NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
Note 1. Organization and Description of Business
Overview
Cord Blood America, Inc. ("CBAI" or the “Company”),
formerly D&A Lending, Inc., was incorporated in the State of
Florida on October 12, 1999. In October, 2009, CBAI re-located its
headquarters from Los Angeles, California to Las Vegas, Nevada.
CBAI's wholly-owned subsidiaries include Cord Partners, Inc.,
CorCell Companies, Inc., CorCell, Ltd., (Cord Partners, Inc.,
CorCell Companies, Inc. and CorCell, Ltd. are sometimes referred to
herein collectively as “Cord”), CBA Properties, Inc.
("Properties"), and Career Channel, Inc. formerly D/B/A Rainmakers
International. CBAI and its subsidiaries engage in the
following business activities:
●
CBAI
and Cord specialize in providing private cord blood and cord tissue
stem cell services. Additionally, the Company is in the business of
procuring birth tissue for organizations utilizing the tissue in
the transplantation and/or research of therapeutic based
products.
●
Properties
was formed to hold corporate trademarks and other intellectual
property.
Company Developments – Banco Vida
On August 17, 2015, the Company received a notice of termination
from Cord Blood Caribbean, Inc. d/b/a Banco Vida (“Banco
Vida”) with regards to both the Tissue Agreement and the
Storage and Processing Agreement between the two companies,
effective February 2016. The Company reached an amendment to
the Tissue Agreement extending the agreement through February 7,
2018, and with automatic renewals for consecutive two (2) year
terms, in perpetuity unless terminated prior to a renewal term or
otherwise in accordance with the amendment. Although the
parties had not yet reached an agreement regarding the Storage and
Processing Agreement between the two companies, Banco Vida
continued to store samples with the Company until December 2016. In
December 2016, the Company and Banco Vida entered a Release
Agreement, pursuant to which the storage relationship between them
ceased. In connection with the Release Agreement, Banco Vida paid
the Company $20,000, and Banco Vida received from the Company
equipment used in the storage of samples. The Company recorded a
gain on settlement of $151,951 relating to release of deferred
revenue and sales of equipment in connection with the
transaction.
Note 2. Summary of Significant Accounting Policies
Basis of Consolidation
The
consolidated financial statements include the accounts of CBAI and
its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated upon
consolidation.
Estimates
The
preparation of 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 amount of revenues and expenses during
the reporting periods. Actual results could differ materially from
those estimates.
Cash
Cash
and cash equivalents include cash on hand, deposits in banks with
maturities of three months or less, and all highly liquid
investments which are unrestricted as to withdrawal or use, and
which have original maturities of three months or less at the time
of purchase.
The
company maintains cash and cash equivalents at several financial
institutions.
Accounts Receivable
Accounts
receivable consist of the amounts due for facilitating the
processing and storage of umbilical cord blood and cord tissue, and
birth tissue procurement services. Accounts
receivable relating to deferred revenues are netted against
deferred revenue for presentation purposes. The allowance for
doubtful accounts is estimated based upon historical experience.
The allowance is reviewed quarterly and adjusted for accounts
deemed uncollectible by management. Amounts are written off when
all collection efforts have failed.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets. Routine maintenance and
repairs are charged to expense as incurred while major replacement
and improvements are capitalized as additions to the related
assets. Sales and disposals of assets are recorded by removing the
cost and accumulated depreciation from the related asset and
accumulated depreciation accounts with any gain or loss credited or
charged to income upon disposition.
Intangible Assets
Intangible assets consist primarily of customer contracts and
relationships as part of the acquisition of the CorCell and
CureSource assets in 2007. During 2011 the Company also foreclosed
and acquired assets from NeoCells, a subsidiary of ViviCells, as
satisfaction of outstanding receivables from Vivicells. Intangible
assets are stated at cost. Amortization of intangible assets is
computed using the sum of the years’ digits method, over an
estimated useful life of 18 years. Amortization expense for the
years ended December 31, 2016 and 2015 was $295,486 and $345,348
respectively.
Impairment of Long-Lived Assets
Long-lived
assets, other than goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets might not be recoverable. Conditions that
would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate that the carrying
amount of an asset or group of assets is not
recoverable.
For
long-lived assets to be held and used, the Company recognizes an
impairment loss only if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment
loss based on the difference between the carrying amount and fair
value. The Company reviews goodwill for impairment at least
annually or whenever events or circumstances are more likely than
not to reduce the fair value of goodwill below its carrying
amount.
Inventory
Inventory,
comprised principally of finished goods, is stated at the lower of
cost or market value using the first-in, first-out
(“FIFO”) method. This policy requires the Company to
make estimates regarding the market value of its inventory,
including an assessment of excess or obsolete inventory. The
Company determines excess and obsolete inventory based on an
estimate of the future demand and estimated selling prices for its
products.
Notes Receivable
Notes
receivable consists of the notes due from Biocordcell Argentina
S.A. (BioCells) and Banco Vida. The notes receivable are recorded
at carrying-value on the financial statements.
For
note receivable from BioCells, since the Company agreed to finance
the sale of the shares in Biocordcell at no stated interest, in
accordance with ASC 500, the interest method was applied using a 6%
borrowing rate. The Company recorded an unamortized discount based
on the 6% borrowing rate and the discount is amortized throughout
the life of the note.
