Forward Looking Statements
This Form 10Q, press releases and certain information provided periodically in
writing or orally by the Company's officers or its agents may contain statements
which constitute "forwardlooking statements". The terms "Cryo-Cell
International, Inc.," "Cryo-Cell," "Company," "we," "our" and "us" refer to
Cryo-Cell International, Inc. The words "expect," "anticipate," "believe,"
"goal," "strategy," "plan," "intend," "estimate" and similar expressions and
variations thereof, if used, are intended to specifically identify
forwardlooking statements. Those statements appear in a number of places in
this Form 10Q and in other places, and include statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things:
(i)
our future performance and operating results;
(ii)
our future operating plans;
(iii)
our liquidity and capital resources; and
(iv)
our financial condition, accounting policies and management judgments.
We have based these forward-looking statements on our current expectations,
assumptions, estimates and projections. These forward-looking statements involve
risks and uncertainties and reflect only our current views, expectations and
assumptions with respect to future events and our future performance. If risks
or uncertainties materialize or assumptions prove incorrect, actual results or
events could differ materially from those expressed or implied by such
forward-looking statements. The factors that might cause such differences
include, among others:
(i)
any adverse effect or limitations caused by recent increases in government
regulation of stem cell storage facilities;
(ii)
any increased competition in our business including increasing competition from
public cord blood banks particularly in overseas markets but also in the U.S.;
(iii)
any decrease or slowdown in the number of people seeking to store umbilical cord
blood stem cells or decrease in the number of people paying annual storage fees;
(iv)
any adverse impacts on revenue or operating margins due to the costs associated
with increased growth in our business, including the possibility of
unanticipated costs relating to the operation of our facility and costs relating
to the commercial launch of new types of stem cells;
(v)
any unique risks posed by our international activities, including but not
limited to local business laws or practices that diminish our affiliates'
ability to effectively compete in their local markets;
(vi)
any technological or medical breakthroughs that would render our business of
stem cell preservation obsolete;
(vii)
any material failure or malfunction in our storage facilities; or any natural
disaster or act of terrorism that adversely affects stored specimens;
(viii)
any adverse results to our prospects, financial condition or reputation arising
from any material failure or compromise of our information systems;
(ix)
the costs associated with defending or prosecuting litigation matters,
particularly including litigation related to intellectual property, and any
material adverse result from such matters;
(x)
the success of our licensing agreements and their ability to provide us with
royalty fees;
(xi)
any difficulties and increased expense in enforcing our international licensing
agreements;
(xii)
any adverse performance by or relations with any of our licensees;
(xiii)
any inability to enter into new licensing arrangements including arrangements
with non-refundable upfront fees;
(xiv)
any inability to realize cost savings as a result of recent acquisitions;
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(xv)
any inability to realize a return on an investment;
(xvi)
any adverse impact on our revenues and operating margins as a result of
discounting of our services in order to generate new business in tough economic
times where consumers are selective with discretionary spending;
(xvii)
the success of our global expansion initiatives and product diversification;
(xviii)
our actual future ownership stake in future therapies emerging from our
collaborative research partnerships;
(xix)
our ability to minimize our future costs related to R&D initiatives and
collaborations and the success of such initiatives and collaborations;
(xx)
any inability to successfully identify and consummate strategic acquisitions;
(xxi)
any inability to realize benefits from any strategic acquisitions;
(xxii)
the Company's ability to realize a profit on the acquisition of PrepaCyte-CB;
(xxiii)
the Company's ability to realize a profit on the acquisition of Cord:Use;
(xxiv)
the impact of the COVID-19 pandemic on our sales, operations and supply chain;
(xxv)
the Company's actual future competitive position in stem cell innovation;
(xxvi)
future success of its core business and the competitive impact of public cord
blood banking on the Company's business;
(xxvii)
the success of the Company's initiative to expand its core business units to
include biopharmaceutical manufacturing and operating clinics, the uncertainty
of profitability from its biopharmaceutical manufacturing and operating clinics,
the Company's ability to minimize future costs to the Company related to R&D
initiatives and collaborations and the success of such initiatives and
collaborations,
(xxviii)
the success of the Company's initiative to purchase a new facility and expand
the Company's cryopreservation and cold storage business by introducing a new
service, ExtraVault, and
(xxix)
the other risk factors set forth in this Report under the heading "Risk
Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof.
Cryo-Cell International, Inc. undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission.
Overview
The Company currently stores nearly 225,000 cord blood and cord tissue specimens
for the exclusive benefit of newborn babies and possibly other members of their
families. Founded in 1989, the Company was the world's first private cord blood
bank to separate and store stem cells in 1992. The Company's U.S.-based business
operations, including the processing and storage of specimens, are handled from
its headquarters facility in Oldsmar, Florida.
Utilizing its infrastructure, experience and resources derived from its
umbilical cord blood stem cell business, the Company has expanded its research
and development activities to develop technologies related to stem cells
harvested from sources beyond umbilical cord blood stem cells. In 2011, the
Company introduced its new cord tissue service, which stores a section of the
umbilical cord tissue. The Company offers the cord tissue service in combination
with the umbilical cord blood service.
