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.
Investors and prospective investors are cautioned that any such forwardlooking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forwardlooking statements as a result of various factors. The
factors that might cause such differences include:
(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 new services relating to other types of stem cells that have not
yet been offered commercially, and there is no assurance that other
stem cell services will be launched or will gain market acceptance;
(v) 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;
(vi) 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;
(vii) any technological or medical breakthroughs that would render our
business of stem cell preservation obsolete;
(viii) any material failure or malfunction in our storage facilities; or any
natural disaster or act of terrorism that adversely affects stored
specimens;
(ix) any adverse results to our prospects, financial condition or
reputation arising from any material failure or compromise of our
information systems;
(x) the costs associated with defending or prosecuting litigation matters,
particularly including litigation related to intellectual property,
and any material adverse result from such matters;
(xi) the success of our licensing agreements and their ability to provide
us with royalty fees;
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(xii) any difficulties and increased expense in enforcing our international
licensing agreements;
(xiii) any adverse performance by or relations with any of our licensees;
(xiv) any inability to enter into new licensing arrangements including
arrangements with non-refundable upfront fees;
(xv) any inability to realize cost savings as a result of recent acquisitions;
(xvi) any inability to realize a return on an investment;
(xvii) any increased U.S. income tax expense as a result of inability to
utilize or exhaustion of net operating losses;
(xviii) 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;
(xix) the success of our global expansion initiatives;
(xx) our actual future ownership stake in future therapies emerging from
our collaborative research partnerships;
(xxi) our ability to minimize our future costs related to R&D initiatives
and collaborations and the success of such initiatives and
collaborations;
(xxii) any inability to successfully identify and consummate strategic
acquisitions;
(xxiii) any inability to realize benefits from any strategic acquisitions;
(xxiv) the Company's ability to realize a profit on the acquisition of
PrepaCyte-CB;
(xxv) the Company's ability to realize a profit on the acquisition of Cord:Use,
(xxvi) the costs associated with proxy contests and its impact on our business,
(xxvii) the impact of the COVID-19 pandemic on our sales, operations and
supply chain and
(xxviii) other factors many of which are beyond our control.
We undertake no obligation to publicly update or revise the forward-looking
statements made in this Form 10Q to reflect events or circumstances after the
date of this Form 10Q 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
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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.
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.
As disclosed in Note 13, on February 23, 2021, the Company entered into a Patent
and Technology License Agreement (the "Agreement") with Duke University
("Duke"). The 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 administer these treatments to patients
with conditions for which there are limited FDA approved therapies, including
cerebral palsy, autism, multiple sclerosis and COVID-19. These treatments
utilize the unique immunomodulatory and potential regenerative properties
derived from cord blood and cord tissue. Per the Agreement, the Company has
been 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 Agreement, the Company intends to expand to a triad of core business units
to include its cord blood bank, biopharmaceutical manufacturing (once BLA(s) or
Emergency Use Authorization(s) are approved by the FDA), and infusion clinic(s)
services, initially under the rights granted to Duke through the FDAs Expanded
Access Program.
During the first quarter of fiscal 2021, the Company capitalized $15,132,189 as
a Duke license agreement which represented the costs to obtain the Agreement and
also recorded a corresponding liability to Duke for the license agreement (see
Note 13). As of August 31, 2021, the balance was $14,891,995, net of
amortization, and is reflected as Duke License Agreement on the accompanying
consolidated balance sheets.
During the nine months ended August 31, 2021, total revenue decreased 9% as
compared to the same period in 2020. The Company reported net income of
approximately $2,721,000 or $0.34 per basic common share for the nine months
ended August 31, 2021 compared to net income of $2,425,000 or $0.32 per basic
common share for the nine months ended August 31, 2020. Net income for the nine
months ended August 31, 2021 principally resulted from a 9% decrease in cost of
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sales, a 7% decrease in selling, general and administrative expenses, a 10%
decrease in interest expense and a 40% decrease in the Contingent Consideration
(described below) which were offset by a 9% decrease in revenue.