Deferred Revenue
Deferred
revenue consists of payments for enrollment in the program and
processing of umbilical cord blood and cord tissue by customers
whose samples have not yet been collected, as well as the pro-rata
share of annual storage fees for customers whose samples were
stored during the year.
Valuation of Derivative Instruments
ASC
815-40 requires that embedded derivative instruments be bifurcated
and assessed, along with free-standing derivative instruments such
as warrants, on their issuance date and in accordance with ASC
815-40-15 to determine whether they should be considered a
derivative liability and measured at their fair value for
accounting purposes. In determining the appropriate fair value, the
Company uses the Binomial option pricing formula and present value
pricing. At December 31, 2016 and December 31, 2015, the Company
adjusted its derivative liability to its fair value, and reflected
the change in fair value, in its consolidated statements of
operations.
Revenue Recognition
CBAI
recognizes revenue under the provisions of ASC 605. CBAI provides a
combination of products and services to customers. This combination
arrangement is evaluated under ASC 605. ASC 605 addresses certain
aspects of accounting for arrangements under multiple revenue
generating activities.
Cord
recognizes revenue from both enrollment fees and processing fees
upon the completion of processing while revenue from storage fees
are recognized ratably over the contractual storage
period.
Cost of Services
Costs
are incurred as umbilical cord blood, cord tissue and birth
tissue are collected. These costs include the transportation
of the umbilical cord blood, cord tissue and birthing tissue from
the hospital, direct material, costs for processing and cryogenic
storage of new samples by a third party laboratory, collection kit
materials and allocated rent, utility and general administrative
expenses. The Company expenses costs in the period
incurred.
Income Taxes
The
Company follows the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that
included the enactment date. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance based on the
portion of tax benefits that more likely than not will not be
realized. There was a valuation allowance equal to 100% of
deferred tax assets as of December 31, 2016 and 2015.
The
Company follows guidance issued by the FASB with regard to its
accounting for uncertainty in income taxes recognized in the
financial statements. Such guidance prescribes a recognition
threshold of more likely than not and a measurement process for
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. In making this
assessment, a company must determine whether it is more likely than
not that a tax position will be sustained upon examination, based
solely on the technical merits of the position and must assume that
the tax position will be examined by taxing authorities. Our policy
is to include interest and penalties related to unrecognized tax
benefits in income tax expense. Interest and penalties totaled $0
for the years ended December 31, 2016 and 2015. The Company files
income tax returns with the Internal Revenue Service
(“IRS”) and various state jurisdictions.
Accounting for Stock Option Plan
The
Company’s share-based employee compensation plans are
described in Note 11. On January 1, 2006, the Company adopted
the provisions of ASC 718 , “Accounting for Stock-based
Compensation (Revised 2004)” (“123(R)”), which
requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors,
including employee stock options.
Earnings (Loss) Per Share
Basic
earnings per share (EPS) is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding. Diluted EPS is similar to
basic EPS except that the weighted average number of common shares
outstanding is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential
common shares had been exercised. The Company’s
common equivalent shares are excluded from the computation of
diluted EPS if the effect is anti-dilutive.
The
diluted weighted average common shares outstanding are
1,272,066,146 and
1,272,066,146
as of December 31, 2016
and 2015, respectively.
Concentration of Risk
Credit
risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off
balance sheet) that arise from financial instruments exist for
groups of customers or counterparties when they have similar
economic characteristics that would cause their ability to meet
their contractual obligations to be similarly affected by changes
in economic or other conditions described below.
Relationships
and agreements which could potentially expose the Company to
concentrations of credit risk consist of the use of one source for
the processing and storage of all umbilical cord blood and one
source for the development and maintenance of a website. The
Company believes that alternative sources are available for each of
these concentrations.
Financial
instruments that subject the Company to credit risk could consist
of cash balances maintained in excess of federal depository
insurance limits. The Company maintains its cash and cash
equivalent balances with high credit quality financial
institutions. At times, cash and cash equivalent balances may be in
excess of Federal Deposit Insurance Corporation limits, and as of
December 31, 2016, such excess was less than $250,000. To date, the
Company has not experienced any such losses.
Fair Value Measurements
Assets
and liabilities recorded at fair value in the consolidated balance
sheets are categorized based upon the level of judgment associated
with the inputs used to measure the fair value. Level inputs, as
defined by ASC 820, are as follows:
●
Level
1 – quoted prices in active markets for identical assets or
liabilities.
●
Level
2 – other significant observable inputs for the assets or
liabilities through corroboration with market data at the
measurement date.
●
Level
3 – significant unobservable inputs that reflect
management’s best estimate of what market participants would
use to price the assets or liabilities at the measurement
date.
The
following table summarizes fair value measurements by level at
December 31, 2016 for assets and liabilities measured at fair value
on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
$
--
|
$
--
|
$
109,731
|
$
109,731
|
Derivative
liability was valued under the Binomial model with the following
assumptions:
Risk
free interest rate
|
0.12%
to 0.47%
|
Expected
life
|
0 to
0.75 years
|
Dividend
Yield
|
0%
|
Volatility
|
0% to
109%
|
The
following table summarizes fair value measurements by level at
December 31, 2015 for assets and liabilities measured at fair value
on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Derivative
liability$
|
--
|
$
--
|
$
(437,503
)
|
$
(437,503
)
|
Derivative
liability was valued under the Binomial model, with the following
assumptions:
Risk
free interest rate
|
0.12%
to 0.63%
|
Expected
life
|
0 to
1.75 years
|
Dividend
Yield
|
0%
|
Volatility
|
0% to
103%
|
For
certain of the Company’s financial instruments, including
cash, accounts receivable, prepaid expenses and other assets,
accounts payable and accrued expenses, and deferred revenues, the
carrying amounts approximate fair value due to their short
maturities. The carrying amounts of the Company’s notes
receivable and notes payable approximates fair value based on the
prevailing interest rates.
