Cryo-Cell International, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended November 30, 2018; comparisons are to fiscal 2017. This is an annual filing, not a standalone fourth-quarter report.
Business context
Cryo-Cell provides cellular processing and cryogenic storage, principally for family-use umbilical cord blood and tissue, and also manufactures the PrepaCyte CB processing system. In June 2018, it acquired substantially all assets of Cord:Use, adding a public cord blood banking business and inventory. The Company and its affiliates reported nearly 500,000 specimens stored worldwide.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $29.22 million | $25.38 million |
| Operating income | $5.19 million | $5.01 million |
| Operating margin | 17.8% | 19.7% |
| Net income (loss) | $(0.85) million | $2.32 million |
| Basic and diluted EPS | $(0.11) | $0.33 basic; $0.30 diluted |
| Cash from operations | $5.33 million | $5.72 million |
| Cash and cash equivalents | $6.04 million | $6.28 million |
| Note payable, principal | $13.21 million | $7.50 million |
- Revenue rose 15%, mainly from processing and storage fees, which increased 16% to $27.82 million. Recurring annual storage fee revenue rose 12%; new domestic specimens processed increased 17%.
- Cost of sales increased 27% to $8.54 million; SG&A increased 16% to $15.63 million. Gross margin was approximately 70.8%, versus 73.5% in FY2017.
- FY2018 net loss reflected higher costs and $4.47 million of income tax expense, including about $3.08 million from remeasuring deferred tax assets after the federal rate reduction. Operating income increased modestly, while interest expense rose to $1.55 million.
- Investing activities used $11.28 million, primarily for the $10.5 million cash portion of the Cord:Use purchase. Financing activities provided $5.71 million, including a $9 million additional bank advance and $3.29 million of note repayments.
- Current assets were $29.54 million and current liabilities $15.43 million at year-end. Current assets included $16.04 million of public cord blood inventory; liquidity therefore depends in part on the inventory’s sale and recovery of its carrying value.
Material changes, outlook, and risks
- Cord:Use acquisition: Closing consideration was $14 million ($10.5 million cash and 465,426 Cryo-Cell shares). Purchase accounting included a $4.70 million estimated earnout; the earnout liability was $4.28 million at year-end and is subject to significant estimation uncertainty. Cord:Use may also receive 75% of annual public-inventory sales above $500,000, subject to the agreement’s terms, and additional stock payments tied to retained revenues.
- The public banking segment generated $296,295 in FY2018 revenue and an operating loss of $329,762. Cord:Use acquisition-related SG&A was $580,000; public banking added $626,057 to cost of sales.
- Management expects cash, marketable securities, and operating cash flows to cover known cash needs for at least 12 months, and anticipates about $500,000 of discretionary capital expenditures over the next 12 months. It cautions that weaker-than-expected revenue or higher costs could require spending reductions or financing.
- Management continues to review strategic alternatives, including mergers, acquisitions, investments, repurchases of revenue-sharing interests, deregistration, or going private; pursuing options could require substantial debt or equity.
- The Company reported a material weakness in internal control over financial reporting related to identifying and applying accounting for deferred discounts on prepaid storage contracts. Management said remediation began, but controls were not effective as of year-end. The filing also notes an outstanding, unamended 2015 Form 8-K concerning PrepaCyte acquisition financial statements and pro forma information; the Company states it was not deemed a timely filer.
- A pending Florida contract dispute alleges damages in excess of $15,000; the Company says it cannot estimate a possible loss and recorded no accrual. It intends to contest the matter. Other ordinary-course claims could also have an adverse quarterly impact.
- Other exposures include regulatory compliance, dependence on key suppliers and the NMDP for public-unit distribution, collectability of receivables, and revenue-sharing agreements with no fixed term. The Company reported no off-balance-sheet arrangements material to investors.
Most important facts for investors to verify
- Whether the public cord blood inventory can be sold at or above its $16.04 million carrying value, and how resulting sales affect the Cord:Use earnout and payments.
- Debt terms, scheduled principal repayments, covenant compliance, and the effect of increased borrowing and interest costs.
- Progress in remediating the prepaid-storage discount control weakness and the status of the unamended 2015 Form 8-K disclosure.
- Whether revenue growth and operating cash generation continue to support liquidity, planned capital spending, and upcoming debt service.
- Developments in the Brotherson litigation and the Company’s deferred tax asset recoverability and valuation allowance judgments.