Cryo-Cell International, Inc. — Q1 FY2021 10-Q
Reporting period: Three months ended February 28, 2021; comparative quarter ended February 29, 2020. The company provides cellular processing and cryogenic storage services, principally for family-use cord blood and tissue, and also sells PrepaCyte CB products and public-bank cord blood units.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $6.861 million | $7.621 million |
| Gross profit and margin | $4.848 million; 70.7% | $5.118 million; 67.2% |
| Operating income and margin | $1.235 million; 18.0% | $1.249 million; 16.4% |
| Net income | $693,590 | $686,966 |
| Basic / diluted EPS | $0.09 / $0.08 | $0.09 / $0.08 |
| Operating cash flow | $2.662 million | $2.616 million |
- Revenue declined 10%, principally due to fewer new domestic cord-blood specimens processed. Processing and storage fees fell 9%; recurring annual storage-fee revenue rose 9%.
- Cost of sales fell 20% to $2.012 million, and selling, general and administrative expenses fell 11% to $3.433 million. Net income edged up despite lower revenue.
- Cash and cash equivalents were $11.278 million at February 28, up $917,000 from November 30, 2020. Operating cash flow was partly offset by $1.775 million of note repayments and $162,000 of investing outflows.
- Net note payable was $4.186 million, including $3.1 million current. The company reported total current assets of $18.696 million and current liabilities of $29.845 million; the resulting current ratio was approximately 0.63. Current liabilities include the Duke license payment obligation.
- Deferred revenue was $36.832 million, including $8.881 million current, representing customer payments for services to be provided in future periods.
Material changes and unusual items
- Duke license: On February 23, 2021, the company entered an exclusive Patent and Technology License Agreement. It recorded a $58.270 million Duke license asset and corresponding license liabilities, largely reflecting the present value of license fees, minimum royalties, equity consideration and related costs. A $5 million license-fee installment was due; after crediting $500,000 in prior option fees, the company transferred $4.889 million to Duke on March 8, 2021, including patent-related costs.
- The agreement also requires future license-fee installments of $5 million in 2022 and $2 million in 2023, royalties generally ranging from 7% to 12.5% of net sales, escalating minimum annual royalties beginning in year two, a $2 million clinical-trial milestone payment in specified circumstances, and additional share issuances upon execution and certain sales and market-cap milestones.
- The company recorded a $152,394 increase in the fair value of Cord:Use contingent consideration, versus a $51,412 decrease in the prior-year quarter. The estimate uses significant unobservable assumptions, and actual payments may differ materially.
- In January 2021, the company extended a lease for 36 months, adding $780,070 to both operating lease assets and liabilities.
Outlook, commentary and risks
- Management expects cash, marketable securities and operating cash flows to be sufficient for known cash needs for at least 12 months. It anticipates approximately $1 million of discretionary capital expenditures over the next 12 months and expects to fund them with cash on hand and future operating cash flows. The filing notes the future Duke installments and says weaker revenue or higher expenses could require spending reductions, deferrals or financing; no financing assurance is given.
- The company reported that COVID-19-related changes in consumer buying patterns reduced new-client sales. It expects results, including sales, earnings and cash flows, may remain affected, and says recovery timing is uncertain. No quantitative earnings or revenue guidance is provided.
- Management intends to explore Duke-related treatments and potentially expand into biopharmaceutical manufacturing and infusion clinics, subject to regulatory approvals and commercial execution. These plans carry development, regulatory, funding and profitability risks.
- Other stated risks include competition, lower demand for cord-blood storage, specimen-storage failures, information-system compromises, regulatory changes, licensee performance, litigation and the uncertain value and recoverability of public-bank inventory. The company reported no material off-balance-sheet arrangements and said disclosure controls were effective; it reported no material internal-control changes during the quarter.
- Management said it continues to review strategic alternatives, which may include acquisitions, investments, share repurchases, deregistration or a going-private transaction; pursuing options could require substantial debt or equity capital.
Important facts for investors to verify
- How the company plans to fund Duke’s scheduled license fees and minimum royalties, and whether the Duke-related programs can achieve required regulatory and commercial milestones.
- Whether new-client sales recover from the COVID-19-related decline and whether recurring storage revenue can sustain results if enrollment remains weak.
- The assumptions behind the $58.270 million Duke license asset and related liabilities, including royalty and minimum-payment estimates, and the potential dilution from equity milestones.
- The composition and recoverability of public cord-blood inventory, given the prior-year $1.284 million impairment and sensitivity of inventory value to unit sales.
- The timing and terms of the remaining note repayments, liquidity needs, and the impact of the low current ratio, while distinguishing deferred revenue from funded debt.