SmartFinancial Inc

NYSE:SMBK

Greetings, and welcome to the Artivion Fourth Quarter and Year-end 2024 Financial Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Laine Morgan from the Gilmartin Group. Thank you. You may begin.

Thanks, operator. Good afternoon, and thank you for joining the call today. Joining me today from Artivion's management team are Pat Mackin, CEO; and Lance Berry, 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 these 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. You can also find a brief presentation with details highlighted on today's call on the Investor Relations section of the Artivion website.

Now I'll turn it over to Artivion's CEO, Pat Mackin.

[Technical Difficulty] year at Artivion as we achieved total constant currency revenue growth of 10%, excluding PerClot. We also expanded EBITDA margins by 310 basis points, resulting in adjusted EBITDA growth of 32% year-over-year, enabling us to deliver positive [Technical Difficulty] while making breakthrough progress on several key clinical and regulatory initiatives and further expanding our global footprint.

We entered the new year with even greater conviction in our ability to execute our best-in-class, multipronged PMA-focused pipeline, and deliver sustained double-digit revenue growth, while growing EBITDA at least twice the rate of constant currency revenue growth.

Before reviewing the fourth quarter performance and our expectations for 2025, I'd like to provide an update on the previously disclosed November '24 cybersecurity incident. Immediately upon discovering that the threat actor had accessed our systems, we initiated business continuity plans, took action to take certain systems off-line and engaged external advisors to contain and remediate the incident.

Due to our team's immediate response, we mitigated the threat actor's ability to adversely impact our systems and the short-term disruption to our business. While we effectively operated for the final few weeks of the quarter, we estimate the incident had a negative impact of approximately $4.5 million on our Q4 revenue.

We are now back to operating at normal levels. However, our manufacturing facilities and tissue processing operations were not operating at a normal level from the beginning of the incident in late November through January. Although, this has challenged near-term tissue and On-X supply, we do not expect this incident to meaningfully impact our business for the full year of 2025, and our 2025 guidance reflects that.

Specifically, we expect our tissue revenues to be significantly lower than normal in Q1, with the difference being recovered over the remainder of the year. As we discussed previously, a significant portion of our tissue revenue comes from SynerGraft pulmonary valves. In this case, our demand outstrips supply for these valves every quarter, and therefore, we hold no inventory.

Importantly, we continue to receive normal levels of donations and process tissue throughout the period of the cyber incident. And therefore, we do not anticipate any meaningful impact for the full year. However, the lead times associated with tissue that were in process or received during that time period will be longer than normal, resulting in tissues that would have been released in Q1 being released later in the year.

Similarly, but to a lesser extent, our lead times for On-X were temporarily extended. And as a result, we expect to have some stocking distributor orders that would have occurred in Q1 to occur later in the year. Lance will provide additional details in his remarks on the impact to Q4, as well as the timing of our 2025 revenues.

Now on to our Q4 results. From a financial perspective, our Q4 performance was driven by continued growth across our product portfolio, as well as, continued benefit from regulatory approvals and commercial footprint expansion in key international markets like Latin America.

From a product category perspective, On-X revenue increased 10% year-over-year on a constant currency basis as we continue to take market share globally with the only mechanical aortic heart valve that can be maintained at a low INR of 1.5 to 2.0.

Based on feedback from the field, our recent market share gains and the proven clinical benefits of the On-X aortic valve, we maintain a strong conviction that the On-X is the best-in-class aortic valve on the market and will continue to take market share worldwide.

In addition, we are encouraged by significant new data that was presented at the Society of Thoracic Surgeons meeting at the end of January. The data, which also published in JACC simultaneously, which is the Journal of American College of Cardiology, showed that across 109,000 patients from the STS database, mechanical aortic valves had a statistically significant improvement in mortality compared to surgically implanted patients under 60.

This is a significant opportunity for the On-X valve and gives us even greater confidence that we should be able to continue to double-digit growth for the foreseeable future.

Also in Q4, our stent graft revenues grew 8% on a constant currency basis in the fourth quarter compared to the same period last year and was one of the areas more heavily impacted by the cyber incident, which Lance will cover in more detail in his section.

Our stent graft portfolio remains a key component to our growth strategy, and we're encouraged by our [Technical Difficulty] which are driven by our differentiated product portfolio that are focused on complex segments of the stent graft market.

Today, the products in our stent graft portfolio are primarily sold in Europe, where we leverage our existing direct sales infrastructure to create significant cross-selling opportunities across our unique aortic product offerings. Our pipeline consists largely of bringing some of these proven products to the U.S. and Japanese markets, representing significant growth opportunity. I will detail shortly our expectations for the impact of AMDS in the U.S.

