NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Note 1. Organization and Description of Business
Overview
CBA Florida, Inc. ("CBAI" or the “Company”), formerly
known as Cord Blood America, Inc., was incorporated in the State of
Florida on October 12, 1999 as D&A Lending, Inc. CBAI's
wholly-owned subsidiaries include CBA Partners, Inc. which was
formerly Cord Partners, Inc., CBA Companies Inc. which was formerly
CorCell Companies, Inc., and CBA Sub Ltd. which was formerly
CorCell, Ltd., (CBA Partners, Inc., CBA Companies Inc. and CBA Sub
Ltd. are sometimes referred to herein collectively as
“Cord”), CBA Properties, Inc. ("Properties"), and
Career Channel, Inc. formerly D/B/A Rainmakers
International. As further described below, on May 17,
2018, CBAI completed a sale of substantially all of the assets of
the Company and its wholly-owned subsidiaries. Prior to the sale of
substantially all of the assets and related liabilities, CBAI and
its subsidiaries had engaged in the following business
activities:
●
|
CBAI and Cord specialized in providing private cord blood and cord
tissue stem cell services. Additionally, the Company was in the
business of procuring birth tissue for organizations utilizing the
tissue in the transplantation and/or research of therapeutic
products.
|
●
|
Properties was formed to hold corporate trademarks and other
intellectual property.
|
Company Developments – Sale of Assets
On February 7, 2018, the Company announced that it entered into an
Asset Purchase Agreement, dated as of February 6, 2018 (the
“Purchase Agreement”), with California Cryobank Stem
Cell Services LLC (“FamilyCord”). The sale of
substantially all of the Company’s assets pursuant to the
Purchase Agreement was completed on May 17, 2018.
Pursuant to the terms of the Purchase Agreement, FamilyCord
acquired from CBAI substantially all of the assets of CBAI and its
wholly-owned subsidiaries and assumed certain liabilities of CBAI
and its wholly-owned subsidiaries. The sale did not include
CBAI’s cash and certain other excluded assets and
liabilities. FamilyCord agreed to pay a purchase price of
$15,500,000 in cash at closing with $3,000,000 of the purchase
price deposited into escrow to secure CBAI’s indemnification
obligations under the Purchase Agreement.
The Purchase Agreement contained customary representations,
warranties and covenants for a transaction of this type and nature.
Pursuant to the terms of the Purchase Agreement, CBAI indemnified
FamilyCord for breaches of its representations and warranties,
breaches of covenants, losses related to excluded assets or
excluded liabilities and certain other matters. The representations
and warranties set forth in the Purchase Agreement generally
survive for two years following the closing.
In connection with the sale, the parties also entered into a
transition services agreement designed to ensure a smooth
transition of CBAI’s business from CBAI to
FamilyCord.
CBAI presently anticipates it will distribute a portion of the sale
proceeds to its shareholders in 2019. However, no distribution has
been declared by CBAI’s board of directors. The initial
distribution amount will be determined by CBAI’s board of
directors and will be subject to such factors as taxes payable,
operating expenses, indemnification obligations under the Purchase
Agreement and other contingencies and estimates. Additional monies
may be distributed over time based on cash available and the
release of known and unknown liabilities. Given cash needed for the
aforementioned expenses and contingencies, total proceeds paid out
to shareholders are expected to be significantly less than the
gross purchase price.
BioCells Acquisition and Subsequent Sale
In
September 2010, the Company entered into a Stock Purchase Agreement
(the “Agreement”), with the Shareholders of Biocordcell
Argentina S.A., a corporation organized under the laws of Argentina
(“BioCells”), providing for the Company’s
acquisition of 50.004% of the outstanding shares of BioCells (the
“Shares).
On
September 29, 2014, the Company closed a transaction whereby it
sold its ownership stake in BioCells, amounting to 50.004% of the
outstanding shares of BioCells to Diego Rissola (Purchaser), who is
the current President and Chairman of the Board of BioCells and a
shareholder prior to the transaction.
Under
the Agreement, the Purchaser was obligated to pay the total amount
of $705,000, as follows:
$5,000
on or before October 12, 2014; $10,000 on or before December 1,
2014; $15,000 on or before March 1, 2015; $15,000 on or before June
1, 2015; $45,000 on or before June 1, 2016; $55,000 on or before
June 1, 2017; $55,000 on or before June 1, 2018; $55,000 on or
before June 1, 2019; $65,000 on or before June 1, 2020; $75,000 on
or before June 1, 2021; $75,000 on or before June 1, 2022; $75,000
on or before June 1, 2023; $80,000 on or before June 1, 2024;
$80,000 on or before June 1, 2025.
On
October 31, 2018, the Company entered into a settlement agreement
with the Purchaser whereby the Purchaser agreed to make a one-time
payment of $294,988 to the Company to settle all remaining payments
and obligations due under the Agreement. The Company received the
settlement payment on November 6, 2019, and wrote off the remaining
unpaid receivable of $89,597 remaining under the terms of the
Agreement.
Note 2. Summary of Significant Accounting Policies
Financial Statement Presentation
The
preparation of the financial statements in conformity with U.S.
generally accepted accounting principles (U.S. GAAP) requires
management to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ from
these estimates. Certain prior year amounts have been reclassified
to conform to current year presentation.
