Cryo-Cell International, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended May 31, 2014. The filing is unaudited. Cryo-Cell processes and cryogenically stores stem-cell specimens, principally umbilical cord blood, and earns service fees and international license royalties.
Financial performance
| Metric | Three months ended May 31, 2014 | Six months ended May 31, 2014 |
|---|---|---|
| Revenue | $4.893 million; prior year $4.859 million | $10.213 million; prior year $9.459 million |
| Operating income | $562,000; prior year $89,000 | $1.367 million; prior year $652,000 |
| Net income | $216,000; prior-year net loss $244,000 | $613,000; prior year $348 |
| Basic earnings per share | $0.02; prior year loss of $0.02 | $0.06; prior year reported as $0.00 |
- Six-month revenue rose 8%. Processing and storage fees increased 3%, including an 8% rise in recurring annual storage revenue; licensee income increased 74%, largely due to approximately $794,000 recognized after Mexico paid its remaining balance. That agreement is terminated, so the payment is not an ongoing revenue source.
- New cord-blood specimens processed fell 18% for the six-month period, principally because international affiliate specimens declined 51%, especially from Ecuador. For the quarter, new specimens fell 14%.
- Six-month cost of sales rose 6% and was 28% of revenue, unchanged year over year. Quarterly cost of sales was 30% of revenue versus 28% a year earlier, attributed partly to laboratory costs for new processing technology. Approximate gross margin was 72% for the six-month period versus 72% a year earlier.
- Six-month SG&A rose 4% to $5.876 million, including about $354,000 of legal fees related to the shareholder derivative case. Quarterly SG&A declined 7%, partly because legal fees were lower.
- Interest expense was $527,000 for six months, primarily related to revenue-sharing agreements. Equity in affiliate losses was $190,000, including a $112,500 valuation allowance associated with Saneron note advances and compensation-related items.
Cash, liquidity and capital resources
- At May 31, cash and cash equivalents were $3.404 million, restricted cash $204,000, and marketable securities and other investments $141,000. Cash and cash equivalents declined $521,000 from November 30, 2013.
- Six-month operating cash flow was $362,000, down from $1.089 million. Investing activities provided $475,000, mainly reflecting a $764,000 release of restricted trust cash, partly offset by equipment, securities and Saneron investment spending. Financing activities used $1.359 million, primarily for $1.407 million of share repurchases.
- Current assets were $8.420 million against current liabilities of $8.786 million, a working-capital deficit of approximately $366,000. Current liabilities include $6.405 million of deferred revenue, reflecting customer storage obligations rather than conventional funded debt.
- The company reported no long-term indebtedness and no line of credit. It had a $2.3 million long-term liability under revenue-sharing agreements.
- Stockholders’ deficit was $9.729 million. The company repurchased 636,531 shares during the six months at an average $2.21 per share. It reported 10,139,190 shares outstanding at May 31; the cover page reports 10,109,750 outstanding as of July 3.
Outlook, risks and notable items
- Management expected cash, marketable securities and future operating cash flow to cover known needs for at least 12 months. It anticipated approximately $500,000 of discretionary capital expenditures over the next 12 months. This is not a revenue or earnings forecast; no specific financial guidance was provided.
- Management cautioned that weaker-than-expected revenue growth or higher expenses could require spending reductions or deferred expenditures, and that financing might be considered if appropriate and available on acceptable terms.
- Key stated risks include competition and public cord-blood banks, lower customer enrollment or storage renewals, regulatory changes, international affiliate performance, facility or information-system failures, litigation, and the possibility that stem-cell preservation becomes obsolete. The company also said it had not used a third party to physically count all stored specimens.
- The company discontinued pursuing certain menstrual-stem-cell patents and trademarks, recording a $26,000 write-off in the six-month period, compared with $379,000 a year earlier. Management said the write-off was not expected to affect core operations; the commercial menstrual-stem-cell service had been paused for lack of market acceptance.
- A shareholder derivative complaint remained pending, with a dismissal hearing scheduled for July 9, 2014. The company’s lawsuit against former legal counsel was confidentially settled on June 2, 2014. A separate revenue-sharing lawsuit was settled in 2013 for $525,000. Management stated that current matters were not expected to materially affect the company overall, while acknowledging that an adverse outcome could materially affect a particular quarter.
- The company stated its disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much reported earnings and license revenue depend on the nonrecurring Mexico payment, and how recurring royalties develop after termination of that agreement.
- Whether annual storage-fee growth can offset continuing declines in new specimen processing, particularly from international affiliates and Ecuador.
- Cash generation after share repurchases, the company’s ability to maintain liquidity given its working-capital deficit, and the assumptions behind the 12-month sufficiency assessment and planned capital spending.
- The status, potential costs and outcomes of the shareholder derivative litigation and any obligations under revenue-sharing agreements.
- The basis for the stock repurchase program and the difference between May 31 and July 3 reported shares outstanding.