The consolidated financial
statements and supplementary data listed in the accompanying Index to Consolidated Financial Statements are attached as part of this report.
The following consolidated financial statements of Cryo-Cell International, Inc. are included in Item 8:
All other schedules for which provision is made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions, are already included in the Notes to Consolidated Financial Statements included under this Item 8 or are inapplicable, and therefore have been omitted.
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,499,881
|
|
|
$
|
4,152,162
|
|
Restricted cash
|
|
|
|
|
|
|
204,344
|
|
Marketable securities
|
|
|
624,223
|
|
|
|
610,424
|
|
Accounts receivable (net of allowance for doubtful accounts of $2,278,862 and $2,067,130,
respectively)
|
|
|
4,052,728
|
|
|
|
3,058,379
|
|
Deferred tax assets, current portion
|
|
|
|
|
|
|
1,336,000
|
|
Prepaid expenses
|
|
|
395,501
|
|
|
|
427,819
|
|
Inventory, net
|
|
|
361,142
|
|
|
|
475,608
|
|
Other current assets
|
|
|
78,448
|
|
|
|
88,392
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,011,923
|
|
|
|
10,353,128
|
|
|
|
|
|
|
|
|
|
|
Property and
Equipment-net
|
|
|
979,463
|
|
|
|
879,070
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
261,000
|
|
|
|
516,328
|
|
Goodwill
|
|
|
|
|
|
|
1,777,822
|
|
Deferred tax assets
|
|
|
9,260,582
|
|
|
|
5,930,987
|
|
Deposits and other assets, net
|
|
|
25,500
|
|
|
|
40,611
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
9,547,082
|
|
|
|
8,265,748
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,538,468
|
|
|
$
|
19,497,946
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,485,430
|
|
|
$
|
1,328,619
|
|
Accrued expenses
|
|
|
2,554,330
|
|
|
|
2,005,351
|
|
Current portion of note payable
|
|
|
2,000,000
|
|
|
|
307,420
|
|
Deferred revenue
|
|
|
7,071,924
|
|
|
|
6,782,562
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,111,684
|
|
|
|
10,423,952
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Deferred revenue, net of current portion
|
|
|
12,596,292
|
|
|
|
10,869,218
|
|
Note payable, net of current portion and debt issuance costs
|
|
|
7,819,750
|
|
|
|
868,947
|
|
Long-term liability - revenue sharing agreements
|
|
|
1,425,000
|
|
|
|
2,300,000
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
21,841,042
|
|
|
|
14,038,165
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
34,952,726
|
|
|
|
24,462,117
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
Preferred stock ($.01 par value, 500,000 authorized and none issued and outstanding)
|
|
|
|
|
|
|
|
|
Series A Junior participating preferred stock ($.01 par value, 20,000 authorized and none issued
and outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($.01 par value, 20,000,000 authorized; 12,504,464 issued and 6,789,596 outstanding
as of November 30, 2016 and 12,260,340 issued and 9,010,322 outstanding as of November 30, 2015)
|
|
|
125,044
|
|
|
|
122,603
|
|
Additional
paid-in
capital
|
|
|
30,340,573
|
|
|
|
28,530,368
|
|
Treasury stock, at cost
|
|
|
(19,124,492
|
)
|
|
|
(8,318,083
|
)
|
Accumulated other comprehensive income
|
|
|
34,408
|
|
|
|
169,932
|
|
Accumulated deficit
|
|
|
(26,789,791
|
)
|
|
|
(25,468,991
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(15,414,258
|
)
|
|
|
(4,964,171
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
19,538,468
|
|
|
$
|
19,497,946
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
34
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Processing and storage fees
|
|
$
|
21,771,600
|
|
|
$
|
19,620,138
|
|
Licensee and royalty income
|
|
|
1,006,319
|
|
|
|
1,000,000
|
|
Product revenue
|
|
|
350,128
|
|
|
|
471,293
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
23,128,047
|
|
|
|
21,091,431
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
5,774,800
|
|
|
|
5,630,865
|
|
Selling, general and administrative expenses
|
|
|
14,722,794
|
|
|
|
12,389,452
|
|
Impairment of goodwill and intangible assets
|
|
|
1,989,089
|
|
|
|
|
|
Research, development and related engineering
|
|
|
53,097
|
|
|
|
45,780
|
|
Depreciation and amortization
|
|
|
154,673
|
|
|
|
92,110
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
22,694,453
|
|
|
|
18,158,207
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
433,594
|
|
|
|
2,933,224
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(14,671
|
)
|
|
|
22,993
|
|
Interest expense
|
|
|
(947,340
|
)
|
|
|
(1,303,872
|
)
|
Impairment of investment in Saneron
|
|
|
|
|
|
|
(684,000
|
)
|
Gain on extinguishment of debt
|
|
|
300,593
|
|
|
|
|
|
Loss on extinguishment of revenue sharing agreement
|
|
|
(2,252,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(2,913,806
|
)
|
|
|
(1,964,879
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) Income before equity in losses of affiliate and income tax expense
|
|
|
(2,480,212
|
)
|
|
|
968,345
|
|
|
|
|
Equity in losses of affiliate
|
|
|
|
|
|
|
(18,824
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income tax expense
|
|
|
(2,480,212
|
)
|
|
|
949,521
|
|
Income tax benefit
|
|
|
1,159,412
|
|
|
|
7,156,822
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(1,320,800
|
)
|
|
$
|
8,106,343
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share - basic
|
|
$
|
(0.16
|
)
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
8,112,791
|
|
|
|
9,537,607
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share - diluted
|
|
$
|
(0.16
|
)
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - diluted
|
|
|
8,112,791
|
|
|
|
9,795,579
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities (net of tax)
|
|
$
|
(135,524
|
)
|
|
$
|
169,932
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (Loss) Income
|
|
$
|
(1,456,324
|
)
|
|
$
|
8,276,275
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
35
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net (loss) income
|
|
$
|
(1,320,800
|
)
|
|
$
|
8,106,343
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
286,650
|
|
|
|
241,208
|
|
Impairment of investment in Saneron
|
|
|
|
|
|
|
684,000
|
|
Impairment of goodwill and intangible assets
|
|
|
1,989,089
|
|
|
|
|
|
Compensatory element of stock options
|
|
|
1,772,306
|
|
|
|
602,978
|
|
Provision for doubtful accounts
|
|
|
630,113
|
|
|
|
699,682
|
|
Equity in losses of affiliate
|
|
|
|
|
|
|
18,824
|
|
Gain on extinguishment of debt
|
|
|
(300,593
|
)
|
|
|
|
|
Loss on extinguishment of revenue sharing agreements
|
|
|
2,252,388
|
|
|
|
|
|
Deferred income tax benefit
|
|
|
(1,911,828
|
)
|
|
|
(7,369,513
|
)
|
Amortization of debt issuance costs
|
|
|
48,435
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,624,462
|
)
|
|
|
313,936
|
|
Prepaid expenses
|
|
|
32,318
|
|
|
|
178,935
|
|
Inventory
|
|
|
114,466
|
|
|
|
117,231
|
|
Other current assets
|
|
|
9,944
|
|
|
|
(29,008
|
)
|
Deposits and other assets, net
|
|
|
15,111
|
|
|
|
11,243
|
|
Accounts payable
|
|
|
329,560
|
|
|
|
335,709
|
|
Accrued expenses
|
|
|
648,842
|
|
|
|
(540,246
|
)
|
Deferred revenue
|
|
|
2,016,436
|
|
|
|
1,480,140
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,987,975
|
|
|
|
4,851,462
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Release of restricted cash held in escrow
|
|
|
204,344
|
|
|
|
(203
|
)
|
Purchases of property and equipment
|
|
|
(342,982
|
)
|
|
|
(108,480
|
)
|
Purchase of Prepacyte
|
|
|
|
|
|
|
(375,374
|
)
|
Purchases of marketable securities and other investments, net
|
|
|
(231,090
|
)
|
|
|
(235,292
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(369,728
|
)
|
|
|
(719,349
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Extinguishment of revenue sharing agreements
|
|
|
(3,400,000
|
)
|
|
|
|
|
Treasury stock purchases
|
|
|
(10,806,409
|
)
|
|
|
(3,205,435
|
)
|
Repayments of note payable
|
|
|
(1,509,107
|
)
|
|
|
(123,633
|
)
|
Proceeds from the exercise of stock options
|
|
|
40,340
|
|
|
|
69,850
|
|
Proceeds from note payable