Pursuant
to guidance in ASC 205-20, Presentation of Financial Statements,
and ASC 360-10-45-9 to 14, Property, Plant and Equipment, regarding
when the results of operations of a component of an entity that is
classified as held for sale would be reported as a discontinued
operation in the financial statements of the entity. The Company
determined that it met the threshold for reporting discontinued
operations due to a strategic business shift having a major effect
on an entity's operations and financial results. In
On February 7, 2018, the Company announced that it entered into the
Purchase Agreement with FamilyCord. The sale of substantially all
of the Company’s assets occurred on May 17, 2018
. For
this reason, the results of operations for the cord blood and cord
tissue stem cell operations have been reclassified into
discontinued operations and the related assets and liabilities are
reflected as held-for-sale for all periods presented. See Note
3.
Basis of Consolidation
The
consolidated financial statements include the accounts of CBAI and
its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated upon
consolidation.
Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during
the reporting periods. Actual results could differ materially from
those estimates.
Cash
Cash
and cash equivalents include cash on hand, deposits in banks with
maturities of three months or less, and all highly liquid
investments which are unrestricted as to withdrawal or use, and
which have original maturities of three months or less at the time
of purchase.
The
Company maintains cash and cash equivalents at several financial
institutions.
Accounts Receivable
Accounts
receivable consist of the amounts due for facilitating the
processing and storage of umbilical cord blood and cord tissue, and
birth tissue procurement services. Accounts
receivable relating to deferred revenues are netted against
deferred revenue for presentation purposes. The allowance for
doubtful accounts is estimated based upon historical experience.
The allowance is reviewed quarterly and adjusted for accounts
deemed uncollectible by management. Amounts are written off when
all collection efforts have failed. The Company wrote off $10,220
and $13,298 in bad debt expense during the years ended December 31,
2018 and 2017, respectively.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets. Routine maintenance and
repairs are charged to expense as incurred while major replacement
and improvements are capitalized as additions to the related
assets. Sales and disposals of assets are recorded by removing the
cost and accumulated depreciation from the related asset and
accumulated depreciation accounts with any gain or loss credited or
charged to income upon disposition.
Intangible Assets (related to
cord blood and cord tissue stem cell
storage business)
Intangible assets consist primarily of customer contracts and
relationships as part of the acquisition of the CorCell and
CureSource assets in 2007. During 2011 the Company also foreclosed
and acquired assets from NeoCells, a subsidiary of ViviCells, as
satisfaction of outstanding receivables from ViviCells. Intangible
assets are stated at cost. Amortization of intangible assets is
computed using the sum of the years’ digits method, over an
estimated useful life of 18 years. Amortization expense included in
the discontinued operations for the years ended December 31, 2018
and 2017 was $27,345 and $295,486 respectively.
Impairment of Long-Lived Assets
Long-lived
assets, other than goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets might not be recoverable. Conditions that
would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate that the carrying
amount of an asset or group of assets is not
recoverable.
For
long-lived assets to be held and used, the Company recognizes an
impairment loss only if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment
loss based on the difference between the carrying amount and fair
value. The Company reviews goodwill for impairment at least
annually or whenever events or circumstances are more likely than
not to reduce the fair value of goodwill below its carrying
amount.
Inventory
Inventory,
comprised principally of finished goods, is stated at the lower of
cost or net realized value using the first-in, first-out
(“FIFO”) method. This policy requires the Company to
make estimates regarding the market value of its inventory,
including an assessment of excess or obsolete inventory. The
Company determines excess and obsolete inventory based on an
estimate of the future demand and estimated selling prices for its
products.
Notes Receivable
(related to
cord blood and cord tissue
stem cell storage business)
Notes
receivable consists of the notes due from Biocordcell Argentina
S.A. (BioCells). The notes receivable are recorded at
carrying-value on the financial statements.
For
note receivable from BioCells, since the Company agreed to finance
the sale of the shares in BioCells at no stated interest, in
accordance with ASC 500, the interest method was applied using a 6%
borrowing rate. The Company recorded an unamortized discount based
on the 6% borrowing rate and the discount is amortized throughout
the life of the note.
Deferred Revenue
(related to
cord blood and cord tissue
stem cell storage business)
Deferred
revenue consists of payments for enrollment in the program and
processing of umbilical cord blood and cord tissue by customers
whose samples have not yet been collected, as well as the pro-rata
share of annual storage fees for customers whose samples were
stored during the year.
Valuation of Derivative Instruments
ASC
815-40 requires that embedded derivative instruments be bifurcated
and assessed, along with free-standing derivative instruments such
as warrants, on their issuance date and in accordance with ASC
815-40-15 to determine whether they should be considered a
derivative liability and measured at their fair value for
accounting purposes. In determining the appropriate fair value, the
Company uses the Binomial option pricing formula and present value
pricing. At December 31, 2018 and December 31, 2017, the Company
adjusted its derivative liability to its fair value, and reflected
the change in fair value, in its consolidated statements of
operations.
