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
August 31, 2016
(Unaudited)
Note 1 - Basis of
Presentation and Significant Accounting Policies
The unaudited consolidated financial statements including the Consolidated
Balance Sheets as of August 31, 2016 and November 30, 2015, the related Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended August 31, 2016 and August 31, 2015 and the Consolidated
Statements of Cash Flows for the nine months ended August 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 nine months ended August 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.
6
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.
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.
Accounts Receivable
Accounts receivable consist of uncollateralized amounts due from clients that have enrolled and processed in the umbilical cord blood stem cell
processing and storage programs and amounts due from license affiliates, and sublicensee territories. Accounts receivable are due within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts outstanding longer than
the contractual payment terms are considered past due. The Company determines its allowance by considering the length of time accounts receivable are past due, the Companys previous loss history, and the clients current ability to pay
its obligations. Therefore, if the financial condition of the Companys clients were to deteriorate beyond the estimates, the Company may have to increase the allowance for doubtful accounts which could have a negative impact on earnings. The
Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. During the third quarter of fiscal 2015, the Company evaluated the
reserve against the accounts receivable from the Companys affiliate in India. The Company determined that reserve of $287,000 could be reversed due to evidence that India would pay the Company and recorded the amount in selling, general and
administrative expenses on the accompanying consolidated statements of comprehensive (loss) income.
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 August 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
7
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.
For the three months ended August 31, 2016, there was income tax benefit of $898,838. For the nine months ended August 31, 2016, there was an
income tax benefit of $697,103. There was approximately $990,000 and $842,000 of U.S. income tax benefit for the three and nine months ended August 31, 2016. The income tax benefit as of the three and nine months ended August 31, 2016 was due to the
Companys net operating losses as of August 31, 2016. 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. For the three and nine months ended August 31, 2016, the Company recognized approximately $91,000 and $145,000, respectively. Foreign income tax expense is included in
income tax expense in the accompanying consolidated statements of comprehensive (loss) income.
For the three and nine months ended August
31, 2015, the Company recorded an income tax benefit, net of foreign taxes, of $6,931,000 and $6,881,000, respectively, of which approximately $6,957,000 relates to a reversal of a portion of the Companys valuation allowance for U.S. income
taxes. The reversal of a portion of the deferred tax valuation allowance is based upon the Companys historical operating performance which includes profitability in ten of the last eleven quarters, steadily improving operations and positive
expectations for future taxable income. 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. For the three and nine months ended August 31, 2015, the Company recognized approximately $25,000 and $76,000, respectively. Foreign income tax expense is included in income tax expense in
the accompanying consolidated statements of comprehensive (loss) income.
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 nine months ended
August 31, 2016 and August 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 nine months ended August 31, 2016 and 2015.
8
Stock Compensation
As of August 31, 2016, the Company has two 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 $433,000 and $60,000 for the three months ended August 31, 2016 and August 31, 2015, respectively, of stock-based option compensation expense. The Company recognized approximately $821,000 and $305,000 for the nine months
ended August 31, 2016 and August 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 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.
9
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.
|
The following table summarizes the financial assets and liabilities measured at fair value on a recurring
basis as of August 31, 2016 and November 30, 2015, respectively, segregated among the appropriate levels within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Fair Value at
August 31, 2016
|
|
|
at August 31, 2016 Using
|
|
Description
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
275,980
|
|
|
$
|
275,980
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
354,043
|
|
|
|
354,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
630,023
|
|
|
$
|
630,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Fair Value at
November 30, 2015
|
|
|
at November 30, 2015 Using
|
|
Description
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
136,798
|
|
|
$
|
136,798
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
473,626
|
|
|
|
473,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
610,424
|
|
|
$
|
610,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
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 of identical securities in active markets and are therefore classified within Level 1 of the fair value hierarchy. For trading securities, there was ($29,371) and ($11,529) in unrealized holding loss recorded
in other income and expense on the accompanying consolidated statements of comprehensive (loss) income for the three months ended August 31, 2016 and 2015. For trading securities, there was ($50,023) and ($4,813) in unrealized holding loss
recorded in other income on the accompanying consolidated statements of comprehensive (loss) income for the nine months ended August 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 securities. 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 ($14,122) and ($82,985) in
unrealized holding loss, net of tax, reported as comprehensive loss on the accompanying statements of comprehensive (loss) income for the three months ended August 31, 2016 and 2015. For available-for-sale securities, there was ($114,342) and
$143,318 in unrealized holding loss and gain, net of tax, respectively, reported as a component of comprehensive (loss) income on the accompanying consolidated statements of comprehensive (loss) income for the nine month period ended August 31,
2016 and 2015. Additionally, there was $0 and $7,361 in realized gains, respectively, on the disposition of available for sale securities recorded in other income and expense on the accompanying consolidated statements of comprehensive (loss) income
for the three and nine months ended August 31, 2015.
