Cryo-Cell International, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended August 31, 2016. The company provides umbilical cord blood and tissue processing and storage services and sells the Prepacyte-CB processing system; it also earns licensing royalties. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Aug. 31, 2016 | Nine months ended Aug. 31, 2016 |
|---|---|---|
| Revenue | $6.332 million, up 16% | $17.257 million, up 13% |
| Operating income (loss) | $(1.062) million | $(23,269) |
| Net income (loss) | $(2.644) million; $(0.35) per diluted share | $(2.130) million; $(0.25) per diluted share |
| Operating cash flow | Not separately reported | $2.425 million, versus $2.864 million in 2015 |
- Revenue growth reflected higher processing and storage fees and India royalties. For the nine-month period, processing and storage fees rose 10%; domestic recurring storage revenue increased 6% and new specimens processed increased 12%.
- Cost of sales was 24% of revenue for the quarter versus 28% a year earlier, and 25% year to date versus 27%. SG&A increased 49% for the quarter and 28% year to date.
- At August 31, cash and cash equivalents were $2.026 million, marketable securities $630,023, current assets $10.145 million, and current liabilities $12.411 million. Total liabilities were $34.558 million and stockholders’ deficit was $17.015 million.
- Balance-sheet notes payable totaled $10.650 million, compared with $1.176 million at November 30, 2015. The company also disclosed $8.0 million in senior term-loan advances, a further $2.133 million advance, and a $650,000 subordinated loan. The CrowdOut loan bears 12% interest and matures in July 2021; the TCB loan bears 3.75% plus LIBOR and matures in July 2021.
- Cash declined $2.126 million during the nine months. Financing used $4.254 million net, including $10.668 million for share repurchases and a $3.4 million RSA settlement, partly offset by $10.783 million in loan proceeds.
Material changes and unusual items
- Compared with 2015, the company moved from net income to net loss in both the quarter and year-to-date periods. The 2015 comparison included approximately $6.957 million from a reversal of a U.S. deferred-tax valuation allowance; the 2016 periods instead included tax benefits associated with net operating losses.
- The company recorded $1.878 million of noncash impairment charges for Prepacyte-CB goodwill and intangible assets. Management cited lower projected revenues and cash flows and the loss of a key customer. Prepacyte-CB segment operating loss was $1.870 million for the quarter and $1.888 million year to date.
- A $3.4 million payment settled the Nyberg lawsuit and acquired the Nybergs’ interests in the Florida and Texas revenue-sharing agreements. The company recorded a $2.252 million loss on extinguishment after offsetting related recorded liabilities. The settlement reduced its ongoing payment obligations under those agreements by 50%.
- The company repurchased 2.429 million shares during the nine months for $10.668 million, including a June private purchase of 2.193 million shares at $4.50 each. At August 31, 5.678 million shares were held as treasury stock. On October 6, the board expanded the repurchase authorization to 8 million shares.
- A $300,593 gain resulted from settling the CMDG acquisition note early. Interest expense was $804,236 year to date, down from $1.025 million in 2015.
Outlook, risks and other disclosures
- No specific revenue or earnings guidance is provided. Management expects cash, marketable securities, and operating cash flows to cover known needs for at least 12 months, while cautioning that weaker revenue or higher expenses could require spending reductions, deferrals, or additional financing.
- Management anticipates approximately $500,000 of discretionary capital expenditures over the next 12 months, principally for software enhancements and property and equipment.
- Management cited risks including competition, weaker demand or storage renewals, regulation, international licensee performance and royalty collection, operating or specimen-storage failures, information-system compromises, litigation, and Prepacyte-CB’s ability to generate a return.
- The company said disclosure controls were effective. Previously reported material weaknesses in internal controls over non-routine transactions and manual storage-revenue processes were reported as remediated in the quarters ended May 31 and August 31, 2016. Management also said the required amended acquisition Form 8-K and related financial information had not yet been filed.
- The Brotherson lawsuit remained unresolved; the company said it could not estimate a possible loss and had accrued none. The Nyberg claims were settled. Separately, a Delaware bylaw action was dismissed as moot; an October 7, 2016 order awarded $50,000 in attorneys’ fees and expenses, reflected in the statements.
Important facts for investors to verify
- Whether revenue, new specimen processing, and recurring storage growth continue, and whether India royalties remain within the agreement’s annual and lifetime caps.
- Whether Prepacyte-CB can recover after the customer loss and impairment, and whether future forecasts support its remaining carrying value.
- Loan balances, rates, repayment terms and covenants, along with the effect of debt-funded repurchases and the settlement on liquidity.
- Management’s 12-month liquidity assessment, actual operating cash generation, and the planned capital expenditures and further repurchases.
- Progress on the remaining litigation and the overdue amended acquisition filing, as well as sustained effectiveness of remediated financial controls.