BioGlue grew 7% on a constant currency basis compared to the same period last year. As a reminder, we received regulatory approval for BioGlue in China last quarter, and we're continuing to work through some additional administrative steps to get access to the hospital level. These steps are expected to take about 6 to 9 months. Therefore, we expect to begin commercializing BioGlue in China in the second half of 2025.

BioGlue has been a great product for patients for many years, and we are excited to be able to bring this technology to another large market. We estimate that approximately 12,000 patients with acute Type A dissections could benefit from BioGlue each year.

Lastly, tissue processing, which was the area most heavily impacted by the cyber incident, declined 8% year-over-year on a constant currency basis in Q4.

From a geographic standpoint, we continue to see results from our growth initiatives across Latin America and Asia Pacific, primarily through new regulatory approvals and commercial footprint expansion.

Latin America and Asia Pacific delivered constant currency revenue growth of [Technical Difficulty] respectively, in the fourth quarter and 26% and 11% for the full year. We continue to anticipate strong revenue growth for both regions over the coming years as we continue to leverage our industry-leading product portfolio in those regions.

I will now turn to our product pipeline and our recent significant regulatory development with the AMDS HDE. Stated simply, the Humanitarian Device Exemption, or HDE, represents a significant milestone achievement for Artivion. For context, an HDE is a marketing application for a product that has been designated a Humanitarian Use Device. AMDS received Humanitarian Use Device and Breakthrough Designations due to its intended benefit for patients in the treatment and diagnosis of a rare disease or condition, with other comparable options currently exist.

The HDE allows for commercial distribution of AMDS in the United States prior to the receipt of any PMA. The HDE for AMDS was granted based on the full primary cohort 30-day data from the PERSEVERE U.S. IDE trial. The results from the IDE trial and the original DARTS trial demonstrate superior clinical benefits of the groundbreaking nature of this technology. And we believe this HDE validates even further data from the PERSEVERE trial, which completed enrollment in November of 2023, demonstrated a statistically significant reduction in all-cause mortality and primary major adverse events.

More specifically, the PERSEVERE area out to 30 days, the primary endpoint demonstrated a statistically significant 72% reduction in mortality and a 54% reduction in major adverse events compared to the current standard of care.

Finally, the results of both these trials demonstrate no DANE tears in any patient treated with AMDS, including the now 5-year datas follow-up from the DARTS study. For context, DANE tears occur in up to 70% of patients following a hemiarch repair without AMDS. The elimination of DANE is an important clinical outcome as patients who experience a DANE will have worse clinical outcomes, including increased mortality [Technical Difficulty] aortic growth and reoperation.

Since receiving the HDE, the 1-year data from AMDS PERSEVERE clinical trial was presented at late-breaking sessions at the STS in Los Angeles in late January. Late-breaking data from our AMDS PERSEVERE trial demonstrated sustained benefit of AMDS out to 1 year, with mortality in the AMDS group 50% lower than the reference cohort. There were also 0 occurrence of DANE compared to the reference cohort, which could have a range of up to 70%.

In addition, there were minimal new occurrences of stroke, renal failure requiring dialysis, or myocardial infarction. These data build on the positive findings from the 30-day readouts, further supporting the life-saving nature of the AMDS technology. So we are very excited by the FDA decision to grant the HDE and will now only enable us to begin selling the product ahead of the PMA approval, but also the HDE stands to meaningfully benefit patient outcomes and save lives.

Lance will cover the expected financial impact of the HDE in 2025, but I did want to cover some specifics related to the HDE and the product. There are 3 steps that each center will have to complete before implanting an AMDS as part of the AMDS launch process.

First, each hospital will need to receive a site-wide IRB before implanting the AMDS, except in the case of an emergency use. Second, we will need to have AMDS approved by the hospital value analysis committee. Third, surgeons and their clinical staff will need to be trained on the device.

Lastly, from a market perspective, for those of you familiar with HDEs, there is a limit of 8,000 devices that can be implanted annually. In the case of AMDS, this limit is larger than the total number of acute DeBakey type I dissections that occur annually in the U.S. So from a practical standpoint, this limit is not an issue.

Now, I'd like to update you on our pipeline. On AMDS, we are focused on securing our PMA. In Q4, we submitted our second PMA module for AMDS to the FDA, and are currently working to complete some additional non-clinical benchtop testing. This testing is pursuant to recently adopted international standards by the FDA and is not related specifically to AMDS.

To account for this additional testing, submission, as well as the FDA review time of this data, we are now anticipating PMA approval for AMDS in mid-2026. Importantly, given the HDE, we do not view this delay as having a meaningful impact on our ability to generate AMDS revenue in the meantime.

Additionally, Endospan is expected to present its 30-day data from its U.S. [Technical Difficulty] and for its NEXUS aortic stent graft system at the AATS Annual Meeting in early May. Assuming the data shows the initial trial endpoints have been met, NEXUS remains on track for approval in the second half of 2026.

Our strong financial, clinical and regulatory performance in 2024 position us well for 2025 and beyond. And reinforce our confidence that we can deliver sustainable double-digit revenue growth, drive EBITDA margin expansion, and grow adjusted EBITDA at twice the rate of constant currency revenue growth.

With that, I'll now turn the call over to Lance.

Thanks, Pat, and good afternoon, everyone. Before I begin, I'd like to remind you to please refer to our press release published earlier today for information regarding our non-GAAP results, including a reconciliation of these results to our GAAP results. Additionally, all percentage changes discussed will be on a year-over-year basis, and revenue growth rates will be in constant currency unless otherwise noted.

Total revenues were $97.3 million for the fourth quarter of 2024, up 3% compared to Q4 of 2023. Meanwhile, adjusted EBITDA increased approximately 15% from $15.3 million to $17.6 million in the fourth quarter of 2024. Adjusted EBITDA margin was 18% in the fourth quarter, i.e., 170 basis point improvement over the prior year, driven by a 210 basis point reduction in non-GAAP adjusted general and administrative and marketing expense as a percentage of revenue.

For the full year, total revenues were $388.5 million, up 9.4% constant currency and 10% constant currency, excluding PerClot, despite the approximate 1 percentage point headwind from the cyber incident. Adjusted EBITDA grew 32% for the full year, 3x the rate of revenue growth. This resulted in adjusted EBITDA margin of 18%, a 310 basis point improvement from 2023.

As Pat mentioned, we delivered these results against a challenging backdrop from the November 2024 cyber incident. Due to great work by our team, the incident was managed with minimal impact to our customers. Today, we are operating at normal levels with some minor inefficiencies, which we expect to be resolved in the near term.

To quantify, we estimate that the disruption associated with the event had a negative revenue impact of approximately $4.5 million, and negative adjusted EBITDA impact of approximately $2 million in Q4. As a result, the cyber incident reduced Q4 revenue growth by an estimated 5% and full year growth by approximately 1%.

We're pleased with our adjusted EBITDA results, which landed above the midpoint of our guidance despite the Q4 challenges and reflects strong operational leverage. We continue to service customers throughout the temporary disruption, and do not expect any meaningful impact on our business from the incident for the full year 2025. However, it will have some impact on the individual quarters for the year, which I will cover in the guidance section of our prepared remarks.

To help contextualize our Q4 results, I'll provide you with some additional details on the estimated impacts of the 2024 cyber event. We were unable to ship approximately $1 million worth of orders on the last day of the quarter that were ready to be shipped. This $1 million was split evenly between tissue and stent grafts. The remaining $3.5 million in cyber incident headwinds related to parts of the business where we do not typically carry an inventory buffer.

As we have previously discussed, demand in a large part of our tissue business outstrips supply every quarter, and therefore, we hold no inventory. While we continue to receive and process tissue throughout the incident, due to the cyber event, we were less efficient and unable to process as much tissue as we normally would have within the quarter. We estimate this had a roughly $2 million negative impact.

The last $1.5 million of impact was related to a portion of our stent graft business that is made-to-order. We continue to produce this product, but less efficiently than normal, resulting in less product availability than would otherwise have been anticipated.

On BioGlue and On-X, we were able to meet demand with inventory on hand as reflected in these products' respective Q4 growth rates, which were generally in line with our expectations. From a product line perspective, on a constant currency basis, On-X revenues increased 10% [Technical Difficulty] grew 8%, BioGlue revenues grew 7% and tissue processing revenues declined 8% in the fourth quarter.

Excluding the estimated impact from the cyber incident, tissue processing would have grown approximately 3% and stent graft would have grown approximately 16%. Other revenue declined by approximately $600,000 in the fourth quarter of 2024, driven by PerClot. As a reminder, we sold the PerClot business in 2021 and are currently in the process of transferring manufacturing.

As a result, we expect to continue generating a limited amount of 0 margin revenue from PerClot until the transfer is complete. For context, excluding PerClot, our underlying business would have grown 10% for the full year 2024 compared to 2023, and 11% excluding both PerClot and the cyber incident.

Our as-reported expenses included approximately $4.6 million associated with the cyber incident, which are excluded from our adjusted EBITDA. The $4.6 million impact consists of external advisor fees and an idle plant charge. We will also incur additional cyber-related expenses in 2025. We anticipate seeking insurance reimbursement for some of these costs, but that process will take some time, and we will exclude any insurance proceeds that we receive from adjusted EBITDA at that time as well.

