The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2016
(Unaudited)
Note 1 - Basis of Presentation and Significant Accounting Policies
The unaudited consolidated financial statements including the Consolidated Balance Sheets as of May 31, 2016 and
November 30, 2015, the related Consolidated Statements of Comprehensive Income for the three and six months ended May 31, 2016 and May 31, 2015 and the Consolidated Statements of Cash Flows for the six months ended May 31, 2016
and 2015 have been prepared by Cryo-Cell International, Inc. and its subsidiaries (the Company or Cryo-Cell) pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting.
Certain financial information and note disclosures, which are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted
pursuant to those rules and regulations. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Companys November 30, 2015 Annual Report on Form
10-K. 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 for all periods presented have been made. The
results of operations for the three and six months ended May 31, 2016 are not necessarily indicative of the results expected for any interim period in the future or the entire year ending November 30, 2016.
Revenue Recognition
Revenue
Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements, the Company allocates revenue to all
deliverables based on their relative selling prices. In such circumstances, accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective
evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when the Company sells the deliverable
separately and it is the price actually charged by the Company for that deliverable.
The Company has identified two deliverables
generally contained in the arrangements involving the sale of its umbilical cord blood product. The first deliverable is the processing of a specimen. The second deliverable is either the annual storage of a specimen, the 21-year storage fee charged
for a specimen or the life-time storage fee charged for a specimen. The Company has allocated revenue between these deliverables using the relative selling price method. The Company has VSOE for its annual storage fees as the Company renews storage
fees annually with its customers on a stand-alone basis. Because the Company has neither VSOE nor TPE for the processing, 21-year storage and life-time storage deliverables, the allocation of revenue has been based on the Companys ESPs.
Amounts allocated to processing a specimen are recognized at the time the processing of the specimen is complete. Amounts allocated to the storage of a specimen are recognized ratably over the contractual storage period. Any discounts given to the
customer are recognized by applying the relative selling price method whereby after the Company determines the selling price to be allocated to each deliverable (processing and storage), the sum of the prices of the deliverables is then compared to
the arrangement consideration, and any difference is applied to the separate deliverables ratably.
The Companys process for
determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing the ESPs for its
processing, 21 year storage and life-time storage fee include the Companys historical pricing practices, as well as expected profit margins.
6
The Company records revenue from processing and storage of specimens and pursuant to agreements
with licensees. The Company recognizes revenue from processing fees upon completion of processing and recognizes storage fees ratably over the contractual storage period as well as other income from royalties paid by licensees related to long-term
storage contracts which the Company has under license agreements. Contracted storage periods are annual, twenty-one years and lifetime. Deferred revenue on the accompanying consolidated balance sheets includes the portion of the annual storage fee,
the twenty-one year storage fee and the life-time storage fee that is being recognized over the contractual storage period as well as royalties received from foreign licensees related to long-term storage contracts in which the Company has future
obligations under the license agreement. The Company classifies deferred revenue as current if the Company expects to recognize the related revenue over the next 12 months. The Company also records revenue within processing and storage fees from
shipping and handling billed to customers when earned. Shipping and handling costs that the Company incurs are expensed and included in cost of sales.
The Company records revenue from the sale of the Prepacyte
®
-CB product line upon
shipment of the product to the Companys customers.
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The Company has recorded a
valuation allowance of $2,630,000 as of both May 31, 2016 and November 30, 2015, as the Company does not believe it is more likely than not that all future income tax benefits will be realized. When the Company changes its
determination as to the amount of deferred income tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made. The ultimate realization of
the Companys deferred income tax assets depends upon generating sufficient taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance, the Company projects future levels of taxable income.
This assessment requires significant judgment. The Company examines the evidence related to the recent history of losses, the economic conditions in which the Company operates and forecasts and projections to make that determination.
There was approximately $148,000 of U.S. income tax expense for the three and six months ended May 31, 2016. There was no U.S. income tax
expense for the three and six months ended May 31, 2015 due to the utilization or expected utilization of net operating losses and foreign tax credit carryforwards, which were not previously benefited in the Companys financial statements.
The Company records foreign income taxes withheld from installment payments of non-refundable up-front license fees and royalty income
earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The Company recognized approximately $54,000 and $25,000 for the three months ended May 31, 2016 and 2015,
respectively, of foreign income tax expense. The Company recognized approximately $54,000 and $51,000 for the six months ended May 31, 2016 and 2015, respectively, of foreign income tax expense. Foreign income tax expense is included in income
tax expense in the accompanying consolidated statements of comprehensive income.
7
The Company recognizes the financial statement benefit of a tax position only after determining
that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from managements belief that a position can or cannot be
sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the three and six months
ended May 31, 2016 and May 31, 2015, the Company had no provisions for interest or penalties related to uncertain tax positions.
Long-Lived
Assets
The Company evaluates the realizability of its long-lived assets, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment, such as reductions in demand or when significant economic slowdowns are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to
undiscounted expected future cash flows. If this comparison indicates that there is impairment and carrying value is in excess of fair value, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted
market prices or (ii) discounted expected future cash flows utilizing a discount rate. The Company did not note any impairment for the three and six months ended May 31, 2016 and 2015.
Stock Compensation
As of May 31,
2016, the Company has three stock-based compensation plans, which are described in Note 10 to the unaudited consolidated financial statements. The Companys third stock-based employee compensation plan became effective December 1, 2011 as
approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting. The Company recognized approximately $136,000 and $54,000 for the three months ended May 31, 2016 and May 31, 2015, respectively, of stock
compensation expense. The Company recognized approximately $388,000 and $245,000 for the six months ended May 31, 2016 and May 31, 2015, respectively, of stock compensation expense.
The Company recognizes stock-based compensation based on the fair value of the related awards. Under the fair value recognition guidance of
stock-based compensation accounting rules, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of
service-based vesting condition and performance-based vesting condition stock option awards is determined using the Black-Scholes valuation model. For stock option awards with only service-based vesting conditions and graded vesting features, the
Company recognizes stock compensation expense based on the graded-vesting method. To value awards with market-based vesting conditions the Company uses a binomial valuation model. The Company recognizes compensation cost for awards with market-based
vesting conditions on a graded-vesting basis over the derived service period calculated by the binomial valuation model. The use of these valuation models involve assumptions that are judgmental and highly sensitive in the determination of
compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Forfeitures are estimated at the time of valuation and reduce expense ratably
over the vesting period.
The estimation of stock awards that will ultimately vest requires judgment and to the extent that actual results
or updated estimates differ from current estimates, such amounts will be recorded as a
8
cumulative adjustment in the period they become known. The Company considered many factors when estimating forfeitures, including the recipient groups and historical experience. Actual results
and future changes in estimates may differ substantially from current estimates.
