NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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.
CBAI previously disclosed that it anticipates distributing proceeds
from the FamilyCord sale to shareholders. On February 11,
2020, the Company’s Board of Directors approved a plan of
dissolution (the “Plan”) that is subject to shareholder
approval. If the Company’s shareholders approve the Plan, the
Company presently intends to make an initial distribution of at
least $0.0048 per share of common stock as promptly as reasonably
possible thereafter. Based on the information
currently available to it, the Company is unable to estimate the
aggregate amount which will ultimately be distributed to its
shareholders. The actual amounts of any distributions may vary
substantially, depending on, among other things, whether the
Company becomes subject to any additional liabilities or claims,
including potential claims for indemnification relating to sales of
the Company’s assets, whether the Company incurs unexpected
or greater than expected losses with respect to contingent
liabilities, the extent to which the Company is able to monetize
any remaining non-cash assets and any future amounts received by
the Company in connection with, among other things, all future
amounts received by the Company, including the amount of FamilyCord
sale proceeds to be released from escrow upon the termination of
the escrow in May 2020 CBAI and its Board of Directors continue to
contemplate a distribution, given the Company’s expenses and
other contingencies the total proceeds ultimately paid out to
shareholders will be significantly less than the gross purchase
price the Company received from its Purchase Agreement with
FamilyCord.
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.
Sale of China Stem Cell Stock and Convertible Debt
The
Company entered into an Asset Purchase Agreement, dated June 19,
2019, with Golden Sun Multi-Manager Fund LP (“Golden
Sun”), whereby the Company sold all shares and convertible
debt it held in China Stem Cells Ltd. (“China Stem
Cells”) to Golden Sun. The total proceeds from the sale was
$50,000. The Company previously wrote-off the entire value of the
China Stem Cells shares and convertible debt held by the Company,
and accrued a gain for the full value of sale proceeds received on
its statement of operations for the nine months ended September 30,
2019.
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 accounting standard codification (“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.
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.
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. The value of cash and cash equivalents held by the
Company at a bank in excess of federally insured limits was
$11,282,312 during the period ended December 31, 2019.
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 $0.00 and
$10,220 in bad debt expense during the years ended December 31,
2019 and 2018, 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, 2019 and 2018 was $0.00
and $27,345 respectively.
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, 2019 and December 31, 2018, 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 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, ASU
2014-09 requires new and enhanced disclosures. 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.
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, 2019 and 2018. The Company files
income tax returns with the Internal Revenue Service
(“IRS”) and various state jurisdictions.
Accounting for Stock Option Plan
The
Company follows the provisions of Accounting Standards Codification
(“ASC”) 718, “Accounting for Stock-based
Compensation”), which requires recognition in the
consolidated financial statements of the cost of employee and
director services received in exchange for an award of equity
instruments over the period the employee or director is required to
perform the 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, 2019 and
2018, 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, 2019, 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.
There
were no financial instruments measured on a recurring basis as of
December 31, 2019 and 2018 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.
Comprehensive Income and Loss
The
Company had no items that would be classified as other
comprehensive income or loss for the years ended December 31, 2019
and 2018.
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 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 determined that there no impact this ASU
on the consolidated financial statements and related disclosures.
The Company has no long-term operating leases on the date of
adoption.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. This new
standard removes, adds and modifies certain disclosure
requirements for fair value measurements in Topic
820. The Company will no longer be required to disclose the
amount of and reasons for transfers between Level 1 and Level 2 of
the fair value hierarchy, and the valuation processes of Level 3
fair value measurements. However, the Company will be required to
additionally disclose the changes in unrealized gains and losses
included in other comprehensive income for recurring Level 3 fair
value measurements, and the range and weighted average of
assumptions used to develop significant unobservable inputs for
Level 3 fair value measurements. The ASU is effective for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The amendments relating to
additional disclosure requirements will be applied prospectively
for only the most recent interim or annual period presented in the
initial year of adoption. All other amendments will be applied
retrospectively to all periods presented upon their effective date.
The Company is permitted to early adopt either the entire ASU
or only the provisions that eliminate or modify the
requirements. The Company evaluated the impact of this
pronouncement and concluded that the guidance does not have a
material impact on its financial position and results of
operations.
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income
Taxes, which is intended to simplify the accounting standard
and improve the usefulness of information provided in the financial
statements. The Company intends to implement this new accounting
guidance effective January 1, 2021, however early adoption is
permitted. The Company is currently assessing the impact this new
accounting guidance will have on its financial
statements.
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 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
during the year ended December 31, 2018:
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, 2019 and December
31, 2018.
