CRYO-CELL INTERNATIONAL, INC. The following discussion and analysis of the financial condition and results of
operations of the Company for the two years ended
1.
our future performance and operating results;
2.
our future operating plans;
3.
our liquidity and capital resources; and
4.
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:
a.
any adverse effect or limitations caused by recent increases in government regulation of stem cell storage facilities;
b.
any increased competition in our business including increasing competition from
public cord blood banks particularly in overseas markets but also in the
c.
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;
d.
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;
e.
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;
f.
any technological or medical breakthroughs that would render our business of stem cell preservation obsolete;
g.
any material failure or malfunction in our storage facilities; or any natural disaster or act of terrorism that adversely affects stored specimens;
h.
any adverse results to our prospects, financial condition or reputation arising from any material failure or compromise of our information systems;
i.
the costs associated with defending or prosecuting litigation matters, particularly including litigation related to intellectual property, and any material adverse result from such matters;
j.
the success of our licensing agreements and their ability to provide us with royalty fees;
k.
any difficulties and increased expense in enforcing our international licensing agreements;
l.
any adverse performance by or relations with any of our licensees;
m.
any inability to enter into new licensing arrangements including arrangements with non-refundable upfront fees;
n.
any inability to realize cost savings as a result of recent acquisitions;
o.
any inability to realize a return on an investment;
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p.
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;
q.
the success of our global expansion initiatives and product diversification;
r.
our actual future ownership stake in future therapies emerging from our collaborative research partnerships;
s.
our ability to minimize our future costs related to R&D initiatives and collaborations and the success of such initiatives and collaborations;
t.
any inability to successfully identify and consummate strategic acquisitions;
u.
any inability to realize benefits from any strategic acquisitions;
v.
the Company's ability to realize a profit on the acquisition of PrepaCyte-CB;
w.
the Company's ability to realize a profit on the acquisition of Cord:Use;
x.
the impact of the COVID-19 pandemic on our sales, operations and supply chain;
y.
the Company's actual future competitive position in stem cell innovation;
z.
future success of its core business and the competitive impact of public cord blood banking on the Company's business;
aa.
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,
bb.
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
cc.
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.
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
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
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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. Due to equipment delivery delays, the Company is
projecting to open the
Corporate Information
We are a
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 the Company's common stock or RSA interests, 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
Revenue. For the fiscal year ended
Processing and Storage Fees. For the fiscal year ended
Product Revenue. For the twelve months ended
Public Cord Blood Banking Revenue. For the twelve months ended
Cost of Sales. For the fiscal year ended
Selling, General and Administrative Expenses. Selling, general and
administrative expenses during the fiscal year ended
Research, Development and Related Engineering Expenses. Research, development
and related engineering expenses for the fiscal year ended
Depreciation and Amortization. Depreciation and amortization (not included in
Cost of Sales) for the fiscal year ended
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Change in the Fair Value of Contingent Consideration. Change in the fair value
of the contingent consideration for the fiscal year ended
Impairment of Public Inventory. The impairment of public inventory for the
twelve months ended
Interest Expense. Interest expense during the fiscal year ended
Gain on Interest Rate Swap. Gain on the change in the fair value of a derivative
for the fiscal year ended
Income Taxes.
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.
There was approximately
Liquidity and Capital Resources
During fiscal 2016 through fiscal 2018, the Company entered into Credit
Agreements ("Credit Agreements") with
On
On
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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
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
•
Net cash provided by operating activities in fiscal 2022 was
•
Net cash provided by operating activities in fiscal 2021 was
•
Net cash used in investing activities in fiscal 2022 was
•
Net cash used in investing activities in fiscal 2021 was
•
Net cash from financing activities in fiscal 2022 was
•
Net cash used in financing activities in fiscal 2021 was
The Company has a revolving line of credit, described above. The balance as of
The Company anticipates making discretionary capital expenditures of
approximately
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
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develop its biopharmaceutical manufacturing capabilities related to mesenchymal stromal cells derived from umbilical cord tissue.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"). ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. ASC 606 also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
In accordance with ASC 606, the Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid when contracts are signed and amortize these costs on a systematic basis, consistent with the pattern of transfer of the storage services provided over time for which the asset relates.
Under ASC 606, revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised services are transferred to the customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring services to a customer ("transaction price").
At contract inception, if the contract is determined to be within the scope of ASC 606, the Company evaluates its contracts with customers using the five-step model: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when (or as) each performance obligation is satisfied. The Company evaluates its contracts for legal enforceability at contract inception and subsequently throughout the Company's relationship with its customers. If legal enforceability with regards to the rights and obligations exist for both the Company and the customer, then the Company has an enforceable contract and revenue recognition is permitted subject to the satisfaction of the other criteria. If, at the outset of an arrangement, the Company determines that a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met. The Company only applies the five-step model to contracts when it is probable that collection of the consideration that the Company is entitled to in exchange for the goods or services being transferred to the customer, will occur.
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The Company records a valuation allowance when it is "more likely than not" that all future income tax benefits will be realized. When the Company changes its determination as to the amount of deferred income tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made. The ultimate realization of the Company's deferred income tax assets depends upon generating sufficient taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance, the Company projects future levels of taxable income. This assessment requires significant judgment. The Company examines the evidence related to the recent history of losses, the economic conditions in which the Company operates and forecasts and projections to make that determination.