Revenue Recognition
(related to
cord blood and cord tissue
stem cell storage business)
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued ASU 2014-09, Revenue from Contracts
with Customers (Topic 606). Under the provisions of Accounting
Standards Update (“ASU”) 2014-09, entities should
recognize revenue in an amount that reflects the consideration to
which they expect to be entitled to in exchange for goods and
services provided. ASU 2014-09 is effective for annual reporting
periods beginning after December 15, 2017. The Company adopted the
provisions of this standard effective January 1, 2018.
CBAI
recognizes revenue under the provisions of Topic 606.
Cost of Services
Costs
are incurred as umbilical cord blood, cord tissue and birth
tissue are collected. These costs include the transportation
of the umbilical cord blood, cord tissue and birthing tissue from
the hospital, direct material and labor, costs for processing and
cryogenic storage of new samples by a third party laboratory,
collection kit materials and allocated rent, utility and general
administrative expenses. The Company expenses costs in the period
incurred.
Income Taxes
The
Company follows the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that
included the enactment date. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance based on the
portion of tax benefits that more likely than not will not be
realized.
The
Company follows guidance issued by the FASB with regard to its
accounting for uncertainty in income taxes recognized in the
financial statements. Such guidance prescribes a recognition
threshold of more likely than not and a measurement process for
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. In making this
assessment, a company must determine whether it is more likely than
not that a tax position will be sustained upon examination, based
solely on the technical merits of the position and must assume that
the tax position will be examined by taxing authorities. Our policy
is to include interest and penalties related to unrecognized tax
benefits in income tax expense. Interest and penalties totaled $0
for the years ended December 31, 2018 and 2017. The Company files
income tax returns with the Internal Revenue Service
(“IRS”) and various state jurisdictions.
Accounting for Stock Option Plan
The Company's share-based employee compensation plans are described
in Note 7. On January 1, 2006, the Company adopted the provisions
of Accounting Standards Codification (“ASC”) 718,
“Accounting for Stock-based Compensation (Revised
2004)” (“123(R)”), which requires recognition in
the consolidated financial statements of the cost of employee and
director services in exchange for the award (presumptively, the
vesting period). ASC 718 also requires measurement of the cost of
employee and director services received in exchange for an award
based on the grant-date fair value of the
award.
Pursuant to ASC Topic 505-50, for share-based payments to
consultants and other third-parties, compensation expense is
determined at the “measurement date.” The expense is
recognized over the vesting period of the award. Until the
measurement date is reached, the total amount of compensation
expense remains uncertain. The Company initially records
compensation expense based on the fair value of the award at the
reporting date.
Earnings (Loss) Per Share
Basic
earnings per share (EPS) is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding. Diluted EPS is similar to
basic EPS except that the weighted average number of common shares
outstanding is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential
common shares had been exercised. The Company’s
common equivalent shares are excluded from the computation of
diluted EPS if the effect is anti-dilutive.
The
diluted weighted average common shares outstanding are
1,272,066,146 and
1,272,066,146
as of December 31, 2018
and 2017, respectively.
Concentration of Risk
Credit
risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off
balance sheet) that arise from financial instruments exist for
groups of customers or counterparties when they have similar
economic characteristics that would cause their ability to meet
their contractual obligations to be similarly affected by changes
in economic or other conditions described below.
Relationships
and agreements which could potentially expose the Company to
concentrations of credit risk consist of the use of one source for
the processing and storage of all umbilical cord blood and one
source for the development and maintenance of a website. The
Company believes that alternative sources are available for each of
these concentrations.
Financial
instruments that subject the Company to credit risk could consist
of cash balances maintained in excess of federal depository
insurance limits. The Company maintains its cash and cash
equivalent balances with high credit quality financial
institutions. At times, cash and cash equivalent balances may be in
excess of Federal Deposit Insurance Corporation limits, and as of
December 31, 2018, this was the case. To date, the Company has not
experienced any such losses.
Fair Value Measurements
Assets
and liabilities recorded at fair value in the consolidated balance
sheets are categorized based upon the level of judgment associated
with the inputs used to measure the fair value. Level inputs, as
defined by ASC 820, are as follows:
●
|
Level 1
– quoted prices in active markets for identical assets or
liabilities.
|
●
|
Level 2
– other significant observable inputs for the assets or
liabilities through corroboration with market data at the
measurement date.
|
●
|
Level 3
– significant unobservable inputs that reflect
management’s best estimate of what market participants would
use to price the assets or liabilities at the measurement
date.
|
The
following table provides a roll-forward of the Company’s
derivative liabilities measured at fair value on a recurring basis
using unobservable level 3 inputs:
|
|
|
Balance
as of beginning of period
|
$
—
|
$
109,731
|
Change
in fair value of derivative
|
—
|
(109,731
)
|
Reversal
of derivative liability associated with payoff of the convertible
note payable
|
—
|
—
|
Balance
as of end of period
|
$
—
|
$
—
|
There
were no financial instruments measured on a recurring basis as of
December 31, 2018 and 2017 and on a non-recurring basis for any of
the periods presented.
For
certain of the Company’s financial instruments, including
cash, accounts receivable, prepaid expenses and other assets,
accounts payable and accrued expenses, and deferred revenues, the
carrying amounts approximate fair value due to their short
maturities. The carrying amounts of the Company’s notes
receivable and notes payable approximates fair value based on the
prevailing interest rates.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with
Customers (Topic 606)” (ASU 2014-09) as modified by ASU No.
