Greetings, and welcome to the CryoLife 2020 first quarter financial conference call. [Operator instructions] 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 may cause actual results to differ materially from those forward-looking statements. Additional information concerning certain risks and uncertainties that may 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?

Okay. 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 frontlines fighting in 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 whose calling is to help others in need. I also want to thank our employees and partners at CryoLife. Our team is making every effort to ensure that our products are available to save or improve the 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 is no doubt that the COVID-19 pandemic has affected CryoLife and 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…

Thanks, Pat, and good afternoon, everyone. Total company revenues were $66.4 million and slightly behind the first-quarter 2019 due primarily to the absence of TMR revenues and the impact of our business from COVID-19. Results are slightly higher than the amount we announced on April 1 and just below our original range of revenue guidance of between $67 million and $69 million. Overall, revenues declined 2% on a GAAP basis and declined 1% on a constant currency basis. In the first quarter of 2020 versus the first quarter of 2019, tissue processing revenues increased 5%, On-X revenues increased 4%, BioGlue revenues decreased 3%, and JOTEC revenues decreased 4%. Performance in each of these product lines was adversely affected by the COVID-19 pandemic. Our gross margins were 66.5% for the first quarter and reflect better OUS distributor performance versus performance in our direct markets, especially in EMEA where performance was impacted by COVID-19. On the bottom line, we reported a GAAP net loss of $6.7 million, or $0.18 per fully diluted share, in the first quarter of 2020. Non-GAAP net loss was $3.0 million, or $0.08 per share. Net loss on both a GAAP and non-GAAP basis reflects a $3.7 million pre-tax loss, or $0.07 per share, primarily related to non-cash unrealized foreign currency losses on intercompany payables. Please refer to our press release for additional information about our non-GAAP results, including a reconciliation of these results to our GAAP results. As of April 24, 2020, we had over $63 million in cash and cash equivalents. I would like to take a moment to talk about our capital structure and measures we have taken to ensure that we will have more than adequate liquidity to support our business for the foreseeable future. We are continuing to monitor our expenses carefully and…

Thanks, Ashely. So as you've heard, 2020 was off to a good start prior to the global pandemic. But at least for the near term, we have shifted from offense to defense. Times like these are putting every company to the test, and I can say with confidence that we are well-suited for the challenge. The bottom line is that the products that we make have a fairly durable demand profile, even during the pandemic, and their use either cannot be delayed or can only be delayed for so long. We estimate that about 50% of our business falls under the non-deferrable CMS procedure categories. And we're beginning to see the deferrable procedures rebound, which is the other 50% of our products. We expect our recently approved JOTEC products, as well as NEXUS, to be rapidly adopted by clinicians, given these products' strong clinical differentiation. The company is sound financially. Our manufacturing operations, supply chain and commercial teams continue to function at near full capacity. We are working hard to support our customers with an uninterrupted supply of products and case support, while reducing expenses that will not impact near-term revenue or long-term prospects for the company. I am confident we have taken the right steps to ensure we are positioned to deliver on our initiatives over the next several months. In sum, looking past the next couple of quarters, we are poised to enter 2021 from a position of strength with the following programs: the limited and full market releases for E-nya, E-nside and E-vita OPEN NEO will be complete; JOTEC supply issues will largely be resolved, as well as our second source supplier will be onboard and contributing by the fourth quarter; we'll be relaunching NEXUS in 2020; the reintroduction of our AAP On-X device in 2020; PROACT Xa enrollment in 2020; BioGlue China approval in 2021; U.S. PerClot approval in 2021. So as the COVID-19 pandemic continues, I want to close by thanking our team for their continued commitment to our mission to improve the lives of patients with aortic disease. I commend you for what you're accomplishing during these challenging times, and I've never been prouder to lead this exceptional company. With that, I'd like to open the lines for questions. Operator, please proceed.

Thank you [Operator instructions]. Our first question comes from Jason Mills with Canaccord Genuity. Please proceed with your question.

So, the question is really about 2021, but let me add some context. We really want your perspective on conversations with physicians and hospitals and how they're thinking about capacity through this year. And then as you get into 2021, are they expecting to be at full capacity for "elective procedures"? And I understand there are varying degrees of electiveness or deferability. But just in general, procedural volume running through the hospitals within your target markets, I guess in both the United States and Europe, are they expecting to be running at 100% of capacity by the end of the year,? Or will capacity take in for a while to prepare for any relapse of COVID in any geography? I guess that's what I'm trying to get my arms around for everybody.

