Cryo-Cell International, Inc. — Q1 FY2016 Form 10-Q
Business context and reporting period. The filing covers the three months ended February 29, 2016; comparisons are with the three months ended February 28, 2015. Cryo-Cell provides cord blood and cord tissue processing and storage services and, following its 2015 acquisition of Prepacyte-CB assets, manufactures and sells processing systems. Balance-sheet comparisons are with November 30, 2015.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 / prior balance date |
|---|---|---|
| Revenue | $5.152 million | $4.843 million; up 6% |
| Gross profit and margin | $3.804 million; 73.8% | $3.569 million; 73.7% |
| Operating income and margin | $156,422; 3.0% | $625,191; 12.9% |
| Net income (loss) | $(122,936); $(0.01) per share | $286,170; $0.03 per share |
| Operating cash flow | $101,417 | $328,964 |
| Cash and cash equivalents | $3.582 million | $4.152 million at Nov. 30, 2015 |
| Total assets / total liabilities | $19.100 million / $24.437 million | $19.498 million / $24.462 million at Nov. 30, 2015 |
- Processing and storage fees were $5.020 million, up 7%; management attributed growth to 3% higher domestic recurring annual storage revenue and 8% more new cord blood specimens processed.
- Prepacyte-CB product revenue was $131,739, with $103,268 of related cost of sales. Licensee and royalty income was nil, versus $169,412 in the prior-year quarter.
- SG&A rose 23% to $3.597 million, including higher marketing and professional fees. Cost of sales rose 6% to $1.348 million. Interest expense was $261,334, primarily reflecting revenue-sharing agreement payments and interest on the acquisition note.
- Cash declined $570,426: operations provided $101,417, investing used $188,017, and financing used $483,826, including $408,403 for treasury-stock purchases and $75,423 of note repayments.
- Current assets were $9.942 million and current liabilities $10.177 million, a $234,222 working-capital deficit. Cash plus marketable securities totaled approximately $4.199 million; restricted cash was an additional $204,400.
- Acquisition-related note payable was $1.101 million. The balance sheet also included a $2.3 million revenue-sharing liability and $17.784 million of deferred revenue, current and long-term combined. Stockholders’ deficit was $5.337 million.
Material changes, outlook and risks
- Revenue increased, but the company moved from prior-year profit to a loss as higher SG&A and cost of sales more than offset revenue growth. Operating margin fell to 3.0% from 12.9%.
- Management said LifeCell India had reached its annual royalty cap and paid amounts due for its fiscal year ending March 31, 2016; Cryo-Cell expected to resume recording licensee income in Q2 FY2016.
- Management expected cash, marketable securities and future operating cash flows to cover known needs for at least 12 months. It anticipated approximately $500,000 of discretionary capital expenditures over the next 12 months. The company had no line of credit and noted that weaker revenue or higher expenses could require spending reductions or financing.
- After quarter-end, the company received conditional commitment letters for up to $8 million in senior credit facilities and up to $1 million in subordinated financing. Neither commitment was reported as closed; the letters had stated expiration dates of May 30 and April 30, 2016, respectively.
- Three lawsuits were disclosed. Cryo-Cell said it intended to defend them; it could not estimate potential losses for two contract claims and accrued no amounts for those claims. A Delaware class action alleges fiduciary-duty and bylaw violations; the stated maximum D&O insurance deductible is $500,000. The filing cautions that litigation outcomes could affect results in a particular quarter.
- Disclosure controls and procedures were concluded to be ineffective, with material weaknesses involving non-routine transaction accounting and manual storage-revenue processes. Remediation was underway. The company also said it had not filed an amended acquisition-related Form 8-K with required Prepacyte pre-acquisition and pro forma financial information and was not deemed a timely filer.
- Other disclosed risks include competition, regulation, demand for cord blood storage, licensee performance, storage-facility or information-system failures, litigation, and the ability to realize value from the Prepacyte acquisition. Management reported no material long-lived-asset impairment in the quarter; the Saneron investment had been impaired to zero in 2015.
Important facts for investors to verify
- Whether Q2 royalty income resumed as expected after LifeCell’s royalty-cap period, and how recurring storage revenue and new specimen processing developed.
- Whether SG&A growth, particularly marketing and professional fees, translated into sustained revenue growth and improved operating profitability.
- Actual operating cash generation, cash and securities balances, and the company’s ability to fund planned capital spending and obligations without new financing.
- Whether the senior and subordinated loan commitments closed, and the resulting borrowing terms, liquidity and repayment burden.
- Developments in the disclosed litigation, potential exposure beyond accrued amounts, and remediation of material weaknesses and the amended acquisition filing.