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Agreement With Endospan | 9 Months Ended
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Sep. 30, 2019
Agreement With Endospan [Abstract] |
Agreement With Endospan | 2. Agreements with Endospan Exclusive Distribution Agreement and Securities Purchase Option Agreement On September 11, 2019 CryoLife, Inc.’s wholly owned subsidiary, JOTEC GmbH, (“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 Endospan’s Nexus stent graft system (“Nexus Product”) and accessories in certain countries in Europe in exchange for a fixed distribution fee of $9.0 million paid in September 2019. Under the terms of the Endospan Distribution Agreement, JOTEC agreed to use its best efforts to market, promote, distribute, sell, and support the Nexus products for approved uses in the countries included within JOTEC’s exclusive distribution rights. JOTEC is obligated to satisfy a minimum purchase amount beginning in 2020. CryoLife also entered into a securities purchase option agreement (“Endospan Option Agreement”) with Endospan for $1.0 million paid in September 2019. The Endospan Option Agreement provides CryoLife the option to purchase all of 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 U.S. Food and Drug Administration (“FDA”) approval of the Nexus Product, with such option expiring if not exercised within 90 days after receiving notice that Endospan has received approval from the FDA for its Nexus Product. The term of JOTEC’s Endospan Distribution Agreement expires upon the earliest to occur of (i) the date on which the acquisition contemplated by the Endospan Option Agreement can no longer be consummated under its terms, or (ii) the date on which the Endospan Option Agreement is terminated pursuant to its terms, or by either party under certain circumstances. JOTEC would be entitled to a termination fee in the event the Endospan Distribution Agreement is terminated by JOTEC due to a suspension of approvals related to the Nexus Product lasting more than six months or the withdrawal of such approvals, an injunction on the Nexus Product lasting more than six months or a permanent injunction on the Nexus Product (unless such injunction resulted solely from an act or omission of JOTEC, its affiliates, or their sub-distributors), and other significant breaches. Loan Agreement CryoLife and Endospan also entered into a loan agreement (“Endospan Loan”), dated September 11, 2019, in which CryoLife 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. The second tranche is required to be funded generally under the same terms as the first tranche, upon certification of Investigational Device Exemption (“IDE”) approval from the FDA of the Nexus Product, and 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 the Nexus Product, 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 CryoLife under the Endospan Loan. The Endospan Loan is secured by substantially all of Endospan’s assets. Such security interest is a first priority security interest, except as to a pre-existing security interest granted to a third party over certain of these assets. The Endospan Loan bears interest at a rate of 5% per annum and is subject to acceleration upon an event of default. Interest on the Endospan Loan is payable upon the closing of the acquisition contemplated in the Endospan Option Agreement, and the principal amount and any additional interest or other obligations are payable upon the first anniversary of the closing of such acquisition. The amounts advanced under the Endospan Loan could be forgiven if Endospan is not in default of the Endospan Loan and certain events as defined in the Endospan agreements have occurred. Variable Interest Entity We consolidate the results of a variable interest entity ("VIE") when it is determined that we are the primary beneficiary. 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. Based on our evaluation of Endospan and the related agreements with Endospan, we determined that Endospan is a VIE. We evaluated whether we are the primary beneficiary of the Endospan VIE by considering whether we have (1) the power to direct those activities of the VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. In evaluating whether we have the power to direct those activities of a VIE that most significantly impact its economic performance, we considered the purpose for which the VIE was created, the importance of each of the activities in which the VIE is engaged, and our decision-making role, if any, in those activities that significantly determine the VIE’s economic performance, as compared to the role of other economic interest holders. In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, we considered our economic interests in Endospan, regardless of form. This evaluation considered the relevant factors of Endospan’s design, including: Endospan’s capital structure, contractual rights to earnings (losses), and subordination of our interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have the potential to be economically significant. 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 date, including any loans and guarantees and other subordinated financial support related to this VIE, totaled $15.0 million as of September 30, 2019, representing our maximum exposure to loss and was 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 Agreement 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 that certain approvals and milestones in obtaining FDA approval. Based on the 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 and the Endospan Option Agreement of $4.8 million in “Other long-term assets” and the Endospan Distribution Agreement of $9.8 million in “Other intangibles, net” in the Summary Consolidated Balance Sheets as of September 30, 2019. We have elected the fair value option for recording the Endospan Loan. We will assess the fair value of the Endospan Loan based on quantitative and qualitative characteristics, and we will adjust the amount recorded to its current fair market value at each reporting period. As of the transaction date, the initial relative fair value calculations to determine the amounts to be recorded for the Endospan Distribution Agreement and the Endospan Option Agreement represent non-recurring Level 3 fair value calculations. The Endospan Distribution Agreement will be amortized over five years, which is the expected timeframe to achieve FDA approval. The Endospan Option Agreement will remain at the recorded value and will be periodically assessed for impairment based on qualitative and quantitative factors.

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