The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2017
(Unaudited)
Note 1
Description of Business, Basis of Presentation and Significant Accounting Policies
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.
The unaudited consolidated financial statements including the Consolidated Balance Sheets as of February 28, 2017 and November 30,
2016, the related Consolidated Statements of Comprehensive Income (Loss) and Cash Flows for the three months ended February 28, 2017 and February 29, 2016 have been prepared by Cryo-Cell International, Inc. and its subsidiaries pursuant to
the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Certain financial information and note disclosures, which are normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations. It is suggested that these consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Companys November 30, 2016 Annual Report on Form
10-K.
In the opinion of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and changes in cash flows for all periods presented have been made. The results of operations for the three months ended February 28, 2017 are not necessarily indicative
of the results expected for any interim period in the future or the entire year ending November 30, 2017.
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
6
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 income from royalties paid by
licensees related to long-term storage contracts which the Company has under license agreements. Contracted storage periods are annual,
twenty-one
years and lifetime. Deferred revenue on the accompanying
consolidated balance sheets includes the portion of the annual storage fee, the
twenty-one-year
storage fee and the life-time storage fee that is being recognized over
the contractual storage period as well as royalties received from foreign licensees related to long-term storage contracts in which the Company has future obligations under the license agreement. The Company classifies deferred revenue as current if
the Company expects to recognize the related revenue over the next 12 months. The Company also records revenue within processing and storage fees from shipping and handling billed to customers when earned. Shipping and handling costs that the
Company incurs are expensed and included in cost of sales.
The Company records revenue from the sale of the PrepaCyte CB product line
upon shipment of the product to the Companys customers.
Accounts Receivable
Accounts receivable consist of uncollateralized amounts due from clients that have enrolled and processed in the umbilical cord blood stem cell
processing and storage programs and amounts due from license affiliates, and sublicensee territories. Accounts receivable are due within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts outstanding longer than
the contractual payment terms are considered past due. The Company determines its allowance by considering the length of time accounts receivable are past due, the Companys previous loss history, and the clients current ability to pay
its obligations. Therefore, if the financial condition of the Companys clients were to deteriorate beyond the estimates, the Company may have to increase the allowance for doubtful accounts which could have a negative impact on earnings. The
Company
writes-off
accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
7
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The Company has recorded a
valuation allowance of $2,301,000 and $2,301,000 as of February 28, 2017 and November 30, 2016, respectively, as the Company does not believe it is more likely than not that all future income tax benefits will be realized. When
the Company changes its determination as to the amount of deferred income tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made. The
ultimate realization of the Companys deferred income tax assets depends upon generating sufficient taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance, the Company projects future
levels of taxable income. This assessment requires significant judgment. The Company examines the evidence related to the recent history of losses, the economic conditions in which the Company operates and forecasts and projections to make that
determination.
The Company recorded U.S. income taxes of approximately $306,000 during the three months ended February 28, 2017.
There was no U.S. income tax expense for the three months ended February 29, 2016 due to the utilization of net operating losses and foreign tax credit carryforwards, which were not previously benefited in the Companys financial
statements.
The Company records foreign income taxes withheld from installment payments of
non-refundable
up-front
license fees and royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has
license agreements. The Company recognized approximately $0 and $0 for the three months ended February 28, 2017 and February 29, 2016, respectively, of foreign income tax expense. Foreign income tax expense is included in income tax
expense in the accompanying consolidated statements of comprehensive income (loss).
The Company recognizes the financial statement
benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the
more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the
unrecognized tax benefits could result from managements belief that a position can or cannot be sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the three months ended
February 28, 2017 and February 29, 2016, the Company had no provisions for interest or penalties related to uncertain tax positions.
Long-Lived Assets
The Company evaluates
the realizability of its long-lived assets, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment, such as reductions in demand or when significant economic slowdowns are present.
Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment and carrying value is in excess of fair
value, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing a discount rate. The Company did not note any impairment for the
three months ended February 28, 2017 and February 29, 2016.
8
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 fiscal year
2016 and a goodwill impairment charge of $1,777,822 was recorded during fiscal year 2016.