The Company issues performance-based equity awards which
vest upon the achievement of certain financial performance goals, including revenue and income targets. Determining the appropriate amount to expense based on the anticipated achievement of the stated goals requires judgment, including forecasting
future financial results. The estimate of the timing of the expense recognition is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any
revision is reflected in the period of the change. If the financial performance goals are not met, the award does not vest, so no compensation cost is recognized and any previously stock-recognized stock-based compensation expense is reversed.
The Company issues equity awards with market-based vesting conditions which vest upon the achievement of certain stock price targets. If the
awards are forfeited prior to the completion of the derived service period, any recognized compensation is reversed. If the awards are forfeited after the completion of the derived service period, the compensation cost is not reversed, even if the
awards never vest.
Fair Value of Financial Instruments
Management uses a fair value hierarchy, which gives the highest priority to quoted prices in active markets. The fair value of financial
instruments is estimated based on market trading information, where available. Absent published market values for an instrument or other assets, management uses observable market data to arrive at its estimates of fair value. Management believes
that the carrying amount of cash and cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The Company believes that the fair value of
its Revenue Sharing Agreements (RSA) liability recorded on the balance sheet is between the recorded book value and up to the Companys previous settlement experience, due to the various terms and conditions associated with each
RSA.
The Company uses an accounting standard that defines fair value as an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure
fair value are as follows:
|
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
|
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
|
9
The following table summarizes the financial assets and liabilities measured at fair value on a
recurring basis as of May 31, 2016 and November 30, 2015, respectively, segregated among the appropriate levels within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
May 31, 2016
|
|
|
Fair Value Measurements
at May 31, 2016 Using
|
|
Description
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
297,099
|
|
|
$
|
297,099
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
376,685
|
|
|
|
376,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
673,784
|
|
|
$
|
673,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
November 30,
2015
|
|
|
Fair Value Measurements
at November 30, 2015 Using
|
|
Description
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities
|
|
$
|
136,798
|
|
|
$
|
136,798
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
473,626
|
|
|
|
473,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
610,424
|
|
|
$
|
610,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a description of the valuation techniques used for these items, as well as the general
classification of such items pursuant to the fair value hierarchy:
Trading securities
Fair values for these investments are
based on quoted prices in active markets and are therefore classified within Level 1 of the fair value hierarchy. For trading securities, there was ($823) and $3,768 in unrealized holding loss and gain, respectively, recorded in other income and
expense on the accompanying consolidated statements of comprehensive income for the three months ended May 31, 2016 and 2015. For trading securities, there was ($20,652) and ($645) in unrealized holding loss, respectively, recorded in other
income and expense on the accompanying consolidated statements of comprehensive income for the six months ended May 31, 2016 and 2015.
Available-for-sale securities
During the second quarter of fiscal 2015, management reevaluated its marketable securities and
determined that there was a change in certain securities from trading to available-for-sale classification. These investments are classified as available for sale and consist of marketable equity securities that we intend to hold for an indefinite
period of time. Investments are stated at fair value and unrealized holding gains and losses are reported as a component of accumulated other comprehensive income until realized. Realized gains or losses on disposition of investments are computed
using the first in, first out (FIFO) method and reported as income or loss in the period of disposition in the accompanying consolidated statements of comprehensive income. For available-for-sale securities, there was ($6,493) and $226,276 in
unrealized holding loss and gain, net of tax, respectively, reported as comprehensive income on the accompanying statements of comprehensive income for the three months ended May 31, 2016 and 2015. For available-for-sale securities, there was
($100,220) and $226,276 in unrealized holding loss and gain, net of tax, respectively, reported as a component of comprehensive income on the accompanying consolidated statements of comprehensive income for the six month period ended May 31,
2016 and 2015. Additionally, there was $7,361 in realized gains on the disposition of available for sale securities recorded in other income and expense on the accompanying consolidated statements of comprehensive income for the three and six months
ended May 31, 2015.
10
Product Warranty and Cryo-Cell Cares
TM
Program
In December 2005, the Company began providing its customers that enrolled after December 2005 a payment warranty under which the Company agrees
to pay $50,000 to its client if the umbilical cord blood product retrieved is used for a stem cell transplant for the donor or an immediate family member and fails to engraft, subject to various restrictions. Effective February 1, 2012, the
Company increased the $50,000 payment warranty to a $75,000 payment warranty to all of its new clients. Additionally, under the Cryo-Cell Cares
TM
program, the Company will pay $10,000 to
the client to offset personal expenses if the umbilical cord blood product is used for bone marrow reconstitution in a myeloblative transplant procedure. The product warranty and the Cryo-Cell Cares program are available to clients who enroll under
this structure for as long as the specimen is stored with the Company. The Company has not experienced any claims under the warranty program nor has it incurred costs related to these warranties. The Company does not maintain insurance for this
warranty program and therefore maintains reserves to cover any estimated potential liabilities. The Companys reserve balance is based on the $75,000 or $50,000 (as applicable) maximum payment and the $10,000 maximum expense reimbursement
multiplied by formulas to determine the projected number of units requiring a payout. The Company determined the estimated expected usage and engraftment failure rates based on an analysis of the historical usage and failure rates and the historical
usage and failure rates in other private and public cord blood banks based on published data. The Companys estimates of expected usage and engraftment failure could change as a result of changes in actual usage rates or failure rates and such
changes would require an adjustment to the established reserves. The historical usage and failure rates have been very low and a small increase in the number of transplants or engraftment failures could cause a significant increase in the estimated
rates used in determining the Companys reserve. In addition, the reserve will increase as additional umbilical cord blood specimens are stored which are subject to the warranty. As of May 31, 2016 and November 30, 2015 the Company
recorded reserves under these programs in the amounts of approximately $17,000 and $17,000, respectively, which are included in accrued expenses in the accompanying consolidated balance sheets.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments
. This update provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by
a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration
of a broader range of reasonable and supportable information to inform credit loss estimates. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is
currently evaluating the effect that the updated standard will have on our financial statements.
In May 2016, the FASB issued Accounting
Standards Update No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
This update clarifies the objectives of collectability, sales and other taxes, noncash consideration,
contract modifications at transition, completed contracts at transition and technical correction. The amendments in this update affect the guidance in Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic
606),
which is not yet effective but will become effective for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method nor has it determined the effect of the standard on its
consolidated financial statements and related disclosures.
11
In April 2016, the FASB issued Accounting Standards Update No. 2016-10,
Revenue from
Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
This update clarifies how an entity identifies performance obligations related to customer contracts as well as help to improve the operability and
understanding of the licensing implementation guidance. The amendments in this update affect the guidance in Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which is not yet effective but will
become effective for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial statements and related
disclosures.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting.
This update simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory
tax withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently
evaluating the effect that the updated standard will have on our financial statements.
In March 2016, the FASB issued Accounting
Standards Update No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).
This update amends the principal-versus-agent implementation guidance and
illustrations in the Boards new revenue standard (ASC 606). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue
standards principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standards control principle. The new standard is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on our financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842).
