CRYO-CELL INTERNATIONAL, INC. — Q1 FY2012 Form 10-Q
Business and period: Cryo-Cell processes and stores umbilical cord blood stem cells, earns recurring storage fees and international license royalties, and continues development of menstrual stem-cell services. This unaudited report covers the three months ended February 29, 2012, compared with the three months ended February 28, 2011.
Financial performance and liquidity
| Metric | Q1 FY2012 | Prior-year quarter |
|---|---|---|
| Total revenue | $4.179 million | $4.473 million |
| Operating income (loss) | ($80,000) | $686,000 |
| Net income (loss) | ($1.682 million) | $233,000 |
| Basic and diluted EPS | ($0.15) | $0.02 |
| Cash from operations | $158,000 | $238,000 |
- Revenue declined 7%. Processing and storage fees fell 8%, principally as specimens processed decreased 26%; recurring annual storage fee revenue rose 8%. Licensee income increased 6% to $342,000.
- Cost of sales decreased 12% to $1.027 million. Selling, general and administrative expenses increased to $3.161 million; management attributed the increase mainly to higher sales and marketing spending and stock compensation. Operating expenses exceeded revenue by $80,000.
- The net loss included approximately $1.227 million of expense from extinguishing the Bio-Stor revenue-sharing agreement. Interest expense fell 24% to $299,000; management expects the cancellation to save approximately $400,000 annually.
- Cash and cash equivalents were $4.320 million at quarter-end, down from $6.305 million at November 30, 2011. Operating cash flow was positive, but financing activities used $3.054 million, including the $2.3 million Bio-Stor payment and $754,000 of share repurchases. Investing activities provided $911,000, largely from redeeming $1.002 million of investments.
- Current assets were $11.240 million and current liabilities $9.714 million, yielding working capital of approximately $1.526 million. Restricted cash was $2.7 million. The company reported no long-term indebtedness and no credit line; however, it had $2.85 million of long-term revenue-sharing liabilities.
- Total assets were $16.491 million and stockholders’ deficit was $4.598 million at February 29, 2012. The company repurchased 415,117 shares during the quarter.
Changes, outlook and risks
- Management said cash and expected operating cash flows should fund known needs for at least 12 months. It anticipated approximately $750,000 of nondiscretionary capital expenditures over the next 12 months. This outlook depends on revenue growth and expense control; if expectations are not met, spending could be reduced or deferred, and financing may be considered. No formal earnings guidance was provided.
- The company refocused on cord blood and cord tissue while continuing menstrual stem-cell development. Effective February 1, 2012, it increased the new-client transplant-failure warranty from $50,000 to $75,000; it reported no historical claims and held a $14,000 reserve for warranty programs.
- International license risks include termination or payment uncertainty: the Curacao licensee notified the company it was terminating its agreement; Germany’s collectability remained uncertain; and a March 2012 Pakistan amendment released an $80,000 license-fee balance. Mexico’s amended arrangement provides $50,000 monthly installments, with no future royalties or other license payments.
- Legal contingencies include a former CEO’s $5 million arbitration demand; the company accrued approximately $950,000 for potential severance but disputes entitlement. Another monetary-damages suit seeks more than $75,000, but the company could not estimate a loss and recorded no accrual. Hearings or trial were scheduled for 2013. The company stated outcomes remain uncertain.
- Disclosure controls and procedures were reported ineffective because of a material weakness in accounting for and documenting non-routine transactions. Management implemented remedial procedures and engaged consultants, but said the controls had not operated long enough to conclude they were effective.
- Other stated risks include declining demand for private cord-blood storage, competition and regulation, licensee performance and collection, acceptance of newer stem-cell services, storage-facility or information-system failures, and litigation.
Key facts for investors to verify
- Whether the decline in new specimen processing and revenue continues, and whether increased marketing spending produces customer growth.
- Cash availability and forecast assumptions, including the accessibility and purpose of the $2.7 million restricted-cash balance.
- The Bio-Stor settlement accounting: the statements report an extinguishment loss of $1,227,390, while MD&A gives $1,227,690.
- The status and potential cost of the former CEO arbitration, the other damages litigation, and the accrued severance obligation.
- Whether the remedial controls operate effectively and whether further non-routine accounting issues emerge.
- Potential dilution and compensation cost from substantial option grants, including 1.13 million performance- and market-based options granted in the quarter.