2015-14, “Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date,” ASU 2016-08, “Revenue
from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net),” ASU No.
2016-10, “Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing,” and ASU
No. 2016-12, “Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients.”
The revenue recognition principle in ASU 2014-09 is that an entity
should recognize revenue to depict the transfer of goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. In addition, new and enhanced disclosures will
be required. Companies may adopt the new standard either using the
full retrospective approach, a modified retrospective approach with
practical expedients, or a cumulative effect upon adoption
approach. The Company adopted ASC 606 effective January 1, 2018
using the full retrospective approach. The adoption of ASU 2014-09
did not have any material impact on the Company’s
consolidated financial position, results of operations, equity or
cash flows.
In August 2016, the FASB issued ASU
No. 2016-15,
Statement of Cash Flows (Topic
230):
Classification of Certain Cash
Receipts and Cash Payments
, in
an effort to reduce the diversity of how certain cash receipts and
cash payments are presented and classified in the statement of cash
flows. The amendments of this ASU are effective for fiscal years
beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted. There has been no
impact as a result of adopting this ASU on our financial statements
and related disclosures.
In
January 2017, the FASB issued ASU No. 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business.
This new standard clarifies the definition of a business and
provides a screen to determine when an integrated set of assets and
activities is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired
(or disposed of) is concentrated in a single identifiable asset or
a group of similar identifiable assets, the set is not a business.
This new standard was effective for the Company on January 1,
2018, and
there was no impact as a
result of adopting this ASU on our financial statements and related
disclosures.
In May
2017, the FASB issued ASU No. 2017-09, Compensation – Stock
Compensation (Topic 718): Scope of Modification Accounting. This
new standard provides guidance about which changes to the terms or
conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. This amendment was
effective for the Company on December 15, 2017.
There was no impact as a result of adopting this
ASU on our financial statements and related
disclosures.
On December 22, 2017 the SEC staff issued Staff Accounting
Bulletin 118 (SAB 118), which provides guidance on
accounting for the tax effects of the Tax Cuts and Jobs Act (the
TCJA). SAB 118 provides a measurement period that should
not extend beyond one year from the enactment date for companies to
complete the accounting under ASC 740. In accordance with SAB
118, a company must reflect the income tax effects of those aspects
of the TCJA for which the accounting under ASC 740 is
complete. To the extent that a company’s accounting for
certain income tax effects of the TCJA is incomplete but for
which they are able to determine a reasonable estimate, it must
record a provisional amount in the financial
statements. Provisional treatment is proper in light of
anticipated additional guidance from various taxing authorities,
the SEC, the FASB, and even the Joint Committee on
Taxation. If a company cannot determine a provisional amount
to be included in the financial statements, it should continue to
apply ASC 740 on the basis of the provisions of the tax laws that
were in effect immediately before the enactment of the TCJA.
The Company has applied this guidance to its financial
statements.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(Topic 842),
under the new guidance,
lessor accounting is largely unchanged. Certain targeted
improvements were made to align, where necessary, lessor accounting
with the lessee accounting model and Topic 606, Revenue from
Contracts with Customers.
The amendments of this ASU are effective for
fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years. Early adoption is permitted. The
Company is currently assessing the potential impact this ASU will
have on the consolidated financial statements and related
disclosures.
Note 3. Discontinued Operations
-
Cord Blood and Cord Tissue Stem Cell
Storage Operations
On February 7, 2018, the Company announced that it entered into the
Purchase Agreement with FamilyCord. The sale of substantially all
of the Company’s assets to FamilyCord was completed on May
17, 2018.
Discontinued Operations
On May 17, 2018, the Company divested its Cord Blood and Cord
Tissue Stem Cell Storage Operations (CBCTS) to FamilyCord $15.5
million in cash and the assumption of net liabilities of $473,538.
The sale resulted in the recognition of an after-tax income of
$13.9 million, which is reflected as net income from discontinued
operations in the Consolidated Statements of
Operations.
The Company has classified the CBCTS assets and liabilities as
held-for-sale as of December 31, 2017 in the accompanying
Consolidated Balance Sheets and has classified the CBCTS operating
results, net of tax, as discontinued operations in the accompanying
Consolidated Statement of Operations for all periods presented.
Previously, CBCTS represented the sole operations of the
Company.
Background
Pursuant to the terms of the Purchase Agreement, FamilyCord agreed
to acquire from CBAI substantially all of the assets of CBAI and
its wholly-owned subsidiaries and to assume certain liabilities of
CBAI and its wholly-owned subsidiaries. FamilyCord agreed to pay a
purchase price of $15,500,000 in cash at closing with $3,000,000 of
the purchase price deposited into escrow to secure CBAI’s
indemnification obligations under the Purchase Agreement. The sale,
which was completed on May 17, 2018, did not include CBAI’s
cash, accounts receivables, and certain other excluded assets and
liabilities.
The assets sold and liabilities transferred in the transaction were
previously the sole revenue generating assets of the Company. The
results of operations associated with the assets sold have been
reclassified into discontinued operations for periods prior to the
completion of the transaction.
