U. S. Securities and Exchange Commission
Washington D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended August 31, 2001
/_/ Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from ____________ to _________
Commission File Number 0-23386
CRYO-CELL INTERNATIONAL, INC.
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(Exact name of Small Business Issuer as Specified in its Charter)
DELAWARE 22-3023093
-------------------------- --------------------------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
3165 McMullen Booth Road, Building B, Clearwater, Florida 33761
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(Address of Principal Executive Offices) (Zip Code)
Issuer's phone number, including area code: (727) 450-8000
___________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report).
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No /_/
State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date. As of August 31, 2001,
11,039,029 shares of $0.01 par value common stock were outstanding.
Transitional Small Business Disclosure Format (check one). Yes /_/ No /X/
CRYO-CELL INTERNATIONAL, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports On Form 8-K 22
SIGNATURES 24
2
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
ASSETS
------
August 31, November 30,
2001 2000
----------------- -----------------
Current Assets
--------------
Cash and cash equivalents $ 5,154,304 $ 2,695,794
Accounts receivable and advances (net of allowance for
doubtful accounts of $29,000) 212,741 131,573
Receivable - Litigation - 69,178
Receivable - Revenue Sharing Agreement 370,000 380,000
Note Receivable 100,000 -
Marketable securities 336,331 429,428
Prepaid expenses and other current assets 251,576 174,817
----------------- -----------------
Total current assets 6,424,952 3,880,790
----------------- -----------------
Property and Equipment 3,202,385 3,018,708
---------------------- ----------------- -----------------
Other Assets
------------
Intangible assets (net of amortization of $63,532 and $57,018, respectively) 117,031 108,675
Investment in European Affiliates 2,800,000 1,000,000
Investment option to purchase 100,000 100,000
Loan receivable - affiliate 150,000 100,000
Deposits with vendors and others 658,495 29,195
----------------- -----------------
Total other assets 3,825,526 1,337,870
----------------- -----------------
$ 13,452,863 $ 8,237,368
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
August 31, November 30,
2001 2000
----------------- -----------------
Current Liabilities
-------------------
Accounts payable $ 93,931 $ 92,911
Accrued expenses and withholdings 86,213 182,782
Current portion of obligations under capital leases 1,933 3,122
----------------- -----------------
Total current liabilities 182,077 278,815
----------------- -----------------
Other Liabilities
-----------------
Unearned revenue 974,174 1,279,683
Deposits 153,225 28,725
Obligations under capital leases-net of current portion 9,394 14,530
----------------- -----------------
Total other liabilities 1,136,793 1,322,938
----------------- -----------------
Stockholders' Equity
--------------------
Preferred stock (500,000 $.01 par value authorized and unissued) - -
Common stock (20,000,000 $.01 par value common shares
authorized; 11,039,029 at August 31, 2001, and 10,135,629
at November 30, 2000 issued and outstanding) 110,380 101,327
Additional paid-in capital 19,900,716 15,214,215
Additional paid-in capital - stock options 209,556 124,010
Accumulated other comprehensive income 117,831 26,928
Accumulated deficit (8,204,490) (8,830,865)
----------------- -----------------
Total stockholders' equity 12,133,993 6,635,615
----------------- -----------------
$ 13,452,863 $ 8,237,368
================= =================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Three Months Ended Nine Months Ended
------------------ -----------------
August 31, August 31, August 31, August 31,
2001 2000 2001 2000
---------------- ----------------- ------------------ ------------------
Revenue $ 1,414,417 $ 554,628 $ 4,046,906 $ 1,500,269
---------------- ----------------- ------------------ ------------------
Costs and Expenses:
Cost of sales 454,289 258,562 1,113,801 641,890
Marketing, general & administrative expenses 936,729 739,179 2,686,896 1,969,202
Research, development and related engineering 30,318 94,760 49,409 290,485
Depreciation and amortization 74,012 27,289 222,196 81,838
---------------- ----------------- ------------------ ------------------
Total cost and expenses 1,495,348 1,119,789 4,072,302 2,983,415
---------------- ----------------- ------------------ ------------------
Operating Income (Loss) (80,931) (565,162) (25,396) (1,483,146)
---------------- ----------------- ------------------ ------------------
Other Income and (Expense):
Interest Income 22,124 42,810 83,571 84,142
Interest Expense (402) (778) (1,396) (2,023)
Other Income 212,039 200,000 582,181 400,000
Settlement on Litigation 119,314 62,631 119,314 62,631
Loss on Sale of Marketable Securities - - (131,899) -
---------------- ----------------- ------------------ ------------------
Total other income 353,075 304,663 651,771 544,750
---------------- ----------------- ------------------ ------------------
Net Income (Loss) $ 272,144 $ (260,499) $ 626,375 $ (938,396)
================ ================= ================== ==================
Net income (loss) per share - basic and diluted $ 0.03 ($0.03) $ 0.06 ($0.10)
================ ================= ================== ==================
Number of Shares Used In Computation
Basic and diluted 10,384,844 10,072,120 10,241,437 9,757,789
================ ================= ================== ==================
Comprehensive income (loss):
Net income (loss): 272,144 (260,499) 626,375 (938,396)
Other comprehensive income (loss)
Net increase (decrease) in value
of marketable securities 120,713 (146,452) 90,903 251,260
---------------- ----------------- ------------------ ------------------
Comprehensive income (loss) 392,857 (406,951) 717,278 (687,136)
================ ================= ================== ==================
Comprehensive income (loss) per share - basic and diluted 0.04 (0.04) 0.07 (0.07)
================ ================= ================== ==================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
-----------------
August 31, August 31,
2001 2000
---- ----
Cash Flows from Operating Activities
Net Income (Loss) $ 626,375 $ (938,396)
Adjustments to reconcile net loss
to cash used for operating activities:
Depreciation and amortization 246,394 102,011
Loss on sale of marketable securities 131,899 -
Issuance of common stock for interest and services rendered 318,646 201,273
Changes in assets and liabilities:
Accounts receivable (81,168) (76,949)
Receivable - Litigation 69,178 -
Receivable - CCEL Europe - (600,000)
Receivable - Revenue Sharing Agreement 10,000 50,000
Receivable - Insurance Claim - (62,631)
Note Receivable (100,000) -
Receivable - Litigation - -
Prepaid expenses and other current assets (76,759) (27,787)
Deposits (479,300) -
Accounts payable 1,019 37,982
Accrued expenses (96,569) (22,376)
Refundable income taxes payable - 100
Unearned revenue and deposits (331,008) 1,098,197
---------------- --------------------
Net cash provided by (used for) operating activities 238,707 (238,576)
---------------- --------------------
Cash flows from investing activities:
Investment - option to purchase - (100,000)
Investment in European Affiliates (1,800,000) -
Loan receivable 250,000 -
Purchases of securities - (2,500)
Purchases of property and equipment (423,557) (363,447)
Payments for intangible assets (14,870) (23,630)
---------------- --------------------
Net cash provided by (used for) investing activities (1,988,427) (489,577)
---------------- --------------------
Cash flows from financing activities
Proceeds from the sale of securities 52,101 21,000
Proceeds from the issuance of common stock 24,500
Proceeds from the sale of warrants 300,000 -
Exercise of stock options 3,837,955 2,476,351
Repayment of capital leases (6,326) (5,699)
---------------- --------------------
Net cash provided by financing activities: 4,208,230 2,491,652
---------------- --------------------
Increase (decrease) in cash and cash equivalents 2,458,510 1,763,499
Beginning of period 2,695,794 1,555,190
---------------- --------------------
End of period $ 5,154,304 $ 3,318,689
================ ====================
Supplemental disclosure of cash flow information:
Interest $ 1,396 $ 2,023
================ ====================
Income taxes $ - $ -
================ ====================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 1 - FINANCIAL STATEMENTS
--------------------------------
The Consolidated Financial Statements including the Consolidated Balance
Sheet as of August 31, 2001, Consolidated Statements of Operations for the nine
months ended August 31, 2001 and Consolidated Statement of Cash Flows for the
nine months ended August 31, 2001 have been prepared by the Company, without
audit. In the opinion of Management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and changes in cash flows at August 31, 2001 and for all
periods presented have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's November 30, 2000 Annual
Report on Form 10-KSB.
