Cryo-Cell International, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended November 30, 2019. This filing reports annual results; it does not provide standalone fourth-quarter financial results. Cryo-Cell processes and stores cord blood and cord tissue for families, manufactures its PrepaCyte CB processing system, and operates a public cord blood banking business acquired from Cord:Use in June 2018.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $31.82 million | $29.22 million |
| Operating income | $5.06 million | $5.19 million |
| Net income (loss) | $2.29 million | ($0.85 million) |
| Basic / diluted EPS | $0.29 / $0.27 | ($0.11) / ($0.11) |
| Cash from operations | $6.32 million | $5.33 million |
| Cash and cash equivalents | $6.54 million | $6.04 million |
| Net note payable, after debt costs | $8.96 million | $12.94 million |
- Revenue grew 9%, led by an 8% increase in processing and storage fees and 12% growth in recurring annual storage fees. New domestic cord blood specimens processed increased 7%. Public banking revenue rose to $652,204 from $296,295; licensee and royalty income remained $1.0 million.
- Cost of sales rose 18% to $10.04 million, while selling, general and administrative expense fell 5% to $14.89 million. Operating income declined modestly; operating margin was approximately 15.9%, versus 17.8% in FY2018.
- FY2019 included a $2.33 million public-inventory impairment, recorded after changes in sales trends and estimated inventory recoverability. The public banking segment reported a $2.98 million operating loss. The filing says the impairment reduced inventory to net realizable value.
- Income tax expense fell to $1.10 million from $4.47 million. FY2018 included approximately $3.08 million related to remeasurement of deferred tax assets following the federal tax-rate reduction under the Tax Cuts and Jobs Act.
- Operating cash flow increased about 19%. Cash rose approximately $501,000 after $690,659 of investing outflows and $5.13 million of financing outflows, including $4.10 million of debt repayments and $992,244 of share repurchases. Management attributed operating cash flow in part to more new clients selecting prepaid storage plans.
- Current assets were $15.39 million and current liabilities $15.43 million, leaving slightly negative working capital of approximately $42,000. Total liabilities of $49.84 million exceeded total assets of $42.89 million; stockholders’ deficit was $6.95 million. Cash plus marketable securities was approximately $7.45 million.
Material changes and business developments
- The Cord:Use acquisition was completed in June 2018 for stated closing consideration of $14.0 million ($10.5 million cash and $3.5 million in stock), plus contingent payments. Its public cord blood inventory and public banking operations contributed to FY2019 revenue and costs; inventory impairment was a significant FY2019 charge.
- The Cord:Use earnout liability was valued at $3.50 million at November 30, 2019, down from $4.28 million a year earlier after a $45,000 payment and a $742,918 fair-value reduction. Actual payments may differ materially from estimates.
- Debt principal was $9.11 million at year-end, with $3.10 million scheduled for repayment in each of FY2020 and FY2021 and the remainder in FY2022. The loan bears interest at 3.75% plus LIBOR and is secured by company assets.
- The company repurchased $992,244 of common stock during FY2019. Shareholders approved ratification and disposition of previously defective equity awards and issuances at the November 2019 annual meeting; certain awards were surrendered for cash.
- Effective December 1, 2018, Cryo-Cell adopted ASC 606 using the modified retrospective method. The filing says adoption did not affect reported product or service revenue, but it changed contract-cost accounting and opening stockholders’ deficit.
Outlook, risks, contingencies and unusual items
- Management expects cash, marketable securities and future operating cash flows to fund known cash needs for at least the next 12 months. It anticipates approximately $500,000 of discretionary capital expenditures over that period, mainly for software and property and equipment. This is management’s expectation, not earnings guidance.
- Management says cash generation depends on revenue growth in cord blood and tissue storage and expense management; weaker-than-expected revenue or higher expenses could require spending reductions or financing. The company has no line of credit.
- Risks described in the filing include competition, dependence on customer enrollment and storage renewals, recoverability and sale of public cord blood inventory, collection-kit and PrepaCyte suppliers, reliance on the NMDP for public-unit distribution, regulatory compliance, and collectability of international license receivables. India royalties reached the $1.0 million annual cap; $900,000 of cumulative royalties remained receivable at year-end.
- A Florida contract-breach lawsuit remains unresolved. The company disputes the claims, cannot estimate a possible loss range, and accrued no amount as of November 30, 2019. The filing notes an unfavorable outcome could affect a particular quarter.
- Disclosure-control reporting is inconsistent: the evaluation section states disclosure controls and procedures were not effective, while a later section says management concluded disclosure controls and internal controls over financial reporting were effective. The auditor did not audit internal control effectiveness. The filing also says the company was not deemed a timely filer because an amended 2015 Form 8-K, including required PrepaCyte pre-acquisition financial statements and pro forma information, had not been filed.
- The independent auditor issued an unqualified opinion on the FY2019 financial statements. The filing’s Item 1A states “Risk Factors: Not applicable,” despite the business and MD&A describing risks and uncertainties.
Most important facts for investors to verify
- Whether recurring storage-fee growth and the increase in new client specimens continue, and whether prepaid-plan mix sustains operating cash flow.
- The sales pace, remaining recoverable value and future impairment exposure of the approximately 6,000-unit public cord blood inventory, as well as future Cord:Use earnout payments.
- Debt repayment capacity, interest-rate exposure under the LIBOR-based loan, and the company’s liquidity after scheduled FY2020 and FY2021 principal payments.
- The status and potential outcome of the unresolved lawsuit and the company’s disclosure-control remediation, including the overdue amended 2015 Form 8-K.
- Collection of the $900,000 India royalty receivable and other international receivables, and the extent to which annual royalty caps constrain future license income.