Cryo-Cell International, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended November 30, 2017; comparisons are with the year ended November 30, 2016. The filing is an annual report, not a standalone fourth-quarter report.
Business context
Cryo-Cell provides umbilical cord blood and cord tissue processing and cryogenic storage for families, and manufactures the PrepaCyte CB processing system. Its two reportable segments are cellular processing and storage, and PrepaCyte CB. The company reported nearly 450,000 specimens stored worldwide with its global affiliates. Recurring storage fees and processing fees are its principal revenue sources; it also earns international license royalties.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $25.38 million | $23.13 million |
| Operating income | $5.01 million | $0.43 million |
| Net income (loss) | $2.32 million | $(1.32) million |
| Basic / diluted EPS | $0.33 / $0.30 | $(0.16) / $(0.16) |
| Operating cash flow | $5.72 million | $4.99 million |
| Cash and cash equivalents at year-end | $6.28 million | $3.50 million |
- Revenue rose 10%. Processing and storage fees increased to $23.94 million from $21.77 million; the company cited 4% growth in recurring annual storage revenue and 14% more new domestic cord blood specimens processed. Product revenue was $442,190; India license and royalty income was $1.00 million, approximately flat year over year.
- Cost of sales increased 16% to $6.72 million, faster than revenue. Selling, general and administrative expense fell 8% to $13.48 million, primarily due to lower bad-debt expense and accounting professional fees. Approximate gross margin was 73.5%, versus 75.0% in FY2016; operating margin was 19.7%, versus 1.9%.
- Net income improved from the prior-year loss, which included a $1.99 million goodwill and intangible impairment, a $2.25 million loss on extinguishment of revenue-sharing interests, and a $1.16 million income-tax benefit. FY2017 had no comparable impairment or RSA extinguishment charge and included $1.31 million of income-tax expense.
- Interest expense increased to $1.30 million from $0.95 million, largely reflecting debt and continuing payments under revenue-sharing agreements (RSAs). RSA payments were $589,399 in FY2017; the recorded RSA liability was $1.43 million, with $616,990 accrued as interest owed at year-end.
- Operating cash flow benefited in part from a $3.51 million increase in deferred revenue, including customer prepayments. Investing activities provided $93,025; financing activities used $3.03 million, including $2.65 million of note repayments and $446,621 of share repurchases.
- At year-end, total assets were $23.91 million and total liabilities $36.41 million, resulting in a $12.50 million stockholders’ deficit. Current assets of $12.74 million were below current liabilities of $13.94 million. Gross note principal was $7.50 million ($2.00 million current and $5.50 million long-term before debt issuance costs); the subordinated $650,000 loan was repaid in June 2017.
Changes, outlook and material matters
- The core cellular-processing and storage segment reported $5.07 million operating profit, up from $2.45 million. PrepaCyte CB revenue rose to $442,190, but the segment still reported a $61,002 operating loss; its FY2016 results included the impairment charge.
- Management said cash, marketable securities and expected operating cash flows should fund known needs for at least 12 months. Planned discretionary capital expenditures were approximately $500,000 over the next 12 months. No formal revenue or earnings guidance was provided; management said cash generation depends on revenue growth and expense management.
- The Tax Cuts and Jobs Act, enacted after year-end, was expected to produce an approximately $3.0 million discrete tax expense in FY2018 from remeasurement of deferred taxes. Management stated it did not expect the Act to affect deferred-tax-asset recoverability.
- Management continues to evaluate strategic alternatives, including mergers or acquisitions, investments, further RSA repurchases, deregistration or a going-private transaction. It cautioned that such actions could require substantial debt or equity financing and increase investment risk.
- An unresolved Florida contract-breach lawsuit remains; the company says it cannot estimate a possible loss and recorded no accrual at November 30, 2017. The Nyberg litigation was settled in 2016 for $3.4 million, also reducing the company’s ongoing obligations on portions of the Florida and Texas RSAs.
- The company reported compliance with applicable FDA requirements and stated disclosure controls and internal controls over financial reporting were effective. However, it disclosed that it had not filed an amended 8-K with required PrepaCyte pre-acquisition financial statements and pro forma information and therefore was not deemed a timely filer. The auditor did not provide an ICFR attestation.
Key investor verification points
- Confirm the sustainability and cash quality of revenue growth, particularly the contribution from prepaid storage plans and the rise in deferred revenue.
- Review the current-versus-long-term debt schedule, loan terms and covenants, interest burden, and ongoing RSA payments and accruals.
- Assess PrepaCyte CB sales, margins and customer outlook, given its operating loss and prior impairment.
- Examine the assumptions supporting the $10.04 million deferred tax asset, its $2.32 million valuation allowance, and the estimated FY2018 tax remeasurement charge.
- Monitor the unresolved lawsuit, regulatory and licensing exposure, supplier dependencies, and the consequences of any strategic transaction or financing.
- Review the outstanding 8-K filing matter and the filing’s share-count and equity-compensation disclosures; common shares outstanding were 7,103,941 at year-end and 7,105,191 as of February 15, 2018.