Yes, I mean so I can give you. I mean, probably like you talked to a lot of people, both hospital executives, as well as surgeons in our teams around the world. What we've been saying and I think it's played out in the media, as well as everywhere else, is this does not -- this pandemic doesn't hit everywhere at the same time. So there's going to be peaks and troughs in different places at different times which, obviously, provides a smoothing effect of the impact. What I can tell you is we've actually started to see, I was very pleased to see that in what we think is the worst month of April, that 60% of our procedures got done. That's a unique position because of the durable nature of our products. The other 40%, which are kind of the more elective that, frankly, as you know, you really can't delay a lot of our procedures. I mean, you've got growing aneurysms and deteriorating heart valves. So you can't push these things off for very long. And what we're already starting to hear is multiple states and cities reopening for these cases. We've got some hospitals where I've talked to surgeons that they're going to go to seven days a week. We've got some hospitals that are going six days a week. When they do that, how long they do that for, I can't predict. I don't control that. As I mentioned in my comments and Ashley mentioned in his comments, I mean the one thing this virus has proven to be is unpredictable. So, for me to sit here and tell you I know exactly how this is going to unfold would not be fair. But what I can tell you is that hospitals are hemorrhaging when it comes to financials, and they need to get back up and running. So I think to the extent there's been a number of messages sent out from big institutions where they were kind of geared up for the COVID-19 onslaught that didn't happen, and they got empty ICU beds and empty hospital beds and their ORs aren't going. So, we're seeing those start to ramp back up. And, again, if something happens in that specific city, that may kind of slow down. But I think you're going to have -- that'll be muted by other cities kind of returning back to kind of full capacity. There has clearly been a message from hospital leadership from the people I've talked to that they are going to try to ramp back up beyond five days a week.

And then just as a follow up, either Pat or Ashley, with respect to your operational expense infrastructure, you've obviously had to make some difficult choices. You mentioned you're on the defensive now. But when you do go back on the offensive, have you found, do you think, operating expense cuts, projects or perhaps efficiencies that you can continue to garner well after the COVID crisis has dissipated? In other words, have you become can you become more efficient? Is that a silver lining possibly after this crisis has abated? Thank you, and good luck with everything.

I think one of the things we've talked about, this is a balancing act. As I started off the call, really nothing about our strategy's changed. I think we're very confident with our strategy to focus on patients that are suffering from aortic disease, and we've ramped up our spending to fuel future growth, because we believe that our current platform with our pipeline can really start to accelerate growth here. That being said, we've obviously had to shift to defense just because of the nature of this pandemic hitting our procedures. Now, I don't think we've been hit as bad as a lot of companies have been hit. The fact that we delivered 60% of our revenue in the worst month is very reassuring and really provides us a lot of strength as it relates to our cash balance and our liquidity. As far as the expense side, I do think one thing you're going to see from everybody is the travel budgets were probably going to be down for a while. I don't think you're going to see a lot I mean, I had a trip to go to China in July. I don't think that's probably going to happen. So I do think there's going to be a total whether it's WebExes and working from home or telecommuting or whatever you want to call it, I do think that the travel spending is going to come down for a lot of people. I also think there's ways, I think, you know, necessity is the mother of all invention. I think our employees have been extremely responsive. And function, just as an example, our finance organization, on March 13, we told everybody that could work from home would work from home. Obviously the people who work in the factories and the sales teams that are out in the ORs couldn't do that. But everyone else started working from home, and that's been almost seven weeks. Our finance team went through their full Q1 audit remotely and did a fantastic job. So I do think it's created a whole lot of new efficiencies. Whether that's going to play out on our expense budget, I haven't I'm still trying to get through Q2.

Our next question comes from Mike Matson with Needham and Company. Please proceed with your question.

This is David Saxon, on for Mike. Thanks for taking the questions. I guess I just wanted to start taking a look back at Q1. Can you talk about the growth you were seeing in January and February and then when in March you saw some disruption? And then second to that, I hear your comments around being down around 40% in April. Can you give any color on what you're seeing exiting the month, if you're seeing any improvement?

So we don't really break out weeks of quarters. It's not something we've ever done and we're not going to do. We gave April numbers this quarter just because of this pandemic, and we thought it was obviously very positive as well. I think March -- what I'll say about Q1 is we were actually tracking to hit the guidance. And we only came in $0.5 million off our guidance. And we were tracking pretty well on that throughout the quarter. There was clearly a big slowdown in the procedures starting on March 15. We actually had -- our last two weeks of March were pretty similar to the last two weeks of March last year, even with the pandemic. So it clearly tells you we were going above that. As it relates to April, we clearly have seen a pickup in the revenue kind of week to week. As each week goes by, the revenue is stronger, reflecting more elective cases coming online. So again, we're one month in. It gives you a data point. We think it's the worst based on what we're seeing. And we see a lot of ORs starting to open up, so we expect it to get better. May will be better than April and June will be better than May. So we'll see where Q2 ends up, but I think we're positive on the signs that we're seeing at least for our business.