NOTE 2 - MARKETABLE SECURITIES
---------------------------------
Return on Investment Corporation
In August 2000 Return on Investment Corporation (ROI) merged into Net/Tech
International, Inc. (NTTI). ROI exchanged one share of common stock for twenty
shares of NTTI common stock.
In November 1998 the Company's ownership percentage in Net/Tech
International Inc. (NTTI) decreased to less than 20% of the outstanding shares
of NTTI. In previous years, the Company accounted for its investment in NTTI
using the equity method but as of the date upon which its ownership percentage
fell below 20% the Company used the guidance in SFAS 115 Accounting for Certain
Investment in Debt and Equity Securities, to account for the investment. Since
NTTI stock was thinly traded and subject to considerable price fluctuation, if
the Company were to attempt to sell large blocks of shares, it was unlikely that
the Company would be able to obtain the exchange market value listed. This
security was therefore subject to considerable market risk as well as subject to
certain trading restrictions that limit the number of shares that can be sold
during a 90-day period.
The Company recognized losses under the equity method for the NTTI
investment during 1998 reducing the cost basis of the stock to $0. An unrealized
gain has been recorded as a component of stockholders equity in the amount of
$289,011 and $389,430 to reflect the fair market value of the investment as of
August 31, 2001 and August 31, 2000, respectively.
6
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 2 - MARKETABLE SECURITIES (CONT'D)
------------------------------------------
Other Securities
In 1997 the Company acquired 100,000 shares of an equity security in
payment for the sale of a Revenue Sharing Agreement. The original cost as
determined by the trading price on the date of acquisition was $400,000. During
February and March 2001, the Company sold 46,000 shares. The gross proceeds from
the sales were $52,101, which resulted in a loss of $131,899, which is
recognized as a Loss on the Sale of Securities. The fair value of this security
as of August 31, 2001 and August 31, 2000 was $44,820 and $190,620, respectively
and the unrealized holding loss on this security was $171,180 and $209,380 as of
August 31, 2001 and August 31, 2000, respectively.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
-----------------------------------------
In June 1998, the Company entered into an agreement with World Medical
Match, a non-profit corporation, whose mission includes assisting the poor with
funds to provide them access to medical matching opportunities. The agreement
states that World Medical Match agrees to grant the Company $50,000 for the
purpose of paying for 200 U-Cord((TM)) stem cell collection kits, processing and
the first year of cryogenic storage for the benefit of indigent expectant
parents. Upon execution of the agreement the Company was granted $25,000, the
unused portion is classified as a deposit on the balance sheet. The Company is
currently working with local medical practices, hospitals, and other medical
industry organizations to implement this project and at August 31, 2001 has
virtually depleted the $25,000 initial deposit. The Company has requested the
release of the second $25,000.
In January 2000 the Company extended its marketing agreement for three
years with Lamaze Publishing Company to sponsor the Lamaze You and Your Baby
tutorial tape and full-page advertisements in the Lamaze Parent Magazine at an
initial cost of $213,362. The total cost for 2001 is $223,585. In July 1999, the
Company was informed that Lamaze Publishing Company was acquired by iVillage,
Inc., a leading online women's network. The Company's agreements with Lamaze
will remain in tact, including the exclusivity provisions as the only cord blood
preservation company on the Lamaze You and Your Baby educational videotape
through the year 2003.
On April 6, 2000, the Company entered into a renewable agreement with
COLTEC, Ltd. for the exclusive license to market the Company's U-Cord(TM)
program in Europe. The marketing rights allow COLTEC, Ltd. to directly market
the U-Cord program, sell revenue sharing agreements or further sub-license the
marketing rights throughout Europe. The Company received $1,400,000 in cash for
the marketing license and will receive royalties of 10.5% to 20% of adjusted U-
Cord processing and storage revenues to be generated in Europe, and granted
COLTEC, Ltd. a three year option to purchase 100,000 shares of the Company's
common stock ($8.00 exercise price) and will issue up to 100,000 additional
options ($12.00 exercise price) as needed, to facilitate sales of sub-licensing
and/or revenue sharing agreements in Europe. The Company recognized $465,000 of
the licensing fees in fiscal 2000 and $525,000 as of August 31, 2001. Subsequent
to the licensing agreement date, COLTEC, Ltd. formed a corporation, CRYO-CELL
Europe, B.V. to engage in the cryogenic cellular storage business under the
agreement. On September 19, 2000, the Company entered into an agreement to
purchase approximately 6% of CRYO-CELL Europe, B.V. In October and November
2000, the Company paid $1,000,000 for 38,760 shares of the capital stock of
CRYO-CELL Europe, B.V. that the Company owned on January 24, 2001.
7
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 3 - COMMITMENTS AND CONTINGENCIES (CONT'D)
--------------------------------------------------
On August 28, 2001, the Company entered into an agreement with CRYO-CELL
Europe, N.V. to purchase 21.9% of CRYO-CELL Italia, Srl from CRYO-CELL Europe's
equity in this emerging business entity. CRYO-CELL Italia intends to offer the
U-Cord program to expectant parents in Italy, initially operating from a
laboratory in the Vatican-owned San Raphaelo Hospital in Milan. Through its
prior agreement with CRYO-CELL Europe, the Company will receive a portion of the
processing and storage fees generated by CRYO-CELL Italia's operations. The
Company's equity purchase of $1,800,000 was facilitated by the exercise of
previously issued stock options.
On June 13, 2001, the Company entered into an agreement for the exclusive
license to market the Company's U-Cord program. The license allows CRYO-CELL de
Mexico to directly market and operate the U-Cord program throughout Mexico and
Central America. The total cost of the license is $900,000 and the licensing
fees are 10.5% to 18% of adjusted U-Cord processing and storage revenues to be
generated in Mexico and Central America. Per the agreement CRYO-CELL de Mexico
will purchase 100,000 warrants at $1.00 each giving them the right to purchase
100,000 shares of the Company's common stock at an exercise price of $8.00 per
share. In June 2001 an initial deposit of $100,000 was received. The remainder
of the payments is due to be paid in three installments over a two-year period.
During October 2001, the License Agreement was revised. The initial cost of the
license was reduced to $600,000 in exchange for a higher percentage of on-going
fees. The Company will now receive 15% of processing fees and 25% of annual
storage fees.
