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 May 31, 1999
/ / 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
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(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) 723-0333
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(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 May 31, 1999, 8,642,955
shares of $0.01 par value common stock were outstanding.
Transitional Small Business Disclosure Format (check one). Yes / / No /X/
<PAGE>
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 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
2
<PAGE>
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31, November 30,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................ $ 123,072 $ 499,696
Stock subscription receivable ........................ -- 150,000
Accounts receivable and advances (net of allowance for
doubtful accounts of $13,380 ) .................... 71,655 47,642
Receivable - litigation (See Note 9) ................. 341,000 --
Marketable securities ................................ 239,741 198,114
Refundable income taxes .............................. 8,078 8,078
Prepaid expenses and other current assets ............ 221,157 79,690
---------- ----------
Total current assets ................. $1,004,703 983,220
---------- ----------
PROPERTY AND EQUIPMENT
Property and equipment, net .......................... 2,336,259 2,371,993
---------- ----------
OTHER ASSETS
Intangible assets (net of amortization of ............ 66,926 69,462
$45,556 and $42,269, respectively)
Marketable securities ................................ 514,192 521,279
Deposits with vendors and others ..................... 103,445 133,175
---------- ----------
Total other assets ................... 684,563 723,916
---------- ----------
TOTAL ASSETS .............................. $4,025,525 $4,079,129
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
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CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31, November 30,
1999 1998
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable ....................................... $ 375,196 $ 293,159
Accrued expenses and withholdings ...................... 136,055 291,788
Short term borrowings .................................. 15,000 565,000
Convertible notes payable .............................. 10,000 540,000
Current portion of obligations under capital leases .... 5,187 4,805
------------ ------------
Total current liabilities ................... 541,438 1,694,752
------------ ------------
OTHER LIABILITIES
Unearned revenue ...................................... 111,515 75,236
Deposits .............................................. 25,000 25,000
Obligations under capital leases-net of current portion 23,710 15,928
------------ ------------
Total other liabilities ..................... 160,225 116,164
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock (500,000 $.01 par value authorized; .... -- --
0 issued and outstanding)
Common stock (15,000,000 $.01 par value common shares
authorized; 8,642,955 at May 31, 1999 and 7,654,598
at November 30, 1998 issued and outstanding) ........ 85,775 76,546
Additional paid-in capital ............................. 10,154,742 8,651,428
Net unrealized gain on marketable securities ........... 353,933 319,393
Accumulated deficit .................................... (7,270,588) (6,779,154)
------------ ------------
Total stockholders' equity .................. 3,323,862 2,268,213
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ..................... $ 4,025,525 $ 4,079,129
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- --------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE $ 311,749 $ 52,300 $ 531,216 $ 88,475
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 130,613 14,454 231,438 24,482
Marketing, general & administrative expenses 531,768 519,237 1,159,822 919,959
Research, development and related engineering 19,190 60,762 42,505 109,816
Depreciation and amortization 28,580 40,000 57,161 80,000
----------- ----------- ----------- -----------
Total Cost and Expenses 710,151 634,452 1,490,926 1,134,258
----------- ----------- ----------- -----------
OPERATING PROFIT LOSS (398,402) (582,152) (959,710) (1,045,783)
----------- ----------- ----------- -----------
OTHER INCOME AND (EXPENSE):
Interest income -- 3,409 -- 10,108
Interest expense (521) (13,716) (2,546) (24,754)
Settlement on litigation (See Note 9) 470,822 -- 470,822 --
Gain on sale of unconsolidated affiliate's stock -- 186,479 -- 255,098
----------- ----------- ----------- -----------
Total Other Income 470,301 176,172 468,276 240,453
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EQUITY IN NET LOSS OF
UNCONSOLIDATED AFFILIATE AND
PROVISION FOR INCOME TAXES (57,923) (405,980) (491,434) (805,330)
