CRYO CELL INTERNATIONAL INC quarterly report, Q1 FY2017

Cryo-Cell International, Inc. — Q1 FY2017 Form 10-Q

Reporting period: Three months ended February 28, 2017; comparisons are to the three months ended February 29, 2016. The company provides cord-blood and cord-tissue processing and storage services and sells PrepaCyte CB processing products.

Financial performance and liquidity

Metric	Q1 FY2017	Prior-year quarter
Revenue	$5.777 million	$5.152 million
Operating income	$1.116 million	$156,000
Net income (loss)	$487,000	($123,000)
Basic/diluted EPS	$0.07 / $0.07	($0.01) / ($0.01)
Operating cash flow	$429,000	$101,000
Cash and cash equivalents at period-end	$3.507 million	$3.582 million

• Revenue increased 12%. Processing and storage fees rose 12%, with recurring annual storage revenue up 10% and new specimens processed up 15%; product revenue was $165,000. Licensee income was zero.
• Gross profit was approximately $4.261 million, or 73.8% of revenue, compared with $3.804 million, also approximately 73.8%. Operating margin increased to approximately 19.3% from 3.0%; net margin was approximately 8.4% versus negative 2.4%.
• Cost of sales rose 12%, broadly in line with revenue. SG&A fell 14% to $3.098 million, mainly reflecting lower marketing campaign costs, stock compensation and accounting professional fees. Interest expense increased to $297,000 from $261,000; income tax expense was $306,000 versus none in the prior-year quarter.
• Cash from operations and $136,000 of net investment sales were offset largely by $500,000 of note repayments and $89,000 of share repurchases, leaving cash up about $7,000 for the quarter.
• At February 28, current assets were $9.322 million and current liabilities $12.591 million, a $3.269 million working-capital deficit and a current ratio of about 0.74. Cash plus marketable securities totaled approximately $3.984 million.
• Reported note payable was $9.354 million net of unamortized debt issuance costs, including $2.0 million classified current. The underlying note principal was $9.650 million. The loans are secured by company assets; the CrowdOut subordinated loan bears 12% interest and matures in July 2021. The TCB term loan bears interest at 3.75% plus LIBOR and matures in July 2021.

Changes, outlook and material matters

• The business returned to quarterly profitability, with the improvement driven by higher revenue and lower SG&A. The core cord-blood service segment generated $1.084 million in operating income; PrepaCyte CB generated $32,000.
• Management anticipated about $500,000 of discretionary capital expenditures over the next 12 months, mainly for software enhancements and property and equipment. It expected cash, marketable securities and operating cash flows to cover known needs for at least 12 months, but noted that weaker-than-expected revenue or higher expenses could require spending reductions or additional financing. The company had no line of credit.
• No formal earnings or revenue guidance was provided. Management said the board and executives continued to review strategic options, potentially including transactions, investments, repurchases of revenue-sharing interests, deregistration or going private; some options could require substantial debt or equity capital.
• The company had a $17,000 reserve for its cord-blood product warranty programs. A pending contract-breach lawsuit seeks damages exceeding $15,000; the company disputes the claims, cannot estimate a possible loss, and accrued no amount.
• PrepaCyte CB goodwill was fully impaired in FY2016: the company recorded $1.778 million of goodwill impairment and $211,000 of intangible-asset impairment. No goodwill remained on the February 2017 balance sheet. These were prior-period charges, not Q1 FY2017 expenses.
• The company repurchased 19,729 shares for about $89,000 in the quarter. It had repurchased approximately 5.734 million shares cumulatively by February 28 and had 2,266,100 shares remaining under the authorized program. The term loan proceeds had also funded earlier share repurchases.
• Management identified risks including competition, reduced demand or storage renewals, regulation, facility or information-system failures, international licensee performance, litigation, and the possibility that technological or medical advances could diminish demand. Management also cited uncertainty in realizing deferred tax assets; the balance sheet included $9.217 million of deferred tax assets and a $2.301 million valuation allowance.

Important facts for investors to verify

• Whether revenue growth, new specimen processing and recurring storage-fee trends continued after the quarter, and whether the absence of licensee income persists.
• Debt repayment terms, variable-rate exposure, collateral and covenant compliance, alongside the $3.269 million working-capital deficit and planned capital spending.
• The basis for management’s 12-month liquidity expectation and how much of reported deferred revenue represents future service obligations.
• The outcome and potential costs of the pending lawsuit, and the assumptions supporting the warranty reserve and deferred-tax-asset valuation.
• The filing’s controls discussion is internally unclear: it reports management’s conclusion that disclosure controls are effective, but also contains language that they are ineffective at ensuring timely reporting. It further says the company was not deemed a timely filer because a required amended acquisition-related Form 8-K had not been filed. Verify the status and implications of that filing.