Cryo-Cell International, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended August 31, 2017; unaudited. Cryo-Cell provides umbilical cord blood and tissue processing and storage services and manufactures PrepaCyte CB processing units. It also earns royalties from international licensees.
Financial performance and position
| Metric | Three months ended August 31, 2017 | Nine months ended August 31, 2017 |
|---|---|---|
| Revenue | $6.90 million, up 9% | $18.91 million, up 10% |
| Operating income | $1.45 million | $3.76 million |
| Net income | $652,019; diluted EPS $0.08 | $1.64 million; diluted EPS $0.21 |
| Operating margin | 21.1% | 19.9% |
| Operating cash flow | Not presented for the quarter | $3.61 million |
- Revenue growth was led by processing and storage fees, up 12% in the quarter and 11% for the nine-month period. New specimen processing volumes increased 14% and 13%, respectively. Nine-month product revenue rose to $342,031; licensee and royalty income declined to $820,877.
- Cost of sales increased 27% for the quarter and 17% for the nine months, outpacing revenue growth. SG&A fell 12% and 9%, respectively, partly due to lower bad-debt expense and professional fees. Nine-month gross margin was approximately 73.1%.
- At August 31, cash and equivalents were $4.67 million and marketable securities were $524,000. Current assets were $10.98 million versus current liabilities of $12.60 million, a working-capital deficit of $1.62 million and current ratio of approximately 0.87.
- Note payable was $8.00 million gross ($7.77 million net of issuance costs), including $2.00 million current. Total liabilities were $34.72 million; stockholders’ deficit was $13.40 million. Cash increased $1.17 million from November 30, 2016.
Changes versus prior comparable periods
- The company moved from a $2.64 million quarterly net loss in 2016 to $652,019 net income in 2017, and from a $2.13 million nine-month net loss to $1.64 million net income.
- Prior-year results included a $1.88 million noncash goodwill and intangible-asset impairment and a $2.25 million loss on extinguishment of revenue-sharing interests. These items did not recur in 2017 and materially affect year-over-year comparisons.
- Interest expense rose to $937,248 for nine months from $804,236, reflecting financing costs and revenue-sharing obligations. The company repaid $2.15 million of notes and repurchased $447,000 of stock during the nine months.
- PrepaCyte CB generated $342,031 in nine-month revenue but reported an $89,597 operating loss; the core cord blood and tissue service segment reported $3.85 million operating income.
Outlook, risks and unusual items
- Management expects cash, marketable securities and operating cash flows to cover known cash needs for at least the next 12 months. The company has no line of credit; if revenue growth falls short or expenses exceed expectations, it may reduce or defer spending or seek financing. No specific earnings or revenue guidance was provided.
- Management cited growth in recurring storage revenue and new specimen processing. It also noted that new clients choosing prepaid storage plans contributed to operating cash flow.
- On July 12, 2017, the company agreed to pay $100,000 in royalties to make the PrepaCyte license fully paid, eliminating future royalties or license fees under that license. The filing also reports increased PrepaCyte-related costs.
- A Florida lawsuit alleges breach of agreements and seeks damages exceeding the court’s $15,000 jurisdictional threshold. The company disputes the claims; loss cannot be estimated and no accrual was recorded. Warranty reserves were approximately $18,000, with no claims reported. New premium PrepaCyte enrollments receive a $100,000 warranty; standard enrollments receive $75,000.
- Key business risks include competition, lower demand for private cord blood storage, licensee performance, regulation, storage-facility failure or disaster, information-system compromise, litigation, and the ability to make PrepaCyte profitable. The company has a $2.30 million valuation allowance against deferred tax assets; realization depends on future taxable income.
- Management reported disclosure controls were effective, but disclosed that the company was not deemed a timely filer because an amended 8-K containing required PrepaCyte pre-acquisition financial statements and pro forma information had not been filed.
Important facts for investors to verify
- Whether growth in new specimens and recurring storage fees continues, and whether rising cost of sales constrains margins.
- Debt repayment terms, interest costs, and the company’s ability to maintain liquidity given its working-capital deficit and stockholders’ deficit.
- PrepaCyte’s sales, operating losses, and the expected impact of the prepaid license arrangement.
- Progress and potential financial exposure in the pending lawsuit, and changes in warranty claims or reserves.
- Completion of the overdue amended 8-K disclosures and the assumptions supporting realization of deferred tax assets.