Cryo-Cell International, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended February 28, 2014; filed April 14, 2014. Unaudited consolidated results. The company provides cellular processing and cryogenic storage, primarily for umbilical cord blood, and earns licensing royalties.
Financial performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $5.32 million | $4.60 million; up 16% |
| Processing and storage revenue | $4.36 million | $4.28 million; up 2% |
| Licensee income | $963,251 | $323,534; up 198% |
| Operating income | $804,525 | $563,061 |
| Net income | $397,112; $0.04 per basic and diluted share | $244,006; $0.02 per share |
| Operating cash flow | $(106,696) | $505,675 provided |
Gross margin was approximately 74.9% versus 72.2% a year earlier; operating margin was approximately 15.1% versus 12.2%, and net margin approximately 7.5% versus 5.3%. SG&A rose 16% to $3.12 million, including approximately $205,000 of legal fees related to a shareholder derivative action. Cost of sales increased 4% to $1.33 million.
Cash and cash equivalents were $3.24 million at February 28, down $682,153 from fiscal year-end. Restricted cash was $943,964; marketable securities and other investments were $99,595. Current assets of $8.56 million were slightly below current liabilities of $8.68 million, a working capital deficit of approximately $117,000. The company reported no long-term indebtedness, but had a $2.30 million long-term revenue-sharing liability. Stockholders’ deficit was $9.13 million.
Changes, outlook and commentary
- Revenue growth primarily reflected a one-time approximately $794,000 Mexico-related payment received in December 2013 under an amended license arrangement. Mexico’s agreement is terminated, with no continuing royalty or payment obligations; management expects reduced licensee income in future periods.
- Recurring annual storage revenue increased 7%, but new cord blood specimens processed fell 23%; new specimens from international affiliates declined 55%, mainly due to the Ecuador affiliate’s closure.
- Saneron-related equity losses increased to $113,575 from $38,450. The company made $75,000 of additional investment during the quarter under a convertible-note arrangement; potential lending under the agreement totals up to $300,000, subject to conditions.
- Cash used in financing was $451,913 for repurchases of 217,751 shares. After quarter-end, the company repurchased another 280,518 shares at an average $2.24 per share.
- Management anticipated approximately $500,000 of discretionary capital expenditures over the next 12 months and stated that cash, marketable securities and expected operating cash flows should fund known needs for at least 12 months. If revenue growth disappoints or expenses exceed expectations, it may cut or defer spending or seek financing; no credit line is available.
- Management said it continues to review strategic options, potentially including a merger, acquisition, deregistration or going-private transaction, but no such action was then contemplated. The company had ceased offering commercial menstrual stem-cell services for the time being due to limited market acceptance.
Risks, contingencies and unusual matters
- Pending shareholder derivative litigation alleges fiduciary-duty breaches, corporate waste and related claims; defendants filed motions to dismiss in February 2014. The company also has a lawsuit against former legal counsel concerning the Mexico license arrangement. Outcomes and potential effects are uncertain.
- A separate revenue-sharing lawsuit was settled for $525,000, paid in December 2013. A former CEO arbitration award was largely paid in 2013; the related accrued balance was zero at February 28, 2014.
- Management identifies risks including regulation, competition, lower demand and storage renewals, dependence on licensees and international operations, facility or information-system failures, litigation, and the possibility that stem-cell storage becomes obsolete. Warranty exposure is estimated using assumptions; the recorded reserve was $15,857, and the company does not insure the program.
- The company recorded a $10.59 million valuation allowance against deferred tax assets. It reported no U.S. income tax expense for the quarter due to use of tax attributes; approximately $47,000 of foreign tax expense was recorded.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the quarter.
Investor verification priorities
- Separate recurring operating performance from the nonrecurring Mexico payment and assess the expected decline in licensee income.
- Track specimen volumes, especially international affiliate activity, recurring storage renewals and the impact of Ecuador’s closure.
- Reconcile operating cash generation with net income, deferred-revenue movements, receivables and the continuing share-repurchase program; note the modest working capital deficit.
- Review developments and possible financial exposure in the shareholder derivative and former-counsel litigation, including legal costs not covered by insurance.
- Confirm actual capital spending, liquidity and Saneron funding, and compare outstanding shares: the filing reports 10,525,474 outstanding at February 28, while its cover reports 10,244,956 as of April 8, 2014.