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
11
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 August 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 August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments.
This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified 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, 2017. The Company is currently evaluating the effect that the updated standard will have on our financial
statements.
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.
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.
12
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 Instruments Overall (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.
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.
13
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 (CMDG), for the purchase of certain assets and assumption of certain liabilities and contracts that CMDG
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 of $1,553,272 in cash and assumed liabilities of the seller less any prepayment made by the Company to CMDG ($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 CMDG, dated June 30, 2015 and a prepayment for inventory of $104,000 paid by the Company to CMDG
during the second quarter of fiscal 2015 was applied to the purchase. On September 30, 2015, $662,500 was due to be paid to CMDG. 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
|
|
|
|
|
|
|
14
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.
The fair values of the license agreement and customer relationships reflect the anticipated cash flows over their expected lives.
On June 30, 2015, the Company entered into a note payable in the amount of $1,300,000 in connection with the APA, which the Company paid
in full on April 22, 2016 (Note 2).
The operating results of Prepacyte CB have been included in the consolidated statements of
comprehensive (loss) income since the date of acquisition.
Note 3 Inventory
The components of inventory at August 31, 2016 and November 30, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
Raw materials
|
|
$
|
14,228
|
|
|
$
|
9,041
|
|
Work-in-process
|
|
|
81,912
|
|
|
|
134,727
|
|
Finished goods
|
|
|
259,530
|
|
|
|
282,152
|
|
Collection kits
|
|
|
62,933
|
|
|
|
57,406
|
|
Inventory reserve
|
|
|
(7,718
|
)
|
|
|
(7,718
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
410,885
|
|
|
$
|
475,608
|
|
|
|
|
|
|
|
|
|
|
Inventory was pledged as collateral on the note payable incurred in connection with the APA (Note 2). As of
August 31, 2016, the note payable was paid in full Pursuant to the APA (Note 6).
15
Note 4 Goodwill
Goodwill represents the excess of the purchase price of the assets acquired from CMDG (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.
During the quarter ended August 31, 2016, the Company
determined that there were sufficient indicators to trigger an interim goodwill impairment analysis. Goodwill is included in the Prepacyte
®
CB reporting segment and the indicators included,
among other factors: (1) decline in projected revenues, (2) decline in forecasted cash flows, and (3) loss of a key customer.
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting unit to its carrying amount. If
the carrying amount of the reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. Fair value can be determined using market, income or cost-based approaches. Our determination of estimated
fair value of the reporting unit is based on a combination of the income-based and market-based approaches. Under the income-based approach, the Company determined fair value based on estimated discounted cash flows. The cash flows are discounted by
an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of the reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant
estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. Under the market-based approach, we determined fair value using the Guideline Company Method, comparing our
reporting unit to similar, publicly-traded companies, developing multiples and applying them to our earnings and revenue bases. As a result of the analysis, the Company concluded that the carrying value of the reporting unit exceeded its estimated
fair value. The second step of the process was then performed to measure the amount of impairment loss.
Step two involves comparing the
implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal
to the excess. As a result of the analysis, the Company concluded that an impairment of the Prepacyte
®
CB reporting segment existed as the carrying amount of the reporting unit exceeded the
implied fair value. Applying ASC 350,
Intangibles-Goodwill and Other
guidance, the Company recorded a goodwill impairment charge of $1,666,430 as of August 31, 2016.