And then just with the limited launch with the three JOTEC products in Europe, can you just talk about the initial feedback you're hearing from both the physician community and maybe the sales force as well?

So we were getting ready to -- I mean, this has obviously been just a delay in those launches. So anytime you do these product launches, we've got to get in and train the surgeon, we've got to do cases. So none of the three JOTEC products have actually started their limited market releases yet. We're going to have to wait on those to -- as Q2, I think the NEO will start in Q2. We'll start to see cases of that. Because those procedures were actually being done at the height of the pandemic, even in places like Italy and Spain. So we expect NEO's limited market release to start this quarter, and then we'll follow with E-nya and E-nside. So we'll report on those in our subsequent quarters.

And then just last one for me, and then I'll hop back in queue. I thought in your closing remarks I heard you're expecting BioGlue in 2021. I guess any update there? Has there been any positive movement on the China front?

So one of the things -- this has obviously been a -- we've been going through this approval process for about a year already. And they typically say it takes a year to two, and this is a PMA-like product with a clinical trial which usually takes longer. We did have our panel meeting. We were supposed to have an in-person panel meeting with the Chinese FDA in March. And obviously with COVID-19, that was not going to happen. And they worked with us and we did it remotely via WebEx. So we did have our panel meeting with the Chinese FDA in March. We've gotten some questions back, and we'll be going through the typical process of responding to those questions. But we're optimistic that we should see this product approved in 2021.

Our next question comes from Suraj Kalia with Oppenheimer and Company. Please proceed with your question.

So, Pat, obviously, you guys did pretty well in Q1. Understanding the lack of visibility with Q2 and Q3, let me come at it from a different angle, Pat. One of the things that companies across the board are there's this notion out that there is pent up demand. I'm just asking for your general opinion. But what you're also picking up in the field, Pat, is that a number of these patients, especially emergent procedures, there are deaths that are happening that are not reported and probably won't come back. Love to get your thoughts what kind of visibility do you all have in the patient funnel specifically for CryoLife and in general?

Yes, I mean, I've talked to some physicians about this. It's obviously a logical kind of line of thought. It's hard to say, though, because if you think about it, you've got two things working at the same time. You've got a period of almost two months where a big chunk of elective cases were not done. And even if there's some -- unfortunately, if some of these patients were affected, if they died of COVID-19 or something else, that they're not going to be there to get their procedure. But that was two months that just disappeared. So what does that do to the overall impact, because you've got the kind of the patient flow coming in as normal. So I don't know. There is no reference guide you can go to a website, you can go look at for something like that. All I do know is what I'm hearing from field reports that we just heard from a hospital that has seven to 10 On-X valves going in next week. So, there clearly is a pent up demand. Now, of the eight weeks of cases that we're going to get done that didn't happen that were more elective in nature, how many of those get done because they're still around or not, I don't know the answer to that. But I would assume, again, given that those two months are disappearing forever, it'll probably wash itself out.

And, Pat, just hopping in between calls, maybe you guys already talked about PROACT Xa. Any update there on delays? Your update on the process?

So, we had a virtual -- we were supposed to have an in-person investigator meeting back in early March. I think it was like the second week of March, and we decided to move it to a virtual meeting. It was actually very well attended. We had like 40 of our 60 sites in attendance for the kickoff meeting. And we have made great progress on IRBs and contracts. We already have a couple sites approved that can start enrollment. So we're actually close to starting enrollment on that trial. There are some centers I will say that were in the kind of the middle of the COVID-19 kind of hotspots that the resources at the hospitals were just not focused on things like this. So, I do think it's going to slow down the start-up. But we're actually making very good progress on bringing our centers online. And given the nature of this trial, particularly since it's such -- one of the very unique things about this trial, as you know, Suraj, is this is a drug trial. All the patients have the heart valve already. See, they actually don't even have to come to the hospital. So we're going to be shipping them drugs. So this is actually a pretty unique trial. It's just more getting through the hospitals' IRBs and contracts, given everything that's going on with their resource constraints.

