Artivion, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Artivion develops and sells cardiovascular medical devices and provides cardiac and vascular tissue preservation services. Figures below are in millions of dollars except per-share data and percentages.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $87.9 | $76.8 | $260.3 | $234.4 |
| Gross margin | $56.3 (64%) | $48.7 (63%) | $168.1 (65%) | $151.6 (65%) |
| Operating income (loss) | $(1.2) | $(4.1) | $2.6 | $2.1 |
| Net loss | $(9.8) | $(13.7) | $(26.7) | $(21.4) |
| Diluted loss per share | $(0.24) | $(0.34) | $(0.65) | $(0.53) |
| Operating cash flow | Not separately presented for the quarter | $8.0 | $(4.9) |
- Q3 revenue rose 14% year over year (12% in constant currency); nine-month revenue rose 11% (also 11% in constant currency). Product revenue increased 15% in Q3 and 12% for nine months; preservation services increased 12% and 9%, respectively.
- Q3 growth included aortic stent grafts (+30%), On-X (+14%), and preservation services (+12%); surgical sealants declined 7%. For nine months, aortic stent grafts increased 16%, On-X 15%, and preservation services 9%, while surgical sealants were up 1%.
- Q3 net loss narrowed versus prior year, while nine-month net loss widened. Nine-month results included a $14.3 million gain from the PerClot asset sale; this helped operating income. Higher contingent consideration expense and interest costs weighed on earnings.
Balance sheet, liquidity and debt
- At September 30, cash and cash equivalents were $53.5 million, versus $39.4 million at year-end 2022. Net working capital was $212.1 million and the current ratio was 5:1.
- Total debt carrying value was approximately $307.4 million, including $212.1 million on the term loan and $100.0 million of 4.25% convertible notes; the revolving facility had no borrowings. The term loan’s stated aggregate interest rate was 8.93% at quarter-end. Debt is secured by substantially all US assets.
- The convertible notes mature July 1, 2025. The credit agreement’s term-loan maturity is scheduled for June 2027, but springing maturity provisions may bring it forward if the convertible notes remain outstanding. The company reported covenant compliance.
- Management said existing cash and cash from operations are expected to cover current operating liquidity needs for at least the next 12 months. The company may seek additional financing for significant business development activity; availability and terms are not assured.
- Nine-month investing cash flow was $2.2 million, including $14.3 million proceeds from the PerClot transaction, offset in part by $5.5 million of capital expenditures and a $5.0 million Endospan loan payment. Financing cash flow was $2.5 million.
Material changes, outlook and risks
- Revenue growth reflected higher sales of aortic stent grafts, On-X products, and preservation services. Management attributed growth in several product lines to sales volumes, pricing, product mix, and improved conditions versus pandemic-affected 2022 comparatives. Preservation-services revenue can vary with tissue supply, processing yields, procedure demand, and timing.
- The FDA approved PerClot in May 2023; Artivion transferred the approval to Baxter and began manufacturing and supplying the product under a 21-month agreement. The company recorded the related $14.3 million pretax gain and reported $2.0 million of PerClot revenue in Q3.
- Artivion abandoned CardioGenesis cardiac laser therapy after its sole-source handpiece supply ended and no alternative supplier was identified; it recorded a $0.4 million write-off in the first nine months.
- General, administrative and marketing expense increased 24% in Q3 and 33% for nine months, including higher personnel and business-development costs. The nine-month business-development expense included a $21.9 million increase in the fair value of Ascyrus contingent consideration, bringing that liability to $62.3 million. Research and development expense declined 46% in Q3 and 31% for nine months.
- Interest expense increased to $6.6 million in Q3 and $19.1 million for nine months, primarily because of the higher term-loan rate. The company also recorded a $5.0 million expense after determining the Endospan loan had no fair value.
- No specific revenue or earnings guidance was provided. Management highlighted new products, new indications, international expansion, and business development as growth drivers, while cautioning that results are subject to uncertainty.
- Key risks include medical-device and tissue regulation, clinical and regulatory approval timelines, reliance on sole- and single-source suppliers, tissue availability and processing, competition, foreign exchange and inflation, hospital staffing and procedure volumes, and geopolitical and supply-chain disruption. NEXUS is manufactured solely by Endospan in Israel. The filing also notes uncertainty around European MDR certifications and the potential effect of the CryoValve SG regulatory classification.
- Potential obligations include up to $100 million of Ascyrus milestone and earn-out payments, and up to $3 million payable to SMI under the Baxter transaction if specified milestones are met. Management reported no pending legal matter it believed would potentially have a material adverse effect, while noting ordinary-course litigation remains uncertain.
Important facts for investors to verify
- Whether revenue growth continues across aortic stent grafts, On-X, and preservation services, and whether surgical sealants stabilize after the Q3 decline.
- How much of operating cash generation is repeatable, given working-capital investment and noncash fair-value adjustments; also track cash, inventory, and deferred preservation costs.
- Debt servicing capacity and refinancing timing, particularly the variable-rate term loan and springing maturity provisions tied to the 2025 convertible notes.
- Changes in the $62.3 million Ascyrus contingent-consideration liability, which depends on Level 3 estimates and milestone assumptions.
- PerClot supply and commercial milestones, the status of Endospan/NEXUS development and supply, and exposure to the disclosed regulatory and geopolitical risks.