CRYO CELL INTERNATIONAL INC quarterly report, Q1 FY2018

Business context and reporting period

Cryo-Cell International, Inc. filed this unaudited Form 10-Q for its first quarter of fiscal 2018, the three months ended February 28, 2018. Its core business is processing and long-term cryogenic storage of umbilical cord blood stem cells; it also manufactures PrepaCyte CB and earns income from licensing arrangements.

Financial performance and position

Processing and storage fees were $6.200 million, versus $5.612 million; product revenue declined to $28,000 from $165,000. Gross margin was approximately 74%, compared with 74% in the prior-year quarter; operating margin fell to approximately 16% from 19%. Interest expense was $281,000, versus $297,000.

Operating cash flow included a $775,000 increase in deferred revenue and significant noncash adjustments, including $3.047 million of deferred tax expense and $556,000 of stock compensation. Investing activities used $482,000, including $254,000 for property and equipment and $200,000 for an intangible asset. Financing activities used $498,000, principally from $500,000 of debt repayment.

Material changes versus the prior comparable period

• Revenue grew 8%, which management attributed primarily to a 10% increase in processing and storage fees. Recurring annual storage revenue rose 8%, and new domestic specimens processed increased 9%.
• Cost of sales increased 6%; selling, general and administrative expense rose 16% to $3.590 million. Management attributed the SG&A increase principally to approximately $478,000 more stock compensation from executive share awards, partly offset by lower professional fees.
• Despite higher revenue, operating income declined about 12%. The company reported a net loss mainly because of the tax charge associated with remeasuring deferred tax assets after the U.S. federal tax rate reduction.
• Cash increased $712,000 from November 30, 2017, while net debt carrying value declined about $473,000. Deferred tax assets decreased to $6.988 million from $10.035 million.

Outlook, commentary, risks and unusual items

• The quarter included approximately $2.985 million of income tax expense from the Tax Cuts and Jobs Act rate reduction to 21%; management said the lower rate reduced the deferred tax asset. The filing reports total income tax expense of $3.203 million.
• Management anticipates approximately $500,000 of discretionary capital expenditures over the next 12 months and expects cash, marketable securities and operating cash flows to cover known needs for at least 12 months. This depends on revenue growth and expense management; the company may reduce or defer spending or seek financing if necessary. It has no line of credit.
• Management identified strategic alternatives, potentially including acquisitions, investments, repurchases of revenue-sharing interests, deregistration or going private; pursuing options could require substantial debt or equity financing. No earnings or revenue guidance was provided.
• Risks include competition, lower demand or annual storage renewals, regulatory changes, international licensee performance, storage-facility or information-system failures, litigation, and the ability to commercialize or profit from products and initiatives.
• A Florida contract lawsuit seeks damages exceeding $15,000; the company disputes the claims, has accrued no amount, and says potential loss cannot be estimated. The filing also notes that an unfavorable outcome in legal matters could affect a particular quarter.
• After quarter-end, the company received notice that shares issued to certain executives under its 2012 incentive plan may have exceeded shares reserved under the plan. An independent board committee is reviewing the matter.
• The controls disclosure is internally inconsistent: it describes disclosure controls as effective, but also says they are ineffective in ensuring information is recorded, processed, summarized and reported on time. The filing further says the company is not a timely filer because it has not filed an amended 8-K with required PrepaCyte acquisition financial and pro forma information; management intended to file it later.

Important facts for investors to verify

• Confirm the earnings impact and deferred-tax-asset assumptions behind the $2.985 million tax remeasurement charge, and whether further tax adjustments are expected.
• Track recurring storage revenue, new specimen volumes, customer renewals and cash generation, including the contribution of prepaid storage plans to deferred revenue and operating cash flow.
• Review debt repayment terms, interest costs, and liquidity relative to the company’s modest $79,000 quarter-end working-capital surplus and planned capital spending.
• Monitor the independent committee’s findings on potentially excess executive-plan share issuances, related compensation accounting, and any resulting control or governance actions.
• Check whether the overdue amended acquisition 8-K was filed and seek clarification of the contradictory disclosure-controls statement.
• Follow the contract litigation and any changes to the company’s assessment of potential loss or required accruals.