Storage of Hope

Storage of Hope

COMPANIES by Dave Szymanski | Tampa Bay Editor

Cryo-Cell stores umbilical cord blood. Its chief executive, Mercedes Walton, is hoping the company's investments and repositioning pay off.

Mercedes Walton remembers the time in 2005 when she went from being interim to permanent CEO of Cryo-Cell International, the umbilical cord blood storage company.

"It was tumultuous," Walton recalls.

Walton was under fire from shareholders angered by executive pay, continuing losses and poor stock performance. A major investor, David Portnoy, proposed replacing the entire board of directors. The pricing structure of company services was off, which affected income. Eventually, there was a shareholder board battle.

But Walton successfully diffused it, adding a new board member who went from being a critic to a supporter of the current board. She adjusted prices, added a new product and repositioned the company.

Ask her how she likes her job now.

"I love it," Walton says. "This is the most exciting industry on the planet. To be associated with a company like Cryo-Cell, to have the opportunity to work in the regenerative process, it is amazing."

Cryo Cell stores stem cell blood from umbilical cords. And that blood, research is showing, has healing properties, such as slowing the progress of Alzheimer's Disease and treating diseases of the blood, such as leukemia. The company is hoping there are many more applications.

It has contracted with Saneron CCEL Therapeutics Inc. in Tampa. Saneron has licensed from both the University of South Florida and the University of Minnesota various patents and patent applications for the therapeutic use of umbilical cord blood stem cells and Sertoli cells.

Cryo-Cell has had 150,000 people use its cord-blood worldwide.

Walton, 54, a New York native who is married and has a daughter, has been a director of Cryo-Cell since October 2000, and became chairwoman of the board in June 2002. She became interim CEO in 2003 and permanent CEO and chairwoman in 2005.

Before joining Cryo-Cell, Walton served as CEO of Ralston Hill Consulting LLC, a privately held business development and management consulting practice.

Walton also was president and chief operating officer of Applied Digital Solutions Inc. in Palm Beach. She was responsible for corporate restructuring and guiding the company's strategic planning and launch of Digital Angel, a wireless corporation.

Before joining Applied Digital, Walton was corporate vice president of strategy and business development at AT&T. During her 24-year tenure there, Walton held positions in business and consumer operations, global network operations, engineering, marketing and sales and product management.

"It was an extraordinary business and education foundation," Walton says. "I was hired into a management development program. Part of the program was multi-disciplinary management experiences. It was a wonderful training ground for a focus on innovation."

Walton holds a bachelor's degree in psychology from Smith College and master's degrees from Harvard University and Massachusetts Institute of Technology in technology management.

Pioneer company

Cryo-Cell was one of the first companies to begin harvesting umbilical cord blood, starting in 1989.

Now universities, including the University of South Florida and Duke, do cooperative studies with Cryo-Cell blood, trying to pinpoint its healing properties.

"By 2003, we were moving forward," Walton says. "We knew the whole arena of science was fast emerging. We determined in 2003 that Cyro-Cell would be the leader in stem cell innovation."

The company is also looking at another source for healing cell research: menstrual cells. And it has been looking at providing other services too, such as harvesting stem cells from the placenta.

"We want to be able to develop the concept and commercialize it into a new service," Walton says. "Cryo-Cell has an extensive patent portfolio. Many research universities have contacted us."

But in the background, a controversy has simmered around the harvesting of stem cells.

"We know there is a lot of controversy," Walton says. "Where does the first stem cell begin? We all start out as one stem cell, for 30 minutes. Then it splits and multiples into hundreds of millions of cells. Four months into pregnancy it differentiates."

From the stem cells may be answers in helping stroke, Alzheimer's and other diseases.

"These cells have abundant potential," Walton says. "Researchers are racing and eager to develop this technology."

The competition

Three companies make up about 80% of the cord blood industry. Besides Cryo-Cell, there are Viacord and CBR.

To differentiate itself, Cyro-Cell is establishing itself as the industry innovator. "We are definitely eager and focused on building a portfolio of other services," Walton says.

Harvesting and preserving the cells is the first step. Coming up with regenerative health uses is the next stage. Human therapies take several years.

On the menstrual cell project, Cryo-Cell is collaborating on three pre-clinic studies with animals. There is interest in pursuing the cell applications to treat stroke, diabetes and other ailments.

"We are finding there is extraordinary interest," Walton says. "Much of it is not only from the U.S., but outside the U.S. They are much further advanced in this application in Southeast Asia and Europe. They have different perspectives on regenerative medicine."

To market its applications, Cyro-Cell has established affiliates in other countries such as India, Mexico, El Salvador and Venezuela to license the technology.

The attention, both positive and controversial, motivates Cyro-Cell.

"It's the frontier of the future," Walton says. "We will always have critics. Twenty years ago, preserving umbilitical cord blood was unheard of."

Since then, more than 8,000 transplants have been done with cord blood cells. Today, stem cells have saved and impacted thousands of lives.

The American Association of Blood Banks measures the industry.

"We are operating to the highest standards and cooperating with world-class researchers," Walton says. "The cells we've brought to market are non-controversial cells. We're taking them from sources that would've been discarded. There are life-saving stem cells."

Investing in itself

Walton calls Cyro-Cell stock "volatile," but also says it is "very undervalued."