Thank you. Our next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

So a few questions. I guess firstly, Ashley, it looked like the SG&A was a bit heavy for the quarter. Were there any one-time items worth calling out? And then looking forward, as you talk about the net reductions of procedures for April and through to Q2 and Q3, could you talk about what we might expect on that line item as far as reductions based on a previous year or Q1?

So for Q1, Jeff, as we spoke about in the fourth-quarter conference call, this was going to be a year of investment for us, especially in channels and other areas to support the growth in the business. And so when we came into the year, actually we started spending money, January and February. And it wasn't until we got into the March time frame when it became apparent that COVID was going to have an impact, and we immediately put the brakes on a lot of the programs that we had. So I don't know if there's really anything in specific to call out other than like the corporate rebranding project that we spent $300,000 on. We have now put a halt on that program. But other than that, Q1 is typically a heavy quarter for us because we have sales meetings and lots of congresses and so forth. Going forward, I don't want to get into specifics from a percentage standpoint or quantify what the expense cuts are. Because based on the revenue progression that Pat laid out earlier in the call, we have cut expenses accordingly to ensure that we have adequate liquidity for the foreseeable future. Now, with that being said, if revenues perform better than what we're anticipating, we're probably going to spend some more money and start reinvesting again. And if for some unforeseen reason and unfortunate reason revenues are worse than we anticipate, let's say there's another breakout, then we have additional levers that we can pull to even cut back even further on spending. So, I don't know if it's really constructive to give you a percentage that we've cut our expenses, because it's going to be a moving target and it's going to be largely dependent upon how the top line plays out.

And, Pat, could you talk about the progress on PerClot and the status in some of the ex-U.S. territories, particularly China?

So one of the things Ashley mentioned in his remarks was this is one of the projects on the R&D side that we've kept full funding for BioGlue in China, full funding for U.S. PerClot, full funding for ProAct Mitral in the U.S. And the testing and basically the package that has to go in for the U. S. PMA, the R&D team is still working on that, and we're planning on submitting at the end of this year. So that work is still ongoing.

And then lastly for me, did the AAP for Q1 have much of a chance to embed within the sales organization outside the U.S. And if so, was there any pickup from kind of that feeding the portfolio for JOTEC and vice versa? Or there wasn't much of a chance to...

It came, the CE Mark, by the time the CE Mark got here and we had to do all the paperwork and the labelling and all that kind of stuff, by the time we landed it in Europe was kind of when Italy and Spain were going through the peak of their crisis. So I think it was modest to some distributors, but it wasn't significant in the quarter.

And then lastly for me. I know you've been asked a few different directions, from a few different directions. So it sounds like on the elective side, generally speaking, that through a transition back to getting the elective procedures, there may be some bolus where there's some catch up phase in a number of institutions. So perhaps if X was the previous run rate, that that may be X plus something as far as catching up. Is that how we should read into it when you're talking about procedures being done six and seven days a week?

I think, so it's really hard. This is part of the challenge that we have. It's really hard to predict what 1,000 heart hospitals are going to do. Every one of those cities has different dynamics going on with their ICUs or not. What's the hospital's financial position? I think one of the real advantages for a portfolio like ours is the cardiac procedures tend to be the most profitable procedures in the hospital. And I've heard centers say they're going to prioritize the cardiac procedures. So, again, I can't predict what's going to happen. I do know that I'm hearing from a number of centers that given the slowdown in the ORs, that they're looking to ramp up their ORs to pick up these elective cases, which is obviously going to be helpful, number one. Number two is that there's a big backlog, and they're going to work, whether it's six days, seven days, I think it'll be different in every hospital. But clearly they're going to be trying to make up for some of these lost procedures and to make sure these patients get treated appropriately.

Thank you. Mr. Mackin, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Well, we appreciate you guys taking the time. And, obviously, this is -- we hope everybody out there stays safe and healthy. Certainly been an interesting seven weeks. I really want to thank our team, though. I think the fact that our three manufacturing facilities have not missed a beat, our commercial team is still covering cases even at the height of the pandemic. As I mentioned, this is a balancing act. We've taken the appropriate actions to kind of go to defense while we're going through this pandemic over kind of Q2 and Q3. We're very pleased to see that we delivered on 60% of our procedures in the worst month, we believe. It'll get better in May and better in June and then better in Q3 from Q2. So, we think things are going to be looking up from here, and we're very excited about 2021. We've got the three JOTEC products, the new NEXUS product. We've got our supply chain improving. We've got the PROACT Xa trial. And we've got kind of around the corner is BioGlue China and U.S. PerClot. So I think we're extremely well-positioned and we'll manage through this. And we appreciate your attention on the call. Thank you.

Ladies and gentleman this concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation.