Forward Looking Statements
This Form 10-Q, press releases and certain information provided periodically in writing or orally by the Company's officers or its agents may contain statements which constitute "forward-looking 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 forward-looking statements. Those statements appear in a number of places in this Form 10-Q 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:
Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include:
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We undertake no obligation to publicly update or revise the forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
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, including the Annual Report on Form 10-K filed by the Company and any Current Reports on Form 8-K filed by the Company.
Overview
The Company is engaged in cellular processing and cryogenic storage, with a current focus on the collection and preservation of umbilical cord blood stem cells for family use. The Company's principal sources of revenues are service fees for cord blood processing and preservation for new customers and recurring annual storage fees. Effective April 2016, the Company offers two pricing models, a standard plan and premium plan. The Company charges fees of $1,675 for the standard plan and $2,025 for the premium plan to new clients for the collection kit, processing, testing and return medical courier service, with discounts in the case of multiple children from the same family and in other circumstances. The Company charges an annual storage fee of $175 for new clients that enroll in the standard and premium plans; storage fees for existing customers depend on the contracts with such customers. The Company continues to offer a one-time payment plan for 18 years of storage and a lifetime payment plan, pursuant to which the client is charged $4,650 for the standard plan and $5,000 for the premium plan and approximately $5,800 for the standard plan and approximately $6,100 for the premium plan, respectively, less discounts in the case of multiple children from the same family and in other circumstances. The one-time plan includes the collection kit, processing and testing, return medical courier service and 18 years of prepaid storage fees. The lifetime plan includes the collection kit, processing and testing, return medical courier service and prepaid storage fees for the life of the client. The Company also receives other income from licensing fees and royalties from global affiliates.
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On June 11, 2018, Cryo-Cell completed its acquisition of substantially all of the assets (the "Cord Purchase") 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 inventory of public cord blood units existing as of the closing date (the "Public Cord Blood Inventory") and Cord:Use's shares of common stock of Tianhe Stem Cell Biotechnologies, Inc., an Illinois corporation (the "Tianhe Capital Stock"). Cord:Use was in the business of public and private cord blood and tissue, collection, processing, storage and banking. The aggregate consideration payable at closing under the Purchase Agreement was $14,000,000, with $10,500,000 paid in cash and the balance paid through the delivery to Seller of 465,426 shares of Cryo-Cell's common stock, par value $0.01 per share ("Common Stock"), at $7.52 per share. In addition, Cryo-Cell assumed certain limited liabilities incurred by Cord:Use in connection with its business that were unpaid as of the closing date and that directly relate to the services to be provided after closing by Cryo-Cell. Cryo-Cell also assumed certain of Cord:Use's contracts and the obligations arising therefrom after the closing. Additionally, Cord:Use is entitled to an earnout from Cryo-Cell's sale of the Public Cord Blood Inventory from and after closing. Each calendar year after the closing, Cryo-Cell 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. 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 Cryo-Cell in excess of the initial $500,000 retained by Cryo-Cell during such year, Cryo-Cell is to deliver $200,000 worth of Cryo-Cell Common stock to Cord:Use, up to an aggregate value of $5,000,000. Cord:Use is also entitled to a portion of the gross profits generated, or deemed to have been generated, by Cryo-Cell from its ownership of the Tianhe Capital Stock.
During the six months ended May 31, 2020, total revenue decreased less than 1% as compared to the same period in 2019. The Company reported net income of approximately $1,640,000 or $0.22 per basic common share for the six months ended May 31, 2020 compared to net income of approximately $330,000 or $0.04 per basic common share for the same period in 2019. Net income for the six months ended May 31, 2020 principally resulted from a 2% decrease in cost of sales and a 12% decrease in interest expense offset by a less than one present decrease in revenue and slight increase in selling, general and administrative expenses. Due to changes in sales trends and estimated recoverability of cost capitalized into inventory, an impairment charge of $2,332,763 was recognized during the six months ended May 31, 2019 to reduce inventory from cost to net realizable value of the liability,
At May 31, 2020, the Company had cash and cash equivalents of $8,419,565. The Company's cash increased approximately $1,900,000 during the first six months of fiscal 2020. Cash provided by operations was approximately $3,438,000 which was offset by approximately $50,000 used for the purchase of property and equipment and approximately $1,550,000 used to repay the note payable.
