Business Context and Reporting Period
Cryo-Cell International, Inc. filed this Form 10-K for the fiscal year ended November 30, 2015; it is an annual report, not a stand-alone fourth-quarter report. The company provides umbilical cord blood and tissue processing and cryogenic storage services, and acquired the Prepacyte-CB processing product business in June 2015. Its global affiliates and the company together stored more than 300,000 specimens.
Financial Results and Liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $21.09 million | $20.13 million |
| Operating income | $2.93 million | $1.98 million |
| Net income | $8.11 million | $0.55 million |
| Basic / diluted EPS | $0.85 / $0.83 | $0.05 / $0.05 |
| Net cash from operating activities | $4.85 million | $1.55 million |
- Revenue increased 5%. Processing and storage fees rose 5% to $19.62 million, including 6% growth in recurring annual storage revenue and a 2% increase in new cord blood specimens processed. Prepacyte-CB contributed $471,000 after the acquisition. Licensee and royalty income declined 32% to $1.00 million.
- Operating margin was approximately 13.9%, compared with 9.8% in 2014. Cost of sales was $5.63 million, or 27% of revenue, versus 28%.
- Reported net income included a $7.16 million income tax benefit, principally reflecting an $8.15 million partial release of the deferred-tax valuation allowance. Pretax income was $950,000; the tax benefit, rather than operating earnings alone, accounts for most of the year-over-year net income increase.
- Cash and cash equivalents were $4.15 million at year-end, up from $3.28 million. Current assets were $10.35 million and current liabilities $10.42 million. Marketable securities were $610,000; restricted cash was $204,000.
- Operating cash flow was $4.85 million. Investing activities used $719,000, while financing activities used $3.26 million, primarily for $3.21 million of share repurchases. The company said cash, marketable securities and expected operating cash flows should cover known needs for at least 12 months; it had no line of credit.
- Debt included a seller note with $1.18 million principal outstanding at year-end, bearing 5% interest and secured by specified assets. The balance sheet also reported $2.30 million in long-term revenue-sharing liabilities and $20.5 million in deferred revenue, including current and noncurrent portions.
- Stockholders’ deficit improved to $4.96 million from $10.73 million, but remained negative.
Material Changes Versus Prior Year
- The Prepacyte-CB acquisition added a second reportable segment and $471,000 of 2015 product revenue. The purchase consideration was reported as $2.85 million, including a $1.30 million seller note; goodwill recognized was $1.78 million.
- Operating income increased 48%, while interest expense rose to $1.30 million from $1.15 million. The company recorded a $684,000 impairment charge to write off its Saneron investment, citing reduced grant funding, fewer employees and insufficient funding to sustain research.
- Fiscal 2014 included $794,000 of income associated with Mexico’s final license-agreement payment, which did not recur. India royalties were $1.00 million in 2015; a change to using actual processing and storage volumes increased fourth-quarter royalty income by $322,353.
- The company repurchased 1,034,210 shares during fiscal 2015 for approximately $3.21 million. A partial tender offer accounted for 557,805 shares purchased at $3.25 per share.
- The valuation allowance for deferred tax assets fell to $2.63 million from $10.52 million, resulting in a substantial noncash tax benefit.
Outlook, Risks, Contingencies and Unusual Items
- Management anticipated approximately $500,000 of discretionary capital expenditures over the next 12 months, principally for software and equipment, funded from cash and operating cash flows. It identified revenue growth and expense management as key to future cash generation and said spending might need to be reduced or deferred if revenue expectations are not met. No formal revenue or earnings guidance is provided.
- Management continues to consider strategic alternatives, including acquisitions, investments, stock or revenue-sharing interest repurchases, deregistration, or a going-private transaction; pursuing such options could require substantial debt or equity financing.
- Disclosure controls and internal control over financial reporting were deemed ineffective because of material weaknesses involving non-routine transaction accounting/documentation and manual controls over payment-plan storage revenue. Remediation steps were underway. The independent auditor audited the financial statements, but did not audit or opine on internal control effectiveness.
- The company stated it had not filed an amended acquisition-related Form 8-K with required Prepacyte pre-acquisition financial statements and pro forma information and was therefore not deemed a timely filer.
- Litigation disclosed included a contract dispute for which loss could not be estimated, a Delaware shareholder class action filed in January 2016 with a maximum D&O deductible of $500,000, and another contract suit served in February 2016. No amounts were accrued for the described contract claims as of November 30, 2015. The company said it intended to contest the claims.
- Risks include dependence on continued cord blood banking demand, competition, foreign affiliate payment or operating problems, regulation, collection-kit and Prepacyte suppliers, and uncertainty in future taxable income and realizability of deferred tax assets. Although Item 1A is marked “Not applicable,” these risks and contingencies are discussed elsewhere in the filing.
- The financial statement audit opinion was unqualified. The company’s $7.16 million tax benefit and the $684,000 Saneron impairment are notable, nonroutine items affecting reported results.
Important Facts for Investors to Verify
- How much of 2015 earnings is sustainable without the large deferred-tax valuation-allowance release, and what assumptions support realization of remaining deferred tax assets?
- Whether recurring storage-fee growth and new-client trends can offset lower license income, including the nonrecurring Mexico payment in the prior year.
- Prepacyte-CB sales, margins and unit volumes relative to the seller-note reduction and repayment provisions, including the 8,000-unit threshold.
- Progress and effectiveness of internal-control remediation, the amended acquisition Form 8-K filing, and subsequent reporting timeliness.
- Developments in pending litigation, RSA cash payments and accruals, and the company’s ability to fund repurchases, investment and capital spending while maintaining liquidity.