On February 23, 2021, the Company entered into a Patent and Technology License
Agreement (the "Duke Agreement") with Duke University ("Duke"). The Duke
Agreement grants the Company the rights to proprietary processes and regulatory
data related to cord blood and cord tissue developed at Duke. The Company plans
to explore, test, and/or administer these treatments to patients with
osteoarthritis and with conditions for which there are limited U.S. Federal Drug
Administration ("FDA") approved therapies, including cerebral palsy, autism, and
multiple sclerosis. These treatments utilize the unique immunomodulatory and
potential regenerative properties derived from cord blood and cord tissue.
Pursuant to the Duke Agreement, the Company has been granted exclusive
commercial rights to Duke's granted exclusive commercial rights to Duke's
intellectual property assets, FDA regulatory data, clinical expertise and
manufacturing protocols associated with various applications of cord blood and
cord tissue stem cells. Through this
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Agreement, the Company intends to expand to a triad of core business units to
include: (1) its cord blood bank and other storage services; (2) cord blood and
cord tissue infusion clinic services initially under the FDA's Expanded Access
Program and in conjunction with the undertaking of cord blood and cord tissue
clinical trials to obtain biologics license application ("BLA") approvals for
new indications, and (3) biopharmaceutical manufacturing if BLA(s) are approved
by the FDA. The Company is projecting to open the Cryo-Cell Institute for
Cellular Therapies and begin infusing patients with autologous cord blood units
during the first half of fiscal 2023.
Cord Blood Stem Cell Processing and Storage Business
Background of Business
Nearly fifty years ago researchers discovered that cells could be cryopreserved
at extremely low temperatures and all cellular activity would cease until the
specimens were thawed. Historically, cryopreservation was required for organ
transplants, blood banking and medical research. Today, cryopreservation of
umbilical cord blood stem cells gives individuals the opportunity to potentially
take advantage of evolving cellular therapies and other medical technologies.
Hematopoietic stem cells are the building blocks of our blood and immune
systems. They form the white blood cells that fight infection, red blood cells
that carry oxygen throughout the body and platelets that promote healing. These
cells are found in bone marrow where they continue to generate cells throughout
our lives. Stem cells can be stored in a cryogenic environment, and upon
thawing, infused into a patient. They can be returned to the individual from
whom they were taken (autologous) or donated to someone else (allogeneic). An
individual's own bone marrow may be used for a transplant if the cancer has not
entered the marrow system (metastasized). Otherwise, a marrow donor needs to be
identified to provide the needed bone marrow. The availability of a marrow donor
or matched stem cell specimen allows physicians to administer larger doses of
chemotherapy or radiation in an effort to eradicate the disease. Stem cell
therapies and transplants are used for both cancerous and non-cancerous
diseases.
Stem cells are found in umbilical cord blood ("cord blood stem cells") and can
be collected and stored after a baby is born. Over 40,000 cord blood stem cell
transplants have been performed to date. The Company believes that many parents
will want to save and store these cells for potential future use by their
family, either for the donor or for another family member. Today, stem cell
transplants are known and accepted treatments for at least 78 diseases, we
believe, a number of them life-threatening. With continued research in this area
of medical technology, other therapeutic uses for cord blood stem cells are
being explored. Moreover, researchers believe they may be utilized in the future
for treating diseases that currently have no cure.
It is the Company's mission to inform expectant parents and their prenatal care
providers of the potential medical benefits from preserving stem cells and to
provide them the means and processes for collection and storage of these cells.
A vast majority of expectant parents are simply unaware that umbilical cord
blood contains a rich supply of non-controversial stem cells and that they can
be collected, processed and stored for the potential future use of the newborn
and possibly related family members. A baby's stem cells are a perfect match for
the baby throughout its life and have a 1-in-4 chance of being a perfect match
and a 3-in-4 chance of being an acceptable match for a sibling. There is no
assurance, however, that a perfect match means the cells could be used to treat
certain diseases of the newborn or a relative. Today, it is still common for the
cord blood (the blood remaining in the umbilical cord and placenta) to be
discarded at the time of birth as medical waste.
Despite the potential benefits of umbilical cord blood stem cell preservation,
the number of parents of newborns participating in stem cell preservation is
still relatively small compared to the number of births (four million per annum)
in the United States. Some reasons for this low level of market penetration are
the misperception of the high cost of stem cell storage and a general lack of
awareness of the benefits of stem cell preservation programs. However, evolving
medical technology could significantly increase the utilization of the umbilical
cord blood for transplantation and/or other types of treatments. The Company
believes it offers the highest quality, highest value service targeted to a
broad base of the market. We intend to maximize our growth potential through our
superior quality, value-driven competitive leadership position, product
differentiation, an embedded client base, increased public awareness and
accelerated market penetration.
The Company believes that the market for cord blood stem cell preservation is
enhanced by global discussion on stem cell research developments and the current
focus on reducing prohibitive health care costs. With the increasing costs of
bone marrow matches and transplants, a newborn's umbilical cord blood cells can
be stored as a precautionary measure. Medical technology is constantly evolving
which may provide new uses for cryopreserved cord blood stem cells.