Recently Issued Accounting Pronouncements
In April 2015, the FASB issued an accounting standard update on
simplifying the presentation of debt issuance costs. The
update requires that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement
guidance for debt issuance costs are not affected by the amendments
in this update. Updates are effective for financial
statements issued for fiscal years beginning after December 15,
2015, with early adoption permitted. The adoption of this guidance
is not expected to have a material impact on the Company’s
consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842),
under the new guidance,
lessor accounting is largely unchanged. Certain targeted
improvements were made to align, where necessary, lessor accounting
with the lessee accounting model and Topic 606, Revenue from
Contracts with Customers.
The
amendments of this ASU are effective for fiscal years beginning
after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted. The Company is currently
assessing the potential impact this ASU will have on the financial
statements and related disclosures.
In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedient
, which is to (1)
clarify the objective of the collectability criterion for applying
paragraph 606-10-25-7; (2) permit an entity to exclude amounts
collected from customers for all sales (and other similar) taxes
from the transaction price; (3) specify that the measurement date
for noncash consideration is contract inception; (4) provide a
practical expedient that permits an entity to reflect the aggregate
effect of all modifications that occur before the beginning of the
earliest period presented when identifying the satisfied and
unsatisfied performance obligations, determiningthe transaction
price, and allocating the transaction price to the satisfied and
unsatisfied performance obligations; (5) clarify that a completed
contract for purposes of transition is a contract for which all (or
substantially all) of the revenue was recognized under legacy GAAP
before the date of initial application, and (6) clarify that an
entity that retrospectively applies the guidance in Topic 606 to
each prior reporting period is not required to disclose the effect
of the accounting change for the period of adoption. The amendments
of this ASU are effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal
years. The Company is currently assessing the potential impact this
ASU will have on the financial statements and related
disclosures
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash
Receipts and Cash Payments
, in an effort to reduce the
diversity of how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. The
amendments of this ASU are effective for fiscal years beginning
after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted. The Company is currently
assessing the potential impact this ASU will have on the financial
statements and related disclosures.
Note 3. Property and Equipment
At
December 31, 2016 and 2015, property and equipment consists
of:
|
|
|
|
|
|
|
|
Furniture and
fixtures
|
1-5
|
$
23,030
|
$
23,030
|
Computer
equipment
|
5
|
217,805
|
217,364
|
Laboratory
Equipment
|
1-5
|
98,188
|
100,844
|
Freezer
equipment
|
7-15
|
364,225
|
370,424
|
Leasehold
Improvements
|
5
|
102,862
|
102,862
|
|
|
806,110
|
814,524
|
Less: accumulated
depreciation and amortization
|
|
(739,482
)
|
(695,335
)
|
|
|
$
66,628
|
$
119,189
|
For the
years ended December 31, 2016 and 2015, depreciation expense
totaled $47,865 and $54,562, respectively.
Note 4. Notes and Loans Payable, and Derivative
Liabilities
At
December 31, 2016 and 2015, notes and loans payable consist
of:
|
|
|
|
|
|
Secured Convertible
Promissory Note to Tonaquint, Inc. 7.5% per annum; due on or before
September 17, 2017.
|
400,000
|
975,000
|
|
|
|
|
|
|
Less: Unamortized
Discount
|
(43,432
)
|
(273,185
)
|
|
$
356,568
|
$
701,815
|
The
total interest expense was $305,640 and $23,539 during the years
ended December 31, 2016 and 2015, respectively. The gains from
changes in derivative liability were $327,772 and $228,404 during
the years ended December 31, 2016 and 2015,
respectively.
Tonaquint, Inc.
On
August 30, 2013, Cord Blood America, Inc. (the
“Company”) filed a Complaint in the United States
District Court for the District of Utah, Central Division against
Tonaquint, Inc. (“Tonaquint”) and St. George
Investments, LLC (“St. George”) (collectively
“Defendants”), case number 2:13-cv-00806-PMW (the
“Action”), and on May 7, 2014, the Company filed an
amended complaint.
On September 25, 2013, Defendants
each filed their Answer and Counterclaim in the Action, which they
amended on March 22, 2014.
On
December 17, 2014, in settlement of the Action, the parties entered
into a Settlement and Exchange Agreement (the "Settlement
Agreement"). Pursuant to the Settlement Agreement, the Secured
Convertible Promissory Note and the Warrant to Purchase Shares of
Common Stock issued by the Company to St. George on or around March
10, 2011, as well as the SGI Purchase Agreement, and all other
documents that made up the March 2011 transaction between the
Company and St. George, all of which have been set forth in detail
in prior filings by the Company, were terminated, cancelled or
otherwise extinguished. Further pursuant to the
Settlement Agreement, the Tonaquint Note was exchanged for a
Secured Convertible Promissory Note of the Company in the principal
amount of $2,500,000 (the "Company Note"), and certain of the other
documents that were part of the June 27, 2012 transaction between
the Company and Tonaquint (the “June 2012 Tonaquint
Transaction”) were terminated, cancelled or otherwise
extinguished, and certain of them were amended, as set forth
below.
