6.8 years | | Lease Expense (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Total Lease Expense | $1,960 | $1,954 | | Cash Flow (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------- | :-------------------------------- | :-------------------------------- | | Operating cash flows for operating leases | $1,889 | $1,796 | 7. Debt New $350 million senior secured credit facilities were secured in January 2024, repaying prior debt and incurring a $3.7 million extinguishment loss, leading to increased interest expense - On January 18, 2024, Artivion entered into new $350 million senior secured credit facilities, comprising a $190 million Initial Term Loan Facility, a $100 million Delayed Draw Term Loan Facility, and a $60 million Revolving Credit Facility[61] - The company borrowed $190 million under the Initial Term Loan Facility and $30 million under the Revolving Credit Facility upon closing, using proceeds to pay off the previously existing credit agreement, which resulted in a $3.7 million loss on extinguishment of debt[62][64] | Debt Metric (in Thousands) | March 31, 2024 | December 31, 2023 | | :------------------------- | :------------- | :---------------- | | Total Loan Balance | $320,405 | $312,045 | | Long-term Loan Balance, net | $313,004 | $305,531 | | Convertible Senior Notes | $100,000 | $100,000 | | Interest Expense (Q1) | $7,826 | $6,096 | 8. Commitments and Contingencies Routine legal proceedings are ongoing, but no pending matters are expected to materially adversely affect the company's financial condition - The company is involved in legal proceedings in the normal course of business and maintains claims-made insurance policies to mitigate financial exposure. Management does not believe any pending matters will have a material adverse effect[76] 9. Revenue Recognition Total revenues increased by 17% in Q1 2024, driven by growth across all geographic regions, with immaterial contract balances | Geographic Region (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | North America | $50,928 | $43,244 | 17.8% | | EMEA | $33,588 | $27,929 | 20.2% | | APAC | $7,609 | $7,878 | -3.4% | | LATAM | $5,306 | $4,178 | 26.9% | | Total Revenues | $97,431 | $83,229 | 17.0% | - No material contract assets or unfulfilled contract obligations existed as of March 31, 2024[80] 10. Stock Compensation Equity grants significantly increased in Q1 2024, raising stock compensation expense, while employees also purchased shares via the ESPP - Equity awards (RSUs and PSUs) totaled 700,000 shares with an aggregate fair value of $14.2 million in Q1 2024, compared to 376,000 shares and $5.0 million in Q1 2023[82] | Stock Compensation Metric (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Total Stock Compensation Expense | $3,672 | $3,513 | - Employees purchased 51,000 shares through the ESPP in Q1 2024, compared to 56,000 shares in Q1 2023[83] 11. Income (Loss) Per Common Share Positive basic and diluted EPS were reported in Q1 2024, a significant improvement from a Q1 2023 loss, with increased diluted weighted-average common shares outstanding | EPS Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------- | :-------------------------------- | :-------------------------------- | | Basic Income (Loss) Per Common Share | $0.18 | $(0.33) | | Diluted Income (Loss) Per Common Share | $0.18 | $(0.33) | | Basic Weighted-Average Common Shares Outstanding (in Thousands) | 41,290 | 40,432 | | Diluted Weighted-Average Common Shares Outstanding (in Thousands) | 47,886 | 40,432 | 12. Segment Information Both Medical Devices and Preservation Services segments achieved strong revenue and gross margin growth in Q1 2024, driven by aortic stent grafts and preservation services | Segment (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :--------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Revenues: | | | | | Medical Devices | $71,114 | $62,291 | 14.2% | | Preservation Services | $26,317 | $20,938 | 25.7% | | Total Revenues | $97,431 | $83,229 | 17.0% | | Gross Margin: | | | | | Medical Devices | $47,364 | $42,758 | 10.8% | | Preservation Services | $15,582 | $10,969 | 42.1% | | Total Gross Margin | $62,946 | $53,727 | 17.2% | | Product/Service (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :----------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Aortic Stent Grafts | $32,103 | $26,150 | 22.7% | | On-X | $19,681 | $17,656 | 11.5% | | Surgical Sealants | $16,981 | $16,703 | 1.7% | | Other Products | $2,349 | $1,782 | 31.8% | | Preservation Services | $26,317 | $20,938 | 25.7% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 17% Q1 2024 revenue increase, driven by product lines and preservation services, detailing changes in revenues, costs, operating expenses, and liquidity, including new credit facilities and fair value adjustments Overview Artivion, a leader in aortic medical devices and tissues, reported a 17% increase in Q1 2024 quarterly revenues, with constant currency revenues up 16% - Artivion, Inc. is a leader in manufacturing, processing, and distributing medical devices and implantable human tissues for cardiac and vascular surgical procedures, focusing on aortic disease[103] | Metric (in Millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Quarterly Revenues | $97.4 | $83.2 | 17% | | Constant Currency Revenues | N/A | N/A | 16% | Presentation Management uses