Business context and reporting period
CryoLife, Inc. (the issuer named in this filing; now known as Artivion, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. It sells medical devices and provides cardiac and vascular tissue-preservation services. COVID-19 disrupted hospital procedures and demand during the period.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $53.8 | $71.1 | $120.2 | $138.6 |
| Gross profit / margin | $35.9 / 67% | $47.0 / 66% | $80.1 / 67% | $91.2 / 66% |
| Operating income (loss) | $(1.9) | $6.5 | $(3.1) | $8.7 |
| Net income (loss) | $(3.7) | $2.8 | $(10.4) | $2.5 |
| Diluted earnings (loss) per share | $(0.10) | $0.07 | $(0.27) | $0.07 |
- Q2 revenue declined 24% year over year; six-month revenue declined 13%. Management attributed the reductions mainly to delayed or cancelled procedures and patient reluctance amid COVID-19.
- Q2 product revenue fell 27% and preservation-services revenue fell 17%. Six-month declines were 16% and 7%, respectively. All major product lines declined in Q2; PhotoFix was the exception among products for the six-month period, growing 15%.
- Gross margin improved to 67% from 66% in both comparison periods, which the company attributed primarily to lower unit costs. Despite lower Q2 general and administrative and marketing expense, the revenue decline and relatively fixed costs contributed to operating and net losses.
- Six-month operating cash flow was a use of $0.8 million, versus $1.9 million provided in 2019. Investing cash outflow was $4.5 million, including $3.8 million of capital expenditures. Financing provided $96.2 million, primarily from convertible-note proceeds.
- At June 30, cash and cash equivalents were $125.6 million, versus $33.8 million at December 31, 2019. Working capital was $238.2 million and the current ratio was 6:1. Debt carrying value was $290.1 million, including $100 million principal of new convertible notes; cash less debt carrying value was approximately $(164.5) million.
Material changes, outlook, and risks
- In June, the company issued $100 million of 4.25% convertible senior notes due July 1, 2025, receiving approximately $96.5 million net proceeds. It used proceeds to repay the $30 million revolver draw and expected to use the balance for general corporate purposes. Management’s stated current intent was to pay principal in cash and any conversion value above principal in shares. The notes’ initial conversion price was approximately $23.46 per share.
- A credit-agreement amendment waived the maximum first-lien leverage covenant through 2020 and introduced a minimum liquidity covenant of $12 million under specified conditions, with restrictions on certain payments. Management stated that existing cash and operating cash flows were expected to meet operational liquidity needs for at least 12 months, while noting potential additional financing needs for significant business development.
- COVID-19 had its most severe revenue impact in April, followed by sequential recovery in May and June. Management expected the pandemic to continue negatively affecting results for at least Q3 2020 and potentially beyond; procedure volumes and the recovery path remained uncertain. The company reduced discretionary spending, hiring, capital expenditure and some R&D, while reporting manufacturing sites operating near full production.
- CardioGenesis cardiac laser therapy revenue fell 91% in Q2 because the supplier could not provide handpieces pending resolution of FDA inspection observations and approval of a manufacturing-location change. The company anticipated supply resumption in the second half of 2020, but this was not assured.
- The company anticipated submitting PerClot’s U.S. premarket approval application in Q4 2020. Failure to obtain approval could impair related assets; the filing reported $1.5 million in prepaid royalties, $1.9 million in net intangible assets, and $1.2 million in net property and equipment associated with PerClot.
- Further Endospan loan tranches of $5 million each may be due upon specified milestones and conditions. CryoLife’s stated maximum exposure to the Endospan variable-interest entity was $15 million as of June 30, 2020. Its contingent option to acquire Endospan was priced at $350 million to $450 million, subject to agreement terms and FDA-related timing.
- Other risks include procedure-volume and tissue-supply variability, regulatory approvals and compliance, foreign-exchange movements, supplier concentration, debt and covenant constraints, and product or tissue liability. The company reported no pending legal matter it believed could potentially have a material adverse effect, but acknowledged ordinary-course legal actions and uncertainty. Estimated unreported product and tissue claims were $1.9 million; actuarial analysis indicated the estimate could be as high as $3.8 million including a reasonable statistical margin.
- No specific revenue or earnings guidance was provided in the supplied filing text. Management also noted that 2020 seasonality may be obscured by COVID-19-related shifts in procedure timing.
Key facts investors should verify
- Whether procedure volumes and revenues recovered after June, particularly during Q3 and beyond, and whether the improvement was sustained.
- Whether operating cash flow, working-capital needs, and the stated 12-month liquidity expectation remain consistent with actual performance.
- Debt balances, interest costs, covenant compliance, minimum-liquidity requirements, and the potential dilution or settlement terms of the convertible notes.
- Whether the cardiac laser handpiece supply resumed as anticipated and whether PerClot’s FDA submission and Endospan milestone funding proceeded on schedule.
- Whether tissue availability, regulatory developments, foreign-exchange effects, or product-liability estimates materially changed after the reporting date.