The
following is a summary of assets and liabilities sold, and gain
recognized, in connection with the sale of assets to
FamilyCord:
Other
current assets
|
$
|
45,391
|
|
Total
current assets
|
|
45,391
|
|
Customer contracts
and relationships, net of amortization
|
|
953,490
|
|
Property, plant
& equipment, less accumulated depreciation
|
|
23,685
|
|
Total
assets
|
$
|
1,022,566
|
|
|
|
|
|
Deferred
revenue
|
$
|
1,496,104
|
|
Total
liabilities
|
$
|
1,496,104
|
|
|
|
|
|
The
gain on sale of assets was reported during the period was
determined as follows:
|
|
|
|
Total
assets sold
|
$
|
1,022,566
|
|
Total
liability sold
|
|
1,496,104
|
|
Net
liability sold
|
|
473,538
|
|
|
|
|
|
Cash
received
|
|
12,500,000
|
|
Cash in
escrow
|
|
3,000,000
|
|
Total
consideration
|
|
15,500,000
|
|
|
|
|
|
Net
gain from sales of assets
|
$
|
15,973,537
|
|
Additionally, the operating results and cash flows related to
assets sold on May 17, 2018 are included in discontinued operations
in the Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the years ended December 31, 2018 and
December 31, 2017.
The following is summary of aggregate carrying amounts of the major
classes of assets and liabilities classified as held-for-sale as of
December 31, 2018 and December 31, 2017:
|
|
|
ASSETS
|
|
|
Inventory
|
$
--
|
$
45,762
|
Property and
equipment, net of accumulated depreciation
|
--
|
35,152
|
Customer contracts
and relationships, net of accumulated amortization
|
--
|
1,049,118
|
Total
assets
|
$
--
|
$
1,130,032
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Deferred
revenue
|
$
--
|
$
1,381,215
|
Total
liabilities
|
$
--
|
$
1,381,215
|
Income From Discontinued Operations
The sale of the majority of the assets related to the cord blood
and cord tissue stem cell operation represents a strategic shift in
the Company’s business. For this reason, the results of
operations related to the assets and liabilities held for sale for
all periods are classified as discontinued operations.
The
following is a summary of the results of operations related to the
assets held for sale for the years ended
December 31, 2018 and December 31,
2017
:
|
|
|
|
|
|
Revenue
|
$
1,108,382
|
$
2,994,676
|
Cost of
services
|
(473,312
)
|
(680,750
)
|
Gross
profit
|
635,070
|
2,313,926
|
Depreciation and
amortization
|
(99,231
)
|
(289,953
)
|
Income from
Discontinued Operations
|
535,839
|
2,023,973
|
FamilyCord
reimbursement
|
435,923
|
--
|
Gain on sale of
assets
|
15,973,537
|
--
|
Income from
discontinued operations before taxes
|
16,945,299
|
2,023,973
|
Income
taxes
|
714,624
|
--
|
Net income from
discontinued operations
|
17,659,923
|
2,023,973
|
The
following is a summary of net cash provided by operating activities
and investing activities for the years ended
December 31, 2018 and December 31,
2017
:
|
|
|
|
|
|
Cash provided by
discontinued operations
|
$
3,289,116
|
$
2,277,550
|
Cash provided by
investing activities of discontinued operations
|
$
12,500,000
|
$
--
|
Note 4. Property and Equipment
At
December 31, 2018 and 2017, property and equipment consisted
of:
|
|
|
|
Furniture and
fixtures
|
1-5
|
$
17,597
|
$
17,597
|
Computer
equipment
|
5
|
124,466
|
124,466
|
Laboratory
Equipment
|
1-5
|
5,837
|
5,837
|
Freezer
equipment
|
7-15
|
34,699
|
34,699
|
Leasehold
Improvements
|
5
|
102,862
|
102,862
|
|
|
285,461
|
285,461
|
Less: accumulated
depreciation and amortization
|
|
(285,461
)
|
(276,369
)
|
|
|
$
--
|
$
9,092
|
Assets
held for sale:
|
|
|
|
Furniture
and fixtures
|
1-5
|
$
--
|
$
5,432
|
Computer
equipment
|
5
|
--
|
93,339
|
Laboratory
Equipment
|
1-5
|
--
|
92,351
|
Freezer
equipment
|
7-15
|
--
|
329,526
|
|
|
--
|
520,648
|
Less: accumulated
depreciation and amortization
|
|
--
|
(485,496
)
|
|
|
$
--
|
$
35,152
|
For the
years ended December 31, 2018 and 2017, depreciation expense
totaled $5,066 and $5,368 respectively for continuing operations
and $5,862 and $22,383, respectively for discontinued
operations.
Note 5. Investment and Notes Receivable, Related
Parties
At
December 31, 2018 and 2017, notes receivable consist
of:
|
|
|
|
|
|
On September 29,
2014, the Company closed a transaction selling its stake in
BioCells to Diego Rissola; current President. Payments
are to be made annually, after June of 2015, and the last payment
due on or before June 1, 2025.
|
$
--
|
$
560,000
|
|
|
|
Unamortized
discount on BioCells note receivable
|
--
|
(140,040
)
|
|
$
--
|
$
419,960
|
Under
the Agreement with the purchaser of BioCells, BioCells was to make
payments as follows: $5,000 on or before October 12, 2014 (amount
paid in 2014); $10,000 on or before December 1, 2014 (amount paid
in 2015); $15,000 on or before March 1, 2015 (amount paid in 2015);
$15,000 on or before June 1, 2015 (amount paid in 2015); $45,000 on
or before June 1, 2016 (amount paid in 2016); $55,000 on or before
June 1, 2017 (amount paid in 2017); $55,000 on or before June 1,
2018 (amount paid in June 2018); $55,000 on or before June 1, 2019;
$65,000 on or before June 1, 2020; $75,000 on or before June 1,
2021; $75,000 on or before June 1, 2022; $75,000 on or before June
1, 2023; $80,000 on or before June 1, 2024; $80,000 on or before
June 1, 2025.