non-GAAP constant currency revenues for operational performance assessment and strategic planning, ensuring consistent measurement across periods - Constant currency revenues are a non-GAAP financial measure used by management and investors to assess ongoing operations and measure performance consistently across periods[105][139] New Accounting Pronouncements Refer to Note 1 of the Condensed Consolidated Financial Statements for details on new accounting standards under evaluation - Refer to Note 1 of 'Notes to Condensed Consolidated Financial Statements' for discussion of new accounting standards[106] Results of Operations Revenues increased by 17% (16% constant currency) in Q1 2024, driven by aortic stent grafts and preservation services, with stable gross margin and decreased operating expenses due to business development income Revenues Total revenues grew 17% (16% constant currency) in Q1 2024, with all product categories and preservation services contributing, especially aortic stent grafts and preservation services | Revenue Category (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Percent Change | | :------------------------------ | :-------------------------------- | :-------------------------------- | :------------- | | Total Revenues | $97,431 | $83,229 | 17% | | Total Products | $71,114 | $62,291 | 14% | | Preservation Services | $26,317 | $20,938 | 26% | | Aortic Stent Grafts | $32,103 | $26,150 | 23% | | On-X | $19,681 | $17,656 | 11% | | Surgical Sealants | $16,981 | $16,703 | 2% | | Other Products | $2,349 | $1,782 | 32% | | Geographic Region (in Thousands) | Three Months Ended March 31, 2024 (GAAP) | Three Months Ended March 31, 2023 (GAAP) | Constant Currency (2023) | Percent Change (Constant Currency) | | :------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------------------- | :--------------------------------- | | North America | $50,928 | $43,244 | $43,250 | 18% | | EMEA | $33,588 | $27,929 | $28,734 | 17% | | Asia Pacific | $7,609 | $7,878 | $7,878 | -3% | | Latin America | $5,306 | $4,178 | $4,344 | 22% | | Total | $97,431 | $83,229 | $84,206 | 16% | - Aortic stent graft revenues increased 23% (19% constant currency), primarily due to increased volume and favorable foreign exchange rates, with significant growth in EMEA[115][116] - Preservation services revenues increased 26%, mainly due to higher average sales prices and an increase in tissues shipped[125] Cost of Products and Preservation Services Cost of products increased by 22% and preservation services by 8% due to higher volumes, while gross margin increased 17%, maintaining a 65% gross margin percentage | Cost Category (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :--------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Cost of Products | $23,750 | $19,533 | 21.6% | | Cost of Preservation Services | $10,735 | $9,969 | 7.7% | | Total Cost of Products and Preservation Services | $34,485 | $29,502 | 16.9% | | Gross Margin | $62,946 | $53,727 | 17.2% | | Gross Margin as % of Total Revenues | 65% | 65% | 0% | - The increase in cost of products was primarily due to higher volume of all products shipped (except surgical sealants) and, to a lesser extent, the cost of aortic stent grafts[126] - Gross margin as a percentage of total revenues remained flat at 65% for both periods[128] Operating Expenses General, administrative, and marketing expenses decreased 39% due to business development income from fair value adjustments, while R&D expenses slightly decreased, focusing on aortic stent graft approvals | Operating Expense (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | General, Administrative, and Marketing | $30,689 | $50,365 | -39% | | Research and Development | $6,946 | $7,223 | -4% | - General, administrative, and marketing expenses included $17.4 million of business development income in Q1 2024, primarily from a fair value reduction of Ascyrus contingent consideration[132] - Research and development spending in Q1 2024 focused on clinical work to gain regulatory approvals for aortic stent grafts and other products[133] Interest Expense Interest expense increased by 28% in Q1 2024, primarily due to higher interest rates on new Credit Facilities after debt refinancing | Metric (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Interest Expense | $7,826 | $6,096 | 28.4% | - The increase in interest expense was primarily due to an increase in the interest rate on the Credit Facilities as a result of debt refinancing in January 2024[134] Loss on Extinguishment of Debt A $3.7 million loss on extinguishment of debt was recorded in Q1 2024 from repaying the prior term loan with new credit facility proceeds | Metric (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Loss on Extinguishment of Debt | $3,669 | $0 | Other Expense (Income), Net Other expense (income), net shifted from income to expense in Q1 2024, primarily driven by realized and unrealized foreign currency effects | Metric (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Other Expense (Income), Net | $1,409 (expense) | $(963) (income) | Earnings The company achieved income before income taxes and net income in Q1 2024, a significant improvement from a Q1 2023 loss, largely due to fair value adjustments of financial instruments | Metric (in Thousands, except per share) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Income (Loss) Before Income Taxes | $12,781 | $(8,919) | | Income Tax Expense | $5,248 | $4,613 | | Net Income (Loss) | $7,533 | $(13,532) | | Diluted Income (Loss) Per Common Share | $0.18 | $(0.33) | - Income before income taxes in Q1 2024 was positively impacted by the change in fair value of financial instruments, partially offset by increased operating and interest expenses[137] - The effective income tax rate was 41% expense in Q1 2024, down from 52% expense in Q1 2023, due to changes in pre-tax profit, valuation allowance, and other tax-related items[138] Non-GAAP Measures of Financial Performance The company uses non-GAAP constant currency revenues as a non-GAAP measure to provide a clearer assessment of operational performance, excluding foreign exchange rate fluctuations - Constant currency revenues are a non-GAAP financial measure used to assess operational performance, as a component in compensation metrics, and as a basis for strategic planning[139] - This non-GAAP measure adjusts revenues for the year-over-year impact of foreign currency movements, applying current period foreign currency rates to prior period transactional currency amounts[139] Seasonality Demand for aortic stent grafts and surgical sealants typically declines in Q3 due to summer holidays, while cardiac preservation services peak in Q3 and vascular services see lowest demand in Q4 - Demand for aortic stent grafts and surgical sealants is seasonal, generally declining in the third quarter due to the summer holiday season in Europe and the US[141][142] - Cardiac preservation services traditionally peak in the third quarter, primarily due to a high number of surgeries for school-aged patients, though this trend is lessening with increased adult population use[142] - Vascular preservation services typically experience lowest demand in the fourth quarter, attributed to fewer vascular surgeries during winter holiday months[143] Liquidity and Capital Resources Net working capital and the current ratio improved in Q1 2024, with existing cash and operations expected to cover liquidity needs for the next 12 months after debt refinancing Net Working Capital Net working capital increased to $231.0 million, and the current ratio improved to 6 to 1 as of March 31, 2024, compared to December 31, 2023 | Metric (in Millions) | March 31, 2024 | December 31, 2023 | | :------------------- | :------------- | :---------------- | | Net Working Capital | $231.0 | $222.8 | | Current Ratio | 6 to 1 | 5 to 1 | Overall Liquidity and Capital Resources The company expects cash from operations and existing cash equivalents to meet operational liquidity needs for at least the next twelve months, with future requirements including debt payments, R&D, and business development - The company believes its cash from operations and existing cash and cash equivalents will enable it to meet current operational liquidity needs for at least the next twelve months[146] - Future cash requirements include interest payments on debt, clinical trials, R&D, working capital, capital expenditures, and potential business development activities[146] Significant Sources and Uses of Liquidity In Q1 2024, $350 million in new credit facilities were secured, with $220 million of initial borrowings repaying existing debt and covering costs; operating cash flows improved, investing increased, and financing provided less cash - New Credit Facilities totaling $350 million were secured in January 2024, with $190 million borrowed under the Initial Term Loan Facility and $30 million under the Revolving Credit Facility[147] - Proceeds from initial borrowings were used to pay off the previously existing credit agreement, incurring a $3.7 million loss on extinguishment of debt[150] | Cash Flow Activity (in Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Operating Activities | $(5,493) | $(6,154) | | Investing Activities | $(3,611) | $(2,843) | | Financing Activities | $737 | $1,171 | Scheduled Contractual Obligations and Future Payments Significant long-term debt obligations include $320.4 million in principal and $136.4 million in anticipated interest, plus contingent payment obligations for acquisitions and lease liabilities - Long-term debt obligations and interest payments include $320.4 million of scheduled principal and $136.4 million in anticipated interest payments related to Credit Facilities, Convertible Senior Notes, and other loans[162] - Contingent payment obligations include up to $100 million to former Ascyrus shareholders and up to $3 million for Baxter transaction milestones[162] Capital Expenditures Capital expenditures increased to $3.6 million in Q1 2024, primarily for manufacturing and tissue processing equipment, software, leasehold improvements, and computer equipment | Metric (in Millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------- | :-------------------------------- | :-------------------------------- | | Capital Expenditures | $3.6 | $2.8 | - Capital expenditures were primarily related to routine purchases of manufacturing and tissue processing equipment, computer software, leasehold improvements, and computer equipment[163] Risks and Uncertainties Refer to the 'Risk Factors' section in Part II, Item 1A for a comprehensive discussion of risks and uncertainties affecting the company - Refer to the 'Risk Factors' identified in Part II, Item 