This update requires organizations
that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. It also requires new qualitative and quantitative disclosures to help
investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated balance sheets and related disclosures.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Financial InstrumentsOverall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
. This update requires all equity investments to be measured at fair value with changes in fair value recognized in net income, requires an entity to present separately in
other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair
value option for financial instruments, and eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at
amortized cost on the balance sheet. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the accounting guidance on financial
liabilities under the fair value option. The Company is currently evaluating the impact of the new standard on our financial statements.
12
In November 2015, the FASB issued Accounting Standards Update No. 2015-17,
Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes
, which requires that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. This update is effective for fiscal years, and interim reporting
periods within those years, beginning after December 15, 2016. The standard permits the use of either the retrospective or prospective transition method. The adoption of this standard is expected to result in a reclassification between current
and non-current deferred tax assets within the Companys consolidated balance sheets and related disclosures.
In July 2015, the FASB
issued Accounting Standards Update No 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory.
This update simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with the
lower of cost or net realizable value test. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard should be
applied prospectively and is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. The Company does not expect the adoption of this standard to
have a material impact on the Companys financial statements.
In June 2014, the FASB issued Accounting Standards Update
No. 2014-12,
Compensation Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period
(ASU
2014-12). This update requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition in determining expense recognition for the award. As
a result, this type of performance condition may delay expense recognition until achievement of the performance target is probable. ASU 2014-12 is effective for reporting periods beginning after December 15, 2015, and early adoption is
permitted. We will adopt ASU 2014-12 effective December 1, 2016 and it is not anticipated to have a material impact on our financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09
, Revenue from Contracts with Customers (Topic 606).
This
update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for
those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued Accounting Standards
Update No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
which defers the effective date of the guidance in Accounting Standards Update No. 2014-09 by one year. This update is now
effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is permitted for annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that reporting period. This update permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method
nor has it determined the effect of the standard its consolidated financial statements and related disclosures.
Note 2 Acquisition
On June 11, 2015, the Company entered into an Asset Purchase Agreement (the APA) with CytoMedical Design
Group LLC (CytoMedical), for the purchase of certain assets and assumption of certain liabilities and contracts that CytoMedical used in the operation of its cord blood business, including the Prepacyte-CB Processing System which is used
in cell processing laboratories to process and store stem cells from umbilical cord blood (the Acquisition). This transaction has been accounted for as a business combination. The purchase price was $2,400,000, plus the value of
inventory, comprised
13
of $1,553,272 in cash and assumed liabilities of the seller less any prepayment made by the Company to CytoMedical ($966,597 at closing and $586,675 on or before September 30, 2015) and a
note payable to the seller in the amount of $1,300,000. The closing was effective on June 30, 2015. As part of the closing, Cryo-Cell paid $861,783 as required per the Disbursement of Funds Schedule in the Amendment No. 1 to Asset Purchase
Agreement (Amended APA) dated June 30, 2015 with CytoMedical, dated June 30, 2015 and a prepayment for inventory of $104,000 paid by the Company to CytoMedical during the second quarter of fiscal 2015 was applied to the
purchase. On September 30, 2015, $662,500 was due to be paid to CytoMedical. A portion of the amount due on September 30, 2015 ($225,000) was contingent on the number of the Companys new clients choosing to have their umbilical cord
blood processed using the Prepacyte-CB product during the months of July, August and September, 2015. This amount was reduced to $149,175. On September 30, 2015, the Company paid $586,675 in accordance with the APA. In connection with the
Acquisition, the Company incurred approximately $22,000 in transaction costs, which were included in selling, general and administrative expenses.
The
following summarizes the fair value of the consideration for the Acquisition:
|
|
|
|
|
Consideration
|
|
|
|
Cash
|
|
$
|
375,374
|
|
Assumed liabilities of seller
|
|
|
1,073,898
|
|
Note payable to seller
|
|
|
1,300,000
|
|
Prepaid expense paid to seller by purchaser
|
|
|
104,000
|
|
|
|
|
|
|
Consideration
|
|
$
|
2,853,272
|
|
|
|
|
|
|
The following summarizes the allocation of the total purchase price for the Acquisition:
|
|
|
|
|
Inventory
|
|
$
|
529,097
|
|
Tooling molds
|
|
|
35,353
|
|
License agreement
|
|
|
470,000
|
|
Customer relationships
|
|
|
41,000
|
|
|
|
|
|
|
Total identifiable net assets acquired
|
|
|
1,075,450
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,777,822
|
|
|
|
|
|
|
In connection with the APA, the Company assumed an exclusive perpetual license agreement which enables the
Company to use licensed technology in its umbilical cord blood processing and storage product for cord blood banking. Under the terms of the APA, the Company will pay a royalty of $5 per bag set unit sold, subject to minimum annual royalties
totaling $35,000.
The goodwill is attributable to the manufacturing process used in the operation of the cord blood business. The
goodwill recognized will be deductible for income tax purposes.
The fair value of inventory and tooling molds were estimated by applying
a comparable cost/market approach, representing Level 2 measurements. The fair value of the license agreement and customer relationships were estimated by applying an income approach, representing Level 3 measurements. The fair value estimates are
based on (1) an assumed discount rate of 16%, (2) long-term sustainable growth rate of 3%, and (3) a ten and fifteen year lives for the license agreement and customer relationships, respectively.
14
The fair values of the license agreement and customer relationships reflect the anticipated cash
flows over their expected lives.
The operating results of Prepacyte CB have been included in the consolidated statements of comprehensive
income since the date of acquisition.
Note 3 Inventory
Inventory has been pledged as collateral on the note payable incurred in connection with the APA (Note 2). The components of
inventory at May 31, 2016 and November 30, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
|
November 30, 2015
|
|
Raw materials
|
|
$
|
14,228
|
|
|
$
|
9,041
|
|
Work-in-process
|
|
|
144,013
|
|
|
|
134,727
|
|
Finished goods
|
|
|
251,276
|
|
|
|
282,152
|
|
Collection kits
|
|
|
57,781
|
|
|
|
57,406
|
|
Inventory reserve
|
|
|
(7,718
|
)
|
|
|
(7,718
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
459,580
|
|
|
$
|
475,608
|
|
|
|
|
|
|
|
|
|
|
Note 4 Goodwill
Goodwill represents the excess of the purchase price of the assets acquired from CytoMedical (Note 2) over the estimated
fair value of the net tangible and identifiable intangible assets acquired. The annual impairment assessment is performed as of September 1, 2015, and an assessment is performed at other times if an event occurs or circumstances change that
would more likely than not reduce the fair value of the asset below its carrying value. Step one of the impairment assessment compares the fair value of the reporting unit to its carrying value and if the fair value exceeds its carrying value,
goodwill is not impaired. If the carrying value exceeds the fair value, the implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value exceeds the carrying value then goodwill is not impaired; otherwise,
an impairment loss would be recorded by the amount the carrying value exceeds the implied fair value. As of May 31, 2016 and November 30, 2015, goodwill is reflected on the consolidated balance sheets at $1,777,822.