Gross margins were 63% in Q4 and were negatively impacted by approximately 2 percentage points by the idle plant charge. Gross margins were generally in line with prior year other than the impact of the idle plant charge.

General, administrative and marketing expenses in the fourth quarter were $51.4 million compared to $50.3 million in the fourth quarter of 2023. Non-GAAP general and administrative and marketing expenses were $47.5 million in the fourth quarter compared to $47.4 million in the fourth quarter of 2023.

R&D expenses for the fourth quarter were $7.4 million compared to $7.6 million in the fourth quarter of 2023. Interest expense net of interest income was $9.4 million as compared to $5.8 million in the prior year. Other income expense this quarter included foreign currency translation loss [Technical Difficulty] $4 million. Free cash flow was $8.7 million in the fourth quarter of 2024.

As of December 31, we had approximately $53.5 million in cash and $314.3 million in debt, net of $5.8 million of unamortized loan origination costs. We do not anticipate the need to raise additional capital to fund our debt obligations, our investments in our channels or our pipeline in the foreseeable future. Our net leverage at the end of Q4 was 3.8x, down from [Technical Difficulty] prior year.

In regard to our capital structure, as stated in our 8-K filing in December, we anticipate all outstanding notes of our convertible debt due July 2025, to convert to common stock at maturity. We believe this approach will optimize our balance sheet as we continue to focus on our multiyear commitment to deleverage and reduce our interest expense.

In summary, 2024 was an excellent year. Excluding PerClot, we grew revenue 10% and adjusted EBITDA an outstanding 32% and made incredible progress on our product pipeline. While the cyber incident was frustrating due to the impact on our people and our Q4 results, our full year performance was still outstanding.

And now for our initial outlook for the full year 2025. We expect constant currency growth of between 10% and 14% for the full year 2025, representing a reported revenue range of $420 million to $435 million. At current rates, we expect foreign currency to have an approximately 2 percentage point negative impact on as-reported revenue.

As we look ahead, we expect the [ overall ] business to grow low double-digits year-over-year over the long term, driven by our portfolio of differentiated products and our best-in-class R&D pipeline.

With our continued top line revenue growth and general expense management, we expect adjusted EBITDA to be in the range of $84 million to $91 million for the full year 2025, representing 18% to 28% growth over 2024, and 200 basis points of adjusted EBITDA margin expansion at the midpoint of our ranges.

Assuming the convertible debt is converted to shares at maturity in July, at the midpoint of our EBITDA guidance range, we expect net leverage to be below 2x by the end of the year.

We expect gross margins to improve by about 100 basis points, driven by mix benefit from U.S. AMDS sales, and continued leverage from our global sales force and G&A infrastructure. R&D expense came in slightly below expectations in 2024 at 7% of sales and is expected to increase to closer to 8% of sales in 2025, which is towards the high end of our longer-term expectations. We continue to expect free cash flow to be positive for the full year 2025.

For revenue, we expect similar dynamics as seen in 2024, except for the anticipated positive impact of the AMDS HDE. In 2024, we also had the benefit of 1 full quarter of the SGPV price increase, which benefited total company 2024 growth rates by approximately 1 percentage point. In general, that means for 2025, annual growth rates for tissue and BioGlue in the mid-single digits, for On-X in the low double-digits, and for stent graft in the mid-teens before consideration of the AMDS HDE.

As Pat outlined, there are several factors that will impact the timing of AMDS revenue under the HDE and therefore, revenue contribution from AMDS in 2025. In addition, some factors driving AMDS adoption under the HDE such as IRB approvals and value analysis committee approvals are largely outside of our control. We expect to have much more visibility in each of these factors as we move through the year, and look forward to providing more detail on our next call.

At this point, we are assuming a 1 to 2 percentage point positive impact during 2025 to our constant currency growth rate from AMDS HDE, with minimal impact on adjusted EBITDA as we invest in year 1 launch activities. In this first year, we will be focused on making any investments necessary to ensure the product is launched successfully and is positioned for stronger contribution in 2026 and beyond. Longer term, we expect this high-margin product to have significant benefits to our adjusted EBITDA.

As it relates to quarterly cadence, while we do not anticipate the cyber incident will have an impact on the full year '25, we do expect it will create some fluctuation between quarters. The extended lead times in the tissue business in Q4 2024 and the first half of Q1 2025 will result in fewer tissue releases in the first quarter, but we expect to catch up over the remainder of 2025.

