Cryo-Cell International, Inc. — Q2 2018 Form 10-Q
Business and period: The company provides umbilical cord blood processing and cryogenic storage, sells PrepaCyte CB processing products, and earns royalties from international licensees. This unaudited filing covers the three and six months ended May 31, 2018; the balance sheet compares May 31, 2018 with November 30, 2017.
Key financial results
| Metric | Three months ended May 31, 2018 | Six months ended May 31, 2018 |
|---|---|---|
| Revenue | $6.53 million, up 4.6% year over year | $12.75 million, up 6.2% |
| Gross profit / margin | $4.75 million / 72.8% | $9.37 million / 73.5% |
| Operating income / margin | $1.15 million / 17.6% | $2.14 million / 16.8% |
| Net income (loss) | $540,000; $0.07 per basic share | ($1.99 million); ($0.28) per basic share |
| Operating cash flow | Not separately provided for the quarter | $1.72 million, versus $2.38 million in 2017 |
- For the six-month period, processing and storage fees rose 9%, reflecting 9% growth in recurring annual storage fees and 8% more new domestic specimens processed. Product revenue fell to $55,000 from $227,000; licensee and royalty income declined to $203,000 from $329,000.
- Six-month cost of sales increased 9% and selling, general and administrative expense increased 9%. Management attributed SG&A growth primarily to higher compensation and stock-option expense and selling and marketing costs.
- Six-month net loss primarily reflects a $2.985 million income-tax charge from remeasuring deferred tax assets after the federal corporate tax rate fell to 21%. The company reported six-month income before tax of $1.53 million; the tax charge drove the reported loss.
Financial position and liquidity
- At May 31, cash and cash equivalents were $6.54 million and marketable securities were $573,000. Cash increased $262,000 from November 30.
- Current assets were $13.04 million and current liabilities $12.80 million, leaving approximately $239,000 of working capital. Total liabilities were $36.32 million, compared with assets of $22.22 million; stockholders’ deficit was $14.10 million.
- Net carrying amount of the Texas Capital Bank note was $6.35 million, including $2.00 million current. The company repaid $1.00 million of principal during the six months. A separate $1.425 million revenue-sharing liability remained.
- Cash from operations was $1.72 million, while investing activities used $467,000 and financing activities used $995,000, mainly for the $1.00 million debt repayment. Operating cash flow was lower than the prior-year period.
- Deferred revenue totaled $25.25 million, including $7.50 million current. Management said prepaid storage-plan enrollments contributed to operating cash flow.
Material changes, outlook and risks
- Cord:Use acquisition after quarter-end: The company paid $14.0 million on June 11, 2018 for substantially all of Cord:Use’s assets and certain stock: $10.5 million cash and 465,426 Cryo-Cell shares valued at $3.5 million. Cryo-Cell also assumed specified contracts and limited liabilities. The agreement includes potential earnout payments tied to public cord blood inventory sales and, in certain circumstances, Tianhe-related gross profits. Acquisition accounting was incomplete; results were expected to be consolidated beginning in Q3 2018.
- Additional borrowing: On June 11, the company increased its Texas Capital Bank borrowing by $9.0 million to help finance the acquisition. The amended note principal was approximately $15.5 million, bearing interest at 3.35% plus LIBOR, payable monthly and maturing in June 2023.
- Before the acquisition, management expected cash, marketable securities and operating cash flows to cover known needs for at least 12 months, and anticipated about $500,000 in discretionary capital spending over the next year. The filing does not provide a clear updated liquidity forecast incorporating the acquisition and increased borrowing.
- Management cited competitive pressure, demand for cord blood storage, regulation, international licensee performance, storage-facility or information-system failures, litigation, and the uncertain commercial prospects of new services and acquisitions among risks. No formal earnings guidance is provided.
- A Florida contract-breach lawsuit remained unresolved. The company disputes the claims, could not estimate a possible loss, and recorded no accrual. Its warranty and Cryo-Cell Cares reserves were approximately $18,000.
- In March 2018, the company received notice that shares issued to certain executives may have exceeded the shares reserved under its 2012 incentive plan; an independent board committee was reviewing the matter. The filing’s disclosure-controls discussion is internally unclear: it states controls were effective, but also says they were ineffective in ensuring information was reported within SEC time limits. The company also said it was not a timely filer because it had not amended a 2015 Form 8-K to provide required PrepaCyte acquisition financial and pro forma information.
Important facts for investors to verify
- How the Cord:Use purchase price, earnouts, assumed obligations and acquisition accounting affect cash, earnings and future dilution.
- Post-acquisition liquidity, debt service, interest-rate exposure and compliance with any credit-agreement terms; the filing does not give a revised post-transaction liquidity forecast.
- The cause and likely duration of the unusually high six-month tax expense, and the recoverability of deferred tax assets.
- The outcome of the incentive-plan share-reserve review and whether any corrective filings or other actions are required.
- Developments in the pending lawsuit and the company’s continuing filing-timeliness and disclosure-control issues.