Artivion(AORT) - 2019 Q1 - Quarterly Report

Part I – FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the quarterly period ended March 31, 2019 Summary Consolidated Statements of Operations and Comprehensive (Loss) Income The company reported a 9% revenue increase to $67.5 million and a significantly reduced net loss of $297 thousand Q1 2019 vs Q1 2018 Statement of Operations (in thousands, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Total Revenues | $67,505 | $61,948 | | Gross Margin | $44,273 | $39,228 | | Operating Income (Loss) | $2,205 | $(3,490) | | Net Loss | $(297) | $(3,855) | | Diluted Loss Per Share | $(0.01) | $(0.11) | Summary Consolidated Balance Sheets Total assets grew to $586.9 million, while liabilities increased due to the adoption of new lease accounting standards Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $178,652 | $179,168 | | Total Assets | $586,928 | $571,091 | | Total Current Liabilities | $36,423 | $34,523 | | Total Liabilities | $314,306 | $296,024 | | Total Shareholders' Equity | $272,622 | $275,067 | - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, resulting in the recognition of operating lease right-of-use assets of $23.0 million and corresponding lease liabilities[11][17] Summary Consolidated Statements of Cash Flows Operating activities generated $1.2 million in cash, a significant improvement from a $9.7 million use in the prior year Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,161 | $(9,727) | | Net cash flows used in investing activities | $(1,427) | $(2,119) | | Net cash flows used in financing activities | $(1,215) | $(1,954) | | Decrease in cash, cash equivalents, and restricted securities | $(1,161) | $(13,361) | Summary Consolidated Statements of Shareholders' Equity Shareholders' equity decreased by $2.5 million, primarily driven by a net loss and foreign currency translation adjustments - Total shareholders' equity decreased by $2.5 million during the first quarter of 2019, from $275.1 million to $272.6 million[15] - The comprehensive loss for the quarter was $4.1 million, which included a net loss of $0.3 million and a foreign currency translation loss of $3.8 million[15] Notes to Summary Consolidated Financial Statements The notes detail accounting policies, including the adoption of ASC 842, segment data, and debt facility information - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, recognizing operating lease right-of-use assets and liabilities of $22.7 million[17][34] - As of March 31, 2019, the company had $186.7 million in goodwill, all related to the Medical Devices segment[26] - The company has a $255.0 million senior secured credit facility, consisting of a $225.0 million term loan and a $30.0 million revolving credit facility[43][50] - Enrollment for the pivotal clinical trial for PerClot in the U.S. was completed in January 2019, with a PMA submission to the FDA anticipated in early 2020[55] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 9% revenue increase, improved margins, and the company's liquidity and capital resources Results of Operations Q1 2019 revenues rose 9% to $67.5 million, with gross margin improving to 66% from 63% year-over-year Revenues by Product/Service (in thousands) | Category | Q1 2019 | Q1 2018 | % Change | | :--- | :--- | :--- | :--- | | Total Products | $48,401 | $43,598 | 11% | | - BioGlue | $17,222 | $15,970 | 8% | | - JOTEC | $15,954 | $14,460 | 10% | | - On-X | $11,731 | $10,309 | 14% | | Total Preservation Services | $19,104 | $18,350 | 4% | | Total Revenues | $67,505 | $61,948 | 9% | - Gross margin increased to 66% in Q1 2019 from 63% in Q1 2018, primarily due to the absence of a $1.5 million inventory step-up expense from the JOTEC acquisition[105][108] - General, administrative, and marketing expenses decreased 2% to $36.5 million, mainly due to lower business development and integration expenses related to the JOTEC Acquisition[109] Liquidity and Capital Resources The company maintains sufficient liquidity with $142.3 million in net working capital and a $30 million undrawn credit facility - Net working capital was $142.3 million as of March 31, 2019, with a current ratio of 5 to 1[121] - Management believes cash from operations and existing cash will be sufficient to meet operational liquidity needs for at least the next twelve months[123] Scheduled Contractual Obligations (in thousands) | Obligation Type | Total | Remainder of 2019 | 2020-2021 | 2022-2023 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt obligations | $225,262 | $2,085 | $5,562 | $5,562 | $212,053 | | Interest on long-term debt | $71,753 | $9,757 | $25,630 | $25,064 | $11,302 | | Operating leases | $29,095 | $4,396 | $11,653 | $5,664 | $7,382 | | Total | $346,795 | $24,822 | $48,657 | $38,387 | $234,929 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate and foreign currency exchange rate fluctuations - The company's interest income and expense are sensitive to U.S. interest rate changes, affecting its $40.3 million in cash and its $225.0 million secured Term Loan[142] - A portion of international revenues and expenses are denominated in foreign currencies, primarily the Euro, creating exposure to exchange rate fluctuations[144][145] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2019 - Based on an evaluation as of March 31, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[148] Part II - OTHER INFORMATION Legal Proceedings Management believes no pending legal matters will have a material adverse effect on the company's business - The company does not believe there are any pending legal matters that could have a material adverse effect on its business, financial condition, or cash flows[150] Risk Factors The company faces significant risks related to acquisition integration, indebtedness, product dependency, and regulations - The company may not realize all anticipated benefits of the JOTEC Acquisition due to factors like market growth, integration challenges, and competition[152] - Significant indebtedness ($225.0 million term loan) could limit borrowing capacity and restrict operations through covenants[155][156] - The company is highly dependent on revenues from key products: BioGlue (26% of revenue), JOTEC (24%), and On-X (17%)[165][166][167] - The FDA is considering reclassifying the CryoValve SGPV to a Class III medical device, which would require a costly and uncertain Premarket Approval (PMA) process[180][181] - The investment in PerClot is subject to significant risk, including the ability to obtain FDA approval and successfully commercialize it in a competitive U.S. market[176] Unregistered Sales of Equity Securities and Use of Proceeds The company purchased 81,490 shares of its common stock to cover taxes on employee stock compensation Common Share Purchases (Q1 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2019 | -- | $ -- | | Feb 2019 | 27,902 | $28.88 | | Mar 2019 | 53,588 | $29.32 | | Total | 81,490 | $29.17 | - The shares purchased were tendered by employees to pay taxes on stock compensation and were not part of a publicly announced repurchase program[235] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[236] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and XBRL interactive data files[239]