|
|
|
10,783,433
|
|
|
|
|
|
Issuance costs associated with the proceeds from the note payable
|
|
|
(378,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5,270,528
|
)
|
|
|
(3,259,218
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(652,281
|
)
|
|
|
872,895
|
|
|
|
|
Cash and cash equivalents - beginning of period
|
|
|
4,152,162
|
|
|
|
3,279,267
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$
|
3,499,881
|
|
|
$
|
4,152,162
|
|
|
|
|
|
|
|
|
|
|
Supplemental
non-cash
investing
activities:
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities
|
|
$
|
(135,524
|
)
|
|
$
|
169,932
|
|
|
|
|
|
|
|
|
|
|
Increase of note payable in connection with the purchased business
|
|
$
|
|
|
|
$
|
1,300,000
|
|
|
|
|
|
|
|
|
|
|
Assumption of accrued expenses in connection with the purchased business
|
|
$
|
|
|
|
$
|
423,504
|
|
|
|
|
|
|
|
|
|
|
Decrease in prepaid expenses in connection with the purchased business
|
|
$
|
|
|
|
$
|
104,000
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
36
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Income/(Loss)
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance at November 30, 2014
|
|
|
11,921,285
|
|
|
$
|
119,213
|
|
|
$
|
27,842,106
|
|
|
$
|
(5,112,648
|
)
|
|
$
|
|
|
|
$
|
(33,575,334
|
)
|
|
$
|
(10,726,663
|
)
|
Common stock issued
|
|
|
339,055
|
|
|
$
|
3,390
|
|
|
$
|
66,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,850
|
|
Compensatory element of stock options
|
|
|
|
|
|
|
|
|
|
|
621,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
621,802
|
|
Unrealized gain on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,932
|
|
|
|
|
|
|
|
169,932
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,205,435
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,205,435
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,106,343
|
|
|
|
8,106,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2015
|
|
|
12,260,340
|
|
|
$
|
122,603
|
|
|
$
|
28,530,368
|
|
|
$
|
(8,318,083
|
)
|
|
$
|
169,932
|
|
|
$
|
(25,468,991
|
)
|
|
$
|
(4,964,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
244,124
|
|
|
|
2,441
|
|
|
|
37,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,340
|
|
Compensatory element of stock options
|
|
|
|
|
|
|
|
|
|
|
1,772,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,772,306
|
|
Unrealized loss on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135,524
|
)
|
|
|
|
|
|
|
(135,524
|
)
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,806,409
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,806,409
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,320,800
|
)
|
|
|
(1,320,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2016
|
|
|
12,504,464
|
|
|
$
|
125,044
|
|
|
$
|
30,340,573
|
|
|
$
|
(19,124,492
|
)
|
|
$
|
34,408
|
|
|
$
|
(26,789,791
|
)
|
|
$
|
(15,414,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
37
CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016 and 2015
NOTE 1
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business.
Cryo-Cell International, Inc. (the Company or Cryo-Cell) was incorporated in Delaware on September 11, 1989 and is
located in Oldsmar, Florida. The Company is organized in two reportable segments, cellular processing and cryogenic cellular storage, with a current focus on the collection and preservation of umbilical cord blood stem cells for family use and the
manufacture of PrepaCyte CB units, the processing technology used to process umbilical cord blood stem cells. Revenues recognized for the cellular processing and cryogenic cellular storage represent sales of the umbilical cord blood stem cells
program to customers, and income from licensees selling the umbilical cord blood stem cells program to customers outside the United States. Revenues recognized for the manufacture of PrepaCyte CB units represent sales of the PrepaCyte CB units to
customers. The Companys headquarters facility in Oldsmar, Florida handles all aspects of its U.S.-based business operations including the processing and storage of specimens, including specimens obtained from certain of its licensees
customers. The specimens are stored in commercially available cryogenic storage equipment.
On October 10, 2001, Saneron
Therapeutics, Inc. merged into one of the Companys wholly owned subsidiaries, CCEL
Bio-Therapies,
Inc. (CCBT), which then changed its name to Saneron CCEL Therapeutics, Inc. (SCTI
or Saneron). As part of the merger, the Company contributed 260,000 shares of its common stock, whose fair value was $1,924,000 and 195,000 common shares of another of its subsidiaries, Stem Cell Preservation Technologies, Inc., whose
fair value was $3,900. At the conclusion of the merger, the Company retained a 43.42%
non-controlling
interest in the voting stock of SCTI. As of November 30, 2016 and 2015, the Company had an interest of
approximately 33% and 33%, respectively, in the voting stock of SCTI. The accompanying consolidated financial statements as of November 30, 2016 and 2015 reflect the investment in SCTI under the equity method of accounting.
Basis of Presentation
The accompanying
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements as of November 30, 2016, and 2015 and for the years then ended includes the accounts
of the Company and all of its subsidiaries, which are inactive. All intercompany balances have been eliminated upon consolidation.
Concentration of
Risks
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash and cash
equivalent accounts in financial institutions, which often exceed the Federal Depository Insurance (FDIC) limit. The Company places its cash with high quality financial institutions and believes it is not exposed to any significant credit risk. The
Company may from time to time invest some of its cash funds in certificates of deposit and bond investments maintained by brokers who are insured under the Securities Investor Protection Corporation (SIPC). The Company believes these are
conservative investments with a low risk for any loss of principal. The Company regularly assesses its marketable security investments for impairment and adjusts its investment strategy as it deems appropriate.
38
The Company depends on one supplier for the source of its collection kits, a critical component
of the umbilical cord blood stem cell collection process. However, the Company believes that alternative sources of supply are available.
The Company depends on three suppliers for the supply and manufacturing of the PrepaCyte CB units. However, the Company believes that
alternative sources of supply and manufacturing are available.
During 2016 and 2015, there were no concentration of risks.
Use of Estimates
The preparation of
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
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.
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
39
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.
Revenue Sharing
Agreements
The Company entered into Revenue Sharing Agreements (RSAs) prior to 2002 with various third and related
parties. The Companys RSAs provide that in exchange for a
non-refundable
up-front
payment, the Company would share for the duration of the contract a percentage of
its future storage revenue collected from the annual storage fees charged related to a certain number of specimens that originated from specific geographical areas. The RSAs have no definitive term or termination provisions. The sharing applies to
the storage fees collected for all specified specimens in the area up to the number covered in the contract. When the number of specimens is filled, any additional specimens stored in that area are not subject to revenue sharing. As there are empty
spaces resulting from attrition, the Company agrees to fill them as soon as possible. The Company has reflected these
up-front
payments as long-term liabilities on the accompanying consolidated balance sheets.