Provision for income taxes -- -- -- --
Equity in net loss of unconsolidated affiliate -- 112,298 -- 220,392
----------- ----------- ----------- -----------
NET LOSS ($57,923) ($518,278) ($491,434) ($1,025,722)
=========== =========== =========== ===========
NET LOSS PER SHARE ($0.01) ($0.07) ($0.06) ($0.14)
=========== =========== =========== ===========
Number of Shares Used In Computation 8,549,460 7,242,086 8,207,458 7,221,192
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements
5
<PAGE>
<TABLE>
<CAPTION>
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
--------------------------
MAY 31, MAY 31,
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (491,434) $(1,025,722)
Adjustments to reconcile net loss
to cash used for operating activities:
Depreciation and amortization 57,161 80,000
Equity in loss of unconsolidated affiliate -- 220,392
Payment of consulting and professional services with stock 117,334
Changes in assets and liabilities:
Accounts receivable (24,013) (46,407)
Receivable litigation (470,822) --
Prepaid expenses and other current assets (141,467) 29,374
Accounts payable 211,859 (12,351)
Unearned revenue and deposits 36,279 43,665
Accrued expenses (155,733) 32,202
Refundable income taxes -- 3,230
Deposits and other 29,730 (147,284)
----------- -----------
NET CASH USED FOR OPERATING ACTIVITIES (831,106) (822,901)
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of property and equipment-net (8,390) (112,589)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES $ (8,390) $ (112,589)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of stock options -- 67,500
Repayment of debt (550,000) --
Sale of common stock 1,015,208 137,500
Borrowing on line of credit -- 50,000
Principal payments under capital leases (2,336) (533)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES: 462,872 254,467
----------- -----------
Decrease in cash and cash equivalents (376,624) (681,023)
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
<PAGE>
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
MAY 31, MAY 31,
1999 1998
(UNAUDITED) (UNAUDITED)
----------- ---------
Cash and cash equivalents:
Beginning of year 499,696 814,156
-------- --------
End of period $123,072 $133,133
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 521 $ 24,754
-------- --------
Income taxes $ -- $ --
-------- --------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
1 The Company borrowed $530,000 on convertible promissory notes. The loans
were converted to 302,000 of the Company's common stock at a price of $1.75
per share.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
7
<PAGE>
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENTS
The Consolidated Financial Statements including the Consolidated
Balance Sheet as of May 31, 1999, Consolidated Statements of Operations for the
six months ended May 31, 1999 and Consolidated Statement of Cash Flows for the
six months ended May 31, 1999 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 May 31, 1999 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, 1998 Annual
Report on Form 10-KSB.
NOTE 2 - MARKETABLE SECURITIES
NET/TECH INTERNATIONAL
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. The Company had accounted for its investment in NTTI in previous years
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. Under
this guidance all of the Company's marketable securities are classified as
available-for-sale as of the balance sheet date and reported at fair value, with
unrealized gains and losses recorded as a component of stockholder's equity.
Since NTTI stock is thinly traded and subject to considerable price fluctuation,
were the Company to attempt to sell large blocks of shares, it is unlikely that
the Company would be able to obtain the exchange market value as listed. This
security is therefore subject to considerable market risk. Since the stock owned
in Net/Tech International, Inc. is subject to trading restrictions a portion of
this investment has been classified as a non-current asset based upon the number
of shares which may not be sold in 1999.
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
$685,933 to reflect the fair market value of the investment as of May 31, 1999.
8
<PAGE>
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(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. The
fair value of this security as of May 31, 1999 and 1998 was $68,000 and $200,000
respectively and the unrealized holding loss on this security was $332,000 and
$200,000 as of May 31, 1999 and 1998 respectively.
NOTE 3 LINE OF CREDIT
In August 1997, the Company entered into a one-year line of credit
agreement with NationsBank, N.A. ("the Bank") whereby the Company borrowed
$550,000 from the Bank. As part of the agreement, the Bank received a $10,000
commitment fee. The agreement expired on August 21, 1998 and in December 1998,
the loan was paid in full.