As of August 31, 2016 and November 30, 2015, goodwill is reflected on the consolidated balance sheets at $111,392 and $1,777,822,
respectively.
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.
16
During the quarter ended August 31, 2016, the Company determined that there were sufficient
indicators to trigger an interim goodwill impairment analysis (Note 4). The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be
recoverable. Determining whether an impairment loss occurred requires a comparison of the carrying amount to the sum of the future forecasted undiscounted cash flows expected to be generated by the asset per ASC 360,
Property, Plant and
Equipment
. As a result of the Companys two-step impairment analysis, an impairment of intangible assets within the Prepacyte
®
CB reporting segment, license agreement and customer
relationships, existed and an intangible asset impairment charge of $211,267 was recorded as of August 31, 2016.
Intangible assets
were as follows as of August 31, 2016 and November 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
Patents
|
|
10-20 years
|
|
$
|
34,570
|
|
|
$
|
34,570
|
|
Less: Accumulated amortization
|
|
|
|
|
(9,472
|
)
|
|
|
(8,075
|
)
|
License agreement
|
|
10 years
|
|
|
470,000
|
|
|
|
470,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
(185,000
|
)
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
(54,833
|
)
|
|
|
(17,917
|
)
|
Customer relationships
|
|
15 years
|
|
|
41,000
|
|
|
|
41,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
(26,267
|
)
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
(3,189
|
)
|
|
|
(3,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Intangible Assets
|
|
$
|
266,809
|
|
|
$
|
516,328
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangibles was $12,902 and $8,933 for the three months ended August 31, 2016 and
August 31, 2015, respectively. Amortization expense of intangibles was $38,252 and $9,864 for the nine months ended August 31, 2016 and August 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 August 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 nine months ended August 31, 2016 on the accompanying consolidated statements of comprehensive (loss) income.
17
As of the three months ended August 31, 2016, the Company recognized $0 of interest expense
related to the note payable. As of the nine months ended August 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 CMDG 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).
|
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 nine months ended August 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended August 31,
2016
|
|
|
For the nine months
ended August 31,
2016
|
|
Net revenue
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
6,243,803
|
|
|
$
|
16,970,939
|
|
Prepacyte
®
-CB
|
|
|
88,135
|
|
|
|
286,253
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
6,331,938
|
|
|
$
|
17,257,192
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,482,900
|
|
|
$
|
4,073,293
|
|
Prepacyte
®
-CB
|
|
|
68,331
|
|
|
|
257,329
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
1,551,231
|
|
|
$
|
4,330,622
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
27,310
|
|
|
$
|
84,542
|
|
Prepacyte
®
-CB
|
|
|
12,436
|
|
|
|
38,624
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
39,746
|
|
|
$
|
123,166
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
808,254
|
|
|
$
|
1,864,325
|
|
Prepacyte
®
-CB
|
|
|
(1,870,329
|
)
|
|
|
(1,887,594
|
)
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
$
|
(1,062,075
|
)
|
|
$
|
(23,269
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
199,439
|
|
|
$
|
781,971
|
|
Prepacyte
®
-CB
|
|
|
|
|
|
|
22,265
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
199,439
|
|
|
$
|
804,236
|
|
|
|
|
|
|
|
|
|
|
18
The following table shows the assets by segment as of August 31, 2016 and November 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
2016
|
|
|
As of November 30,
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
16,755,419
|
|
|
$
|
16,697,621
|
|
Prepacyte
®
-CB
|
|
|
786,866
|
|
|
|
2,800,325
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,542,285
|
|
|
$
|
19,497,946
|
|
|
|
|
|
|
|
|
|
|
Note 8 (Loss) Income per Common Share
The following table sets forth the calculation of basic and diluted net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
August 31, 2016
|
|
|
August 31, 2015
|
|
|
August 31, 2016
|
|
|
August 31, 2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
($
|
2,644,361
|
)
|
|
$
|
7,829,572
|
|
|
|
(2,130,165
|
)
|
|
$
|
8,325,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding-basic
|
|
|
7,583,771
|
|
|
|
9,462,102
|
|
|
|
8,546,110
|
|
|
|
9,697,679
|
|
Dilutive common shares issuable upon exercise of stock options
|
|
|
|
|
|
|
288,095
|
|
|
|
|
|
|
|
247,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares-diluted
|
|
|
7,583,771
|
|
|
|
9,750,197
|
|
|
|
8,546,110
|
|
|
|
9,945,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
($
|
0.35
|
)
|
|
$
|
0.83
|
|
|
($
|
0.25
|
)
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
($
|
0.35
|
)
|
|
$
|
0.80
|
|
|
($
|
0.25
|
)
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
For the three and nine months ended August 31, 2016, the Company excluded the effect of all
outstanding stock 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 nine months ended August 31, 2015, the Company excluded the effect of 225,000 and 287,500, 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 August 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. As of August 31, 2016 and November 30, 2015, the net Saneron investment, which represents underlying goodwill, is 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 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 has made no additional payments through August 31, 2016.
