Quarterly Report (10-q)

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended May 31, 2017

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to

Commission File Number 0-23386

CRYO-CELL INTERNATIONAL, INC.

(Exact name of Registrant as Specified in its Charter)

DELAWARE

22-3023093

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

700 Brooker Creek Blvd. Oldsmar, FL 34677

(Address of Principal Executive Offices) (Zip Code)

Issuer’s phone number, including area code: (813) 749-2100

(Former name, former address and former fiscal year, if changed since last report).

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ☒ No ☐ Not Applicable ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☒

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

State the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date. As of July 7, 2017, 12,893,267 shares of $0.01 par value common stock were issued and 7,103,041 were outstanding.

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


	PAGE

PART I - FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements

Consolidated Balance Sheets		3

Consolidated Statements of Comprehensive Income		4

Consolidated Statements of Cash Flows		5

Notes to Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures about Market Risk		34

Item 4. Controls and Procedures		34

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		35

Item 1A. Risk Factors		35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36

Item 3. Defaults Upon Senior Securities		36

Item 4. Mine Safety Disclosures		36

Item 5. Other Information		36

Item 6. Exhibits		37

SIGNATURES		38

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	May 31,			November 30,
	2017			2016
ASSETS
Current Assets
Cash and cash equivalents	$	4,697,937		$	3,499,881
Marketable securities		478,340			624,223
Accounts receivable (net of allowance for doubtful accounts of $2,232,254 and $2,278,862, respectively)		4,556,040			4,052,728
Prepaid expenses		498,704			395,501
Inventory, net		296,258			361,142
Other current assets		155,403			78,448

Total current assets		10,682,682			9,011,923

Property and Equipment-net		887,551			979,463

Other Assets
Intangible assets, net		243,709			261,000
Deferred tax assets		9,193,787			9,260,582
Deposits and other assets, net		28,888			25,500

Total other assets		9,466,384			9,547,082

Total assets	$	21,036,617		$	19,538,468

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable	$	1,185,069		$	1,485,430
Accrued expenses		2,635,778			2,554,330
Current portion of note payable		2,000,000			2,000,000
Deferred revenue		7,156,482			7,071,924

Total current liabilities		12,977,329			13,111,684

Other Liabilities
Deferred revenue, net of current portion		14,033,361			12,596,292
Note payable, net of current portion and debt issuance costs		6,886,192			7,819,750
Long-term liability—revenue sharing agreements		1,425,000			1,425,000

Total other liabilities		22,344,553			21,841,042

Total liabilities		35,321,882			34,952,726

Commitments and contingencies (Note 10)

Stockholders’ Deficit
Preferred stock ($.01 par value, 500,000 authorized and none issued and outstanding)		—			—
Series A Junior participating preferred stock ($.01 par value, 20,000 authorized and none issued and outstanding)		—			—
Common stock ($.01 par value, 20,000,000 authorized; 12,893,267 issued and 7,104,664 outstanding as of May 31, 2017 and 12,504,464 issued and 6,789,596 outstanding as of November 30, 2016)		128,932			125,044
Additional paid-in capital		30,859,100			30,340,573
Treasury stock, at cost		(19,528,417	)		(19,124,492	)
Accumulated other comprehensive income		61,048			34,408
Accumulated deficit		(25,805,928	)		(26,789,791	)

Total stockholders’ deficit		(14,285,265	)		(15,414,258	)

Total liabilities and stockholders’ deficit	$	21,036,617		$	19,538,468

The accompanying notes are an integral part of these consolidated financial statements.

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months Ended						For the Six Months Ended
	May 31,			May 31,			May 31,			May 31,
	2017			2016			2017			2016
Revenue:
Processing and storage fees	$	5,846,227		$	5,349,745		$	11,458,051		$	10,370,204
Licensee and royalty income		328,669			356,932			328,669			356,932
Product revenue		61,855			66,379			226,655			198,118

Total revenue		6,236,751			5,773,056			12,013,375			10,925,254

Costs and Expenses:
Cost of sales		1,591,966			1,431,100			3,108,063			2,779,391
Selling, general and administrative expenses		3,411,759			3,405,712			6,509,914			7,002,965
Research, development and related engineering		8,840			11,988			23,456			20,672
Depreciation and amortization		31,936			41,872			63,566			83,420

Total costs and expenses		5,044,501			4,890,672			9,704,999			9,886,448

Operating Income		1,192,250			882,384			2,308,376			1,038,806

Other Income (Expense):
Other expense		(38,259	)		(647	)		(64,701	)		(18,671	)
Interest expense		(325,314	)		(343,463	)		(622,358	)		(604,797	)
Gain on extinguishment of debt		—			300,593			—			300,593

Total other expense		(363,573	)		(43,517	)		(687,059	)		(322,875	)

Income before income tax expense		828,677			838,867			1,621,317			715,931
Income tax expense		(331,737	)		(201,735	)		(637,454	)		(201,735	)

Net Income	$	496,940		$	637,132		$	983,863		$	514,196

Net income per common share—basic	$	0.07		$	0.07		$	0.14		$	0.06

Weighted average common shares outstanding—basic		7,144,775			9,087,807			7,024,280			9,029,909

Net income per common share—diluted	$	0.06		$	0.07		$	0.13		$	0.06

Weighted average common shares outstanding—diluted		7,726,560			9,397,230			7,582,535			9,336,538

Other Comprehensive Income
Unrealized gain (loss) on marketable securities (net of tax)	$	33,701		$	(6,493	)	$	26,640		$	(100,220	)

Comprehensive Income	$	530,641		$	630,639		$	1,010,503		$	413,976

The accompanying notes are an integral part of these consolidated financial statements.

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended
	May 31,			May 31,
	2017			2016
Cash flows from operating activities:
Net income	$	983,863		$	514,196
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		113,708			147,652
Compensatory element of stock options		471,019			388,115
Provision for doubtful accounts		81,563			375,199
Gain on extinguishment of debt		—			(300,593	)
Deferred income tax benefit		66,795			—
Amortization of debt issuance costs		66,442			—
Changes in assets and liabilities:
Accounts receivable		(584,875	)		(1,018,577	)
Prepaid expenses		(103,203	)		21,550
Inventory		64,884			16,028
Other current assets		(76,955	)		47,380
Deposits and other assets, net		(3,388	)		15,111
Accounts payable		(300,361	)		347,008
Accrued expenses		81,448			(39,042	)
Deferred revenue		1,521,627			830,799

Net cash provided by operating activities		2,382,567			1,344,826

Cash flows from investing activities:
Release of restricted cash held in escrow		—			204,344
Purchases of property and equipment		(4,505	)		(292,242	)
Sales (purchases) of marketable securities and other investments, net		172,523			(224,047	)

Net cash provided by (used in) investing activities		168,018			(311,945	)

Cash flows from financing activities:
Treasury stock purchases		(403,925	)		(443,207	)
Repayments of note payable		(1,000,000	)		(875,774	)
Proceeds from the exercise of stock options		51,396			—
Proceeds from note payable		—			650,100

Net cash used in financing activities		(1,352,529	)		(668,881	)

Increase in cash and cash equivalents		1,198,056			364,000
Cash and cash equivalents—beginning of period		3,499,881			4,152,162

Cash and cash equivalents—end of period	$	4,697,937		$	4,516,162

Supplemental non-cash investing activities:
Unrealized gain (loss) on marketable securities, net of tax	$	26,640		$	(100,220	)

The accompanying notes are an integral part of these consolidated financial statements.