Our Cord Blood Stem Cell Storage Services
The Company enters into storage agreements with its clients under which the
Company charges a fee for the processing and testing and first year of storage
of the umbilical cord blood. Thereafter, the client is charged an annual fee to
store the specimen, unless the client entered into an 18-year pre-paid storage
plan or a lifetime pre-paid storage plan.
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The Company's corporate headquarters are located in a nearly 18,000 square-foot
state-of-the-art current Good Manufacturing Practice and Good Tissue Practice
(cGMP/cGTP)-compliant facility. Food and Drug Administration ("FDA") 21 CFR Part
1271, effective in May 2005, requires human cellular and tissue-based products
to be manufactured in compliance with good tissue practices (cGTPs). In
addition, the cellular products cryogenic storage area has been designed as a
"bunker," with enhanced provisions for security, building fortification for
environmental element protection and back-up systems for operational
redundancies. The Company believes that it was the first private bank to process
cord blood in a technologically and operationally advanced cGMP/cGTP-compliant
facility. The Company's facility, which also currently houses the Company's
client services, marketing and administrative operations, is designed to
accommodate a broad range of events such as client tours and open houses, as
well as educational workshops for clinicians and expectant parents.
Due to the limited storage capacity of its existing facility in Oldsmar, FL, the
Company purchased a 56,000 square foot facility located near the Research
Triangle Park in the Regional Commerce Center in Durham, North Carolina ("New
Facility"). The Company believes it will have space for not only its existing
and future internal storage needs, but also will have the capacity to offer
third party pharmaceutical companies and medical institutions storage services,
to set up a cellular therapy laboratory to manufacture MSCs and the Cryo-Cell
Institute for Cellular Therapies under the same roof.
Competitive Advantages
The Company believes that it provides several key advantages over its
competitors, including:
• The world's first private cord blood bank, that in combination with its
global affiliates, currently stores nearly 225,000 cord blood and cord
tissue specimens,
• Our facility's status as a cGMP- and cGTP-compliant private cord blood
bank with AABB accreditation and FACT (the Foundation for the
Accreditation for Cellular Therapy) accreditation,
• a state-of-the-art laboratory processing facility,
• utilization of a processing method using superior technology that yields
the maximum recovery of healthy stem cells and provides superior red
blood depletion over all other methods,
• a five-compartment cord blood freezer bag that allows for multiple uses
of the baby's cord blood stem cells,
• a safe, secure and monitored storage environment,
• since inception, 100% viability rate of the Company's specimens upon
thaw for therapeutic use,
• a state-of the-art, insulated collection kits,
• 7-day per week processing capability, and
• a payment warranty under which the Company agrees to pay $50,000
(effective February 1, 2012 this payment was increased to $75,000 for
new clients, effective June 1, 2017 this payment was increased to
$100,000 for new clients that choose our premium cord blood processing
method, PrepaCyte® CB Processing System ("PrepaCyte CB")) to its client
if the umbilical cord blood product retrieved is used for a stem cell
transplant for the donor or an immediate family member and fails to
engraft, subject to various restrictions.
Cord Tissue
In August 2011, the Company introduced its advanced new cord tissue service,
which stores a section of the umbilical cord tissue. Approximately six inches of
the cord tissue is procured and transported to the Company's laboratory for
processing, testing and cryopreservation for future potential use. Umbilical
cord tissue is a rich source of MSCs, which have many unique functions including
the ability to inhibit inflammation following tissue damage, to secrete growth
factors that aid in tissue repair, and to differentiate into many cell types
including neural cells, bone cells, fat cells and cartilage. MSCs are
increasingly being researched in regenerative medicine for a wide range of
conditions.
In June 2018, the Company acquired substantially all of the assets of Cord:Use
Cord Blood Bank, Inc., a Florida corporation ("Cord:Use"), in accordance with
the definitive Asset Purchase Agreement between Cryo-Cell and Cord:Use (the
"Purchase Agreement"), including without limitation Cord:Use's cord blood
operations and its inventory of public cord blood units existing as of the
closing date (the "Public Cord Blood Inventory"), which included both public
(PHS 351) and private (PHS 361) banks. The Company closed the Cord:Use location
and maintains its operations in Oldsmar, Florida. The new PHS 351 product is
distributed under an IND (10-CBA) maintained by the National Marrow Donor
Program ("NMDP"). The Company has continued the contract with Duke initiated by
Cord:Use to manufacture, test, cryopreserve, store and distribute the public
cord blood units. As part of the Cord:Use Purchase Agreement, the Company has an
agreement with Duke, expiring on January 31, 2025, for Duke to receive, process,
and store cord blood
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units for the Public Cord Blood Bank ("Duke Services"). As of August 31, 2022,
the Company had approximately 6,000 cord blood units in inventory. Costs charged
by Duke for their Duke Services are based on a monthly fixed fee for processing
and storing 12 blood units per month. The public units are listed on the NMDP
Single Point of Access Registry and are available to transplant centers
worldwide. The Company is reimbursed via cost recovery for public cord blood
units distributed for transplant through the NMDP.