The Company faces various risks related to health epidemics, pandemics and similar outbreaks, including the global outbreak of COVID-19. The Company believes it has taken appropriate steps to minimize the risk to our employees and to maintain normal business operations but cannot at this time predict the impact of the COVID-19 pandemic. It could have a material adverse effect on the business, financial position, results of operations and/or cash flows. Operating results for the six months ended May 31, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ending November 30, 2020.
Consistent with its fiduciary duties, the board of directors and management has reviewed and will continue to review strategic options and opportunities for the Company, in order to maximize shareholder value. These options may include, but are not limited to, strategic mergers or acquisitions, investments in other public and/or private companies, repurchases of RSA interests, a deregistration of the Company's
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common stock under the Securities Exchange Act of 1934 or a going-private transaction. These options may or may not be related to the Company's current business. In order to undertake any of the aforementioned activities, the Company may take on substantial debt or equity capital which could increase the risk of investment in the Company.
Results of Operations - Six Month Period Ended May 31, 2020 Compared to the Six-Month Period Ended May 31, 2019
Revenues. Revenues for the six months ended May 31, 2020 were $15,492,618 as compared to $15,622,964 for the same period in 2019, a 1% decrease. The decrease in revenue was primarily attributable to a 1% decrease in processing and storage fees.
Processing and Storage Fees. Processing and storage fee revenue is attributable to a 9% increase in recurring annual storage fee revenue offset by a 6% decrease in the number of new domestic cord blood specimens processed in the first six months of fiscal 2020 versus the same period in 2019.
Public Banking Revenue. For the six months ended May 31, 2020, revenue from public banking was $367,721 compared to $368,480 for the six months ended May 31, 2019.
Product Revenue. For the six months ended May 31, 2020, revenue from the PrepaCyte-CB product sales was $117,707 compared to $37,760 for the six months ended May 31, 2019.
Licensee and Royalty Income. Licensee and royalty income for the six months ended May 31, 2020, was $201,828 as compared to $201,828 for the 2019 period. Licensee and royalty income for the six months ended May 31, 2020 and May 31, 2019 consists of royalty income earned on the processing and storage of specimens in India where the Company has a definitive License and Royalty Agreement.
Per the License and Royalty Agreement with LifeCell, there is a $1 Million cap on the amount of royalty due to the Company per year and a $10 Million cap on the amount of royalties due to the Company for the term of the License and Royalty Agreement. Since inception of the License and Royalty Agreement, the Company has recorded approximately $9,500,000 in royalty income due under the terms of the License and Royalty Agreement, of which, LifeCell has paid the Company approximately $8,500,000 as of May 31, 2020. The balance of approximately $1,000,000 is reflected as Accounts Receivable on the accompanying consolidated balance sheets.
Cost of Sales. Cost of sales for the six months ended May 31, 2020 was $4,983,687 as compared to $5,094,518 for the same period in 2019, representing a 2% 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 $103,000 and $96,000 for the six months ended May 31, 2020 and 2019, respectively. Also, included in Cost of sales is $73,131 and $164,627 related to the costs associated with production of the PrepaCyte-CB processing and storage system for the six months ended May 31, 2020 and May 31, 2019, respectively. Also included in Cost of Sales is $889,041 and $672,361 for the six months ended May 31, 2020 and May 31, 2019, respectively, related to the public cord blood bank. The decrease in cost of sales for the six months ended May 31, 2020 versus May 31, 2019 is due to the decrease in the number of new domestic cord blood specimens processed for the six months ended May 31, 2020 versus May 31, 2019 which is offset by the increase in costs due to the public cord blood bank.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended May 31, 2020 were $7,428,597 as compared to $7,393,229 for the 2019 period representing a slight increase. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees.
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Research, Development and Related Engineering Expenses. Research, development and related engineering expenses for the six months ended May 31, 2020 were $15,543 as compared to $10,841 for the 2019 period.