Additionally, while we were able to meet On-X demand in Q4 with existing inventory on hand, our On-X throughput in December and January were below normal levels. As a result, we anticipate we will have lower-than-normal distributor sales of On-X in Q1, but we will catch up over the remainder of the year. Also, we anticipate AMDS sales to be minimal in Q1 and grow sequentially each quarter of 2025.

While we do not plan to provide quarterly guidance on a regular basis, given the expected non-typical quarterly cadence, we are providing onetime guidance for first quarter 2025 revenue for clarity. We are forecasting our first quarter reported revenue to be in the range of $94 million to $96 million. This represents roughly $10 million less of primarily tissue and some On-X revenues than we would normally expect. We anticipate this $10 million will be caught up over the remainder of 2025, as we clear our tissue processing backlog and return On-X inventory to desired levels.

In summary, we are proud of our progress to-date through our strong full year 2024 results, and we are excited about the prospects of the business in 2025 and beyond.

With that, I will turn the call back to Pat for his closing comments.

Thanks, Lance. So as you've just heard, our strategy is working. We're pleased with our strong performance in 2024, which positions us well for double-digit growth on the revenue side and twice as fast for EBITDA.

More specifically, we have the following key growth drivers will help us deliver on our continued revenue and EBITDA growth for 2025 and beyond. AMDS HDE allows us to begin commercializing AMDS in the U.S. prior to the PMA, which we're already in full process now. The recent data, I mentioned, about the On-X versus bioprosthetic valves, focusing on the mortality benefit in under 6-year-olds in patients for mechanical valves versus tissue valves.

Number three, BioGlue China regulatory approval. As we said in the script, we will [Technical Difficulty] in the second half of this year, which should continue to drive our BioGlue revenue growth.

Number four, we're going to be submitting our full PMA for AMDS. We talked about that pushing back to mid-2026. And then finally, NEXUS PMA will be showing their 30-day data, which is the primary endpoint of their FDA trial here in early May, which gives us access to our next PMA, assuming that they get approval.

I want to thank our employees around the globe for their continued dedication to our mission and for being a leading partner to surgeons focused on aortic disease.

With that, operator, please open up the line.

[Operator Instructions] Our first question comes from the line of Rick Wise with Stifel.

Maybe let's just start off with your early AMDS commercial progress to date. It sounds like it's going well, but can you give us more detail, more color, more perspective on the number of hospitals that are interested, the early physician feedback, just the setup for the year ahead. Maybe you could talk us through that.

Yes. Thanks, Rick. So let me just start with kind of the building blocks of what we've already done to-date. We, obviously, received the HDE in early December. We had a couple of weeks of internal kind of paperwork we need to do, so the device didn't really become available for shipment and selling until really late December.

In January, we trained our U.S. commercial team, which went extremely well. They're highly motivated and highly trained. Two weeks later, at the end of January, we presented the 1-year PERSEVERE data that I mentioned in my script, where we show a 50% reduction in mortality at 1 year and still no DANEs, whereas the control or the reference cohort had up to 70% DANEs.

Our commercial team is in the process of the 3 steps, which is you've got to get an IRB, you then got to go through value analysis committee, and then the surgeons got to get trained. A number of centers that are in the mix of that. We're not going to kind of break down and give you guys, kind of, our internal scorecard. We're going to -- we'll report the number every quarter in our stent graft number. But I can tell you, we've got roughly 55 feet on the street in the U.S. that are all actively pursuing AMDS accounts as we speak.

I don't want to be denser than usual, but help me better understand your clearly very high, strong confidence that 100% of the lost revenue will return throughout the year. And again, the part that confuses me is just that, you think that wouldn't these patients that you might have implanted, wouldn't they have gotten competitive device or some kind of competing procedure, and so they're not going to come back? And just talk about it on the tissue and on the On-X side, if you would, just help us better understand.

Yes. So I'll take a shot at that first, Rick, and then Pat can jump in. So I mean, obviously, there's going to be some patients that just can't wait and will have to get some other similar device. But the demand just so far exceeds our supply every single quarter that -- I mean, every quarter, there are patients that are getting other devices because they can't get ours.

And we just have a high level of confidence that when we can release these tissues that they will be purchased by customers. That there's just significantly higher demand than there is supply. And because we've continued to receive donations as normal throughout this whole process, and we're processing them, it's just that it's taking longer. So it's basically just that.

I mean, because the donations coming in were still normal and that wasn't impacted. And because we don't see any change to the underlying demand, we don't see any reason why we shouldn't catch that up over the course of the year.

Yes. I mean, I think part of what's fueling it is the data, right? So if you look at the 2 segments, the big drivers for our tissue business and for the On-X business is the clinical data. I mean, the Ross data, there was Ross data presented at American Heart in November, that shows it's the best aortic valve operation for younger patients under kind of 50.