Pursuant to the Purchase Agreement, Cord:Use is entitled to an earn out from the
Company's sale of the Public Cord Blood Inventory from and after closing. Each
calendar year after the closing, the Company is required to pay to Cord:Use 75%
of all gross revenues, net of any returns, received from the sale of public cord
blood inventory in excess of $500,000 up to an aggregate amount of $200,000,000.
Such payments are to be made quarterly, within 30 days of the end of the last
month of each calendar quarter, until the public cord blood inventory is
exhausted. In addition, each calendar year after closing, until the public cord
blood inventory is exhausted, for every $500,000 of retained gross revenues, net
of any returns, received and retained by the Company in excess of the initial
$500,000 retained by the Company during such year, the Company is also required
to deliver its common stock to Cord:Use, up to an aggregate total value of
$5,000,000. As of August 31, 2022, the Company has delivered 465,426 shares at
$7.52 per share of its common stock to Cord:Use.
The Public Cord Blood Inventory creates a large, ethnically diverse,
high-quality inventory of available cord blood stem cell units for those in need
of life saving therapy. The Company collects cord blood units at hospitals in
Florida, Arizona, California and Washington. The Company's public inventory is
stored at Duke in North Carolina, and the cord blood units are sold through the
NMDP located in Minnesota, who ultimately distributes the cord blood units to
transplant centers located in the United States, and around the world.
In connection with its acquisition of Cord:Use, the Company acquired 665,287
shares of Tianhe Stem Cell Biotechnologies, Inc., an Illinois corporation
("Tianhe"). We believe these shares represent approximately 5% of the Tianhe
capital stock. In addition to the other amounts payable to Cord:Use, pursuant to
the Cord:Use Asset Purchase Agreement, the Company agreed to pay Cord:Use (1)
the Tianhe Sales Earnout; (2) the Tianhe Valuation Earnout; and (3) the Tianhe
Recap Earnout (collectively hereinafter referred to as the "Earnout Payments"),
which are further discussed below.
If the Company generates more than $500,000 in gross profits from the sale of
the Tianhe capital stock (whether in a single transaction or series of
transactions) (each, a "Tianhe Sale Event"), the Company is obligated to pay
Cord:Use 7% of the gross profits derived from such sale in excess of $500,000 in
gross profits (collectively, the "Eligible Profits"), payable in a number of
shares of common stock of the Company (the "Tianhe Sales Earnout") equal to the
quotient of the dollar amount of the Eligible Profits divided by the average of
the closing sale prices of common stock during the 30 consecutive full trading
days ending at the closing of trading on the trading day immediately prior to
the date the Tianhe Sale Event. "Gross profit", for these purposes, means the
gross sale price of each share of Tianhe Stock sold pursuant to the Tianhe Sales
Event minus (x) 0.43 per share and (y) all reasonable and documented transaction
expenses (paid to third parties) directly related to the sale of the Tianhe
Stock.
In the event a Tianhe Sale Event has not occurred on or before the five year
anniversary of the Closing Date of the Cord:Use Asset Purchase Agreement, then
the Company and Cord:Use will select an independent valuator to determine the
fair market value of the Tianhe Stock owned by the Company and the Company will
pay Cord:Use the Tianhe Valuation Earnout, which is 7% of the gross profits that
would have been derived from a hypothetical sale of Tianhe capital stock,
provided, that, notwithstanding the foregoing, in the Company's sole discretion,
the Company may, instead of issuing shares of its common stock, transfer 7% of
its Tianhe Stock to Cord:Use in full payment of the Tianhe Valuation Earnout.
Additionally, if the Company, at any time after the Closing Date of the Cord:Use
Asset Purchase Agreement, purchases additional shares of Tianhe Stock so that
its aggregate holdings exceeds a majority percentage interest of the capital
stock of Tianhe (the "Tianhe Recap Event"), the Company is required to pay to
Cord:Use an additional amount equal to 10% of the value (based on the purchase
price paid by the Company) of such additional shares of Tianhe Stock equal to
the difference between the price paid for the shares as of the Closing Date and
the additional shares of Tianhe Stock acquired thereafter, payable in shares of
common stock of the Company.
ExtraVault
On March 14, 2022, the Company entered into a $11.2 million purchase contract
with Scannell Properties #502, LLC ("Scannell") for a 56,000 square foot
facility located near the Research Triangle Park in the Regional Commerce Center
in Durham, North Carolina (the "New Facility"). Pursuant to the Agreement, on
March 16, 2022, the Company transferred an initial earnest deposit of $200,000.
On June 10, 2022, the Company exercised its right to extend the closing date and
transferred an additional deposit of $50,000 for a closing extension. On July
18, 2022, the Company completed the purchase of the property. The Company
transferred $2,240,000 from cash on hand and financed the remaining balance of
$8,960,000 with a term loan from Susser Bank (see Note 5). The New Facility has
space for not only its existing and future internal storage needs, but also has
the capacity to offer third party pharmaceutical companies and medical
institutions cold storage services ("ExtraVault" - see www.extravault.com), to
set up a cellular
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therapy laboratory to manufacture mesenchymal stromal cells from cord tissue
("MSCs") and the space to consolidate the Cryo-Cell Institute for Cellular
Therapies under the same roof.