Stock Compensation
As of February 28, 2017, the Company has two stock-based compensation plans, which are described in Note 8 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 $77,000 and $252,000 for the three months ended February 28, 2017 and February 29, 2016, respectively, of stock-based compensation expense.
The Company recognizes stock-based compensation based on the fair value of the related awards. Under the fair value recognition guidance of
stock-based compensation accounting rules, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of
service-based vesting condition and performance-based vesting condition stock option awards is determined using the Black-Scholes valuation model. For stock option awards with only service-based vesting conditions and graded vesting features, the
Company recognizes stock compensation expense based on the graded-vesting method. To value awards with market-based vesting conditions the Company uses a binomial valuation model. The Company recognizes compensation cost for awards with market-based
vesting conditions on a graded-vesting basis over the derived service period calculated by the binomial valuation model. The use of these valuation models involves 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.
9
The Company issues equity awards with market-based vesting conditions which vest upon the
achievement of certain stock price targets. If the awards are forfeited prior to the completion of the derived service period, any recognized compensation is reversed. If the awards are forfeited after the completion of the derived service period,
the compensation cost is not reversed, even if the awards never vest.
Fair Value of Financial Instruments
Management uses a fair value hierarchy, which gives the highest priority to quoted prices in active markets. The fair value of financial
instruments is estimated based on market trading information, where available. Absent published market values for an instrument or other assets, management uses observable market data to arrive at its estimates of fair value. Management believes
that the carrying amount of cash and cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The Company believes that the fair value of
its Revenue Sharing Agreements (RSA) liability recorded on the balance sheet is between the recorded book value and up to the Companys previous settlement experience, due to the various terms and conditions associated with each
RSA.
The Company uses an accounting standard that defines fair value as an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure
fair value are as follows:
|
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
|
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
|
The following table summarizes the financial assets and liabilities measured at fair value on a
recurring basis as of February 28, 2017 and November 30, 2016, respectively, segregated among the appropriate levels within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Fair Value at
|
|
|
at February 28, 2017 Using
|
|
Description
|
|
February 28,
2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
Trading Securities
|
|
$
|
167,696
|
|
|
$
|
167,696
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
308,760
|
|
|
|
308,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
476,456
|
|
|
$
|
476,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Fair Value at
|
|
|
at November 30, 2016 Using
|
|
Description
|
|
November 30,
2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
Trading Securities
|
|
$
|
304,142
|
|
|
$
|
304,142
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
320,081
|
|
|
|
320,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
624,223
|
|
|
$
|
624,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a description of the valuation techniques used for these items, as well as the general
classification of such items pursuant to the fair value hierarchy:
Trading securities
Fair values for these investments are
based on quoted prices in active markets and are therefore classified within Level 1 of the fair value hierarchy. For trading securities, there was ($26,600) and ($19,800) in unrealized holding losses, respectively, recorded in other income and
expense on the accompanying consolidated statements of comprehensive loss for the three months ended February 28, 2017 and February 29, 2016, respectively.
Available-for-sale
securities
These investments
are classified as available for sale and consist of marketable equity securities that we intend to hold for an indefinite period of time. Investments are stated at fair value and unrealized holding gains and losses are reported as a component of
accumulated other comprehensive income until realized. Realized gains or losses on disposition of investments are computed using the first in, first out (FIFO) method and reported as income or loss in the period of disposition in the accompanying
consolidated statements of comprehensive income (loss). For
available-for-sale
securities, there was approximately ($7,000) and ($94,000) in unrealized holding losses,
net of tax, respectively, reported as comprehensive loss on the accompanying statements of comprehensive income (loss) for the three months ended February 28, 2017 and February 29, 2016, 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 was paying $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. Effective October 13, 2014, the Company no longer offers the Cryo-Cell Cares
TM
program to new clients. The product warranty is 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
11
failure rates and the historical usage and failure rates in other private and public cord blood banks based on published data. The Companys estimates of expected usage and engraftment
failure could change as a result of changes in actual usage rates or failure rates and such changes would require an adjustment to the established reserves. The historical usage and failure rates have been very low and a small increase in the number
of transplants or engraftment failures could cause a significant increase in the estimated rates used in determining the Companys reserve. In addition, the reserve will increase as additional umbilical cord blood specimens are stored which are
subject to the warranty. As of February 28, 2017 and November 30, 2016 the Company recorded reserves under these programs in the amounts of approximately $17,000 and $17,000, respectively, which are included in accrued expenses in the
accompanying consolidated balance sheets.
