Cryo-Cell International, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended August 31, 2019. Unaudited consolidated results. Cryo-Cell provides cord-blood and cord-tissue processing and storage, public cord blood banking, and PrepaCyte CB products.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $8.22 million | $7.87 million | $23.85 million | $20.62 million |
| Operating income | $1.99 million | $0.92 million | $3.34 million | $3.06 million |
| Net income (loss) | $1.12 million | $0.24 million | $1.45 million | $(1.75) million |
| Basic EPS | $0.14 | $0.03 | $0.19 | $(0.24) |
- Nine-month revenue rose 16%, driven mainly by a 15% increase in processing and storage fees. Management attributed growth to higher recurring domestic storage revenue and more new domestic specimens processed.
- Nine-month cost of sales increased 31% to $7.68 million. Gross margin was approximately 67.8%, down from 71.6% a year earlier; the increase in costs reflected public-bank operations and higher processing volumes.
- Nine-month operating margin was approximately 14.0%, versus 14.8% in 2018. The current period included a $2.33 million public-inventory impairment charge; SG&A fell 5% to $10.95 million, partly reflecting the absence of $580,000 in prior-year Cord:Use acquisition costs.
- Q3 revenue increased about 4% year over year. Q3 operating margin improved to approximately 24.2% from 11.7%, primarily alongside lower SG&A and higher revenue.
- Nine-month interest expense increased to $1.25 million from $0.995 million. The prior-year net loss included approximately $2.985 million of tax expense related to the 2017 federal tax-rate reduction; 2019 income tax expense was $0.654 million.
Cash, liquidity and debt
- At August 31, 2019, cash and cash equivalents were $7.34 million and marketable securities were $0.875 million. Cash increased $1.30 million from November 30, 2018.
- Nine-month operating cash flow was $5.12 million; investing used $0.51 million, mainly for property and equipment; financing used $3.32 million, primarily for debt repayments.
- Net carrying value of notes payable was $9.70 million, down from $12.94 million at November 30, 2018; $3.10 million was current. Current assets of $15.92 million exceeded current liabilities of $14.27 million by approximately $1.65 million. Total liabilities were $48.79 million and stockholders’ deficit was $6.96 million.
- Deferred revenue, largely advance payments for future storage services, totaled $31.67 million, including $8.78 million expected to be recognized within 12 months.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management expects cash, marketable securities and operating cash flows to fund known needs for at least 12 months, and anticipates approximately $500,000 of discretionary capital expenditures over the next 12 months. If revenue growth falls short or costs exceed expectations, the company may need to reduce or defer spending or seek financing; it has no line of credit.
- The Cord:Use public-bank inventory was written down by $2.33 million due to changes in sales trends and estimated recoverability. The public cord blood banking segment reported a nine-month operating loss of $2.80 million, compared with a $0.24 million loss in 2018.
- Cord:Use contingent consideration was valued at $3.60 million, down from $4.28 million at November 2018. Its fair value depends on estimates and may fluctuate; actual payments may differ materially.
- A 2015 contract lawsuit remains unresolved. The company says it intends to contest the claims; it cannot estimate a possible loss and has recorded no accrual.
- Management identified risks including regulation, competition, customer demand, storage-facility or information-system failures, international licensee performance, litigation, and the ability to realize value from acquisitions and public-bank inventory.
- Management stated disclosure controls were effective, while also noting an independent board committee’s review of shares purportedly issued beyond the 2012 stock plan reserve. The company also said it had not filed an amended 8-K with required PrepaCyte acquisition financial statements and pro forma information, and therefore was not deemed a timely filer.
- ASC 606 was adopted effective December 1, 2018 using the modified retrospective method; management said adoption did not affect reported revenue amounts. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether growth in recurring storage fees and new customer processing continues, and whether cost growth and margins stabilize.
- Public-bank inventory sales, remaining inventory recoverability, future impairment risk, and Cord:Use earnout obligations.
- Debt repayment requirements, interest costs, and management’s 12-month liquidity assessment.
- Collection of the approximately $750,000 LifeCell royalty receivable and the implications of the agreement’s royalty caps.
- Status and potential outcomes of the contract litigation, stock-plan share issuance review, and overdue amended PrepaCyte 8-K filing.