The Company anticipates this New Facility will expand the Company's
cryopreservation and cold storage business by introducing a new service,
ExtraVault (www.extravault.com). With over 30 years of experience in handling
biological specimens for both research and clinical use, Cryo-Cell intends to
leverage this expertise and offer these biorepository services to
biopharmaceutical companies and healthcare institutions. The new facility is
being constructed to offer state-of-the-art biologic, reagent and vaccine
storage at cost effective prices. A robust inventory management system is
planned to be implemented that Cryo-Cell believes will allow customers to view
their own inventory through a customer portal and place distribution orders
online. As a result, it is anticipated ExtraVault will provide expertise,
experience, customer electronic access and cost sensitive solutions to the
Company's partners in the biopharma and healthcare industries.
Marketing
The Company markets its cord blood stem cell preservation services directly to
expectant parents and by distributing information through obstetricians,
pediatricians, childbirth educators, certified nurse-midwives and other related
healthcare professionals. The Company believes that its revenues have been
facilitated by a variety of referral sources, resulting from high levels of
customer satisfaction. New expectant parent referrals during fiscal 2022 are
provided by physicians, midwives and childbirth educators, and by
client-to-client referrals and repeat clients storing the stem cells of their
additional children.
The Company has a national team of field cord blood educators who increase
awareness of the benefits of storing cord blood and cord tissue to the Company's
clinical referral sources, including physicians, midwives and hospitals and to
expectant parents. Other promotional activities include internet advertisements
and telemarketing activities. In addition, the Company exhibits at conferences,
trade shows and other meetings attended by pregnant women and/or medical
professionals. Significant portions of client referrals to the Company are from
medical caregiver professionals.
The Company's client support team advisors are available by telephone to enroll
clients and educate both expectant parents and the medical community on the
life-saving potential of cord blood stem cell preservation.
The Company continues to use its website, www.cryo-cell.com, to market its
services and to provide resource information to expectant parents. The site,
which is frequently updated and improved, is divided into areas of interest,
including sections for expectant parents, medical caregivers and investors.
Expectant parents may request and receive information about the umbilical cord
blood and cord tissue service and enroll online.
The Company intends to continue offering cord blood and cord tissue banking
services to expectant parents and relying on both online advertising and its
national team of field cord blood educators to enroll new clients. A significant
portion of its new enrollments are generated from returning customers and
referrals. Many of the Company's clients choose to enter into either multiyear
storage contracts, which results in deferred revenues that are recognized over
the life the storage contracts.
Our public units are listed on the NMDP registry, which is connected to all
other major international registries. NMDP has a contract with the Health
Resources & Services Administration (HRSA), part of the Human Health Services
Department of the US government, to be the single point of access for bone
marrow, peripheral blood and cord blood for transplant centers needing stem
cells for transplant.
Additionally, the Company has definitive license agreements to market the
Company's umbilical cord blood stem cell programs in Costa Rica, El Salvador,
Guatemala, Honduras, Nicaragua and Panama.
Corporate Information
We are a Delaware corporation that was incorporated in 1989. Our executive
offices are located at 700 Brooker Creek Blvd, Suite 1800, Oldsmar, Florida
34677 and our telephone number at such office is (813) 749-2100. Our website
address is https://www.cryo-cell.com. Information contained on our website is
not deemed part of this report.
Results of Operations - Nine-Month Period Ended August 31, 2022 Compared to the
Nine-Month Period Ended August 31, 2021
Revenue. Revenue for the nine months ended August 31, 2022 was $22,572,707 as
compared to $21,569,464 for the same period in 2021. The increase in revenue was
in part due to a 4% increase in processing and storage fees.
Processing and Storage Fees. Processing and storage fee revenue is attributable
to a 6% increase in recurring annual storage fee revenue offset by a decrease in
the number of new domestic cord blood specimens processed in the first nine
months of fiscal 2022 versus the same period in 2021.
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Product Revenue. For the nine months ended August 31, 2022, revenue from the
product sales was $75,600 compared to $56,200 for the nine months ended August
31, 2021.
Public Cord Blood Banking Revenue. For the nine months ended August 31, 2022,
revenue from the public cord blood banking sales was $337,405 compared to
$289,231 for the nine months ended August 31, 2021. The increase in revenue is
due to the volatility of customer demand.
Cost of Sales. Cost of sales for the nine months ended August 31, 2022 was
$6,653,497 as compared to $6,693,806 for the same period in 2021, representing a
1% decrease. Cost of sales includes wages and supplies associated with process
enhancements to the existing production procedures and quality systems in the
processing of cord blood specimens at the Company's facility in Oldsmar, Florida
and depreciation expense of approximately $155,000 and $154,000 for the nine
months ended August 31, 2022 and 2021, respectively. Cost of Sales also includes
$63,934 and $129,581 for the nine months ended August 31, 2022 and 2021,
respectively, related to the costs associated with production of the
PrepaCyte®-CB processing and storage system. Also included in Cost of Sales is
$1,246,108 and $1,111,022 for the nine months ended August 31, 2022 and 2021,
respectively, related to the public banks.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended August 31, 2022 were
$10,891,951 as compared to $10,075,502 for the 2021 period representing an 8%
increase. These expenses are primarily comprised of selling and marketing
expenses, salaries and wages for personnel and professional fees.