As of May 31, 2016, there were no indications of impairment and no impairment loss was recorded for goodwill.
Note 5 Intangible Assets
The Company incurs certain legal and related costs in connection with patent and trademark applications. If a future
economic benefit is anticipated from the resulting patent or trademark or an alternate future use is available to the Company, such costs are capitalized and amortized over the expected life of the patent or trademark. The Companys assessment
of future economic benefit involves considerable management judgment. A different conclusion could result in the reduction of the carrying value of these assets.
15
Intangible assets were as follows as of May 31, 2016 and November 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives
|
|
May 31, 2016
|
|
|
November 30, 2015
|
|
Patents
|
|
10-20 years
|
|
$
|
34,570
|
|
|
$
|
34,570
|
|
Less: Accumulated amortization
|
|
|
|
|
(9,006
|
)
|
|
|
(8,075
|
)
|
License agreement
|
|
10 years
|
|
|
470,000
|
|
|
|
470,000
|
|
Less: Accumulated amortization
|
|
|
|
|
(43,081
|
)
|
|
|
(17,917
|
)
|
Customer relationships
|
|
15 years
|
|
|
41,000
|
|
|
|
41,000
|
|
Less: Accumulated amortization
|
|
|
|
|
(2,505
|
)
|
|
|
(3,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Intangible Assets
|
|
$
|
490,978
|
|
|
$
|
516,328
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangibles was approximately $13,000 and $500 for the three months ended May 31,
2016 and May 31, 2015, respectively. Amortization expense of intangibles was approximately $25,000 and $900 for the six months ended May 31, 2016 and May 31, 2015, respectively.
Note 6 Note Payable
On June 30, 2015, the Company entered into a note payable in the amount of $1,300,000 in connection with the APA (Note
2). The note was payable in 48 monthly installments of $29,938 including principal and interest at the rate of 5% per annum, commencing on July 31, 2015, and ending on June 30, 2019. Pursuant to the APA, the note was secured by all
assets, inventory, molds and tools sold and transferred to the Company, tangible personal property held for sale or lease, accounts, contract rights, and other rights to payment and general intangibles.
On April 22, 2016 the Company paid $778,287 which constituted payment in full of the Companys payment obligations to CMDG pursuant
to the terms of the original APA and Promissory Note, as well as pursuant to the terms of the Loan/Promissory Note Sale Agreement and Mutual Release executed by the Company and CMDG on April 22, 2016. Prior to making the payment in full, the
Company made payments totaling $269,443 pursuant to the terms of the original APA and Promissory Note. The remaining principal balance of the note payable is $0 and $1,176,367 and is reflected on the accompanying balance sheets as of May 31,
2016 and November 30, 2015, respectively. The difference between the remaining principal balance and the final payment made on April 22, 2016 was $300,593 which was recorded as gain on extinguishment of debt for the three and six months
ended May 31, 2016 on the accompanying consolidated statements of comprehensive income.
As of the three months ended May 31,
2016, the Company recognized $7,874 of interest expense related to the note payable. As of the six months ended May 31, 2016, the Company recognized $22,265 of interest expense related to the note payable.
Note 7
Segment Reporting
During the third quarter of fiscal 2015, the Company purchased certain assets and assumed certain liabilities and contracts
that CytoMedical used in the operation of its cord blood business (See Note 2). The Company evaluated and determined that this acquisition qualifies as a separate segment.
The Company is organized in two reportable segments:
|
1.
|
The cellular processing and cryogenic storage of umbilical cord blood and cord tissue stem cells for family use. Revenue is generated from the initial processing and testing fees and the annual storage fees charged each
year for storage (the Umbilical cord blood and cord tissue stem cell service).
|
16
|
2.
|
The manufacture of Prepacyte® CB units, the processing technology used to process umbilical cord blood stem cells. Revenue is generated from the sales of the Prepacyte® CB units (the
Prepacyte®-CB).
|
The following table shows, by segment: net revenue, cost of sales, operating profit, depreciation and
amortization, interest expense, income tax benefit (expense) and other comprehensive income for the three months and six months ended May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended May 31, 2016
|
|
|
For the six months
ended May 31, 2016
|
|
Net revenue
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
5,349,745
|
|
|
$
|
10,370,204
|
|
Prepacyte®-CB
|
|
|
66,379
|
|
|
|
198,118
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
5,416,124
|
|
|
$
|
10,568,322
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,345,370
|
|
|
$
|
2,590,393
|
|
Prepacyte®-CB
|
|
|
85,730
|
|
|
|
188,998
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
1,431,100
|
|
|
$
|
2,779,391
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
28,555
|
|
|
$
|
57,233
|
|
Prepacyte®-CB
|
|
|
13,317
|
|
|
|
26,187
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
41,872
|
|
|
$
|
83,420
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
915,052
|
|
|
$
|
1,056,069
|
|
Prepacyte®-CB
|
|
|
(32,668
|
)
|
|
|
(17,263
|
)
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
882,384
|
|
|
$
|
1,038,806
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
335,589
|
|
|
$
|
582,532
|
|
Prepacyte®-CB
|
|
|
7,874
|
|
|
|
22,265
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
343,463
|
|
|
$
|
604,797
|
|
|
|
|
|
|
|
|
|
|
The following table shows the assets by segment as of May 31, 2016 and November 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2016
|
|
|
As of November 30,
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
17,741,253
|
|
|
$
|
16,697,621
|
|
Prepacyte®-CB
|
|
|
2,728,075
|
|
|
|
2,800,325
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,469,328
|
|
|
$
|
19,497,946
|
|
|
|
|
|
|
|
|
|
|
17
Note 8 Income per Common Share
The following table sets forth the calculation of basic and diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
637,132
|
|
|
$
|
210,032
|
|
|
$
|
514,196
|
|
|
$
|
496,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding-basic
|
|
|
9,087,807
|
|
|
|
9,809,127
|
|
|
|
9,029,909
|
|
|
|
9,816,762
|
|
Dilutive common shares issuable upon exercise of stock options
|
|
|
309,423
|
|
|
|
233,477
|
|
|
|
306,629
|
|
|
|
232,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares-diluted
|
|
|
9,397,230
|
|
|
|
10,042,604
|
|
|
|
9,336,538
|
|
|
|
10,049,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended May 31, 2016, the Company excluded the effect of 40,000 and 40,000,
respectively, outstanding options from the computation of diluted earnings per share, as the effect of potentially dilutive shares from the outstanding stock options would be anti-dilutive.
For the three and six months ended May 31, 2015, the Company excluded the effect of 271,000 and 271,000, respectively, outstanding
options from the computation of diluted earnings per share, as the effect of potentially dilutive shares from the outstanding stock options would be anti-dilutive.