On August 15, 2001, the Company entered into an agreement with CRYO-CELL
Middle East, Inc. for the exclusive license to market the Company's U-Cord
program in Israel and throughout the Middle East. The total cost of the license
is $1,000,000 which will be recognized by the Company over a three year period.
In addition to the license fees, the Company is entitled to receive 15% of net
processing revenues and at least 18% of annual storage fees generated by
CRYO-CELL Middle East's operations. In addition, the Company agreed to the sale
of 100,000 warrants at $1.00 each to purchase shares of CCEL at $9.00 per share
over the next five years. In August 2001 the Company received the initial
deposit of $50,000 and $100,000 for the purchase of the warrants.
NOTE 4 - LEGAL PROCEEDINGS
-----------------------------
On or about July 11, 1996, CRYO-CELL filed suit in San Francisco Superior
Court against the University of Arizona, Dr. David Harris and Cord Blood
Registry, Inc. (CBR). The suit claimed breach of contract and other related
business torts. After settlement discussions were unproductive, the University
of Arizona counter-sued CRYO-CELL for breach of contract and negligent
misrepresentation on March 27, 1997.
On July 20, 1998, as a result of the evidence, the jury awarded CRYO-CELL
$1,050,000 against Defendant University of Arizona. In addition, an award of
$120,000 was granted to the Company against the University of Arizona and David
Harris, individually, for misappropriation of trade secrets. The court rejected
three post-trial motions by the University of Arizona including a request to
reduce the award or set aside the verdict.
8
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 4 - LEGAL PROCEEDINGS (CONT'D)
--------------------------------------
On or about September 27, 1999 the Company accepted the University's offer
of $800,000 and settled the matter. On September 30, 1999, the Company received
$441,000 from the University of Arizona. The remaining balance of $359,000 is
being held in escrow, to satisfy a legal lien filed November 4, 1998 by the
Company's previous attorneys, Horwitz and Beam. The Company disputes their
position and has countersued Horwitz and Beam for malpractice and is seeking
$1,000,000 in compensatory damages and an unspecified amount of punitive damages
deemed appropriate by the court. CRYO-CELL retained the services of Horwitz &
Beam, a California law firm, to handle the above-described lawsuit including its
allegations against CBR for interference in a legitimate contract between two
parties and unfair business practices, among other claims. The court granted a
summary judgment dismissal in favor of CBR. CRYO-CELL believes that Horwitz &
Beam mishandled the CBR aspect of the case and certain aspects of its case
against the University of Arizona. There is a dispute concerning the amount of
fees owed by the Company to Horwitz & Beam.
On March 8, 1999, the Company, the Company's CEO and Chairman, the
Company's Executive Vice President, and the Company's legal counsel were named
as the defendants in a lawsuit filed in the Superior Court of Orange County,
California by Horwitz & Beam, the attorneys which had represented CRYO-CELL in
its suit against the University of Arizona et al. The plaintiff alleges breach
of contract and seeks payment of $129,822 in allegedly unpaid fees and costs
associated with the University of Arizona litigation. The plaintiff also asserts
claims of misrepresentation. In reference to these misrepresentation claims,
plaintiff has filed a Statement of Damages, which asserts $1,000,000 in general
damages and $3,500,000 in punitive damages.
The Company believes there is no merit to the suit and that none of the
claimed $129,822 in fees is due and owing under the contract. The Company
believes that Horwitz & Beam brought this action and improperly sought punitive
damages for the purpose of interfering with the Company's efforts to raise and
maintain additional capital.
Accordingly, on June 14, 1999, the Company filed: (1) an answer denying all
liability; (2) a counterclaim for breach of contract and malpractice, seeking in
excess of $1 million in compensatory damages arising from the malpractice; (3) a
motion to dismiss the individual defendants for lack of jurisdiction; and (4) a
motion to dismiss all punitive damages allegations against the Company.
On December 17, 1999, Judge Alicemarie H. Stotler of the United States
District Court in the Central District of California, issued an Order in which
she: (1) granted CRYO-CELL International, Inc.'s ("CRYO-CELL") Motion to Strike
Punitive Damages and Dismiss Part of the Complaint; (2) granted Daniel
Richard's, Mark Richard's and Gerald F. Maass' (the "Individual Defendants")
Motion to Dismiss Complaint for Lack of Personal Jurisdiction; and (3) granted
in part and denied in part Horwitz & Beam, Inc.'s ("H&B") Motion for Order
Dismissing Counterclaim and/or Strike Portions Thereof. As discussed in more
detail below, the net effect of this order was to reframe the Complaint as a fee
dispute, as opposed to a multi-million dollar claim for fraud against CRYO-CELL
and its corporate officers. By its order, the Court has barred recovery in this
action against the Individual Defendants, and has reduced CRYO-CELL's exposure
from over $3.5 million dollars to $129,822, plus a possible award of attorneys'
fees.
9
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 4 - LEGAL PROCEEDINGS (CONT'D)
--------------------------------------
On June 1, 2001, the Company entered into a settlement of the litigation
Horwitz & Beam v. CRYO-CELL International, Inc. pending in Federal District
Court for the Central District of California. The settlement includes the
release of all claims against CRYO-CELL. It also provides for the release of all
claims that CRYO-CELL had against Horwitz & Beam (and certain Horwtiz & Beam
attorneys), arising from Horwitz & Beam's prior representation of the Company in
litigation against the University of Arizona and David Harris.
Under the terms of the settlement, CRYO-CELL and Horwitz & Beam are to
split $376,984, previously held in escrow pending resolution of the dispute.
Each party will bear its own attorney's fees and costs. On June 22, 2001, the
Company received $188,492, which under the terms of the settlement was fifty
percent of the monies held in escrow. A gain on settlement of $119,314 has been
recognized in the third quarter of fiscal 2001.
NOTE 5 - STOCKHOLDERS' EQUITY
--------------------------------
During 2000, the Company received $21,000 in cash proceeds from the sale of
5,000 shares of its common stock through private placements. The Company also
issued 879,250 common shares to option holders who exercised these options in
2000 for $2,540,203. As of August 31, 2001 the Company issued 785,450 shares of
its common shares to option holders who exercised options for $3,837,955. The
Company also received $24,500 in cash proceeds from the sale of 7,000 shares of
its common stock. On May 30, 2001 the Company received $200,000 for the purchase
of 100,000 stock warrants. The warrants may be exercised at a price of $6.00 per
share and expire in 2006.
The Company made payments for consulting services through the issuance of
common stock. Consulting fees of $233,100 were paid by the issuance of 48,950
common shares as of August 31, 2001. The Company also issued 65,000 shares of
its common stock to the University of South Florida per the agreement made
between the University and CCEL Bio-Therapies, Inc., a subsidiary of the
Company, during the first and second quarters of fiscal 2001.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its stock options. Accordingly, compensation expense is
recognized for the amount of the excess of the market price over the exercise
price on the date of the grant.
10
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 5 - STOCKHOLDERS' EQUITY (CONT'D)
-----------------------------------------
On or about July 25, 2001 the Board of Directors of CRYO-CELL
International, Inc. announced that the Company will declare and distribute a
stock dividend in the shares of its wholly-owned subsidiary, Stem Cell
Preservation Technologies, Inc. Stem Cell Preservation is a developing stage
company which will be involved in the development of marketing programs for the
collection and preservation of adult stem cells.