NOTE 4 - 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-CordTM stem cell collection kits 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 which is classified
as a deposit on the balance sheet. The Company is currently working with local
physicians and hospitals to implement this project.
As part of the September 1998 agreement between Steve Ferens and the
Company, CRYO-CELL committed to issue 200,000 shares of the Company's restricted
common stock in exchange for marketing services to be provided by Ferens and his
team of sub-contractors. The contract is for a five year period and provides for
the issuance of 10,000 shares of stock upon the signing of the agreement, 40,000
shares upon the implementation of the marketing program and 50,000 shares to be
issued at various times during the contract period. The agreement calls for the
balance of 100,000 shares to be issued upon the achievement of certain
performance goals during the third year of the agreement. The Company issued
60,000 shares as of May 31, 1999. These issuances resulted in compensation
expense of $42,500 during 1998, $34,000 of which is an accrued expense as of
November 30, 1998 and compensation expense of $23,750 as of May 31, 1999. The
remaining shares will be issued subject as outlined above and recorded as an
expense in the period of issuance.
In January 1999, the Company extended its marketing agreement with
Lamaze Publishing Company to sponsor the Lamaze tutorial tape and full page
advertisements in the Lamaze Parent Magazine at a cost of $200,000. The extended
agreement commences in April 1999. As of May 31, 1999, the Company paid $100,000
of this agreement and is recognizing this as a prepaid expense on the balance
sheet. The prepaid expense is being prorated over the term of the contract and
expensed accordingly. In July 1999, the Company was informed that Lamaze
Publishing Company is to be acquired by iVillage, Inc., a leading online women's
network. The Company's agreements with Lamaze will remain in tact, including the
exclusivity provisions for first rights for renewal each year.
9
<PAGE>
CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(UNAUDITED)
NOTE 5 - LEGAL PROCEEDINGS
On July 20, 1998, the Company won a jury verdict in San Francisco
Superior Court against the University of Arizona and other defendants. The award
was $1,050,000 for the breach of contract and an additional $120,000 was awarded
to the Company for the University of Arizona's misappropriation of trade
secrets. The court rejected three post-trial motions by the University of
Arizona to reduce the award or set aside the verdict. The University is now
appealing the judgment. The University has expressed a willingness to enter
settlement talks and such talks have commenced. The appellate briefs have yet to
be filed.
On February 10, 1999 the Company, the Company's Executive Vice
President, the Company's legal counsel and the Company's CEO and Chairman 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, pursuant to Rule 9(b) of the Federal Rules of Civil
Procedure and Section 3294(a) of the California Civil Code, which does not
authorize punitive damages in an action for breach of an obligation arising from
contract. The motion to strike punitive damages has not yet been ruled on by the
court.
NOTE 6 - CONVERTIBLE NOTES
In November 30, 1998, the Company borrowed $530,000 on eleven
convertible promissory notes. The notes had a term of six months at which time
the principal plus interest, at 8% per year is due. The promissory notes
contained a conversion provision to the Company's restricted common stock at
$2.00 per share. In February 1999, the loan agreements were converted to 302,000
shares of the Company's common stock at a price of $1.75 per share. The loan
holders agreed to forego any accrued interest and any registration rights. All
shares are subject to Rule 144.
In October 1998, the Company entered into a convertible note agreement
borrowing $10,000 from an investor. The note has a term of one year at which
time the principal plus interest, at 20% per year, will be due. The noteholder
has the option to be paid in full for interest plus principal or to convert to
the Company's common stock at $2.00 per share. All shares are subject to Rule
144.
10
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CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY, 1999
(UNAUDITED)
NOTE 7 - STOCKHOLDERS EQUITY
In December 1998, the Company received $580,320 from the sale of
310,000 shares of its restricted common stock at $1.87 per share. The proceeds
from this transaction were used to eliminate the line of credit (see Note 3). In
January and February 1999, the Company received $200,000 from the exercise of
options to purchase 200,000 shares of its common stock at $1.00 per share.
