CryoLife, Inc. (now Artivion, Inc.) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The filing registrant is named CryoLife, Inc.; the company’s business includes medical devices and preservation services for cardiac and vascular surgery.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $76.1M | $53.8M | $147.2M | $120.2M |
| Gross margin | $50.5M (66%) | $35.9M (67%) | $98.4M (67%) | $80.1M (67%) |
| Operating income (loss) | $1.3M | $(1.9)M | $2.8M | $(3.1)M |
| Net loss | $(2.2)M | $(3.7)M | $(5.3)M | $(10.4)M |
| Diluted loss per share | $(0.06) | $(0.10) | $(0.14) | $(0.27) |
- Q2 revenue rose 42% year over year (37% excluding foreign exchange); six-month revenue increased 22% (19% excluding foreign exchange). Product revenue grew 50% in Q2 and 31% for six months; preservation-services revenue grew 22% and 4%, respectively.
- Q2 revenue growth included aortic stents and stent grafts of 60%, surgical sealants 44%, On-X 46%, and preservation services 22%. Management attributed growth broadly to increased product and procedure volumes, improved conditions versus the pandemic-affected 2020 period, foreign exchange, and acquired AMDS sales.
- Gross profit increased with higher sales volume, but Q2 gross margin percentage eased to 66% from 67%, partly due to product write-downs. Six-month gross margin percentage was essentially unchanged.
- Operating expenses rose: Q2 general, administrative and marketing expense was $40.8M versus $32.3M, and R&D was $8.4M versus $5.5M. Six-month expenses were $79.5M and $16.1M, respectively. Acquisition-related business development, integration and severance costs were $3.4M in Q2 and $4.8M for six months.
- Interest expense increased to $4.9M in Q2 and $8.9M for six months, from $3.7M and $7.0M. Other income was $1.3M in Q2; six-month other expense was $0.6M, primarily reflecting foreign-currency effects.
Cash, liquidity and debt
- At June 30, 2021, cash and cash equivalents were $50.5M, down from $61.4M at year-end 2020. Cash, cash equivalents and restricted securities totaled $51.0M.
- Six-month operating cash use was $0.4M, compared with $0.8M in 2020. Investing cash use was $7.0M, including $7.2M of capital expenditures; financing cash use was $3.7M. Inventory and deferred preservation costs increased $11.7M and receivables increased $5.5M, weighing on operating cash flow.
- Working capital was $179.2M and the current ratio was 4:1. Total assets were $810.5M and shareholders’ equity was $301.8M.
- Net carrying value of borrowings was $309.7M; scheduled principal across loans was $319.1M. The $100M 4.25% convertible notes mature July 2025. The term loan and revolving facility maturities were extended to June 2027 and June 2025, respectively, subject to earlier springing maturities tied to the notes. The term-loan interest margin increased by 0.25 percentage points under the amendment. The company reported covenant compliance.
- Management said cash from operations and existing cash were expected to meet operational liquidity needs for at least the next 12 months. It also noted possible future financing needs if it pursues significant business development activity.
Changes, outlook and risks
- Revenue and operating results improved substantially from the prior-year period, when COVID-19-related hospital capacity limits and postponed procedures had a larger impact. COVID-19 continued to affect procedures and collections in some regions; management cautioned that variants, vaccine uptake, supply-chain disruption and hospital restrictions could affect future results.
- A contaminated saline-solution lot led to a 2020 tissue write-off and quarantine. Some quarantined tissue was released late in Q2 2021; management said the issue had reduced tissue availability and affected revenue, particularly in Q1 and to a lesser extent Q2.
- The Ascyrus acquisition generated $4.3M of contingent-consideration fair-value expense for the first half. The contingent liability was $64.2M at June 30, based on Level 3 estimates involving milestone probabilities and projected sales.
- On July 28, 2021, after quarter-end, CryoLife agreed to sell its PerClot assets to a Baxter subsidiary. CryoLife may receive up to $45M, including $19M at closing, further amounts subject to FDA approval and sales milestones, plus approximately $0.8M for manufacturing equipment. CryoLife remains responsible for FDA-approval efforts and certain transition and supply services. The financial impact was still under evaluation.
- Key risks include dependence on hospital procedure volumes and tissue availability, product quality and supplier concentration, regulatory and clinical-approval uncertainty, competition, foreign-exchange exposure, acquisition execution, and substantial debt. No specific financial guidance was provided. Management’s forward-looking statements are subject to these and other risks.
Important facts for investors to verify
- Whether post-pandemic procedure volumes and revenue growth persist, and how much growth reflects acquired products, currency movements or underlying demand.
- Progress in resolving tissue availability effects and any further quality or supply-chain issues.
- PerClot sale proceeds, FDA approval milestones, retained obligations and the transaction’s eventual accounting impact.
- Ascyrus milestone and sales-based contingent payments, and the assumptions driving their fair value.
- Debt-service capacity, covenant requirements and the effect of floating-rate borrowing and convertible-note maturity provisions on liquidity.