Under
the Company Note, the Company shall make monthly payments to
Tonaquint, with the first payment due on or before April
17, 2015, and with payments continuing thereafter until the
Company's Note is paid in full, with a maturity date that is 33
calendar months after the effective date of December 17, 2014. The
amount of the monthly payments is $100,000 (the “Installment
Amount”);
provided,
however,
that if the remaining amount owing under the
Company Note as of the applicable Installment Date (defined in the
Company Note) is less than $100,000, then the Installment Amount
for such Installment Date shall be equal to the outstanding amount.
The Company may prepay any or all of the outstanding amount of the
Company Note at any time, without penalty. In the event the Company
prepays an amount that is less than the outstanding amount, then
the prepayment amount shall be applied to the next Installment
Amount(s) due under the Company Note.
For
each monthly payment, the Company may elect to designate all or any
portion of the Installment Amount then due as a conversion
eligible amount (hereafter “Conversion Eligible
Amount”); provided that the total outstanding Conversion
Eligible Amount that has not been converted by Tonaquint, as set
forth below, at any given time may not exceed one hundred thousand
dollars ($100,000) without Tonaquint’s prior written consent
and subject to additional restrictions set forth in the Company
Note. In the event the Company designates any portion of any
monthly payment amount as a Conversion Eligible Amount, the
applicable monthly payment shall be reduced by an amount equal to
the portion thereof designated as a Conversion Eligible Amount. The
Conversion Eligible Amount shall continue to be included in and be
deemed to be a part of the Outstanding Balance (defined in the
Company Note) of the Company Note unless and until such amount is
either paid in cash by the Company or converted into Common Stock
by Tonaquint. The Company may pay the Conversion Eligible Amount in
cash, provided that no prepayments of cash shall reduce the
Conversion Eligible Amount until the Outstanding Balance is equal
to or less than the Conversion Eligible Amount.
Once
the Company has designated amounts as Conversion Eligible Amount,
Tonaquint may convert all or any portion of that amount into
shares of the Company's Common Stock. In the event of a conversion
by Tonaquint of a Conversion Eligible Amount, the number of Common
Stock shares delivered to Tonaquint upon conversion will be
calculated by dividing the amount of the Company Note that is being
converted by 70% of the average of the three (3) lowest Closing Bid
Prices of the Common Stock (as defined in the Company Note) in the
twenty (20) Trading Days immediately preceding the applicable
Conversion.
The
Company records debt discounts in connection with the issuance of
convertible debt and the initial valuation of the derivative
liability. The discounts are amortized to non-cash interest expense
over the life of the debt.
The
Company Note has an interest rate of 7.5%, compounding daily, which
would increase to a rate of 15.0% on the happening of certain
Events of Default (defined in the Company Note) that are not
considered a Payment Default (defined in the Company Note),
provided that the Company may cure the default in accordance with
and subject to the terms set forth in the Company Note. Where a
Payment Default occurs, including where (i) Borrower shall fail to
pay any principal, interest, fees, charges, or any other amount
when due and payable under that Company Note; or (ii) Borrower
shall fail to deliver any Conversion Shares in accordance with the
terms of the Company Note, late fees shall accrue as set forth in
the Company Note, and in addition, the Company shall have ninety
(90) days from delivery of notice of default from Tonaquint to cure
the default, as set forth in more detail in the Company Note. If
the Company fails to cure the Payment Default, Tonaquint may
accelerate the Company Note by written notice to the Company, with
the Outstanding Balance becoming immediately due and payable in
cash at the Mandatory Default Amount (defined in the Company Note)
equal to (i) the Outstanding Balance as of the date of acceleration
(which Outstanding Balance, for the avoidance of doubt, will
include all Late Fees that accrue until any applicable Payment
Default is cured) multiplied by (ii) two hundred fifty percent
(250%), along with other remedies, as set forth in the Company
Note.
As of December 31, 2015, the principal balance on the Tonaquint
note was $975,000, and there was $128,607 of accrued
interest.
As of
December 31, 2016, the principal balance on the Tonaquint note was
$400,000, and there was $
204,494
of accrued
interest.
Note 5. Investment and Notes Receivable, Related
Parties
At
December 31, 2016 and 2015, notes receivable consist
of:
|
|
|
Effective August
14, 2014, Company entered into a Secured Promissory Note with Banco
Vida which carries 8% interest per annum. Interest only
payments for first 12 months; thereafter principal and interest on
standard amortization schedule due on or before February 1,
2017.
|
$
--
|
$
63,141
|
|
|
|
On September 29,
2014, the Company closed a transaction selling its stake in
BioCells to Diego Rissola; current President. Payments
are to be annually, after June of 2015, and the last payment due on
or before June 1, 2025.
|
615,000
|
660,000
|
|
|
|
Unamortized
discount on BioCells note receivable
|
(167,582
)
|
(195,336
)
|
|
|
|
|
|
|
|
$
447,418
|
$
527,805
|
Under
the Agreement with Purchaser of BioCells, BioCells is to make
payments as follows: $5,000 on or before October 12, 2014; $10,000
on or before December 1, 2014; $15,000 on or before March 1, 2015;
$15,000 on or before June 1, 2015; $45,000 on or before June 1,
2016; $55,000 on or before June 1, 2017; $55,000 on or before June
1, 2018; $55,000 on or before June 1, 2019; $65,000 on or before
June 1, 2020; $75,000 on or before June 1, 2021; $75,000 on or
before June 1, 2022; $75,000 on or before June 1, 2023; $80,000 on
or before June 1, 2024; $80,000 on or before June 1, 2025. As of
December 31, 2016, the Purchaser is current on all
payments.
