Business context and reporting period
This is CryoLife, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The filing describes a medical-device and human-tissue preservation business; it identifies the registrant as CryoLife, Inc., not Artivion, Inc. Results reflect the COVID-19 pandemic and the September acquisition of Ascyrus Medical LLC.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $65.1 million | $67.9 million | $185.3 million | $206.5 million |
| Gross margin | $43.1 million (66%) | $45.2 million (67%) | $123.2 million (66%) | $136.5 million (66%) |
| Operating income | $3.6 million | $4.7 million | $0.5 million | $13.4 million |
| Net income (loss) | $(2.9) million | $(0.1) million | $(13.2) million | $2.4 million |
| Diluted EPS | $(0.08) | $(0.00) | $(0.35) | $0.06 |
Q3 revenue declined 4% year over year; nine-month revenue declined 10%. Q3 operating margin was approximately 5.6%, versus 6.9% a year earlier. For the nine-month period, operating margin was approximately 0.3%, versus 6.5%. Revenue declines and fixed operating costs contributed to the losses. Interest expense was $4.9 million in Q3 and $12.0 million for nine months; other expense included a $4.9 million fair-value adjustment to the Endospan loan.
Operating cash flow was $6.9 million for nine months, down from $14.8 million. Investing cash use was $70.8 million, primarily for Ascyrus, Endospan, and capital expenditures; financing provided $95.3 million, mainly from convertible-note proceeds. Cash and cash equivalents were $64.1 million at September 30, versus $33.8 million at December 31, 2019. Working capital was $180.0 million and the current ratio was 4:1.
Reported debt was approximately $290.9 million net of unamortized issuance costs, including $100 million principal amount of 4.25% convertible notes due July 2025. The revolver was repaid in June and had no reported outstanding balance at quarter-end. Operating and finance lease liabilities were $20.7 million and $5.8 million, respectively.
Material changes versus comparable periods
- Product revenue fell 5% in Q3 and 12% for nine months; preservation-services revenue fell 2% and 5%, respectively.
- Q3 product weakness included CardioGenesis cardiac laser therapy (down 94%), PerClot (down 26%), On-X (down 4%), and JOTEC (down 3%). BioGlue and PhotoFix grew 1% and 4%. For nine months, CardioGenesis revenue fell 93%; BioGlue, JOTEC, On-X, and PerClot also declined.
- Management attributed much of the revenue pressure to procedures delayed or cancelled because of COVID-19, hospital restrictions, and patient reluctance. It reported sequential recovery through Q3 after the sharpest impact in April.
- Gross margin percentage was broadly stable for the nine-month period, but lower Q3 margin reflected product mix. Cost reductions and lower preservation-service unit costs partly offset lower sales.
- Cash increased partly because of the $100 million convertible-note issuance. The Ascyrus acquisition added $62.7 million of preliminary goodwill and $72.6 million of acquired intangible assets.
Outlook, commentary, risks, and unusual items
- No quantitative revenue or earnings guidance is provided. Management said cash from operations and existing cash were expected to cover current operating liquidity needs for at least the next 12 months, while noting future cash needs could include debt service, clinical research, working capital, and business-development payments.
- Management warned COVID-19 could continue to affect results through Q4 2020 and beyond; procedure volumes, supply, clinical-trial timing, and regulatory reviews remained uncertain. Spending actions included hiring restrictions, reduced discretionary and R&D spending, lower capital expenditures, and temporary senior-management salary reductions.
- CardioGenesis handpiece supply was unavailable pending resolution of FDA observations at the supplier’s manufacturing-site change inspection. The company anticipated supply resuming in the first half of 2021.
- Management anticipated being positioned to submit PerClot’s U.S. PMA application in Q4 2020. Failure to secure approval could impair related prepaid royalties, intangible assets, and property and equipment.
- Ascyrus was acquired for $63.7 million cash and $20.0 million in stock at closing. Additional consideration is milestone- and sales-contingent; the company recorded a $55.4 million fair-value liability, with potential further consideration of up to $120 million under the transaction terms. Purchase-price allocation remained preliminary.
- The credit agreement required minimum liquidity of $12 million under specified conditions and included payment restrictions. The company had obtained a waiver of its maximum first-lien leverage covenant through year-end 2020.
- Other material risks include foreign-exchange exposure, competition, regulatory approvals and product quality, tissue availability and processing, debt and covenant compliance, and the ability to realize benefits from acquisitions. Management said it knew of no pending legal matter expected to have a material adverse effect.
Important facts for investors to verify
- Whether procedure volumes and revenue continued to recover after Q3, and the continuing effects of COVID-19 on hospital activity.
- Progress on CardioGenesis handpiece supply and whether the anticipated first-half 2021 resumption occurred.
- PerClot PMA submission and subsequent regulatory status, and the recoverability of related assets.
- Ascyrus regulatory and commercial milestones, resulting contingent payments, and final purchase-price allocation.
- Cash generation, debt service, covenant compliance, and remaining liquidity after acquisition-related and other contractual commitments.