The Company does not intend to enter into additional RSAs.
In the future, the Company could reverse the liability relating to the RSAs
over an appropriate period of time, based on the Companys expectations of the total amount of payments it expects to pay to the other party under the particular RSA. However, the RSAs do not establish a finite term or time frame over which to
estimate the total payments and the Company had not previously estimated and has concluded that it is not currently practicable to estimate the projected cash flows under the RSAs. At present, the Company intends to defer the reversal of the
liability, until such time as these amounts can be determined. During the periods when the Company defers the reversal of the liability, the quarterly payments made during these periods will be treated as interest expense, which will be recognized
as the payments become due. In future periods, if a portion of the liability can be
de-recognized
based on the effective interest method, the payments will be allocated between interest and amortization of the
liability. As cash is paid out to the other party during any period, the liability would be
de-recognized
based on the portion of the total anticipated payouts made during the period, using the effective
interest method. That is, a portion of the payment would be recorded as interest expense, and the remainder would be treated as repayment of principal, which would reduce the liability.
License and Royalty Agreements
The
Company has entered into licensing agreements with certain investors in various international markets in an attempt to capitalize on the Companys technology. The investors typically pay a licensing fee to receive Company marketing programs,
technology and
know-how
in a selected area. The investor may be given a right to sell
sub-license
agreements as well. As part of the accounting for the
up-front
license fee paid, or payable, to the Company, revenue from the
up-front
license fee is recognized based on such factors as when the payment is due, collectability and
when all material services or conditions relating to the sale have been substantially performed by the Company based on the terms of the agreement. The Company has twelve active licensing agreements. The following areas each have one license
agreement: El Salvador, Guatemala, Panama, Honduras, China and Pakistan. The following areas each have two license agreements: India, Nicaragua and Costa Rica.
40
In addition to the license fee, the Company earns processing and storage fees on subsequent
processing and storage revenues received by the licensee in the licensed territory and a fee on any
sub-license
agreements that are sold by the licensee where applicable. These fees are included in processing
and storage fees revenue on the consolidated statements of comprehensive (loss) income. As part of the accounting for royalty revenue from India, the Company uses estimates and judgments based on historical processing and storage volume in
determining the timing and amount of royalty revenue to recognize. The Company periodically reviews license and royalty receivables for collectability and, if necessary, will record an expense for an allowance for uncollectible accounts.
Cash and Cash Equivalents
Cash and cash
equivalents consist of highly liquid investments with a maturity date of three months or less at the time of purchase.
Restricted Cash
The Companys bank provided a Letter of Credit in favor of a company that provided third-party financing to the Companys clients. As
a requirement to issue the Letter of Credit, the Companys bank required that $200,000 of cash be designated restricted, accordingly, the Company had a certificate of deposit with a principal balance of $200,000 as of November 30, 2015.
During fiscal year 2016, the Company redeemed the certificate of deposit and received $204,000 which represented the principal and interest balance.
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.
Inventory
Inventory is comprised of collection kits, finished goods,
work-in-process
and raw materials. Collection kits are used in the collection and processing of umbilical cord blood and cord tissue stem cells and
work-in-process
and finished goods include products purchased for resale and for use in the Companys processing and storage service. Inventory is valued at the lower of
cost or market using the
first-in,
first-out
(FIFO) method.
Property
and Equipment
Property and equipment are stated at cost. Depreciation is provided primarily by the straight-line method over the
estimated useful lives of the related assets. Estimated useful lives of property and equipment are as follows:
|
|
|
Furniture and equipment
|
|
3-10
years
|
Leasehold improvements
|
|
Lesser of
8-10
years or the lives of the leases
|
Computer software internal use
|
|
1-5
years
|
41
Leasehold improvements are amortized over the shorter of the respective life of the lease or the
estimated useful lives of the improvements. Upon the sale or retirement of depreciable assets, the cost and related accumulated depreciation is removed from the accounts and the resulting profit or loss is reflected in earnings. Expenditures for
maintenance, repairs and minor betterments are expensed as incurred.
The Company capitalizes external direct costs of materials and
services consumed in developing or obtaining
internal-use
computer software. Capitalized
internal-use
software costs, which are included in property and equipment, are
depreciated over the estimated useful lives of the software.
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 as of November 30, 2016 and November 30, 2015, respectively.
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. Goodwill is not amortized but is tested for impairment at least annually at the PrepaCyte
CB reporting segment level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment loss, if any, is recognized based on a comparison of the fair value of the asset to its carrying value, without
consideration of any recoverability. The annual impairment assessment is performed during the fourth quarter and at other times if an event occurs or indicators of impairment exist by first assessing qualitative factors to determine whether it is
more likely than not that the fair value of the reporting segment is less than its carrying amount. If we conclude it is more likely than not that the fair value of goodwill is less than its carrying amount, a quantitative impairment test is
performed. During the third quarter of fiscal 2016, the Company determined that there were sufficient indicators to trigger an impairment analysis. During the fourth quarter of fiscal 2016, the Company performed its annual impairment analysis.
The Company concluded that an impairment of the PrepaCyte CB reporting segment existed during the third and fourth quarters of fiscal 2016 and a goodwill impairment charge of $1,777,822 was recorded as of November 30, 2016.
Investment in Saneron
Saneron is
involved in the area of stem cell research. The Company accounts for this investment under the equity method. The Company previously recorded equity in losses of affiliate until the investment balance was zero and only goodwill remained. The Company
recorded compensation expense during the year ended November 30, 2015, related to expense for stock and warrant awards that were granted in previous years by Saneron at below fair market value to certain employees, consultants and members of
Saneron management who represent owners of Saneron and serve on its board of directors. The investment is reviewed annually to determine if an other than temporary impairment exists. During the fourth quarter of fiscal 2015, the Company discovered
evidence that led management to believe that an other than temporary impairment existed as of November 30, 2015 and has written off the investment balance of $684,000 as of November 30, 2015.
42
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 records a
valuation allowance when it is more likely than not that all of the future income tax benefits will not 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.
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 fiscal 2016 and 2015 the Company had no uncertain tax provisions and therefore no provisions for interest or penalties related to uncertain tax positions.
Research, Development and Related Engineering Costs
Research, development and related engineering costs are expensed as incurred.
Cost of Sales
Cost of sales represents
the associated expenses resulting from the processing, testing and storage of the umbilical cord blood. Cost of sales related to PrepaCyte CB represents the associated expenses resulting from the manufacturing of the PrepaCyte CB units.
Advertising
Advertising costs are
expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive (loss) income. Total advertising expense for the fiscal years ended November 30, 2016 and 2015
was approximately $1,186,000 and $756,000, respectively.
Rent Expense
Rent is expensed on a straight-line basis over the term of the lease and is included in cost of sales and selling, general and administrative
expenses in the accompanying consolidated statements of comprehensive (loss) income. All leases include provisions for escalations and related costs.
43
Legal Expense
Legal fees are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated
statements of comprehensive (loss) income.