At August 31, 2021, the Company had cash and cash equivalents of $7,700,806. The
Company's cash decreased approximately $2,700,000 during the first nine months
of fiscal 2021. Cash provided by operations was approximately $6,259,000 and the
Company received approximately $1,100,000 from the exercise of stock options,
which were offset by $1,554,004 used for the purchase of property and equipment,
$5,106,224 paid to Duke as part of the Patent Option Agreement (see Note 13) and
$3,325,000 used to repay the note payable.
In March 2020, the World Health Organization declared a pandemic related to the
rapidly spreading coronavirus ("COVID-19") outbreak. 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 and continues to actively monitor the global outbreak and spread of
COVID-19 and continues to take steps to mitigate the potential risks to us posed
by its spread and related circumstances and impacts. Due to the change in
consumer buying patterns as a result of COVID-19, the Company has experienced a
decline in new client and public banking sales resulting in a decrease in
revenues for the three and nine months ended August 31, 2021 compared to the
three months ended August 31, 2020. While the ultimate health and economic
impact of COVID-19 remains highly uncertain, we expect that our business
operations and results of operations, including our net sales, earnings and cash
flows, may continue to be impacted by decreases in new client and public banking
sales. We cannot predict the timing and speed of the recovery, and any delay in
the recovery could significantly impact our future results.
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 revenue sharing agreements
("RSA") interests, a deregistration of the Company's 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 - Nine-Month Period Ended August 31, 2021 Compared to the
Nine-Month Period Ended August 31, 2020
Revenue. Revenue for the nine months ended August 31, 2021 was $21,569,464 as
compared to $23,606,976 for the same period in 2020. The decrease in revenue was
in part due to a 5% 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 an 8%
decrease in the number of new domestic cord blood specimens processed in the
first nine months of fiscal 2021 versus the same period in 2020.
Product Revenue. For the nine months ended August 31, 2021, revenue from the
product sales was $56,200 compared to $200,507 for the nine months ended August
31, 2020. The decrease in revenue is due to what the Company believes is a
temporary change in customer demand.
Public Cord Blood Banking Revenue. For the nine months ended August 31, 2021,
revenue from the public cord blood banking sales was $289,231 compared to
$484,547 for the nine months ended August 31, 2020. The decrease in revenue is
due to the volatility of customer demand.
Licensee Income. Licensee income for the nine months ended August 31, 2021 was
$0 as compared to $629,702 for the 2020 period. Licensee and royalty income for
the nine months ended August 31, 2021 and August 31, 2020 consists of royalty
income earned on the processing and storage of specimens in India where the
Company has a definitive License and Royalty Agreement.
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Per the License and Royalty Agreement with LifeCell, there is a $1,000,000 cap
on the amount of royalty due to the Company per year and a $10,000,000 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 $10,000,000 in royalty income due under the
terms of the License and Royalty Agreement, of which, LifeCell has paid the
Company approximately $9,700,000 as of August 31, 2021. The balance of
approximately $300,000 is reflected as Accounts Receivable on the accompanying
consolidated balance sheets. As of August 31, 2021, the Company has recognized
all of the licensee income due under the License and Royalty Agreement with
LifeCell.
Cost of Sales. Cost of sales for the nine months ended August 31, 2021 was
$6,693,806 as compared to $7,344,011 for the same period in 2020, representing a
9% 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 $154,000 and $155,000 for the nine
months ended August 31, 2021 and 2020, respectively. Cost of Sales also
includes $129,581 and $128,153 for the nine months ended August 31, 2021 and
August 31, 2020, respectively, related to the costs associated with production
of the PrepaCyte®-CB processing and storage system. Also included in Cost of
Sales is $1,111,022 and $1,283,203 for the nine months ended August 31, 2021 and
August 31, 2020, respectively, related to the public banks. The decrease in cost
of sales for the nine months ended August 31, 2021 versus August 31, 2020 is due
to the decrease in the number of new domestic cord blood specimens processed
during the nine months ended August 31, 2021 versus August 31, 2020.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended August 31, 2021 were
$10,075,502 as compared to $10,804,404 for the 2020 period representing a 7%
decrease. These expenses are primarily comprised of selling and marketing
expenses, salaries and wages for personnel and professional fees. The decrease
in selling, general and administrative expenses is primarily attributable to a
$586,000 or a 13% decrease in selling expenses, a $230,000 or a 46% decrease in
bad debt expense and a $217,000 or a 48% decrease in stock compensation expense
for the nine months ended August 31, 2021 versus the nine months ended August
31, 2020. These expenses are offset by an increase for the nine months ended
August 31, 2021 of $254,000 in expenses associated with the development of the
Cryo-Cell Institute for Cellular Therapies' and $131,000 in patent maintenance
costs associated with the Duke License Agreement (see Note 13) versus the same
period in 2020.