Note 9 - Investment in Saneron CCEL Therapeutics, Inc. (Saneron)
As of May 31, 2016 and November 30, 2015, the Company had an ownership interest of approximately 33% in Saneron,
which is accounted for under the equity method of accounting. As of May 31, 2016 and November 30, 2015, the net Saneron investment reflected on the consolidated balance sheets is $0. During 2015 management reviewed the Saneron investment
to determine if there were any indicators that would imply that the investment was impaired. Based on managements review, there was evidence of a loss in value in the fourth quarter of 2015 and the Company impaired the net Saneron investment,
resulting in a charge of approximately $684,000. The main factors that led to this decision included a decline in grant funding, reduction in employees, and the inability to sustain research activities due to lack of funding. Without the ability to
perform current and future research activities, management believes the carrying amount of the investment is impaired and not recoverable.
In October 2013, the Company entered into a Convertible Promissory Note Purchase Agreement with Saneron. Cryo-Cell will loan Saneron in
quarterly payments an aggregate amount up to $300,000, subject to certain conditions. The initial loan amount was $150,000 to be paid in four quarterly installments of $37,500 per quarter. If after the initial loan amount, Saneron has made best
efforts, satisfactory to Cryo-Cell in its sole discretion, to have started independently or via serving as a sponsor of a clinical trial related to its U-CORD-CELL program, then Cryo-Cell will agree to lend Saneron an
18
additional $150,000 through a series of four additional quarterly payments of $37,500. Upon receipt of each quarterly payment, Saneron will deliver a convertible promissory note
(Note) that matures five years from the date of the Note. Upon maturity of any Note, Saneron will have the option to repay all or a portion of the loan in cash or convert the outstanding principal and accrued interest under the
applicable Note(s) into shares of Saneron common stock. The Company made five payments of $37,500 through November 30, 2014. The Company made no additional payments through May 31, 2016.
For the three months ended May 31, 2016 and May 31, 2015, the Company recorded equity in losses of Saneron operations of
approximately $0 and $8,248, respectively, which related to certain stock awards that were granted by Saneron at below fair market value to certain employees, consultants and members of Sanerons management who represent owners of Saneron and
serve on its board of directors. For the six months ended May 31, 2016 and Mary 31, 2015, the Company recorded equity in losses of Saneron operations of approximately $0 and $16,496, respectively, which related to certain stock awards that were
granted by Saneron at below fair market value to certain employees, consultants and members of Sanerons management who represent owners of Saneron and serve on its board of directors.
Note 10 Stockholders Equity
Employee Stock Incentive Plan
The Company maintains the 2006 Stock Incentive Plan (the 2006 Plan) under which it has reserved 1,000,000 shares of the
Companys common stock for issuance pursuant to stock options, restricted stock, stock-appreciation rights (commonly referred to as SARs) and stock awards (i.e. performance options to purchase shares and performance units). As of
May 31, 2016 and November 30, 2015, there were 566,430 options issued, but not yet exercised, under the 2006 Plan, respectively. As of May 31, 2016, there were 256,179 shares available for future issuance under the 2006 Plan.
The Company also maintains the 2012 Equity Incentive Plan (the 2012 Plan) which became effective December 1, 2011 as approved
by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting on July 10, 2012. The 2012 Plan originally reserved 1,500,000 shares of the Companys common stock for issuance pursuant to stock options, restricted
stock, SARs, and other stock awards (i.e. performance shares and performance units). In May 2012, the Board of Directors approved an amendment to the 2012 Plan to increase the number of shares of the Companys common stock reserved for issuance
to 2,500,000 shares. As of May 31, 2016, there were 569,729 service-based options issued, 129,729 service-based restricted common shares granted, 278,948 performance-based and 116,240 market-based restricted common shares granted under the 2012
plan. As of November 30, 2015, there were 400,000 service-based options issued, 129,729 service-based restricted common shares granted, 203,403 performance-based and 116,240 market-based restricted common shares granted under the 2012 plan.
Service-based vesting condition options
The fair value of each option award is estimated on the date of the grant using the Black-Scholes valuation model that uses the assumptions
noted in the following table. Expected volatility is based on the historical volatility of the Companys stock over the most recent period commensurate with the expected life of the Companys stock options. The Company uses historical data
to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of
options granted to employees is calculated, in accordance with the simplified method for plain vanilla stock options allowed under GAAP. Expected dividends are based on the historical trend of the Company not issuing
dividends.
19
There were 169,729 and 0 options granted during the three and six months ended May 31, 2016
and May 31, 2015, respectively.
Variables used to determine the fair value of the options granted for the three and six months ended
May 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
May 31, 2016
|
|
|
May 31, 2016
|
|
Weighted average values:
|
|
|
|
|
|
|
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
84.7
|
%
|
|
|
84.7
|
%
|
Risk free interest rate
|
|
|
1.24
|
%
|
|
|
1.24
|
%
|
Expected life
|
|
|
6 years
|
|
|
|
6 years
|
|
Stock option activity for options with only service-based vesting conditions for the six months ended
May 31, 2016, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
|
Contractual
Life (Years)
|
|
|
Intrinsic
Value
|
|
Outstanding at November 30, 2015
|
|
|
968,930
|
|
|
$
|
2.17
|
|
|
|
5.01
|
|
|
$
|
1,095,525
|
|
|
|
|
|
|
Granted
|
|
|
169,729
|
|
|
|
3.15
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/forfeited
|
|
|
(2,500
|
)
|
|
|
2.10
|
|
|
|
|
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2016
|
|
|
1,136,159
|
|
|
$
|
2.32
|
|
|
|
5.32
|
|
|
$
|
804,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 31, 2016
|
|
|
1,019,264
|
|
|
$
|
2.22
|
|
|
|
4.81
|
|
|
$
|
804,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the total value of the difference between the Companys closing
stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options that would have been received by the option holders had all option holders exercised their options on
either May 31, 2016 or May 31, 2015, as applicable. The intrinsic value of the Companys stock options changes based on the closing price of the Companys stock.
There were no options exercised during the six months ended May 31, 2016 and May 31, 2015.
20
Significant option groups outstanding and exercisable at May 31, 2016 and related price and
contractual life information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Contractual
Life (Years)
|
|
|
Average
Exercise Price
|
|
|
Outstanding
|
|
|
Average
Exercise Price
|
|
$1.01 to $2.00
|
|
|
465,930
|
|
|
|
4.98
|
|
|
$
|
1.72
|
|
|
|
465,930
|
|
|
$
|
1.72
|
|
$2.01 to $3.00
|
|
|
478,000
|
|
|
|
3.99
|
|
|
$
|
2.56
|
|
|
|
478,000
|
|
|
$
|
2.56
|
|
$3.01 to $4.00
|
|
|
192,229
|
|
|
|
9.44
|
|
|
$
|
3.15
|
|
|
|
75,334
|
|
|
$
|
3.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,136,159
|
|
|
|
5.32
|
|
|
$
|
2.32
|
|
|
|
1,019,264
|
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys non-vested options as of May 31, 2016, and changes during
the six months ended May 31, 2016, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Options
|
|
|
Fair Value
|
|
Non-vested at November 30, 2015
|
|
|
15,003
|
|
|
$
|
1.90
|
|
Granted
|
|
|
169,729
|
|
|
|
1.91
|
|
Vested
|
|
|
(67,837
|
)
|
|
|
2.16
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Non-vested at May 31, 2016
|
|
|
116,895
|
|
|
$
|
1.76
|
|
As of May 31, 2016, there was approximately $204,000 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the 2006 Plan and the 2012 Plan. The cost is expected to be recognized over a weighted-average period of 1.47 years as of May 31, 2016. The total fair value of shares vested during
the six months ended May 31, 2016 was approximately $147,000.
