Artivion, Inc.

Greetings and welcome to the CryoLife 2020 First Quarter Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lynn Lewis from Gilmartin Group. Thank you, Ms. Lewis. You may begin.

Good afternoon, and thank you for joining the call today. Joining me today from Cryolife's management team are Pat Mackin, CEO, and Ashley Lee, CFO. Before we begin, I'd like to make the following statements to comply with the safe harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the company's or management's intentions, hopes, beliefs, expectations, or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates, and assumptions that make up actual results to differ materially from those forward-looking statements. Additional information concerning certain risks and uncertainties that impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. With that, I'll turn the call over to Cryolife CEO, Pat Mackin.

Pat? Hey, thanks, Lynn, and good afternoon, everybody, and thanks for joining us. Before I talk about Cryolife's achievements during this past quarter, I'd like to acknowledge and express our sincere gratitude to the healthcare providers who are on the front lines fighting this COVID-19 pandemic. Having worked with these impressive individuals for decades, I'm not surprised about their dedication. Our industry is filled with outstanding people who are calling us to help others in need. I also want to thank our employees and partners at CarLife. Our team is making every effort to ensure that our products are available to save or improve lives of people around the world. On today's call, I'll provide an update on our current anticipated performance during the COVID-19 pandemic and progress year-to-date on our objectives. Ashley Lee, our CFO, will review our first quarter financial results and provide details regarding our loan structure and liquidity. I will then make closing remarks and open up the call for your questions. Let me begin by saying that there's no doubt that the COVID-19 pandemic has affected Cryolife and has almost every other company in the world. Nothing, however, about our strategy, that is to achieve higher growth while spending more to support that growth, has changed except for this temporary disruption caused by the pandemic. We remain cautiously optimistic because through the worst of the pandemic, So far, we've been able to continue relatively normal operations, achieve important objectives to support long-term growth opportunities, fund key R&D projects, and ensure liquidity for the foreseeable future. In addition, many of our products are used in procedures that cannot be postponed, even in a COVID-19 world. Turning to our achievements, we were off to a solid start of the year in our first quarter. It was progressing nicely, until the COVID-19 began to hit in March. We started to see more impact on regions beyond China. In the first quarter, we restored the CE mark for our AAP. We also received CE mark for Aveda Open Neo. We improved Yotech supply. And our clinical trials for addressing exciting large growth opportunities were advancing as anticipated. Even though the effect of the pandemic began to be felt in mid-March, we achieved Q1 revenues of 66.4 million, which reflected a decrease of 2% versus first quarter 2019 and less than 1% decrease on a constant currency basis. If you exclude TMR, our growth rate for the first quarter would have been approximately 1% and 2% over first quarter 2019 on a constant currency basis. I believe we are well positioned to weather the COVID-19 storm and have a strong year in 2021. I will start by sharing with you how I expect our business to perform moving forward in 2020 based on what we know today. Normally, we would not discuss certain aspects of our financial performance beyond the quarter close. But we believe that it's important to do so now so that you have a better picture of how we anticipate COVID-19 will impact us over the next few quarters. Of course, this virus and its impact on the global economy has been and will likely continue to be unpredictable. But we believe for 2020 that April will mark our weakest year-over-year monthly performance, and Q2 will likely mark the weakest quarter-over-quarter performance. While our revenue results for April are not completely finalized, we believe they will show our total revenue was down approximately 40% versus April 2019, and that our performance will continue to improve sequentially in May and June, as well as in Q3 and Q4 will improve versus Q2. There are two principal reasons why we believe this. First, even at the height of the pandemic over the last two months, our business remains strong because up to 50% of our products are used in non-elective procedures that simply cannot be postponed or delayed very long. In fact, in March, CMS, the main U.S. government agency responsible for hospital reimbursement, issued recommendations regarding which surgical procedures should be performed, excuse me, should not be performed during the pandemic And approximately 50% of our product sales are from these types of procedures. For instance, BioGlue and Avita Open are used in acute type A dissections. Vascular tissue, like sap in his vein, is used in limb salvage operations. And our tissue valve is also used in pediatric as well as infected heart valve patients. Using the CMS recommendation, we estimate that 40 to 50% of our procedures that use our products would not be postponed during March and April. And our estimates appear to have been conservative, given our April revenue performance. We saw these results reflected in the productivity of our sales team, as during the past few months, they've been very busy around the globe, ensuring the supply of our devices, supporting emergency procedures, both in person and virtually, and they've been employing some creative solutions to ensure continued customer service and patient care. Second, we expect revenue to improve going forward. April appears to have been the peak of the lockdown in the U.S. in Europe, as we saw about a 40% reduction in our business during this time, which was better than our model based