All record shareholders of CRYO-CELL (CCEL) on August 31, 2001 will receive
a distribution of three shares of Stem Cell Preservation Technologies, Inc.
common stock for every four shares of CCEL that they owned on the record date.
The payment date of the shares to be distributed will follow the effective date
of a registration statement, which is anticipated in four to six months. Stem
Cell Preservation Technolgies, Inc. is currently preparing this registration
statement which it intends to file with the Securities and Exchange Commission.
Upon the effectiveness of the registration statement and distribution of the
shares, shareholders will be able to sell one-third of their shares immediately
and the balance over the following two years.
NOTE 6 - AGREEMENTS
----------------------
Arizona/Florida
On February 9, 1999, the previous agreements with the Company's Arizona
Revenue Sharing investors were modified and replaced by a Revenue Sharing
Agreement for the state of Florida for a price of $1,000,000. Under the terms of
this agreement the Company credited the investors' previously paid $450,000
toward the purchase of the Revenue Sharing Agreement. The balance of $550,000
will be paid through their Revenue Sharing entitlements to their share of net
storage revenues. The Revenue Sharing Agreement applies to net storage revenues
originating from specimens from within the state of Florida. The Revenue Sharing
Agreement entitles the investors to net revenues from a maximum of 33,000
storage spaces and cancels the investor's obligation to provide the Company with
$675,000 plus accrued interest under the prior Arizona agreement.
Illinois
In 1996, the Company signed agreements with a group of investors entitling
them to an on-going 50% share in the Company's portion of net storage revenues
generated by specimens stored in the Illinois Masonic Medical Center. Since the
Company will no longer be storing new specimens in Chicago, the agreements were
modified in 1998 to entitle the investors to a 50% share of the Company's
portion of net revenues relating to specimens originating in Illinois and its
contiguous states and stored in Clearwater, Florida for a maximum of up to
33,000 spaces. The revenue generated by this Single Unit Revenue Sharing
Agreement was $1,000,000.
11
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 6 - AGREEMENTS (CONT'D)
-------------------------------
Bio-Stor, LLC
On February 26, 1999, the Company modified all previous agreements with
Bio-Stor, LLC. The modified agreement enters Bio-Stor into a Revenue Sharing
Agreement for the state of New York. The Company will credit Bio-Stor's $900,000
(previously paid) toward the purchase of 90% of its 50% share in CRYO-CELL's
portion of net storage revenues generated by the specimens originating from the
Company's clients in the state of New York for up to 33,000 shared spaces. This
agreement supersedes all other agreements between Bio-Stor, LLC and the Company.
Other Agreements
On November 5, 1998 an agreement previously entered into by the Company
with a private investor was revised. Per the terms of the original agreement,
the investor had purchased 10% of a Revenue Sharing Agreement in the state of
New Jersey. The new agreement has transferred the $100,000 investment to the
state of New York. Under the revised agreement the investor will receive 10% of
the 50% share in CRYO-CELL's portion of net storage revenues generated by the
specimens originating from the Company's clients in the state of New York for up
to 33,000 spaces.
Tenet HealthSystem Hospitals, Inc.
On November 30, 1996, the Company signed agreements with OrNda HealthCorp.
Two "one-third" Revenue Sharing Agreements were purchased in which OrNda paid
the Company $666,666. OrNda was acquired by Tenet Healthcare Corporation, which
agreed to be bound by the terms of the OrNda agreements. The agreements were
renegotiated and the Company will store all Tenet originated specimens at its
headquarters' lab in Clearwater, Florida while paying Tenet a revenue sharing
entitlement.
New Jersey
On November 30, 1999, the Company entered into agreements with two
investors entitling them to on-going shares in a portion of CRYO-CELL's net
storage revenue generated by specimens originating from within the state of New
Jersey. Deposits totaling $50,000 were received upon signing of the agreements
and the remaining $450,000 was originally due in May 2000. In May 2000 the
original due date for the remaining balance was extended to November 2001. As of
August 31, 2001 the remaining balance due is $370,000. Upon receipt of the
balance due the investors will be entitled to a portion of net storage revenues
generated to a maximum of 33,000 storage spaces.
12
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 6 - AGREEMENTS (CONT'D)
-------------------------------
Texas
On May 31, 2001 the Company entered into an agreement with two investors
entitling them to on-going shares in a portion of CRYO-CELL's net storage
revenue generated by specimens originating from within the state of Texas. An
initial deposit of $50,000 was received upon signing of the agreement and the
remaining balance of $700,000 was paid on August 30, 2001. The investors are
entitled to a portion of net storage revenues generated to a maximum of 33,000
storage spaces.
Women & Infants' Hospital of Rhode Island
In June 1998, the Company signed an agreement with Women & Infants'
Hospital of Rhode Island ("hospital") for the establishment of a commercial
placental/umbilical cord blood bank at their Providence, Rhode Island medical
facility. Per the agreement the hospital required $50,000 to be placed in
escrow. The $50,000 is classified as cash on the balance sheet. The hospital has
since acquired new management and the lab space was reduced making it
inefficient for the use as a cord blood bank. In the second quarter of 2001, the
agreement was mutually terminated. In June 2001, the Company received the
$50,000 that was placed in escrow along with accrued interest.
University of South Florida at Tampa
In February 2000, the Company, through its subsidiary CCEL BIO-THERAPIES,
Inc., entered into a research agreement with the University of South Florida at
Tampa to collaborate on a technology for the potential treatment of a number of
debilitating degenerative diseases. The research project is to be conducted at
the University's laboratory facilities. In March 2000, the Company transferred
$200,000 to CCEL BIO-THERAPIES, Inc. to meet its funding commitment. CCEL
BIO-THERAPIES, Inc. and the University are co-assignees of a filed patent
application covering the technology. An application has been made for federal
grants (STTR research grants) on behalf of CCEL BIO-THERAPIES, Inc. In addition,
an application was filed for a State of Florida I-4 (now Hi-Tech Corridor)
matching grant. The Company has been granted worldwide marketing rights for any
product developed as a result of this research program. Under the terms of the
agreement, the University will receive standard royalty payments on any future
product sales. In February 2001, the Company paid the University an initial
$100,000 license payment with the issuance of 15,000 shares of the Company's
common stock. In May 2001, the Company paid the University the first two
benchmark payments totaling $200,000 with the issuance of 50,000 shares of the
Company's common stock. The University was awarded the Hi-Tech Corridor grant in
the amount of $100,000. In September 2001, CCEL BIO-THERAPIES was awarded the
STTR grant in the amount of $107,000.
In August 2001, the Company announced its intent to merge its CCEL
BIO-THERAPIES subsidiary with Saneron Therapeutics, Inc., subject to Board
approval by both companies. The combined assets of the merged companies will
include a large portfolio of international patents held by Saneron and the
proprietary technology relating cord blood, which is jointly owned by USF and
CRYO-CELL. The result will be the combination of U-Cord stem cell technology
with Saneron's Sertoli cell, growth factor, cellular expansion and
cryopreservation technologies. Upon the effective date of the merger, CRYO-CELL
will own approximately 43% of the combined companies.
