Business context and reporting period
Cryo-Cell International, Inc. (CRYO CELL) filed this unaudited Form 10-Q for the three months ended February 28, 2015, its first fiscal quarter. The company processes and cryogenically stores umbilical cord blood stem cells, with revenue primarily from processing and storage fees and, to a lesser extent, licensee royalties. It said it had ceased offering commercial menstrual stem cell services for the time being because of limited market acceptance.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $4.843 million | $5.320 million |
| Operating income | $625,000 | $805,000 |
| Net income | $286,000; $0.03 per basic and diluted share | $397,000; $0.04 per basic and diluted share |
| Operating cash flow | $329,000 provided | $107,000 used |
- Gross profit was approximately $3.569 million, or 73.7% of revenue, versus $3.986 million, or 74.9%, in the prior-year quarter. Operating margin was approximately 12.9% versus 15.1%; net margin was approximately 5.9% versus 7.5%.
- Cash and cash equivalents were $3.550 million at quarter-end, up from $3.279 million at November 30, 2014. Marketable securities were $98,000. Cash increased by $271,000, after $19,000 used in investing activities and $39,000 used for treasury-stock purchases.
- Current assets of $8.847 million slightly exceeded current liabilities of $8.703 million, leaving working capital of approximately $144,000. Deferred revenue totaled $16.257 million, including current and long-term portions. The company reported no long-term indebtedness; it also carried a $2.3 million long-term revenue-sharing liability.
- Stockholders’ deficit was $10.281 million. The company reported an approximately $10.332 million valuation allowance against deferred tax assets and no U.S. income tax expense for the quarter; foreign income tax expense was approximately $25,000.
Material changes versus the prior comparable period
- Revenue declined 9%. Processing and storage fees increased 7%, including a 13% rise in recurring annual storage-fee revenue and a 4% increase in new cord-blood specimens processed. Licensee income fell 82%, to $169,000 from $963,000.
- The prior-year quarter included approximately $794,000 from Mexico’s final payment under a terminated license arrangement; that payment did not recur. Current-quarter licensee income was royalties from India.
- Net income fell 28%, principally reflecting lower revenue. Cost of sales decreased 5% and selling, general and administrative expenses decreased 7%; the latter comparison benefited from approximately $205,000 of prior-year legal fees.
- Operating cash flow improved from cash use of $107,000 to cash generation of $329,000. Equity-method losses from Saneron, in which Cryo-Cell held an approximately 33% interest, fell to $8,000 from $114,000.
Outlook, risks, contingencies and unusual items
- Management expected cash, marketable securities and future operating cash flows to fund known cash needs for at least 12 months. It anticipated approximately $500,000 of discretionary capital expenditures over the next 12 months, principally for software enhancements and property and equipment, funded from cash on hand and operations. The company had no line of credit and said financing could be considered if appropriate; no specific revenue or earnings guidance was provided.
- Management said cash needs depend on increasing cord-blood and cord-tissue service revenue and controlling discretionary expenses. If revenue growth falls short or expenses exceed expectations, the company may reduce or defer expenditures; the filing cautions this could adversely affect sales activity and new-service development.
- Disclosed business risks include increased regulation and competition, lower demand or storage-fee renewals, facility failure or disaster, information-system compromise, licensing and international-affiliate performance, litigation, and the possibility that technological or medical advances could make preservation services obsolete.
- Disclosure controls and procedures were deemed ineffective. Management cited a material weakness in identifying and applying accounting treatment for non-routine transactions and related documentation, and said it was implementing a review process and using qualified consultants.
- Subsequent to quarter-end, the board increased the share-repurchase authorization from three million to six million shares; the company also reported buying an additional 77,502 shares. As of February 28, it had repurchased 2,231,532 shares overall. The company’s shareholder-rights plan generally treats ownership of 20% or more as an acquiring-person threshold, subject to stated exceptions.
- A March 10, 2015 complaint sought to compel Cord Blood America, Inc. to hold an annual shareholder meeting to elect directors. The company said ordinary-course legal matters could still produce an unfavorable outcome material to a particular quarter. Other described lawsuits had been settled or dismissed. The filing lists no separate specific amount for the new complaint.
- The company’s $75,000-or-$50,000 specimen warranty reserve was approximately $17,000. It reported no historical warranty claims and does not maintain insurance for the program. The Cryo-Cell Cares reimbursement program was no longer offered to new clients after October 13, 2014.
Important facts for investors to verify
- Whether recurring processing and storage revenue can offset the absence of the one-time Mexico license payoff and support sustained profitability and operating cash flow.
- Trends in new specimen processing, annual storage renewals, pricing and customer discounts following the February 2015 pricing-plan changes.
- Progress in remediating the material weakness in accounting controls, including management’s planned follow-up disclosure.
- Actual capital spending, liquidity and cash generation against the stated 12-month sufficiency assessment, particularly given limited working capital and no credit line.
- Developments in the Cord Blood America shareholder-meeting litigation, other contingencies, and use of the expanded repurchase authorization.