CRYO-CELL INTERNATIONAL, INC. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended May 31, 2012; unaudited. Cryo-Cell provides cellular processing and cryogenic storage, primarily for umbilical cord blood, and earns additional income from international licensing and royalties.
Financial performance and position
| Metric | Three months ended May 31, 2012 | Six months ended May 31, 2012 |
|---|---|---|
| Revenue | $4.43 million | $8.60 million |
| Operating income (loss) | $(1.12) million | $(1.20) million |
| Net income (loss) | $(3.22) million | $(4.91) million |
| Basic EPS | $(0.28) | $(0.43) |
| Operating cash flow | $(0.38) million for six months |
- Revenue declined 4% for the quarter and 5% for the six-month period versus 2011. Processing and storage fees fell 4% and 6%, respectively; licensee income rose 5% for both periods.
- For the six months, cost of sales was 26% of revenue, compared with 25% in 2011. Quarterly cost of sales rose to 27% of revenue from 24%.
- Six-month SG&A increased 43% to $7.45 million, driven mainly by higher sales and marketing costs and stock-option expense. The company reported approximately $1.02 million of stock compensation for the six months, including about $700,000 from accelerated Co-CEO option vesting following a proxy nomination notice.
- At May 31, cash and cash equivalents were $2.80 million, restricted cash $2.65 million, and current assets $9.58 million versus current liabilities of $9.80 million. Cash declined $3.50 million from November 30, 2011. The filing reports no long-term indebtedness; revenue-sharing obligations remain on the balance sheet.
- Total assets were $13.13 million and stockholders’ deficit was $7.68 million. The company used $3.98 million in financing activities, including $2.58 million to cancel revenue-sharing interests and $1.40 million to repurchase shares.
Material changes and unusual items
- Specimens processed declined 23% year over year in both reported comparison periods. Recurring annual storage revenue increased 7%; lower sales discounts partially offset the processing-volume decline.
- The company paid $2.3 million to terminate the Bio-Stor revenue-sharing agreement and $276,000 to repurchase certain Illinois RSA interests. These transactions produced a reported $1.28 million six-month extinguishment loss; interest expense declined 27% as RSA obligations were reduced.
- A $1.72 million U.S. income-tax charge resulted from reserving deferred tax assets after recent cumulative losses. Management stated the remaining net deferred tax assets were reserved because realization was not considered more likely than not.
- The company repurchased 674,379 shares during fiscal 2012 at an average price of $2.08. The board later increased the authorized repurchase amount to as many as 3 million shares.
- Management said it is refocusing on cord blood and cord tissue while continuing development of menstrual stem-cell technology. Research and development expense fell 81% to $22,420 for the six months.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected cash, marketable securities and future operating cash flows to cover known needs for at least 12 months, and anticipated approximately $750,000 of nondiscretionary capital spending over the next 12 months. This expectation depends on revenue growth and expense management; if targets are missed, spending reductions, deferrals or financing may be needed.
- Key risks include declining cord-blood processing demand, competition from public banks, uncertain acceptance of menstrual stem-cell services, licensee performance, facility or information-system failures, regulation, and litigation and proxy-contest costs.
- Former CEO Mercedes Walton seeks $5 million in arbitration; the company has accrued approximately $950,000 for potential severance but disputes entitlement. A separate damages lawsuit seeks more than $75,000, with no accrual recorded and the amount not estimable; trial was scheduled for February 2013.
- Disclosure controls were reported ineffective at quarter-end. Management said it had implemented remediation steps for a material weakness involving accounting for non-routine transactions, but the controls had not operated long enough to conclude they were effective.
- The company’s $2.45 million grantor-trust balance is restricted and relates to potential management change-in-control obligations. Its cord-blood warranty reserves were $13,713; the company carries no insurance for the program.
Investor verification points
- Reconcile the net-loss figure: the statements of operations report a Q2 loss of $3,224,930, while the EPS note gives $3,244,930 for the same quarter.
- Assess cash runway using unrestricted cash, restricted funds, recurring cash flow, planned capital spending and remaining RSA payments.
- Track specimen-processing volumes, storage renewals, sales-force costs and whether the revenue decline stabilizes.
- Monitor the deferred-tax valuation allowance, stock-based compensation and dilution from outstanding options and repurchases.
- Review updates on the Walton arbitration, the unquantified damages lawsuit, proxy-related costs and remediation of disclosure controls.