13
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2001
(Unaudited)
NOTE 7 - RECEIVABLE LITIGATION
---------------------------------
On or about September 27, 1999 the Company accepted the University of
Arizona's offer of $800,000 to settle its litigation. In September 1999, the
Company received $441,000 from the University of Arizona leaving a balance of
$359,000 that is being held in escrow to satisfy a legal lien filed November 4,
1998 by the Company's previous attorneys, Horwitz and Beam. The Company reduced
the award to $510,178 and recognized this as gain on litigation. This reduction
includes a 20% contingency fee ($160,000) to the Company's previous attorneys
and $129,822 in contested legal fees that the Company feels are not due and
owing under the contract (See Note 4). When the $289,822 is netted against the
$359,000 held in escrow the result is a receivable balance of $69,178. The
Company has requested the release of the $69,178 from escrow, which is the
excess of 20% of the $800,000 actual settlement amount. The overage is a result
of the Company's settlement of the $1,170,000 original jury award. On June 1,
2001, the Company entered into a settlement of the litigation (See Note 4).
Under the terms of the settlement the Company and Horwitz and Beam are to split
$376,984 previously held in escrow. On June 22, 2001, the Company received
$188,492.
Item 2. Management's Discussion and Analysis or Plan of Operation.
CRYO-CELL International, Inc. was incorporated on September 11, 1989 in the
state of Delaware. It is engaged in cryogenic cellular storage and the design
and development of cellular storage devices. The Company's current focus is on
the processing and preservation of umbilical cord (U-Cord(TM)) blood stem cells
for autologous/sibling use. The Company believes that it is the fastest growing
commercial firm currently specializing in separated umbilical cord blood stem
cell storage. CRYO-CELL has pioneered several technologies that allow for the
processing and storage of specimens in a cryogenic environment. The Company's
original mission of affordability for U-Cord blood preservation remains in
effect. These technologies include a process for the storage of fractionated
(separated) U-Cord stem cells and the development and patenting of the first
computer controlled, robotically operated cryogenic storage system.
It is the Company's mission to make expectant parents aware of the
potential medical benefits from preserving stem cells and to provide them the
means and processes for collection and storage of these cells. Today, stem cell
transplants are known and accepted treatments for a number of life-threatening
diseases. With continued research in this area of medical technology, other
avenues for their potential use and expansion are being explored. A vast
majority of expectant parents are simply unaware that umbilical cord blood
contains a rich supply of stem cells and that they can be collected, processed
and stored for the potential future use of the newborn and possibly related
family members. A baby's stem cells will remain a perfect match for the baby
throughout its life and have a 1-in-4 chance (or better) of being a perfect
match for a sibling. There is no assurance, however, that a perfect match could
treat certain diseases. Today, it is still common for the cord blood (the blood
remaining in the umbilical cord and placenta) to be discarded at the time of
birth as medical waste. Obviously, the Company believes that no U-Cord specimen
should be discarded when it could possibly save a life.
Given the potential benefits of U-Cord stem cell preservation, the number
of parents of newborns participating in stem cell preservation is still
relatively small compared to the number of births (four million per annum) in
the United States alone. Critical reasons for this low level of market
penetration are the misperception of the high cost of stem cell storage as well
as a general lack of awareness of the benefits of stem cell preservation
programs. However, evolving medical technology could significantly
14
increase the utilization of the U-Cord blood for transplantation and/or other
types of treatments. A number of competitors in this market have been charging
upwards of $1000 - $1500 for this stem cell preservation plus higher annual fees
for storage than the Company charges. The cost is usually not covered by
insurance. The Company has made this procedure affordable and within financial
reach of most families. The growth and profitability of the Company should come
from increases in stem cell specimen storage volume driven by its marketing
approaches, resulting in an increasing base of annual stem cell storage renewal
fees.
During 2001, all U-Cord(TM) blood processing and preservation will be done
at the Company's facility. The Company plans to open a second cellular storage
repository during this fiscal year.
During the period since its inception, the Company's research and
development activities have principally involved the design and development of
its cellular storage systems ("CCEL Cellular Storage System") and in securing
patents on the same.
The Company believes that its long-term cellular storage units can provide
an improved ability to store cells or other material in liquid nitrogen, its
vapors or other media. The units are controlled by a computer system, which
robotically inserts vials in pre-selected storage areas inside the chamber.
Additionally, the stored material can be robotically inserted or retrieved by
computer on an individual basis without all of the remaining specimens being
exposed to ambient temperature. The efficient use of storage space and a dual
identification system for inventory control is a competitive advantage for the
Company. The Company is the assignee of all patents on the units.
Other cryopreservation systems are manually operated and can expose the
laboratory technician to liquid nitrogen when inserting or retrieving specimens.
Moreover, the use of these units exposes the remaining stored specimens to
ambient temperature whenever specimens are inserted or retrieved. The Company
has designed and holds patents on a system, which makes use of the latest in
computer, robotics and bar code laser scanning identification technologies. The
unit is assembled by an independent manufacturer utilizing the Company's
patented designs.
In February 1999, the Company was granted a patent on the CCEL III computer
controlled robotically operated cellular storage system, which is designed to be
multi-functional. When completely developed the unit will be able to store more
than 35,000 5ml vials, and many times that number of smaller vials. Because the
CCEL III is multi-functional it is currently being evaluated for various other
uses.
The following is a discussion and analysis of the financial condition and
results of operations of the Company for the quarter ended August 31, 2001 as
compared to the same period of the prior year.
General
To increase awareness of its services, the Company has invested in a
variety of marketing programs designed to educate expectant parents and those
medical caregivers to whom they turn to for advice.
The Company markets its preservation services to expectant parents and by
distributing information to obstetricians, pediatricians, Lamaze instructors and
other childbirth educators, certified nurse-midwifes and other related
healthcare professionals. The Company has clinical educators who work with the
medical community and with expectant parents to educate them on cord blood stem
cell preservation. The Company also has a clinical support team of specially
trained nurses who are available 24 hours, 7 days a week to educate expectant
parents and the medical community on the life-saving potential of cord blood
stem cell preservation. In addition, the Company exhibits at conferences, trade
15
shows and other media focusing on the expectant parent market. The Company is
realizing an increasing level of interest from its Web site, www.CRYO-CELL.com.
In January 2000 the Company renewed its agreement with the Lamaze
Publishing Company to sponsor the Lamaze You and Your Baby tutorial tape. The
agreement has been extended for three (3) years and calls for Lamaze to
distribute the videotape to 1.8 million women in their third trimester of
pregnancy. Over 90% of first time mothers and 45% of the pre-natal market avail
themselves of the Lamaze Institute for Family Education proven instruction
programs. The tutorial tape, which is distributed by approximately 9, 000
instructors, discusses the importance of cord blood storage and refers viewers
to the full-page ad that the Company has placed in the Lamaze Parents Magazine,
which is distributed to 2.4 million expectant mothers. During 2000, 600,000 You
and Your Baby CD's were distributed through WAL-MART stores for the first time.
The Company also places an ad in Lamaze para Padres, Lamaze Publishing's
magazine for Hispanic mothers-to-be. The Company has exclusivity on the tutorial
tape in the cord blood storage category and first right of refusal for renewal
of the agreement beyond 2003.
In March 2000, the Company became a sponsor of the 2000 ACOG (American
College of Obstetricians and Gynecologists) Meeting CD-ROM. The CD includes a
segment on the Company's U-Cord(TM) program and was distributed to approximately
40,000 ACOG members in November 2000. The Company is the only cord blood
preservation firm featured on the CD-ROM.