In May 1999, the Company received $84,888 from the sale of 40,000
shares of its restricted common stock at a price of $2.12 per share. In June
1999, the Company received $200,000 from the sale of 100,000 shares of its
restricted common stock at a price of $2.00 per share.
NOTE 8 - AGREEMENTS
ARIZONA
On February 9, 1999, the previous agreements with the Company's Arizona
Revenue Sharing Partners were modified. The modifications were necessary due to
the litigation with the University of Arizona and the investors entered into
Revenue Sharing Partnership Agreements for the state of Florida. The Company
will credit the investors $450,000 (previously paid) toward the purchase of the
partnership. The balance of $550,000 will be paid through their entitlements.
Per the revised agreement the partners were issued 100,000 options of the
Company's common stock at an exercise price of $2.50 per share with a five year
term. The Revenue Sharing Partnership applies to storage originating from
clients in the state of Florida and covers a total of 33,000 spaces. It cancels
the investors previous obligation to provide the Company with $675,000 plus
accrued interest.
ILLINOIS
In 1996, the Company signed agreements with a group of investors
entitling them to an on-going 50% share in CRYO-CELL's portion of net storage
revenue generated by the 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 contiguous states and stored in Clearwater up to 33,000 spaces.
BIO-STOR
On February 26, 1999, the Company modified all previous agreements with
Bio-Stor International, Inc. The modified agreement enters Bio-Stor into a
Revenue Sharing Partnership Agreement for the state of New York. The Company
will credit Bio-Stor's $900,000 (previously paid) toward the purchase of 90% of
the New York partnership. Bio-Stor will receive 90% 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
shared spaces. This agreement supersedes all other agreements between Bio-Stor
International, Inc and the Company.
11
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CRYO-CELL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(UNAUDITED)
NOTE 8 - AGREEMENTS (CONT'D)
DUBLIND PARTNERS, INC.
In February 1999, the Company entered into an exclusive agreement with
Dublind Securities, Inc. and Dublind Partners, Inc. concerning the placement of
securities in a minimum amount of $3,500,000 up to $7,000,000. The agreement
engaged DSI until July 1, 1999 and expired if a minimum of $3,500,000 was not
raised by that date.
Dublind Partners, Inc. did not raise the minimum capital required by
the agreement by July 1, 1999. The Company did not agree to extend the agreement
and believes that it can arrange alternative financing on more favorable terms,
with significantly less dilution of the Company's common stock.
NOTE 9 - LITIGATION
The University of Arizona has made a settlement offer to the Company in
the amount of $700,000. The Company has neither accepted nor rejected this
offer; settlement discussions have been underway and the Company believes they
can be resolved shortly. The Company has deducted $359,000 from the $700,000
offer, which the Company's previous attorneys had claimed was due them, as a
lien against the award. The Company disputes their position and has countersued
Horwitz & Beam and is seeking $1,000,000 in compensatory damages on an
unspecified amount of punitive damages deemed appropriate by the court. The
Company has shown $341,000 as a receivable as a minimal amount expected from the
settlement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
CRYO-CELL International, Inc., is a Delaware Corporation, incorporated
on September 11, 1989. It is engaged in cellular storage and the design and
development of cellular storage devices. During the period since its inception,
the Company's activities have principally involved the design and development of
its cellular storage unit ("CCEL Cellular Storage Unit") and in securing patents
on the same. The Company's primary focus is to utilize its cellular storage
experience and technology for the cryopreservation of umbilical cord blood
(U-CordTM) stem cells in its own processing and cryopreservation facility at its
Clearwater, Florida headquarters. During 1998 the Company consolidated its new
specimen processing and storage activities to its own state of the art facility
in its Clearwater, Florida headquarters.
In June 1998, the Company signed an agreement with Women & Infants
Hospital of Rhode Island for the establishment of a commercial
placental/umbilical cord blood bank at their Providence, Rhode Island medical
facility. Women & Infants Hospital currently has annual births in excess of
9,000 and will be offering its stem cell banking services to the parents
of these babies. Women & Infants laboratory personnel have completed their
training at the Company's state of the art facility in Clearwater, Florida;
commencement of processing and storage at Women & Infants laboratory is expected
to commence within the next few months.
