Cryo-Cell International, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended November 30, 2012; comparison is with fiscal 2011. Although the request metadata says “2012 Q4,” this filing reports full-year results, not standalone quarterly results. The filing was signed February 28, 2013.
Business context
Cryo-Cell processes and cryogenically stores cellular material, with its core business in family umbilical cord blood banking. It also offers cord tissue, menstrual stem cell and reproductive tissue storage services, and earns revenue from international licensees. The company reported more than 275,000 stored specimens worldwide across it and its affiliates; approximately 145,000 were stored at its Oldsmar, Florida facility.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $17.970 million | $17.918 million |
| Processing and storage fees | $16.628 million | $16.555 million |
| Licensee income | $1.342 million | $1.364 million |
| Gross profit / gross margin | $13.081 million / 72.8% | $13.519 million / 75.4% |
| Operating loss / operating margin | $(1.711) million / (9.5)% | $(0.277) million / (1.5)% |
| Net loss / basic loss per share | $(6.308) million / $(0.56) | $(2.096) million / $(0.18) |
| Cash provided by operating activities | $0.361 million | $0.819 million |
- Processing and storage fees rose slightly: recurring annual storage revenue increased 8%, while new specimens processed declined 12%. Management attributed higher net revenue per new specimen to pricing and fewer discounts; cord tissue service growth also contributed.
- Cost of sales increased 11% to $4.888 million, or 27% of revenue versus 25% in 2011. SG&A rose 16% to approximately $14.426 million, principally reflecting sales and marketing investment, a national sales force and higher stock compensation.
- Interest expense declined 30% to $1.022 million, partly due to RSA terminations. The company also recorded a $1.596 million loss on extinguishment of revenue sharing agreements.
- Cash and cash equivalents were $2.677 million, down $3.628 million year over year. Restricted cash was $2.577 million, including funds in an irrevocable executive-benefit trust. Current assets were $9.315 million and current liabilities $10.664 million (current ratio approximately 0.87).
- Net cash used in financing was $4.951 million, including $3.248 million for RSA buyouts and $1.703 million to repurchase 792,374 shares. Investing activities provided $0.962 million, largely from marketable securities sales.
- The balance sheet showed $21.328 million in total liabilities and an $8.998 million stockholders’ deficit. The company reported no long-term indebtedness; remaining revenue-sharing-agreement liabilities totaled $2.3 million.
Material changes, outlook and risks
- The net loss widened substantially, reflecting the RSA extinguishment charge, higher operating expenses and a $1.719 million deferred-tax valuation allowance charge. The valuation allowance against deferred tax assets was $10.947 million at year-end; the company concluded realization was not more likely than not given recent losses.
- The company settled or bought out certain revenue-sharing interests for $3.248 million in cash. It reported $2.3 million of RSA liabilities remaining and $0.419 million accrued for interest owed to RSA holders.
- Management said cash, marketable securities and expected operating cash flows should fund known needs for at least 12 months. It planned approximately $750,000 of discretionary capital spending over the next 12 months, primarily for software and equipment. If revenue growth falls short or expenses exceed expectations, it may reduce or defer spending or seek financing; no financing assurance was provided.
- Mexico’s amended license arrangement provides for $1.863 million in installments and ends the license relationship once paid, reducing future license income. Affiliates in Venezuela and Ecuador received termination notices over payment defaults; subsequent payments were received and new agreements were under discussion.
- Principal risks include dependence on consumer acceptance of private cord blood storage and discretionary spending; competition from private and public banks; uncertain scientific and commercial prospects for newer services; regulatory compliance; international licensee performance; and technology changes. The Florida storage facility faces hurricane and continuity risks; the filing notes no redundant systems or formal disaster recovery plan and potentially insufficient insurance.
- Legal matters include former CEO Mercedes Walton’s $5 million arbitration claim, with up to $1 million potentially covered by insurance and a $950,000 severance accrual disputed by the company. A separate damages complaint seeks more than $75,000; the company said the loss could not be estimated and recorded no accrual. A hearing in the Walton matter began in February 2013 and was scheduled to reconvene in March; the other case was scheduled for trial in September 2013.
- Management reported that a prior material weakness in internal controls concerning accounting for non-routine transactions was remediated by November 30, 2012 and concluded controls were effective. The independent auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Important facts for investors to verify
- Reconcile the roughly flat revenue and increase in annual storage revenue with the 12% decline in newly processed specimens, and monitor customer retention, bad debts and discounts.
- Assess the sustainability of operating cash generation against the company’s cash decline, negative working capital, restricted trust funds and planned capital expenditures.
- Review the remaining RSA obligations, their future cash costs and the accounting treatment of payments and liabilities.
- Track the Walton arbitration, the unaccrued damages suit and any resulting legal costs or liabilities.
- Monitor licensee collections and replacement agreements, especially Mexico, Venezuela and Ecuador, and the effect on recurring license income.
- Evaluate whether the company’s new sales efforts and newer services can produce profitable growth, given the larger net loss, higher SG&A and tax valuation allowance.