This
loan receivable is secured, non-interest bearing, and subject to a
6% discount rate. As of December 31, 2015, the receivable has a
balance of $464,664, net of unamortized discount of $195,336 and
allowance of doubtful accounts of $0. As of December 31, 2016,
the receivable has a balance of $447,418, net of unamortized
discount of $167,582 and allowance of doubtful accounts of
$0. The Purchaser is current with payments as of
December 31, 2016. The Company incurred interest income from the
amortized discount of $28,104 and $20,655 during the years ended
December 31, 2016 and 2015, respectively.
Note 6. Commitments and Contingencies
VidaPlus
On
January 24, 2011, the Company entered into a Stock Purchase
Agreement to acquire up to 51% of the capital stock in VidaPlus, an
umbilical cord processing and storage company headquartered in
Madrid, Spain. The Agreement is organized into three tranches; the
first executed at closing with an initial investment of
approximately $204,000 (150,000 Euro) for an amount equivalent to
7% as follows; 1% of share capital in initial equity or
approximately $30,000 and 6% or an estimated $174,000 as a loan
convertible into equity within 12 months of closing. The initial
investment was secured by a Pledge Agreement on 270 VidaPlus
samples that were incurring annual storage fees. The second tranche
provided the opportunity for an additional 28% in share capital
through monthly investments based on the number of samples
processed in that month (up to a maximum of 550,000 EUR). In
connection with Tranche 2, the Company loaned VidaPlus $246,525.
Converting the investment from a loan into equity was to take place
within 24 months of the date the amount of shares due to the
Company pursuant to the second tranche is calculated. According to
the Stock Purchase Agreement, the third tranche follows a similar
loan to equity agreement as tranche two but for an additional 16%
equity at the option of the Company (up to a maximum of 550,000
EUR).
In
connection with the VidaPlus Stock Purchase Agreement entered into
on January 24, 2011, the Company was obligated to make monthly
loans to VidaPlus based on the number of new samples processed and
up to a maximum of 550,000 Euro for each of Tranche 2 and 3 of the
Agreement. Tranche 2 did contain provisions that provided the
Company an option to discontinue funding if certain performance
targets were not met.
In
January 2012, the Company exercised its right to convert its
Tranche 1 loan into 6% of the outstanding shares of VidaPlus, and
as a result, the Company owned a total of 7% of the outstanding
shares. At the time of the equity conversion, the Company no longer
maintained its Pledge on the 270 VidaPlus samples associated with
Tranche 1; however, the Company maintained a liquidation preference
in VidaPlus over the money invested by the Company in VidaPlus.
Additionally, the Company declined to make any further investment
(loan or otherwise) to VidaPlus under either Tranche 2, Tranche 3
or otherwise. Pursuant to the Agreement, CBAI held a pledge over
the umbilical cord blood maintenance and storage contracts between
VidaPlus and certain of its customers, and all rights contained
therein, including but not limited to the rights to administer
those contracts and the rights to collect the revenues derived from
those contracts, for 328 samples. CBAI held that pledge until such
time as it converted the monies paid to VidaPlus under Tranche 2 of
the Stock Purchase Agreement into equity into VidaPlus, in
accordance with the formulas set forth in the Stock Purchase
Agreement. CBAI was required to make that conversion within two
years of when the calculation was made as to the amount of shares
to which CBAI is entitled pursuant to Tranche 2, which meant that
such conversion would take place around or before February 2014.
CBAI also holds a liquidation preference in VidaPlus for the money
the Company invested in VidaPlus. On February 14, 2014, CBAI
delivered to VidaPlus its election to convert its loan under
Tranche 2 into shares of stock in VidaPlus, including Anti-Dilution
shares. The Company is entitled to an additional
ownership stake of approximately 2.24% in connection with the
forgoing, bringing its total ownership percentage to approximately
9.24%.
The
Company holds approximately 9.24% of the outstanding shares of
VidaPlus, and has a balance of convertible loans receivable
amounting to $246,525. During the year ended December 31, 2012, the
Company reviewed the recoverability of the equity investment and
loans receivable and the carrying amount exceeds the fair value of
the investment as a result of recurring and continued operating
losses at VidaPlus. Fair value of the loans receivable is
determined based on the discounted future net cash flows expected
to be generated by assets pledged against the loans. The Company
recorded an impairment of 100% of the book value of the equity
investment and convertible loan receivable.
