CRYO CELL INTERNATIONAL INC annual report, FY2016

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Cryo-Cell International, Inc. — FY2016 Form 10-K

Business context and reporting period. The company provides umbilical cord blood and cord tissue processing and cryogenic storage services, and manufactures PrepaCyte CB processing units. This annual report covers the fiscal year ended November 30, 2016; comparisons are with FY2015.

Financial performance and position

  • Revenue: $23.13 million, up 10% from $21.09 million. Processing and storage fees were $21.77 million, up 11%; product revenue was $350,128, down 26%; licensee and royalty income was $1.01 million.
  • Profitability: Gross profit was $17.35 million (75.0% gross margin), versus $15.46 million (73.3%) in FY2015. Operating income was $434,000 (1.9% margin), down from $2.93 million. Net loss was $1.32 million, or $0.16 per basic share, versus net income of $8.11 million, or $0.85 per share.
  • Cash flow: Operating cash flow was $4.99 million, compared with $4.85 million. Investing activities used $370,000 and financing activities used $5.27 million. Cash declined $652,000 to $3.50 million. Marketable securities were $624,000.
  • Liquidity and debt: Current assets were $9.01 million and current liabilities $13.11 million, implying negative working capital of about $4.10 million and a current ratio of about 0.69. Notes payable were $10.15 million gross and $9.82 million net of debt issuance costs, including $2.00 million current. Total liabilities were $34.95 million versus total assets of $19.54 million; stockholders’ deficit was $15.41 million.
  • Margins and costs: Cost of sales rose 3% to $5.77 million. SG&A rose 19% to $14.72 million, including higher marketing costs, compensation and stock-based compensation.

Material changes versus FY2015

  • New cord blood specimens processed increased 23%; recurring annual storage revenue increased 5%. Management also reported continued year-over-year growth in cord tissue service.
  • PrepaCyte CB revenue fell 26%, and its segment recorded an operating loss of $2.01 million, versus operating profit of $90,000 in FY2015.
  • The company recorded $1.99 million of non-cash goodwill and intangible asset impairment, citing reduced projected revenue and cash flows and loss of a key customer. PrepaCyte goodwill was fully impaired.
  • Net results included a $2.25 million loss on extinguishment of revenue-sharing agreements following a $3.4 million settlement payment. The settlement ended the Nybergs’ interests in portions of the Florida and Texas agreements and reduced the company’s related ongoing payment obligations by 50%.
  • The company recorded a $1.16 million income tax benefit, versus $7.16 million in FY2015. Deferred tax asset realization depends on future taxable income; the year-end valuation allowance was $2.30 million.

Outlook, commentary, risks and unusual items

  • Management said cash, marketable securities and expected operating cash flows should fund known needs for at least 12 months. It anticipates approximately $500,000 of discretionary capital expenditures over the next 12 months and says spending may be reduced or deferred if revenue or expense assumptions are not met.
  • Management is reviewing strategic alternatives, including mergers or acquisitions, investments, further RSA buyouts, deregistration or going-private options; these could require substantial additional debt or equity financing. No formal revenue or earnings guidance is provided.
  • Debt raised in 2016 funded share repurchases and part of the Nyberg settlement: a Texas Capital Bank term loan and amendment totaling $10.13 million, plus a $650,000 subordinated loan bearing 12% interest and maturing in 2021. The senior loan bears interest at 3.75% plus LIBOR and also matures in 2021. The loans are secured by company assets.
  • The company repurchased 2,463,850 shares for $10.81 million in FY2016. It reported 6,789,596 shares outstanding at November 30, 2016; the share repurchases were funded in part with borrowing.
  • Risks discussed include competition and limited market penetration, evolving medical and regulatory requirements, reliance on key suppliers, collection risks from licensees, and uncertainty in litigation. A separate “Risk Factors” item is marked “Not applicable.”
  • The Brotherson contract dispute remained unresolved; the company said loss could not be estimated and accrued nothing. The Delaware bylaw litigation was dismissed as moot, with $50,000 in attorneys’ fees awarded. The Nyberg dispute was settled as described above.
  • The auditor issued an unqualified opinion on the financial statements, but did not audit internal control over financial reporting. Management reported prior material weaknesses involving non-routine transactions and manual storage-revenue processes as remediated during 2016. The filing also says the company was not a timely filer because it had not filed the required amended acquisition Form 8-K with PrepaCyte’s pre-acquisition financials and pro forma information.

Most important facts for investors to verify

  • Debt terms, repayment schedule, collateral and any applicable covenants, particularly against negative working capital and substantial stockholders’ deficit.
  • Whether core storage-service growth can offset PrepaCyte’s revenue decline and segment losses, and whether the impairment assumptions reflect current operating prospects.
  • The sustainability and cash implications of deferred tax assets and the company’s valuation-allowance judgments.
  • Future cash requirements from RSAs, remaining legal matters, share repurchases and management’s strategic alternatives.
  • Completion of the required amended acquisition Form 8-K and continued effectiveness of remediated internal controls.