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, 2019 and
December 31, 2018:
|
|
|
|
|
|
Revenue
|
$--
|
$1,108,382
|
Cost of
services
|
--
|
(473,312)
|
Gross
profit
|
--
|
635,070
|
Depreciation and
amortization
|
--
|
(99,231)
|
Income from
Discontinued Operations
|
--
|
535,839
|
FamilyCord
reimbursement
|
--
|
435,923
|
Gain on sale of
assets
|
--
|
15,973,537
|
Income from
discontinued operations before taxes
|
--
|
16,945,299
|
Income
taxes
|
--
|
(714,624)
|
Net income from
discontinued operations
|
--
|
16,230,675
|
The
following is a summary of net cash provided by operating activities
and investing activities for the years ended December 31, 2019 and
December 31, 2018:
|
|
|
|
|
|
Cash provided by
discontinued operations
|
$--
|
$3,289,116
|
Cash provided by
investing activities of discontinued operations
|
$--
|
$12,500,000
|
Note 4. Property and Equipment
At
December 31, 2019 and 2018, property and equipment consisted
of:
|
|
|
|
Furniture and
fixtures
|
1-5
|
$--
|
$17,597
|
Computer
equipment
|
5
|
--
|
124,466
|
Laboratory
Equipment
|
1-5
|
--
|
5,837
|
Freezer
equipment
|
7-15
|
--
|
34,699
|
Leasehold
Improvements
|
5
|
--
|
102,862
|
|
|
--
|
285,461
|
Less: accumulated
depreciation and amortization
|
|
--
|
(285,461)
|
|
|
$--
|
$--
|
Assets
held for sale:
|
|
|
|
Furniture
and fixtures
|
1-5
|
$--
|
$--
|
Computer
equipment
|
5
|
--
|
--
|
Laboratory
Equipment
|
1-5
|
--
|
--
|
Freezer
equipment
|
7-15
|
--
|
--
|
|
|
--
|
--
|
Less: accumulated
depreciation and amortization
|
|
--
|
--
|
|
|
$--
|
$--
|
For the
years ended December 31, 2019 and 2018, depreciation expense
totaled $0.00 and $5,066, respectively, for continuing operations
and $0.00 and $5,862, respectively, for discontinued
operations.
Note 5. 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. All lease
payments due for the Second Amendment Lease for the three and nine
months ended September 30, 2019, were paid by September 30, 2019.
On October 25, 2018, the Company entered into a sublease agreement
(“Sublease”) for its offices at 1857 Helm Drive, Las
Vegas, Nevada, pursuant to which a sub-tenant (the
“Sublessee”) occupied the offices in exchange for
payment of the rent for the offices to the landlord. The Sublease,
and the Company’s underlying lease for the offices, ended on
September 30, 2019 and the Sublessee vacated the
offices.
On
October 1, 2019, the Company moved to a new corporate headquarters
located at 3753 Howard Hughes Parkway, Suite 200, Office #258, Las
Vegas, Nevada. The new month-to-month lease for the Company’s
headquarters was entered into on August 21, 2019 and commenced on
October 1, 2019. The Company believes that it has adequate space
for its anticipated needs.
The
Company’s rent expense was $18,211 and $166,558 during the
years ended December 31, 2019 and 2018, respectively.
Note 6. 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, 2019 and 2018.
The
Company’s stock option activity was as follows:
|
|
Weighted Average
Exercise Price
|
Weighted Avg.
Contractual
Remaining
Life
|
|
|
|
|
Outstanding,
December 31, 2018
|
4,307,994
|
0.69
|
1.06
|
Granted
|
--
|
--
|
--
|
Exercised
|
--
|
--
|
--
|
Forfeited/Expired
|
3,643,934
|
--
|
--
|
Outstanding
December 31, 2019
|
664,060
|
0.53
|
0.40
|
Exercisable
December 31, 2019
|
664,060
|
0.53
|
0.40
|
The
following table summarizes significant ranges of outstanding stock
options under the stock option plan at December 31,
2019:
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Weighted
Average
Exercise
Price
|
Number
of
Options
Exercisable
|
Weighted
Average
Exercise
Price
|
$.53
|
664,060
|
0.40
|
$0.53
|
664,060
|
$0.53
|
-
|
664,060
|
0.40
|
$0.53
|
664,060
|
$0.53
|
Note 7. Income Tax
The
components of income (loss) consists of the following:
|
|
|
|
|
Loss from
continuing operations
|
$(402,976)
|
$(3,771,861)
|
Income from
discontinued operations
|
-
|
19,113,490
|
Income before
taxes
|
$(402,976)
|
$15,341,629
|
For
the year ended December 31, 2019, income from discontinued
operations included a $279,951 tax benefit for federal and state
income taxes arising from a 2014 asset sale that had originally
been treated as a capital gain when it should have been treated as
a capital loss.