Recently Issued Accounting Pronouncements
In 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.
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
12
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 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.
13
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 May 2014, the FASB issued Accounting Standards Update
No. 2014-09
, Revenue from Contracts with Customers (Topic 606).
This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer
of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of
revenue and cash flows arising from customer contracts. In August 2015, the FASB issued Accounting Standards Update
No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date,
which defers the effective date of the guidance in Accounting Standards Update
No. 2014-09
by one year. This update is now effective for annual and interim periods beginning after
December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods
within that reporting period. This update permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard its
consolidated financial statements and related disclosures.
Note 2 Goodwill
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 was 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.
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.
Goodwill represents the excess of the purchase price of the assets acquired from CMDG over the estimated fair
value of the net tangible and identifiable intangible assets acquired. The annual impairment assessment is performed as of September 30
th
each year, 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.
14
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.
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 February 28, 2017, and November 30, 2016, there is
no goodwill is reflected on the consolidated balance sheets.
The operating results of Prepacyte CB have been included in the consolidated
statements of comprehensive income (loss) since the date of acquisition.
15
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
February 28, 2017 and November 30, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2017
|
|
|
November 30, 2016
|
|
Raw materials
|
|
$
|
|
|
|
$
|
9,100
|
|
Work-in-process
|
|
|
70,753
|
|
|
|
|
|
Finished goods
|
|
|
150,213
|
|
|
|
261,000
|
|
Collection kits
|
|
|
72,713
|
|
|
|
98,760
|
|
Inventory reserve
|
|
|
(7,718
|
)
|
|
|
(7,718
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
285,961
|
|
|
$
|
361,142
|
|
|
|
|
|
|
|
|
|
|
Note 4 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 2). 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 during the third quarter of fiscal 2016.
Intangible assets were as follows
as of February 28, 2017 and November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives
|
|
|
February 28, 2017
|
|
|
November 30, 2016
|
|
Patents
|
|
|
10-20 years
|
|
|
$
|
34,570
|
|
|
$
|
34,570
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(10,403
|
)
|
|
|
(9,937
|
)
|
License agreement
|
|
|
10 years
|
|
|
|
470,000
|
|
|
|
470,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
|
|
(185,000
|
)
|
|
|
(185,000
|
)
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(68,111
|
)
|
|
|
(60,194
|
)
|
Customer relationships
|
|
|
15 years
|
|
|
|
41,000
|
|
|
|
41,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
|
|
(26,267
|
)
|
|
|
(26,267
|
)
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(3,435
|
)
|
|
|
(3,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Intangible Assets
|
|
|
$
|
252,354
|
|
|
$
|
261,000
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangibles was approximately $9,000 and $12,000 for the three months ended
February 28, 2017 and February 29, 2016, respectively.
Note 5 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.
16
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 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. As of the three months ended February 29, 2016, the Company recognized $14,391 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. As of February 28, 2017 and November 30, 2016, principal
paid to date is $1,133,000 and $633,000, respectively, at a rate of 3.75% per annum plus LIBOR. As of the three months ended February 28, 2017 and February 29, 2016, the Company paid interest of $102,488 and $0, respectively, which is
reflected in interest expense on the accompanying consolidated statements of comprehensive income (loss).
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 February 28, 2017 and February 29, 2016, the Company paid interest of $19,500 and $0,
respectively, which is reflected in interest expense on the accompanying consolidated statements of comprehensive income (loss).
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 the three months ended February 28, 2017 and February 29, 2016, $34,153 and $0, respectively, of the debt issuance costs were amortized and
are reflected in interest expense on the accompanying consolidated statements of comprehensive income (loss).