Research, Development and Related Engineering Expenses. Research, development
and related engineering expenses for the nine months ended August 31, 2022 were
$308,388 as compared to $19,431 for the 2021 period. The increase for the nine
months ended August 31, 2022 is due to the expenses related to the development
of a manufacturing laboratory related to the Duke License Agreement (See Note
12).
Depreciation and Amortization. Depreciation and amortization (not included in
Cost of Sales) for the nine months ended August 31, 2022 was $839,995 compared
to $558,167 for the 2021 period.
Change in the Fair Value of Contingent Consideration. Change in the fair value
of the contingent consideration for the nine months ended August 31, 2022 was an
increase of $259,769 compared to a decrease of $604,109 for the 2021 period. The
contingent consideration is the earnout that Cord:Use is entitled to from the
Company's sale of the public cord blood inventory from and after closing,
described above. The contingent consideration was remeasured to fair value as of
August 31, 2022. The estimated fair value of the contingent earnout was
determined using a Monte Carlo analysis examining the frequency and mean value
of the resulting earnout payments. The resulting value captures the risk
associated with the form of the payout structure. The risk-neutral method is
applied, resulting in a value that captures the risk associated with the form of
the payout structure and the projection risk. The carrying amount of the
liability may fluctuate significantly and actual amounts paid may be materially
different from the estimated value of the liability.
Interest Expense. Interest expense during the nine months ended August 31, 2022,
was $947,968 compared to $957,479 during the comparable period in 2021, of
which, $118,438 and $146,756, respectively, related to the credit and
subordination agreements with Texas Capital Bank, National Association and
Susser Bank as described in Note 5. Interest expense also includes of $737,514
and $695,591 as of the nine months ended August 31, 2022 and 2021, respectively,
for amounts due to the parties to the Company's revenue sharing agreements based
on the Company's storage revenue collected. The remaining interest expense for
the nine months ended August 31, 2022 is due to the accretion of the outstanding
liability due to Duke per the Agreement, see Note 12.
Gain (Loss) on Change in Fair Value of Derivative. Gain (loss) on the change in
the fair value of a derivative for the nine months ended August 31, 2022 was
$62,835. The fair value is based on prevailing market data and derived from
proprietary models based on well recognized financial principles and reasonable
estimates about relevant future market conditions.
Income Taxes. U.S. income tax expense for the nine months ended August 31, 2022
was $762,854 compared to $1,134,198 for the nine months ended August 31, 2021.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The ultimate realization of our deferred
tax assets depends upon generating sufficient future taxable income prior to the
expiration of the tax attributes. In assessing the need for a valuation
allowance, we must project future levels of taxable income. This assessment
requires significant judgment. We examine the evidence related to the recent
history of tax losses, the economic conditions in which we operate and our
forecasts and projections to make that determination.
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Results of Operations - Three-Month Period Ended August 31, 2022 Compared to the
Three-Month Period Ended August 31, 2021
Revenue. Revenue for the three months ended August 31, 2022 was $7,680,959 as
compared to $7,503,652 for the same period in 2021, a 2% increase. The increase
in revenue for the three months ended August 31, 2022 versus 2021 was in part
due to a 3% increase in processing and storage fees.
Processing and Storage Fees. Processing and storage fee revenue is attributable
to a 6% increase in recurring annual storage fee revenue offset by an 11%
decrease in the number of new domestic cord blood specimens processed for three
months ended August 31, 2022 versus the same period in 2021.
Product Revenue. For the three months ended August 31, 2022, revenue from the
product sales was $21,000 compared to $18,200 for the three months ended August
31, 2021.
Public Cord Blood Banking Revenue. For the three months ended August 31, 2022,
revenue from the public cord blood banking sales was $137,825 compared to
$158,936 for the three months ended August 31, 2021. The decrease in revenue is
due to the volatility of customer demand.
Cost of Sales. Cost of sales for the three months ended August 31, 2022 was
$2,348,755 as compared to $2,458,938 for the same period in 2021, representing a
4% decrease. Cost of sales includes wages and supplies associated with process
enhancements to the existing production procedures and quality systems in the
processing of cord blood specimens at the Company's facility in Oldsmar, Florida
and depreciation expense of approximately $53,000 and $51,000 for the three
months ended August 31, 2022 and 2021, respectively. Cost of Sales also includes
$10,622 and $53,498 for the three months ended August 31, 2022 and 2021,
respectively, related to the costs associated with production of the
PrepaCyte®-CB processing and storage system. Also included in Cost of Sales is
$454,733 and $462,021 for the three months ended August 31, 2022 and 2021,
respectively, related to the public banks. The decrease in cost of sales for the
three months ended August 31, 2022 versus August 31, 2021 is due to the decrease
in the number of new domestic cord blood specimens processed during the three
months ended August 31, 2022 versus August 31, 2021.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended August 31, 2022 were
$3,603,411 as compared to $3,493,794 for the 2021 period representing a 3%
increase. These expenses are primarily comprised of selling and marketing
expenses, salaries and wages for personnel and professional fees.