1A of this Form 10-Q for a discussion of risks and uncertainties[164] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on cash and variable-rate debt, and foreign currency exchange rate risk on international balances; a 10% adverse change in interest rates is not material, but a similar exchange rate change could impact financial position by approximately $7.0 million Interest Rate Risk Interest income and expense are sensitive to US interest rate changes, but a 10% adverse change is not expected to materially affect financial position, results, or cash flows - Interest income and expense are sensitive to changes in US interest rates, affecting cash and cash equivalents and variable rate Credit Facilities and Convertible Senior Notes[165] - A 10% adverse change in interest rates is not expected to have a material effect on the company's financial position, results of operations, or cash flows[165] Foreign Currency Exchange Rate Risk Foreign currency exchange rate risk exists on foreign-denominated balances and international revenues/expenses; a 10% adverse change could impact financial position or cash flows by approximately $7.0 million, but not materially affect profitability - The company has balances (cash, receivables, payables) and revenues/expenses denominated in foreign currencies, making them sensitive to exchange rate changes[166][168] - An additional 10% adverse change in exchange rates could impact financial position or cash flows by approximately $7.0 million, but would not have a material impact on profitability[169] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2024, with no material changes in internal controls over financial reporting Evaluation of Disclosure Controls and Procedures Management, with CEO and CFO, concluded that disclosure controls were effective at a reasonable assurance level as of March 31, 2024, ensuring timely and accurate reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2024[172] - Disclosure controls are designed to ensure information required for Exchange Act reports is recorded, processed, summarized, and reported timely to management[170] Changes to Disclosure Controls and Procedures No changes in internal controls over financial reporting occurred during Q1 2024 that materially affected, or are reasonably likely to materially affect, these controls - No changes in internal controls over financial reporting occurred during the three months ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, these controls[173] Part II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal proceedings but does not anticipate any current matters to have a material adverse effect on its business or financial results - The company is involved in legal proceedings in the normal course of business but does not believe any pending matters could have a material adverse effect on its business or financial results[174][175] Item 1A. Risk Factors This section outlines risks from international operations, geopolitical conflicts, competition, product dependence, supply chain, regulatory compliance, financial indebtedness, acquisitions, rebranding, and IT disruptions Business and Economic Risks The company faces risks from international operations, geopolitical conflicts, intense competition, dependence on key products, foreign currency fluctuations, acquisition charges, and public health crises - International operations expose the company to risks including staffing difficulties, compliance obligations (e.g., FCPA, GDPR), regulatory changes, longer collection cycles, currency fluctuations, inflationary pressures, and adverse tax consequences[177] - Geopolitical conditions, such as the wars in Ukraine and the Gaza Strip, may impact the global supply chain, increase costs, and disrupt business operations, although direct material impact has not yet occurred[179][180] - The company is highly dependent on revenues from tissue preservation services, BioGlue, aortic stent grafts, and On-X products, making it vulnerable to risks affecting these specific areas, including competition, regulatory approvals, and supply[183][187][189][190] Operational Risks Operational risks include heavy reliance on suppliers and contract manufacturers, single/sole-source dependencies, workforce retention, acquisitions, corporate rebranding, and IT system disruptions - The company is heavily dependent on suppliers and contract manufacturers for quality products, facing risks of material failure, regulatory non-compliance, and supply chain disruptions exacerbated by global events[198][201] - Reliance on single and sole-source suppliers for critical components (e.g., BioGlue, On-X, aortic stent grafts) and single manufacturing facilities poses significant disruption risks if these sources fail[202][205][206][207][208] - Acquisitions, licenses, and corporate rebranding efforts carry risks such as dilution, debt, integration challenges, failure to realize anticipated benefits, market confusion, and IT system vulnerabilities[212][214][217][223] Industry Risks The highly regulated medical device and tissue processing industry exposes the company to patient injury claims, regulatory scrutiny, product reclassification risks, challenges in approvals and market acceptance, increased enforcement, and healthcare policy changes - Products and tissues are highly regulated, leading to risks of patient