17
As of February 28, 2017 and November 30, 2016, the note payable obligation was as
follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2017
|
|
|
November 30, 2016
|
|
Note payable
|
|
$
|
9,650,100
|
|
|
$
|
10,150,100
|
|
Unamortized debt issuance costs
|
|
|
(296,197
|
)
|
|
|
(330,350
|
)
|
|
|
|
|
|
|
|
|
|
Net note payable
|
|
$
|
9,353,903
|
|
|
$
|
9,819,750
|
|
|
|
|
|
|
|
|
|
|
Current portion of note payable
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
Long-term note payable, net of debt issuance costs
|
|
|
7,353,903
|
|
|
|
7,819,750
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,353,903
|
|
|
$
|
9,819,750
|
|
|
|
|
|
|
|
|
|
|
Interest expense on the note payable for the three months ended February 28, 2017 was as follows:
|
|
|
|
|
|
|
February 28, 2017
|
|
Interest expense on notes payable
|
|
$
|
121,988
|
|
Debt issuance costs
|
|
|
34,153
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
156,141
|
|
|
|
|
|
|
There was $0 interest expense related to the note payable for the three months ended February 29, 2016.
Note 6 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).
|
The following table shows, by segment: net revenue, cost of sales, operating profit, depreciation and amortization, interest expense, income tax benefit
(expense) and other comprehensive income for the three months ended February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
For the three
months ended
February 28,
2017
|
|
|
For the three
months ended
February 29,
2016
|
|
Net revenue
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
5,611,824
|
|
|
$
|
5,020,459
|
|
Prepacyte
®
-CB
|
|
|
164,800
|
|
|
|
131,739
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
5,776,624
|
|
|
$
|
5,152,198
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,392,795
|
|
|
$
|
1,245,023
|
|
Prepacyte
®
-CB
|
|
|
123,302
|
|
|
|
103,268
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
1,516,097
|
|
|
$
|
1,348,291
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
22,566
|
|
|
$
|
28,678
|
|
Prepacyte
®
-CB
|
|
|
9,064
|
|
|
|
12,870
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
31,630
|
|
|
$
|
41,548
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,083,692
|
|
|
$
|
127,951
|
|
Prepacyte
®
-CB
|
|
|
32,434
|
|
|
|
28,471
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
1,116,126
|
|
|
$
|
156,422
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
297,044
|
|
|
$
|
246,943
|
|
Prepacyte
®
-CB
|
|
|
|
|
|
|
14,391
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
297,044
|
|
|
$
|
261,334
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
(305,717
|
)
|
|
$
|
|
|
Prepacyte
®
-CB
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
$
|
(305,717
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
(7,061
|
)
|
|
$
|
(93,727
|
)
|
Prepacyte
®
-CB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
(7,061
|
)
|
|
$
|
(93,727
|
)
|
|
|
|
|
|
As of
February 28, 2017
|
|
|
As of
November 30, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
19,186,558
|
|
|
$
|
18,960,261
|
|
Prepacyte
®
-CB
|
|
|
566,797
|
|
|
|
578,207
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,753,355
|
|
|
$
|
19,538,468
|
|
|
|
|
|
|
|
|
|
|
Note 7 Income (Loss) per Common Share
Net income (loss) per common share data are based on net income. The following table sets forth the calculation of basic and diluted (loss)
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
February 28, 2017
|
|
|
For the three months ended
February 29, 2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
486,923
|
|
|
($
|
122,936
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding-basic
|
|
|
6,901,108
|
|
|
|
8,971,373
|
|
Dilutive common shares issuable upon exercise of stock options
|
|
|
536,135
|
|
|
|
|
|
Weighted-average shares-diluted
|
|
|
7,437,243
|
|
|
|
8,971,373
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
($
|
0.01
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
($
|
0.01
|
)
|
|
|
|
|
|
|
|
|
|
For the three months ended February 28, 2017, the Company included the effect of all outstanding stock
options in the computation of diluted earnings per share, as all of the outstanding stock options were in the money as of February 28, 2017. For the three months ended February 29, 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.
Note 8 Stockholders Equity
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
February 28, 2017 and November 30, 2016, there were 550,500 and 572,281 options issued, but not yet exercised, under the 2006 Plan, respectively. As of February 28, 2017, there were 229,429 shares available for future issuance under
the 2006 Plan.