In March 2000, the Company launched its Mother to Mother(TM) Educational
Network program to offer the Company's umbilical cord blood preservation program
to expectant parents. The network is comprised of clients who have stored or who
have enrolled to store their newborn's U-Cord blood stem cells with the Company.
These independent contractors contact expectant parents, OB/GYN's and medical
caregivers advising them of the Company's affordable service.
The Company's advertisements have appeared in, or are scheduled for
insertion in, several national targeted prenatal magazines including American
Baby, Pregnancy, Baby Talk and Fit Pregnancy. Expectant parents have also
received information via emails and newsletter links through BabyCenter.com.
BayNews 9, a CNN affiliate, and NewsChannel 10 have both carried stories about
CRYO-CELL's affordable service.
In January 2001, the Company established the Grandparent's Legacy Program.
Through this program, grandparents can provide the gift of cord blood stem cell
preservation for their grandchildren.
In April 2001, the Company entered into a multi-faceted exclusive
cooperative marketing agreement with iMaternity, which operates a national chain
of stores serving expectant mothers. The Company and iMaternity will offer
cross-links to each other's websites with ongoing promotional activities.
Included in their marketing plans are the enrollments of more than 1,000,000
mothers-to-be during the next 12 months in the iMaternity Preferred Membership
Club.
In September 1999, the Company was granted a Blood Bank license to operate
in the state of New Jersey. The Company is now authorized to operate in all 50
states.
In February 2000, the Company, through its subsidiary CCEL BIO-THERAPIES,
Inc., entered into a research agreement with the University of South Florida at
Tampa to collaborate on a technology for the potential treatment of a number of
debilitating degenerative diseases. The research project is to be conducted at
the University's laboratory facilities. In March 2000, the Company transferred
$200,000 to CCEL BIO-THERAPIES, Inc. to meet its funding commitment. CCEL
BIO-THERAPIES, Inc. and the University are co-assignees of a filed patent
application covering the technology. An application has been made for federal
grants (STTR research grants) on behalf of CCEL BIO-THERAPIES, Inc. In
16
addition, an application was filed for a State of Florida I-4 (now Hi-Tech
Corridor) matching grant. The Company has been granted worldwide marketing
rights for any product developed as a result of this research program. Under the
terms of the agreement, the University will receive standard royalty payments on
any future product sales. In February 2001, the Company paid the University an
initial $100,000 license payment with the issuance of 15,000 shares of the
Company's common stock. In May 2001, the Company paid the University the first
two benchmark payments totaling $200,000 with the issuance of 50,000 shares of
the Company's common stock. The University was awarded the Hi-Tech Corridor
grant in the amount of $100,000. In September 2001, CCEL BIO-THERAPIES was
awarded the STTR grant in the amount of $107,000.
In August 2001, the Company announced its intent to merge its CCEL
BIO-THERAPIES subsidiary with Saneron Therapeutics, Inc., subject to Board
approval by both companies. The combined assets of the merged companies will
include a large portfolio of international patents held by Saneron and the
proprietary technology relating cord blood which is jointly owned by USF and
CRYO-CELL. The result will be the combination of U-Cord stem cell technology
with Saneron's Sertoli cell, growth factor, cellular expansion and
cryopreservation technologies. Upon the effective date of the merger, CRYO-CELL
will own approximately 43% of the combined companies.
On April 6, 2000, the Company entered into a renewable agreement with
COLTEC, Ltd. for the exclusive license to market the Company's U-CORD program in
Europe. The marketing rights allow COLTEC, Ltd. to directly market the U-CORD
program, sell revenue sharing agreements or further sub-license the marketing
rights throughout Europe. The Company received $1,400,000 in cash for the
marketing license and will receive royalties of 10.5% to 20% of adjusted U-CORD
processing and storage revenues to be generated in Europe, and granted COLTEC,
Ltd. a three year option to purchase 100,000 shares of the Company's common
stock ($8.00 exercise price) and will issue up to 100,000 additional options
($12.00 exercise price), as needed, to facilitate sales of sub-licensing and/or
revenue sharing agreements in Europe. The Company recognized $465,000 of the
licensing fees in 2000. Subsequent to the licensing agreement date, COLTEC, Ltd.
formed a corporation, CRYO-CELL Europe, B.V. to engage in the cryogenic cellular
storage business under the agreement. At September 19, 2000 the Company entered
into an agreement to purchase approximately 6% of CRYO-CELL Europe, B.V. In
October and November 2000, the Company paid $1,000,000 for 38,760 shares of the
capital stock of CRYO-CELL Europe, B.V. that the Company owned on January 24,
2001.
On August 28, 2001, the Company entered into an agreement with CRYO-CELL
Europe, N.V. to purchase 21.9% of CRYO-CELL Italia, Srl from CRYO-CELL Europe's
equity in this emerging business entity. CRYO-CELL Italia intends to offer the
U-Cord program to expectant parents in Italy, initially operating from a
laboratory in the Vatican-owned San Raphaelo Hospital in Milan. Through its
prior agreement with CRYO-CELL Europe, the Company will receive a portion of the
processing and storage fees generated by CRYO-CELL Italia's operations. The
Company's equity purchase of $1,800,000 was facilitated by the exercise of
previously issued stock options.
On June 13, 2001, the Company entered into an agreement for the exclusive
license to market the Company's U-Cord program in Mexico. The license allows
CRYO-CELL de Mexico to directly market and operate the U-Cord program throughout
Mexico and Central America. The total cost of the license is $900,000 and the
licensing fees are 10.5% to 18% of adjusted U-Cord processing and storage
revenues to be generated in Mexico and Central America. Per the agreement
CRYO-CELL de Mexico will purchase 100,000 warrants at $1.00 each giving them the
right to purchase 100,000 shares of the Company's common stock at an exercise
price of $8.00 per share. In June 2001 an initial deposit of $100,000 was
received. The remainder of the payments is due to be paid in three installments
over a two-year period. During October 2001, the License Agreement was revised.
The initial cost of the license was reduced to $600,000 in exchange for a higher
percentage of on-going fees. The Company will now receive 15% of processing fees
and 25% of annual storage fees.
17
On August 15, 2001, the Company entered into an agreement with CRYO-CELL
Middle East, Inc. for the exclusive license to market the Company's U-Cord
program in Israel and throughout the Middle East. The total cost of the license
is $1,000,000 which will be recognized by the Company over a three year period.
In addition to the license fees, the Company is entitled to receive 15% of net
processing revenues and at least 18% of annual storage fees generated by
CRYO-CELL Middle East's operations. In addition the Company agreed to the sale
of 100,000 warrants at $1.00 each to purchase shares of CCEL at $9.00 per share
over the next five years. In August 2001 the Company received the initial
deposit of $50,000 and $100,000 for the purchase of the warrants.
Management
At present there are 37 employees on the staff of the Company. Daniel D.
Richard serves as the Chairman of the Board and Chief Executive Officer.
Daniel D. Richard, Chairman of the Board and Chief Executive Officer. Mr.
