Artivion(AORT) - 2019 Q3 - Quarterly Report

Part I – FINANCIAL INFORMATION Item 1. Financial Statements CryoLife's unaudited Q3 2019 financial statements show a net loss of $0.13 million, with total assets of $592.6 million and new Endospan agreements Consolidated Statement of Operations Highlights (in thousands) | Metric | Q3 2019 (Unaudited) | Q3 2018 | Nine Months 2019 (Unaudited) | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $67,881 | $64,598 | $206,525 | $195,042 | | Gross Margin | $45,222 | $42,714 | $136,461 | $127,793 | | Operating Income | $4,704 | $4,618 | $13,411 | $6,533 | | Net (Loss) Income | $(134) | $1,565 | $2,401 | $(2,064) | | Diluted (Loss) Income per Share | $0.00 | $0.04 | $0.06 | $(0.06) | Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $36,685 | $41,489 | | Total current assets | $181,354 | $179,168 | | Goodwill | $183,368 | $188,781 | | Total Assets | $592,602 | $571,091 | | Long-term debt | $214,793 | $215,721 | | Total Liabilities | $315,101 | $296,024 | | Total Shareholders' Equity | $277,501 | $275,067 | Consolidated Statement of Cash Flows Highlights (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2019 (Unaudited) | 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $14,767 | $(640) | | Net cash used in investing activities | $(20,753) | $(4,997) | | Net cash used in financing activities | $(836) | $(1,278) | - In September 2019, the company entered into significant agreements with Endospan Ltd., including an exclusive distribution agreement, a securities purchase option, and a secured loan agreement, with initial payments totaling $15.0 million[16][17][18] - The company adopted the new lease accounting standard, ASC 842, on January 1, 2019, resulting in the recognition of operating lease liabilities and corresponding right-of-use assets of $22.7 million[14] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q3 2019 revenue growth to $67.9 million, driven by product sales, and confirms sufficient liquidity for the next twelve months Results of Operations Q3 2019 total revenues increased 5% to $67.9 million, driven by product and service growth, with a 67% gross margin and net loss from foreign currency impacts Revenues by Product and Service (in thousands) | Product/Service | Q3 2019 | Q3 2018 | % Change | 9 Months 2019 | 9 Months 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Products | $47,484 | $45,152 | 5% | $147,053 | $138,063 | 7% | | BioGlue | $15,679 | $15,646 | 0% | $50,834 | $48,685 | 4% | | JOTEC | $15,774 | $15,004 | 5% | $48,936 | $46,669 | 5% | | On-X | $12,610 | $11,298 | 12% | $36,751 | $33,495 | 10% | | Total Preservation Services | $20,397 | $19,446 | 5% | $59,472 | $56,979 | 4% | | Total Revenues | $67,881 | $64,598 | 5% | $206,525 | $195,042 | 6% | - Excluding foreign exchange effects, revenues increased by 6% for Q3 2019 and 8% for the nine-month period compared to 2018[68] - A supply issue with CardioGenesis cardiac laser therapy handpieces is expected to impact Q4 2019 sales, with supply anticipated to resume in Q1 2020[76] - General, administrative, and marketing expenses for the nine months of 2019 included $2.6 million in business development and integration expenses, a significant decrease from $6.9 million in the same period of 2018, primarily related to the JOTEC acquisition[88] Liquidity and Capital Resources Net working capital was $139.2 million as of September 30, 2019, with $14.8 million net cash from operations, and sufficient liquidity for the next twelve months - Net working capital was $139.2 million as of September 30, 2019, compared to $144.7 million at December 31, 2018[92] - The company's primary cash requirements in the first nine months of 2019 were for general working capital, funding of the Endospan agreements, debt service, and capital expenditures[93] - Future cash requirements include potential funding of two additional $5.0 million tranches to Endospan upon completion of certain clinical trial milestones[95] - As of September 30, 2019, approximately 28% of the company's cash and cash equivalents were held in foreign jurisdictions[95] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate changes on its $225.0 million term loan and foreign currency fluctuations, primarily impacting Euro, GBP, and CHF transactions - The company is exposed to interest rate risk on its $36.7 million in cash and cash equivalents and its $225.0 million secured Term Loan Facility[102] - Foreign currency exchange rate risk exists due to revenues and expenses denominated in Euros, British Pounds, Swiss Francs, Polish Zlotys, Canadian Dollars, and Brazilian Reals[103] Item 4. Controls and Procedures As of September 30, 2019, the CEO and CFO concluded that disclosure controls and procedures are effective at a reasonable assurance level - Management, including the CEO and CFO, concluded that as of September 30, 2019, the company's disclosure controls and procedures were effective at the reasonable assurance level[104] Part II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal proceedings, but management does not anticipate any material adverse effects on its financial condition or operations - The company does not believe that any pending legal matters could have a material adverse effect on its business, financial condition, results of operations, or cash flows[106] Item 1A. Risk Factors Key risks include failure to realize benefits from JOTEC and Endospan, significant indebtedness, heavy revenue dependence on core products, and evolving regulatory environments - The company may not realize all anticipated benefits from the JOTEC Acquisition due to factors like market growth, integration challenges, and competition[106] - Significant indebtedness could limit the company's ability to raise capital, require dedication of substantial cash flow to repayment, and restrict operational flexibility[108] - The business is significantly dependent on revenues from tissue preservation services (30% of total), BioGlue (23%), JOTEC (23%), and On-X (19%), making it vulnerable to risks specific to these areas[113][114][116] - The company faces significant risks related to its new agreements with Endospan, including Endospan's ability to obtain FDA approval for the Nexus Product and successfully commercialize it[119] - Products and tissues are subject to significant quality and regulatory risks, including potential recalls, liability claims, and changes in regulations such as the new European Union Medical Device Regulation (MDR)[117] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2019, CryoLife purchased 2,165 common shares at $27.04 each, solely for employee tax obligations, not as part of a general repurchase plan Issuer Purchases of Equity Securities (Q3 2019) | Period | Total Number of Common Shares Purchased | Average Price Paid per Common Share | | :--- | :--- | :--- | | July 2019 | 253 | $30.25 | | August 2019 | 1,912 | $26.61 | | September 2019 | 0 | -- | | Total | 2,165 | $27.04 | Item 5. Other Information In October 2019, the Clawback Policy was amended to require recoupment of excess performance-based compensation following a material accounting restatement - In October 2019, the company's Clawback Policy was amended to require recoupment of excess performance-based compensation following a material accounting restatement[156]