Patent License Agreement
PharmaStem
Therapeutics claimed to hold certain patents relating to the
storage, expansion and use of hematopoietic stem cells. Previously,
PharmaStem commenced suit against numerous companies involved in
cord blood collection and preservation alleging infringement of its
patents. In October 2003, after a jury trial, judgment was entered
against certain of the Company’s competitors and in favor of
PharmaStem in one of those suits. In February 2004, PharmaStem
commenced suit against Cord Partners and certain of its competitors
alleging infringement of its patents. Management of Cord Partners
determined to settle, rather than to litigate, this matter. As a
result, PharmaStem and Cord Partners entered into a Patent License
Agreement in March 2004. Pursuant to the Patent License Agreement,
Cord Partners could, on a non-exclusive basis, collect, process and
store cord blood utilizing PharmaStem’s claimed technology
and processes allegedly covered by its patents for so long as the
patents may remain in effect. Most of the patents at issue expired
in 2010. PharmaStem could claim,
arguendo
, Cord Partners is obligated
under the Patent License Agreement to pay royalties to PharmaStem
of 15% of all revenues generated by Cord Partners from the
collection and storage of cord blood on and after January 1, 2004.
Other than potential royalties, which would be disputed by Cord, no
amount is payable by Cord Partners to PharmaStem. All litigation
between the parties was dismissed and all prior claims were
released. As of 2008, Cord ceased paying all royalties to
PharmaStem. The patents have been declared void under a final
decision on appeal, and as such, there is no pending litigation in
this matter. As of December 31, 2014, the Company included
approximately $226,000 in accounts payable and $120,000 included in
accrued expenses to account for this liability since 2008, though
the Company disputes that it owes any royalties to Pharmastem.
As of
September 30, 2015, the Company made a one-time adjustment of the
previously held amount of approximately $226,000 in accounts
payable and $120,000 in accrued expenses, to its income statement
as a gain on a settlement payable of $346,269.
Employment Agreement
On March 31, 2015, the Company entered into an Executive Employment
Agreement with Stephen Morgan, the Company’s Vice President,
General Counsel and Corporate Secretary, which is effective as of
April 1, 2015 and shall terminate as of March 31, 2017, unless
earlier terminated by the Company or Mr. Morgan in accordance with
the agreement (the “Morgan Employment
Agreement”).
The Morgan Employment Agreement provides for a base
salary
equal to $130,000, as well as an annual bonus
opportunity, payable at the discretion of the Board of Directors,
equal to 25% of Mr. Morgan’s base salary for that
calendar year, provided that Mr. Morgan had the option to receive
any portion of his salary and bonus in stock of the Company, in
lieu of cash, at a value determined by the Board of Directors in
their reasonable discretion and otherwise in accordance with the
Employment Agreement.
Amended Employment Agreement
Effective April 9, 2015, the Company entered into an Amendment to
Executive Employment Agreement with Stephen Morgan amending his
employment agreement, such that Mr. Morgan no longer has the
option, in his sole discretion, to receive his salary and bonus
amounts in the form of Company stock, rather than
cash.
Effective February 12, 2016, the Company entered into a Second
Amendment to Executive Employment Agreement with Mr. Morgan (the
“Second Amendment”), amending his original, April 1,
2015 employment agreement. Concurrent with the Second Amendment,
Mr. Morgan commenced serving as Interim President of the
Company. Mr. Morgan no longer serves as Vice President
of the Company, but remains in his positions as Corporate Secretary
and General Counsel. The Second Amendment reflects a
five thousand dollar ($5,000) increase in Mr. Morgan’s annual
salary during the period Mr. Morgan serves as Interim President,
which period commenced on February 12, 2016 and shall end at any
time on three (3) days’ notice by the Company (the
“Interim Term”). The Amendment further provides that
the increase in Mr. Morgan’s salary shall not be included in
any severance calculations, including the severance calculations
set forth in Sections 5(e) and 5(f) of his original agreement, and
that upon termination of the Interim Term for any reason, Mr.
Morgan’s employment, duties and salary shall revert back to
what they were prior to the Second Amendment.
Vicente Agreements
On
December 18, 2014, the Company entered into an Executive Employment
Agreement with Joseph R. Vicente, the Company’s former
President and Chairman of the Board, which was effective as of
January 1, 2015 and was to terminate as of December 31, 2017,
unless earlier terminated by the Company or Mr. Vicente in
accordance with the agreement (the “Vicente Employment
Agreement”).
The
Vicente Employment Agreement provided for a base salary
equal to $135,000, as well as an
annual bonus opportunity, payable at the discretion of the Board of
Directors, equal to 30% of Mr. Vicente’s base salary for
that calendar year. Mr. Vicente had the option to receive any
portion of his salary and bonus in stock of the Company, which was
amended effective April 9, 2015 pursuant to
an Amendment to
Executive Employment Agreement whereby Mr. Vicente no longer had
the option in his sole discretion to receive his salary and bonus
amounts in stock
. The Vicente Employment Agreement includes
two-year restrictions on competition and solicitation of customers
following termination of the agreement.
Effective February 12, 2016 (the “Separation Date”),
the Company entered a Mutual Separation Agreement with Mr. Vicente
(the “Separation Agreement”). Pursuant to
the Separation Agreement, Mr. Vicente stepped down from his
positions as President and as a member of the
Board. Under the Separation Agreement, Mr. Vicente is
entitled to receive a severance, payable in equal monthly
installments over the twenty four month period post separation, in
an amount equal to all compensation paid by the Company to Mr.
Vicente for the 24 months preceding the termination, including
salary and bonus received by Mr. Vicente. Additionally,
the Company will pay for the value of his health insurance
premiums, in monthly installments, until the earlier of twenty-four
months after the Separation Date or until Mr. Vicente or his
dependents become eligible for group health insurance coverage
through a new employer. Mr. Vicente is also entitled to
payment of his salary through the Separation Date, payment for
unused vacation days, payment for any unreimbursed expenses, and a
bonus payment for work performed in calendar year 2015, payable
within sixty (60) days of the Company completing its fiscal 2015
audit.