Depreciation and Amortization. Depreciation and amortization (not included in Cost of Sales) for the six months ended May 31, 2020 was $87,524 compared to $112,314 for the 2019 period.
Change in the Fair Value of Contingent Consideration. Change in the fair value of the contingent consideration for the six months ended May 31, 2020 and May 31, 2019 was a decrease of $23,989 and $670,927, respectively, creating a gain in the accompanying consolidated statements of comprehensive income. 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 May 31, 2020. 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.
Impairment of Public Inventory. The impairment of public inventory for the six months ended May 31, 2020 was $0 compared to $2,332,763 for the 2019 period. Due to changes in sales trends and estimated recoverability of cost capitalized into inventory, an impairment charge of $2,332,763 was recognized during the six months ended May 31, 2019 to reduce inventory from cost to net realizable value.
Interest Expense. Interest expense during the six months ended May 31, 2020 was $730,670 compared to $831,212 for the six months ended May 31, 2019, of which, $238,202 and $419,682, respectively, related to the credit and subordination agreements with Texas Capital Bank, National Association as described in Note 6. The remaining interest expense is mainly comprised of amounts due to the parties to the Company's revenue sharing agreements ("RSAs") based on the Company's storage revenue collected.
Income Taxes. U.S. income tax expense for the six months ended May 31, 2020 was $610,562 compared to $133,782 for the six months ended May 31, 2019.
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.
The Company records foreign income taxes withheld from installment payments of non-refundable up-front license fees and royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The Company recorded $21,828 and $21,828 for the six months ended May 31, 2020 and May 31, 2019, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of comprehensive income .
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Results of Operations - Three Month Period Ended May 31, 2020 Compared to the Three-Month Period Ended May 31, 2018
Revenues. Revenues for the three months ended May 31, 2020 were $7,871,844 as compared to $8,127,852 for the same period in 2019.
Processing and Storage Fees. The decrease in processing and storage fee revenue is primarily attributable to a 7% increase in recurring annual storage fee revenue and a 13% decrease in the number of new cord blood specimens processed for three months ended May 31, 2020 versus the same period in 2019.
Public Banking Revenue. For the three months ended May 31, 2020, revenue from public banking was $213,642 compared to $234,115 for the three months ended May 31, 2019.
Product Revenue. For the three months ended May 31, 2020, revenue from the PrepaCyte-CB product sales was $57,300 compared to $12,040 for the three months ended May 31, 2019.
Licensee and Royalty Income. Licensee and royalty income for the three months ended May 31, 2020, was $201,828 as compared to $201,828 for the 2019 period. Licensee and royalty income for the three months ended May 31, 2020 and May 31, 2019 consisted of royalty income earned on the processing and storage of cord blood stem cell specimens in India where the Company has a definitive license agreement.
Per the License and Royalty Agreement with LifeCell, there is a $1 Million cap on the amount of royalty due to the Company per year and a $10 Million cap on the amount of royalties due to the Company for the term of the License and Royalty Agreement. Since inception of the License and Royalty Agreement, the Company has recorded approximately $9,500,000 in royalty income due under the terms of the License and Royalty Agreement, of which, LifeCell has paid the Company approximately $8,500,000 as of May 31, 2020. The balance of approximately $1,000,000 is reflected as Accounts Receivable on the accompanying consolidated balance sheets.
Cost of Sales. Cost of sales for the three months ended May 31, 2020 was $2,480,543 as compared to $2,628,291 for the same period in 2019, representing a 6% 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 $51,000 and $48,000 for the three months ended May 31, 2020 and 2019, respectively. Also, included in Cost of Sales is $32,014 and $4,621 related to the costs associated with production of the PrepaCyte-CB processing and storage system for the three months ended May 31, 2020 and May 31, 2019, respectively. Also included in Cost of Sales is $482,088 and $404,771 for the three months ended May 31, 2020 and May 31, 2019, respectively, related to the public cord blood bank. The decrease in cost of sales for the three months ended May 31, 2020 versus May 31, 2019 is due to the decreased costs associated with the 6% decrease in the number of new domestic cord blood specimens processed in the second quarter fiscal 2020 versus the second quarter fiscal 2019.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended May 31, 2020 were $3,558,568 as compared to $3,647,927 for the 2019 period representing a 2% decrease. Selling, general and administrative expenses is primarily comprised of expenses for 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 May 31, 2020 were $9,821 as compared to $4,957 for the 2019 period.