For the three and nine months
ended August 31, 2016, the Company recorded equity in losses of Saneron operations of $0. For the three and nine months ended August 31, 2015, the Company recorded equity in losses of Saneron operations of $1,000 and $18,000, respectively,
which solely related to certain stock and warrant awards in Saneron common stock that were granted by Saneron at below fair value to certain employees, consultants and members of Saneron 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 August 31, 2016 and November
20
30, 2015, there were 572,281 and 568,930 options issued, but not yet exercised, under the 2006 Plan, respectively. As of August 31, 2016, there were 221,179 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 August 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. As of August 31, 2016, there were 1,405,354 shares available for future issuance 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.
There were 35,000 and 204,729 options granted during the three and nine months ended August 31, 2016.
There were 22,500 options granted during the three and nine months ended August 31, 2015.
Variables used to determine the fair value of the options granted for the three and nine months ended August 31, 2016 and August 31,
2015, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
August 31, 2016
|
|
|
August 31, 2015
|
|
|
August 31, 2016
|
|
|
August 31, 2015
|
|
Weighted average values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividends
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
66.09%
|
|
|
|
75.50%
|
|
|
|
66.39%
|
|
|
|
75.50%
|
|
Risk free interest rate
|
|
|
1.09%
|
|
|
|
1.57%
|
|
|
|
1.22%
|
|
|
|
1.57%
|
|
Expected life
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
|
|
5.6 years
|
|
|
|
5.0 years
|
|
21
Stock option activity for options with only service-based vesting conditions for the nine months
ended August 31, 2016, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term (Years)
|
|
|
Intrinsic
Value
|
|
Outstanding at November 30, 2015
|
|
|
968, 930
|
|
|
$
|
2.17
|
|
|
|
5.01
|
|
|
$
|
1,095,525
|
|
Granted
|
|
|
204,729
|
|
|
|
3.19
|
|
|
|
|
|
|
|
155,830
|
|
Exercised
|
|
|
(23,399
|
)
|
|
|
1.72
|
|
|
|
|
|
|
|
51,384
|
|
Expired/forfeited
|
|
|
(8,250
|
)
|
|
|
2.18
|
|
|
|
|
|
|
|
14,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2016
|
|
|
1,142,010
|
|
|
$
|
2.36
|
|
|
|
5.24
|
|
|
$
|
1,814,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 31, 2016
|
|
|
995,740
|
|
|
$
|
2.24
|
|
|
|
4.69
|
|
|
$
|
1,704,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the nine months ended August 31,
2016 and August 31, 2015 was $1.86 and $1.90, respectively.
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 August 31, 2016 or November 30, 2015, as applicable. The intrinsic value of the Companys stock options changes based on the closing price of the Companys stock.
During the three and nine months ended August 31, 2016, the Company issued 23,399 common shares to option holders who exercised options
for $40,340.
During the three and nine months ended August 31, 2015, the Company issued 27,500 common shares to option holders who
exercised options for $54,100.