Mr. Vicente remains subject to the restrictive covenants contained
in the Vicente Employment Agreement, including a covenant not to
compete and a non-solicitation provision, and is subject to
additional restrictive covenants in the Separation
Agreement.
Operating Leases
On
January 21, 2014, the Company entered a First Amendment to Lease,
which extended its lease at the property located at 1857 Helm
Drive, Las Vegas (the “Property”), Nevada through
September 30, 2019. In connection with the amendment,
the Company received an abatement of the entire amount of its rent
for January 2014, except for CAM charges. In addition,
as of October 1, 2014, the Company’s monthly lease payments
reverted back to their rates as they existed in June 2009, other
than CAM charges, with annual adjustments thereafter as set
forth in the Amendment. Moreover, the Landlord had the option to
lease a portion of the premises then occupied by the Company to a
third party, and if this portion is leased to a third party, the
Company’s monthly rent amount was to be
reduced
pro
rata
with the portion of the space leased to a third
party. If the Landlord is unable to or elects not to
lease a portion of the premises to a third party by November 30,
2015 and by each subsequent anniversary thereof, the Company shall
receive an additional abatement of one month rent, excluding CAM
charges, in December 2015, December 2016 and December 2017,
respectively and as applicable. Effective May 15, 2016, the
Company entered a Second Amendment to Lease. The Second Amendment
to Lease sets forth that the square footage of the Property has
been reduced by 380 square feet, such that the Property now
consists of 16,523 square feet, confirms the abatements set forth
in the First Amendment to Lease, sets forth that the
Company’s Common Area Maintenance Expenses and HOA costs
shall be calculated based on the reduced square footage amount, and
confirms that the Company’s monthly rent amounts will remain
unchanged from the First Amendment to Lease.
The Company’s
monthly rent payments are approximately $15,451, which includes
Common Area Maintenance (CAM)
charges.
Commitments
for future minimum rental payments, by year, and in the aggregate,
to be paid under such operating lease as of December 31, 2016, are
as follows:
|
|
|
|
2017
|
186,518
|
2018
|
191,006
|
2019
|
145,835
|
Total
|
$
523,358
|
The
Company’s rent expense was $177,394 and $160,478 during the
year ended December 31, 2016 and 2015, respectively.
Convertible Promissory Note to Tonaquint
Commitments
for future minimum principal payments, by year, and in the
aggregate, to be paid under such convertible note as of December
31, 2016, are as follows:
|
|
|
|
2017
|
400,000
|
Total
|
$
400,000
|
Note 7. Related Party Transactions and Commitments
Related Party Transactions
VidaPlus
The
Company is entitled to approximately 9.24% of the outstanding
shares of VidaPlus, and has a balance of convertible loans
receivable amounting to $246,525. During the year ended December
31, 2012, the Company reviewed the recoverability of the equity
investment and loans receivable and the carrying amount exceeds the
fair value of the investment as a result of recurring and continued
operating losses at VidaPlus. Fair value of the loans receivable is
determined based on the discounted future net cash flows expected
to be generated by assets pledged against the loans. The Company
recorded an impairment of 100% of the book value of the equity
investment and convertible loan receivable.
Note 8. Stock Option Plan
Stock Option Plan
The
Company's Stock Option Plan permits the granting of stock options
to its employees, directors, consultants and independent
contractors for up to 8.0 million shares of its common stock. The
Company believes that such awards encourage employees to remain
employed by the Company and also to attract persons of exceptional
ability to become employees of the Company. On July 13, 2009, the
Company registered its 2009 Flexible Stock Plan, which increases
the total shares available to 4 million common shares. The
agreement allows the Company to issue either stock options or
common shares from this Plan.
On June
3, 2011, the Company registered its 2011 Flexible Stock Option
plan, and reserved 1,000,000 shares of the Company's common stock
for future issuance under the Plan. The Company canceled the
Company's 2010 Flexible Stock Plan, and returned 501,991 reserved
but unused common shares back to its treasury.
Stock
options that vest at the end of a one-year period are amortized
over the vesting period using the straight-line method. For stock
options awarded using graded vesting, the expense is recorded at
the beginning of each year in which a percentage of the options
vests. The Company did not issue any stock options for the years
ended December 31, 2016 and 2015.
The
Company’s stock option activity was as follows:
|
|
Weighted Average
Exercise Price
|
Weighted Avg.
Contractual
Remaining
Life
|
|
|
|
|
Outstanding,
December 31, 2014
|
5,106,775
|
1.01
|
4.41
|
Granted
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
Forfeited/Expired
|
497,411
|
-
|
-
|
Outstanding,
December 31, 2015
|
4,609,364
|
0.67
|
3.87
|
Exercisable at
December 31, 2015
|
4,609,364
|
0.67
|
3.87
|
Granted
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
Forfeited/Expired
|
150,685
|
-
|
-
|
Outstanding,
December 31, 2016
|
4,458,679
|
0.68
|
2.98
|
Exercisable,
December 31, 2016
|
4,458,679
|
0.68
|
2.98
|
The
following table summarizes significant ranges of outstanding stock
options under the stock option plan at December 31,
2016:
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Weighted
Average
Exercise
Price
|
Number
of
Options
Exercisable
|
Weighted
Average
Exercise
Price
|
$
0.33 — 1.11
|
4,458,679
|
2.98
|
$
0.68
|
4,458,679
|
$
0.68
|
|
4,458,679
|
2.98
|
$
0.68
|
4,458,679
|
$
0.68
|
Note 9. Warrant Agreements
As part
of the Settlement and Exchange Agreement entered into on December
17, 2014 between the Company and St. George, the Warrant to
Purchase Shares of Common Stock issued by the Company to St. George
on or around March 10, 2011, was terminated, cancelled or otherwise
extinguished.