Research, Development and Related Engineering Expenses. Research, development
and related engineering expenses for the three months ended August 31, 2022 were
$80,272 as compared to $10,004 for the 2021 period. The increase for the three
months ended August 31, 2022 is due to the expenses related to the development
of a manufacturing laboratory related to the Duke License Agreement (See Note
12).
Depreciation and Amortization. Depreciation and amortization (not included in
Cost of Sales) for the three months ended August 31, 2022 was $281,903 compared
to $269,482 for the 2021 period.
Change in the Fair Value of Contingent Consideration. Change in the fair value
of the contingent consideration for the three months ended August 31, 2022 was
an increase of $412,307 compared to a decrease of $324,904 for the 2021 period.
The contingent consideration is the earnout that Cord:Use is entitled to from
the Company's sale of the public cord blood inventory from and after closing,
described above. The contingent consideration was remeasured to fair value as of
August 31, 2022. The estimated fair value of the contingent earnout was
determined using a Monte Carlo analysis examining the frequency and mean value
of the resulting earnout payments. The resulting value captures the risk
associated with the form of the payout structure. The risk-neutral method is
applied, resulting in a value that captures the risk associated with the form of
the payout structure and the projection risk. The carrying amount of the
liability may fluctuate significantly and actual amounts paid may be materially
different from the estimated value of the liability.
Interest Expense. Interest expense during the three months ended August 31,
2022, was $365,349 compared to $335,870 during the comparable period in 2021, of
which, $90,547 and $38,252, respectively, related to the credit and
subordination agreements with Texas Capital Bank, National Association and
Susser Bank as described in Note 5. Interest expense also includes of $258,125
and $239,806 as of the three months ended August 31, 2022 and 2021,
respectively, for amounts due to the parties to the Company's revenue sharing
agreements based on the Company's storage revenue collected. The remaining
interest expense for the three months ended August 31, 2022 is due to the
accretion of the outstanding liability due to Duke per the Agreement, see Note
12.
Gain (Loss) on Change in Fair Value of Derivative. Gain (loss) on the change in
the fair value of a derivative for the three months ended August 31, 2022 was
$62,835. The fair value is based on prevailing market data and derived from
proprietary models based on well recognized financial principles and reasonable
estimates about relevant future market conditions.
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Income Taxes. U.S. income tax expense for the three months ended August 31, 2022
was $174,146 compared to $404,735 for the three months ended August 31, 2021.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The ultimate realization of our deferred
tax assets depends upon generating sufficient future taxable income prior to the
expiration of the tax attributes. In assessing the need for a valuation
allowance, we must project future levels of taxable income. This assessment
requires significant judgment. We examine the evidence related to the recent
history of tax losses, the economic conditions in which we operate and our
forecasts and projections to make that determination.
Liquidity and Capital Resources
On May 20, 2016, the Company entered into a Credit Agreement ("Credit
Agreement") with Texas Capital Bank, National Association ("TCB") for a term
loan of $8.0 million in senior credit facilities. The proceeds of the term loan
were used by the Company to fund repurchases of the Company's common stock.
Subject to the terms of the Credit Agreement, on May 20, 2016, TCB advanced the
Company $100.00. On July 1, 2016, TCB advanced the remaining principal amount of
$7,999,900 per a promissory note dated May 20, 2016 between the Company and TCB.
On August 26, 2016, the Company entered into a First Amendment to Credit
Agreement with TCB. Pursuant to terms of the First Amendment to Credit
Agreement, on August 26, 2016, TCB made an additional advance to the Company in
principal amount of $2,133,433 per an Amended and Restated Promissory Note dated
August 26, 2016 between the Company and TCB. The additional proceeds of the term
loan were used by the Company to fund the extinguishment of revenue sharing
agreements.
On June 11, 2018, the Company entered into a Second Amendment to Credit
Agreement with TCB. Pursuant to the terms of the Second Amendment to Credit
Agreement, TCB made an additional advance to the Company in principal amount of
$9,000,000 per an Amended and Restated Promissory Note dated June 11, 2018
between the Company and TCB in the principal amount of $15,500,000. The proceeds
were used to finance a portion of the purchase price of the Cord:Use Purchase.
The TCB loan bears interest at a rate of 3.75% per annum plus LIBOR, payable
monthly, and matures on June 2022. See Note 5.
As of July 1, 2022, the Company paid the TCB term loan in full. The Company has
no further obligations under the Credit Agreement.
On July 18, 2022, the Company entered into a Credit Agreement ("Agreement
Susser") with Susser Bank, a Texas state bank, as administrative agent
("Susser") on behalf of itself and the other lenders (collectively, the
"Lenders") for (i) a revolving credit facility in an aggregate principal amount
of up to $10,000,000 (the "RCF"); and (ii) a term loan facility in an original
principal amount of $8,960,000 (the "Term Loan Susser" and together with the RCF
collectively, the "Loans"). In connection with the RCF the Company entered into
a Revolving Credit Note, in favor of Susser, in the stated principal amount of
$10,000,000 (the "RCF Note"), and in connection with the Term Loan the Company
entered into a Term Note, in favor of Susser, in the stated principal amount of
$8,960,000 (the "Term Note" and together with RCF Note, collectively, the
"Notes").
