CRYO CELL INTERNATIONAL INC annual report, FY2011

Full document

Cryo-Cell International, Inc. — FY2011 Form 10-K

Reporting period: Fiscal year ended November 30, 2011. This filing reports annual results; it does not provide a clear standalone fourth-quarter income statement. Cryo-Cell processes and cryogenically stores cellular specimens, principally umbilical cord blood, and also offers cord-tissue, menstrual stem-cell, and reproductive-tissue storage services. The company and its affiliates reported more than 240,000 cord-blood specimens stored worldwide.

Financial performance and liquidity

  • Revenue: $17.92 million, up approximately 1% from $17.76 million in FY2010. Processing and storage fees rose 2% to $16.55 million; licensee income fell 10% to $1.36 million.
  • Profitability: Gross profit was $13.52 million, with a gross margin of approximately 75%. The company recorded an operating loss of $277,000 and a net loss of $2.10 million, or $0.18 per basic and diluted share, versus FY2010 net income of $3.46 million, or $0.29 per share. FY2010 included a $1.56 million income-tax benefit, including a valuation-allowance release.
  • Major expense changes: Marketing, general and administrative expense increased 31% to $12.41 million, including proxy-contest and related legal costs, a $950,000 severance accrual, higher stock compensation, and increased sales and marketing expense. The company also recorded a $627,000 software impairment and $210,000 of abandoned patent costs.
  • Cash flow: Operating activities provided $819,000, down from $2.34 million in FY2010. Investing activities used $2.96 million, including $2.5 million placed in an irrevocable grantor trust; financing activities provided $81,000. Cash and cash equivalents declined by $2.06 million to $6.31 million.
  • Liquidity and obligations: Current assets were $14.05 million and current liabilities $10.56 million, implying working capital of approximately $3.49 million and a current ratio of about 1.33. Restricted cash was $2.70 million; short-term marketable securities were $1.00 million. Revenue-sharing agreement liabilities totaled $3.75 million at year-end. The company reported no long-term indebtedness as of February 28, 2012 and no line of credit.
  • Margins and balance sheet: Operating margin was approximately -1.5% and net margin approximately -11.7%. Total assets were $19.47 million; stockholders’ deficit was $2.46 million.

Material changes versus FY2010

  • Revenue was nearly flat, while the company moved from FY2010 profitability to a FY2011 net loss, principally due to sharply higher G&A expenses and one-time impairment and abandonment charges.
  • Processing and storage fees increased as specimens processed rose 3% and recurring annual storage revenue increased 6%; cost of sales declined 2%.
  • Cash from operations decreased, while year-end cash fell partly because $2.5 million was transferred to the trust. The 2011 board change followed a proxy contest, and new cord-tissue service was introduced.
  • The FY2010 comparative financial statements were retrospectively adjusted for a revised accounting method for allocating revenue among multiple deliverables.

Outlook, risks, contingencies, and unusual items

  • Management expected cash, marketable securities, and future operating cash flows to cover known cash needs for at least 12 months, and anticipated approximately $1.25 million of non-discretionary capital expenditures over the next 12 months. It cautioned that weaker revenue or higher expenses could require spending reductions or financing; availability and terms of financing were not assured.
  • Management is refocusing on cord-blood and cord-tissue services while continuing development of menstrual stem-cell technology. Adoption of newer services and potential therapies remains uncertain; menstrual stem cells had not yet been used in human therapies.
  • International license revenue is concentrated: Mexico and India accounted for approximately $1.27 million of FY2011 licensee income. Under an October 2011 amendment, Mexico agreed to pay $1.863 million in installments, with no further royalties or license payments; the agreement is to terminate after payment. The company recorded a $1.66 million receivable and $1.63 million deferred revenue. Management expected the amendment to reduce future licensee income.
  • After year-end, on December 6, 2011, Cryo-Cell paid Bio-Stor $2.3 million to cancel its New York revenue-sharing agreement. At November 30, the associated $900,000 liability was classified as current.
  • Mercedes Walton sought $5 million in arbitration following her termination; Cryo-Cell accrued $950,000 for potential severance but disputes that she is entitled to it. A separate damages complaint sought more than $75,000; the company said the loss could not yet be estimated and recorded no accrual. The company also identified a prior license-related lawsuit that was dismissed, with no appeal filed.
  • Controls: Management concluded internal control over financial reporting was ineffective at year-end due to a material weakness in identifying and accounting for non-routine transactions and documenting the accounting. Management described remediation steps, but could not guarantee they would resolve the weakness. The independent auditor issued an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
  • Other significant risks include competition, discretionary customer spending, regulatory compliance, intellectual-property protection, dependence on international licensees, customer receivables, information-system and storage-facility disruption, and hurricane exposure. The company stated it had no formal disaster-recovery plan or redundant systems for certain disruptions.

Most important facts for investors to verify

  • Whether recurring customer growth and storage fees can offset the loss of Mexico royalties and the higher expense base.
  • The collectability and accounting recognition of Mexico’s installment receivable, and the resulting effect on future license income and cash flows.
  • The status and eventual resolution of the Walton arbitration, the separate damages lawsuit, and the $950,000 severance accrual.
  • Cash availability after the $2.3 million post-year-end Bio-Stor payment, restrictions on trust funds, and planned capital spending.
  • Progress and effectiveness of remediation for the material weakness in financial-reporting controls.
  • Whether the company’s disclosed service warranties, revenue-sharing obligations, and deferred revenue are adequately reflected in reserves and liquidity planning.