Cryo-Cell International, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Cryo-Cell provides cord blood and tissue processing and cryogenic storage, manufactures PrepaCyte CB, and operates a public cord blood bank. This unaudited filing covers the quarter and six months ended May 31, 2021; comparisons are with the corresponding 2020 periods.
Key financial results
| Metric | Three months ended May 31 | Six months ended May 31 |
|---|---|---|
| Revenue, 2021 (change vs. 2020) | $7.21 million (-8%) | $14.07 million (-9%) |
| Operating income, 2021 (2020) | $2.00 million ($1.75 million) | $3.23 million ($3.00 million) |
| Net income, 2021 (2020) | $1.17 million ($0.95 million) | $1.86 million ($1.64 million) |
| Diluted EPS, 2021 (2020) | $0.14 ($0.12) | $0.23 ($0.20) |
| Gross margin, 2021 (2020) | 69.2% (68.5%) | 69.9% (67.8%) |
Six-month operating cash flow was $4.20 million, compared with $3.44 million in 2020. Cash and equivalents were $7.95 million at May 31, down from $10.36 million at November 30, 2020. Total assets were $58.32 million and total liabilities $54.32 million; stockholders’ equity was $4.00 million, versus a $2.67 million deficit at November 30. Current assets of $14.78 million were below current liabilities of $20.12 million.
Debt included $3.46 million in gross notes payable ($3.10 million current). The balance sheet also included $6.76 million of Duke license agreement liabilities, $30.62 million of deferred revenue, and $0.88 million of long-term revenue-sharing liabilities. Deferred revenue primarily represents customer payments received for services to be provided in future periods.
Material changes versus prior periods
- Revenue fell as lower new-client processing and public-bank sales outweighed 9% growth in recurring annual storage-fee revenue. New domestic specimens processed decreased 12% for the six-month period and 3% for the quarter.
- Six-month cost of sales declined 15% and SG&A declined 11%; operating income and net income nevertheless increased despite lower revenue. Depreciation and amortization rose to $288,685 from $87,524, primarily reflecting newly recognized assets.
- Licensee and royalty income was zero in the 2021 periods, versus $201,828 in 2020. The company said it had reached the $10 million lifetime royalty cap under its LifeCell agreement; approximately $300,000 remained receivable.
- Notes payable decreased from $6.01 million at November 30, 2020 to $3.46 million, following $2.55 million of repayments. Cash declined by $2.41 million, chiefly reflecting Duke-related payments and debt repayment, partly offset by operating cash generation and option exercises.
Outlook, risks, and unusual items
- Duke license: The February 2021 agreement grants exclusive commercial rights to specified Duke cord blood and tissue intellectual property and data. It requires a $12 million license fee in installments, sales-based royalties of 7%–12.5%, minimum annual royalties beginning in year two, specified milestone payments, and potential share issuances. The company plans to pursue treatment, manufacturing, and infusion-clinic opportunities, including under an FDA Expanded Access Program; commercial success and regulatory approvals are uncertain.
- Accounting adjustment: In Q2, management revised its accounting for the Duke agreement after identifying termination-clause provisions it had not considered. It reduced the initially recorded license asset and related liability by $42.90 million; the May 31 license asset was $15.13 million, net of amortization. The filing says the adjustment affected the February 28 balance sheet but not first-quarter net income, EPS, or equity.
- Management outlook: The company anticipates about $10 million of discretionary capital expenditures over the next 12 months, including software, equipment, and Duke agreement obligations. Management states cash, marketable securities, and future operating cash flows should cover known needs for at least 12 months, but notes spending may need to be reduced or deferred if revenue growth falls short or expenses exceed expectations. No specific revenue or earnings guidance is provided.
- COVID-19: Management attributed weaker new-client and public-bank sales partly to pandemic-related changes in consumer buying patterns and warned that revenue, earnings, and cash flow may remain affected; the timing of recovery is uncertain.
- Controls and contingencies: Disclosure controls and internal control over financial reporting were deemed ineffective due to a material weakness involving interpretation of a non-routine transaction. Management implemented changes, including a more comprehensive review process. The company also disclosed ordinary-course litigation, with no estimated loss amount provided, and a $1.55 million Durham property purchase agreement, with $1.50 million due at closing.
- Other stated risks include competition, regulation, reduced demand for cord blood storage, storage-facility or information-system failures, litigation, international licensee performance, and the possibility that emerging therapies or technology affect the business.
Important facts for investors to verify
- Progress, regulatory pathway, expected costs, and potential dilution under the Duke license, including the scheduled license-fee and minimum-royalty payments.
- Whether new-client and public-bank sales recover, and whether recurring storage-fee growth can offset lower processing activity.
- Cash-flow performance and funding needs against the anticipated $10 million of spending and other commitments; assess the current-liability position and remaining debt payments.
- Remediation and effectiveness of controls following the disclosed material weakness and Duke accounting adjustment.
- Recoverability of public cord blood inventory and collection of the approximately $300,000 LifeCell receivable; the filing notes inventory valuation and contingent earnout estimates involve judgment.