Cryo-Cell International, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended May 31, 2016. Financial statements are unaudited. Cryo-Cell provides cord blood and cord tissue processing and storage services, and sells Prepacyte-CB processing systems; it also receives international license royalties.
Financial results and position
| Metric | Three months ended May 31, 2016 | Six months ended May 31, 2016 |
|---|---|---|
| Revenue | $5.77 million, up 15% year over year | $10.93 million, up 11% |
| Operating income | $882,384 | $1.04 million, down 15% year over year |
| Net income | $637,132, versus $210,032 | $514,196, versus $496,202 |
| Basic and diluted EPS | $0.07 | $0.06 |
| Operating margin | 15.3% | 9.5% |
| Operating cash flow | Not separately presented for the quarter | $1.34 million, versus $1.83 million |
Six-month revenue growth reflected a 9% increase in processing and storage fees and $198,118 of Prepacyte-CB product revenue, which was absent in the prior-year period. Management attributed higher processing and storage fees to more new specimens processed and a small increase in domestic recurring storage revenue. Cost of sales rose 5% for the six months and was 25% of revenue, compared with 27% a year earlier. SG&A increased 18% to $7.00 million, including higher marketing and professional fees. The quarter’s net income included a $300,593 gain on extinguishment of debt.
At May 31, cash and cash equivalents were $4.52 million, with marketable securities of $674,000. Current assets were $11.13 million and current liabilities $10.52 million, for working capital of approximately $619,000 and a current ratio of about 1.06. Total assets were $20.47 million versus total liabilities of $25.07 million; stockholders’ deficit was $4.61 million. Deferred revenue totaled approximately $18.48 million. Note payable was $650,100, and the revenue-sharing liability was $2.30 million.
Changes, outlook, and material matters
- The company paid off the seller note for the Prepacyte-CB acquisition in April 2016; the resulting $300,593 debt-extinguishment gain increased reported earnings. Prepacyte-CB generated $198,118 of six-month revenue but an operating loss of $17,263.
- The company repurchased 143,793 shares for $443,207 during the six months. After the reporting date, it agreed to repurchase 2,192,484 shares for $9.87 million. A Texas Capital Bank $8.0 million term loan was advanced on July 1, 2016; it bears interest at 3.75% plus LIBOR and matures in July 2021. A $650,000 CrowdOut subordinated loan bears 12% interest and also matures in July 2021.
- Management expected cash, marketable securities, and operating cash flows to cover known needs for at least 12 months, and anticipated approximately $500,000 in discretionary capital expenditures over the next 12 months. It cautioned that weaker-than-expected revenue or higher expenses could require spending reductions, deferred expenditures, or additional financing. No specific revenue or earnings guidance was provided.
- Management said it would continue reviewing strategic options, potentially including transactions or further repurchases; these could require substantial debt or equity capital. Risks cited include demand and competition, regulatory changes, international licensee performance, facility or information-system failures, litigation, and the commercial prospects of Prepacyte-CB.
- Three lawsuits were disclosed, including a Delaware class action involving directors and officers. The company said it intended to defend the claims; loss estimates were unavailable for two contract cases and no amounts were accrued for them. The Delaware matter has a $500,000 maximum insurance deductible.
- Disclosure controls and procedures were reported ineffective, with material weaknesses involving accounting for non-routine transactions and manual storage-revenue controls. Remediation was underway. The company also said it had not filed an amended acquisition-related Form 8-K with required acquired-business financial statements and pro forma information and was therefore not deemed a timely filer. The cover page marked “No” for having filed all required Exchange Act reports during the prior 12 months.
Most important facts to verify
- Confirm the status and remediation of the disclosed control weaknesses, late-filer status, and missing amended acquisition Form 8-K information.
- Review the post-quarter $9.87 million share repurchase, funding sources, loan terms, and resulting leverage and liquidity.
- Assess whether operating cash generation can be sustained given lower six-month operating income and cash flow, higher SG&A, and Prepacyte-CB’s operating loss.
- Track the three legal matters, potential costs, and any developments affecting the unaccrued contingencies.
- Reconcile share counts: the balance sheet reported 9,087,254 shares outstanding at May 31, while the cover page reported 6,894,770 outstanding as of July 7, 2016, following the subsequent repurchase agreement.