During 1999, all U-cord(TM) blood processing and preservation will be
done at the Company's facility with the exception of those specimens processed
at Women & Infants Hospital in Providence, Rhode Island. It is anticipated that
this shift in focus will limit the number of new LifespanSM Center
implementations in the future.
The Company's technology involves patented, multi-faceted cellular
storage units and the technology for processing stem cells from umbilical cord
blood. The Company believes that its long-term cellular storage unit will
provide an improved ability to store cells or other material in liquid nitrogen,
its
12
<PAGE>
vapors or other media. The unit is controlled by a computer system that
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 dual
identification system for inventory control is a competitive advantage for the
Company. The Company is the assignee of all patents on the units.
An independent manufacturer utilizing the Company's patented design
currently assembles the unit. The Company has been advised by Underwriters
Laboratories ("U/L") that it has passed all required inspections and the unit is
now U/L listed. In order to affix the U/L label to all units that are deployed
in the future, they must contain the same parts, operating capabilities and
features as in the tested CCEL II model.
In February 1999, the Company was informed that the patent on the CCEL
III computer controlled robotically operated cellular storage system has been
granted. The CCEL III is designed to be multi-functional and to meet
International manufacturing requirements. When completely developed the unit
will be able to store more than 35,000 specimens in 5ml vials. Moreover, as many
as 8 million one inch vials could be preserved in approximately 250 square feet.
The prototype is expected to be completed in the third quarter of 1999.
The following is a discussion and analysis of the financial condition
and results of operations of the Company for the quarter ended May 31, 1999 as
compared to the same period of the prior year.
GENERAL
CRYO-CELL has renewed its agreement with the Lamaze Publishing Company
to sponsor the Lamaze YOU AND YOUR BABY tutorial tape. The agreement 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
program. The tutorial tape, which will be distributed by over 12,000
instructors, discusses the importance of cord blood storage and refers viewers
to the full page ad the company has placed in the Lamaze Parents Magazine, which
will be distributed to 2.4 million expectant mothers. In addition, the Company
has also placed 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 1999.
In June 1998, the Company entered into an agreement with International
Broadcast Corporation (IBC). IBC was to produce a one-half hour infomercial
relating to CRYO-CELL's U-CordTM stem cell processing and storage activities.
IBC has since been acquired by 5th Avenue Channel Corp. In May 1999, the Company
signed an exclusive joint venture marketing agreement with 5th Avenue Channel
Corp. Under the terms of the new agreement, the Company and 5th Avenue Channel
will have an equal 50-50 partnership in a new corporation, the Newbirth Network,
Inc. This new entity will offer important health information and products to
expectant parents through 5th Avenue's television, Internet and mass marketing
distributions. Upon calling 5th Avenue Channel's toll-free number, expectant
parents can receive a videotape explaining the option they have for storing
their newborn's cord blood stem cells. 5th Avenue Channel has committed to
producing and distributing a minimum of one million tapes for a small shipping
and handling charge.
In June 1998, the Company was granted a license to operate in the state
of New York. The New York Department of Health has approved the Company's
application to operate as a comprehensive tissue procurement service, processing
and storage facility. This license allows the Company to offer its cord blood
stem cell banking services to the residents of New York, which represents a new
market in excess of 270,000 annual births.
13
<PAGE>
In September 1998, the Company acquired Medical Marketing Network, Inc.
and the services of Steven Ferens for shares of the Company's common stock.
Medical Marketing Network, Inc. has approximately 70 independent sales
contractors that call on and sell products to more than 6,000 obstetricians and
gynecologists (OB/GYNs) across the country. The contract is primarily
performance based, with a goal of 45,000 stored specimens by the third year. The
Company's marketing program will now have extensive representation with the
medical community. This acquisition will allow physicians to make their OB
patients more aware of this medical technology.