Significant option groups outstanding and exercisable at August 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
|
|
|
441,781
|
|
|
4.99
|
|
$
|
1.72
|
|
|
|
441,781
|
|
|
$
|
1.72
|
|
$2.01 to $3.00
|
|
|
473,000
|
|
|
3.76
|
|
|
2.57
|
|
|
|
473,000
|
|
|
|
2.57
|
|
$3.00 to $4.00
|
|
|
227,229
|
|
|
8.82
|
|
|
3.18
|
|
|
|
80,959
|
|
|
|
3.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,142,010
|
|
|
5.24
|
|
$
|
2.36
|
|
|
|
995,740
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
A summary of the status of the Companys non-vested options as of August 31, 2016, and
changes during the nine months ended August 31, 2016, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested at November 30, 2015
|
|
|
15,003
|
|
|
$
|
1.90
|
|
|
|
|
Granted
|
|
|
204,729
|
|
|
|
1.86
|
|
Vested
|
|
|
(73,462
|
)
|
|
|
1.87
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at August 31, 2016
|
|
|
146,270
|
|
|
$
|
1.86
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2016, there was approximately $225,000 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 1.1 years as of August 31, 2016. The total fair value of shares vested
during the nine months ended August 31, 2016 was approximately $137,000.
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 August 31, 2016 was approximately $107,000 and is reflected as selling,
general and administrative expenses in the accompanying consolidated statement of comprehensive (loss) income. As of August 31, 2016, there was approximately $137,000 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
There were no performance-based or market-based vesting condition options granted during the three months and nine months ended August 31,
2016 and August 31, 2015, respectively. As of August 31, 2016 and August 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 vest 1/3 upon grant, 1/3 on December 1, 2014
and the remaining 1/3 on December 1, 2015. The stock compensation expense of the shares vested as of August 31, 2015 was $220,000 and is reflected as selling, general and administration expenses in the accompanying consolidated
statement of comprehensive (loss) income. As of August 31, 2015, there was approximately $20,000 of total unrecognized compensation cost which was recognized during the remainder of fiscal year 2015, related to the non-vested shares of
restricted common stock. As of August 31, 2016, there was $0 of total unrecognized compensation cost related to the non-vested shares of restricted common stock.
23
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 August 31, 2016, there was $0 of total unrecognized compensation cost related to the issuance of these shares of restricted common shares.
The 2016 Employment Agreements also provide for the grant of shares 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 shares 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. As of
August 31, 2016, based upon certain performance thresholds being attained by each of the Companys Co-CEOs, the Company recognized approximately $403,000 of compensation cost. As of August 31, 2016, there was approximately
$134,000 of unrecognized compensation cost related to these performance 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.
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.
24
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.
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
25
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.
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 August 31, 2016, Lifecell has paid the Company $4.4 Million for royalties due under the terms of the License and Royalty Agreement.
26
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 nine months ended August 31, 2016 and August 31, 2015. The
initial license fees and processing and storage royalties are reflected in licensee and royalty income in the accompanying consolidated statements of comprehensive (loss) income.
Processing and Storage Royalties
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August 31, 2016
|
|
|
Nine Months
Ended
August 31, 2016
|
|
India
|
|
$
|
609,045
|
|
|
$
|
965,977
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
609,045
|
|
|
$
|
965,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August 31, 2016
|
|
|
Nine Months
Ended
August 31, 2015
|
|
India
|
|
$
|
169,411
|
|
|
$
|
508,235
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
169,411
|
|
|
$
|
508,235
|
|
|
|
|
|
|
|
|
|
|
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
27
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 August 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 alleged breaches of fiduciary duties and sought 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, violated Section 141(k) of the Delaware General Corporation Law relating to the removal of
directors. The plaintiff amended the complaint on March 4, 2016 to remove the breach of fiduciary duty count and to move forward only on its claim that one provision of the Bylaws violated Section 141(k). On March 18, 2016,
the Company announced that the Board of Directors had amended the Bylaw in question. Plaintiff filed a stipulation dismissing the action as moot on June 2. The Court retained jurisdiction to hear plaintiffs request for $200,000
in attorneys fee associated with mooting the litigation. The Court heard argument on plaintiffs request for attorneys fees on September 29, 2016. On October 7, 2016, the Court issued its order awarding Plaintiff
$50,000 in attorneys fees and expenses which is reflected in the accompanying consolidated statements of comprehensive (loss) income. The Companys maximum deductible under its Directors and Officers insurance policy for this claim
was $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. On July 27, 2016 the Company entered into a Settlement Agreement and Release of All Claims (Agreement) with Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family Trust (collectively,
the Nybergs). Pursuant to the terms of the Agreement, the Company made a payment of $3,400,000 (the Settlement Payment) on August 26, 2016. In consideration of the Settlement Payment, all legal claims brought against the
Company by the Nybergs pursuant to the lawsuit, will be settled. Additionally, in consideration of the Settlement Payment, the Nybergs, who owned the rights to and interests in 50% of each of the Florida Revenue Sharing Agreement and the Texas
Revenue Sharing Agreement (together, the RSAs) terminated their rights to these interests in the RSAs, resulting in a 50% reduction in the Companys ongoing payment obligations under the RSAs (see Note 14).