We literally sell every large pulmonary valve we have. So I think your point is fair, like, are we missing out on some right now? Yes, but we know exactly how much tissue we brought in, which was at the normal level throughout the cyber event. We had to do some [Technical Difficulty] it's going to take us longer to get it through the process, but we'll sell every one of them.

And then same for On-X. I mean, we were able because we had enough stuff in WIP to basically grow On-X 10% in the fourth quarter during a cyber event, but we really depleted a lot of inventory because we weren't making valves for a month. We will catch that up in the new data I just talked about, that was presented at STS.

You know, 109,000 patients, it basically shows that you will die more if you get a tissue valve if you're under the age of 60. And we just got the data. So we're super bullish on both On-X and the SGPV for the Ross. And we've got the materials. We just have to get them through the process, and we were kind of tied up for a bit there with the cyber event. But we've got full year guidance of 10% to 14%, and feel very strongly about it.

And just one last one for me, if I could. I just want to make sure I'm fully understanding the time line delay -- the PMA time line delay for the AMDS device pushed out to mid '26. Is this conservatism? I mean, it seems like good news that you submitted the second module in the fourth quarter. I'm just not clear what's delayed here? And why are you pushing it out? Help us better understand.

Yes. No, that's fair, Rick. So I will say when we were working on the HDE, literally, there was no PMA discussions going on. We focused 100% on the HDE, which obviously I think makes sense. We got that approval in early. We were submitting modules. We submitted 2 modules in 2024.

We started having our first discussions about the status of the PMA in January. And one of the things the FDA notified us about, and this is unrelated to any of this recent stuff is, there's some new testing -- bench testing that are in the international standards. They're applying it to all companies and all devices, implantable devices, which we're going to have to do for AMDS. So this is a kind of a new test -- some new testing they want us to do, which everyone is going to have to do.

And when you look at what the testing is and how long it takes and the submissions and everything else, it's going to add 2 quarters. And we're just being transparent with people. I personally don't think it has a big impact. And the only real difference between the HDE and the PMA is getting an IRB. And we feel pretty comfortable that this isn't going to change the revenue trajectory. So yes, I mean, we're going to keep working it and try to bring that in, but that's the -- we're being transparent with folks.

Our next question comes from the line of Frank Takkinen with Lake Street Capital Markets.

I'll also start with one, maybe on AMDS. Can you remind us just how many implanting sites or potential implanting sites you see in the U.S. and the penetration into those sites you have with your existing sales force with other products?

Yes. I would say big picture, there's about 1,000 centers that do DeBakey type I dissection. As a rule of thumb -- I mean, we basically sell stuff to all those centers. But as a rule of thumb, 80% of the volume is probably in the top 600 centers, which is where we're focused. So again, we call in all them, but we're not obviously going to go after all 1,000 at once. It's obviously impractical. Also, the volume tends to be skewed to the larger centers.

So we have -- I would say we have great coverage of the 80% of the volume immediately. And we'll have to work through kind of prioritization, which we've already done on which ones we go after first. But obviously, we're going to go after the larger centers and then follow -- we have a whole kind of cadence for that launch.

And then just one more on the cybersecurity incident. Can you help us at an operational level, what is occurring that is preventing the processing? Is it extra steps that now need to occur? Is it just business unit leadership distraction? What exactly is kind of the bottleneck to producing or processing the tissue?

Things that have -- we would normally use our systems for we were having to do manually for a period of time. And so that is just extending the period of time that it takes to get through everything. And it really relates to tissues that were either in process at the time of the event or that where donations that are received basically through January. So if we receive a donation today, it processes through our systems normally, and it will have a normal lead time. But there was a 2-month period, plus whatever was already in process where it's just -- it's a lot more labor intensive and it's going to take a lot longer to get through it.

And then just last one for me. I appreciate the commentary on kind of Q1 revenue. Can you help us maybe think about Q1 adjusted EBITDA in light of the revenue cadence throughout the year?

Yes. I mean, I think definitely, Q1 is going to be the lowest adjusted EBITDA of the year. And I think you got to kind of think through that proportionately with drop through on revenue. It's not like we're going to go cut a bunch of expenses out of Q1 just because we're going to have timing differences on revenue.

Yes. But I also think -- I mean, we give full year revenue and EBITDA guidance, which is exactly what we've been telling people. We're going to grow the top line double-digits and the bottom line at least twice as fast. We've given you the kind of the range of revenue and EBITDA. I mean, this was obviously the cyber event with an unexpected onetime. It was painful to go through. Our team did a great job responding to it. But trying to parcel out like, Q1, we've given you kind of some revenue direction. I mean, full year EBITDA guidance and revenue guidance we feel very comfortable with.