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 our financial assets and liabilities measured at fair value on a recurring basis as of
November 30, 2016 and 2015, respectively, segregated among the appropriate levels within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
Fair Value Measurements
|
|
|
|
November 30,
|
|
|
at November 30, 2016 Using
|
|
Description
|
|
2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
304,142
|
|
|
$
|
304,142
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
320,081
|
|
|
|
320,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
624,223
|
|
|
$
|
624,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
Fair Value Measurements
|
|
|
|
November 30,
|
|
|
at November 30, 2015 Using
|
|
Description
|
|
2015
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ($17,000) and ($1,600) in unrealized holding losses, respectively, recorded in other income and
expense on the accompanying consolidated statements of comprehensive (loss) income for the twelve months ended November 30, 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 (loss) income. For
available-for-sale
securities, there was ($136,000) and $170,000 in
unrealized holding (loss) gains, net of tax, respectively, reported as comprehensive income on the accompanying statements of comprehensive (loss) income for the years ended November 30, 2016 and 2015. Additionally, there was $0 and $24,000 in
realized losses and gains 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 years ended November 30, 2016 and
November 30, 2015, respectively.
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
45
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 November 30, 2016 and November 30, 2015 the Company recorded reserves under these programs in
the amounts of approximately $17,000 and $17,000, respectively, which are included in accrued expenses in the accompanying consolidated balance sheets.
(Loss) Income per Common Share
Basic
(loss) income per common share was computed by dividing net income by the weighted average number of common shares outstanding. Diluted income per common share includes the effect of all dilutive stock options. The composition of basic and diluted
net (loss) income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
November 30, 2016
|
|
|
November 30, 2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
($
|
1,320,800
|
)
|
|
$
|
8,106,343
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding-basic
|
|
|
8,112,791
|
|
|
|
9,537,607
|
|
Dilutive common shares issuable upon exercise of stock options
|
|
|
|
|
|
|
257,972
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares-diluted
|
|
|
8,112,791
|
|
|
|
9,795,579
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
($
|
0.16
|
)
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
($
|
0.16
|
)
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
For the year ended November 30, 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 year ended November 30, 2015, the Company excluded the effect of 225,000 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.
Stock Compensation
As of November 30, 2016, the Company has two stock-based employee compensation plans, which are described in Note 13 to the
consolidated financial statements. The Companys most recent 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 $1,772,000 and $603,000 for the years ended November 30, 2016 and November 30, 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
46
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.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update
No. 2017-04,
Intangibles
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The update removes Step 2 from the goodwill impairment test. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019, although early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on our financial statements.
In December 2016, the FASB issued Accounting Standards Update
No. 2016-18,
Statement of Cash
Flows (Topic 230). Restricted Cash
. This update clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires a reconciliation of totals in the statement of cash
flows to the related cash and cash equivalents and restricted cash captions in the balance sheet. 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 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.
47
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.
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
48
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.
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. We elected to early adopt the standard on the prospective
basis effective November 30, 2016, and all deferred tax assets and liabilities are classified as
non-current
beginning with fiscal year 2016.
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 April 2015, the FASB issued Accounting Standards Update
No. 2015-03
, Interest
Imputation of Interest (Subtopic
835-30):
Simplifying the Presentation of Debt Issuance Costs.
This update simplified the presentation of debt issuance costs by requiring the debt issuance costs to be
presented as a deduction from the corresponding debt liability. This standard became effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015, with early adoption permitted. We elected to adopt
this standard effective fiscal year ending November 30, 2016 and debt issuance costs incurred during the fiscal year are being presented as a deduction against our note payable within the Companys consolidated balance sheets and related
disclosures.
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
49
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
|
|
|
|
|
|
|
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.
50
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 6).
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
Inventory has been pledged as collateral on the note payable incurred in connection with the APA (Note 2). The components of inventory at
November 30, 2016 and November 30, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
9,100
|
|
|
$
|
9,041
|
|
Work-in-process
|
|
|
|
|
|
|
134,727
|
|
Finished goods
|
|
|
261,000
|
|
|
|
282,152
|
|
Collection kits
|
|
|
98,760
|
|
|
|
57,406
|
|
Inventory reserve
|
|
|
(7,718
|
)
|
|
|
(7,718
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
361,142
|
|
|
$
|
475,608
|
|
|
|
|
|
|
|
|
|
|
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 30, 2016, 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 third quarter of fiscal 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.
51
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.
The annual impairment assessment was performed as of September 30, 2016. The Company concluded that there was
an additional impairment of the PrepaCyte CB reporting segment as the carrying amount of the reporting unit exceeded the implied fair value. Applying ASC 350,
Intangibles-Goodwill and Other
guidance, the Company recorded an additional
goodwill impairment charge of $111,392 as of November 30, 2016.
As of November 30, 2016, and November 30, 2015, goodwill
is reflected on the consolidated balance sheets at $0 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.
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.
52
Intangible assets were as follows as of November 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives
|
|
November 30, 2016
|
|
|
November 30, 2015
|
|
Patents
|
|
10-20 years
|
|
$
|
34,570
|
|
|
$
|
34,570
|
|
Less: Accumulated amortization
|
|
|
|
|
(9,937
|
)
|
|
|
(8,075
|
)
|
License agreement
|
|
10 years
|
|
|
470,000
|
|
|
|
470,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
(185,000
|
)
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
(60,194
|
)
|
|
|
(17,917
|
)
|
Customer relationships
|
|
15 years
|
|
|
41,000
|
|
|
|
41,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
(26,267
|
)
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
(3,172
|
)
|
|
|
(3,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Intangible Assets
|
|
|
|
$
|
261,000
|
|
|
$
|
516,238
|
|
|
|
|
|
|
|
|
|
|
Expected amortization related to these intangible assets for each of the next five fiscal years and for
periods thereafter is as follows:
|
|
|
|
|
Years ending November 30:
|
|
|
|
|
2017
|
|
$
|
28,884
|
|
2018
|
|
$
|
28,884
|
|
2019
|
|
$
|
28,884
|
|
2020
|
|
.$
|
28,645
|
|
2021
|
|
$
|
28,645
|
|
Thereafter
|
|
$
|
117,058
|
|
|
|
|
|
|
Total
|
|
$
|
261,000
|
|
|
|
|
|
|
Amortization expense of intangibles was approximately $44,000 and $23,000 for the twelve months ended
November 30, 2016 and November 30, 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
November 30, 2016 and November 30, 2015, respectively. The
53
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 twelve months ended
November 30, 2016 on the accompanying consolidated statements of comprehensive (loss) income.
As of the twelve months ended
November 30, 2016, the Company recognized $22,265 of interest expense related to the note payable.
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 17. As of November 30, 2016, principal paid to date is $633,000. As of November 30, 2016, the Company paid interest of $164,799, which is reflected in interest expense on the accompanying consolidated
statements of comprehensive (loss) income.
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. As of November 30, 2016, the Company paid interest of $42,250 which is reflected in interest expense on the accompanying consolidated statements of comprehensive (loss) income.
Collateral of the term and subordinated loans includes all money, securities and property of the Company.
The Company incurred debt issuance costs related to the term and subordinated loans in the amount of $378,785 which is recorded as a direct
reduction of the carrying amount of the note payable and amortized over the life of the loan. As of November 30, 2016, $48,435 of the debt issuance costs have been amortized and are reflected in interest expense on the accompanying consolidated
statements of comprehensive (loss) income.