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.
28
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). 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. On October 6, 2016, 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 eight million
(8,000,000) 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.
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.
On June 20, 2016, the Company entered into a Stock Purchase Agreement with Ki Yong Choi and Michael Cho. Pursuant to the Stock Purchase
Agreement, the Company purchased 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, that was funded through the proceeds of a term loan for approximately $8 million in senior
credit facilities and the remainder through the working capital of the Company.
As of August 31, 2016, the Company had repurchased
an aggregate of 5,678,354 shares of the Companys common stock, inclusive of the shares that were accepted as part of the tender offer the Stock Purchase Agreement with Ki Yond Choi and Michael Cho, at an average price of $3.34 per share
through open market and privately negotiated transactions. The Company purchased 2,429,033 and 957,956 shares of the Companys common stock during the nine months ended August 31, 2016 and August 31, 2015, respectively, at an average
price of $4.39 per share and $3.08 per share, respectively.
The repurchased shares will be held as treasury stock and have been removed
from common shares outstanding as of August 31, 2016 and November 30, 2015. As of August 31, 2016 and November 30, 2015, 5,678,354 and 3,249,790 shares, respectively, were held as treasury stock.
Subsequent to the balance sheet date, the Company repurchased an additional 17,900 shares of the Companys common stock at an average
price of $3.94 per share through open market and privately negotiated transactions.
Note 14 Cancellation of Revenue Sharing Agreements
On July 27, 2016 the Company entered into a Settlement Agreement and Release of All Claims (Agreement) with
Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family Trust (collectively, the Nybergs). Pursuant to the terms of the Agreement, on August 26, 2016, the Company made a one-time lump-sum payment
in the amount of $3.4 million (the
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Settlement Payment). In consideration of the Settlement Payment, all legal claims brought against the Company by the Nybergs pursuant to a lawsuit (see Note 12), will be settled.
Additionally, in consideration of the Settlement Payment, the Nybergs, who owned the rights to and interests in 50% of each of the Florida Revenue Sharing Agreement and the Texas Revenue Sharing Agreement (together, the RSAs) terminated
their rights to these interests in the RSAs, resulting in a 50% reduction in the Companys ongoing payment obligations under the RSAs. Pursuant to the terms of the Agreement, the Nybergs no longer have the rights to share in a portion of the
Companys storage revenues derived from specimens which originated in the states of Florida and Texas, including all rights to any storage revenues generated and unpaid prior to the date of the Agreement including entitlements that were due for
the quarter ended May 31, 2016. The payment amount of $3.4 million was offset by the carrying amount of the long-term liability related to the RSAs in the amount of $875,000 and accrued expenses in the amount of $272,612 to reflect the
extinguishment of revenue sharing agreements in the amount of $2,252,388 for the three and nine months ended August 31, 2016.
Note 15
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 were used by the Company to fund 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 August 26, 2016, the Company entered into a First Amendment to Credit Agreement with TCB. Pursuant to terms of the First Amendment to Credit Agreement, on August 26, 2016, TCB
made an additional advance to the Company in principal amount of $2,133,433 per an Amended and Restated Promissory Note dated August 26, 2016 between the Company and TCB. The additional proceeds of the term loan were used by the Company to fund
a portion of the Settlement Agreement and Release of All Claims with Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family Trust as described in Note 14.
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.
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