Artivion, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Artivion develops and sells medical devices and preserves human tissue for cardiac and vascular surgery. This filing covers the quarter and six months ended June 30, 2022; financial statements are unaudited. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $80.3m | $76.1m | $157.6m | $147.2m |
| Gross margin | $52.2m; 65% | $50.5m; 66% | $102.9m; 65% | $98.4m; 67% |
| Operating income | $4.5m | $1.3m | $6.2m | $2.8m |
| Net loss | $(4.3)m | $(2.2)m | $(7.6)m | $(5.3)m |
| Diluted loss per share | $(0.11) | $(0.06) | $(0.19) | $(0.14) |
Revenue mix and change. Q2 revenue increased 6% year over year (9% excluding foreign exchange); six-month revenue rose 7% (10% excluding foreign exchange). Q2 aortic stent graft revenue grew 13%, On-X 10%, and preservation services 7%; surgical sealants declined 11%. For the first half, aortic stent grafts rose 20%, On-X 10%, and preservation services 9%, while surgical sealants fell 11%.
Profitability and unusual items. Gross margin dollars increased, but the reported gross margin rate declined, primarily due to inflation in materials and labor and, for the first half, an unfavorable mix in some aortic stent graft sales. Q2 operating income improved as general, administrative, and marketing expense fell; the six-month R&D expense increased 17%. Other expense was $3.8m in Q2 versus $1.3m of other income in Q2 2021, primarily reflecting foreign-currency gains and losses. The company recorded $3.2m of Q2 income from remeasurement of Ascyrus contingent consideration, versus $3.3m of expense in Q2 2021. Foreign-currency translation reduced comprehensive income by $14.8m in Q2.
Cash flow, balance sheet, and debt
- Cash and liquidity: Cash and equivalents were $40.4m at June 30, down from $55.0m at year-end 2021. Net working capital was $198.8m and the current ratio was 6:1. Management said existing cash and cash from operations were expected to cover current operational liquidity needs for at least 12 months.
- Cash flow, first half: Operating activities used $8.9m, compared with $0.4m used in the prior-year period. Investing activities used $5.0m, including $4.1m of capital expenditures; financing activities used $1.0m. Cash declined by $14.6m.
- Debt: Gross borrowings were $316.1m and net borrowings, after unamortized issuance costs, were $308.5m; balance-sheet debt was $308.5m, including $1.6m current. Debt included a $214.9m term loan and $100.0m of 4.25% convertible notes due July 2025. The term loan and revolving facility have stated maturities in 2027 and 2025, respectively, subject to earlier springing maturities linked to the convertible notes. The company reported compliance with debt covenants.
- Other obligations: Potential Ascyrus milestone and sales-based payments are up to $100m; the company also disclosed a $5m Endospan milestone payment and up to $9m of potential Baxter-related payments. These are contingent, not necessarily amounts currently due.
Outlook, commentary, and risks
The filing provides no specific numerical revenue or earnings guidance. Management identifies new products, new indications, global expansion, and business development as growth drivers. It cautions that operating results may fluctuate and that COVID-19, hospital staffing and procedure disruptions, supply-chain constraints, labor and material inflation, and foreign-exchange movements could affect revenue, costs, and cash flow.
Regulatory execution is a notable near-term issue: temporary commercialization restrictions related to the BioGlue CE Mark transition weighed on European sales. The company anticipated completing the notified-body transition and renewal in Q3 or Q4 2022, relying on country-specific derogations in the interim. Other risks include product and tissue quality, dependence on sole-source suppliers and specialized staff, clinical and regulatory approvals, and the substantial debt burden. The company stated it knew of no pending legal matter expected to have a material adverse effect, while noting that ordinary-course legal actions remain subject to uncertainty.
Important facts for investors to verify
- Whether BioGlue CE Mark renewal and required country derogations were obtained on the anticipated timetable, and how European sales developed.
- Whether growth in aortic stent grafts, On-X, and preservation services continued, and whether surgical sealant revenue stabilized.
- Whether inflation, product mix, and foreign exchange continued to pressure gross margin and reported earnings.
- Whether operating cash flow improved from the first-half use of $8.9m and liquidity remained adequate against debt service and contingent obligations.
- Progress and assumptions underlying Endospan, Ascyrus, and Baxter milestone obligations, and any changes in debt maturities, rates, or covenant status.