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Depreciation and Amortization. Depreciation and amortization (not included in Cost of Sales) for the three months ended May 31, 2020 was $43,303 compared to $55,334 for the 2019 period.
Change in the Fair Value of Contingent Consideration. Change in the fair value of the contingent consideration for the three months ended May 31, 2020 was $27,423 compared to ($1,037,984) for the 2019 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 May 31, 2020. 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.
Impairment of Public Inventory. The impairment of public inventory for the three months ended May 31, 2020 was $0 compared to $2,332,763 for the 2019 period. Due to changes in sales trends and estimated recoverability of cost capitalized into inventory, an impairment charge of $2,332,763 was recognized during the three months ended May 31, 2019 to reduce inventory from cost to net realizable value.
Interest Expense. Interest expense during the three months ended May 31, 2020, was $365,371 compared to $424,287 during the comparable period in 2019, of which, $103,941 and $209,546, respectively, related to the credit and subordination agreements with Texas Capital Bank, National Association as described in Note 6. The remaining interest expense is mainly comprised of amounts due to the parties to the Company's revenue sharing agreements ("RSAs") based on the Company's storage revenue collected.
Income Taxes. U.S. income tax expense for the three months ended May 31, 2020 was $358,182 compared to $29,115 for the three months ended May 31, 2019.
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.
The Company records foreign income taxes withheld from installment payments of non-refundable up-front license fees and royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The Company recorded $21,828 and $21,828 for the three months ended May 31, 2020 and 2019, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of comprehensive income.
Liquidity and Capital Resources
On May 20, 2016, the Company entered into a Credit Agreement ("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 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.
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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.
Prior to the 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 May 31, 2020, the Company had cash and cash equivalents of $8,419,565 as compared to $6,541,037 at November 30, 2019. The increase in cash and cash equivalents during the six months ended May 31, 2020 was primarily attributable to the following:
Net cash provided by operating activities for the six months ended May 31, 2020 was $3,437,755, which was primarily attributable to the Company's operating results.
Net cash provided by operating activities for the six months ended May 31, 2019 was $2,381,722, which was primarily attributable to the Company's operating results and an increase in the Company's new clients choosing the prepaid storage plans versus the annual storage fee plan.
Net cash used in investing activities for the six months ended May 31, 2020 was $50,228 which was primarily attributable to the purchases of property and equipment.
Net cash used in investing activities for the six months ended May 31, 2019 was $408,870 which was primarily attributable to the purchases of property and equipment.
Net cash used in financing activities for the six months ended May 31, 2020 was $1,508,999, which was primarily attributable to the payments of $1,550,000 to repay the note payable described above offset by the receipt of $41,000 from the exercise of stock options.
Net cash used in financing activities for the six months ended May 31, 2019 was $1,544,298, which was primarily attributable to the payments of $1,550,000 to repay the note payable described above offset by the receipt of $5,700 from the exercise of stock options.
The Company does not have a line of credit.
The Company will closely monitor its liquidity and capital resources due to any potential impact that the COVID-19 pandemic may have on operations.
The Company anticipates making discretionary capital expenditures of approximately $500,000 over the next twelve months for software enhancements and purchases of property and equipment. The Company anticipates funding future property and equipment purchases with cash-on-hand and cash flows from future operations.
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The Company anticipates that its cash and cash equivalents, marketable securities and cash flows from future operations 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 and managing discretionary expenses. If expected increases in revenues are not realized, or if expenses are higher than anticipated, the Company may 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. In addition, the Company may consider seeking equity or debt financing if deemed appropriate for its plan of operations, and if such financing can be obtained on acceptable terms. There is no assurance that any reductions in expenditures, if necessary, will not have an adverse effect on the Company's business operations, including sales activities and the development of new services and technology.
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 2019 Annual Report on Form 10-K filed with the SEC on February 28, 2020. 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 2019 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.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably 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 : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q) - marketscreener.com