During the second fiscal quarter of 2016, the Company entered into
Amended and Restated Employment Agreements (2016 Employment Agreements) with each of the Companys Co-CEOs. Per the Employment Agreements, each of the Co-CEOs is to receive base grant equity awards in the form of qualified options
of the Companys common stock. As of April 15, 2016, David Portnoy and Mark Portnoy were granted 70,270 and 59,459 options of the Companys common stock, respectively. The options were issued under the Companys 2012 Stock Plan
and will vest 1/3 upon grant, 1/3 on December 1, 2016 and the remaining 1/3 on November 30, 2017. The fair value of these options vested as of May 31, 2016 was approximately $97,000 and is reflected as selling, general and
administrative expenses in the accompanying consolidated statement of comprehensive income. As of May 31, 2016, there was approximately $142,000 of total unrecognized compensation cost related to the non-vested options of common stock and these
will continue to vest as notated above and per the 2016 Employment Agreements through November 30, 2017.
Performance and
market-based vesting condition options
The 2016 Employment Agreements also provide for the grant of qualified options of the
Companys common stock based on certain performance measures being attained by each of the Companys Co-CEOs. The 2016 Employment Agreements provide that if David Portnoy and Mark Portnoy are employed by the Company on November 30,
2016, then no later than February 28, 2017, the Company will grant up to 186,487 and 162,163 qualified options of common stock, respectively, based on certain performance thresholds, as defined in the agreements. In addition, if David
Portnoy and Mark Portnoy are employed by the Company on November 30, 2017, then no later than February 28, 2018, the Company will grant up to an additional 186,487 and 162,163 qualified options of common stock, respectively, based on
similar performance thresholds, as defined in the 2016 Employment Agreements.
21
There were no performance-based or market-based vesting condition options granted during the
three months ended May 31, 2016 and May 31, 2015. As of May 31, 2016 and May 31, 2015, there were no performance or market-based vesting condition options outstanding.
Restricted common shares
During the first fiscal quarter of 2014, the Company entered into Amended and Restated Employment Agreements (Employment
Agreements) with each of the Companys Co-CEOs. Per the Employment Agreements, each of the Co-CEOs received base grant equity awards in the form of restricted shares of the Companys common stock. As of December 1,
2013, David Portnoy and Mark Portnoy were granted 70,270 and 59,459 shares of the Companys common stock, respectively. The shares were issued under the Companys 2012 Stock Plan and vested 1/3 upon grant, 1/3 on December 1, 2014
and the remaining 1/3 on December 1, 2015. The fair value of the shares vested as of May 31, 2015 was $200,000 and is reflected as selling, general and administration expenses in the accompanying consolidated statement of
comprehensive income. As of May 31, 2016, there was $0 of total unrecognized compensation cost related to the non-vested shares of restricted common stock.
The Employment Agreements also provide for the grant of restricted shares of the Companys common stock based on certain performance
measures being attained by each of the Companys Co-CEOs. The Employment Agreements provide that if David Portnoy and Mark Portnoy are employed by the Company on November 30, 2014, then no later than February 15, 2015, the Company
will grant up to 186,487 and 162,163 shares of restricted common shares, respectively, based on certain performance thresholds, as defined in the agreements. The Company issued David Portnoy 93,244 shares and Mark Portnoy 81,082 shares during
the first quarter of fiscal 2015. In addition, if David Portnoy and Mark Portnoy are employed by the Company on November 30, 2015, then no later than February 15, 2016, the Company will grant up to an additional 186,487 and 162,163 shares
of restricted common shares, respectively, based on similar performance thresholds, as defined in the agreements. The Company issued David Portnoy 118,062 shares and Mark Portnoy 102,663 shares during the first quarter of fiscal 2016. As of
May 31, 2016, there was $0 of total unrecognized compensation cost related to the issuance of these shares of restricted common shares.
Preferred Stock Rights Plan
On November 26, 2014, the Board of Directors of the Company declared a dividend payable December 5, 2014 of one preferred share
purchase right (a Right) for each share of common stock, par value $0.01 per share, of the Company (a Common Share) outstanding as of the close of business on December 5, 2014 (the Record Date) and authorized
the issuance of one Right for each additional Common Share that becomes outstanding between the Record Date and the earliest of the close of business on the Distribution Date (hereinafter defined), the Redemption Date (hereinafter defined), and the
close of business on the Final Expiration Date (hereinafter defined), and for certain additional Common Shares that become outstanding after the Distribution Date, such as upon the exercise of stock options or conversion or exchange of securities or
notes.
The Rights will be issued pursuant to a Rights Agreement dated as of December 5, 2014 (the Rights Agreement),
between the Company and Continental Stock and Transfer Trust, as Rights Agent (the Rights Agent). The Rights will not and are not intended to prevent an acquisition of the Company that the Board of Directors of the Company considers
favorable to and in the best interests of all shareholders of the Company. Rather, because the exercise of the Rights may cause substantial dilution to an Acquiring Person (hereinafter defined) unless the Rights are redeemed by the Board of
Directors before an acquisition transaction, the Rights Agreement ensures that the Board of Directors has the ability to negotiate with an Acquiring Person on behalf of unaffiliated shareholders. A description of the material terms and general
effect of the Rights Agreement is set forth below.
22
Each Right represents the right to purchase from the Company one one-thousandth (1/1,000) of
a share of Series A Junior Participating Preferred Stock (the Preferred Shares), subject to adjustment as provided in the Rights Agreement. This fraction of a Preferred Share is substantially similar to a Common Share, in that the Rights
Agreement provides for each Preferred Share to have the voting, liquidation and dividend rights that are equivalent to 1,000 times the rights of a Common Share.
Initially, the Rights are not exercisable, are transferable only in connection with the transfer of Common Shares, and, generally, are
evidenced only by the certificates for Common Shares. The holders of Rights will, solely by reason of their ownership of Rights, have no rights as shareholders of the Company, including, without limitation, the right to vote or to receive dividends.