As of November 30, 2016, the note payable obligation was as follows:
|
|
|
|
|
|
|
November 30,
2016
|
|
Note payable
|
|
$
|
10,150,100
|
|
Unamortized debt issuance costs
|
|
|
(330,350
|
)
|
|
|
|
|
|
Net note payable
|
|
$
|
9,819,750
|
|
|
|
|
|
|
Current portion of note payable
|
|
$
|
2,000,000
|
|
Long-term note payable, net of debt issuance costs
|
|
|
7,819,750
|
|
|
|
|
|
|
Total
|
|
$
|
9,819,750
|
|
|
|
|
|
|
54
Future principal payments under the note payable obligation are as follows:
|
|
|
|
|
Years ending November 30:
|
|
Amount
|
|
2017
|
|
$
|
2,000,000
|
|
2018
|
|
|
2,000,000
|
|
2019
|
|
|
2,000,000
|
|
2020
|
|
|
2,000,000
|
|
2021
|
|
|
2,150,100
|
|
|
|
|
|
|
Total
|
|
$
|
10,150,100
|
|
|
|
|
|
|
Interest expense on the note payable for the years ended November 30, 2016 was as follows:
|
|
|
|
|
|
|
November 30,
2016
|
|
Interest expense on notes payable
|
|
$
|
229,314
|
|
Debt issuance costs
|
|
|
48,435
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
277,749
|
|
|
|
|
|
|
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).
|
|
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).
|
55
The following table shows, by segment: net revenue, cost of sales, operating profit, depreciation and
amortization, interest expense, income tax benefit (expense), other comprehensive income, and assets for the years ended November 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
For the years ended November 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
22,777,919
|
|
|
$
|
20,620,138
|
|
PrepaCyte CB
|
|
|
350,128
|
|
|
|
471,293
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
23,128,047
|
|
|
$
|
21,091,431
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
5,446,126
|
|
|
$
|
5,276,125
|
|
PrepaCyte CB
|
|
|
328,674
|
|
|
|
354,740
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
5,774,800
|
|
|
$
|
5,630,865
|
|
|
|
|
|
|
|
|
|
|
Operating profit:
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
2,447,160
|
|
|
$
|
2,842,957
|
|
PrepaCyte CB
|
|
|
(2,013,566
|
)
|
|
|
90,267
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
$
|
433,594
|
|
|
$
|
2,933,224
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
240,916
|
|
|
$
|
218,568
|
|
PrepaCyte CB
|
|
|
45,735
|
|
|
|
22,640
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
286,651
|
|
|
$
|
241,208
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
925,075
|
|
|
$
|
1,277,815
|
|
PrepaCyte CB
|
|
|
22,265
|
|
|
|
26,057
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
947,340
|
|
|
$
|
1,303,872
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,141,823
|
|
|
$
|
7,166,789
|
|
PrepaCyte CB
|
|
|
17,589
|
|
|
|
(9,967
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
$
|
1,159,412
|
|
|
$
|
7,156,822
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
(135,524
|
)
|
|
$
|
169,932
|
|
PrepaCyte CB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
$
|
(135,524
|
)
|
|
$
|
169,932
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
18,960,261
|
|
|
$
|
16,697,621
|
|
PrepaCyte CB
|
|
|
578,207
|
|
|
|
2,800,325
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,538,468
|
|
|
$
|
19,497,946
|
|
|
|
|
|
|
|
|
|
|
NOTE
8-
ALLOWANCE FOR DOUBTFUL ACCOUNTS.
The activity in the allowance for doubtful accounts is as follows for the years ended November 30, 2016 and 2015:
|
|
|
|
|
December 1, 2014
|
|
$
|
1,976,966
|
|
Bad Debt Expense
|
|
|
699,682
|
|
Write-offs
|
|
|
(995,716
|
)
|
Recoveries
|
|
|
386,198
|
|
|
|
|
|
|
November 30, 2015
|
|
|
2,067,130
|
|
Bad Debt Expense
|
|
|
630,113
|
|
Write-offs
|
|
|
(791,434
|
)
|
Recoveries
|
|
|
373,053
|
|
|
|
|
|
|
November 30, 2016
|
|
|
2,278,862
|
|
56
NOTE 9 - INVESTMENTS IN AFFILIATES.
As of November 30, 2016 and November 30, 2015, the Company had an ownership interest of approximately 33% and 33%, respectively, in
Saneron, which is accounted for under the equity method. As of November 30, 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 made no additional payments through November 30, 2016.
Equity in losses of affiliate for the years ended November 30, 2016 and November 30, 2015 consists of $0 and $19,000, 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 - PROPERTY AND EQUIPMENT.
The major classes of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Furniture and equipment
|
|
$
|
4,987,623
|
|
|
$
|
4,689,763
|
|
Leasehold improvements
|
|
|
1,169,232
|
|
|
|
1,169,232
|
|
Computer software internal use
|
|
|
1,194,039
|
|
|
|
1,154,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,350,894
|
|
|
|
7,013,022
|
|
|
|
|
Less: Accumulated Depreciation
|
|
|
(6,371,431
|
)
|
|
|
(6,133,952
|
)
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment
|
|
$
|
979,463
|
|
|
$
|
879,070
|
|
|
|
|
|
|
|
|
|
|
57
Depreciation expense was approximately $243,000 in fiscal 2016 and approximately $218,000 in
fiscal 2015 of which approximately $132,000 and $149,000 is included in cost of sales, respectively, in the accompanying consolidated statements of comprehensive (loss) income.
NOTE 11 - ACCRUED EXPENSES.
Accrued expenses are as
follows:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
|
2016
|
|
|
2016
|
|
Professional fees
|
|
$
|
32,210
|
|
|
$
|
61,971
|
|
Payroll and payroll taxes (1)
|
|
|
1,267,818
|
|
|
|
820,268
|
|
Interest expense
|
|
|
586,646
|
|
|
|
820,436
|
|
General expenses
|
|
|
223,955
|
|
|
|
302,676
|
|
Federal and state taxes
|
|
|
443,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,554,330
|
|
|
$
|
2,005,351
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Payroll and payroll taxes includes accrued vacation and wages due as of November 30, 2016 and November 30, 2015.
|
NOTE 12INCOME TAXES.