injury claims, regulatory scrutiny, inspections, enforcement actions, and potential reclassification or suspension of product clearances/approvals[224] - The transition to the European Medical Device Regulation (MDR) has caused difficulties, including delays in CE Mark renewals (e.g., BioGlue, Chord-X) and challenges with Notified Bodies, impacting product availability in certain markets[225][227] - The FDA's potential reclassification of CryoValve SG pulmonary heart valve to a Class III medical device could make its continued processing commercially infeasible due to stringent PMA requirements[228][230] - Challenges exist in obtaining clinical results and regulatory approvals for new and existing products (e.g., BioGlue in China, PROACT Mitral trial), and successful commercialization can be slow and costly[231][232][234][235] Legal, Quality, and Regulatory Risks The company faces product liability claims, scrutiny under healthcare compliance laws, increasing burdens from new data privacy, sustainability, and AI regulations, and intellectual property risks including patent challenges and infringement - As a medical device manufacturer, the company is exposed to product liability claims from patient injury, with existing insurance potentially insufficient to cover all losses[244][245] - Relationships with healthcare providers are subject to scrutiny under US and international healthcare compliance laws (bribery, anti-kickback, false claims, privacy), with potential for significant penalties for violations[246][247][248] - The proliferation of new regulatory regimes (e.g., GDPR, CSRD, AI) increases compliance burdens and operating costs, with significant penalties for noncompliance[249][250] - The company's intellectual property (trade secrets, patents, licenses) is subject to risks of challenges to validity, independent development by competitors, and potential infringement by or against others[251] Risks Relating to Our Indebtedness Debt agreements impose significant operating and financial restrictions, limiting capital raising and operations; a default could accelerate repayment and lead to liquidation of pledged assets, including substantially all US assets - Debt agreements contain covenants that impose significant operating and financial restrictions, limiting the company's ability to incur debt, pay dividends, dispose of assets, and make investments[253] - High indebtedness could adversely affect the ability to raise additional capital, limit operational flexibility, and expose the company to interest rate fluctuations due to variable rate borrowings[254] - Substantially all US assets are pledged as collateral under the existing Credit Agreement, and a default could result in acceleration of indebtedness and potential liquidation of assets[255][256] Risks Relating to Ownership of our Common Stock Common stock ownership risks include shareholder activism, challenges in meeting ESG expectations, absence of future dividends, and anti-takeover provisions that could deter beneficial changes of control - Shareholder activism could disrupt business, divert management attention, impact stock price, and make it difficult to attract/retain personnel[258] - Increased shareholder and regulatory emphasis on ESG matters may impact investment strategies, employee retention, customer relations, and financial results[259] - The company does not anticipate paying any dividends on common stock for the foreseeable future, and credit facility restrictions limit future dividend payments[260] - Provisions of Delaware law and anti-takeover measures in organizational documents may discourage or prevent a change of control, even if beneficial to shareholders[261] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any equity securities in Q1 2024; Amy D. Horton, Chief Accounting Officer, adopted a Rule 10b5-1 trading arrangement for common stock sales - The company did not repurchase any of its equity securities during the three months ended March 31, 2024[263] - Amy D. Horton, Chief Accounting Officer, adopted a Rule 10b5-1 trading arrangement to sell up to 12,430 shares of common stock between June 10, 2024, and March 11, 2025[263] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reported period - No defaults upon senior securities occurred during the three months ended March 31, 2024[263] Item 4. Mine Safety Disclosures This item is not applicable - This item is not applicable[263] Item 5. Other Information Amy D. Horton, Chief Accounting Officer, adopted a Rule 10b5-1 trading arrangement for common stock sales, effective June 2024 to March 2025 - Amy D. Horton, Chief Accounting Officer, adopted a Rule 10b5-1 trading arrangement on March 11, 2024, to sell up to 12,430 shares of common stock between June 10, 2024, and March 11, 2025[263] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, equity plans, credit agreements, and certifications - The exhibit index includes corporate governance documents, equity and cash incentive plans, credit and guaranty agreements, and certifications[266] Signatures The report is duly signed by J. Patrick Mackin, Chairman, President, and CEO, and Lance A. Berry, CFO and Executive Vice President, Finance, on May 7, 2024 - The report is signed by J. Patrick Mackin, Chairman, President, and CEO, and Lance A. Berry, CFO and Executive Vice President, Finance, on May 7, 2024[269]