CRYO-CELL INTERNATIONAL, INC. — Q3 2018 Form 10-Q
Business context and period: Cryo-Cell provides cord blood and tissue processing and cryogenic storage, manufactures PrepaCyte CB, and earns license and royalty income. This unaudited report covers the three and nine months ended August 31, 2018; balance-sheet comparisons are with November 30, 2017.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $7.87 million | $6.90 million | $20.62 million | $18.91 million |
| Operating income | $0.92 million | $1.45 million | $3.06 million | $3.76 million |
| Net income (loss) | $0.245 million | $0.652 million | $(1.75) million | $1.64 million |
| Operating margin | 11.7% | 21.1% | 14.8% | 19.9% |
| Operating cash flow | Not separately reported | Not separately reported | $4.49 million | $3.61 million |
- Q3 revenue increased 14%; processing and storage revenue rose 15%, with new domestic specimens processed up 22%. Nine-month revenue increased 9%, reflecting an 11% increase in processing and storage fees and 14% more new specimens processed.
- Margins and operating income declined as cost of sales and SG&A grew faster than revenue. Nine-month cost of sales rose 15% and SG&A rose 16%; SG&A included $735,000 of nonrecurring Cord:Use acquisition costs. Product revenue fell to $84,000 for the nine months from $342,000.
- Nine-month net loss includes approximately $2.985 million of tax expense from remeasuring deferred tax assets after the federal tax rate reduction to 21%. Management attributed the loss primarily to this charge and higher operating expenses, partially offset by revenue growth.
- Cash and cash equivalents were $7.04 million, plus $0.95 million of marketable securities. Current assets were $30.48 million and current liabilities $14.91 million; inventory of $16.17 million largely reflects acquired public cord blood units. Total liabilities were $52.50 million, exceeding assets of $42.65 million; stockholders’ deficit was $9.85 million.
- Note payable principal was $14.98 million ($14.69 million net of issuance costs), including $3.10 million current. The loan bears interest at 3.35% plus LIBOR and matures in June 2023. The company generated $4.49 million from operations, used $11.21 million in investing, and received $7.48 million net from financing during the nine months.
Material changes, outlook and risks
- Cord:Use acquisition: Completed June 11, 2018 for $14.0 million at closing—$10.5 million cash and 465,426 shares—plus contingent consideration. The purchase-price allocation included $16.04 million of public cord blood inventory and $2.01 million goodwill. The company borrowed an additional $9.0 million to fund part of the purchase. The seller is also entitled to specified inventory-sale earnouts and a share of certain Tianhe-related profits. Public banking generated $65,575 revenue and incurred $308,662 cost of sales in the nine-month period.
- Management expects cash, marketable securities and operating cash flows to cover known needs for at least 12 months, and anticipates approximately $500,000 of discretionary capital expenditures over the next year. This outlook depends on revenue growth and expense management; management says spending may need to be reduced or deferred if expected revenue does not materialize. No specific earnings or revenue guidance is provided.
- Disclosed risks include regulatory changes, competition, lower demand or storage renewals, facility or information-system failures, international licensee performance and enforcement, acquisition integration and returns, litigation, and the possibility of needing additional financing. The company has no line of credit.
- A Florida contract lawsuit remains unresolved; the company contests the claims, cannot estimate a possible loss, and recorded no accrual. The filing also reports an independent board committee reviewing whether executive shares were issued in excess of the 2012 Plan’s reserved shares.
- Controls disclosure warrants attention: the filing’s language is internally inconsistent about whether disclosure controls are effective. It says management is reviewing controls in connection with the share-issuance matter and notes the company was not deemed a timely filer because it had not filed an amended 8-K with required PrepaCyte acquisition financial and pro forma information.
Important facts for investors to verify
- How much of the Cord:Use inventory can be sold, on what timeline, and what contingent payments or stock issuance may result.
- Whether the federal tax remeasurement is predominantly a one-time noncash charge, and how deferred tax assets and any valuation allowance may change.
- Debt repayment terms, floating-rate exposure, and liquidity after acquisition-related and earnout obligations.
- Collection of the approximately $500,000 LifeCell royalty receivable and the company’s allowance for doubtful accounts.
- Outcome of the stock-plan share review, the status of the required amended 8-K, and resolution or developments in the pending lawsuit.