on the CMS recommendation predicted. In addition, we're already seeing hospitals in the U.S., Europe, and Asia starting to schedule more elective-type cases. The 40% or so of our cases that were not performed in April are more elective in nature, but due to the progressive nature of the diseases our devices treat, such as aortic aneurysms and bowel stenosis, these procedures cannot be delayed for very long. As a result, while it's impossible to forecast our revenue for the remainder of the second quarter with accuracy, given the uncertainties regarding the pandemic, we do believe we will have a marked sequential improvement in our revenue performance for May and June and thereafter. On the expense front, we have taken significant steps to reduce expenses and increase liquidity through Q2 and Q3, which we believe will be the worst part of the pandemic for crowd life. We are protecting short-term cash and liquidity during the pandemic, but also investing for growth when the pandemic subsides. As such, we've continued to invest in R&D programs, and in particular, those that will deliver revenue in 2021 and 2022. In his comments, Ashley will provide you the specific details of the expense cuts that we have taken and their expected impact on the company. We anticipate that these actions will reduce expenses without adversely impacting our near-term revenues and the long-term prospects for the business. Moving on to manufacturing. We have had no significant supply chain disruptions this year to date, and our three manufacturing sites have been running at almost full capacity during the pandemic, even since mid-March when we imposed mandatory work from home at all sites. At each of these sites, we have put in place protocols during the pandemic to ensure the continued safety of employees who must come into this office every day. In previous earnings calls, we've talked about our challenges meeting demand for Yotech products and the impact on our revenue performance. We believe that the slowdown in elective surgeries due to the pandemic will increase the likelihood that our Yotech inventory position will improve over the next 90 days. Notwithstanding the pandemic, we are also proceeding with our second-source sewing supplier and expect them to contribute to our Yotech production by the fourth quarter of this year. Moving on, a common question companies are being asked during this crisis is, how is your liquidity? As we previously announced at the beginning of the crisis, we took steps to improve our liquidity. Solely as a precautionary measure, we drew down our $30 million line of credit under our credit facility. We've also renegotiated our maintenance covenant under the facility for the remainder of 2020 and into 2021. During this period, covenant compliance generally only becomes a requirement if we make certain restricted payments or we fall below $12 million in combined cash on the balance sheet and undrawn availability under the revolving credit facility. Based on our current cash balance and our projections for the business at this time, and even if we assume we take no further measures to ensure liquidity, we do not anticipate that we will fall short of this covenant of our amended credit facility. Next, even through the pandemic, we are taking steps to be in a position to deliver growth. Beginning with our next generation Neotech products, we are making progress on our goal of introducing the three new products and Nexus in the EU. Our teams are gearing up to train physicians, we are building supply to support the three product launches, and we have sufficient Nexus inventory. In 2020, we still plan the limited and full market releases for Avito Open Neo, for Enya, for Ensign, as well as a resumption of the launch of Nexus. With surgeon training and launches behind us in 2020, and with full inventory available for each product, we'll be very well positioned to sell these products in 2021. In addition, we recently received breakthrough device designation from the FDA for our next generation frozen elephant trunk, Avita OpenNeo. And Endospan likewise recently received the same designation for its Nexus in connection with its IDE. This designation recognizes that both Avita OpenNeo and Nexus are likely to be more effective treatments of certain New York diseases than other products that are currently available. It also should help, hopefully, to speed up FDA evaluation and commercialization in the U.S. for Avita OpenNeo and Nexus so that more patients can obtain access sooner to these devices. Turning to the PROACT-10A trial, we successfully conducted our investigators' meeting during the first quarter of 2020 with more than 40 sites participating virtually. As a reminder, this is a prospective randomized clinical trial to determine if patients with onyx aortic valves could be maintained safely and effectively on Eliquis versus Warfen. We believe that if this trial is successful, it meets its primary endpoint. that the onyx aortic valve will become the market leader in the mechanical valve segment and also take share from existing bioprosthetic aortic valves. Our investigators are eager to begin enrollment. However, enrollment is likely to be somewhat delayed as the COVID-19 pandemic has adversely impacted hospitals' ability to conduct clinical trial work. In the meantime, we continue to make progress with IRB approvals and contract negotiations. And last, in February, we received a renewed CE mark for our ascending aortic prosthesis known as the AAP, which had been suspended since late 2016. We once again have a complete portfolio of Onyx products available in Europe, allowing us to be more competitive and drive further market share gains. AAP is indicated for the treatment of disease, damage, or malfunctioning native or prosthetic heart valves in the aortic position involving the ascending aortic aneurysm. These associated aortic root diseases present in as many as 10% of all aortic valve replacements. We are delighted to have this product back in our bag. With that, I'll now turn the call over to Ashley for a detailed financial review of the quarter. Ashley.