The Rights will become exercisable and trade separately from the Common Shares upon the Distribution Date (the Distribution Date), which takes place upon the earlier of:
|
(i)
|
The tenth day after the earlier of either the public announcement or public disclosure of facts indicating that a person has become an Acquiring Person; or
|
|
(ii)
|
The tenth business day (or such later date as may be determined by the Board of Directors of the Company prior to any person becoming an Acquiring Person) after the date of the commencement or announcement of the
intention to commence a tender or exchange offer, the consummation of which would result in any person becoming an Acquiring Person.
|
For the purposes of the Rights Agreement, an Acquiring Person is any person who, together with all affiliates and associates, becomes the
Beneficial Owner (as defined in the Rights Agreement) of 20% or more of the outstanding Common Shares, other than: the Company; any subsidiary of the Company; any employee benefit plan of the Company or of any subsidiary of the Company, or any
entity holding Common Shares pursuant to any such plan; any person who becomes the Beneficial Owner of 20% or more of outstanding Common Shares solely as a result of an acquisition of Common Shares by the Company, until such person thereafter
becomes the Beneficial Owner (other than through a dividend or stock split) of an additional 0.25% or more of the outstanding Common Shares; any person who, the Board determines in good faith, inadvertently crossed the ownership threshold and then
promptly sells down below the threshold (unless such divestiture requirement is waived by the Board); any person, along with its affiliates and associates, that, as of the time of the adoption of the Rights Agreement, is the Beneficial Owner of 20%
or more of the Common Shares, until such person increases their ownership to 22.5% or above; and any person who or which is the Beneficial Owner of the common shares of an existing shareholder who is the Beneficial Owner of 20% or more of the Common
Shares, until such person increases their percentage ownership by 0.25% or more.
In the event that a person becomes an Acquiring Person,
the Board of Directors of the Company may elect to exchange any then-unexercised Rights (other than those of an Acquiring Person, which Rights become void), in whole or in part, for Common Shares at an exchange ratio of one Common Share per Right
(subject to adjustment as provided in the Rights Agreement). In lieu of fractional Common Shares, the Company will pay to the Rights holders an amount of cash equal to the same fraction of the current per share market value of a whole Common Share,
based upon the closing market price of the last trading day prior to exchange. If the Board of Directors determines, before the Distribution Date, to effect an exchange, the Board may delay the occurrence of the Distribution Date, provided that the
Distribution Date must occur no later than 20 days after the earlier of the public announcement or public disclosure of facts indicating that an Acquiring Person has become such. However, notwithstanding the foregoing, the Board of Directors may not
effect such an exchange at any time after an Acquiring Person, together with all affiliates and associates, becomes the Beneficial Owner of a majority of the outstanding Common Shares.
23
The Board of Directors may, at its option, at any time prior to a person becoming an Acquiring
Person, redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the Redemption Price) (the date of such action by the Board of Directors being the Redemption Date). Immediately upon the action of the Board
of Directors electing to redeem the Rights, without any further action and without any notice, the right to exercise the Rights will terminate and each Right will thereafter represent only the right to receive the Redemption Price.
Assuming that the Board of Directors has not elected to exchange or redeem the Rights, in the event that, after any person becomes an
Acquiring Person, (i) the Company merges into another entity, (ii) another entity merges into the Company and all of the outstanding Common Shares do not remain outstanding after such merger, or (iii) the Company sells 50% or more of
its assets, each holder of a Right will, upon exercise, become entitled to receive the number of common shares of the acquiring entity having a value equal to (x) multiplying the Purchase Price of a Right by the number of Rights exercisable by
the holder, and dividing that product by (y) 50% of the current per share market price of the common shares of the acquiring entity. The acquiring entity is required to assume the obligations of the Company under the Rights Agreement and to
reserve sufficient shares of its common stock to satisfy its obligations under the Rights Agreement. Pursuant to the Rights Agreement, the Company will not enter into any consolidation, merger or sale, unless it enters into a supplemental agreement
with the acquiring entity for the benefit of the Rights holders.
Any of the terms of the Rights may be amended or terminated by the Board
of Directors at any time, without the consent of the holders of the Rights, except that after such time as any person becomes an Acquiring Person, no such amendment may adversely affect the interests of the holders of the Rights (other than the
Acquiring Person).
The Rights will expire on December 5, 2017, unless earlier redeemed, exchanged, terminated, or unless the
expiration date is extended.
Note 11 License Agreements
The Company enters into two types of licensing agreements and in both types, the Company earns revenue on the initial
license fees. Under the technology agreements, the Company earns processing and storage royalties from the affiliates that process in their own facility. Under the marketing agreements, the Company earns processing and storage revenues from
affiliates that store specimens in the Companys facility in Oldsmar, Florida.
Technology Agreements
The Company has entered into a definitive License and Royalty Agreement with LifeCell International Private Limited, formerly Asia Cryo-Cell
Private Limited, (LifeCell) to establish and market its umbilical cord blood and menstrual stem cell programs in India.
The
Company changed the methodology used to record the processing and storage royalty income during fiscal year 2015 from recognizing royalty income based on historical estimates of specimens processed and stored to utilizing actual specimens processed
and stored. The Company accounted for this change as a change in accounting estimate.
24
Per the License and Royalty Agreement with Lifecell, there is a $1 Million cap on the amount of
royalties due to the Company per year and a $10 Million cap on the amount of royalties due to the Company for the term of the License and Royalty Agreement. The cap(s) are calculated based on Lifecells fiscal year end, March 31
st
. As of the end of the Companys fiscal year ended November 30, 2015, Lifecell had reached the $1 Million cap and paid the Company in full for Lifecells fiscal year ended
March 31, 2016. As of May 31, 2016, Lifecell has paid the Company $4.1 Million for royalties due under the terms of the License and Royalty Agreement.
Marketing Agreements
The Company has
definitive license agreements to market the Companys umbilical cord blood stem cell programs in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama and Pakistan. In October 2012, the Company sent a notice of termination to the
Companys Venezuelan affiliate for failure to meet its payment obligation in accordance with the contract. Subsequent to the notice of termination, payment was received for outstanding processing and storage fees due from Venezuela. The Company
is in the process of discussing a new agreement. The Company continues to accept umbilical cord blood stem cell specimens to be processed and stored during the negotiations. In December 2012, the Company sent a notice of termination to the
Companys affiliate in Ecuador for failure to meet its payment obligation in accordance with the contract. Subsequent to the notice of termination, payment was received for outstanding processing and storage fees due from Ecuador. In August
2013, the Company was notified that its affiliate in Ecuador was closed by the National Institute of Organic Donation (INDOT). As a result, the Company recorded an allowance for uncollectible receivables for the $150,000 processing and storage fee
receivable due from Ecuador in the third quarter of fiscal 2013. During the fourth quarter of fiscal 2013, the Company began to bill the Ecuadorian clients directly for cord blood specimens that are stored at the Companys facility in Oldsmar,
Florida.
The following table details the initial license fees for the technology and marketing agreements and processing and storage
royalties earned under the technology agreements for the three and six months ended May 31, 2016 and May 31, 2015. The initial license fees and processing and storage royalties are reflected in licensee and royalty income in the
accompanying consolidated statements of operations.
