Business context and reporting period
This Form 10-Q is for CryoLife, Inc. and subsidiaries, for the quarter and six months ended June 30, 2014. The request identifies Artivion, Inc.; however, the filing itself is for CryoLife, Inc. CryoLife develops and sells cardiac and vascular medical devices and preserves and distributes human tissues for transplantation.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $34.7 | $33.5 | $70.4 | $69.1 |
| Gross margin | $22.4; 65% | $21.5; 64% | $44.9; 64% | $44.8; 65% |
| Operating income | $2.2 | $2.8 | $3.9 | $6.1 |
| Net income | $2.2 | $1.8 | $3.2 | $4.0 |
| Diluted EPS | $0.08 | $0.06 | $0.11 | $0.14 |
- Q2 revenue grew 3%; first-half revenue grew 2%. Product revenue rose 12% in Q2 and 5% in the first half, while preservation-services revenue declined 6% and 1%, respectively.
- BioGlue and BioFoam revenue grew 14% in Q2 and 6% year to date. HeRO Graft revenue increased 20% and 23%; PerClot increased 22% and 14%. Revascularization technology revenue fell 9% and 16%.
- First-half operating cash flow was $0.8 million, compared with $4.0 million in 2013. Investing cash use was $3.8 million and financing cash use was $3.8 million. Cash and cash equivalents decreased by $6.8 million to $30.9 million.
- At June 30, current assets were $105.8 million and current liabilities $19.1 million; working capital was $86.7 million and the current ratio was 6:1. Total liabilities were $27.8 million and shareholders’ equity $146.0 million.
- No borrowings were outstanding under the $20 million GE Capital revolving facility; full availability remained. The facility expires October 28, 2014. A $5 million cash balance was restricted under its covenant.
- Quarterly dividend increased to $0.03 per share. The company repurchased 227,188 shares for approximately $2.0 million in the first half.
Material changes versus comparable periods
- Despite modest revenue growth, first-half operating income fell 36% and net income fell 19%, mainly as operating expenses increased. R&D expense rose 26% in the first half, while general, administrative, and marketing expense rose 4%.
- Q2 net income increased year over year despite lower pretax income, primarily because income tax expense fell to $0.2 million from $1.0 million. The company reversed $0.748 million of uncertain tax liabilities after an IRS examination; first-half effective tax rate was 22%, versus 31% in 2013.
- Preservation-services shipments were temporarily restricted in Q2 during a review of internal training following FDA inspection observations, reducing tissue availability and revenue. Inventory rose to $12.1 million from $9.8 million at year-end.
- Cash from operations was lower, partly reflecting higher deferred preservation costs and inventory, prepaid expenses, and other assets. The company continued capital spending, dividends, and share repurchases.
Outlook, commentary, risks and unusual items
- Management expected 2014 revenue growth for BioGlue, PerClot, and HeRO Graft; it expected preservation-services revenue in the second half to be comparable to or slightly above the prior-year period. It did not expect to recover the full Q2 tissue-revenue shortfall during the remainder of 2014.
- Management expected general and administrative expenses to rise for full-year 2014 and R&D spending to increase materially, particularly for PerClot clinical studies. It expected Bard litigation costs to be material and potentially unpredictable.
- The FDA issued a Form 483 after a 2014 inspection, following an earlier warning letter. The company said corrective actions and FDA communications were ongoing and expected related costs to continue through year-end. Further FDA action, including a recall or manufacturing hold, could materially affect operations and results.
- The FDA was considering classifying CryoValve SGPV as a Class III device, which could require a PMA and create additional cost or disruption. CryoLife anticipated submitting post-clearance study results by December 31, 2014.
- PerClot received FDA investigational-device exemption approval for a pivotal U.S. trial; enrollment was planned for the second half of 2014, with PMA expected in the first half of 2016. PerClot Topical received 510(k) clearance, with shipments planned for the second half of 2014. A patent dispute with Bard remained unresolved; motions were pending and discovery had not begun.
- The company began distributing ProCol under exclusive worldwide distribution rights and had paid Hancock Jaffe $1.0 million by June 30. Further payments of up to $2.3 million were contemplated for 2014; additional inventory depends in part on FDA approval of the supplier’s manufacturing-facility supplement.
- Management believed available cash and operating cash flows would cover operational liquidity needs for at least 12 months, but cited potential cash requirements for trials, litigation, ProCol, repurchases, dividends, and business development. It noted possible need for additional borrowing or equity financing.
- Other exposures include a $2.0 million secured loan to cash-constrained ValveXchange, estimated unreported product and tissue claims of $1.5 million (potentially as high as $2.7 million under the company’s analysis), and up to $8.4 million of contingent additional proceeds from the 2013 Medafor sale, subject to escrow and milestones.
- In July 2014, after quarter-end, J. Patrick Mackin was appointed President and CEO effective September 2, 2014. The filing reports a $200,000 signing bonus and equity awards under his employment agreement.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for CryoLife, Inc., notwithstanding the Artivion metadata.
- Track FDA follow-up to the Form 483 and warning letter, including any impact on tissue availability, compliance costs, or enforcement actions.
- Monitor the CryoValve SGPV classification process and required study submission, as well as PerClot trial progress, commercialization timing, and the Bard patent litigation.
- Assess the October 2014 GE Capital facility expiration, renewal or replacement terms, and cash available after restricted balances and planned uses.
- Evaluate whether product growth can offset preservation-services pressure and rising operating, clinical-trial, litigation, and manufacturing costs.
- Follow ProCol supply and facility approval, ValveXchange loan recoverability, and any Medafor contingent proceeds or liability claims.