Our next question comes from the line of Suraj Kalia with Oppenheimer & Company.

First and foremost, congrats on a strong finish to the year despite the cyber breach, and you guys have had a 4-year run for what it's worth, and I've never missed a beat even in COVID. So it's unfortunate for this macro level incident.

Pat, that having said, the 190,000 patient retrospective analyses that you talked about, yes, it directionally points like there is a strong argument to be made that mechanical valves should dominate 60 below, maybe 60 to 65.

But by the same token, Pat, that analysis also indicated that overall mechanical valve usage was declining, right? So I guess my question, Pat, to you, is what kind of missionary work is needed let's say, from Artivion to reverse this trajectory and get to the expectation that On-X would deliver?

Yes. So maybe I can make a couple of comments. So this was presented as a late breaker at STS and it's 109,000 patients. And they basically looked at -- if you got a tissue valve or a mechanical valve, and you're under the age of 70 was the actual study. And basically, the lines cross at 60. So if you were under 60, you actually had a survival benefit by getting a mechanical valve.

And as far as the mechanical valve market declining, it actually -- it was shown over years that mechanical valve market has actually been growing. And that -- by the way, that's just a U.S. number that they're looking at. So we've actually been -- the market has actually been growing, but it's way down from where it was, say, 10 years ago.

And I think to your point, I think, one, if you talk to surgeons, surgeons were really blown away by the data and guys are walking out of there saying, I don't know if you heard the discussant was from the Mayo Clinic and basically said, you guys have been doing patients wrong and you should have been putting mechanical valves in under 60-year-olds all along. It was pretty much a smackdown.

But I think to your question, I think getting after referring cardiologists with our surgeon group, and we've got some plans in place that we'll be working on kind of midpoint of the year. So I do think there's some -- to your point, there's some stuff we can do to accelerate that. But this recent On-X post-approval data showing an 87% reduction in bleeding, coupled with this recent data out of JACC, showing a mortality benefit in patients under 60 means we can actually start going after valves in patients under 60, which doubled our business.

So people were always kind of like hemming and hawing, you guys keep growing On-X 10%. How long are you going to be able to keep doing that? Well, it looks like for a while.

Pat, on AMDS, I know everyone has asked a question or the other, so forgive me for belaboring this. From 30-day to 1 year, right, we now have the data. What has been the conversation in the clinical community in terms of the 30-day to 1-year trajectory? What's the noise on the ground? Any color you could share with us?

Yes. I was actually just at a surgical meeting with about 60 heart surgeons. We had -- this data was presented again, and this is just last weekend. I think there is an overwhelming -- it's been shown in work that other analysts have done. The amount of, I think, support for this device being used in acute Type A dissections is extremely strong.

I mean to have -- a lot of these patients, by the way, a lot of these patients like die on the table. So a 72% reduction in mortality, this is truly a life-saving device, which is why the FDA took us down the HDE pathway.

And I think this is going to be a very important device for patients who have this devastating condition. And the physician buzz on this is extremely high. So I think part of the reason we're so bullish on our [Technical Difficulty] is AMDS is really a great take away. We have a great sales force. We have great clinical data. We have a great device. There's no competition. And we're going to be pushing hard to get this technology to patients.

And last one quick one, then I'll hop back in queue. OUS has obviously been strong, especially LatAm. And as we look for FY '25, I believe you said there will be 1% to 2% hit on FX. Forgive me if I got that number wrong. But just kind of --

Yes. 2% --

2 percentage point.

Yes. It's really the euro.

It's 2 percentage points at current rates.

And should we still think about OUS, just in terms of relative contribution to the U.S., as being quite a bit higher? Just any additional color, because look, regulatory and policy-wise the environment is quite uncertain. Hence, I'm just trying to understand how -- as you all think through OUS contribution, what are the relative buffers in place?

Yes, thanks. I mean, I think as far as the -- I'm not sure if I understood the part about the regulatory side of things. But I mean, we're about 50-50 U.S., outside the U.S., the biggest region for us is obviously Europe, which is heavily impacted by the euro, which is where the FX comes in. But all of our regions are growing.

And then, I think, you had the comments about contribution. I don't know if that was about revenue contribution or about EBITDA contribution. But as it relates to EBITDA, we have a pretty significant natural hedge given our manufacturing that we do in Europe. And so it has some small impact on 2025 EBITDA, but it's not significant.

Our next question comes from the line of Mike Matson with Needham & Company.

Can you just remind us on as far as Endospan goes, when would be the earliest that you potentially have to make a decision on whether or not to acquire the company? I'm assuming it would be probably more in the 2026 timeframe, but I just want to make sure that, that's right.

