Cryo-Cell International, Inc. — Q2 FY2017 Form 10-Q
Business context and period. The company provides umbilical cord blood and cord tissue processing and storage, and manufactures PrepaCyte CB processing units. The quarter and six-month periods ended May 31, 2017; comparisons are with the periods ended May 31, 2016. Financial statements are unaudited.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $6.237 million | $5.773 million | $12.013 million | $10.925 million |
| Operating income | $1.192 million | $0.882 million | $2.308 million | $1.039 million |
| Net income | $0.497 million | $0.637 million | $0.984 million | $0.514 million |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $2.383 million | $1.345 million |
- Q2 revenue increased 8%; six-month revenue increased 10%. Growth mainly reflected more new domestic specimens processed and higher recurring annual storage revenue. Six-month processing and storage fees rose 10%; licensee and royalty income declined to $329,000 from $357,000.
- Six-month cost of sales increased 12% to $3.108 million, while SG&A fell 7% to $6.510 million. Operating income more than doubled year over year. Approximate six-month gross margin was 74%, compared with 75% in 2016.
- Q2 net income declined despite higher operating income, with total other expense rising to $364,000 from $44,000 and income tax expense increasing to $332,000 from $202,000. The prior-year periods included a $301,000 debt-extinguishment gain; FY2017 did not.
- Six-month diluted EPS was $0.13 versus $0.06; Q2 diluted EPS was $0.06 versus $0.07. Weighted-average shares were lower than the prior year, following substantial past share repurchases.
Financial position and liquidity
- At May 31, cash and cash equivalents were $4.698 million, marketable securities $478,000, and current assets $10.683 million. Current liabilities were $12.977 million; the current ratio was approximately 0.82.
- Net note payable on the balance sheet was $8.886 million, including $2.0 million current and $6.886 million long-term. The TCB term loan bears interest at 3.75% plus LIBOR. A separate $650,000 CrowdOut subordinated loan was repaid June 5, 2017, after quarter-end.
- Total liabilities were $35.322 million against total assets of $21.037 million, leaving a stockholders’ deficit of $14.285 million. Deferred revenue totaled approximately $21.190 million, reflecting future service obligations and license-related amounts.
- Cash increased $1.198 million during the six months. Operating cash flow of $2.383 million and net investing inflows of $168,000 were partly offset by $1.353 million of financing outflows, including $1.000 million of note repayments and $404,000 of stock repurchases.
Changes, outlook and risks
- Management attributed six-month profit growth primarily to revenue gains and lower SG&A, partly offset by higher cost of sales. New domestic specimen processing increased 17% for the six-month period, according to management; recurring domestic storage revenue grew 7%.
- Management expects cash, marketable securities and future operating cash flows to fund known needs for at least 12 months. It anticipates approximately $500,000 in discretionary capital expenditures over the next 12 months. No earnings or revenue guidance was provided.
- Management may consider strategic transactions, investments, share repurchases, deregistration or a going-private transaction; these options could require substantial additional debt or equity financing. The company continued repurchases and had 2,205,887 shares remaining under its authorized program at May 31.
- Key stated risks include regulation, competition, lower customer enrollment or annual renewals, licensee performance and royalty collection, facility or specimen-storage failure, information-system compromise, litigation, and the commercial prospects of PrepaCyte CB. Management reported prior-year impairment charges that eliminated goodwill and reduced PrepaCyte-related intangible assets; no goodwill remained at May 31, 2017.
- A Florida contract-breach lawsuit remained unresolved. The company said it could not estimate a loss range and had accrued no amount. Management said it intended to contest the claims.
- Management stated disclosure controls were effective, but also disclosed that the company had not filed an amended 8-K containing required PrepaCyte pre-acquisition financial statements and pro forma information and therefore was not deemed a timely filer.
Important facts for investors to verify
- Whether core enrollment and recurring storage-fee growth continues, and how specimen volume affects costs and margins.
- Debt terms, interest-rate exposure, required repayments and the post-period CrowdOut payoff; reconcile the separate loan disclosure with balance-sheet debt presentation.
- Cash conversion and the extent to which operating cash flow depends on customer prepayments and deferred revenue.
- Progress and economics of PrepaCyte CB, given prior impairment charges and the segment’s small revenue base.
- Potential exposure and developments in the Brotherson litigation, and completion of the overdue amended 8-K filing.
- Use of cash for repurchases and strategic alternatives, including any financing needs or dilution implications.