Richard is the founder of the Company and co-inventor of much of the Company's
technology it currently employs. Mr. Richard has served as Chairman of the Board
since the Company's inception. Prior to founding the Company, Mr. Richard was
the first officer and director of Marrow-Tech, Inc., a publicly traded company
engaged in the field of cellular replication. Mr. Richard was also the President
of Daniel Richard Consultants, Inc., a marketing firm which operated in
forty-four cities in the U.S. and throughout the world.
Wanda D. Dearth, President and Chief Operating Officer. Ms Dearth joined the
Company in June 2000. Ms. Dearth joined the Company from kforce.com (formerly
Romac International, Inc.) where she was Business Unit Vice President for the
nurse staffing division. Ms. Dearth has a history of over 15 years placing
physicians and nurses throughout the U.S. She has over 20 years of marketing and
operational experience with the majority of her career specializing in start-up
operations. Ms. Dearth graduated from Miami University of Ohio with a B. S. in
Business Administration. In October 2000, Ms. Dearth was appointed a member of
the Company's Board of Directors.
Gerald F. Maass, Executive Vice President. Mr. Maass joined the Company in March
1998. Prior to joining the Company Mr. Maass worked for Critikon, a subsidiary
of Johnson & Johnson, where his most recent position was International Director
of Marketing for the Patient Monitoring business. Mr. Maass' ten-year tenure
with Johnson and Johnson included several marketing and business development
roles; he also served on the Critikon management committee. Prior to Johnson &
Johnson, Mr. Maass was with Baxter Healthcare and Control Data Corporation in
marketing, sales management, business development and business management roles.
Mr. Maass began his career with Mayo Clinic in Rochester, MN and holds a B.S.
degree in Medical Technology. In September 1998, Mr. Maass was appointed a
member of the Company's Board of Directors.
Geoffrey J. O'Neill, Ph.D., Laboratory Director. Dr. O'Neill joined the company
in April 1999 and has oversight of the Company's processing laboratory and
storage facility. He has over 25 years experience in human hematopoetic
progenitor cell therapy, including expertise in the processing, cryopreservation
and storage of stem cells, flow cytometry analysis, HLA typing and CD34+ cell
purification. Dr. O'Neill also has expertise in immunohematology and blood
banking. A co-author of many publications, he has an undergraduate degree in
microbiology and a Ph.D. in Immunology.
Jill Taymans, Chief Financial Officer. Ms. Taymans joined the Company in April
1997 serving initially as Controller and was appointed CFO in May 1998. Ms.
Taymans graduated from the University of Maryland in 1991 with a BS in
Accounting. She has worked in the accounting industry for over nine years in
both the public and private sectors. Prior to joining the company she served for
three years as Controller for a telecommunications company in Baltimore,
Maryland.
18
E. Thomas Deutsch, III, Chief Information Officer. Mr. Deutsch joined the
Company in May 1996 and is a software and process engineer, specializing in
healthcare information systems. He graduated from the University of North
Carolina in Chapel Hill in 1986 with a B. S. degree in Mathematics. Prior to
joining the Company in 1996, Mr. Deutsch worked for Shared Medical Systems in
Malvern, PA, IBM in Atlanta, GA, and HBO and Company in Atlanta, GA. His
responsibilities include developing, implementing and supporting the Company's
communications and information systems, developing, implementing and supporting
the Company's Internet plan and systems engineering for the patented CCEL II
Cellular Storage System.
Medical Advisory Board
The Company has established a Medical & Scientific Advisory Board comprised
of the more than 10 researchers, physicians and scientists from various fields
such as oncology, stem cell research, hematology, genetic research, assisted
reproduction and other specialties. Many of the Company's Advisory Board members
are heads of departments and are committed to cellular storage as part of new
services to improve patient care and saves lives.
Results of Operations
Revenues. Revenues for the nine months ended August 31, 2001 were $4,046,906 as
compared to $1,500,269 for the same period in 2000. The revenues for the nine
months ended August 31, 2001 include $750,000 from the sale of a Revenue Sharing
Agreement and $3,296,906 in sales from customers. Actual processing and storage
revenue from sales to customers increased $1,796,637 or 184%. The increase in
revenues reflects the significant growth in the processing and storage revenue
associated with the Company's U-Cord(TM) stem cell program. The Company believes
that the growth is a result of its investments in its various marketing
programs, including its activities with Lamaze Publishing, and the increased
traffic on its updated Web site www.CRYO-CELL.com. The upward sales trend has
continued into the fourth quarter of fiscal 2001.
Cost of Sales. Cost of sales for the nine months ended August 31, 2001 were
$1,113,801 as compared to $641,890 in 2000. The cost of sales for the nine
months ended August 31, 2001 and August 31, 2000 represents the associated
expenses resulting from the processing and testing of the U-Cord(TM) specimens
in the Company's own state of the art laboratory in Clearwater, Florida.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses during the nine months ended August 31, 2001 were
$2,686,896 as compared to $1,969,202 in 2000. The increase reflects, in part,
the expenses of additional executive management, market development, lab
operations support and clinical services expansion associated with the growth of
the Company's cellular storage program.
Research, Development and Related Engineering Expenses. Research, development
and related engineering expenses for the nine months ended August 31, 2001, were
$49,409 as compared to $290,485 in 2000. The expenses incurred in 2001 reflect
the funding of the research project between the Company's subsidiary, CCEL
Bio-Therapies, Inc., and the University of South Florida at Tampa. The reduction
reflects the impact of previous investments regarding the Company's third
generation cellular storage system.
Liquidity and Capital Resources
At August 31, 2001, the Company had cash and cash equivalents of $5,154,304
as compared to $3,318,689 at August 31, 2000. The increase in cash and cash
equivalents was a result of the $3,837,955 that the Company received from the
exercise of 785,450 shares of the Company's common stock.
19
The Company anticipates that cash reserves, cash flows from operations and
receivables from its agreements will be sufficient to fund its growth. Cash
flows from operations will depend primarily on increasing revenues resulting
from an extensive umbilical cord blood cellular storage marketing campaign.
Forward Looking Statements
In addition to historical information, this report contains forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis or Plan of Operation." 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.
(the "Company") 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 most recent Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q to be filed by the Company in 1999 and any
Current Reports on Form 8-K filed by the Company.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
I. In December 1992, CRYO-CELL entered into an exclusive agreement with
the University of Arizona to develop and enhance a commercial (paid
for) cord blood stem cell bank. Prior to this agreement the University
of Arizona had not commenced storing any cord blood specimens.
CRYO-CELL provided the means for the University to obtain approximately
1400 paying clients. Prior to the termination of the exclusive
agreement, which CRYO-CELL alleges was unwarranted, the University
breached its contract with CRYO-CELL and entered into an Agreement with
Cord Blood Registry, Inc. (CBR).
On or about July 11, 1996, CRYO-CELL filed suit in San Francisco
Superior Court against the University of Arizona, Dr. David Harris and
Cord Blood Registry, Inc. The suit claimed breach of contract and other
related business torts. Months later, after settlement discussions were
unproductive, the University of Arizona counter-sued CRYO-CELL for
breach of contract and negligent misrepresentation.
On July 20, 1998, as a result of the evidence, the jury awarded
CRYO-CELL $1,050,000 against Defendant University of Arizona. In
addition, an award of $120,000 was granted to the Company against the
University of Arizona and David Harris, individually, for
misappropriation of trade secrets. The jury voted unanimously against
the University and in favor of CRYO-CELL as to the counter claims. The
court rejected three post-trial motions by the University of Arizona
including a request to reduce the award or set aside the verdict.