The Company markets its cellular banking services by targeting
expectant parents through direct information to obstetricians, pediatricians,
Lamaze instructors, childbirth educators, certified nurse-midwifes and other
related healthcare professionals. In addition, the Company exhibits at
conferences, trade shows and other media which focus on the expectant parent
market. Of significant note is the increasing level of interest being generated
by the Company's website, www.CRYO-CELL.com.
During the quarter, the Company continued its program of marketing its
Revenue Sharing Agreements. Under this arrangement the Company shares its
storage revenues with investors who receive entitlements on storage spaces.
YEAR 2000
The Company has analyzed the Year 2000 (Y2K) impact on its business and
has determined that this will not have a material impact to the Company's
business, products, operations or financial condition. The Company does not use
any internally developed application platforms. All business support systems and
applications are created on commercially available packages that are either
already confirmed to be Y2K compliant, or will be compliant with an upgrade to
the latest release. All software upgrades are scheduled for completion during
the third quarter of 1999. An Integrated Systems Test will be scheduled once all
of the software applications have been upgraded.
The outside independent contractor responsible for manufacturing the
CCEL II Cellular Storage System has certified that, once the operating system
and database applications have been upgraded to the most current release, it
will be Y2K compliant. The upgrades are scheduled for implementation during the
third quarter of 1999.
The Company has required commitment from its vendors that they will
provide the Company uninterrupted service before, during, and after January 1,
2000. All of the mission critical vendors the Company uses are either already
Y2K compliant, or will be compliant by the end of the third quarter of 1999.
MANAGEMENT
At present there are 15 employees on the staff of the Company. Daniel
D. Richard serves as the Chairman of the Board and Chief Executive Officer.
In February 1998, Gerald F. Maass joined the Company as Executive Vice
President and General Manager. Mr. Maass resigned from a 10 year tenure with
Johnson & Johnson (Critikon) where he served as International Director of
Marketing. Mr. Maass' international contacts will be invaluable in the
development of strategic alliances for the Company's proprietary technology in
foreign markets. Along with extensive marketing experience, Mr. Maass also
brings to CRYO-CELL experience in the medical technology field. In September
1998, Mr. Maass was appointed a member of the Company's Board of Directors.
In April 1999, Geoffrey J. O'Neill, Ph.D. joined the Company as
Laboratory Director. Prior to joining the Company Dr. O'Neill was at Florida
Medical Center, Ft. Lauderdale, Florida where he established an autologous
program for the collection, isolation and cryopreservation and storage of
hematopoietic progenitor cells, primarily for breast cancer patients. Dr.
O'Neill was previously Director of the Bone Marrow Laboratory at the University
of Miami/Jackson Memorial Hospital, establishing the
14
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laboratory within the Department of Pathology. As Assistant Director of the
Transfusion Service, he had responsibility for this AABB accredited program,
which supported both allogenic and autologous stem cell transplants. Dr O'Neill
did his post-doctoral fellowship in Immunobiology at Memorial Sloan-Kettering
Cancer Center, NY, under the auspices of Dr. Robert A. Good, a pioneer in bone
marrow transplantation. His undergraduate degree is in microbiology; his Ph.D.
in immunology. A co-author of over 80 publications, Dr. O'Neill is an expert in
the fields of immunohematolgy, blood banking, HLA typing and flow cytometry.
RESULTS OF OPERATIONS
REVENUES. Revenues for the six months ended May 31, 1999 were $531,216 as
compared to $88,475 for the same period in 1998. The increase reflects the
significant growth in the processing and storage revenue associated with the
Company's U-CordTM 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, the launch of the Medical Marketing Network
and the increased traffic on its updated website www.CRYO-CELL.com.