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

May 31, 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 Company’s 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 May 31, 2017 and November 30, 2016, the related Consolidated Statements of Comprehensive Income for the three and six months ended May 31, 2017 and May 31, 2016 and the Consolidated Statements of Cash Flows for the six months ended May 31, 2017 and May 31, 2016 have been prepared by Cryo-Cell International, Inc. and its subsidiaries (“the Company” or “Cryo-Cell”) pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Certain financial information and note disclosures, which are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s 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 and six months ended May 31, 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 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 Company’s 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 Company’s 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 Company’s 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 Company’s customers.

Income Taxes

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The Company has recorded a valuation allowance of $2,301,000 and $2,301,000 as of May 31, 2017 and November 30, 2016, 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 Company’s 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 $296,000 and $148,000, for the three months ended May 31, 2017 and May 31, 2016, respectively. The Company recorded U.S. income taxes of approximately $602,000 and $148,000 for the six months ended May 31, 2017 and May 31, 2016, respectively.

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 $36,000 and $54,000 for the three months ended May 31, 2017 and 2016, respectively, of foreign income tax expense. The Company recognized approximately $36,000 and $54,000 for the six months ended May 31, 2017 and 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.

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 management’s belief that a position can or cannot be sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the three and six months ended May 31, 2017 and May 31, 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 and six months ended May 31, 2017 and 2016.

Goodwill

Goodwill represents the excess of the purchase price of the assets acquired from CytoMedical Design Group LLC (“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 May 31, 2017, the Company has two stock-based compensation plans, which are described in Note 8 to the unaudited consolidated financial statements. The Company’s 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 $394,000 and $136,000 for the three months ended May 31, 2017 and May 31, 2016, respectively, of stock compensation expense. The Company recognized approximately $471,000 and $388,000 for the six months ended May 31, 2017 and May 31, 2016, respectively, of stock compensation expense.

The Company recognizes stock-based compensation based on the fair value of the related awards. Under the fair value recognition guidance of stock-based compensation accounting rules, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of service-based vesting condition and performance-based vesting condition stock option awards is determined using the Black-Scholes valuation model. For stock option awards with only service-based vesting conditions and graded vesting features, the Company recognizes stock compensation expense based on the graded-vesting method. To value awards with market-based vesting conditions the Company uses a binomial valuation model. The Company recognizes compensation cost for awards with market-based vesting conditions on a graded-vesting basis over the derived service period calculated by the binomial valuation model. The use of these valuation models 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.

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 Company’s 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 May 31, 2017 and November 30, 2016, respectively, segregated among the appropriate levels within the fair value hierarchy:


	Fair Value at May 31, 2017		Fair Value Measurements at May 31, 2017 Using
Description	Fair Value at May 31, 2017		Level 1		Level 2		Level 3
Assets:
Trading securities	$	112,976	$	112,976		—		—
Available-for-sale securities		365,364		365,364		—		—

Total	$	478,340	$	478,340		—		—


	Fair Value at November 30, 2016		Fair Value Measurements at November 30, 2016 Using
Description	Fair Value at 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 ($38,590) and ($823) in unrealized holding loss, respectively, recorded in other income and expense on the accompanying consolidated statements of comprehensive income for the three months ended May 31, 2017 and 2016. For trading securities, there was ($65,210) and ($20,652) in unrealized holding loss, respectively, recorded in other income and expense on the accompanying consolidated statements of comprehensive income for the six months ended May 31, 2017 and 2016.

Available-for-sale securities – These investments are classified as available for sale and consist of marketable equity securities that we intend to hold for an indefinite period of time. Investments are stated at fair value and unrealized holding gains and losses are reported as a component of accumulated other comprehensive income until realized. Realized gains or losses on disposition of investments are computed using the first in, first out (FIFO) method and reported as income or loss in the period of disposition in the accompanying consolidated statements of comprehensive income. For available-for-sale securities, there was $33,701 and ($6,493) in unrealized holding gain and loss, net of tax, respectively, reported as comprehensive income on the accompanying statements of comprehensive income for the three months ended May 31, 2017 and 2016. For available-for-sale securities, there was $26,640 and ($100,220) in unrealized holding gain and loss, net of tax, respectively, reported as a component of comprehensive income on the accompanying consolidated statements of comprehensive income for the six month period ended May 31, 2017 and 2016.

Product Warranty and Cryo-Cell Cares ^TM Program

In December 2005, the Company began providing its customers that enrolled after December 2005 a payment warranty under which the Company agrees to pay $50,000 to its client if the umbilical cord blood product retrieved is used for a stem cell transplant for the donor or an immediate family member and fails to engraft, subject to various restrictions. Effective February 1, 2012, the Company increased the $50,000 payment warranty to a $75,000 payment warranty to all of its new clients. Additionally, under the Cryo-Cell Cares ^TM program, the Company will pay $10,000 to the client to offset personal expenses if the umbilical cord blood product is used for bone marrow reconstitution in a myeloblative transplant procedure. The product warranty and the Cryo-Cell Cares program are available to clients who enroll under this structure for as long as the specimen is stored with the Company. The Company has not experienced any claims under the warranty program nor has it incurred costs related to these warranties. The Company does not maintain insurance for this warranty program and therefore maintains reserves to cover any estimated potential liabilities. The Company’s reserve balance is based on the $75,000 or $50,000 (as applicable) maximum payment and the $10,000 maximum expense reimbursement multiplied by formulas to determine the projected number of units requiring a payout. The Company determined the estimated expected usage and engraftment failure rates based on an analysis of the historical usage and failure rates and the historical usage and failure rates in other private and public cord blood banks based on published data. The Company’s 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 Company’s reserve. In addition, the reserve will increase as additional umbilical cord blood specimens are stored which are subject to the warranty. As of May 31, 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 May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This update provides clarity, reduces the diversity in practice, and the cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, although early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on our financial statements.