On
October 31, 2018, the Company entered into a settlement agreement
whereby the purchaser of BioCells agreed to make a one-time payment
of $294,988 to the Company to settle and all remaining payments and
obligations due under the BioCells purchase Agreement. The
settlement payment was received by the Company on November 6, 2018
and constitutes a full and final satisfaction of all outstanding
related obligations. The Company wrote off the remaining unpaid
receivable of $89,597 remaining under the terms of the
Agreement.
Note 6. Commitments and Contingencies
Operating Leases
On
January 21, 2014, the Company entered a First Amendment to Lease
(the “Amendment”), which extended its lease at the
property located at 1857 Helm Drive, Las Vegas (the
“Property”), Nevada through September 30,
2019. In connection with the Amendment, the Company
received an abatement of the entire amount of its rent for January
2014, except for common area maintenance (“CAM”)
charges. In addition, as of October 1, 2014, the
Company’s monthly lease payments reverted back to their rates
as they existed in June 2009, other than CAM charges, with annual
adjustments thereafter as set forth in the Amendment.
Moreover, the landlord had the option to lease a portion of the
premises then occupied by the Company to a third party, and if this
portion is leased to a third party, the Company’s monthly
rent amount was to be reduced
pro rata
with the portion of the
space leased to a third party. If the landlord was
unable to or elected not to lease a portion of the premises to a
third party by November 30, 2015 and each subsequent anniversary
thereof, the Company was to receive an additional abatement of one
month rent, excluding CAM charges, in December 2015, December 2016
and December 2017, respectively and as applicable. Effective
May 15, 2016, the Company entered a Second Amendment to Lease. The
Second Amendment to Lease sets forth that the square footage of the
Property has been reduced by 380 square feet, such that the
Property now consists of 16,523 square feet, confirms the
abatements set forth in the First Amendment to Lease, sets forth
that the Company’s CAM expenses and home owner association
costs shall be calculated based on the reduced square footage
amount, and confirms that the Company’s monthly rent amounts
will remain unchanged from the First Amendment to
Lease.
Commitments
for future minimum rental payments, by year, and in the aggregate,
to be paid under such operating lease as of December 31, 2018, were
as follows:
|
|
|
|
2019
|
145,835
|
Total
|
$
145,835
|
On
October 25, 2018, the Company entered into a sublease agreement
(“Sublease”) with a subtenant. The Sublease, approved
by the landlord on October 26, 2018, and includes essentially the
same terms and lease payment obligations included in the First
Amendment to Lease between the Company and the landlord. The
Company received $40,264 in rental payments from the subtenant in
2018.
The
Company’s rent expense was $166,558 and $162,899 during the
years ended December 31, 2018 and 2017, respectively.
Note 7. Share Based Compensation
Stock Option Plan
The
Company's Stock Option Plan permits the granting of stock options
to its employees, directors, consultants and independent
contractors for up to 8.0 million shares of its common stock. On
July 13, 2009, the Company also registered its 2009 Flexible Stock
Plan (the “Plan”), which increased the total shares
available to 4 million common shares. The Plan allows the Company
to issue either stock options or common shares.
On June
3, 2011, the Company registered its 2011 Flexible Stock Option
plan, and reserved 1,000,000 shares of the Company's common stock
for future issuance under such plan. The Company also canceled the
Company's 2010 Flexible Stock Plan and returned 501,991 reserved
but unused common shares back to its treasury.
Stock
options that vest at the end of a one-year period are amortized
over the vesting period using the straight-line method. For stock
options awarded using graded vesting, the expense is recorded at
the beginning of each year in which a percentage of the options
vests. The Company did not issue any stock options for the years
ended December 31, 2018 and 2017.
The
Company’s stock option activity was as follows:
|
|
Weighted Average
Exercise Price
|
Weighted Avg.
Contractual
Remaining
Life
|
|
|
|
|
Outstanding,
December 31, 2017
|
4,307,994
|
0.69
|
2.06
|
Granted
|
--
|
--
|
--
|
Exercised
|
--
|
--
|
--
|
Forfeited/Expired
|
--
|
--
|
--
|
Outstanding
December 31, 2018
|
4,307,994
|
0.69
|
1.06
|
Exercisable
December 31, 2018
|
4,307,994
|
0.69
|
1.06
|
The
following table summarizes significant ranges of outstanding stock
options under the stock option plan at December 31,
2018:
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Weighted
Average
Exercise
Price
|
Number
of
Options
Exercisable
|
Weighted
Average
Exercise
Price
|
$
0.53 — 1.11
|
4,307,994
|
1.06
|
$
0.69
|
4,307,994
|
$
0.69
|
|
4,307,994
|
1.06
|
$
0.69
|
4,307,994
|
$
0.69
|
Note 8. Income Tax
The
components of income (loss) consists of the following:
|
|
|
|
|
Loss
from continuing operations
|
$
(3,771,861
)
|
$
(1,616,561
)
|
Income
from discontinued operations
|
16,945,299
|
2,023,973
|
Income
before taxes
|
$
13,173,438
|
$
407,412
|
Income
tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
U.S.