Processing and Storage Royalties
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31, 2016
|
|
|
Six Months Ended
May 31, 2016
|
|
India
|
|
$
|
356,932
|
|
|
$
|
356,932
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
356,932
|
|
|
$
|
356,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31, 2015
|
|
|
Six Months Ended
May 31, 2015
|
|
India
|
|
$
|
169,412
|
|
|
$
|
338,824
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
169,412
|
|
|
$
|
338,824
|
|
|
|
|
|
|
|
|
|
|
25
Note 12 Legal Proceedings
On December 3, 2015, a complaint styled
Gary T. Brotherson, M.D., et al. v. Cryo-Cell International, Inc.,
Case
No. 15-007461-CI, Circuit Court, Sixth Judicial Circuit, Pinellas County, Florida, was served on the Company, naming it as defendant and alleging, among other things, that the Company breached certain agreements with plaintiffs and seeking
damages in excess of $15,000, the jurisdictional amount of the court in which the action is pending. On January 12, 2016, the Company served its answer, affirmative defenses, and counterclaim against the plaintiffs. The Company believes
the plaintiffs claims are without merit and it intends to contest the action vigorously. At this time, it is not possible for the Company to estimate the loss or the range of possible loss in the event of an unfavorable outcome, as the
ultimate resolution of the complaint is uncertain at this time. No amounts have been accrued as of May 31, 2016.
On January 20,
2016, a class action complaint was filed in the Court of the Chancery of the State of Delaware against the Company and certain current officers and directors of the Company (Case No. 11915-VCG). The complaint alleges breaches of fiduciary
duties and is seeking appropriate injunctive relief and a declaratory judgment against defendants that a certain provision of the Companys Amended and Restated Bylaws, as amended through September 22, 2014 is in violation of
Section 141(k) of the Delaware General Corporation Law. The Company believes the litigation is without merit and intends to defend the litigation vigorously. The Companys maximum deductible under its Directors and Officers
insurance policy for this claim is $500,000.
On February 24, 2016, a complaint styled
Charles D. Nyberg and Mary J. Nyberg and as
trustees of the CDMJNyberg Family Trust v. Cryo-Cell International, Inc.,
Case No. 8:16CV408t30, United States District Court, Middle District of Florida, Hillsborough County, Florida, was served on the Company, naming it as defendant and
alleging, among other things, that the Company breached certain agreements with plaintiffs and seeking damages in excess of $75,000, the jurisdictional amount of the court in which the action is pending. The Company believes the
plaintiffs claims are without merit and it intends to contest the action vigorously. At this time, it is not possible for the Company to estimate the loss or the range of possible loss in the event of an unfavorable outcome, as the
ultimate resolution of the complaint is uncertain at this time. No amounts have been accrued as of May 31, 2016.
In addition, from
time to time the Company is subject to proceedings, lawsuits, contract disputes and other claims in the normal course of its business. The Company believes that the ultimate resolution of current matters should not have a material adverse effect on
the Companys business, consolidated financial position or results of operations. It is possible, however, that there could be an unfavorable ultimate outcome for or resolution which could be material to the Companys results of operations
for a particular quarterly reporting period. Litigation is inherently uncertain and there can be no assurance that the Company will prevail. The Company does not include an estimate of legal fees and other related defense costs in its estimate of
loss contingencies.
Note 13 Share Repurchase Plan
In December 2011, the Companys Board of Directors authorized management at its discretion to repurchase up to one
million (1,000,000) shares of the Companys outstanding common stock. On June 6, 2012, the Board of Directors of the Company increased the number of shares of the Companys outstanding common stock that management is authorized
to repurchase to up to three million (3,000,000) shares. On April 8, 2015, the Board of Directors of the Company increased the number of shares of the Companys outstanding common stock that management is authorized to repurchase to
up to six million (6,000,000) shares. The repurchases must be effectuated through open market purchases, privately negotiated block trades, unsolicited negotiated transactions, and/or pursuant to any trading plan that may be adopted in
accordance with Rule 10b5-1 of the Securities and Exchange Commission or in such other manner as will comply with the provisions of the Securities Exchange Act of 1934.
26
On June 30, 2015, the Company commenced a partial tender offer to purchase up to 750,000
shares of its common stock, at a price of $3.25 per share. The maximum number of shares proposed to be purchased in the tender offer represented 7.76% of Cryo-Cells outstanding common shares (including shares of unvested restricted stock) as
of June 30, 2015. On June 29, 2015, the last trading day prior to the commencement of the tender offer, the last sale price of Cryo-Cells shares reported on the OTCBB was $2.29 per share. The tender offer expired on July 28,
2015. Cryo-Cell accepted for purchase 557,805 shares of its common stock, including all odd lots properly tendered, at a purchase price of $3.25 per share, for an aggregate cost of $1,812,866 excluding fees and expenses relating to the
tender offer.
As of May 31, 2016, the Company had repurchased a total of 3,393,114 shares of the Companys common stock at an
average price of $2.58 per share through open market and privately negotiated transactions. The Company purchased 143,793 and 344,026 shares of the Companys common stock during the six months ended May 31, 2016 and May 31, 2015,
respectively, at an average price of $3.08 per share and $2.77 per share, respectively.
The repurchased shares will be held as treasury
stock and have been removed from common shares outstanding as of May 31, 2016 and November 30, 2015. As of May 31, 2016 and November 30, 2015, 3,393,114 and 3,249,790 shares, respectively, were held as treasury stock.
On June 20, 2016, subsequent to the balance sheet date, the Company entered into a repurchase agreement of 2,179,068 Shares from Ki Yong
Choi and 13,416 Shares from Michael Cho for $4.50 per share, $9,866,178 in the aggregate, which was funded in part through the occurrence of a term loan for $8.0 million in senior credit facilities and working capital of the Company (see Note 14).
Note 14 Term Loans
On May 20, 2016, the Company entered into a Credit Agreement (Agreement) with Texas Capital Bank, National
Association (TCB) for a term loan of $8.0 million in senior credit facilities. The proceeds of the term loan will be used by the Company to fund continued repurchases of the Companys common stock. Subject to the terms of the
Agreement, on May 20, 2016, TCB advanced the Company $100.00. On July 1, 2016, TCB advanced the remaining principal amount of $7,999,900 per a promissory note dated May 20, 2016 between the Company and TCB, at a rate of 3.75% per
annum plus LIBOR, payable monthly with a maturity date of July 2021.
On May 20, 2016, the Company also entered into a Subordination
Agreement with TCB and CrowdOut Capital LLC (CrowdOut) for a subordinated loan of the principal amount of $650,000, which amount CrowdOut advanced to the Company on May 20, 2016. The proceeds of the subordinated loan will be used by
the Company to fund continued repurchases of the Companys common stock. Per a promissory note dated May 20, 2016 between the Company and CrowdOut, interest at 12% per annum on the principal sum of $650,000 is payable monthly with a
maturity date of July 2021, at which time, the principal amount of $650,000 is payable.
27