The Company
recorded the following income tax provision for the years ended November 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
432,000
|
|
|
$
|
|
|
State
|
|
|
212,000
|
|
|
|
63,000
|
|
Foreign
|
|
|
109,000
|
|
|
|
150,000
|
|
|
|
|
Subtotal
|
|
|
753,000
|
|
|
|
213,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,662,000
|
)
|
|
|
(6,761,000
|
)
|
State
|
|
|
(250,000
|
)
|
|
|
(609,000
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(1,912,000
|
)
|
|
|
(7,370,000
|
)
|
|
|
|
Income Tax (Benefit) Expense
|
|
$
|
(1,159,000
|
)
|
|
$
|
(7,157,000
|
)
|
|
|
|
|
|
|
|
|
|
58
As of November 2016 and 2015 the tax effects of temporary differences that give rise to the
deferred tax assets are as follows:
|
|
|
|
|
|
|
2016
|
|
|
|
Total Non-current
|
|
Tax Assets:
|
|
|
|
|
Deferred Income (Net of Discounts)
|
|
$
|
4,917,000
|
|
NOLs, Credits, and Other Carryforward Items
|
|
|
459,000
|
|
Tax Over Book Basis in Unconsolidated Affiliate
|
|
|
1,678,000
|
|
Accrued Payroll
|
|
|
68,000
|
|
Reserves and Other Accruals
|
|
|
1,416,000
|
|
Stock Compensation
|
|
|
433,000
|
|
Depreciation and Amortization
|
|
|
616,000
|
|
RSA
Buy-out
|
|
|
1,996,000
|
|
|
|
|
|
|
Total Assets:
|
|
|
11,583,000
|
|
|
|
Tax Liabilities:
|
|
|
|
|
Unrealized Gains on AFS Securities
|
|
|
(21,000
|
)
|
|
|
|
|
|
Total Liabilities:
|
|
|
(21,000
|
)
|
Less: Valuation Allowance
|
|
|
(2,301,000
|
)
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
|
9,261,000
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
Current
|
|
|
Non-current
|
|
|
Total
|
|
Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income (Net of Discounts)
|
|
$
|
218,000
|
|
|
$
|
4,406,000
|
|
|
$
|
4,624,000
|
|
NOLs, credits, and other carryforward items
|
|
|
|
|
|
|
1,137,000
|
|
|
|
1,137,000
|
|
Tax over book basis in unconsolidated affiliate
|
|
|
|
|
|
|
1,686,000
|
|
|
|
1,686,000
|
|
Accrued payroll
|
|
|
55,000
|
|
|
|
|
|
|
|
55,000
|
|
Reserves and other accruals
|
|
|
1,063,000
|
|
|
|
|
|
|
|
1,063,000
|
|
Stock compensation
|
|
|
|
|
|
|
618,000
|
|
|
|
618,000
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
7,000
|
|
|
|
7,000
|
|
RSA
Buy-out
|
|
|
|
|
|
|
810,000
|
|
|
|
810,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets:
|
|
|
1,336,000
|
|
|
|
8,664,000
|
|
|
|
10,000,000
|
|
|
|
|
|
Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on AFS securities
|
|
|
|
|
|
|
(103,000
|
)
|
|
|
(103,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities:
|
|
|
|
|
|
|
(103,000
|
)
|
|
|
(103,000
|
)
|
Less: Valuation Allowance
|
|
|
|
|
|
|
(2,630,000
|
)
|
|
|
(2,630,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
$
|
1,336,000
|
|
|
$
|
5,931,000
|
|
|
|
7,267,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A valuation allowance covering the deferred tax assets of the Company for November 30, 2016 and
November 30, 2015, has been provided as the Company does not believe it is more likely than not that all of the future income tax benefits will be realized. The valuation allowance changed by approximately ($329,000) and ($7,887,000) during the
years ended November 30, 2016 and 2015, respectively. As of November 30, 2015, we had a valuation allowance against our deferred tax assets of $9,897,000. The 2015 change was primarily a result of NOL usage and assets relating to deferred
revenue. The change for year ended November 30, 2016 was primarily a result of Nybergs RSA Buy Out, impairment of the PrepaCytes intangible assets, and a partial release of the valuation allowance.
During the last quarter of the year ended November 30, 2016, the Company bought out a revenue sharing agreement extinguishing $875,000 of
their RSA deferred tax asset and capitalizing the full amount of $3,400,000 to be amortized over the next fifteen years. Positive evidence exists for the realization of the deferred tax asset further allowing the company to release the $875,000, tax
effected at $329,000, from their valuation allowance for the current year.
The Company evaluates the recoverability of our deferred tax
assets as of the end of each quarter, weighing all positive and negative evidence, and are required to establish and maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax
assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation
allowance is not needed.
The positive evidence that weighed in favor of releasing the allowance as of November 30, 2016 and
ultimately outweighed the negative evidence against releasing the allowance was the following:
|
|
|
Identifiable sources of future income relating to the Companys deferred revenue accounts.
|
|
|
|
Certainty as to the amount available of deferred tax assets and nature in which the deferred tax assets reverse;
|
60
|
|
|
Profitability for years ended November 30, 2014 and 2015 and our expectations regarding the sustainability of these profits;
|
|
|
|
The Companys three-year cumulative position as of November 30, 2016; and
|
|
|
|
The Companys taxable income projection for fiscal years ending November 30, 2017, 2018 and 2019.
|
As of August 31, 2015, we concluded that the positive evidence in favor of releasing the allowance outweighed the negative evidence
against releasing the allowance and that it was more likely than not that our deferred tax assets, except the deferred tax assets relating to the foreign tax credit carryforwards, investment in Saneron CCEL Therapeutics, Inc., capital loss
carryforwards, and deferred revenue: RSA, would be realized. Further positive evidence and analysis as of November 30, 2016 allowed the Company to conclude that an additional amount of the valuation allowance to be released relating to the
Nyberg RSA Buy Out and therefore the only valuation allowance as of
year-end
was for the investment in Saneron CCEL Therapeutics, Inc., capital loss carryforwards, and deferred revenue: RSA.
The Company has utilized all of its unused net operating losses available for carryforward as of November 30, 2016 to offset future
federal taxable income. The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating losses if there has been an ownership change. Such an ownership change as described in Section 382 of the
Internal Revenue code may limit the Companys utilization of its net operating loss carryforwards. An analysis has been performed on the net operating loss carryforwards as of November 30, 2016 and it has been concluded that no ownership
changes have occurred through November 30, 2016 which would potentially limit the utilization of the net operating losses.
A
reconciliation of the income tax provision with the amount of tax computed by applying the federal statutory rate to pretax income follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended November 30, 2016
|
|
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
Tax at Federal Statutory Rate
|
|
|
(880,000
|
)
|
|
|
34.0
|
|
|
|
272,000
|
|
|
|
34.0
|
|
State Income Tax Effect
|
|
|
(94,000
|
)
|
|
|
3.6
|
|
|
|
29,000
|
|
|
|
3.6
|
|
Change in Valuation Allowance
|
|
|
|
|
|
|
0.0
|
|
|
|
264,000
|
|
|
|
33.0
|
|
Valuation Allowance Release
|
|
|
(329,000
|
)
|
|
|
(12.7
|
)
|
|
|
(8,151,000
|
)
|
|
|
(1,019.5
|
)
|
Permanent Disallowances
|
|
|
184,000
|
|
|
|
(7.3
|
)
|
|
|
160,000
|
|
|
|
20
|
|
Other
|
|
|
(40,000
|
)
|
|
|
1.6
|
|
|
|
269,000
|
|
|
|
33.6
|
|
Foreign tax credits
|
|
|
(109,000
|
)
|
|
|
4.3
|
|
|
|
(150,000
|
)
|
|
|
(18.8
|
)
|
Foreign tax withholding
|
|
|
109,000
|
|
|
|
(4.3
|
)
|
|
|
150,000
|
)
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
(1,159,000
|
)
|
|
|
44.7
|
|
|
$
|
(7,157,000
|
)
|
|
|
(895.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
The Company adopted the accounting standard for uncertain tax positions, ASC
740-10,
on December 1, 2007. As required by the standard, 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. There were no uncertain tax positions as of November 30, 2016 and 2015.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the years ended November 30,
2016 and 2015, the Company had no provisions for interest or penalties related to uncertain tax positions.
The Company or one of its
subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. The table below summarizes the open tax years and ongoing tax examinations in major jurisdictions as of November 30, 2016:
|
|
|
|
|
Jurisdiction
|
|
Open Tax Years
|
|
Examinations in Process
|
United States Federal Income Tax
|
|
2012 - 2015
|
|
For the Year Ended November 30, 2014
|
United States Various States
|
|
2011 - 2015
|
|
N/A
|
NOTE 13 - STOCKHOLDERS EQUITY.
Common Stock Issuances
During the year
ended November 30, 2016, the Company issued 23,399 common shares to option holders who exercised options for $40,340. During the year ended November 30, 2015, the Company issued 35,000 common shares to option holders who exercised options
for $69,850.