Federal Tax
|
$
1,577,221
|
$
-
|
State
and Local Tax
|
123,393
|
|
Current
Income Tax
|
$
1,700,614
|
|
Deferred U.S.
Federal Tax
|
503,577
|
|
Total Income
Tax
|
$
2,204,191
|
$
-
|
The
difference between the provision for income taxes (benefit) and the
amount computed by applying the U.S. federal income tax rate for
the years ended December 31, 2018 and 2017 are as
follows:
|
|
|
|
|
Federal
income tax benefit/expense at statutory rate (34%)
|
21.00
%
|
34.0
%
|
State
income tax, net of federal benefit
|
0.63
|
--
|
Permanent
differences
|
0.00
|
2.10
|
Federal rate
reduction under tax reform
|
0.00
|
1,314.0
|
Other
|
0.00
|
(220.5
)
|
Reduction in
NOLs
|
48.54
|
|
Change in valuation
allowance
|
(55.84
)
|
(1,129.6
)
|
Effective income
tax rate
|
14.33
%
|
0.0
%
|
The
major components of the Company’s deferred tax assets as of
December 31, 2018 and 2017 are shown below.
|
|
|
Net
operating loss carryforwards
|
$
65,559
|
$
9,016,972
|
Other
deferred tax assets
|
38,648
|
22,350
|
Gain
Liability
|
(546,908
)
|
—
|
|
|
|
Deferred
tax liabilities, long-lived assets
|
—
|
(391,532
)
|
Valuation
allowance
|
(60,876
)
|
(8,647,790
)
|
Net
deferred tax assets (liabilities)
|
$
(503,577
)
|
$
—
|
Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted income tax rates in effect
for the year the temporary differences are expected to be recovered
or settled. Tax rate changes affecting deferred tax assets and
liabilities are recognized in the statement of operations at the
enactment date
The
Company has evaluated the positive and negative evidence bearing
upon the realization of its deferred tax assets and
liabilities. Under applicable accounting standards,
management has considered the Company’s operational history
and concluded that it is more likely than not the Company will
recognize partial benefits of its deferred tax assets for 2018
while a full valuation allowance was needed for
2017. Accordingly, a valuation allowance of $60,876 and
$8,647,790 was established at December 31, 2018 and 2017
respectively, to offset the net deferred tax assets. The decrease
in valuation allowance by $8,586,914 to $60,876 for the year ending
December 31, 2018 is primarily related to the utilization of net
operating loss carryforwards to offset current year income and also
the write-off of net operating losses due to Section 382 limitation
analysis. Additionally, for 2017 the valuation allowance was
reduced due to revaluation of deferred tax assets affected by the
reduction at the federal tax rate under the U.S. Tax Cuts and Jobs
Act enacted in December of 2017.
As of
2017, the Company neither had nor anticipated sufficient income to
absorb the benefits from net operating loss carryforwards, and
established a full valuation allowance. In 2018, with the sale of
assets consummated, the valuation allowance was released since net
operating losses were utilized due to taxable gain from the sale or
written-off due to Section 382 limitation. The tax benefit of
$714,624 from the Continuing Operations losses was offset with an
equivalent tax within the Discontinued Operations.
The
Company has U.S. federal net operating loss (“NOL”)
carryforwards available at December 31, 2018 of approximately
$312,000 that will begin to expire in 2025. The Company has its
operations in the state of Nevada, which does not have state income
taxes. The State of Nevada has a gross receipts tax, which is
included as a component of operating expenses.
Utilization
of the NOL carryforwards may be subject to a substantial annual
limitation under Section 382 of the Internal Revenue Code of 1986
due to ownership change limitations that could occur in the
future. These future ownership changes may limit the
amount of net operating loss carryforwards that can be utilized
annually to offset future taxable income and tax,
respectively. To the extent an ownership change may
occur, the NOL credit carryforwards and other deferred tax assets
may be subject to limitations.
On
December 22, 2017, President Trump signed into law the Tax Cuts and
Jobs Act (the “TCJA”) which significantly reforms the
Internal Revenue Code of 1986, as amended. The TCJA, among other
things, includes changes to U.S. federal tax rates, imposes
significant additional limitations on the deductibility of interest
and NOLs, allows for the expensing of capital expenditures, and
puts into effect the migration from a “worldwide”
system of taxation to a territorial system. The TCJA permanently
lowers the corporate federal income tax rate to 21% from the
existing maximum rate of 35%, effective for tax years including or
commencing on January 1, 2018. As a result of the
reduction of the corporate federal income tax rate to 21%, U.S.
