CRYO-CELL INTERNATIONAL, INC. — Q1 FY2020 10-Q
Reporting period: Three months ended February 29, 2020; comparisons are with the three months ended February 28, 2019 unless noted. Balance-sheet comparisons are with November 30, 2019. The filing is unaudited.
Business context and results
Cryo-Cell provides cellular processing and cryogenic storage, primarily for family-use umbilical cord blood and tissue; it also sells PrepaCyte CB processing products and operates a public cord blood banking business. Processing and storage fees remain the principal revenue source.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $7.621 million | $7.495 million | +1.7% |
| Operating income | $1.249 million | $854,000 | +46.3% |
| Net income | $687,000 | $276,000 | +149.0% |
| Basic / diluted EPS | $0.09 / $0.08 | $0.04 / $0.03 | Higher |
| Cash from operations | $2.616 million | $1.854 million | +41.0% |
Financial position, cash flow and margins
- Revenue mix: Processing and storage fees were $7.406 million (+1%); public banking revenue was $154,000 (+15%); product revenue was $60,000 (+135%). Management attributed processing and storage growth principally to a 7% increase in recurring annual storage fee revenue. Licensee income was zero in both periods.
- Margins: Gross margin was approximately 67.2%, versus 67.1%. Operating margin was approximately 16.4%, versus 11.4%; net margin was approximately 9.0%, versus 3.7%.
- Expenses and unusual comparison: Cost of sales rose 2% to $2.503 million and SG&A rose 3% to $3.870 million. The contingent-consideration fair-value adjustment was a $51,000 gain in Q1 FY2020, compared with a $367,000 expense in Q1 FY2019, contributing to the operating-income improvement. Total other expense was $310,000, including $365,000 of interest expense; reported income tax expense was $252,000.
- Cash and liquidity: Cash and equivalents were $8.416 million and marketable securities were $959,000 at February 29, 2020. Current assets were $16.895 million and current liabilities $16.070 million (working capital approximately $825,000; current ratio approximately 1.05). Cash increased $1.875 million during the quarter. Operating cash flow of $2.616 million was partly offset by $775,000 of debt repayments; investing activities used $7,000.
- Debt and obligations: Note payable was $8.206 million net of debt issuance costs, of which $3.100 million was current; the loan matures in July 2021. The company also reported a $1.425 million revenue-sharing liability and $3.444 million of contingent consideration. Deferred revenue totaled $33.065 million, including $8.610 million classified current. Total liabilities were $50.731 million, exceeding total assets of $44.730 million; stockholders’ deficit was $6.001 million.
- Other balance-sheet items: Inventory was $13.660 million, including $13.403 million of finished public-bank units. The filing cites a $2.333 million inventory impairment recorded in Q2 FY2019; no impairment was recorded in this quarter.
Material changes, outlook and risks
- Operating income improved despite modest revenue growth, aided in part by the favorable year-over-year change in contingent consideration. Public banking remained loss-making, with segment operating loss increasing to $253,000 from $133,000; the cord blood and tissue service segment generated $1.490 million of operating income.
- The company adopted lease accounting standard ASC 842 on December 1, 2019. At quarter-end it reported an operating-lease right-of-use asset of $496,000 and lease liabilities totaling $496,000.
- Outlook: Management expected cash, marketable securities and future operating cash flows to cover known needs for at least 12 months. It anticipated approximately $500,000 of discretionary capital expenditures over the next 12 months, funded from cash and operations. No specific revenue or earnings guidance was provided. Management said lower-than-expected revenue or higher expenses could require expenditure reductions or financing; no assurance was given that financing would be available on acceptable terms.
- COVID-19: The pandemic was declared after the balance-sheet date. Operations continued, but management said the impact was unknown and evolving and could reduce demand through an economic downturn; the company planned to monitor liquidity and had taken steps to protect employees and maintain operations.
- Acquisition earnout: Under the Cord:Use agreement, the seller is generally entitled to 75% of annual public-inventory sales above $500,000, plus potential stock payments under specified thresholds. The contingent liability is a Level 3 fair-value estimate; actual payments may differ materially.
- Legal and reporting matters: A 2015 lawsuit alleges breach of agreements and seeks damages exceeding $15,000, the court’s stated jurisdictional threshold. The company disputes the claims, has accrued nothing, and cannot estimate a possible loss. Management reported disclosure controls effective, while also stating that the company was not deemed a timely filer because a required amended 2015 acquisition Form 8-K had not been filed; management intended to file it later.
- Other disclosed risks include competition, regulation, customer demand and annual storage renewals, storage-facility or information-system failures, licensee performance, litigation, acquisition returns, and the effects of COVID-19. Management also said it would continue reviewing strategic options, which could involve additional debt or equity.
Most important facts for investors to verify
- Whether recurring storage revenue and customer renewals can sustain growth, and how COVID-19 affected subsequent demand and collections.
- Public-bank inventory sales, recoverability of the $13.4 million finished-goods balance, and the eventual Cord:Use earnout cash and stock payments.
- Debt repayment capacity and terms, including the $3.1 million current portion, alongside lease, revenue-sharing and deferred-revenue obligations.
- The assumptions supporting the $9.080 million deferred tax asset and the company’s ability to realize it through future taxable income.
- Developments in the unaccrued lawsuit and the status and implications of the outstanding amended acquisition Form 8-K.