Artivion, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results; comparisons are with the corresponding 2022 periods. Amounts below are in millions of dollars unless noted.
Business context and financial performance
Artivion makes and distributes medical devices and preserves human tissue used in cardiac and vascular surgery. Its reportable segments are Medical Devices and Preservation Services.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $89.3 | $80.3 | $172.5 | $157.6 |
| Gross margin | $58.1; 65% | $52.2; 65% | $111.8; 65% | $102.9; 65% |
| Operating income | $7.7 | $4.5 | $3.8 | $6.2 |
| Net loss | $(3.4) | $(4.3) | $(16.9) | $(7.6) |
| Diluted loss per share | $(0.08) | $(0.11) | $(0.41) | $(0.19) |
| Operating cash flow | Not presented quarterly | $0.8 | $(8.9) |
Revenue grew 11% in Q2 and 9% in the first half year over year; constant-currency revenue growth was 11% in both periods. Q2 product revenue increased 12%, led by aortic stent grafts (+19%) and On-X (+10%); preservation services rose 9%. First-half revenue increased across all reported product and service categories.
Financial position, cash flow and debt
- At June 30, cash and cash equivalents were $48.8 million, versus $39.4 million at December 31, 2022. Net working capital was $207.7 million and the current ratio was 5:1.
- Total debt carrying value was $307.7 million, including $212.6 million on the term loan and $100.0 million of convertible notes. The credit agreement interest rate was 9.00%; interest expense rose to $6.4 million for Q2 and $12.5 million for the first half.
- Six-month cash flow included $4.2 million from investing activities, principally the $14.3 million PerClot-related receipt, offset in part by a $5.0 million Endospan loan tranche and $4.0 million of capital expenditures. Financing activities provided $3.4 million.
- Management said cash on hand and operating cash flows were expected to meet operational liquidity needs for at least 12 months. Future needs include debt service, clinical and R&D spending, working capital, capital expenditures and potential business-development obligations.
Changes, unusual items and management commentary
- FDA approval of PerClot in May 2023 triggered an $18.8 million payment from Baxter, of which $4.5 million was paid to SMI. Artivion recorded a net $14.3 million gain. The company then began manufacturing and supplying PerClot to Baxter under a 21-month agreement, subject to renewal provisions.
- Q2 operating income includes the $14.3 million PerClot gain. Excluding that gain, operating results would have been a loss; the filing does not present this adjusted amount as a non-GAAP measure.
- General, administrative and marketing expense rose 47% in Q2 and 38% in the first half. The increase included Ascyrus contingent-consideration remeasurement expense of $10.9 million in Q2 and $15.7 million year to date. The contingent-consideration liability was $56.1 million at June 30, up from $40.4 million at year-end.
- Research and development expense decreased 14% in Q2 and 22% in the first half. Interest expense increased primarily because of the higher term-loan rate. A $5.0 million Endospan loan fair-value expense was recorded in the first half.
- Artivion abandoned its CardioGenesis cardiac laser therapy business after its supplier ceased handpiece supply and no alternative was identified. It wrote off related assets and recorded a $0.4 million expense.
- No specific full-year revenue or earnings guidance is stated in the provided filing text. Management identifies new products, new indications, international expansion and business development as growth areas, while noting uncertainty in procedure volumes, labor availability, supply chains, inflation, interest rates and foreign exchange.
Risks and contingencies
- Key business risks include reliance on single- or sole-source suppliers, tissue availability and processing, product quality and liability claims, competition, regulatory approvals and certification renewals, and dependence on major product lines including tissue preservation, BioGlue, aortic stent grafts and On-X.
- Foreign exchange is a material exposure: management estimated that a further 10% adverse currency move affecting foreign-currency balances could affect financial position or cash flows by approximately $7.0 million.
- Debt is largely variable-rate and secured by substantially all US assets. The filing notes covenant restrictions and springing maturity provisions tied to the convertible notes; Artivion reported compliance with debt covenants at June 30, 2023.
- Potential payments include up to $100.0 million of Ascyrus milestone and sales-based consideration and up to $3.0 million to SMI under the Baxter transaction if specified milestones are achieved. The Italian medical-device spending-cap repayment exposure was estimated at approximately €0.4 million and remained subject to challenge and negotiation.
- The company said it was not aware of pending legal matters expected to have a material adverse effect, while cautioning that litigation outcomes are uncertain. Disclosure controls were considered effective at a reasonable assurance level, with no material control changes reported during the quarter.
Investor verification points
- Separate underlying operating performance from the one-time $14.3 million PerClot gain and assess the recurring drivers of operating expenses.
- Track the Ascyrus contingent-consideration valuation, potential payments and effects on reported earnings.
- Review cash generation, working-capital use and the ability to service high-rate debt, including convertible-note and credit-facility maturity terms.
- Monitor whether PerClot manufacturing and supply proceeds as planned, and the commercial and regulatory progress of Endospan/NEXUS and other pipeline programs.
- Assess supplier continuity, tissue supply, product quality, and European regulatory certification risks, including BioGlue and PhotoFix.