Cryo-Cell International, Inc. — Q3 2020 Form 10-Q
Business context and period. Cryo-Cell provides cord blood and tissue processing and cryogenic storage, manufactures PrepaCyte CB, and operates public cord blood banking. This unaudited quarterly report covers the three and nine months ended August 31, 2020; comparisons are to the corresponding 2019 periods. Fiscal year-end is November 30.
Financial performance and liquidity
| Metric | Three months ended Aug. 31, 2020 | Nine months ended Aug. 31, 2020 |
|---|---|---|
| Revenue | $8.11 million, down 1% year over year | $23.61 million, down 1% |
| Operating income | $2.48 million, versus $1.99 million | $5.48 million, versus $3.34 million |
| Net income | $784,467, versus $1.12 million | $2.42 million, versus $1.45 million |
| Basic / diluted EPS | $0.10 / $0.10 | $0.32 / $0.30 |
| Gross margin | 70.9%, versus 68.5% | 68.9%, versus 67.8% |
| Operating margin | 30.6%, versus 24.2% | 23.2%, versus 14.0% |
Cash flow. Nine-month operating cash flow was $5.49 million, compared with $5.17 million. Investing activities provided $306,000, including $708,000 from marketable-security liquidations, offset by a $350,000 Duke patent option payment and $52,000 of capital expenditures. Financing activities used $4.23 million, including $2.32 million of debt repayments and $1.90 million to terminate a revenue-sharing agreement. Cash increased $1.57 million to $8.11 million.
Balance sheet and debt. At August 31, cash was $8.11 million and marketable securities were $63,000. Current assets were $16.76 million and current liabilities $14.43 million (current ratio approximately 1.16). Total assets were $44.44 million; total liabilities were $48.48 million, leaving a $4.04 million stockholders’ deficit. Note principal was $6.78 million ($6.70 million net of issuance costs), including $3.10 million current; maturity is July 2021. Deferred revenue totaled $35.31 million, including $9.11 million current.
Material changes and notable items
- Revenue was broadly stable, but processing and storage fees declined. For the first nine months, recurring annual storage-fee revenue rose 9%, while new domestic cord blood specimens processed fell 8%. Product revenue increased to $201,000 from $71,000; public banking revenue declined to $485,000 from $529,000.
- Operating income improved year over year in both periods. For the nine-month comparison, the absence of the prior-year $2.33 million public-inventory impairment was a significant factor; cost of sales and SG&A also declined 4% and 1%, respectively.
- Third-quarter net income fell despite higher operating income, partly because the company recorded a $1.07 million noncash loss on extinguishing revenue-sharing obligations. The related termination required a $1.94 million cash payment and ended the Erie Group’s share of specified storage revenues; the parties also agreed to dismiss the related complaint with prejudice.
- Debt declined from $9.11 million principal at November 30, 2019 to $6.78 million at August 31, 2020. Interest expense for the nine-month period fell to $1.07 million from $1.25 million.
- The company paid Duke $350,000 for an exclusive six-month patent option, with a possible six-month extension for $150,000. It said it anticipates opening a clinic to expand access to treatments under a Duke FDA Expanded Access Program.
Outlook, risks, and management commentary
- No specific revenue or earnings guidance was provided. Management expects approximately $500,000 of discretionary capital expenditures over the next 12 months and believes cash, marketable securities, and operating cash flows will fund known needs for at least that period. The company has no line of credit and cautioned that weaker revenue or higher costs could require spending reductions, deferrals, or financing.
- Management stated that COVID-19’s effects on sales, operations, supply chain, financial position, results, and cash flows could be materially adverse, and that the impact could not yet be predicted.
- Other disclosed risks include competition and declining demand for cord blood storage, regulation, reliance on licensees and royalty collections, specimen-storage failure or disasters, cybersecurity, litigation, and the possibility that medical or technological developments make the business less relevant. The company holds approximately 6,000 public cord blood units; recoverability and future sales trends affect inventory valuation.
- Management said the board and management continue to review strategic alternatives, potentially including acquisitions or mergers, investments, repurchases of revenue-sharing interests, deregistration, or a going-private transaction. These options may require substantial debt or equity financing.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the nine months.
Investor verification priorities
- Assess whether recurring storage-fee growth can offset the lower number of new specimens processed and whether COVID-19 affects customer enrollment and collections.
- Review the quality and collectability of receivables, including approximately $1.35 million due from LifeCell, and the adequacy of the allowance for doubtful accounts.
- Verify the debt repayment and maturity requirements, cash-flow assumptions, and management’s stated 12-month liquidity outlook.
- Distinguish recurring operating performance from the $1.07 million revenue-sharing extinguishment loss, $1.94 million settlement payment, and absence of the prior-year inventory impairment.
- Monitor public-bank inventory sales and valuation, the Cord:Use contingent earnout (reported at $3.28 million and based on Level 3 estimates), and the Duke patent option and proposed clinic plans.
- Review the strategic-alternatives process and any potential financing, dilution, or governance implications; as of October 12, 2020, 7,545,613 common shares were outstanding.