GAAP requires companies to revalue their deferred tax assets and
deferred tax liabilities as of the date of enactment, with the
resulting tax effects accounted for in the reporting period of
enactment. This revaluation resulted in a provision of
$4,602,300 to income tax expense in continuing operations and a
corresponding reduction of the Company’s valuation
allowance. As a result of the offsetting valuation
allowance, there was no impact to the Company’s income
statement for the year ended December 31, 2017 from the reduction
in federal income tax rates.
We
previously provided a provisional estimate of the
effect of the Tax Act in our financial statements. In the fourth
quarter of 2018, we completed our analysis to determine there was
no additional effect of the Tax Act as of December 31,
2018.
For the
years ending December 31, 2018 and 2017, the Company is not aware
of any uncertain tax positions or benefits. The Company’s
policy is to record estimated interest and penalties related to
uncertain tax benefits as income tax expense. As of
December 31, 2018, and 2017, the Company had no accrued interest or
penalties recorded related to uncertain tax positions.
The tax
years 2013 through 2018 remain open to examination by major taxing
jurisdictions to which the Company is subject, which are primarily
in the U.S. The statute of limitations for U.S. net operating
losses utilized in future years will remain open beginning in the
year of utilization.
Note 9. Other
Certain U.S. Federal Income Tax Consequences of the Sale of
Assets
The sale of assets to FamilyCord was a transaction taxable to the
Company for United States federal income tax purposes. In general,
the Company will recognize taxable gain in an amount equal to the
difference, if any, between (i) the total amount realized by the
Company on the sale and (ii) the Company’s aggregate adjusted
tax basis in the assets sold. The total amount realized by the
Company on the sale will equal the cash the Company receives in
exchange for the assets sold, plus the amount of related
liabilities assumed by the Buyer or cancelled in the transaction.
The Company expects that a portion of the taxable gain recognized
on the sale will be offset by current year losses from operations
and available net operating loss carry forwards, as currently
reflected on our consolidated U.S. federal income tax returns.
However, the Company believes that a significant portion of its net
operating loss carryforwards will never be fully utilized and will
expire unused.
Our shareholders will not be subject to U.S. federal income tax on
the sale. However, as discussed below, our shareholders will be
subject to U.S. federal income tax upon the receipt of any
distribution of sale proceeds made by the Company to our
shareholders.
Certain U.S. Federal Income Tax Consequences of the Sale of Assets
to U.S. Shareholders
For purposes of this discussion, a “U.S. shareholder”
is a beneficial owner of shares of Company stock who or that is,
for U.S. federal income tax purposes:
●
an
individual who is a citizen or resident of the United
States;
●
corporation,
or any other entity taxable as a corporation, created or organized
in or under the laws of the United States, any state thereof or the
District of Columbia;
●
an
estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
●
any
trust (i) if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons (as defined in the United States
Internal Revenue Code of 1986) have the authority to control all
substantial decisions of the trust, or (ii) if a valid election is
in place to treat the person as a United States
person.
Pursuant to the Purchase Agreement, the Company may not dissolve or
liquidate for at least two years following closing of the
transaction. Therefore, prior to the Company’s adoption of a
plan of liquidation, each distribution made by the Company to a
U.S. shareholder is characterized as a dividend to the extent of
the Company’s current and accumulated earnings and profits
(as determined under U.S. federal income tax principles). Provided
that certain holding period requirements are satisfied, a dividend
received by a U.S. shareholder who is an individual, trust or
estate may qualify as “qualified dividend income” that
is currently subject to U.S. federal income tax at a maximum rate
of 20%. Dividends received by corporate U.S. shareholders may be
eligible for a dividend received deduction (subject to applicable
exceptions and limitations). Any portion of a distribution that
exceeds the Company’s current and accumulated earnings and
profits is treated as a non-taxable return of capital, reducing
such U.S. shareholder’s adjusted tax basis in its shares of
Company stock and, thereafter as gain from the sale or exchange of
Company stock.
If the Company adopts of a plan of liquidation in the future, the
tax consequences of each distribution to a U.S. shareholder will
change. The Company will provide an additional discussion of U.S.
federal income tax considerations if the Company adopts of a plan
of liquidation in the future.
Note 10. Tax Estimates and Tax Expense
For the
year ended December 31, 2018, income from discontinued operations
included a $1,237,753 of expense for estimated federal and state
income taxes arising from the sale of substantially all of the
Company’s assets and we have realized an income tax benefit
from continuing operations of $714,624 as a consequence of the
utilization of federal and state net operating loss
offsets.
The
Company recognizes interest and/or penalties related to uncertain
tax positions in income tax expense. For the year ended December
31, 2018, the Company accrued an income tax expense of $41,118 for
tax penalties and related interest imposed by the Internal Revenue
Service. The penalties covered tax years 2012 through 2014, and are
due to the late filing of Company tax returns.
Note 11. Stockholders’ Equity
Preferred Stock
The
Company has 5,000,000 shares of $0.0001 par value preferred stock
authorized, which includes 1,500,000 shares of Series A Preferred
Stock. As of December 31, 2018 and 2017, the Company had no
preferred stock issued and outstanding.
Common Stock
As of
December 31, 2018 the Company had 2,890,000,000 shares of $0.0001
par value common stock authorized. As of December 31, 2018 and
2017, the Company had 1,272,066,146 shares of common stock issued
and outstanding, and 20,000 shares remain in the Company’s
treasury.