Note 2 – Goodwill

On June 11, 2015, the Company entered into an Asset Purchase Agreement (the “APA”) with 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 30th 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.

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 May 31, 2017, and November 30, 2016, there is no goodwill reflected on the consolidated balance sheets.

The operating results of PrepaCyte CB have been included in the consolidated statements of comprehensive income since the date of acquisition.

Note 3 – Inventory

The components of inventory at May 31, 2017 and November 30, 2016 are as follows:


	May 31, 2017			November 30, 2016
Raw materials	$	—		$	9,100
Work-in-process		79,263			—
Finished goods		198,825			261,000
Collection kits		25,888			98,760
Inventory reserve		(7,718	)		(7,718	)

Total inventory	$	296,258		$	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 Company’s 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 Company’s 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 May 31, 2017 and November 30, 2016:


	Useful lives		May 31, 2017			November 30, 2016
Patents		10-20 years	$	34,570		$	34,570
Less: Accumulated amortization				(10,869	)		(9,937	)
License agreement		10 years		470,000			470,000
Less: Intangible asset impairment				(185,000	)		(185,000	)
Less: Accumulated amortization				(76,028	)		(60,194	)
Customer relationships		15 years		41,000			41,000
Less: Intangible asset impairment				(26,267	)		(26,267	)
Less: Accumulated amortization				(3,697	)		(3,172	)

Net Intangible Assets			$	243,709		$	261,000

Amortization expense of intangibles was approximately $9,000 and $13,000 for the three months ended May 31, 2017 and May 31, 2016, respectively. Amortization expense of intangibles was approximately 17,000 and $25,000 for the six months ended May 31, 2017 and May 31, 2016, respectively.

Note 5 – Notes Payable

On June 30, 2015, the Company entered into a note payable in the amount of $1,300,000 in connection with the APA (Note 2). The note was payable in 48 monthly installments of $29,938 including principal and interest at the rate of 5% per annum, commencing on July 31, 2015, and ending on June 30, 2019. Pursuant to the APA, the note was secured by all assets, inventory, molds and tools sold and transferred to the Company, tangible personal property held for sale or lease, accounts, contract rights, and other rights to payment and general intangibles.

On April 22, 2016 the Company paid $778,287 which constituted payment in full of the Company’s 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 three and six months ended May 31, 2016 on the accompanying consolidated statements of comprehensive income. As of the three months ended May 31, 2016, the Company recognized $7,874 of interest expense related to the note payable. As of the six months ended May 31, 2016, the Company recognized $22,265 of interest expense related to the note payable.

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 Company’s 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 May 31, 2017 and November 30, 2016, principal paid to date is $1,633,000 and $633,000, respectively, at a rate of 3.75% per annum plus LIBOR. As of the three month and six months ended May 31, 2017, the Company paid interest of $104,030 and $206,518, respectively, which is reflected in interest expense on the accompanying consolidated statements of comprehensive income. As of the three and six months ended May 31, 2016, the Company paid interest of $0 and $0, respectively.

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 were to be used by the Company to fund continued repurchases of the Company’s 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 was payable monthly with a maturity date of July 2021, at which time, the principal amount of $650,000 was payable. On June 5, 2017, the principal sum of $650,000 plus interest of $867 was paid to CrowdOut and the subordinated loan was paid in full. As of the three and six months ended May 31, 2017, the Company paid interest of $19,933 and $39,433, respectively which is reflected in interest expense on the accompanying consolidated statements of comprehensive income. As of the three and six months ended May 31, 2016, the Company paid interest of $0 and $0, respectively.

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 loan 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 and six months ended May 31, 2017, $32,289 and $66,442, respectively, of the debt issuance costs were amortized and are reflected in interest expense on the accompanying consolidated statements of comprehensive income. As of the three and six months ended May 31, 2016, $0 and $0, respectively, of the debt issuance costs were amortized.

As of May 31, 2017 and November 30, 2016, the note payable obligation was as follows:


	May 31, 2017			November 30, 2016
Note payable	$	9,150,100		$	10,150,100
Unamortized debt issuance costs		(263,908	)		(330,350	)

Net note payable	$	8,886,192		$	9,819,750

Current portion of note payable	$	2,000,000		$	2,000,000
Long-term note payable, net of debt issuance costs		6,886,192			7,819,750

Total	$	8,886,192		$	9,819,750

Interest expense on the note payable for the three and six months ended May 31, 2017 was as follows:


	For the three months ended May 31, 2017		For the six months ended May 31, 2017
Interest expense on notes payable	$	123,963	$	245,951
Debt issuance costs		32,289		66,442

Total interest expense	$	156,252	$	312,393

There was $0 interest expense related to the note payable for the three and six months ended May 31, 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:

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”).

The manufacture of PrepaCyte ^® CB units, the processing technology used to process umbilical cord blood stem cells. Revenue is generated from the sales of the PrepaCyte ^® CB units (the “PrepaCyte ^® CB”).

The following table shows, by segment: net revenue, cost of sales, operating profit, depreciation and amortization, interest expense, income tax benefit (expense) and other comprehensive income for the three months and six months ended May 31, 2017:


	For the three months ended May 31, 2017			For the six months ended May 31, 2017
Net revenue
Umbilical cord blood and cord tissue stem cell service	$	6,174,896		$	11,786,720
PrepaCyte ^® -CB		61,855			226,655

Total net revenue	$	6,236,751		$	12,013,375


Cost of sales
Umbilical cord blood and cord tissue stem cell service	$	1,517,078		$	2,909,873
PrepaCyte ^® -CB		74,888			198,190

Total cost of sales	$	1,591,966		$	3,108,063


Depreciation and amortization
Umbilical cord blood and cord tissue stem cell service	$	22,873		$	45,439
PrepaCyte ^® -CB		9,063			18,127

Total depreciation and amortization	$	31,936		$	63,566


Operating income (loss)
Umbilical cord blood and cord tissue stem cell service	$	1,214,346		$	2,298,038
PrepaCyte ^® -CB		(22,096	)		10,338

Total operating income	$	1,192,250		$	2,308,376


Interest expense
Umbilical cord blood and cord tissue stem cell service	$	325,314		$	622,358
PrepaCyte ^® -CB		—			—

Total interest expense	$	325,314		$	622,358


Income tax expense
Umbilical cord blood and cord tissue stem cell service	$	(331,737	)	$	(637,454	)
PrepaCyte ^® -CB		—			—

Total income tax expense	$	(331,737	)	$	(637,454	)

The following table shows the assets by segment as of May 31, 2017 and November 30, 2016:


	As of May 31, 2017		As of November 30, 2016
Assets
Umbilical cord blood and cord tissue stem cell service	$	20,562,496	$	18,960,261
PrepaCyte ^® -CB		474,121		578,207

Total assets	$	21,036,617	$	19,538,468


	For the three months ended May 31, 2016			For the six months ended May 31, 2016
Net revenue
Umbilical cord blood and cord tissue stem cell service	$	5,706,677		$	10,727,136
PrepaCyte ^® -CB		66,379			198,118

Total net revenue	$	5,773,056		$	10,925,254


Cost of sales
Umbilical cord blood and cord tissue stem cell service	$	1,345,370		$	2,590,393
PrepaCyte ^® -CB		85,730			188,998

Total cost of sales	$	1,431,100		$	2,779,391


Depreciation and amortization
Umbilical cord blood and cord tissue stem cell service	$	28,555		$	57,233
PrepaCyte ^® -CB		13,317			26,187

Total depreciation and amortization	$	41,872		$	83,420


Operating income (loss)
Umbilical cord blood and cord tissue stem cell service	$	915,052		$	1,056,069
PrepaCyte ^® -CB		(32,668	)		(17,263	)

Total operating income	$	882,384		$	1,038,806


Interest expense
Umbilical cord blood and cord tissue stem cell service	$	335,589		$	582,532
PrepaCyte ^® -CB		7,874			22,265

Total interest expense	$	343,463		$	604,797


Income expense
Umbilical cord blood and cord tissue stem cell service	$	(201,735	)	$	(201,735	)
PrepaCyte ^® -CB		—			—

Total income expense	$	(201,735	)	$	(201,735	)

Note 7 – Income per Common Share

The following table sets forth the calculation of basic and diluted net income per common share:


	Three Months Ended				Six Months Ended
	May 31, 2017		May 31, 2016		May 31, 2017		May 31, 2016
Numerator:
Net Income	$	496,940	$	637,132	$	983,863	$	514,196

Denominator:
Weighted-average shares outstanding-basic		7,144,775		9,087,807		7,024,280		9,029,909
Dilutive common shares issuable upon exercise of stock options		581,785		309,423		558,255		306,629

Weighted-average shares-diluted		7,726,560		9,397,230		7,582,535		9,336,538

Net income per common share:
Basic	$	0.07	$	0.07	$	0.14	$	0.06

Diluted	$	0.06	$	0.07	$	0.13	$	0.06

For the three and six months ended May 31, 2017, the Company included the effect of all outstanding options in the computation of diluted earnings per share, as all of the outstanding stock options were in the money.

For the three and six months ended May 31, 2016, the Company excluded the effect of 40,000 and 40,000, respectively, outstanding options from the computation of diluted earnings per share, as the effect of potentially dilutive shares from the outstanding stock options would be anti-dilutive.

Note 8 – Stockholders’ Equity

Employee Stock Incentive Plan

The Company maintains the 2006 Stock Incentive Plan (the “2006 Plan”) under which it has reserved 1,000,000 shares of the Company’s common stock for issuance pursuant to stock options, restricted stock, stock-appreciation rights (commonly referred to as “SARs”) and stock awards (i.e. performance options to purchase shares and performance units). As of May 31, 2017 and November 30, 2016, there were 540,500 and 572,281 options issued, but not yet exercised, under the 2006 Plan, respectively. As of May 31, 2017, there were 231,929 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 Company’s 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 Company’s common stock reserved for issuance to 2,500,000 shares As of May 31, 2017, there were 569,729 service-based options issued, 129,729 service-based restricted common shares granted, 640,970 performance-based and 116,240 market-based restricted common shares granted under the 2012 Plan. As of May 31, 2017, there were 1,043,332 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 Company’s stock over the most recent period commensurate with the expected life of the Company’s 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 0 and 169,729 options granted during the three and six months ended May 31, 2017 and May 31, 2016, respectively.

Variables used to determine the fair value of the options granted for the three and six months ended May 31, 2016 are as follows:


	Three Months Ended			Six Months Ended
	May 31, 2016			May 31, 2016
Weighted average values:
Expected dividends		0	%		0	%
Expected volatility		84.7	%		84.7	%
Risk free interest rate		1.24	%		1.24	%
Expected life		6 years			6 years

Stock option activity for options with only service-based vesting conditions for the six months ended May 31, 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	$	2,157,112
Granted		—			—				—
Exercised		(26,781	)		1.92				78,149
Expired/forfeited		(5,000	)		1.36				21,275

Outstanding at May 31, 2017		1,110,229		$	2.38		4.60	$	3,590,126

Exercisable at May 31, 2017		1,037,405		$	2.32		4.35	$	3,411,901

The aggregate intrinsic value represents the total value of the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options that would have been received by the option holders had all option holders exercised their options on either May 31, 2017 or May 31, 2016, as applicable. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s stock.

For the three and six months ended May 31, 2017, the Company issued 7,500 and 26,781 common shares to option holders who exercised options for $17,900 and $51,396, respectively.

There were no options exercised during the three and six months ended May 31, 2016.

Significant option groups outstanding and exercisable at May 31, 2017 and related price and contractual life information are as follows:


	Outstanding						Exercisable
Range of Exercise Prices	Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Outstanding		Weighted Average Exercise Price
$1.01 to $2.00		425,000		4.42	$	1.73		425,000	$	1.73
$2.01 to $3.00		458,000		3.05	$	2.58		458,000	$	2.58
$3.01 to $4.00		227,229		8.07	$	3.18		154,405	$	3.19

		1,110,229		4.60	$	2.38		1,037,405	$	2.32

A summary of the status of the Company’s non-vested options as of May 31, 2017, and changes during the six months ended May 31, 2017, is presented below:


	Options			Weighted Average Grant-Date Fair Value
Non-vested at November 30, 2016		97,406		$	1.84
Granted		—			—
Vested		(24,582	)		1.85
Forfeited		—			—

Non-vested at May 31, 2017		72,824		$	1.84

As of May 31, 2017, there was approximately $91,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Plan and the 2012 Plan. The cost is expected to be recognized over a weighted-average period of .53 years as of May 31, 2017. The total fair value of shares vested during the six months ended May 31, 2017 was approximately $45,000.