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Long-Lived Assets
The Company evaluates the realizability of its long-lived assets, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment, such as reductions in demand or when significant
economic slowdowns are present. Reviews are performed to determine whether the
carrying value of an asset is impaired, based on comparisons to undiscounted
expected future cash flows. If this comparison indicates that there is
impairment and carrying value is in excess of fair value, the impaired asset is
written down to fair value, which is typically calculated using: (i) quoted
market prices or (ii) discounted expected future cash flows utilizing a discount
rate. The Company did not note any impairment for the twelve months ended
Stock Compensation
As of
The Company recognizes stock-based compensation based on the fair value of the related awards. Under the fair value recognition guidance of stock-based compensation accounting rules, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of service-based vesting condition and performance-based vesting condition stock option awards is determined using the Black-Scholes valuation model. For stock option awards with only service-based vesting conditions and graded vesting features, the Company recognizes stock compensation expense based on the graded-vesting method. To value awards with market-based vesting conditions the Company uses a binomial valuation model. The Company recognizes compensation cost for awards with market-based vesting conditions on a graded-vesting basis over the derived service period calculated by the binomial valuation model. The use of these valuation models involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.
The estimation of stock awards that will ultimately vest requires judgment and to the extent that actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period they become known. The Company considered many factors when estimating forfeitures, including the recipient groups and historical experience. Actual results and future changes in estimates may differ substantially from current estimates.
The Company issues performance-based equity awards which vest upon the achievement of certain financial performance goals, including revenue and income targets. Determining the appropriate amount to expense based on the anticipated achievement of the stated goals requires judgment, including forecasting future financial results. The estimate of the timing of the expense recognition is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any revision is reflected in the period of the change. If the financial performance goals are not met, the award does not vest, so no compensation cost is recognized and any previously stock-recognized stock-based compensation expense is reversed.
The Company issues equity awards with market-based vesting conditions which vest upon the achievement of certain stock price targets. If the awards are forfeited prior to the completion of the derived service period, any
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recognized compensation is reversed. If the awards are forfeited after the completion of the derived service period, the compensation cost is not reversed, even if the awards never vest.
On
License and Royalty Agreements
The Company has entered into licensing agreements with certain investors in
various international markets in an attempt to capitalize on the Company's
technology. The investors typically pay a licensing fee to receive Company
marketing programs, technology and know-how in a selected area. The investor may
be given a right to sell sub-license agreements as well. As part of the
accounting for the up-front license revenue, revenue from the up-front license
fee is recognized based on such factors as when the payment is due,
collectability and when all material services or conditions relating to the sale
have been substantially performed based on the terms of the agreement. The
following areas each have one license agreement:
In addition to the license fee, the Company earns a royalty on processing and
storage fees on subsequent processing and storage revenues received by the
licensee in the licensed territory and a fee on any sub-license agreements that
are sold by the licensee where applicable. The Company processes and stores
specimens sent directly from customers of licensees in
Accounts Receivable
Accounts receivable consist of uncollateralized amounts due from clients that have enrolled and processed in the umbilical cord blood stem cell processing and storage programs and amounts due from license affiliates, and sublicensee territories. Accounts receivable are due within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering the length of time accounts receivable are past due, the Company's previous loss history, and the client's current ability to pay its obligations. Therefore, if the financial condition of the Company's clients were to deteriorate beyond the estimates, the Company may have to increase the allowance for doubtful accounts which could have a negative impact on earnings. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Inventories
As part of the Asset Purchase Agreement, the Company has an agreement with
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units which have been processed and frozen but may not ultimately become
distributable (see Note 2). Due to changes in sales trends and estimated
recoverability of cost capitalized into inventory, an impairment charge of
Patents and Trademarks
The Company incurs certain legal and related costs in connection with patent and trademark applications. If a future economic benefit is anticipated from the resulting patent or trademark or an alternate future use is available to the Company, such costs are capitalized and amortized over the expected life of the patent or trademark. The Company's assessment of future economic benefit involves considerable management judgment. A different conclusion could result in the reduction of the carrying value of these assets.
Revenue Sharing Agreements
The Company has entered into Revenue Sharing Agreements ("RSAs") with various parties whereby these parties contracted with the Company for a percentage of future storage revenues the Company generates and collects from clients in specific geographical areas. The RSAs have no definitive term or termination provisions. The sharing applies to the storage fees collected for all specified specimens in the area up to the number covered in the contract. When the number of specimens is filled, any additional specimens stored in that area are not subject to revenue sharing. As empty spaces result from attrition over time, the Company agrees to fill them as soon as possible. The parties typically pay the Company a non-refundable up-front fee for the rights to these future payments. The Company recognized these non-refundable fees as a long-term liability. Given the criteria under which these RSAs are established, cash flows related to these contracts can fluctuate from period to period. All payments made to the other parties to the RSAs are recognized as interest expense. At such time as the total payments can be determined, the Company will commence amortizing these liabilities under the effective interest method. The Company does not intend to enter into additional RSAs.
Contingent Consideration
The contingent consideration is the earnout that Cord:Use is entitled to from
the Company's sale of the public cord blood inventory. The estimated fair value
of the contingent earnout was determined using a
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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