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
November 30, 2016 and November 30, 2015, there were 572,281 and 568,930 options issued, but not yet exercised, under the 2006 Plan, respectively. As of November 30, 2016, there were 226,929 shares available for future issuance under
the 2006 Plan.
The Company 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 November 30, 2016, there were 569,729 service-based options issued, 129,729 service-based restricted common shares granted, 630,970 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 November 30, 2016, there were 1,053,332 shares available for future issuance under the 2012 Plan.
62
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.
Variables used to determine the fair value of the options granted for the years ended November 30, 2016 and
November 30, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average values:
|
|
|
|
|
|
|
|
|
Expected dividends
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
66.39%
|
|
|
|
75.50%
|
|
Risk free interest rate
|
|
|
1.22%
|
|
|
|
1.57%
|
|
Expected life
|
|
|
5.6 years
|
|
|
|
5.0 years
|
|
Stock option activity for options with only service-based vesting conditions for the year ended
November 30, 2016, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Options
|
|
|
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
|
|
|
|
|
|
217,249
|
|
Exercised
|
|
|
(23,399
|
)
|
|
|
1.72
|
|
|
|
|
|
51,384
|
|
Expired/forfeited
|
|
|
(8,250
|
)
|
|
|
2.18
|
|
|
|
|
|
17,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 30, 2016
|
|
|
1,142,010
|
|
|
$
|
2.36
|
|
|
4.99
|
|
$
|
2,157,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at November 30, 2016
|
|
|
1,044,604
|
|
|
$
|
2.28
|
|
|
4.66
|
|
$
|
2,055,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the years ended November 30, 2016
and November 30, 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 November 30, 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.
63
Significant option groups outstanding and exercisable at November 30, 2016 and related price
and contractual life information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Range of Exercise
Prices
|
|
Outstanding
|
|
|
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
$1.01 to $2.00
|
|
|
441,781
|
|
|
4.74
|
|
$
|
1.72
|
|
|
|
441,781
|
|
|
$
|
1.72
|
|
$2.01 to $3.00
|
|
|
473,000
|
|
|
3.51
|
|
$
|
2.57
|
|
|
|
473,000
|
|
|
$
|
2.57
|
|
$3.01 to $4.00
|
|
|
227,229
|
|
|
8.57
|
|
$
|
3.18
|
|
|
|
129,823
|
|
|
$
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,142,010
|
|
|
4.99
|
|
$
|
2.36
|
|
|
|
1,044,604
|
|
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys
non-vested
options as of
November 30, 2016, and changes during the fiscal year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Options
|
|
|
Fair Value
|
|
Non-vested
at November 30, 2015
|
|
|
15,003
|
|
|
$
|
1.90
|
|
|
|
|
Granted
|
|
|
204,729
|
|
|
|
1.86
|
|
Vested
|
|
|
(122,326
|
)
|
|
|
1.88
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at November 30, 2016
|
|
|
97,406
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2016, there was approximately $155,000 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 .97 years as of November 30,
2016. The total fair value of options vested during the fiscal year ended November 30, 2016 was approximately $230,000.
Performance and market-based vesting condition options
There were no performance-based or market-based vesting condition options granted during the fiscal years ended November 30, 2016 and
November 30, 2015.
As of November 30, 2016 and November 30, 2015, there were no performance or market-based vesting
condition options outstanding.
Restricted common shares
During the first quarter 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
is to receive 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
64
December 1, 2014 and the remaining 1/3 on December 1, 2015. As of November 30, 2016 and November 30, 2015, these shares are fully vested. As of November 30, 2016 and
November 30, 2015, there was $0 of total unrecognized compensation cost related to these 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 state 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 market and performance thresholds, as defined in the agreements. 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.
As of November 30, 2015, certain market and performance thresholds were met during fiscal year 2015 and the Board agreed to grant David
Portnoy and Mark Portnoy 118,117 and 102,711 shares of restricted common shares, respectively. The fair value of the shares with a grant date during the 2015 fiscal year was approximately $336,000 and is reflected as selling, general and
administrative expense in the accompanying consolidated statements of comprehensive (loss) income for the year ended November 30, 2015. There was approximately $242,000 of total unrecognized compensation cost as of November 30, 2015 which
was recognized during the first quarter of fiscal year 2016 as the Board granted certain subjective performance shares with a grant date during the 2016 fiscal year and these costs are reflected as selling, general and administrative expense in the
accompanying consolidated statements of comprehensive (loss) income as of November 30, 2016.
As of April 15, 2016, the Company
entered into Amended and Restated Employment Agreements (Employment Agreements) with each of the Companys
Co-CEOs.
The Employment Agreements 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
during fiscal year 2016. The Employment Agreements state 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. Based upon the performance measures being attained, the Company will grant a
total of 183,145 and 159,257 shares of common stock to David Portnoy and Mark Portnoy, respectively. The fair value of the shares to be granted is approximately $1,252,000 and is reflected as selling, general and administrative expense in the
accompanying consolidated statements of comprehensive (loss) income for the year ended November 30, 2016. There was $0 of total unrecognized compensation cost as of November 30, 2016.
As of April 18, 2016, the Company entered into a second Amendment Agreement (the Amendment), with the Companys CIO Oleg
Mikulinsky effective December 1, 2015, amending certain terms of the Amendment Agreement dated May 1, 2013 and Mikulinsky Employment Agreement dated March 5, 2012. The Amendment provides for the grant of shares of the Companys
common stock based on certain performance measures being attained by the Company during fiscal year 2016. The Amendment states if Executive is employed by the Company on November 30, 2016, then no later than February 28, 2017, the Company
will grant Executive up to 20,000 shares of restricted stock based on performance as set forth in the Amendment. Based upon performance measures being attained, the Company will grant a total of 19,620 shares of common stock to Oleg Mikulinksy. The
fair value of the shares to be granted is approximately $31,747 and is reflected as selling, general and administrative expense in the accompanying consolidated statements of comprehensive (loss) income for the year ended November 30, 2016.
There was $45,900 of total unrecognized compensation cost as of November 30, 2016.
65
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, the Redemption Date , and the close of business on the Final Expiration
Date, 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.
Rights were to 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 were 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 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.
The Rights Agreement was to expire on December 5, 2017, unless earlier redeemed, exchanged, terminated, or unless the expiration date is
extended. Effective October 31, 2016, the Company terminated the Rights Agreement through an Amendment to Rights Agreement (Rights Amendment) which revised the termination date of the Rights Agreement. Pursuant to the Rights
Amendment, the termination of the Rights Agreement was effective October 31, 2016.
NOTE 14 - 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 change increased licensee and royalty income by $322,353 in the fourth quarter of fiscal 2015. 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 royalty 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. As of November 30, 2016, Lifecell has paid the Company $5.1 Million for royalties due under the terms of the License and Royalty
Agreement.
66
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.`
The following table details the processing and storage royalties earned for the
technology agreements for fiscal years 2016 and 2015. The initial license fees and processing and storage royalties are reflected in licensee income in the accompanying consolidated statements of comprehensive (loss) income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended November 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
License
Fee
|
|
|
Processing
and
Storage
Royalties
|
|
|
Total
|
|
|
License
Fee
|
|
|
Processing
and
Storage
Royalties
|
|
|
Total
|
|
India
|
|
|
|
|
|
|
1,006,319
|
|
|
|
1,006,319
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Total
|
|
$
|
|
|
|
$
|
1,006,319
|
|
|
$
|
1,006,319
|
|
|
$
|
|
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15 COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has
employment agreements in place for certain members of management. These employment agreements which include severance arrangements, are for periods ranging from one to two years and contain certain provisions for severance payments in the event of
termination or change of control.
