CryoLife, Inc. Form 10-Q — Quarter Ended June 30, 2015
Entity note: The supplied filing is for CryoLife, Inc., not Artivion, Inc. It covers the second quarter and first six months of 2015; financial statements are unaudited. Dollar figures below are in millions unless stated otherwise.
Business context and reporting period
CryoLife develops and distributes medical devices and processes and distributes implantable human tissues for cardiac and vascular surgery. Its two reporting segments are Medical Devices and Preservation Services. The filing reports the three and six months ended June 30, 2015, compared with the same periods in 2014.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $35.5 | $34.7 | $69.4 | $70.4 |
| Gross margin | $21.6 (61%) | $22.4 (65%) | $41.2 (59%) | $44.9 (64%) |
| Operating income (loss) | $(0.5) | $2.2 | $(2.0) | $3.9 |
| Net income (loss) | $(0.5) | $2.2 | $(0.8) | $3.2 |
| Diluted EPS | $(0.02) | $0.08 | $(0.03) | $0.11 |
| Operating cash flow | Not provided quarterly | $5.2 | $0.8 |
- Q2 revenue rose 2% year over year, while first-half revenue declined 2%. Q2 product revenue was $19.9 million and preservation-services revenue $15.6 million; first-half totals were $39.3 million and $30.0 million, respectively.
- Gross margin fell as tissue-processing costs rose and revenue mix shifted away from higher-margin BioGlue toward tissues and lower-margin products. First-half product costs also included a PerClot Topical inventory write-down; the filing does not give its amount.
- Operating expenses were $22.0 million in Q2 and $43.2 million in the first half, up 9% and 6%, respectively. General, administrative and marketing costs included approximately $1.4 million of expense tied to former CEO Steven Anderson’s separation.
- Q2 pretax income was $0.2 million, but tax expense was $0.7 million, resulting in a net loss. The reported effective tax rate was approximately 402% for Q2 and 52% for the first half, reflecting low pretax income, tax-rate changes, and permanent tax differences.
- Cash and cash equivalents were $35.1 million at June 30, 2015, up from $33.4 million at year-end 2014. Current assets were $108.6 million and current liabilities $19.2 million, for working capital of $89.4 million and a 6:1 current ratio.
- Six-month investing cash use was $1.8 million, including $2.2 million of capital expenditures and $0.9 million proceeds from the Medafor investment. Financing cash use was $1.9 million, including $1.7 million of dividends. Cash increased $1.7 million during the period.
- Total liabilities were $26.5 million. No borrowings were outstanding under the $20 million GE revolving facility, which had $20 million available; the facility also permits a requested acquisition term loan of up to $25 million. A required $5 million is restricted as collateral. The company reported compliance with credit covenants and no off-balance-sheet arrangements.
Material changes versus prior comparable periods
- Q2 preservation-services revenue increased 9%, led by higher cardiac and vascular service fees and improved vascular shipments. First-half preservation-services revenue declined 2%, as tissue shipments remained affected by reduced availability and timing of releases.
- Medical-device revenue declined 2% in Q2 and 1% in the first half. Lower BioGlue sales were partly offset by HeRO Graft growth and initial ProCol and PhotoFix sales. BioGlue and BioFoam revenue fell 6% in Q2 and 7% for the first half; HeRO Graft revenue increased 2% and 9%, respectively.
- Preservation-services costs rose 19% in Q2 and 7% in the first half, driven by lower processing throughput, compliance and personnel costs, and materials. Cost of products rose 17% in the first half, partly due to the PerClot inventory write-down and new distributed products.
- First-half operating cash flow improved from $0.8 million to $5.2 million, primarily because the prior-year period had greater working-capital cash needs.
Outlook, commentary, risks and unusual items
- Management expected 2015 BioGlue revenue to benefit from Japan’s July 2015 expanded indication, with distributor sales expected to begin in Q3 and potential market opportunity estimated above $10 million annually. Management was also seeking approval in China.
- Management expected overall 2015 PerClot revenue to be comparable to 2014, but U.S. sales and distribution were halted in March 2015 under a preliminary injunction in Medafor patent litigation. PerClot pivotal-trial enrollment began in Q2; management expected significant trial costs in 2015 and 2016 and FDA PMA in 2018. If the company does not prevail or settle, a U.S. launch could be delayed until early 2019.
- Management expected 2015 cardiac laser therapy revenue to increase slightly, HeRO Graft revenue to increase, cardiac preservation-services revenue to be comparable with 2014, and vascular preservation-services revenue to increase. Research and development spending was expected to rise materially in 2015, mainly due to the PerClot trial.
- The company expected tissue-processing costs to remain elevated in Q3, with improvements in tissue availability and costs anticipated in the second half of 2015. A stronger U.S. dollar had reduced translated international revenue; management expected this pressure to continue through 2015.
- In June 2015 the company agreed to acquire certain assets from its French distributor for €1.2 million and transition to direct sales, with closing and payment expected in October. The transition had already contributed to lower BioGlue shipments to France.
- Anderson’s April retirement and separation agreement included cash and other benefits; approximately $2.4 million of cash severance and compensation was expected in October 2015, with an estimated $0.1 million bonus payment expected in February 2016. The filing recorded approximately $1.4 million of related Q2 expense.
- The FDA issued a close-out letter in April 2015, finding corrective actions effective and the quality-management system in substantial compliance after prior warning-letter remediation.
- Management believed existing cash and operating cash flow would meet operational liquidity needs for at least 12 months. Future cash demands include clinical-trial and litigation costs, severance, dividends, business development, capital expenditures, and working capital. Significant business development could require borrowing or additional financing.
- Other risks include dependence on BioGlue, tissue availability and processing yields, competition, product-liability exposure, regulatory changes (including possible reclassification of CryoValve SG tissue), foreign exchange, and the outcome and cost of the PerClot litigation. Estimated unreported product and tissue-processing claims were $1.5 million, with $0.63 million of related insurance recoveries; the filing notes the liability could be as high as $2.7 million including a statistical fluctuation margin.
Most important facts for investors to verify
- Confirm the issuer identity: this filing names CryoLife, Inc., despite the request identifying Artivion, Inc.
- Track whether gross margins recover as tissue-processing throughput and costs improve, and whether tissue availability supports service revenue.
- Monitor the Medafor litigation, the U.S. PerClot injunction, clinical-trial costs and milestones, and any effect on the expected launch timeline.
- Assess BioGlue trends, foreign-exchange exposure, and the actual sales contribution from Japan, ProCol, PhotoFix, and direct sales in France.
- Verify cash generation and cash requirements against severance payments, dividends, litigation and trial spending, and potential business-development activity; distinguish unrestricted cash from the $5 million restricted balance.
- Review the tax-rate outlook and the effect of unusual items, including the Medafor escrow gain, PerClot inventory write-down, and former CEO separation expense.