The Company also maintains the 2012 Equity Incentive Plan (the 2012 Plan) which became effective
December 1, 2011 as approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting on July 10, 2012. The 2012 Plan originally reserved 1,500,000 shares of the Companys common stock for issuance
pursuant to stock options, restricted stock, SARs, and other stock awards (i.e. performance shares and performance units). In May 2012, the Board of Directors approved an amendment to the 2012 Plan to increase the number of shares of the
Companys common stock reserved for issuance to 2,500,000 shares. As of February 28, 2017, 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 February 28, 2017, there were 1,053,332 shares available for future issuance under the 2012 Plan.
Service-based vesting condition options
The fair value of each option award is estimated on the date of the grant using the Black-Scholes valuation model that uses the assumptions
noted in the following table. Expected volatility is based on the historical volatility of the Companys stock over the most recent period commensurate with the expected life of the Companys stock options. The Company uses historical data
to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of
options granted to employees is calculated, in accordance with the simplified method for plain vanilla stock options allowed under GAAP. Expected dividends are based on the historical trend of the Company not issuing
dividends.
There were no options granted during the three months ended February 28, 2017 and February 29, 2016, respectively.
20
Stock option activity for the three months ended February 28, 2017, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
Outstanding at November 30, 2016
|
|
|
1,142,010
|
|
|
$
|
2.36
|
|
|
|
4.99
|
|
|
$
|
1,095,525
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(19,281
|
)
|
|
|
1.74
|
|
|
|
|
|
|
|
57,949
|
|
Expired/forfeited
|
|
|
(2,500
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2017
|
|
|
1,120,229
|
|
|
$
|
2.37
|
|
|
|
4.82
|
|
|
$
|
2,225,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 28, 2017
|
|
|
1,041,780
|
|
|
$
|
2.31
|
|
|
|
4.56
|
|
|
$
|
2,132,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 February 28, 2017 or February 29, 2016, as applicable. The intrinsic value of the Companys stock options changes based on the closing price of
the Companys stock.
For the three months ended February 28, 2017, the Company issued 19,281 common shares to option holders
who exercised options for $33,496.
There were no options exercised during the three months ended February 29, 2016.
Significant option groups exercisable at February 28, 2017 and related price and contractual life information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$1.01 to $2.00
|
|
|
427,500
|
|
|
|
4.65
|
|
|
$
|
1.73
|
|
|
|
427,500
|
|
|
$
|
1.73
|
|
$2.01 to $3.00
|
|
|
465,500
|
|
|
|
3.28
|
|
|
$
|
2.57
|
|
|
|
465,500
|
|
|
$
|
2.57
|
|
$3.01 to $4.00
|
|
|
227,229
|
|
|
|
8.32
|
|
|
$
|
3.18
|
|
|
|
148,780
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,120,229
|
|
|
|
4.82
|
|
|
$
|
2.37
|
|
|
|
1,041,780
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
A summary of the status of the Companys
non-vested
options as of February 28, 2017, and changes during the three months ended February 28, 2017, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average
Grant-Date
Fair Value
|
|
|
|
|
|
Non-vested
at November 30, 2016
|
|
|
97,406
|
|
|
$
|
1.84
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(18,957
|
)
|
|
|
1.83
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at February 28, 2017
|
|
|
78,449
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017 there was approximately $123,000 of total unrecognized compensation cost related
to
non-vested
service related 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 .74 years as of
February 28, 2017. The total fair value of shares vested during the three months ended February 28, 2017 was approximately $35,000.
Performance and market-based vesting condition options
There were no performance-based or market-based vesting condition options granted during the three months ended February 28, 2017 and
February 29, 2016.
