ARTIVION, INC. quarterly report, Q1 FY2015

Business context and reporting period

CryoLife, Inc. (the issuer named in the filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. Its businesses comprise medical-device products and preservation services for human cardiac and vascular tissues.

Financial performance and liquidity

Q1 2015 investing cash use was $1.6 million, including $1.1 million of capital expenditures; financing cash use was $616,000, including $850,000 of dividends. Current assets were $103.3 million and current liabilities $17.2 million, yielding working capital of $86.1 million and a 6:1 current ratio. The company had no borrowings under its $20 million revolving credit facility, with $20 million available. A further $5 million of cash was restricted under the credit agreement; $828,000 of restricted securities were also reported.

Material changes versus the prior comparable period

• Preservation-services revenue fell 11% to $14.4 million, led by lower vascular-tissue shipments; medical-device revenue was nearly flat at $19.4 million.
• BioGlue and BioFoam revenue declined 8% to $14.0 million, reflecting lower volume and foreign-exchange effects. CardioGenesis revenue increased 27% to $2.1 million and HeRO Graft revenue increased 15% to $1.9 million. ProCol and PhotoFix contributed $204,000 and $172,000, respectively, as newly distributed products.
• Gross margin declined as a share of revenue from 63% to 58%. The filing cites weaker BioGlue mix, a PerClot Topical inventory write-down, higher PerClot manufacturing costs, and higher tissue-processing costs per unit.
• Operating expenses rose 2% to $21.2 million. General, administrative and marketing costs increased 4%; research and development costs fell 10%.
• Cash from operations improved from use of $2.0 million to generation of $1.3 million, chiefly because the prior-year period had a larger working-capital cash requirement.

Outlook, commentary, risks and unusual items

• Management expects the strong U.S. dollar to continue to weigh on product revenue during 2015. It expects BioGlue revenue to face transition-related pressure in a major European market during Q2 and Q3.
• Management expected 2015 revenue growth for PerClot, HeRO Graft and cardiac preservation services; slight growth for CardioGenesis; and vascular preservation-services revenue comparable to 2014. These are product-level expectations, not consolidated revenue guidance.
• A court injunction in March 2015 barred U.S. marketing, sales and distribution of PerClot, including PerClot Topical, while patent litigation proceeds. CryoLife stopped U.S. sales and appealed the injunction in April. The filing reports an inventory write-down and impairment of a PerClot Topical intangible asset. The company began enrollment in a pivotal U.S. PerClot trial in Q2 2015 and expected FDA PMA approval in 2017; both timing and approval remain uncertain.
• FDA reinspection concluded in March without a new Form 483. In April, the company received a close-out letter confirming that corrective actions related to prior FDA findings had been implemented and were effective.
• Management expected tissue-processing throughput and per-unit cost pressures to continue at least through the first half of 2015, while procedures were being refined. The filing attributes reduced tissue availability and lower shipments partly to prior-year quality and processing changes.
• The effective tax rate was approximately 85%, versus 39% a year earlier, due to the absence of an anticipated domestic production deduction and other permanent tax differences. Management expected the rate for the rest of 2015 to remain significantly above 2014.
• Former CEO Steven Anderson retired on April 9, 2015. The separation agreement included approximately $2.4 million in cash severance and compensation payments, an estimated $100,000 bonus, benefits and accelerated equity vesting. The company expected to record about $1.2 million of incremental expense in Q2.
• Management stated that existing cash and operating cash flows should meet operational liquidity needs for at least 12 months. Potential cash demands include PerClot trials, litigation, severance, dividends and business development. It also noted that significant business development could require borrowing or additional financing.
• Other material risks include dependence on BioGlue, competition and foreign-exchange exposure, regulatory and product-liability risks, donor-tissue availability, and uncertainty over the PerClot litigation and clinical program. The filing reported estimated unreported product and tissue-processing claims of $1.4 million, with related insurance recoveries of $615,000; its actuarial estimate could be as high as $2.7 million.

Important facts for investors to verify

• Progress and outcome of the Medafor patent litigation and appeal, including the continuing U.S. PerClot injunction.
• PerClot clinical-trial enrollment, costs, regulatory milestones and ability to obtain FDA approval.
• Whether tissue-processing throughput, availability and unit costs improve as management expects.
• Revenue and margin trends by product and preservation service, including currency effects and BioGlue’s European sales transition.
• Cash needs, credit-facility covenant compliance, Anderson separation costs, and any additional Medafor escrow or milestone receipts.