Artivion, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Artivion makes medical devices and provides preservation services for cardiac and vascular surgery, including aortic stent grafts, On-X heart valves, BioGlue surgical sealants, and preserved human tissues.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $83.2 million | $77.2 million | +8%; +10% at constant currency |
| Gross profit / margin | $53.7 million / 64.6% | $50.7 million / 65.7% | Profit +6%; margin down about 1.1 percentage points |
| Operating expenses | $57.6 million | $49.1 million | +17% |
| Operating income (loss) | $(3.9) million | $1.6 million | Declined |
| Net loss | $(13.5) million | $(3.4) million | Loss increased |
| Diluted loss per share | $(0.33) | $(0.08) | Loss per share increased |
| Cash from operating activities | $(6.2) million | $(0.6) million | More cash used |
Revenue growth reflected higher On-X, preservation services, surgical sealant, and aortic stent graft sales, partly offset by lower other product revenue. On-X revenue rose 23% and preservation services rose 6%. Constant-currency product revenue grew 12%. Gross margin dollars increased, but margin percentage fell, mainly due to inflation-related material and labor costs, partly offset by pricing.
General, administrative, and marketing expense rose 29% to $50.4 million, including a $4.8 million expense from remeasuring Ascyrus acquisition contingent consideration; the comparable 2022 period included $1.8 million of income from that valuation. Research and development expense declined 29% to $7.2 million. Interest expense increased to $6.1 million from $3.9 million, primarily due to higher term-loan rates. The effective tax expense rate was 52%, versus 40%.
Financial position and liquidity
- Cash and cash equivalents were $30.8 million at March 31, 2023, down from $39.4 million at December 31, 2022. Approximately 60% of cash was held outside the United States.
- Net working capital was $196.7 million and the current ratio was 5:1, broadly unchanged from year-end.
- Long-term debt was $306.3 million, with $1.6 million of current maturities. Total loan balances before unamortized issuance costs were $314.1 million. The credit facility’s aggregate interest rate was 8.66% at quarter-end.
- Cash used in investing activities was $2.8 million, including $2.2 million of capital expenditures. Financing activities provided $1.2 million, principally from stock-option exercises and share issuance, partly offset by debt repayment and tax-withholding share repurchases.
- Management stated that existing cash and cash from operations were expected to cover current operational liquidity needs for at least the next 12 months. It also noted potential future needs for debt service, clinical trials, research and development, capital spending, and business-development obligations.
Material changes, outlook, and risks
- Management cited four growth areas: new products, new indications, global expansion, and business development. The filing provides no specific full-year revenue or earnings guidance; first-quarter results are not necessarily indicative of the full year.
- In February 2023, the CardioGenesis handpiece supplier stopped supply after its sole-source tubing supplier ceased operating. Artivion was evaluating alternatives and did not expect significant revenue from the product line until a new manufacturing source was qualified and approved.
- Artivion expected to fund a further $5.0 million Endospan loan tranche in Q2 2023, subject to agreement requirements, after a clinical-trial enrollment milestone. The loan’s fair-value impact was under evaluation.
- Potential contingent payments include up to $100 million tied to Ascyrus milestones and sales, and up to $7.5 million related to Baxter milestones. The Ascyrus liability was valued at $45.2 million at quarter-end; its fair value relies on management assumptions about future milestones and revenue.
- Key risks include hospital staffing and procedure-volume disruptions; inflation, foreign-exchange movements, and supply-chain constraints; dependence on sole-source suppliers; regulatory approvals and European medical-device certification transitions; tissue availability and processing risks; clinical-trial and product-adoption uncertainty; and competition. The company also highlighted variable-rate debt and foreign-currency exposure. It reported compliance with debt covenants and effective disclosure controls.
- Management reported no pending legal matter it currently believed could have a material adverse effect, while noting that adverse outcomes in ordinary-course proceedings could affect a particular period. A potential Italian medical-device spending-ceiling repayment exposure was estimated at approximately €400,000 and remained subject to ongoing challenges and negotiations.
Important facts for investors to verify
- Whether revenue growth continues and whether gross-margin pressure from costs and foreign exchange persists.
- Progress in qualifying and obtaining approval for a replacement CardioGenesis handpiece supplier, and the resulting effect on sales.
- Cash generation, liquidity needs, and ability to service variable-rate debt; monitor the 2025 convertible-note maturity and related credit-facility springing-maturity provisions.
- Endospan loan funding and repayment prospects, and changes in Ascyrus contingent consideration assumptions or valuation.
- Regulatory and clinical milestones, including BioGlue approvals and medical-device certifications, as well as supply and tissue-processing constraints.