During the second fiscal quarter of 2016, the Company entered into Amended and Restated Employment Agreements (“2016 Employment Agreements”) with each of the Company’s Co-CEOs. Per the 2016 Employment Agreements, each of the Co-CEOs is to receive base grant equity awards in the form of qualified options of the Company’s common stock. As of April 15, 2016, David Portnoy and Mark Portnoy were granted 70,270 and 59,459 options of the Company’s common stock, respectively. The options were issued under the Company’s 2012 Stock Plan and will vest 1/3 upon grant, 1/3 on December 1, 2016 and the remaining 1/3 on November 30, 2017. The fair value of these options vested as of May 31, 2017 was approximately $182,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income. As of May 31, 2017, there was approximately $62,000 of total unrecognized compensation cost related to the non-vested options of common stock and these will continue to vest as notated above and per the 2016 Employment Agreements through November 30, 2017.

Performance and market-based vesting condition options

There were no performance-based or market-based vesting condition options granted during the three and six months ended May 31, 2017 and May 31, 2016. As of May 31, 2017 and May 31, 2016, there were no performance or market-based vesting condition options outstanding.

Restricted common shares

During the first fiscal quarter of 2014, the Company entered into Amended and Restated Employment Agreements (“Employment Agreements”) with each of the Company’s Co-CEOs. The Employment Agreements provide for the grant of restricted shares of the Company’s common stock based on certain performance measures being attained by each of the Company’s Co-CEOs. The Employment Agreements provide that 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 186,487 and 162,163 shares of restricted common shares, respectively, based on certain performance thresholds, as defined in the agreements. The Company issued David Portnoy 118,062 shares and Mark Portnoy 102,663 shares during the first quarter of fiscal 2016. As of May 31, 2016, there was $0 of total unrecognized compensation cost related to the issuance of these shares of restricted common shares.

As of April 15, 2016, the Company entered into Amended and Restated Employment Agreements (“Employment Agreements”) with each of the Company’s Co-CEOs. The Employment Agreements provide for the grant of shares of the Company’s common stock based on certain performance measures being attained by each of the Company’s 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 for fiscal 2016 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 related to the fiscal 2016 performance measures as of May 31, 2017. As of May 31, 2017, the Company has recognized approximately $362,000 of compensation cost related to the fiscal 2017 performance measures and there was approximately $362,000 in unrecognized compensation cost related to the fiscal 2017 performance measures.

As of April 18, 2016, the Company entered into a second Amendment Agreement (the “Amendment”), with the Company’s 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 Company’s 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 $78,000. There was $0 of total unrecognized compensation cost as of May 31, 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 Company’s 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 royalties due to the Company per year and a $10 Million cap on the amount of royalties due to the Company for the term of the License and Royalty Agreement. As of May 31, 2017, Lifecell has paid the Company $5.1 Million for royalties due under the terms of the License and Royalty Agreement.

Marketing Agreements

The Company has definitive license agreements to market the Company’s umbilical cord blood stem cell programs in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama and Pakistan.

The following table details the initial license fees for the technology and marketing agreements and processing and storage royalties earned under the technology agreements for the three and six months ended May 31, 2017 and May 31, 2016. The initial license fees and processing and storage royalties are reflected in licensee and royalty income in the accompanying consolidated statements of operations.


Processing and Storage Royalties

	Three Months Ended May 31, 2017		Six Months Ended May 31, 2017
India	$	328,669	$	328,669

Total	$	328,669	$	328,669


	Three Months Ended May 31, 2016		Six Months Ended May 31, 2016
India	$	356,932	$	356,932

Total	$	356,932	$	356,932

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 May 31, 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 Company’s 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 Company’s 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 Company’s Board of Directors authorized management at its discretion to repurchase up to one million (1,000,000) shares of the Company’s outstanding common stock. On June 6, 2012, the Board of Directors of the Company increased the number of shares of the Company’s 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 Company’s 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 Company’s 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-Cell’s 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-Cell’s shares reported on the OTCBB was $2.29 per share. The tender offer expired on July 28, 2015. Cryo-Cell accepted for purchase 557,805 shares of its common stock, including all “odd lots” properly tendered, at a purchase price of $3.25 per share, for an aggregate cost of $1,812,866 excluding fees and expenses relating to the tender offer.

On June 20, 2016, the Company entered into a Stock Purchase Agreement with Ki Yong Choi and Michael Cho. Pursuant to the Stock Purchase Agreement, the Company purchased 2,179,068 Shares from Ki Yong Choi and 13,416 Shares from Michael Cho for $4.50 per share, $9,866,178 in the aggregate, that was funded through the proceeds of a term loan for approximately $8 million in senior credit facilities and the remainder through the working capital of the Company.

As of May 31, 2017, the Company had repurchased a total of 5,794,113 shares of the Company’s common stock at an average price of 3.37 per share through open market and privately negotiated transactions. The Company purchased 79,942 and 143,793 shares of the Company’s common stock during the six months ended May 31, 2017 and May 31, 2016, respectively, at an average price of $5.05 per share and $3.08 per share, respectively.

The repurchased shares will be held as treasury stock and have been removed from common shares outstanding as of May 31, 2017 and November 30, 2016. As of May 31, 2017 and November 30, 2016, 5,794,810 and 5,714,868 shares, respectively, were held as treasury stock.

Subsequent to the balance sheet date, the Company repurchased an additional 2,823 shares of the Company’s common stock at an average price of $5.77 per share through open market and privately negotiated transactions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This Form 10-Q, press releases and certain information provided periodically in writing or orally by the Company’s officers or its agents may contain statements which constitute “forward-looking statements”. The terms “Cryo-Cell International, Inc.,” “Cryo-Cell,” “Company,” “we,” “our” and “us” refer to Cryo-Cell International, Inc. The words “expect,” “anticipate,” “believe,” “goal,” “strategy,” “plan,” “intend,” “estimate” and similar expressions and variations thereof, if used, are intended to specifically identify forward-looking statements. Those statements appear in a number of places in this Form 10-Q and in other places, and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things:

(i)

our future performance and operating results;

(ii)

our future operating plans;

(iii)

our liquidity and capital resources; and

(iv)

our financial condition, accounting policies and management judgments.

Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include:

(i)

any adverse effect or limitations caused by recent increases in government regulation of stem cell storage facilities;

(ii)

any increased competition in our business including increasing competition from public cord blood banks particularly in overseas markets but also in the U.S.;

(iii)

any decrease or slowdown in the number of people seeking to store umbilical cord blood stem cells or decrease in the number of people paying annual storage fees;

(iv)

any new services relating to other types of stem cells that have not yet been offered commercially, and there is no assurance that other stem cell services will be launched or will gain market acceptance;

(v)

any adverse impacts on revenue or operating margins due to the costs associated with increased growth in our business, including the possibility of unanticipated costs relating to the operation of our facility and costs relating to the commercial launch of new types of stem cells;

(vi)

any unique risks posed by our international activities, including but not limited to local business laws or practices that diminish our affiliates’ ability to effectively compete in their local markets;

(vii)

any technological or medical breakthroughs that would render our business of stem cell preservation obsolete;

(viii)

any material failure or malfunction in our storage facilities; or any natural disaster or act of terrorism that adversely affects stored specimens;

(ix)

any adverse results to our prospects, financial condition or reputation arising from any material failure or compromise of our information systems;

(x)

the costs associated with defending or prosecuting litigation matters, particularly including litigation related to intellectual property, and any material adverse result from such matters;

(xi)

the success of our licensing agreements and their ability to provide us with royalty fees;

(xii)

any difficulties and increased expense in enforcing our international licensing agreements;

(xiii)

any adverse performance by or relations with any of our licensees;

(xiv)

any inability to enter into new licensing arrangements including arrangements with non-refundable upfront fees;

(xv)

any inability to realize cost savings as a result of recent acquisitions;

(xvi)

any inability to realize a return on an investment;

(xvii)

any increased U.S. income tax expense as a result of inability to utilize or exhaustion of net operating losses;

(xviii)

any adverse impact on our revenues and operating margins as a result of discounting of our services in order to generate new business in tough economic times where consumers are selective with discretionary spending;

(xix)

the success of our global expansion initiatives;

(xx)

our actual future ownership stake in future therapies emerging from our collaborative research partnerships;

(xxi)

our ability to minimize our future costs related to R&D initiatives and collaborations and the success of such initiatives and collaborations;

(xxii)

any inability to successfully identify and consummate strategic acquisitions;

(xxiii)

any inability to realize benefits from any strategic acquisitions ;

(xxiv)

the Company’s ability to realize a profit on the acquisition of PrepaCyte-CB;

(xxv)

the costs associated with proxy contests and its impact on our business and

(xxvi)

other factors many of which are beyond our control.

We undertake no obligation to publicly update or revise the forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Cryo-Cell International, Inc. undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K filed by the Company and any Current Reports on Form 8-K filed by the Company.

Overview

The Company’s principal sources of revenues are service fees for cord blood processing and preservation for new customers and recurring annual storage fees. Effective April 2016, the Company offers two pricing models, a standard plan and premium plan. The Company charges fees of $1,600 for the standard plan and $1,950 for the premium plan to new clients for the collection kit, processing, testing and return medical courier service, with discounts in the case of multiple children from the same family and in other circumstances. The Company charges an annual storage fee of $150 for new clients that enroll in the standard and premium plans; storage fees for existing customers depend on the contracts with such customers. The Company continues to offer a one-time payment plan for 21 years of storage and a life-time payment plan, pursuant to which the client is charged $4,099 for the standard plan and $4,449 for the premium plan and $6,000 for the standard plan and $7,000 for the premium plan, respectively, less discounts in the case of multiple children from the same family and in other circumstances. The one-time plan includes the collection kit, processing and testing, return medical courier service and 21 years of pre-paid storage fees. The life-time plan includes the collection kit, processing and testing, return medical courier service and pre-paid storage fees for the life of the client. The Company also receives other income from licensing fees and royalties from global affiliates.

On June 11, 2015, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) 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. The PrepaCyte CB Processing System is used in cell processing laboratories to process and store stem cells from umbilical cord blood. The purchase price was $2,400,000, plus the value of inventory, comprised of $1,553,272 in cash and assumed liabilities less any prepayment made by the Company to CMDG. On April 22, 2016, the Company paid $778,287 which constituted payment in full of the Company’s 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. The difference between the remaining principal balance and the final payment made on April 22, 2016 was $300,593 which was recorded as a gain on extinguishment of debt for the three and six months ended May 31, 2016 on the accompanying consolidated statements of comprehensive income.

During the six months ended May 31, 2017, total revenue increased 10% as compared to the same period in 2016. The Company reported net income of approximately $984,000 or $0.14 per basic common share for the six months ended May 31, 2017 compared to net income of approximately $514,000 or $0.06 per basic common share for the same period in 2016. The increase in net income for the six months ended May 31, 2017 principally resulted from the 10% increase in total revenues and a 7% decrease in selling, general and administrative expenses. This was partially offset by a 12% increase in cost of sales.

At May 31, 2017, the Company had cash and cash equivalents of $4,697,937. The Company’s cash increased approximately $1,200,000 during the first six months of fiscal 2017. Cash provided by operations was approximately $2,400,000 and cash provided by the sale of marketable securities was approximately $173,000 which were offset by approximately $404,000 used for stock repurchases and $1,000,000 used to repay the note payable described below. 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 Company’s 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. On May 20, 2016, the Company entered into a Subordination Agreement with Texas Capital Bank 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 were to be used by the Company to fund continued repurchases of the Company’s common stock. On June 5, 2017, subsequent to the balance sheet date, the Company paid CrowdOut the principal sum of $650,000 plus interest of $867. The subordinated loan is paid in full.

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 proceeds of the term loan were used by the Company to fund a portion of the Settlement Agreement and Release of All Claims with Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family Trust.

Consistent with its fiduciary duties, the board of directors and management has reviewed and will continue to review strategic options and opportunities for the Company, in order to maximize shareholder value. These options may include, but are not limited to, strategic mergers or acquisitions, investments in other public and/or private companies, repurchases of RSA interests, a deregistration of the Company’s common stock under the Securities Exchange Act of 1934 or a going-private transaction. These options may or may not be related to the Company’s current business. In order to undertake any of the aforementioned activities, the Company may take on substantial debt or equity capital which could increase the risk of investment in the Company.

Results of Operations – Six Month Period Ended May 31, 2017 Compared to the Six-Month Period Ended May 31, 2016

Revenues. Revenues for the six months ended May 31, 2017 were $12,013,375 as compared to $10,925,254 for the same period in 2016, a 10% increase. The increase in revenue was primarily attributable to a 10% increase in processing and storage fees.

Processing and Storage Fees. The increase in processing and storage fee revenue is attributable to a 7% increase in domestic recurring annual storage fee revenue and a 17% increase in the number of new domestic cord blood specimens processed in the first six months of fiscal 2017 versus the same period in 2016.

Product Revenue . On June 11, 2015, the Company entered into an Asset Purchase Agreement as described in Note 2 of the Company’s financial statements. For the six months ended May 31, 2017, revenue from product sales was $226,655 compared to $198,118 for the six months ended May 31, 2016.

Licensee and Royalty Income. Licensee and royalty income for the six months ended May 31, 2017, was $328,669 as compared to $356,932 for the 2016 period. Licensee and royalty income for the six months ended May 31, 2017 and May 31, 2016 consists of royalty income earned on the processing and storage of specimens in India where the Company has a definitive License and Royalty Agreement.

