Cryo-Cell International, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended August 31, 2021. The company provides cord-blood and cord-tissue processing and cryogenic storage, manufactures PrepaCyte CB, and operates a public cord-blood bank. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Aug. 31, 2021 | Prior-year quarter | Nine months ended Aug. 31, 2021 | Prior-year period |
|---|---|---|---|---|
| Revenue | $7.50 million | $8.11 million | $21.57 million | $23.61 million |
| Operating income | $1.60 million | $2.48 million | $4.83 million | $5.48 million |
| Net income | $856,494 | $784,467 | $2.72 million | $2.42 million |
| Operating cash flow | Not separately provided | Not separately provided | $6.26 million | $5.49 million |
- Quarterly revenue declined about 8%; operating income fell about 36%, while net income rose about 9%. Nine-month revenue declined about 9%, while net income increased about 12%.
- Gross margin was approximately 67% for the quarter and 69% for the nine-month period. Operating margin was approximately 21% and 22%, respectively; nine-month operating margin was about 23% in the prior-year period.
- Processing and storage fees were $7.33 million for the quarter and $21.22 million year to date. Nine-month recurring storage-fee revenue grew 9%, offset by an 8% reduction in new domestic specimens processed. No licensee income was recorded in 2021, compared with $629,702 for the nine months of 2020.
- Cash and cash equivalents were $7.70 million at August 31, down from $10.36 million at November 30, 2020. The company generated $6.26 million from operations, spent $6.66 million on investing activities and $2.26 million on financing activities.
- Current assets were $14.92 million versus current liabilities of $19.86 million. The current portion of the bank note was $2.66 million; no long-term note payable remained. The Duke license liability totaled approximately $6.82 million, including $4.92 million current.
- Deferred revenue was $39.72 million, including $9.33 million expected to be recognized over the next 12 months. Stockholders’ equity was $4.80 million, compared with a $2.67 million deficit at November 30, 2020.
Material changes and unusual items
- The Duke University patent and technology license, signed February 23, 2021, added a $14.89 million net license asset at August 31. The agreement includes a $12 million license fee, royalties of 7%–12.5% of applicable net sales, future minimum royalties, a potential $2 million clinical-trial milestone, and potential equity issuances. The company issued shares valued at about $3.59 million in connection with the agreement.
- Year-to-date property and equipment purchases were $1.55 million, including approximately $1.51 million for North Carolina real estate for the planned Institute of Cellular Therapies. The company also paid $5.11 million to Duke during the period.
- Quarterly cost of sales rose 4% despite lower revenue, which management attributed partly to lab-supply cost trends and public-bank costs. Nine-month selling, general and administrative expense fell 7%, but included increased costs for the institute and Duke patent maintenance.
- The $604,109 nine-month reduction in contingent-consideration fair value benefited reported income. The liability, related to the Cord:Use public-inventory earnout, was $905,743 and is based on Level 3 estimates that may differ materially from actual payments.
- In the prior-year period, termination of the Erie Group revenue-sharing agreement resulted in a $1.07 million extinguishment loss; the agreement termination also involved a $1.94 million payment and resolved the related complaint.
Outlook, risks and controls
- Management expects cash, marketable securities and future operating cash flows to fund known needs for at least 12 months. It anticipates approximately $10 million in discretionary capital expenditures over the next 12 months, including software, equipment and Duke-related obligations; future clinical trials may require substantial additional cash. No specific revenue or earnings guidance was provided.
- Management said COVID-19-related changes in consumer buying patterns reduced new-client and public-banking sales and may continue to affect sales, earnings and cash flows; the timing of recovery is uncertain.
- Other disclosed risks include competition, weaker demand for cord-blood storage, the ability to commercialize Duke-licensed treatments, litigation and licensing risks, potential storage-facility or information-system failures, and the valuation and saleability of public-bank inventory. The company held approximately 6,000 public cord-blood units and had recorded a $1.28 million inventory impairment in fiscal 2020.
- Disclosure controls and procedures were reported not fully effective due to a material weakness involving interpretation of a non-routine transaction. Management said it implemented a more comprehensive review process during the quarter; effectiveness has not yet been established by the filing.
- The company said ordinary-course legal matters are not expected to materially affect its overall position, but an unfavorable result could materially affect a particular quarter. It reported no off-balance-sheet arrangements material to investors and no additional risk-factor update in this filing.
Important facts for investors to verify
- Whether new-client processing volumes and public-bank sales recover, and whether recurring storage growth can offset lower enrollment and the loss of LifeCell royalties after the agreement’s royalty cap was reached.
- The timing and full cash, royalty, milestone and potential dilution implications of the Duke agreement, alongside the planned $10 million expenditures and clinical-trial funding needs.
- Whether operating cash generation and liquidity remain adequate given current liabilities exceeding current assets and the company’s stated spending plans.
- Progress in remediating the material weakness and whether subsequent filings conclude that disclosure controls are effective.
- Assumptions behind public-bank inventory recoverability and Cord:Use contingent consideration, and whether actual sales or payments materially differ from estimates.