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This is a speculative, or story stock. So, what is the story before we examine the financial statements.

This company manufactures equipment for performing anastomotoses on both venous and arterial tissue.

The later designs are still awaiting FDA approval in the US. They are however being sold in Japan and Europe. The later generation models failed the FDA based on lack of significant data within the research protocols.

The two trials that the FDA “failed” had respectively; 55 patients, 54 patients. The latest trial due for re-submission in 1Q 2008 has 220 patients.

This limited data is a real problem. Not only in the clinical trials, but in the real world where the limited sales of product are actually being used. Doctors [surgeons] are very conservative, and will adhere to the recognised “Gold Standard” treatment. Thus data gathering is both critical, but very difficult and represents a significant risk.

Within their Financial Statements the company identify alternative treatments. They have listed;

*Pharmacological intervention; Platelet adhesion inhibitors, cholesterol inhibitors

*Stents & Drug eluting stents

*Coronary angioplasty

I shall add two more that they have ignored, both of which are increasingly being utilized, the first by primary physicians, which is prevention via diet, exercise, lifestyle, and the second which is actually where the future of curative/pallitative medicine lies;

*Stem Cell technology http://www.vescell.com/

There are a number of further serious risks;

*The main competitors to this company are J&J and Abbott Labs. Both dwarf this company in any metric you care to utilize. That this company is going against these two head-to-head must give pause.

*One significant customer, which is “Century” located in Japan. Whenever a company with weak revenues, which this is, is tied to a dominant customer, this adds significant risk.

*Weak R&D spending. This is a “research” based company supposedly. Well their R&D spending has increased by a tiny 2.5% compounded. This is the smallest increase on their Financial Statements. The next smallest spend is on CapEx. at 5%. This company certainly isn’t spending like a company looking to stretch the envelope.

*Losses are large and growing at a 17.2% compounded. Far from gradually improving, this company is going backwards. Losses currently are [-$81.83] million.

There are no earnings, nor have there ever been any earnings. All the cash has been raised via selling of various forms of debt and equity.

The major source of expenses that has grown at 19% compounded is SG&A which is the primary method of marketing via a direct sales team.

Cost of Goods actually exceeds Revenues. This is dangerous in that Fixed costs are not even being recovered, never mind Variable costs.

An alarming development is the reduction in CapEx to below the Depreciation rate, most likely to try and reduce losses, however, the message management is sending is of even less growth going into the immediate future.

Costs have also been capitalised. While not illegal, it is aggressive accounting. On a 5yr average $0.97 million were capitalised, and in the most recent statement this rose to $1.18 million.

Per $1.00 of assets the company is earning on a 5yr average $0.08 and in the last Financial Statement $0.17 This does not include any adjustments and is based on Revenue. This is clearly unsustainable.

*Burn Rate; at the current rate, the company can remain in business for 18mths. After this point [or prior] more cash will need to be sourced.

In addition, there are some 1.3 million Options outstanding, 730K Warrants with common stock at 110K. This means, should either warrants or options be exercised in excess of the treasury shares, open market purchases would be required, further depleting cash assets.

Part of the “Cash” assets are held in the following form [as per last statement]

*$5.8 million in Auction Rate Securities

*$1.2 million in Commercial Paper

*$1.8 million in Treasury Paper

Interesting as currently all three markets are in turmoil, thus the company liquidity may not be quite what their CFO was expecting.

Patents; currently 50 US Patents, 62 International, with life between 2018-2024, and a small number currently in application.

Inventory is accounted for via FIFO. This has some interesting consequences, which I shall cover as an update.