Cryo-Cell International, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended May 31, 2015; unaudited. Cryo-Cell provides cellular processing and cryogenic storage, primarily for umbilical cord blood, and earns processing, storage, and license/royalty revenue.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $5.014 million | $4.893 million | $9.857 million | $10.213 million |
| Operating income | $602,091 | $562,330 | $1.227 million | $1.367 million |
| Net income | $210,032 | $215,773 | $496,202 | $612,885 |
| Basic EPS | $0.02 | $0.02 | $0.05 | $0.06 |
- For the six-month period, revenue fell 3.5% and net income fell 19.0%. Processing and storage revenue rose 4.8% to $9.518 million, while licensee and royalty income declined to $338,824 from $1.133 million. The prior-year period included approximately $794,000 from Mexico’s payoff of an amended license obligation; that agreement is now terminated.
- Q2 revenue increased 2.5%; processing and storage revenue rose about 3%, while license and royalty income was essentially unchanged. New specimens processed were relatively flat year over year for the six-month period; Q2 volume declined 4% year over year.
- Cost of sales declined 6% for the six months and 8% in Q2. It represented 27% of revenue in the six-month period versus 28% in 2014, and 27% in Q2 versus 30%. SG&A rose slightly for six months and 8% in Q2.
- Interest expense rose 27% for six months to $671,087, primarily reflecting revenue-sharing agreement payments tied to storage revenue. Six-month operating income declined despite lower cost of sales, and net income was also affected by lower revenue and higher interest expense.
- Six-month operating cash flow was $1.832 million, versus $362,000 in 2014. Investing activities used $244,472 and financing activities used $952,463, principally for share repurchases. Cash and cash equivalents increased by $635,000 to $3.914 million.
Financial position and liquidity
- At May 31, 2015, current assets were $9.307 million and current liabilities were $9.111 million, implying working capital of approximately $196,000. Marketable securities were $532,369; restricted cash was $204,252.
- The company reported no long-term indebtedness and no line of credit. It did report a $2.3 million long-term liability for revenue-sharing agreements, in addition to deferred revenue of $16.802 million in total.
- Stockholders’ deficit was $10.695 million. Accounts receivable, net, was $3.707 million, against an allowance for doubtful accounts of $2.151 million.
- Available-for-sale securities generated a $226,276 unrealized gain recorded in other comprehensive income. This gain increased comprehensive income but was not net income.
Outlook, significant developments, and risks
- Management expected cash, marketable securities, and operating cash flows to cover known needs for at least 12 months. It anticipated approximately $500,000 in discretionary capital expenditures over the next 12 months, mainly for software and property/equipment. This expectation depends on revenue growth and expense management; management noted that weaker revenue or higher costs could require spending reductions or financing.
- On June 11, 2015, the company agreed to acquire specified assets and assume certain liabilities of CytoMedical Design Group’s Prepacyte-CB cord blood business. The acquisition closed July 1; Cryo-Cell paid $861,783 at closing and issued a $1.3 million promissory note. Purchase accounting and pro forma information were not yet available. Results were expected to include the business beginning in Q3 2015.
- On June 30, 2015, the company commenced a tender offer for up to 750,000 shares at $3.25 per share, to be funded with cash on hand; it was scheduled to expire July 28, 2015. The board had also increased the share repurchase authorization to up to six million shares. During the six months, the company repurchased 344,026 shares for approximately $952,000.
- Management identified risks including competition, lower demand for cord blood storage, dependence on licensees and international markets, facility or information-system failures, litigation, and the possibility that technological or medical advances could reduce demand. It also noted uncertainty in realizing deferred tax assets; a valuation allowance of $10.187 million remained at May 31.
- Legal matters included a March 2015 company lawsuit seeking to compel Cord Blood America, Inc. to hold an annual shareholder meeting. The filing states that current matters were not expected to have a material adverse effect overall, but an unfavorable outcome could materially affect an individual quarter.
- Disclosure controls and procedures were reported as not effective because of a material weakness in identifying and documenting accounting treatment for non-routine transactions. Management described plans to strengthen review procedures and use qualified consultants. No material control changes occurred during the quarter.
Most important facts to verify
- Whether recurring storage revenue and new-client specimen volumes can offset the loss of Mexico-related license income and sustain overall growth.
- The ongoing cost and terms of revenue-sharing agreements, given rising interest expense and the $2.3 million recorded liability.
- Completion of Prepacyte-CB purchase accounting, the final acquisition consideration and assumed liabilities, and the acquired business’s contribution to results.
- The final outcome and cash impact of the tender offer and continuing share repurchases, including their effect on liquidity and shares outstanding.
- Progress in remediating the material weakness in controls, and the implications of the cover-page response indicating the company had not filed all required Exchange Act reports during the prior 12 months.
- Any changes to the valuation allowance, warranty reserve, or legal contingencies; the filing reports a $17,000 warranty reserve and does not quantify possible legal defense costs.