Cryo-Cell International, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended February 28, 2019. The filing is unaudited. Cryo-Cell provides cord blood and tissue processing and cryogenic storage, manufactures PrepaCyte CB, and operates a public cord blood banking business acquired with Cord:Use in June 2018.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $7.50 million | $6.23 million |
| Gross profit / margin | $5.03 million / 67.1% | $4.63 million / 74.3% |
| Operating income / margin | $854,000 / 11.4% | $987,000 / 15.9% |
| Net income (loss) | $276,000 | ($2.53 million) |
| Basic / diluted EPS | $0.04 / $0.03 | ($0.36) / ($0.36) |
| Operating cash flow | $1.79 million | $1.69 million |
- Processing and storage fees were $7.34 million, up 18%; public banking contributed $134,000, versus none in the prior-year quarter. PrepaCyte product revenue was $26,000, down from $28,000.
- Cost of sales rose 54% to $2.47 million, faster than revenue. SG&A increased 4% to $3.75 million; the company cited $171,000 higher bad-debt expense and $145,000 higher selling and marketing expense.
- Cash and cash equivalents were $7.08 million at February 28, up from $6.04 million at November 30, 2018; marketable securities were $809,000. Working capital was approximately $15.10 million (current assets $30.38 million less current liabilities $15.28 million).
- Net carrying amount of the note payable was $12.20 million, including $3.10 million current and $9.10 million long-term. Principal outstanding was $12.43 million. The company repaid $775,000 during the quarter. Interest expense totaled $407,000, including bank-loan interest and revenue-sharing obligations.
- Deferred revenue, reflecting prepaid services not yet recognized, totaled $29.39 million, of which $8.27 million was current. Stockholders’ deficit was $8.23 million.
Material changes versus the prior comparable period
- Revenue increased 20%, primarily from 18% growth in processing and storage fees and a 27% increase in new domestic specimens processed. Public banking revenue and related costs reflect the Cord:Use acquisition.
- Operating income declined about 14% despite higher revenue, as cost of sales rose substantially; gross and operating margins contracted.
- The company reported a profit versus a prior-year loss. The comparison is significantly affected by approximately $2.985 million of prior-year tax expense from the 2017 U.S. tax-law change, which reduced the value of deferred tax assets. Q1 2019 income tax expense was $105,000.
- Interest expense rose to $407,000 from $315,000. A $367,000 increase in the fair value of the Cord:Use contingent earnout was recorded as expense; the liability was $4.65 million at quarter-end.
- Cash from operations improved modestly. Financing cash outflow increased to $769,000, mainly from debt repayment.
Outlook, management commentary, risks and unusual items
- Management stated that cash, marketable securities and expected operating cash flows should fund known cash needs for at least 12 months. It anticipated approximately $500,000 of discretionary capital expenditures over the next 12 months, mainly for software and equipment. The company has no line of credit and may reduce or defer spending, or seek financing, if revenue or expense assumptions are not met.
- No quantified revenue or earnings guidance was provided. Management identified growth in storage services and control of discretionary expenses as important to operating cash flow.
- Risks cited include competition, declining demand or storage renewals, regulatory changes, international licensee performance, litigation, storage-facility or information-system failures, and the ability to realize benefits from the Cord:Use and other acquisitions. Actual Cord:Use earnout payments may differ materially from the estimated fair value.
- A pending Florida lawsuit alleges breach of agreements and seeks damages exceeding $15,000. The company disputes the claims, has accrued no amount, and says it cannot estimate a possible loss or range.
- On March 26, 2019, the company agreed to buy land for $350,000; $30,000 earnest money was paid April 2, with the balance due at closing.
- ASC 606 was adopted December 1, 2018 using the modified retrospective method. The company recorded a $253,000 net-of-tax opening equity adjustment and capitalized contract acquisition costs; it said adoption did not change revenue timing. ASU 2016-01 adoption reclassified approximately $341,000 from accumulated other comprehensive income to accumulated deficit/retained earnings.
- Disclosure controls were described as effective at quarter-end. However, the filing reiterates a previously disclosed material weakness in internal control over financial reporting involving deferred discounts on prepaid storage contracts; remediation was ongoing. An independent board committee was also reviewing whether executive shares had exceeded the 2012 plan’s reserved share count. The company additionally said it was not a timely filer pending an amended 2015 acquisition-related 8-K.
Most important facts for investors to verify
- Whether processing and storage growth continues while unit costs, bad-debt expense and margins stabilize.
- The public cord blood inventory’s sales pace, profitability and resulting Cord:Use earnout obligations.
- Debt repayment requirements, interest burden and liquidity relative to planned investment and operating needs.
- Progress and effectiveness of remediation for the deferred-discount control weakness, and the outcome of the review of potentially excess plan share issuances.
- Resolution and potential financial exposure from the pending lawsuit, and completion cost and funding for the land purchase.