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
|
(86,176)
|
503,577
|
Total Income
Tax
|
$(86,176)
|
$2,204,191
|
The Company has realized an income tax benefit from continuing
operations of $86,176 as a consequence of the utilization of
federal and state net operating loss
offsets.
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, 2019 and 2018 were as
follows:
|
|
|
|
|
Federal income tax
benefit/expense at statutory rate (34%)
|
21.00%
|
21.00%
|
State income tax,
net of federal benefit
|
23.12
|
0.63
|
Capital loss
benefit
|
46.47
|
0.00
|
Valuation
allowance
|
1.14
|
(55.84)
|
Reduction in
NOLs
|
0.00
|
48.54
|
Other
|
(2.51)
|
0.00
|
Effective income
tax rate
|
89.22%
|
14.33%
|
The
major components of the Company’s deferred tax assets as of
December 31, 2019 and 2018 are shown below.
|
|
|
Net operating loss
carryforwards
|
$144,551
|
$65,559
|
Other deferred tax
assets
|
25,491
|
38,648
|
Gain
Liability
|
(600,516)
|
(546,908)
|
Valuation
allowance
|
(56,193)
|
(60,876)
|
Net deferred tax
assets (liabilities)
|
$(486,667)
|
$(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.
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 2019 and
2018. Accordingly, a valuation allowance of $56,193 and
$60,876 was established at December 31, 2019 and 2018,
respectively, to offset the net deferred tax assets. The decrease
in valuation allowance by $4,683 to $56,193 for the year ending
December 31, 2019 was 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.
The
Company has U.S. federal net operating loss (“NOL”)
carryforwards available at December 31, 2019 of approximately
$688,340 that will begin to expire in 2025. The 2019 NOLs of
$376,155 will have an indefinite life and will not expire under the
Tax Cuts and Jobs Act (the “TCJA”). 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 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, 2019 and 2018, 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, 2019, and 2018, the Company had no accrued interest or
penalties recorded related to uncertain tax positions.
The tax
years 2014 through 2019 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 8. 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.
On
February 11, 2020, the Company’s Board of Directors approved
a plan of dissolution (the “Plan”) that is subject to
shareholder approval. If the Company’s shareholders approve
the Plan, the Company presently intends to make an initial
distribution of at least $0.0048 per share of common stock as
promptly as reasonably possible thereafter. Based on the
information currently available to it, the Company is unable to
estimate the aggregate amount which will ultimately be distributed
to its shareholders.
Note 9. Tax Estimates and Tax Expense
For the
year ended December 31, 2019, income from discontinued operations
included a $279,951 tax benefit for federal and state income
taxes arising from a 2014 asset sale that had originally been
treated as a capital gain when it should have been treated as a
capital loss. In addition, we have realized an income tax
benefit from continuing operations of $86,176 as a consequence of
the utilization of federal and state net operating loss
offsets.
Note 10. 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, 2019 and 2018, the Company had no
preferred stock issued and outstanding.
Common Stock
As of
December 31, 2019 the Company had 2,890,000,000 shares of $0.0001
par value common stock authorized. As of December 31, 2019 and
2018, the Company had 1,272,066,146 shares of common stock issued
and outstanding, and 20,000 shares remain in the Company’s
treasury.
Note 11. Subsequent Events
On
February 11, 2020, the Company’s Board of Directors approved
a Plan of Dissolution of the Company (the “Plan of
Dissolution”) for the orderly liquidation and wind-up of the
Company (the “Dissolution”). The Plan and the
Dissolution are contingent on approval of the Plan by the
Company’s shareholders. If the Company’s
shareholders approve the Plan, the Company presently intends to
make an initial distribution of at least $0.0048 per share of
common stock as promptly as reasonably possible thereafter. Based
on the information currently available to it, the Company is unable
to estimate the aggregate amount which will ultimately be
distributed to its shareholders. The actual amounts of any
liquidating distributions may vary substantially, depending on,
among other things, whether the Company becomes subject to any
additional liabilities or claims, including potential claims for
indemnification relating to sales of the Company’s assets,
whether the Company incurs unexpected or greater than expected
losses with respect to contingent liabilities, the extent to which
the Company is able to monetize any remaining non-cash assets and
any future amounts received by the Company in connection with,
among other things, all future amounts received by the Company,
including the amount of asset sale proceeds to be released from
escrow upon the termination of the escrow in May 2020.