The
Company has not issued any warrants since January 1, 2012. There
are no warrants outstanding and exercisable at December 31, 2016
and 2015.
Note 10. Income Tax
For the
years ended December 31, 2016 and 2015, the Company incurred a net
profit of $102,243 and $437,945, respectively. The net
deferred tax asset generated by the loss carry-forward has been
fully reserved. Based upon management’s evaluation, a
valuation allowance of 100% has been establish, since it is more
likely than not that the deferred tax assets will not be
realized. The cumulative net operating loss carry-forward is
$39,311,214 as of December 31, 2016 and will expire beginning in
the year 2033.The provision for income tax consists of the
following:
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
102,243
|
$
35,785
|
$
437,935
|
$
153,277
|
|
|
|
|
|
NOL
|
(40,867,272
)
|
|
(42,827,184
)
|
|
Bad debt
expense
|
48,554
|
16,994
|
59,311
|
20,759
|
Accounts
payable
|
151,305
|
52,957
|
152,804
|
53,481
|
Accrued
expenses
|
112,020
|
39,207
|
204,939
|
71,729
|
Deferred
revenue
|
1,430,206
|
500,572
|
1,601,432
|
560,501
|
Accounts
receivable
|
(113,316
)
|
(39,661
)
|
(349,859
)
|
(122,451
)
|
Prepaid
expense
|
(175,065
)
|
(61,273
)
|
(151,874
)
|
(53,156
)
|
Stock-based
compensation
|
-
|
|
(3,649
)
|
(1,277
)
|
Meals &
entertainment (50%)
|
112
|
39
|
8,873
|
3,106
|
|
|
|
|
|
Tax loss
(gain) for the year
|
$
(39,311,214
)
|
$
544,620
|
$
(40,867,272
)
|
$
685,969
|
The cumulative tax
effect at the expected rate of 35% of significant items comprising
our net deferred tax amount is as follows:
|
|
|
|
Deferred tax asset
attributable to:
|
|
|
Net operating loss
carryover
|
$
(13,758,925
)
|
$
(14,303,545
)
|
Non-deductible
entertainment
|
39
|
3,106
|
Bad debt
expenses
|
16,994
|
20,759
|
Deferred
revenue
|
500,572
|
560,501
|
Stock-based
compensation
|
-
|
(1,277
)
|
Others
|
(8,770
)
|
(50,397
)
|
Valuation
allowance
|
13,250,089
|
13,770,853
|
Net deferred tax
asset
|
$
-
|
$
-
|
The
Company has their tax years 2015 to 2013 open by statute for
Federal, State and Local purposes.
Note 11. Stockholders’ Equity
Preferred Stock
The
Company has 5,000,000 shares of $0.0001 par value preferred stock
authorized. The Company issued
724,000
shares of Series A Convertible Preferred Stock
in connection
with the Red Oak investment of cash proceeds of $724,000 in
accordance with the Agreement set forth in detail in Item 5.
On May 7, 2015, per the terms of the
Red Oak Agreement, the 724,000 shares of Preferred Stock held by
Red Oak automatically converted into 381,052,632 common shares of
the Company equivalent to 29.98% ownership in the
Company.
Common Stock
On May
7, 2015, the Company’s shareholders approved an amendment to
the Company’s Amended and Restated Articles of Incorporation
to increase the authorized common stock to 2,890,000,000 shares,
par value $0.0001, up from 890,000,000. This amendment was adopted
by the Company’s Board of Directors on January 21,
2015.
During
the year ended December 31, 2015, the Company issued
381,052,632 shares of common stock to Red Oak as
described above under the heading Preferred
Stock.
During
the year ended December 31, 2015, the Company
issued 1,013,514 shares of common stock to
employees as employee compensation fair value at
$3,649.
As of
December 31, 2016, the Company had 1,272,066,146 shares
outstanding. 20,000 shares remain in the Company’s
treasury.
Note 12. Subsequent Events
Amendment
to Employment Agreement
Effective
March 31, 2017,
the Company entered
into a Third Amendment to Executive Employment Agreement (the
“Third Amendment”) with Stephen Morgan (the
“Employee”), amending his original, April 1, 2015
employment agreement. The Third Amendment provides
that
the last day of the term
of Employee’s employment is extended from March 31, 2017, to
March 31, 2018, subject to the other terms and conditions of
Section 2 of the original agreement; provided, however, that (i)
the Company may change Employee’s status from full-time to
part-time employee at any time, (ii) concurrently with any such
change in status, the Company may modify Employee’s base
compensation amount and structure, and Employee’s prospective
bonus, if any, and (iii) notwithstanding any such change in status,
Employee shall remain eligible to receive the amount and other
benefits set forth in Section 5(f) in accordance with the terms and
conditions thereof.