Cryo-Cell International, Inc. — Form 10-Q summary
Reporting period: Third quarter and nine months ended August 31, 2015. The company provides cord blood processing and storage services, earns licensee royalties, and added sales of the PrepaCyte-CB processing system following its June 30 acquisition.
Financial performance
| Metric | Three months ended Aug. 31, 2015 | Nine months ended Aug. 31, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $5.436 million | $15.293 million | $4.938 million; $15.151 million |
| Operating income | $1.264 million | $2.492 million | $0.429 million; $1.796 million |
| Net income | $7.830 million | $8.326 million | $0.237 million; $0.849 million |
| Basic earnings per share | $0.83 | $0.86 | $0.02; $0.08 |
| Cash from operations | Not separately reported | $2.864 million | $1.312 million |
Revenue increased about 10% in the quarter and 1% over nine months. Nine-month processing and storage fees rose 5%, including a 6% increase in recurring annual storage fees, while new specimen processing was relatively flat. Product revenue contributed $265,848 in 2015. Nine-month licensee and royalty income fell to $508,235 from $1.302 million, mainly because the prior-year period included a $794,000 final payment from the terminated Mexico agreement.
Gross margin was approximately 72% for the quarter and 73% for the nine-month period, versus approximately 70% and 71% in 2014. Nine-month operating margin was approximately 16%, compared with 12%. Cost of sales declined 4% and SG&A declined 3% over nine months; third-quarter SG&A declined 11%. Interest expense increased to $1.025 million for nine months, largely reflecting revenue-sharing agreement costs.
Tax-related earnings item: Net income was substantially increased by a $6.881 million net income-tax benefit for the nine months, including a roughly $6.957 million reversal of the U.S. deferred-tax valuation allowance. The company cited profitability in ten of the last eleven quarters and expectations of future taxable income as support. This benefit is not operating revenue or operating cash flow.
Financial position and liquidity
- At August 31, cash and cash equivalents were $2.719 million, restricted cash $0.204 million, and marketable securities $0.461 million. Cash declined $0.560 million from November 30, 2014.
- Current assets were $9.907 million and current liabilities $10.452 million, a working-capital deficit of approximately $0.545 million. Current liabilities include $6.781 million of deferred revenue.
- Total assets were $19.435 million, up from $10.210 million, reflecting the acquisition and recognition of deferred tax assets. Stockholders’ deficit narrowed to $4.828 million from $10.727 million.
- The company reported $1.251 million outstanding on the seller note for the PrepaCyte-CB acquisition ($0.304 million current; $0.947 million long term) and a $2.300 million long-term revenue-sharing liability. It had no line of credit. The seller note bears 5% interest, is secured by acquired assets, and includes sales-based principal adjustments.
- Operating cash flow of $2.864 million was more than offset by $2.947 million used for share repurchases and $0.482 million used in investing activities. Management expected cash, marketable securities, and future operating cash flows to cover known needs for at least 12 months, subject to revenue and expense performance.
Material changes, outlook, and risks
- The company acquired selected assets, contracts, and the PrepaCyte-CB product business from CytoMedical for total consideration of approximately $2.853 million, including a $1.300 million seller note. The preliminary allocation included $1.742 million of goodwill. The company had not yet determined whether the acquired activity qualified as a separate operating segment.
- Management anticipated approximately $500,000 of discretionary capital expenditures over the following 12 months, principally for software and equipment. No specific revenue or earnings guidance was provided. Management said financing might be considered if appropriate and available on acceptable terms.
- The company repurchased 957,956 shares for $2.947 million during the nine months, including 557,805 shares accepted in a tender offer at $3.25 per share. Repurchases contributed materially to the cash decline. The board had authorized repurchases of up to six million shares.
- Disclosure controls and internal controls over financial reporting remained ineffective because of a material weakness in accounting for and documenting non-routine transactions. Management described steps to improve review procedures and use qualified consultants.
- Risks identified include competition, falling demand or storage renewals, regulation, international licensee performance and collections, storage-facility or information-system failures, litigation, and the ability to profit from the acquisition. The company also warned that goodwill, deferred tax assets, and future cash needs depend on estimates and future performance.
- A shareholder-rights plan may become exercisable if a person reaches a 20% ownership threshold, subject to stated exceptions; it was scheduled to expire December 5, 2017 unless earlier changed. A company-filed action seeking to compel Cord Blood America to hold an annual shareholder meeting was pending. Management said existing matters were not expected to materially harm the company overall, but an adverse result could affect a particular quarter.
Important facts for investors to verify
- Whether future taxable income supports the large valuation-allowance reversal and realization of deferred tax assets.
- PrepaCyte-CB sales, margins, integration costs, and performance against the seller note’s sales-based adjustment terms.
- Cash generation and liquidity after substantial buybacks, given the working-capital deficit and planned capital expenditures.
- Progress in remediating the material weakness and improving disclosure and financial-reporting controls.
- Collection of the India affiliate receivable and trends in recurring storage revenue, new client enrollments, and licensee royalties.