As of February 28, 2017 and February 29, 2016, 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 December 1, 2014 and the remaining 1/3 on December 1, 2015. As of February 28, 2017 and February 29, 2016, these shares are fully vested and 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 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 February 28, 2015, certain
market and performance thresholds were met during fiscal year 2014 and the Board agreed to grant David Portnoy and Mark Portnoy 31,087 and 27,033 shares of restricted common shares, respectively. The fair value of these shares as of
February 28, 2015 was $134,000 and is reflected as selling, general and administrative expense in the accompanying consolidated statements of comprehensive income (loss). As of February 29, 2016, certain market and performance thresholds
were met during fiscal year 2015 and the Board agreed to grant David Portnoy and Mark Portnoy 118,062 and 102,663 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 income (loss) for the year ended November 30, 2015. There was approximately $242,000
22
of total unrecognized compensation cost as of November 30, 2015 which was recognized during the first quarter of fiscal year 2016 and is reflected as selling, general and administrative
expense in the accompanying consolidated statements of comprehensive income (loss) as the Board granted certain subjective performance shares with a grant date during the 2016 fiscal year.
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 granted 183,145 and 159,257 shares of common stock to David Portnoy and Mark Portnoy, respectively. The fair value of the shares
granted was approximately $1,252,000 and was reflected as selling, general and administrative expense in the consolidated statements of comprehensive income (loss) for the year ended November 30, 2016. There was $0 of total unrecognized
compensation cost as of February 28, 2017.
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 granted 19,620 shares
of common stock to Oleg Mikulinksy. The fair value of the shares granted was approximately $31,747. There was $0 of total unrecognized compensation cost as of February 28, 2017.
Note 9 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.
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 February 28, 2017, Lifecell has paid the Company $5.1 Million for royalties due under the terms of the License and Royalty Agreement.
23
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.
For the three months ended February 28, 2017 and February 29, 2016, the
Company recognized $0 and $0, respectively, for initial license fees and processing and storage royalties.
Note 10 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 February 28, 2017.
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 11 Share Repurchase Plan
In December 2011, the Companys Board of Directors authorized management at its discretion to repurchase up to one million (1,000,000)
shares of the Companys outstanding common stock. On June 6, 2012, the Board of Directors of the Company increased the number of shares of the Companys outstanding common stock that management is authorized to repurchase to up to
three million (3,000,000). On April 8, 2015, the Board of Directors of the Company increased the number of shares of the Companys outstanding common stock that management is authorized to repurchase to up to six million (6,000,000)
shares. On October 6, 2016, the Board of Directors of the Company increased the number of shares of the Companys outstanding common stock that management is authorized to repurchase to up to eight million (8,000,000) shares. The
repurchases must be effectuated through open market purchases, privately negotiated block trades, unsolicited negotiated transactions, and/or pursuant to any trading plan that may be adopted in accordance with Rule
10b5-1
of the Securities and Exchange Commission or in such other manner as will comply with the provisions of the Securities Exchange Act of 1934.
On June 30, 2015, the Company commenced a partial tender offer to purchase up to 750,000 shares of its common stock, at a price of $3.25
per share. The maximum number of shares proposed to be purchased in the tender offer represented 7.76% of Cryo-Cells outstanding common shares (including shares of unvested restricted stock) as of June 30, 2015. On June 29, 2015, the
last trading day prior to the commencement of the tender offer, the last sale price of Cryo-Cells shares reported on the OTCBB was $2.29 per share. The tender offer expired on July 28, 2015. Cryo-Cell accepted for purchase 557,805 shares
of its common stock, including all odd lots properly tendered, at a purchase price of $3.25 per share, for an aggregate cost of $1,812,866 excluding fees and expenses relating to the tender offer.
24
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
February 28, 2017, the Company had repurchased an aggregate of 5,733,900 shares of the Companys common stock at an average price of $3.35 per share through open market and privately negotiated transactions. The Company purchased 19,729
and 133,575 shares of the Companys common stock during the first quarters of fiscal 2017 and 2016, respectively, at an average price of $4.50 per share and $3.06 per share, respectively.
The repurchased shares will be held as treasury stock at cost and have been removed from common shares outstanding as of February 28,
2017 and November 30, 2016. As of February 28, 2017 and November 30, 2016, 5,734,597 and 5,714,868 shares, respectively, were held as treasury stock.
Subsequent to the balance sheet date, the Company repurchased an additional 4,265 shares of the Companys common stock at an average
price of 4.54 per share through open market and privately negotiated transactions.