Cryo-Cell International, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2019. Cryo-Cell provides cellular processing and cryogenic storage, principally for umbilical cord blood and tissue for family use, and operates a public cord blood bank and PrepaCyte CB product business. The statements are unaudited.
Financial results and liquidity
| Metric | Three months ended May 31 | Six months ended May 31 |
|---|---|---|
| Revenue | 2019: $8.13 million; 2018: $6.53 million | 2019: $15.62 million; 2018: $12.75 million |
| Operating income | 2019: $497,000; 2018: $1.15 million | 2019: $1.35 million; 2018: $2.14 million |
| Net income (loss) | 2019: $54,000; 2018: $540,000 | 2019: $330,000; 2018: $(1.99) million |
| Net income (loss) per basic share | 2019: $0.01; 2018: $0.07 | 2019: $0.04; 2018: $(0.28) |
| Operating cash flow | Not presented separately | 2019: $2.35 million; 2018: $1.72 million |
- Second-quarter revenue increased about 25%; six-month revenue increased about 22%. Processing and storage fees drove the increase, with public banking revenue of $234,000 in the quarter and $368,000 year to date, versus none in 2018.
- Gross margin, calculated as revenue less cost of sales, was about 67.7% for Q2 and 67.4% for the six-month period, compared with 72.8% and 73.5% in 2018. Operating margin was about 6.1% and 8.6%, respectively, versus 17.6% and 16.8%.
- At May 31, cash and cash equivalents were $6.47 million and marketable securities were $840,000. Current assets were $15.00 million against current liabilities of $13.61 million. The company reported a stockholders’ deficit of $8.09 million.
- Net note payable was $11.45 million, including $3.10 million current and $8.35 million long-term; principal before unamortized issuance costs was $11.66 million. Six-month repayments were approximately $1.55 million. Interest expense rose to $831,000 from $585,000.
- Cash increased $429,000 over the six months. Investing used $373,000, including $409,000 in property and equipment purchases; the latter included $350,000 for land. Financing used $1.54 million, principally for debt repayment.
Material changes and unusual items
- Cost of sales rose 51% for the six months, outpacing revenue growth. Management attributed the increase to public-bank costs and more domestic specimens processed.
- The company recorded a $2.33 million impairment of public cord blood inventory after reassessing sales trends and recoverability. This contributed to public banking segment operating losses of $2.50 million for Q2 and $2.64 million for six months.
- A reduction in the Cord:Use contingent-consideration liability produced a reported benefit of $1.04 million for Q2 and $671,000 for six months. The liability was $3.61 million at May 31; management cautioned its fair value and eventual payments may differ materially.
- SG&A increased 4% for six months, including higher selling and marketing costs and a $200,000 increase in bad debt expense. Interest expense also increased.
- The 2018 six-month loss included approximately $2.99 million of tax expense related to the federal tax-rate reduction under the Tax Cuts and Jobs Act. Cryo-Cell adopted ASC 606 in December 2018; the filing says adoption did not change revenue amounts or timing, but resulted in capitalization of certain contract acquisition costs and a $253,000 net opening-equity adjustment.
Outlook, risks and contingencies
- Management expects approximately $500,000 of discretionary capital expenditures over the next 12 months, primarily for software enhancements and property and equipment. It believes cash, marketable securities and operating cash flows should cover known cash needs for at least 12 months, but notes weaker-than-expected revenue or higher expenses could require spending reductions or financing. The company has no line of credit.
- Management identifies risks including competition, lower demand or storage renewals, regulation, specimen-storage or information-system failures, international licensee performance and enforcement, acquisition returns, and the potential need for additional capital. The Cord:Use earnout depends on public-inventory sales; its estimate is subject to significant uncertainty.
- A pending Florida lawsuit alleges breach of agreements and seeks damages exceeding $15,000. The company disputes the claims; loss cannot currently be estimated and none was accrued. It also notes other claims in the ordinary course of business.
- Management stated disclosure controls were effective, while noting an independent committee is reviewing a claim that executive shares were issued beyond the 2012 plan’s reserved amount. The company also disclosed it had not filed an amended 2015 Form 8-K containing required PrepaCyte acquisition financial and pro forma information and was therefore not deemed a timely filer.
Important facts for investors to verify
- Whether public cord blood inventory sales support the remaining carrying value after the $2.33 million impairment, and how quickly the inventory can be sold.
- The assumptions behind the Cord:Use earnout valuation and the potential cash and share payments as inventory sales progress.
- Whether operating cash generation can sustain debt service, planned capital spending and operations if revenue growth slows; review loan terms and maturities.
- The status and potential financial impact of the lawsuit, the share-plan review, and the overdue amended 8-K filing.
- The filing’s cover page marked “No” for having filed all required reports during the prior 12 months; investors should confirm filing compliance and the status of the identified 8-K deficiency.