On July 29, 2022, the Company entered into an Amendment to Credit Agreement
("Amendment") with Susser on behalf of itself and the lenders. The Company is
exposed to interest rate risk related to its variable rate debt obligation under
the Term Note. In July 2022, the Company entered into an interest rate swap
agreement with Susser to manage exposure arising from this risk. The swap
agreement has a notional amount equal to the Term Note. The agreement pays the
Company monthly SOFR plus 3.25% on the notional amount and the Company pays a
fixed rate of interest equal to 6.09%. The effective date of the amended term
loan was July 29, 2022 with a maturity date of July 29, 2032.
Other than the foregoing loans, the Company's principal source of cash has been
from sales of its umbilical cord blood program to customers and royalties from
licensees.
At August 31, 2022, the Company had cash and cash equivalents of $2,924,696 as
compared to $8,263,088 at November 30, 2021. The decrease in cash and cash
equivalents during the nine months ended August 31, 2022 was primarily
attributable to the following:
•
Net cash from operating activities for the nine months ended August 31, 2022 was
$6,142,911 which was attributable to the Company's operating activities.
•
Net cash from operating activities for the nine months ended August 31, 2021 was
$6,258,619 which was attributable to the Company's operating activities.
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•
Net cash from investing activities for the nine months ended August 31, 2022 was
$17,195,210 which was primarily attributable to $12,193,470 used to purchase
property and equipment including a new facility (See Note 9) and $5,000,000 used
as part of the Patent Option and Technology License Agreement with Duke (See
Note 12).
•
Net cash from investing activities for the nine months ended August 31, 2021 was
$6,660,228 which was primarily attributable to $1,554,004 used to purchase
property, equipment and software and $5,106,224 used as part of the Patent
Option and Technology License Agreement with Duke (See Note 12).
•
Net cash from financing activities for the nine months ended August 31, 2022 was
$5,713,907 which was primarily attributable to the payments of $1,908,433 to
partially repay the TCB note payable described above and $1,692,433 used to
repurchase the Company's common stock which was partially offset by the receipt
of $551,274 from the exercise of stock options and $8,960,000 received per a
Credit Agreement with Susser Bank described above.
•
Net cash from financing activities for the nine months ended August 31, 2021 was
$2,258,710 which was primarily attributable to the payments of $3,325,000 to
repay the TCB note payable described above offset by the receipt of $1,066,290
from the exercise of stock options.
The Company anticipates making discretionary capital expenditures of
approximately $10,000,000 over the next twelve months for property build out,
purchases of property and equipment, obligations under the Patent and Technology
License Agreement with Duke University and software enhancements. The Company
anticipates funding future property build out, equipment purchases, obligations
under the Patent Technology License Agreement with Duke University and software
enhancements with cash-on-hand, cash flows from future operations, the Company's
revolving line of credit (see Note 5) and potential additional debt financing.
The Company anticipates that its cash and cash equivalents, marketable
securities and cash flows from future operations, together with external sources
of capital will be sufficient to fund its known cash needs for at least the next
12 months. Cash flows from operations will depend primarily upon increasing
revenues from sales of its umbilical cord blood and cord tissue cellular storage
services, developing its infusion services at the Cryo-Cell Institute for
Cellular Therapies and managing discretionary expenses. If expected increases in
revenues are not realized, or if expenses are higher than anticipated, or if the
Company is unable to obtain additional financing, the Company will be required
to reduce or defer cash expenditures or otherwise manage its cash resources
during the next 12 months so that they are sufficient to meet the Company's cash
needs for that period. Any reductions in expenditures, if necessary, may have an
adverse effect on the Company's business operations, including sales activities
and the development of new services and technology. In the future, the Company
anticipates using a substantial amount of cash to fund clinical trials related
to the Patent and Technology License Agreement with Duke University (see Note
12) and to develop its biopharmaceutical manufacturing capabilities related to
mesenchymal stromal cells derived from umbilical cord tissue.
Critical Accounting Policies
This discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make judgments,
estimates, and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and disclosures of contingent assets and
liabilities. For a full discussion of our accounting policies please refer to
Note 1 to the Consolidated Financial Statements included in our 2021 Annual
Report on Form 10-K filed with the SEC on February 22, 2022. Our most critical
accounting policies and estimates include: recognition of revenue and the
related allowance for doubtful accounts, stock-based compensation, income taxes
and license and revenue sharing agreements. We continually evaluate our
judgments, estimates and assumptions. We base our estimates on the terms of
underlying agreements, historical experience and other factors that we believe
are reasonable based on the circumstances, the results of which form our
management's basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates. There have been changes to our critical accounting
policies and estimates from the information provided in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our 2021 Annual Report on Form 10-K. Please refer to Note 1 to the
Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements.
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Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonable
likely to have a current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
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CRYO-CELL INTERNATIONAL, INC. 