COST OF SALES. Cost of sales for the six months ended May 31, 1999 were $231,438
as compared to $24,482 in 1998. For the period ended May 31, 1999, $20,660 of
the total cost of sales represents the entitlements associated with the Revenue
Sharing Agreements. The remaining cost of sales for the six months ended May 31,
1999 represents the associated expenses resulting from the processing and
testing of the U-CordTM 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 six months ended May 31, 1999 were $1,030,000
as compared to $919,9599 in 1998. The increase reflects the expense of market
development, client services associated with the Company's cellular storage
program, continued product development, and the establishment of an expanded
management team to handle the continuing growth. In addition, the Company
incurred printing and promotional expenses associated with the marketing
campaign with Lamaze Publishing Company and the Medical Marketing Network
program.
RESEARCH, DEVELOPMENT AND RELATED ENGINEERING EXPENSES. Research, development
and related engineering expenses for the six months ended May 31, 1999, were
$42,505 as compared to $109,816 in 1998. The expenses incurred reflect the
continued development of the Company's second generation cellular storage unit,
as well as, the research and development of the Company's third generation
cellular storage systems.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1999, the Company had cash and cash equivalents of $123,072
as compared to $133,133 at May 31, 1998. The decrease in cash and cash
equivalents was a result of the funding of operations.
To date, the Company's sources of cash have been from the issuance of
its own equities, the sale of Revenue Sharing Agreements, the borrowing on a
line of credit, the borrowing on a convertible loan and the sale of subsidiary
stock.
The Company anticipates that cash reserves, cash flows from operations
and the anticipated sale of its preferred stock 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. The Company's direct sales of its U-CordTM cellular storage program
have begun to increase significantly due to the awareness being created through
its activities with Lamaze Publishing, Medical Marketing Network, the Company's
website and other forms of marketing exposure.
15
<PAGE>
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 1997 and
any Current Reports on Form 8-K filed by the Company.
16
<PAGE>
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) autologous cord blood stem cell bank. 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.
Evidence surfaced at trial corroborating that in a subsequent contract
between the University of Arizona and CBR, the parties had indemnified
each other against:
a. the interference in a legitimate business arrangement between
CRYO-CELL and the University of Arizona
b. disparagement of CRYO-CELL
c. wrongful use of CRYO-CELL's material
On July 20, 1998, as a result of the evidence, the jury awarded
$1,050,000 against Defendant University of Arizona. In addition, an
award of $120,000 was granted 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. The University is now appealing the judgment. The University
has expressed a willingness to enter into settlement talks and such
talks have commenced. The appellate briefs have yet to be filed.
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. 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 February 10, 1999, the Company, the Company's Executive Vice
President, the Company's legal counsel and the Company's CEO and
Chairman 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 that the naming of certain officers and the
Company attorney individually, (although they were operating in their
corporate capacities) is an abuse of the civil process and, moreover,
is an attempt to interfere with the Company's ability to raise
additional capital.
17
<PAGE>
The Company believes there is no merit to the suit. The Company
believes 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, pursuant to Rule 9(b)
of the Federal Rules of Civil Procedure and Section 3294(a) of the
California Civil Code, which does not authorize punitive damages in an
action for breach of an obligation arising from contract. The motion to
strike punitive damages has not yet been ruled on by the court.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation (1)
3.11 Amendment to Certificate of Incorporation
3.2 By-Laws (1)
3.21 Board Minutes to Amendment of By-Laws
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 Companyis 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 Companyis Annual Report on
Form 10-K for the year ended November 30, 1998.
(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.
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.
19
<PAGE>
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: July 15, 1999
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 123,072
<SECURITIES> 0
<RECEIVABLES> 71,655
<ALLOWANCES> 13,380
<INVENTORY> 0
<CURRENT-ASSETS> 1,004,703
<PP&E> 2,596,538
<DEPRECIATION> 260,279
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<CURRENT-LIABILITIES> 541,438
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<COMMON> 85,775
<OTHER-SE> 3,238,087
<TOTAL-LIABILITY-AND-EQUITY> 3,323,862
<SALES> 531,216
<TOTAL-REVENUES> 531,216
<CGS> 231,438
<TOTAL-COSTS> 1,361,104
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 2,546
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<EXTRAORDINARY> 0
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<NET-INCOME> (491,434)
<EPS-BASIC> (.06)
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