Research, Development and Related Engineering Expenses. Research, development
and related engineering expenses for the nine months ended August 31, 2021 were
$19,431 as compared to $16,791 for the 2020 period.
Depreciation and Amortization. Depreciation and amortization (not included in
Cost of Sales) for the nine months ended August 31, 2021 was $558,167 compared
to $130,034 for the 2020 period. The increase in depreciation and amortization
is the result of the Duke License Agreement as described above (see Note 13).
Change in the Fair Value of Contingent Consideration. Change in the fair value
of the contingent consideration for the nine months ended August 31, 2021 was a
decrease of $604,109 compared to a decrease of $169,741 for the 2020 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, 2021. 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, 2021,
was $957,479 compared to $1,069,345 during the comparable period in 2020, of
which, $146,756 and $321,957, respectively, related to the credit and
subordination agreements with Texas Capital Bank, National Association as
described in Note 5. Interest expense is also comprised of $695,591 and
$747,388 as of the nine months ended August 31, 2021 and 2020, 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, 2021 is due to the accretion of the outstanding
liability due to Duke per the Agreement, see Note 13.
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Extinguishment of Revenue Sharing Agreement. On August 31, 2020, the Company
entered into a Termination Agreement with the Erie Group pursuant to which all
such parties terminated all of their respective rights, duties, obligations,
options, and liabilities to each other arising out of or related to the
Cryo-Cell International, Inc. Space and Time Sharing (SATS) Lease Agreement,
Addendum thereto, Addition to such Addendum, and Amendment to the Cryo-Cell
International, Inc. Space and Time Sharing (SATS) Lease Agreement among the
Company and the Erie Group (collectively, the "SATS Agreement"). Additionally,
pursuant to the terms of the Termination Agreement, the Company made a payment
of $1,939,748 on the Effective Date and the parties released each other from all
claims related to the SATS Agreement and to dismiss with prejudice the
previously disclosed complaint (See Note 9). Pursuant to the terms of the
Agreement, the Erie Group will no longer have the rights to share in a portion
of the Company's storage revenues derived from specimens which originated in the
state of Illinois and its five contiguous states. The payment amount of
$1,939,748 was offset by the carrying amount of the long-term liability related
to the SATS in the amount of $550,000 and accrued expenses in the amount of
$279,100 to reflect the extinguishment of revenue sharing agreements in the
amount of $1,070,900 for the nine months ended August 31, 2020.
Income Taxes. U.S. income tax expense for the nine months ended August 31, 2021
was $1,134,198 compared to $715,858 for the nine months ended August 31, 2020.
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 $0 and $68,102 for the nine
months ended August 31, 2021 and 2020, respectively, of foreign income tax
expense, which is included in income tax expense in the accompanying
consolidated statements of income.
Results of Operations - Three Month Period Ended August 31, 2021 Compared to the
Three-Month Period Ended August 31, 2020
Revenue. Revenue for the three months ended August 31, 2021 was $7,503,652 as
compared to $8,114,358 for the same period in 2020, a decrease of 8%.
