Cryo-Cell Faces Significant Downside Due To Revenue Sharing Agreements (CCEL)

We were able to clear out of our entire position of Cryo-Cell (CCEL) during the last four trading sessions, and boy are we relieved. A quick run thru of the company's latest 10Q that was filed the other day, reveals that our thesis is entirely correct and we think the company faces significant downside as more shareholders wake up to the company's Revenue Sharing Agreements. We'll keep following this company, since the industry, including ViaCell (VIAC), is intriguing, and as we well know every dog has its price.

In any case, what's interesting about the 10Q is that revenue increased by about 13% and yet the company's interest expenses (Cryo-Cell's indirect way of referring to expenses associated with revenue sharing agreements), increased by 24%, wiping out any operating profits at the company. By our estimates, on an annualized basis, Cryo-Cell (CCEL) is paying about a 24% interest rate on its debt/Revenue Sharing Agreements.

Current investors in Cryo-Cell should be aware that the company's interest expenses related to Revenue Sharing Agreements will continue to rise as revenues rises, implying no ceiling to the company's future interest rate. In essence, as Cryo-Cell gains more customers and increases revenue, holders of its Revenue Sharing Agreements will rake in money at an ever increasing rate, siphoning money away from equity shareholders. Since, these Revenue Sharing Agreements have no terms and can by all indications be renegotiated quite easily, it seems quite obvious that management at Cryo-Cell is not in the least bit interested in long-term shareholder value.

The bottom-line is that we would not touch Cryo-Cell (CCEL) until these Revenue Sharing Agreements are eliminated. In the interim, since the company will post high losses going forward, and its cash balance will deteriorate over the next year, we think the stock can trade down to $1.20 a share (about 1X annualized revenue), before becoming a decent value.

The lesson of Cryo-Cell (CCEL): Don't get seduced by enviable business models and promises of increased shareholder value, if management seems unwilling to restructure past agreements that are currently harmful to shareholders. Be especially wary of companies that try to deflect attention away from questionable expenses by relabeling these expenses under more acceptable names (i.e. Cryo-Cell should label Revenue Sharing expenses, as that, and not Interest Expenses, which they are not).