Yes, that's correct, Mike. I think the exciting thing that's coming up here pretty quickly is they're going to be presenting their kind of their pivotal data of the PMA course, that's the 60-patient trial that will be [Technical Difficulty] you will have the full data set at AATS in May in Seattle, so not so far away.

And then basically, it's just kind of the same process we went through with prior PMAs, which is, they'll hit 1-year follow-up in October -- excuse me, they'll hit 1-year follow-up in October. But to get that data together and then submit the PMA, we're saying second half of '26, they'd get approval, which means we have 90 days post that to make a decision, which -- so depending when they get approval, let's say they get approval in Q4, we'd have to make a decision in Q1 of '27.

And then just as far as the convertible debt goes, I guess, why not roll it over into a new convert versus just letting it -- exchanging it for shares basically?

Yes. We have multiple different options. We could roll it into new convert or we could roll it into the existing private debt that we have. We just felt like at this point in time, it would be best to deleverage, get that down lower. Hopefully, we're going to get great news and execute our option on Endospan, and this will just put us in an even better position to do that. So that's the drivers behind the thought around using shares.

Yes. We talk to our shareholders all the time, and it's one of the things we've talk to them about. And I think people would like to see us delever. And as Lance said, at the midpoint of our EBITDA guidance for 2025, if we transition that convert to shares, we're going to be sitting around 2x, which feels a lot better than 3.8x.

Our next question comes from the line of Daniel Stauder with Citizens.

So first one, just on guidance. I appreciate the cadence and the commentary around first quarter. But just back in the envelope, if we plug in the midpoint for the first quarter and have improvement throughout the year, gets us to second half '25 closer to mid to high teens growth. Is that kind of the right way we should be thinking about it? Or just anything else you can give us on the cadence would be great.

Yes. So I think there's a couple of things, right? So one is -- and it's -- the cyber thing did create a timing issue, which is unfortunate, but we're being very kind of transparent with everybody. It's a timing thing. Our underlying business is totally fine. And it's taken us some time to process the tissue and to build up our inventory in On-X. I told you all the good news on both of those product lines.

I think a couple of other things. One, AMDS will build throughout the year, right? We just launched -- we just trained our sales force in the second week of January. So we've got to go through that process. I talked about. We've got to get IRBs, value analysis, training. So we will definitely build AMDS throughout the year. Obviously, Q4 is going to be a pretty easy comp given the cyber event that we just talked about.

So I think when you put that all together and then you spread more inventory for On-X later in the year, tissues getting pushed later in the year, you add that all together, it holds together. Yes, I wouldn't be putting guidance out like this if I didn't believe it.

No, totally get it. I guess, just one follow-up on guidance, but more on the bottom line or EBITDA rather. You mentioned contributions are from more operating leverage within SG&A. But I'm pretty sure you said some will come from the AMDS benefits. How much is that adding to the EBITDA outlook? I think, we've talked about 90% gross margins for that product, but what's the EBITDA margin we should be thinking about?

Just kind of the math on the EBITDA leverage is, we're expecting about 1 percentage point of gross margin expansion, about 2 percentage points of leverage out of SG&A. And then we're going to increase our spend in R&D by about 1 percentage point as compared to last year.

Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

Just one. Lance, you talked about gross margin improvement of 100 basis points. Can you just clarify, is that full year over full year? That's not related to the fourth quarter, correct?

Correct. That's full year. Now, obviously, there will be more benefit in the second half because that's when we expect to have more AMDS revenues, and that's really what's driving the benefit. But yes, the 100 basis points [Technical Difficulty] impact.

And do you think you'll break out AMDS at some point separately or it will be contained within our stents and grafts?

That's not the plan, but we definitely think you'll expect to see the impact in our stent graft number pretty clearly.

And then just one more for me. Pat, you talked about this. So we should expect to see the 60-patient data at the thoracic conference in May of Endospan, correct?

Correct.

And we have reached the end of the question-and-answer session. And I would like to turn the floor back to Pat Mackin for closing remarks.

Yes. Well, thanks for joining the call. And as you hear, we obviously dealt with a challenging cyber event in the fourth quarter and still delivered a good year. We've got some stuff we've got to clean up on the tissue side and On-X inventory [Technical Difficulty] kind of out of the first quarter.

But we're super excited about our AMDS HDE; there's long-term On-X data showing mortality benefit, where we can double that opportunity; launching BioGlue in China; and there's Ross data that keeps coming out stronger and stronger where we sell every pulmonary valve we have.

So as you heard in the guidance, we're pretty bullish on the company and appreciate your attention, and look forward to updating you on our progress on the next call.

Thank you. And this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.