There are just fewer than 12 million shares, trading over the counter under the symbol CCEL. The stock's 52-week range was 65 cents to $3 a share; a recent closing price was 74 cents.

Cryo-Cell has gone through major evolution in the last five years. In 2003, the company lost $7.5 million on $7.5 million in revenue. The cord blood market became more competitive. In some cases, Cryo-Cell's prices were five times less than its competitors.

"We were basically bleeding," Walton says. "We were the loss leader. Our price was $275 and competitors were selling the same thing for $1,700."

So one of Walton's first strategic goals was repositioning its service. It started going after major accreditations. It started offering new programs for individuals and families. Cyro-Cell Cares is a program to help families looking for a transplant. After these actions, in 2004, Cryo-Cell became profitable. It stayed that way from the first quarter of 2004 to the second quarter of 2006.

But Walton believed that to keep the company growing, it needed to invest in itself, diversifying its services, doing more research and development, marketing and repositioning its service.

The reposition: Offer distinctive benefits and reprice the service. Go from a loss-leader brand to innovative brand. Today that price may be $1,720 for a service with many enhancements, processing, testing and a first year of storage.

This all came with a cost. Cryo-Cell has had operating losses since the second quarter of 2006, and posted losses of $2.8 million in 2006 and $5 million in 2007. But Walton believes the company will reap the benefits of its investments this year and the years to come with increased market share.

Cryo-Cell posted a net loss of $247,000, or 2 cents a share, in the company's 2008 fiscal first quarter, ended Feb. 29, compared to a net loss of $787,000, or 7 cents a share, in the same period a year earlier. Revenue for the first quarter was $4.2 million, the same as the year-ago period.

"We've turned the corner," Walton says. "The R&D expenses have slowed down. Scientists are funding research on their own."

In the work on menstrual cells, Cryo-Cell provides menstrual cells and researchers provide research. They split the ownership 50-50.

Walton knows Cryo-Cell is a big departure from her days in the wireless industry and at AT&T. But she still feels at home.

"I'm not a scientist," Walton says. "I am a strategist. It was the strategy and skill set that brought me here."

She anticipates traveling worldwide to help market the company.

"Companies want to collaborate," Walton says. "I am an evangelist for stem cell technology. In our generation, we will see a seismic shift in how stem cells will affect the quality of our lives. It's a regenerative medicine model. We will have the opportunity to regenerate an organ and have a healthy organ to take you through life."

BY THE NUMBERS

CRYO-CELL INTERNATIONAL

BALANCE SHEET

ASSETS 11/30/06 11/30/07 % change

Current assets:

Cash and cash equivalents 7,414,140 3,364,711 -120

Restricted cash 200,000 200,000 0

Marketable securities

and other investments 989,581 1,002,810 1

Accounts receivable

and advances 1,213,569 2,431,554 100

Deferred tax assets 45,000 18,000 -60

Prepaid expenses

and other current assets 649,971 570,112 -12

Total current assets 10,512,261 7,587,187 -28

Property and equipment-net 3,188,662 3,115,581 -2

Other assets:

Marketable securities

and other investments 50,760 43,200 -14

Note receivable 93,238 80,088 -14

Investment in Saneron CCEL 684,000 684,000 0

Deposits and other assets 111,462 123,653 11

Total other assets 939,460 930,941 -1

Total assets 14,640,383 11,633,709 -20

LIABILITIES & STOCKHOLDERS DEFICIT

Current liabilities:

Accounts payable 1,207,167 1,891,601 57

Accrued expenses 1,706,199 1,331,170 -22

Deferred revenue 3,592,485 4,064,035 13

Total current liabilities 6,505,851 7,286,806 12

Other liabilities:

Deferred revenue 5,875,107 6,696,841 14

Deferred tax liabilities 45,000 18,000 -60

Long-term liability-

revenue-sharing agreements 3,750,000 3,750,000 0

Deferred consulting obligation 556,571 472,744 -15

Total other liabilities 10,226,678 10,937,585 7

Total stockholders deficit (2,092,146) (6,590,682) 215

INCOME STATEMENT 11/30/06 11/30/07 % Change

Revenue: 17,180,383 17,460,196 2

Costs and Expenses:

Cost of sales 6,067,671 6,592,145 9

Marketing and administrative expenses 12,957,465 14,462,914 12

Research, development

and engineering 486,164 545,489 12

Total cost and expenses 20,140,447 22,132,859 10

Operating loss (2,960,064) (4,672,663) 58

Other income (Expense):

Interest income 322,369 318,009 1

Interest expense (1,015,389) (1,390,264) 37

Total other (expense) income 232,983 (110,955) 52

Loss before income tax expense 2,811,368 5,005,415 78

Net loss 2,811,368 5,005,415 78

Net loss per common share – basic 0.24 0.43 79

AT A GLANCE: Cryo-Cell

Headquarters: Oldsmar

Market capitalization: $8.64 million

Stock symbol: CCELL

Recent stock price: 78 cents

52-week stock price range: 65 cents to $3

Price-earnings ratio (trailing 12 months): N/A

Source: Yahoo! Finance

REVIEW SUMMARY

Company: Cryo-Cell International

Industry: Biotechnology

Key: Invest and reposition to gain market share.