Per the License and Royalty Agreement with Lifecell, there is a $1,000,000 cap on the amount of royalty due to the Company per year and a $10,000,000 cap on the amount of royalties due to the Company for the term of the License and Royalty Agreement. As of May 31, 2017, Lifecell has paid the Company $5,100,000 for royalties due under the terms of the License and Royalty Agreement.

Cost of Sales. Cost of sales for the six months ended May 31, 2017 was $3,108,063 as compared to $2,779,391 for the same period in 2016, representing a 12% increase. Cost of sales includes wages and supplies associated with process enhancements to the existing production procedures and quality systems in the processing of cord blood specimens at the Company’s facility in Oldsmar, Florida and depreciation expense of approximately $50,000 and $64,000 for the six months ended May 31, 2017 and 2016, respectively. Also, included in cost of sales is $198,190 and $188,998 related to the costs associated with production of the PrepaCyte ^® -CB processing and storage system for the six months ended May 31, 2017 and May 31, 2016, respectively. The increase in cost of sales for the six months ended May 31, 2017 versus May 31, 2106 is due to the increased costs associated with the 15% increase in the number of new domestic cord blood specimens processed in the first six month of fiscal 2017 versus the first six month of fiscal 2016.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended May 31, 2017 were $6,509,914 as compared to $7,002,965 for the 2016 period representing a 7% decrease. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees. The decrease in selling, general and administrative expenses is primarily due to approximately $129,000 or 4% decrease in selling and marketing expenses which is mainly due to an expenditure of $250,000 during the six months ended May 31, 2016 which was related to the implementation of a new consumer marketing campaign. Also, contributing to the decrease in selling, general and administrative expenses is a decrease of approximately $294,000 in bad debt expense and a decrease of approximately $213,000 in professional fees related to accounting and legal services.

Research, Development and Related Engineering Expenses. Research, development and related engineering expenses for the six months ended May 31, 2017 were $23,456 as compared to $20,672 for the 2016 period. The expenses for each period primarily relate to the Company’s cord tissue service.

Depreciation and Amortization . Depreciation and amortization (not included in Cost of Sales) for the six months ended May 31, 2017 was $63,566 compared to $83,420 for the 2016 period.

Interest Expense. Interest expense during the six months ended May 31, 2017 was $622,358 compared to $604,797 during the comparable period in 2016. Interest expense for the six months ended May 31, 2017 and May 31, 2016 was $0 and of $22,265, respectively, related to the repayment of the note payable as a result of the Asset Purchase Agreement (Note 2 and Note 5) and $312,393 and $0, respectively, related to the credit and subordination agreements with Texas Capital Bank, National Association and CrowdOut Capital LLC as described in Note 5. The remaining interest expense is mainly comprised of amounts due to the parties to the Company’s revenue sharing agreements (“RSAs”) based on the Company’s storage revenue collected.

Gain on Extinguishment of Debt. There was no gain on extinguishment of debt for the six months ended May 31, 2017. Gain on extinguishment of debt was $300,593 for the six months ended May 31, 2016 which is the difference between the remaining principal balance and the payment made on April 22, 2016 constituting payment in full of the Company’s 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 (see Note 5) on April 22, 2016.

Income Taxes . Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance, we must project future levels of taxable income. This assessment requires significant judgment. We examine the evidence related to the recent history of tax losses, the economic conditions in which we operate and our forecasts and projections to make that determination.

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 recorded $35,546 and $53,540 for the six months ended May 31, 2017 and May 31, 2016, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of comprehensive income.

U.S. income tax expense for the six months ended May 31, 2017 was $601,908. U.S. income tax expense for the six months ended May 31, 2016 was $148,195.

Results of Operations – Three Month Period Ended May 31, 2017 Compared to the Three-Month Period Ended May 31, 2016

Revenues. Revenues for the three months ended May 31, 2017 were $6,236,751 as compared to $5,773,056 for the same period in 2016. The increase in revenue was primarily attributable to a 9% increase in processing and storage fees.

Processing and Storage Fees. The increase in processing and storage fee revenue is attributable to a 7% increase in domestic recurring annual storage fee revenue and a 14% increase in the number of new domestic cord blood specimens processed for three months ended May 31, 2017 versus the same period in 2016.

Product Revenue . On June 11, 2015, the Company entered into an Asset Purchase Agreement as described in Note 2 of the Company’s financial statements. For the three months ended May 31, 2017, revenue from the product sales was $61,855 compared to $66,379 for the three months ended May 31, 2016.

Licensee and Royalty Income. Licensee and royalty income for the three months ended May 31, 2017, was $328,669 as compared to $356,932 for the 2016 period. Licensee and royalty income for the three months ended May 31, 2017 and May 31, 2016 consisted of royalty income earned on the processing and storage of cord blood stem cell specimens in India where the Company has a definitive license agreement.

Cost of Sales. Cost of sales for the three months ended May 31, 2017 was $1,591,966 as compared to $1,431,000 for the same period in 2016, representing an 11% increase. Cost of sales includes wages and supplies associated with process enhancements to the existing production procedures and quality systems in the processing of cord blood specimens at the Company’s facility in Oldsmar, Florida and depreciation expense of approximately $24,000 and $31,000 for the three months ended May 31, 2017 and 2016, respectively. Also, included in Cost of Sales is $74,888 and $85,730 related to the costs associated with production of the PrepaCyte ^® -CB processing and storage system for the three months ended May 31, 2017 and May 31, 2016, respectively. The increase in cost of sales for the three months ended May 31,

2017 versus May 31, 2106 is due to the increased costs associated with the 14% increase in the number of new domestic cord blood specimens processed in the second quarter fiscal 2017 versus the second quarter fiscal 2016.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended May 31, 2017 were $3,411,759 as compared to $3,405,712 for the 2016 period representing a less than 1% increase. Selling, general and administrative expenses are primarily comprised of expenses for selling and marketing expenses, salaries and wages for personnel and professional fees. The slight increase in selling, general and administrative expenses is due to a an increase of approximately $258,000 in stock compensation expense offset by a decrease of approximately $204,000 in bad debt expense and a decrease of approximately $236,000 in professional fees related to consulting and legal services.

Research, Development and Related Engineering Expenses. Research, development and related engineering expenses for the three months ended May 31, 2017 were $8,840 as compared to $11,988 for the 2016 period.

Depreciation and Amortization . Depreciation and amortization (not included in Cost of Sales) for the three months ended May 31, 2017 was $31,936 compared to $41,872 for the 2016 period.

