Business context and reporting period
Registrant identification: The supplied filing is for CryoLife, Inc. and subsidiaries, not Artivion, Inc. It is a Form 10-Q for the quarter ended September 30, 2015. The company reported medical-device products and human-tissue preservation services. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $36.7 | $37.1 | $106.1 | $107.5 |
| Gross margin | $23.0; 63% | $23.8; 64% | $64.2; 61% | $68.7; 64% |
| Operating income | $2.5 | $3.0 | $0.5 | $6.9 |
| Net income | $2.1 | $2.3 | $1.4 | $5.5 |
| Diluted EPS | $0.07 | $0.08 | $0.05 | $0.19 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $10.0 | $3.3 |
- Q3 product revenue fell 3%, while preservation-services revenue rose 1%. Vascular preservation services reached a quarterly record of $9.3 million. For the nine months, both product and preservation-services revenue declined.
- Gross margin and operating income weakened, particularly year to date. Higher tissue-processing costs, unfavorable product and tissue mix, and a PerClot inventory write-down pressured margins. Nine-month operating expenses rose to $63.7 million from $61.7 million; R&D increased to $7.9 million from $6.6 million.
- Nine-month net income included an $891,000 gain from the release of Medafor sale escrow consideration. The nine-month effective tax rate was approximately negative 9%, helped by a $794,000 reversal of uncertain tax positions; management expected the Q4 rate to be higher.
- At September 30, cash and cash equivalents were $38.5 million, with a further $5.0 million classified as long-term restricted cash. Current assets were $112.8 million and current liabilities $22.2 million; working capital was $90.6 million and the current ratio 5:1. Total liabilities were $28.1 million. No borrowings were outstanding under the $20 million revolving facility, and the company reported full availability and compliance with its covenants.
- Nine-month investing cash outflow was $2.8 million, including $3.2 million of capital expenditures and $891,000 of Medafor proceeds. Financing cash outflow was $2.0 million, including $2.6 million of dividends paid. Cash increased $5.1 million to $38.5 million during the period.
Material changes versus the prior comparable period
- Q3 revenue declined 1%; nine-month revenue also declined 1%. BioGlue and BioFoam revenue fell 6% in both periods, reflecting lower volume and foreign-exchange effects. For nine months, cardiac preservation revenue declined 4%, while vascular preservation revenue increased 2%.
- Q3 gross margin decreased by $0.8 million; nine-month gross margin declined by $4.5 million. The nine-month operating-income decline was substantial, from $6.9 million to $0.5 million, and net income fell from $5.5 million to $1.4 million.
- Operating cash flow improved to $10.0 million from $3.3 million, which management attributed primarily to the absence of the prior-year period’s large working-capital cash requirement.
- The U.S. dollar’s strengthening against the pound and euro reduced translated revenue. Management expected foreign-exchange pressure to continue through the rest of 2015 and into 2016.
Outlook, commentary, risks, and unusual items
- Management expected cash on hand and operating cash flow to cover operational liquidity needs for at least 12 months. It cited future cash needs for the PerClot clinical trial and litigation, dividends, R&D, capital expenditures, business development, and severance. Management said significant business development could require additional borrowing or financing.
- Management expected 2015 PerClot revenue to be comparable to 2014, with quarter-to-quarter variability; it expected the U.S. pivotal-trial costs to be significant in 2015 and 2016 and targeted FDA PMA in 2018. A court injunction bars U.S. PerClot marketing and sales during patent litigation; if the company does not prevail or settle, a U.S. launch could be delayed until early 2019. The company had ceased U.S. distribution and recorded a write-down of U.S.-market PerClot inventory.
- The court litigation concerns Medafor’s patent infringement counterclaim. CryoLife’s appeal of the preliminary injunction was dismissed in June 2015; the case was proceeding through discovery. Litigation costs and possible restrictions, royalties, or damages are risks.
- CryoLife reported that Hancock Jaffe had breached the ProCol distribution agreement, including failure to ship inventory on time. At September 30, the company had prepaid approximately $1.8 million for inventory not yet received and was negotiating an amendment; the prepayment could be impaired if inventory or repayment is not secured.
- Preservation operations continued to be affected by processing changes, lower throughput, compliance and personnel costs, and tissue availability. Management said processing improvements had begun to increase tissue availability and expected per-unit processing costs to decrease slightly in Q4. It expected full-year cardiac preservation revenue to decline slightly and vascular preservation revenue to increase.
- Other stated expectations included slight full-year HeRO Graft revenue growth, a slight Q4 decline in CardioGenesis revenue, and materially higher full-year R&D spending. The company completed its transition to direct sales in France after quarter-end, acquiring certain distributor business assets for €1.2 million in October 2015.
- Unusual expenses included approximately $2.9 million of severance and termination benefits in nine-month G&A, including costs related to former CEO and Executive Chairman Steven Anderson’s retirement. Approximately $2.4 million of his cash severance and compensation was paid in October 2015; an estimated $100,000 bonus was expected in February 2016.
- Management identified significant risks from reliance on BioGlue, competition (including products expected to compete with BioGlue in 2016), regulatory requirements, tissue supply, key suppliers and facilities, foreign exchange, and product-liability claims. The estimated unreported loss liability was $1.5 million, with $645,000 of related insurance recoverables; the liability estimate could be as high as $2.8 million under the disclosed actuarial range.
Most important facts for an investor to verify
- Confirm the issuer identity: the filing itself names CryoLife, Inc., despite the request metadata naming Artivion, Inc.
- Track whether the margin and earnings deterioration reverses, particularly the effects of tissue-processing throughput, product mix, and BioGlue sales.
- Monitor the PerClot patent case, U.S. injunction, clinical-trial spending, and FDA approval and launch timing.
- Confirm resolution of the ProCol supply dispute and recoverability of the approximately $1.8 million inventory prepayment.
- Assess cash conversion, foreign-exchange exposure, severance and other commitments, and continued covenant compliance; $5.0 million of cash was restricted and unavailable for general liquidity.
- Review the disclosed outlook and contingent estimates against subsequent results; management cautioned that interim results were not necessarily indicative of full-year performance.