Processing and Storage Fees. For the three months ended August 31, 2021,
processing and storage fees revenue was $7,326,516 compared to $7,486,858 for
the three months ended August 31, 2020, a 2% decrease. Processing and storage
fee revenue is attributable to an 8% increase in recurring annual storage fee
revenue offset by a less than 1% decrease in the number of new domestic cord
blood specimens processed in the third quarter of fiscal 2021 versus the same
period in 2020. The average selling price in the third quarter of fiscal 2021
was 37% less than in the same period in 2020.
Product Revenue. For the three months ended August 31, 2021, revenue from the
product sales was $18,200 compared to $82,800 for the three months ended August
31, 2020. The decrease in revenue is due to what the Company believes is a
temporary change in customer demand.
Public Cord Blood Banking Revenue. For the three months ended August 31, 2021,
revenue from the public cord blood banking sales was $158,936 compared to
$116,826 for the three months ended August 31, 2020. The decrease in revenue is
due to the volatility of customer demand.
Licensee Income. Licensee income for the three months ended August 31, 2021, was
$0 as compared to $427,874 for the 2020 quarter. Licensee income for the three
months ended August 31, 2021 and August 31, 2020 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 and Royalty Agreement.
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Per the License and Royalty Agreement with Lifecell, there is a $1,000,000 cap
on the amount of royalty due to the Company per year and a $10,000,000 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 $10,000,000 in royalty income due under the
terms of the License and Royalty Agreement, of which, Lifecell has paid the
Company approximately $9,700,000 as of August 31, 2021. The balance of
approximately $300,000 is reflected as Accounts Receivable on the accompanying
consolidated balance sheets. As of August 31, 2021, the Company has recognized
all of the licensee income due under the License and Royalty Agreement with
Lifecell.
Cost of Sales. Cost of sales for the three months ended August 31, 2021 was
$2,458,938 as compared to $2,360,324 for the same period in 2020, representing a
4% increase. 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 $51,000 for the three
months ended August 31, 2021 and 2020, respectively. Also, included in cost of
sales is $53,498 and $55,021 related to the costs associated with production of
the Prepacyte®-CB processing and storage system for the three months ended
August 31, 2021 and August 31, 2020, respectively. Public cord blood banking
costs included in cost of sales for the three months ended August 31, 2021 and
2020, are $462,021 and $394,162, respectively. The increase in cost of sales for
the three months ended August 31, 2021 versus August 31, 2020 is due to the
increase in the cost of lab supplies associated with the current economic trends
and the increase in costs due to the public cord blood bank.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended August 31, 2021 were
$3,493,794 as compared to $3,375,807 for the 2020 period, representing a 3%
increase. Selling, general and administrative expenses is primarily comprised of
expenses for selling and marketing expenses, salaries and wages for personnel
and professional fees. The increase in selling, general and administrative
expenses is primarily attributable to approximately $167,000 in expenses
associated with the development of the Cryo-Cell Institute for Cellular
Therapies' and $104,000 in patent maintenance costs associated with the Duke
License Agreement (see Note13). Also attributable to the increase for the three
months ended August 31, 2021 versus August 31, 2020 is approximately $67,000 or
a 67% increase in bad debt, offset by an 8% or a $108,000 decrease in selling
expenses.
Research, Development and Related Engineering Expenses. Research, development
and related engineering expenses for the three months ended August 31, 2021 were
$10,004 as compared to $1,248 for the 2020 period.
Depreciation and Amortization. Depreciation and amortization (not included in
Cost of Sales) for the three months ended August 31, 2021 was $269,482 compared
to $42,510 for the 2020 period. The increase in depreciation and amortization is
the result of the Duke License Agreement as described above (see Note 13).
Change in the Fair Value of Contingent Consideration. Change in the fair value
of the contingent consideration for the three months ended August 31, 2021 was a
decrease of $324,904 compared to a decrease of $145,752 for the 2020 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, 2021. 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,
2021, was $335,870 compared to $338,675 during the comparable quarter in
2020. Interest expense for the three months ended August 31, 2021 and August 31,
2020 consists of $38,252 and $87,753, respectively, related to the credit and
subordination agreements with Texas Capital Bank, National Association as
described in Note 5. Interest expense is also comprised of $239,806 and $215,173
as of the three months ended August 31, 2021 and 2020, 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, 2021 is due to the accretion of the outstanding
liability due to Duke per the Agreement, see Note 13.