Interest Expense. Interest expense during the three months ended May 31, 2017, was $325,314 compared to $343,463 during the comparable period in 2016. Interest expense for the three months ended May 31, 2017 and May 31, 2016 was $0 and of $7,874, respectively, related to the repayment of the note payable as a result of the Asset Purchase Agreement (Note 2 and Note 5) and $156,252 and $0, respectively, related to the credit and subordination agreements with Texas Capital Bank, National Association and CrowdOut Capital LLC as described in Note 6. The remaining interest expense is mainly comprised of amounts due to the parties to the Company’s revenue sharing agreements (“RSAs”) based on the Company’s storage revenue collected.

Gain on Extinguishment of Debt. There was no gain on extinguishment of debt for the six months ended May 31, 2017. Gain on extinguishment of debt was $300,593 for the three months ended May 31, 2016 which is the difference between the remaining principal balance and the payment made on April 22, 2016 constituting payment in full of the Company’s 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 (see Note 5) on April 22, 2016.

Income Taxes. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance, we must project future levels of taxable income. This assessment requires significant judgment. We examine the evidence related to the recent history of tax losses, the economic conditions in which we operate and our forecasts and projections to make that determination.

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 recorded $35,546 and $53,540 for the three months ended May 31, 2017 and 2016, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of comprehensive income.

U.S. income tax expense for the three months ended May 31, 2017 was 296,191. U.S. income tax expense for the three months ended May 31, 2016 was $148,195.

Liquidity and Capital Resources

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 Company’s 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. On May 20, 2016, the Company entered into a Subordination Agreement with Texas Capital Bank 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 were to be used by the Company to fund continued repurchases of the Company’s 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 was payable monthly with a maturity date of July 2021, at which time, the principal amount of $650,000 was due. In June 2017, subsequent to the balance sheet date, the Company repaid the subordinated principal plus interest of $650,867.

On August 26, 2016, the Company entered into a First Amendment to Credit Agreement with TCB. Pursuant to terms of the First Amendment to Credit Agreement, on August 26, 2016, TCB made an additional advance to the Company in principal amount of $2,133,433 per an Amended and Restated Promissory Note dated August 26, 2016 between the Company and TCB. The additional proceeds of the term loan were used by the Company to fund a portion of the Settlement Agreement and Release of All Claims with Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family Trust as previously disclosed.

Prior to the loans, the Company’s principal source of cash has been from sales of its umbilical cord blood program to customers and royalties from licensees.

At May 31, 2017, the Company had cash and cash equivalents of $4,697,937 as compared to $3,499,881 at November 30, 2016. The increase in cash and cash equivalents during the six months ended May 31, 2017 was primarily attributable to the following:

Net cash provided by operating activities for the six months ended May 31, 2017 was $2,382,567, which was primarily attributable to the Company’s operating results and an increase in the Company’s new clients choosing the prepaid storage plans versus the annual storage fee plan.

Net cash provided by operating activities for the six months ended May 31, 2016 was $1,344,826, which was primarily attributable to the Company’s operating results.

Net cash provided by investing activities for the six months ended May 31, 2017 was $168,018, which was primarily attributable to sales and purchases of marketable securities and other investments in the amount of $172,523 slightly offset by the purchases of property and equipment in the amount of $4,505.

Net cash used in investing activities for the six months ended May 31, 2016 was $311,945, which was primarily attributable to the purchases of property and equipment in the amount of $292,242 and sales and purchases of marketable securities and other investments in the amount of $224,047 which were partially offset by the redemption of a Certificate of Deposit in the amount of $204,344.

Net cash used in financing activities for the six months ended May 31, 2017 was $1,352,529, which was primarily attributable to the stock repurchase plan pursuant to which the Company has repurchased 79,942 shares of the Company’s common stock for approximately $404,000 and $1,000,000 used to repay the note payable described above.

Net cash used in financing activities for the six months ended May 31, 2016 was $668,881, which was primarily attributable to the stock repurchase plan pursuant to which the Company has repurchased 143,793 shares of the Company’s common stock for $443,207 and the repayments of the note payable with CMDG for $875,774 which was partially offset by the subordinated loan in the amount of $650,000.

The Company does not have a line of credit.

The Company anticipates making discretionary capital expenditures of approximately $500,000 over the next twelve months for software enhancements and purchases of property and equipment. The Company anticipates funding future property and equipment purchases with cash-on-hand and cash flows from future operations.

The Company anticipates that its cash and cash equivalents, marketable securities and cash flows from future operations will be sufficient to fund its known cash needs for at least the next 12 months. Cash flows from operations will depend primarily upon increasing revenues from sales of its umbilical cord blood and cord tissue cellular storage services and managing discretionary expenses. If expected increases in revenues are not realized, or if expenses are higher than anticipated, the Company may be required to reduce or defer cash expenditures or otherwise manage its cash resources during the next 12 months so that they are sufficient to meet the Company’s cash needs for that period. In addition, the Company may consider seeking equity or debt financing if deemed appropriate for its plan of operations, and if such financing can be obtained on acceptable terms. There is no assurance that any reductions in expenditures, if necessary, will not have an adverse effect on the Company’s business operations, including sales activities and the development of new services and technology.

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 1 to the Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K filed with the SEC. Our most critical accounting policies and estimates include: recognition of revenue and the related allowance for doubtful accounts, stock-based compensation, income taxes and license and revenue sharing agreements. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2016 Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their most recent review, as of the end of the period covered by this report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective, and that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

The Company has not made an amended 8-K filing with respect to the Current Reports on Form 8-K that was filed on July 16, 2015 to announce the acquisition of PrepaCyte. Accordingly, the Company is not deemed a timely filer. Management intends to subsequently make this amended 8-K filing to include the required pre-acquisition financial statements of PrepaCyte as well as the required pro forma financial information.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting during the six months ended May 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Co-CEOs and CFO, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its

stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

CEO and CFO Certifications

Appearing as exhibits 31.1, 31.2 and 31.3 to this report there are Certifications of the Co-CEOs and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this report is the information concerning the evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Not applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASE OF EQUITY SECURITIES


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
March 1 – 31, 2017		4,265	$	4.54		4,265		2,261,835
April 1 – 30, 2017		6,086	$	4.68		6,086		2,255,749
May 1 – 31, 2017		49,862	$	5.36		49,862		2,205,887

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

(a)

Exhibits



31.1		Certification of Co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certification of Co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.3		Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Cryo-Cell International, Inc.

/s/ DAVID PORTNOY
David Portnoy Co-Chief Executive Officer

Cryo-Cell International, Inc.

/s/ MARK PORTNOY
Mark Portnoy Co-Chief Executive Officer

Cryo-Cell International, Inc.

/s/ JILL TAYMANS
Jill M. Taymans Vice President, Finance

Date: July 7, 2017

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