On or about September 27, 1999 the Company accepted the University's
offer of $800,000 and settled the matter in order to avoid a lengthy
and costly appeals process. On September 30, 1999, the Company received
$441,000 from the University of Arizona. The remaining balance of
$359,000 is being held in escrow, to satisfy a legal lien filed
November 4, 1998 by the Company's previous attorneys, Horwitz and Beam.
The Company disputes their position and has counter sued Horwitz and
Beam for malpractice and is seeking $1,000,000 in compensatory damages
and an unspecified amount of punitive damages deemed appropriate by the
court.
II. CRYO-CELL retained the services of Horwitz & Beam, a California law
firm, to handle the above-described lawsuit including its allegations
against CBR for interference in a legitimate contract between two
parties and unfair business practices, among other claims. CRYO-CELL
believes that Horwitz & Beam mishandled the CBR aspect of the case and
certain aspects of its case against the University of Arizona by
failing to depose CBR defendants on a timely basis and failing to
respond to the University's request for an exemption from punitive
damages (stating they were a public entity), among others. Without this
evidence, the court granted a summary judgment dismissal in favor of
CBR. There is a dispute as to whether Horwitz and Beam is entitled to
the fees of $129,822 they claim is owed by the Company.
On March 8, 1999, the Company, the Company's CEO and Chairman, the
Company's Executive Vice President, and the Company's legal counsel
were named as the defendants in a lawsuit filed in the Superior Court
of Orange County, California by Horwitz & Beam, the attorneys which had
represented CRYO-CELL in its suit against the University of Arizona et
al. The plaintiff alleges breach of contract and seeks payment of
$129,822 in allegedly unpaid fees and costs associated with the
University of Arizona litigation. The plaintiff also asserts claims of
misrepresentation. In reference to these misrepresentation claims,
plaintiff has filed a Statement of Damages, which asserts $1,000,000 in
general damages and $3,500,000 in punitive damages.
21
Accordingly, on June 14, 1999, the Company filed: (1) an answer denying
all liability; (2) a counterclaim for breach of contract and
malpractice, seeking in excess of $1 million in compensatory damages
arising from the malpractice; (3) a motion to dismiss the individual
defendants for lack of jurisdiction; and (4) a motion to dismiss all
punitive damages allegations against the Company.
On December 17, 1999, Judge Alicemarie H. Stotler of the United States
District Court in the Central District of California, issued an Order
in which she: (1) granted CRYO-CELL International, Inc.'s ("CRYO-CELL")
Motion to Strike Punitive Damages and Dismiss Part of the Complaint;
(2) granted Daniel Richard's, Mark Richard's and Gerald F. Maass' (the
"Individual Defendants") Motion to Dismiss Complaint for Lack of
Personal Jurisdiction; and (3) granted in part and denied in part
Horwitz & Beam, Inc.'s ("H&B") Motion for Order Dismissing Counterclaim
and/or Strike Portions Thereof. The net effect of this order was to
reframe the Complaint as a fee dispute, as opposed to a multi-million
dollar claim for fraud against CRYO-CELL and its corporate officers. By
its order, the Court has barred recovery in this action against the
Individual Defendants, and has reduced CRYO-CELL's exposure from over
$3.5 million dollars to $129,822, plus a possible award of attorneys'
fees.
CRYO-CELL has established an escrow in the amount of $359,000 to cover
the disputed legal fees ($129,822) and the 20% recovery of the judgment
against the University of Arizona and David Harris. The Company has
requested the release of approximately $70,000 from escrow, which is
the excess of 20% of the $800,000 actual settlement amount. The overage
is a result of CRYO-CELL's settlement of the $1,170,000 original jury
award.
On June 1, 2001, the Company entered into a settlement of the
litigation Horwitz & Beam v. CRYO-CELL International, Inc. pending in
Federal District Court for the Central District of California. The
settlement includes the release of all claims against CRYO-CELL. It
also provides for the release of all claims that CRYO-CELL had against
Horwitz & Beam (and certain Horwtiz & Beam attorneys), arising from
Horwitz & Beam's prior representation of the Company in litigation
against the University of Arizona and David Harris.
Under the terms of the settlement, CRYO-CELL and Horwitz & Beam are to
split $376,984, previously held in escrow pending resolution of the
dispute. Each party will bear its own attorney's fees and costs. On
June 22, 2001, the Company received $188,492, which under the terms of
the settlement was fifty percent of the monies held in escrow. A gain
on settlement has been recognized in the third quarter of fiscal 2001.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
3.1 Certificate of Incorporation (1)
3.11 Amendment to Certificate of Incorporation (1)
3.2 By-Laws (1)
3.21 Board Minutes to Amendment of By-Laws (1)
10.11 Agreement with InstaCool of North America, Inc. (2)
10.12 Agreement with the University of Arizona (2)
10.13 Agreement with Illinois Masonic Medical Center (4)
10.14 Agreement with Bio-Stor (4)
10.15 Agreement with Gamida-MedEquip (4)
10.16 Agreement with ORNDA HealthCorp (Tenet
HealthSystem Hospitals, Inc.) (4)
10.17 Convertible Note from Net/Tech International, Inc.
dated November 30, 1995 (3)
10.18 Amended Agreement with Bio-Stor (5)
10.19 Agreement with Dublind Partners, Inc. (6)
10.20 Agreement with Medical Marketing Network, Inc. (6)
21 List of Subsidiaries (3)
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (No. 33-34360).
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended November 30, 1994.
(3) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended November 30, 1995.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended November 30, 1996.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended November 30, 1997.
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended November 30, 1998.
(7) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended November 30, 1999.
(8) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended November 30, 2000.
(b) Reports on Form 8-K.
(1) Form 8-K filed September 12, 1997 - Resignation of William
C. Hardy as President, Chief Operating Officer and member
of the Board. Resignation of Leonard Green from the Board
of Directors.
(2) Form 8-K filed November 18, 1997 - Company filed a
multi-count lawsuit in the United States District Court,
Northern District of New York claiming that Stainless
Design Corporation of Saugerties, New York breached its
contract.
(3) Form 8-K filed February 16, 2000 - The judge issued an
order in which she (1) granted the Company's motion to
strike punitive damages and dismiss part of the complaint,
(2) granted Daniel Richard's, Mark Richard's and Gerald
Maass' motion to dismiss complaint for lack of personal
jurisdiction, and (3) granted in part and denied in part
Horwitz & Beam, Inc.'s motion to for order dismissing
counterclaim and/or strike portions thereof.
(4) Form 8-K filed June 6, 2000 - Appointment of Wanda D.
Dearth as President and COO.
Supplemental Information to be furnished with reports filed
pursuant to Section 15(d).
(c) No annual reports or proxy material have been sent to security
holders for the current fiscal year. Copies of any such report
or proxy material so furnished to security holders subsequent
to the filing of the annual report on this form will be
furnished to the Commission when sent to security holders.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRYO-CELL INTERNATIONAL, INC.
/s/DANIEL D. RICHARD
------------------------------
Daniel D. Richard
Chief Executive Officer
Date: October 12, 2001
24