Cryo-Cell International, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended August 31, 2014; unaudited. Cryo-Cell provides cellular processing and cryogenic storage, principally umbilical cord blood, with revenue from processing, recurring storage fees and international licensee royalties.
Financial performance and position
| Metric | Three months ended Aug. 31, 2014 | Nine months ended Aug. 31, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $4.94 million | $15.15 million | $4.83 million quarter; $14.29 million nine months |
| Operating income | $429,000 | $1.80 million | $583,000 quarter; $1.23 million nine months |
| Net income | $237,000 | $849,000 | $194,000 quarter; $195,000 nine months |
| Basic/diluted EPS | $0.02 | $0.08 | $0.02 in both comparable periods |
| Operating cash flow | $1.31 million for nine months | $844,000 for nine months |
- Quarter revenue rose 2%, but operating income fell about 26%; net income increased about 22%, helped by higher other income. Nine-month revenue rose 6%, operating income 45%, and net income substantially exceeded the prior year.
- For the nine months, processing and storage fees were $13.85 million, up about 4%; licensee income was $1.30 million, up about 33%. Cost of sales rose 8% to $4.32 million and was 29% of revenue versus 28% a year earlier. Quarterly cost of sales was 30% of revenue versus 28%.
- At August 31, cash and cash equivalents were $3.45 million, restricted cash $204,000, and marketable securities $123,000. Cash and equivalents declined $476,000 from November 30, 2013. Operating cash flow was partly offset by $2.29 million spent on share repurchases. Investing cash flow included release of $764,000 of escrow cash.
- Current assets were $8.27 million against current liabilities of $8.80 million. Current liabilities include $6.62 million of deferred revenue; total deferred revenue, including noncurrent, was $15.84 million. Stockholders’ deficit was $10.22 million.
- The company reported no long-term indebtedness and no line of credit. Interest expense was $836,000 for nine months, primarily relating to revenue-sharing agreements; a $2.30 million long-term liability for those agreements remained on the balance sheet.
Material changes and unusual items
- Recurring annual storage revenue increased 8% for nine months, while new cord blood specimens processed fell 17%; management attributed the decline mainly to a 49% reduction in international-affiliate specimens, particularly after Ecuador’s affiliate was closed. In the quarter, new specimens fell 14% and international specimens 47%.
- Nine-month licensee income included about $794,000 from Mexico’s payoff of its remaining balance under an amended agreement. The Mexico agreement is terminated, with no continuing royalties or other license payments; management noted that the amendment reduced future license income. The quarter’s licensee income was royalty income and declined to $169,000 from $324,000.
- The company invested $150,000 in Saneron and recorded $242,000 of equity in affiliate losses for nine months, including valuation allowances related to the Saneron notes and compensation-related items.
- Share repurchases totaled 968,302 shares for about $2.29 million during the nine months. As of August 31, 2.10 million shares had been repurchased under the 3.0 million-share authorization, leaving 904,883 authorized shares available. Outstanding shares at August 31 were 9,821,169.
- Management reported a material weakness in controls over identifying and accounting for non-routine transactions and related documentation. Disclosure controls and internal controls over financial reporting were concluded ineffective; management said it was taking steps to improve controls.
- Management reported a confidential settlement of its claim against former legal counsel in June 2014. A shareholder derivative case was dismissed in July 2014. The filing also describes the prior $525,000 settlement of the revenue-sharing lawsuit. Other litigation outcomes can be uncertain.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected cash, marketable securities and operating cash flows to cover known needs for at least 12 months, and anticipated about $500,000 of discretionary capital spending over the next 12 months, principally software and equipment.
- Management cautioned that funding capacity depends on revenue growth and expense management; weaker revenue or higher costs could require spending reductions or deferrals, or potentially external financing on acceptable terms.
- Risks highlighted include lower demand for cord blood storage, competition (including public banks), regulation, international licensee performance and enforcement, storage-facility or information-system failures, litigation, and the possibility that new services or research collaborations do not succeed.
- The company discontinued certain menstrual stem-cell patents and trademarks, writing off about $26,000 in the nine-month period; management said the effect on future operations was immaterial and would not affect core operations. The 2013 comparable period included a $379,000 write-off.
- The company maintained a $10.28 million valuation allowance against deferred tax assets and reported no U.S. income tax expense for the period, using tax-loss and foreign-tax-credit carryforwards; foreign income tax expense was $98,000 for nine months.
Important facts for investors to verify
- Whether recurring storage-fee growth can offset declines in new specimen processing and the loss of ongoing Mexico license revenue.
- The quality and collectability of receivables: net accounts receivable was $3.95 million, with an allowance for doubtful accounts of $1.84 million; operating cash flow also reflected a $1.53 million use from increased receivables.
- Progress and effectiveness of remediation for the disclosed material weakness in non-routine transaction controls.
- Cash needs and capital allocation, particularly continued repurchases, the planned capital expenditures, and the company’s ability to sustain positive operating cash flow.
- Saneron funding, valuation allowances and prospects, alongside the $2.30 million revenue-sharing liability and related interest expense.
- Final status and potential financial effects of litigation and other contingencies; the filing states that legal outcomes remain inherently uncertain.