Leases
The Company entered into a
ten-year
lease in April 2004 for its 17,600 square foot cGMP/cGTP compliant
corporate headquarters in Oldsmar, Florida for rent of approximately $141,000 per year for each of the first two years and escalating thereafter. The lease effectively commenced during October 2004, and the Company moved into this facility in
November 2004. This facility contains the Companys executive offices, its conference and training center, its laboratory processing and cryogenic storage facility and its scientific offices.
On June 7, 2006, the Company entered into a lease amendment, which amended the Companys lease for its principal offices in Oldsmar,
Florida. The original lease covered approximately 17,600 square feet of space. Under the amendment, the Company leased an additional 9,600 square feet of space at the same location, beginning on August 1, 2006 and ending with the termination of
the lease in 2013. The Companys rent for the additional space was $11,032 per month through July 31, 2009, with annual increases thereafter through the entire lease term to a maximum of $13,176 per month for the additional space.
In June 2013, the Company signed an amendment to terminate the building lease on the additional 9,600 square feet that was entered into during
June 2006. The termination fee was $150,000 and is reflected, net of rent paid for May and June 2013, in selling, general, and administrative expenses. The Company also extended the main lease through December 31, 2015 for the 17,600 square
foot space.
67
In January 2016, the Company extended the main lease through December 31, 2018 for the
17,600 square foot space.
Rent charged to operations was $288,832 and $260,272 for the fiscal years ended November 30, 2016 and
2015, respectively, and is included in cost of sales and selling, general and administrative expenses in the consolidated statements of comprehensive (loss) income.
The future minimum rental payments under the operating lease are as follows:
|
|
|
|
|
Fiscal Year Ending November 30,
|
|
Rent
|
|
2017
|
|
$
|
228,651
|
|
2018
|
|
$
|
229,038
|
|
2019
|
|
$
|
19,087
|
|
The Company entered into a
one-year
lease in November 2013 for an
additional 800 square feet of office space in Miami, Florida for annual rent of approximately $27,120. The lease commenced during December 2013. In December 2016, the Company extended the lease through December 31, 2018.
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 November 30, 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, 2016. The Court retained jurisdiction to hear plaintiffs request for $200,000 in
attorneys fee associated with mooting the litigation. The Court heard arguments 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
68
action is pending. 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 17).
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 16 - RETIREMENT PLAN
The Company
maintains a 401(k) retirement plan (the 401(k) Plan), which allows eligible employees to defer up to 15% of their eligible compensation. In fiscal 2008, the Company implemented an employer match up to certain limits. In fiscal 2010, the
Company implemented a Safe Harbor provision with matching contributions up to certain limits. For the years ended November 30, 2016 and November 30, 2015, the Company made matching contributions of approximately $121,000 and $114,000,
respectively, to the 401(k) Plan.
NOTE 17 - REVENUE SHARING AGREEMENTS (RSAs)
Florida
. On February 9, 1999, the previous agreements with the Companys Arizona Revenue Sharing investors were modified and replaced
by a RSA for the state of Florida for a price of $1,000,000. The revenue sharing agreement applies to net storage revenues originating from specimens from within the state of Florida. The revenue sharing agreement entitles the investors to revenues
of up to a maximum of 33,000 storage spaces. The revenue sharing agreement was entered into prior to the time he became a member of the Board from which he resigned during December 2004.
Illinois
. In 1996, the Company signed agreements with a group of investors entitling them to an
on-going
50% share of the Companys 75% share of the annual storage fees (net storage revenues) less a deduction for 50% of billing and collection expenses generated by specimens stored in the Illinois Masonic Medical Center for a price of
$1,000,000. The agreements were modified in 1998 to broaden the covered specimens to those originating in Illinois and its contiguous states and stored in Oldsmar, Florida for a maximum of up to 33,000 storage spaces.
Texas
. On May 31, 2001, the Company entered into an agreement with Red Rock Partners, an Arizona general partnership, entitling them to
on-going
shares in a portion of the Companys net storage revenue generated by specimens originating from within the State of Texas for a price of $750,000. The investors are entitled to a 37.5% share of net
storage revenues originating in the State of Texas to a maximum of 33,000 storage spaces. The revenue sharing agreement was entered into prior to the time he became a
69
member of the Board, from which he resigned during December 2004. During fiscal 2008, Red Rock assigned 50% of their interest in the agreement to SCC Investments, Inc., an Arizona corporation.
During fiscal year 2010, SCC Investments, Inc. assigned its interest to SCF Holdings, LLC, an Arizona limited liability company.
The
Company made total payments to all RSA holders of $666,138 and $796,759 for the fiscal years ended November 30, 2016 and 2015, respectively. The Company recorded an RSA accrual of $546,229 and $820,436 as of November 30, 2016 and 2015,
respectively, related to interest owed to the RSA holders, which is included in accrued expenses in the Companys consolidated financial. The Company also recorded interest expense of $669,590 and $1,277,815 for the fiscal years ended
November 30, 2016 and 2015, respectively, which is reflected in interest expense on the accompanying consolidated statements of comprehensive (loss) income.
Extinguishment of RSAs
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 Settlement Payment). In consideration of the Settlement Payment, all legal claims brought against the Company by the Nybergs pursuant to a lawsuit (see Note 15), 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 FL and TX RSAs) terminated their rights to these interests in the
FL and TX RSAs, resulting in a 50% reduction in the Companys ongoing payment obligations under the FL and TX 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 twelve months ended November 30, 2016.
The Company changed the
methodology used to calculate the RSA payments owed to the RSA holders during fiscal year 2015 from calculating on the amount billed to customers to the amount collected from customers as noted per the RSA contracts. For fiscal 2015, this change in
methodology accounted for a decrease in amounts owed to the RSA holders of approximately $187,000. The Company accounted for this change as a change in accounting estimate.
NOTE 18 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.
70
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 November 30, 2016,
the Company had repurchased an aggregate of 5,713,171 shares of the Companys common stock, inclusive of the shares that were accepted as part of the tender offer for the Stock Purchase Agreement with Ki Yond Choi and Michael Cho, at an average
price of $3.35 per share through open market and privately negotiated transactions. The Company purchased 2,463,850 and 1,034,210 shares of the Companys common stock during the twelve months ended November 30, 2016 and November 30,
2015, respectively, at an average price of $4.39 per share and $3.10 per share, respectively.
The repurchased shares are held as treasury
stock at cost and have been removed from common shares outstanding as of November 30, 2016 and November 30, 2015. As of November 30, 2016 and November 30, 2015, 5,714,868 and 3,249,790 shares, respectively, were held as treasury
stock.
Subsequent to the balance sheet date, the Company repurchased an additional 13,401 shares of the Companys common stock at an
average price of $4.48 per share through open market and privately negotiated transactions.
NOTE 19 RELATED PARTY TRANSACTIONS
David Portnoy, the Companys Chairman and
Co-Chief
Executive officer, is the brother of the
Companys
Co-Chief
Executive Officer Mark Portnoy. The Companys Audit Committee Chairman, Harold Berger, provides accounting services to the Companys
Co-Chief
Executive Officer Mark Portnoy and to PartnerCommunity, Inc. The Companys Chairman and
Co-Chief
Executive Officer, David Portnoy, serves as the Chairman
of the Board of PartnerCommunity, Inc.