Cryo-Cell International, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended February 28, 2013; comparative period ended February 29, 2012. Unaudited consolidated results.
Business context
Cryo-Cell processes and stores umbilical cord blood stem cells, with recurring storage fees and international license royalties as additional revenue sources. The company said it was refocusing on cord blood and cord tissue while continuing development of menstrual stem cell technology.
Financial performance and liquidity
- Revenue: $4.60 million, up 10% from $4.18 million. Processing and storage fees were $4.28 million, up 11%; licensee income was $324,000, down 5%.
- Profitability: Operating income was $563,000 versus an operating loss of $80,000. Net income was $244,000 ($0.02 per basic and diluted share), compared with a $1.68 million net loss ($0.15 per share).
- Costs: Cost of sales rose 25% to $1.28 million and was 30% of processing and storage revenue, versus 27%. Selling, general and administrative expense fell 15% to $2.70 million.
- Cash flow: Operating cash flow was $506,000, compared with $158,000. Investing used $77,000 and financing used $247,000, primarily for share repurchases. Cash and cash equivalents increased $182,000 to $2.86 million.
- Liquidity and obligations: Current assets were $9.32 million and current liabilities $10.41 million, a working-capital deficit of about $1.09 million. Restricted cash was $2.55 million. Deferred revenue totaled $14.71 million. Stockholders’ deficit was $8.87 million.
- Debt: Management reported no long-term indebtedness. The balance sheet nevertheless included a $2.30 million long-term liability for revenue-sharing agreements; quarterly interest expense was $251,000.
- Capital allocation: The company repurchased 107,128 shares for approximately $247,000 during the quarter.
Material changes and management outlook
- Revenue growth was primarily driven by a 12% increase in specimens processed and a 4% rise in recurring annual storage-fee revenue. Management attributed the return to profit partly to lower SG&A and higher revenue.
- SG&A declined partly because sales and marketing expense fell about $313,000, stock-option expense fell about $169,000, and professional services fell about $77,000. Cost of sales increased 25%.
- The prior-year quarter included a $1.23 million loss on extinguishment of the Bio-Stor revenue-sharing agreement; no comparable charge occurred in Q1 2013.
- Management anticipated approximately $750,000 of discretionary capital expenditures over the next 12 months, primarily for software and property and equipment. It said available cash, marketable securities and expected operating cash flows should fund known needs for at least 12 months, while warning that weaker revenue or higher costs could require spending reductions or financing.
- No specific revenue or earnings guidance was provided. The filing cautions that interim results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Former CEO Mercedes Walton’s arbitration seeks $5 million in damages and other relief; up to $1 million may be covered by insurance. The company had accrued approximately $950,000 for potential severance, disputes her entitlement, and intends to defend itself. Post-trial briefs were due May 1, 2013.
- A separate damages lawsuit, for which the claim exceeds $75,000 but is not quantified, had no recorded accrual; trial was scheduled for September 3, 2013. The company said an unfavorable outcome in litigation could materially affect a particular quarter.
- $2.34 million remained in an irrevocable grantor trust associated with change-in-control obligations; the company cannot direct the trustee to return the funds. Restricted cash also includes this trust balance.
- Mexico’s amended license arrangement provides for installment payments; at quarter-end the company reported a $976,000 receivable and $970,000 deferred revenue related to the arrangement. Affiliates in Venezuela and Ecuador had received termination notices for payment defaults; the company was discussing new agreements and continued processing and storage specimens during negotiations.
- Key business risks include regulation, competition, demand for cord blood storage, market acceptance of newer services, licensee performance and collections, facility or information-system failures, and litigation. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue and specimen-processing growth persist, and whether cost of sales continues to rise faster than revenue.
- Cash generation, the working-capital deficit, use of restricted cash, and the basis for management’s 12-month liquidity assessment.
- Collection of the Mexico receivable and the outcome of negotiations with Venezuela and Ecuador affiliates.
- Developments in the Walton arbitration and other litigation, including potential exposure beyond recorded accruals and insurance coverage.
- Revenue-sharing obligations and related interest expense, alongside management’s statement that the company has no long-term indebtedness.