Artivion, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Artivion develops and sells cardiovascular medical devices and provides cardiac and vascular tissue preservation services. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $76.8 | $72.2 | $234.4 | $219.4 |
| Gross margin | $48.7 (63%) | $47.8 (66%) | $151.6 (65%) | $146.1 (67%) |
| Operating income (loss) | $(4.1) | $14.7 | $2.1 | $17.5 |
| Net income (loss) | $(13.7) | $10.6 | $(21.4) | $5.3 |
| Diluted EPS | $(0.34) | $0.26 | $(0.53) | $0.13 |
| Operating cash flow | Not separately presented for the quarter | $(4.9) | $(3.3) |
Reported revenue grew 6% in Q3 and 7% for the nine-month period. Management said growth was 11% for both periods excluding foreign-exchange effects. Q3 revenue increases in preservation services, On-X, and surgical sealants were partly offset by lower aortic stent graft sales. For the nine months, growth in aortic stent grafts, preservation services, and On-X was partly offset by lower surgical sealant revenue.
Gross margin dollars increased, but gross margin percentage declined, which management attributed mainly to inflation in materials and labor and product mix, partly offset by pricing. Q3 operating results also included $4.7 million of PROACT Xa trial termination and wind-down costs in R&D. The prior-year comparison included a $15.9 million gain from the PerClot asset sale to Baxter, explaining much of the change in operating results.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $37.6 million at September 30, 2022, down from $55.0 million at December 31, 2021. About 44% of cash was held outside the U.S.
- Net working capital was $192.0 million and the current ratio was 5:1, versus $202.7 million and 6:1 at year-end 2021.
- Net borrowings were $308.2 million: a $214.3 million term loan, $100.0 million of 4.25% convertible notes, and other borrowings, net of unamortized loan costs. Long-term debt maturities were $1.6 million current and $306.7 million non-current.
- The term loan is variable-rate; the credit facility is secured by substantially all U.S. assets. The company reported compliance with debt covenants. The convertible notes mature July 2025; credit-facility maturities may spring earlier if the notes remain outstanding under specified conditions.
- For the first nine months, investing cash use was $8.0 million, primarily capital expenditures of $6.9 million; financing cash use was $0.8 million. Cash declined $17.4 million, including a $3.7 million adverse foreign-exchange effect.
Management stated that cash, cash equivalents, and operating cash flows were expected to cover current operational liquidity needs for at least the next 12 months. Future cash needs include debt service, R&D and clinical trials, working capital, capital expenditures, and potential business-development payments. Management noted that additional financing might be needed for significant future business-development activity, with no assurance of availability on acceptable terms.
Material developments, outlook, and risks
- PROACT Xa: The company stopped the On-X trial in September on the independent monitoring board’s recommendation. The board cited insufficient evidence that apixaban was non-inferior to warfarin and potential patient risk. Most of the $4.7 million recorded wind-down costs were expected to be incurred in Q4 2022 and Q1 2023.
- Regulatory: Artivion was transitioning BioGlue and PhotoFix certifications to a new European notified body. It anticipated completing BioGlue’s CE Mark renewal in Q4 2022 and relied on country-specific derogations to continue commercialization in the interim. Delays or lost derogations could constrain sales. The filing also notes that the Chord-X CE Mark expired in September 2022, affecting future supply in some territories once saleable inventory is depleted.
- Operating environment: COVID-related hospital staffing shortages, procedure delays, and collection difficulties, supply-chain disruption, inflation, labor constraints, and a stronger U.S. dollar remained risks. Management said COVID’s revenue impact was smaller than in the prior year but varied by region. Foreign exchange reduced reported international revenue; management also warned that distributor purchases may be affected by local-currency weakness.
- Other exposures: Revenue depends in part on tissue availability and processing yields, and on aortic stent grafts, BioGlue, and On-X. The company faces single- and sole-source supplier and facility dependencies, medical-device and tissue quality/liability risks, and international regulatory and currency risks. An additional 10% adverse exchange-rate change affecting foreign-currency balances could affect financial position or cash flows by approximately $7.0 million.
- Contingencies and commitments: Potential Ascyrus milestone and sales-based payments are up to $100 million; the fair-value liability was $44.8 million at quarter-end. The company also disclosed a $5 million Endospan clinical-milestone payment obligation and potential Baxter-related milestone payments. Management reported no pending legal matter believed likely to have a material adverse effect, while noting that ordinary-course proceedings remain subject to uncertainty.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management identifies new products, new indications, global expansion, and business development as growth areas, while cautioning that results may fluctuate and forward-looking expectations are subject to risks.
Important facts for investors to verify
- Whether revenue growth persists after currency effects, and whether the stated 11% constant-currency growth for both Q3 and nine months is consistent with the company’s underlying schedules.
- Whether gross-margin pressure from inflation, labor, product mix, and foreign exchange continues, and whether the company returns to positive operating and net income.
- Cash generation, working-capital demands, and debt-service capacity, including exposure to variable rates and the credit facility’s springing-maturity provisions.
- Completion of BioGlue certification and renewal, continuation of country derogations, and the commercial impact of the Chord-X certification lapse.
- Financial and strategic effects of ending PROACT Xa, including remaining wind-down costs and implications for On-X market development.
- Progress and potential cash consequences of Ascyrus, Endospan, and Baxter milestones, and exposure to key suppliers, tissue availability, and hospital procedure volumes.