Cryo-Cell International, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended August 31, 2012. Financial statements are unaudited; comparisons are with the corresponding 2011 periods unless noted.
Business context
Cryo-Cell provides umbilical cord blood processing and storage, with recurring storage fees and income from international licensing and royalties. The company also develops menstrual stem cell and cord tissue offerings. Management said it was refocusing on its cord blood and cord tissue business while continuing development of menstrual stem cell technology.
Financial performance
| Metric | Three months ended Aug. 31, 2012 | Nine months ended Aug. 31, 2012 |
|---|---|---|
| Revenue | $4.54 million, up 3% | $13.15 million, down 2% |
| Operating income (loss) | $38,443, versus a $1.90 million loss | ($1.16 million), versus a $586,876 loss |
| Net income (loss) | ($547,097), versus ($2.38 million) | ($5.45 million), versus ($1.97 million) |
| Basic loss per share | ($0.05), versus ($0.20) | ($0.48), versus ($0.17) |
| Operating cash flow | Not reported for the quarter | $39,596, versus $459,741 |
For the nine months, processing and storage fees fell 3% to $12.13 million, while licensee income rose 6% to $1.02 million. Specimens processed declined 28%, partly offset by 7% growth in recurring annual storage fees and lower discounts. In the quarter, processing and storage fees increased 3%, despite a 26% decline in specimens processed, reflecting higher average selling prices and 6% growth in recurring storage fees.
Nine-month cost of sales was 27% of revenue versus 26% in 2011; quarterly cost of sales was 29% versus 27%. Selling, general and administrative expense rose 3% to $10.51 million for the nine months, mainly due to higher sales and marketing spending and stock compensation. The company recorded about $700,000 of stock compensation from accelerated Co-CEO option vesting following a director nomination notice. Nine-month research and development expense declined 48% to $88,466.
Financial position, cash flow and liquidity
- At August 31, 2012, cash and cash equivalents were $2.71 million, down from $6.31 million at November 30, 2011. Restricted cash was $2.65 million, largely held in an irrevocable trust related to potential management obligations.
- Current assets were $9.38 million and current liabilities $10.23 million, a working capital deficit of about $848,000. Total assets were $12.70 million; stockholders’ deficit was $8.20 million.
- Nine-month operating cash flow was $39,596. Investing activities provided $887,643, mainly from securities sales; financing activities used $4.52 million, including $3.05 million paid to cancel revenue-sharing interests and $1.47 million spent on share repurchases.
- The company reported no long-term indebtedness and no line of credit. The balance sheet nevertheless included a $2.30 million long-term revenue-sharing liability and a $194,000 current note payable related to revenue-sharing agreement buyouts.
- Management anticipated about $750,000 in discretionary capital expenditures over the next 12 months and stated that cash, marketable securities and expected operating cash flows should cover known cash needs for at least 12 months. It cautioned that weaker-than-expected revenue or higher expenses could require spending reductions, deferrals, or financing.
Material changes, outlook and risks
- The nine-month net loss included a $1.60 million loss on extinguishment of revenue-sharing agreements and a $1.72 million income tax expense from establishing a valuation allowance against deferred tax assets. Management cited recent cumulative losses as the reason future taxable income projections could not support realization of those assets.
- Revenue-sharing agreement cancellations reduced future obligations and contributed to lower interest expense, down 35% for the nine months. The buyouts also used substantial cash.
- The company repurchased 705,150 shares through August 31 for approximately $1.47 million. The board had authorized repurchases of up to three million shares.
- Management identified risks including declining specimen processing, competition, consumer demand, international licensee performance, regulation, technology or storage-facility failures, litigation, and the uncertain commercial acceptance of newer stem cell services.
- Two pending matters were highlighted: former CEO Mercedes Walton’s arbitration demand seeking $5 million, for which the company had accrued about $950,000 and intended to defend itself; and a separate damages suit with an unspecified claim above $75,000, for which no loss was accrued and the company said an estimate was not possible.
- Disclosure controls and procedures were reported ineffective. Management said it had implemented remediation steps for a material weakness involving accounting for non-routine transactions, but the controls had not operated long enough to conclude they were effective.
Important facts for investors to verify
- Whether operating revenue and cash flow can improve given the substantial year-to-date decline in specimens processed and minimal operating cash generation.
- The cash accessibility and terms of the restricted trust, and the timing and amount of remaining revenue-sharing agreement obligations.
- Whether management’s 12-month liquidity outlook remains achievable after planned capital expenditures and continued operating needs.
- The outcomes and potential additional costs of the Walton arbitration and other litigation; the filing gives differing trial dates for the separate damages suit in different sections.
- Progress in remediating ineffective disclosure controls, and the potential impact of outstanding equity awards and future share repurchases on dilution and cash resources.