Artivion(AORT) - 2019 Q2 - Quarterly Report

Part I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents CryoLife's unaudited consolidated financial statements for Q2 and H1 2019 and 2018, including statements of operations, balance sheets, cash flows, and shareholders' equity Summary Consolidated Statements of Operations and Comprehensive Income (Loss) CryoLife reported Q2 2019 total revenues of $71.1 million, operating income of $6.5 million, and net income of $2.8 million, with H1 revenues reaching $138.6 million Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $71,139 | $68,496 | $138,644 | $130,444 | | Gross Margin | $46,966 | $45,851 | $91,239 | $85,079 | | Operating Income | $6,502 | $5,405 | $8,707 | $1,915 | | Net Income (Loss) | $2,832 | $226 | $2,535 | $(3,629) | | Diluted EPS | $0.07 | $0.01 | $0.07 | $(0.10) | Summary Consolidated Balance Sheets As of June 30, 2019, total assets increased to $597.1 million, driven by receivables and lease assets, with total liabilities at $315.0 million and shareholders' equity at $282.2 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $39,747 | $41,489 | | Total current assets | $188,557 | $179,168 | | Goodwill | $188,106 | $188,781 | | Total Assets | $597,123 | $571,091 | | Total current liabilities | $37,468 | $34,523 | | Long-term debt | $215,013 | $215,721 | | Total Liabilities | $314,970 | $296,024 | | Total Shareholders' Equity | $282,153 | $275,067 | - The company adopted the new lease accounting standard (ASC 842) as of January 1, 2019, resulting in the recognition of $22.7 million in operating lease right-of-use assets and corresponding lease liabilities[16][27] Summary Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $1.9 million for H1 2019, compared to a $9.0 million use in H1 2018, with an overall cash decrease of $1.9 million Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $1,907 | $(8,960) | | Net cash used in investing activities | $(3,646) | $(3,631) | | Net cash used in financing activities | $(824) | $(2,960) | | Decrease in cash | $(1,981) | $(15,034) | Notes to Summary Consolidated Financial Statements Detailed disclosures cover accounting policies, debt, leases, revenue recognition, and segment information, including ASC 842 adoption and PerClot clinical trial progress - As of January 1, 2019, the company adopted ASC 842 (Leases), recognizing operating lease right-of-use assets and liabilities of $22.7 million using a modified retrospective approach[16][27] - The company's debt is primarily from a $225.0 million secured term loan facility entered into in December 2017, with an interest rate of 5.58% per annum as of June 30, 2019, and a $30.0 million revolving credit facility remains undrawn[33][34] - Enrollment for the pivotal clinical trial for PerClot in the U.S. was completed in January 2019, with a Premarket Approval (PMA) submission to the FDA anticipated in early 2020[39] Revenue by Segment (in thousands) | Segment | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Medical devices | $51,168 | $49,313 | $99,569 | $92,911 | | Preservation services | $19,971 | $19,183 | $39,075 | $37,533 | | Total revenues | $71,139 | $68,496 | $138,644 | $130,444 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2019 financial results, highlighting revenue growth, stable gross margin, improved operating cash flow, and sufficient liquidity Results of Operations Q2 revenues grew 4% to $71.1 million and H1 revenues grew 6% to $138.6 million, driven by BioGlue, On-X, and preservation services, with stable operating expenses Revenue by Product/Service (Q2, in thousands) | Product/Service | Q2 2019 | Q2 2018 | % Change | | :--- | :--- | :--- | :--- | | BioGlue | $17,933 | $17,069 | 5% | | JOTEC | $17,208 | $17,205 | 0% | | On-X | $12,410 | $11,888 | 4% | | Preservation services | $19,971 | $19,183 | 4% | | Total | $71,139 | $68,496 | 4% | Revenue by Product/Service (YTD, in thousands) | Product/Service | YTD 2019 | YTD 2018 | % Change | | :--- | :--- | :--- | :--- | | BioGlue | $35,155 | $33,039 | 6% | | JOTEC | $33,162 | $31,665 | 5% | | On-X | $24,141 | $22,197 | 9% | | Preservation services | $39,075 | $37,533 | 4% | | Total | $138,644 | $130,444 | 6% | - Gross margin as a percentage of total revenues was 66% in Q2 2019, down from 67% in Q2 2018, primarily due to revenue mix and inventory write-offs, but increased for the six-month period to 66% from 65% in 2018 due to the absence of JOTEC inventory step-up costs[68] - General, administrative, and marketing expenses decreased 1% for the six months ended June 30, 2019, primarily due to lower business development and integration expenses related to the JOTEC Acquisition ($1.3 million in H1 2019 vs. $5.1 million in H1 2018)[68] Liquidity and Capital Resources Net working capital was $151.1 million as of June 30, 2019, with $1.9 million in operating cash flow for H1, and sufficient liquidity for the next twelve months - Net working capital was $151.1 million as of June 30, 2019, compared to $144.7 million at December 31, 2018[72] - Net cash provided by operating activities was $1.9 million for the first six months of 2019, compared to net cash used of $9.0 million in the same period of 2018[77] - The company has a $255.0 million senior secured credit facility, consisting of a $225.0 million term loan and an undrawn $30.0 million revolving credit facility[74] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and foreign currency fluctuations, but management assesses a 10% adverse change would not be material - The company is exposed to interest rate risk on its $39.7 million in cash and its variable-rate $225.0 million secured Term Loan Facility[81] - Foreign currency exchange rate risk exists as a portion of international revenues and expenses are denominated in Euros, British Pounds, Swiss Francs, and other currencies[81] - Management concluded that a 10% adverse change in interest rates or foreign currency exchange rates would not have a material effect on the company's financial position, results of operations, or cash flows[81] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2019 - Based on an evaluation as of June 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[83] Part II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, but management does not anticipate any material adverse effects on its financial condition or operations - The company states that it does not believe any pending legal matters could have a material adverse effect on its business, financial condition, results of operations, or cash flows[84] Item 1A. Risk Factors Significant risks include failure to realize JOTEC acquisition benefits, substantial indebtedness, dependence on key products, regulatory compliance, and intense competition - The company may not realize all anticipated benefits from the JOTEC acquisition, and its significant indebtedness could adversely affect its ability to raise capital and react to market changes[85][87] - The business is significantly dependent on revenues from tissue preservation services (28% of revenue) and key products like BioGlue (25%), JOTEC (24%), and On-X (18%)[93][94][95] - The company faces significant regulatory risks, including potential reclassification of its CryoValve SGPV to a Class III device by the FDA and more stringent requirements under the new European Medical Device Regulation (MDR)[95][97] - Competition is intense from large, well-established medical device companies like Baxter, Medtronic, and Johnson & Johnson, which have greater financial and marketing resources[105][106] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2019, the company repurchased 8,817 common shares at an average price of $31.17 to cover tax obligations related to stock compensation Share Repurchases in Q2 2019 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | 0 | N/A | | May 2019 | 8,753 | $31.17 | | June 2019 | 64 | $31.05 | | Total | 8,817 | $31.17 | - The shares purchased were tendered by employees to cover taxes on stock compensation and were not part of a formal, publicly announced buyback program[125]