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Extinguishment of Revenue Sharing Agreement. On August 31, 2020, the Company
entered into a Termination Agreement with the Erie Group pursuant to which all
such parties terminated all of their respective rights, duties, obligations,
options, and liabilities to each other arising out of or related to the
Cryo-Cell International, Inc. Space and Time Sharing (SATS) Lease Agreement,
Addendum thereto, Addition to such Addendum, and Amendment to the Cryo-Cell
International, Inc. Space and Time Sharing (SATS) Lease Agreement among the
Company and the Erie Group (collectively, the "SATS Agreement"). Additionally,
pursuant to the terms of the Termination Agreement, the Company made a payment
of $1,939,748 on the Effective Date and the parties released each other from all
claims related to the SATS Agreement and to dismiss with prejudice the
previously disclosed complaint (See Note 9). Pursuant to the terms of the
Agreement, the Erie Group will no longer have the rights to share in a portion
of the Company's storage revenues derived from specimens which originated in the
state of Illinois and its five contiguous states. The payment amount of
$1,939,748 was offset by the carrying amount of the long-term liability related
to the SATS in the amount of $550,000 and accrued expenses in the amount of
$279,100 to reflect the extinguishment of revenue sharing agreements in the
amount of $1,070,900 for the three months ended August 31, 2020.
Income Taxes. U.S. income tax expense for the three months ended August 31, 2021
and August 31, 2020 was $404,735 and $105,296, respectively.
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 $0 and $46,274 for the
three months ended August 31, 2021 and 2020, respectively, of foreign income tax
expense, which is included in income tax expense in the accompanying
consolidated statements of income.
Liquidity and Capital Resources
On August 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 August 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 August 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.
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.
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At August 31, 2021, the Company had cash and cash equivalents of $7,700,806 as
compared to $10,361,125 at November 30, 2020. The decrease in cash and cash
equivalents during the nine months ended August 31, 2021 was primarily
attributable to the following:
Net cash provided by operating activities for the nine months ended August 31,
2021 was $6,258,619, which was attributable to the Company's operating
activities.
Net cash provided by operating activities for the nine months ended August 31,
2020 was $5,489,878, which was attributable to the Company's operating
activities.
Net cash used in investing activities for the nine months ended August 31, 2021
was $6,660,228 which was primarily attributable $1,510,150 used to purchase real
estate for the Company's Institute of Cellular Therapies in North Carolina,
$43,854 used to the purchase equipment and software and $5,106,224 used as part
of the Patent Option and Technology License Agreement with Duke (See Note 13).
Net cash provided by investing activities for the nine months ended August 31,
2020 was $305,691 which was attributable to cash received due to the liquidation
of marketable securities in the amount of $708,087, offset by $52,396 used to
purchase property and equipment and $350,000 used as part of the Patent Option
Agreement with Duke (See Note 13).
Net cash used in 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 note payable described above offset by the receipt of $1,066,290 from
the exercise of stock options.
Net cash used in financing activities for the nine months ended August 31, 2020
was $4,228,998, which was primarily attributable to the payments of $2,324,998
to repay the note payable described above, $1,900,000 used to terminate a
revenue sharing agreement (See Note 14), and $45,000 used to pay the Cord:Use
earnout (See Note 1) which are offset by the receipt of $41,000 from the
exercise of stock options.
The Company does not have a line of credit.
The Company anticipates making discretionary capital expenditures of
approximately $10,000,000 over the next twelve months for software enhancements,
purchases of property and equipment and obligations under the Patent and
Technology License Agreement with Duke University. The Company anticipates
funding future property and equipment purchases with cash-on-hand and cash flows
from future operations.
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. 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 13.).
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
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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 2020
Annual Report on Form 10-K filed with the SEC on March 1, 2021. 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 2020 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 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. 
