The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017
(Unaudited)
Note 1 - Description of
Business, Basis of Presentation and Significant Accounting Policies
Cryo-Cell International, Inc. (the Company or
Cryo-Cell) was incorporated in Delaware on September 11, 1989 and is located in Oldsmar, Florida. The Company is organized in two reportable segments, cellular processing and cryogenic cellular storage, with a current focus on the
collection and preservation of umbilical cord blood stem cells for family use and the manufacture of PrepaCyte CB units, the processing technology used to process umbilical cord blood stem cells. Revenues recognized for the cellular processing and
cryogenic cellular storage represent sales of the umbilical cord blood stem cells program to customers, and income from licensees selling the umbilical cord blood stem cells program to customers outside the United States. Revenues recognized for the
manufacture of PrepaCyte CB units represent sales of the PrepaCyte CB units to customers. The Companys headquarters facility in Oldsmar, Florida handles all aspects of its U.S.-based business operations including the processing and storage of
specimens, including specimens obtained from certain of its licensees customers. The specimens are stored in commercially available cryogenic storage equipment.
The unaudited consolidated financial statements including the Consolidated Balance Sheets as of August 31, 2017 and November 30,
2016, the related Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended August 31, 2017 and August 31, 2016 and the Consolidated Statements of Cash Flows for the nine months ended August 31, 2017
and 2016 have been prepared by Cryo-Cell International, Inc. and its subsidiaries pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Certain financial information and note disclosures,
which are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations. It is suggested
that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Companys November 30, 2016 Annual Report on Form
10-K.
In the
opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows for all periods presented have been made. The results of
operations for the three and nine months ended August 31, 2017 are not necessarily indicative of the results expected for any interim period in the future or the entire year ending November 30, 2017.
Revenue Recognition
Revenue
Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements, the Company allocates revenue to all
deliverables based on their relative selling prices. In such circumstances, accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective
evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when the Company sells the deliverable
separately and it is the price actually charged by the Company for that deliverable.
The Company has identified two deliverables
generally contained in the arrangements involving the sale of its umbilical cord blood product. The first deliverable is the processing of a specimen. The
6
second deliverable is either the annual storage of a specimen, the
21-year
storage fee charged for a specimen or the life-time storage fee charged for a
specimen. The Company has allocated revenue between these deliverables using the relative selling price method. The Company has VSOE for its annual storage fees as the Company renews storage fees annually with its customers on a stand-alone basis.
Because the Company has neither VSOE nor TPE for the processing,
21-year
storage and life-time storage deliverables, the allocation of revenue has been based on the Companys ESPs. Amounts allocated to
processing a specimen are recognized at the time the processing of the specimen is complete. Amounts allocated to the storage of a specimen are recognized ratably over the contractual storage period. Any discounts given to the customer are
recognized by applying the relative selling price method whereby after the Company determines the selling price to be allocated to each deliverable (processing and storage), the sum of the prices of the deliverables is then compared to the
arrangement consideration, and any difference is applied to the separate deliverables ratably.
The Companys process for determining
its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing the ESPs for its processing,
21-year
storage and life-time storage fee include the Companys historical pricing practices, as well as expected profit margins.
The Company records revenue from processing and storage of specimens and pursuant to agreements with licensees. The Company recognizes revenue
from processing fees upon completion of processing and recognizes storage fees ratably over the contractual storage period as well as other income from royalties paid by licensees related to long-term storage contracts which the Company has under
license agreements. Contracted storage periods are annual,
twenty-one
years and lifetime. Deferred revenue on the accompanying consolidated balance sheets includes the portion of the annual storage fee, the
twenty-one-year
storage fee and the life-time storage fee that is being recognized over the contractual storage period as well as royalties received from foreign licensees
related to long-term storage contracts in which the Company has future obligations under the license agreement. The Company classifies deferred revenue as current if the Company expects to recognize the related revenue over the next 12 months. The
Company also records revenue within processing and storage fees from shipping and handling billed to customers when earned. Shipping and handling costs that the Company incurs are expensed and included in cost of sales.
The Company records revenue from the sale of the PrepaCyte CB product line upon shipment of the product to the Companys customers.
Income Taxes
Deferred income tax assets
and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to be recovered or settled. The Company has recorded a valuation allowance of $2,301,000 as of both August 31, 2017 and November 30, 2016, as the Company does not believe it is
more likely than not that all future income tax benefits will be realized. When the Company changes its determination as to the amount of deferred income tax assets that can be realized, the valuation allowance is adjusted with a
corresponding impact to income tax expense in the period in which such determination is made. The ultimate realization of the Companys deferred income tax assets depends upon generating sufficient taxable income prior to the expiration of the
tax attributes. In assessing the need for a valuation allowance, the Company projects future levels of taxable income. This assessment requires significant judgment. The Company examines the evidence related to the recent history of losses, the
economic conditions in which the Company operates and forecasts and projections to make that determination.
7
The Company recorded U.S. income taxes of approximately $437,000 and $1,039,000, for the three
and nine months ended August 31, 2017, respectively.
For the three months ended August 31, 2016, there was income tax benefit
of ($898,838). For the nine months ended August 31, 2016, there was an income tax benefit of ($697,103). There was approximately ($990,000) and ($842,000) of U.S. income tax benefit for the three and nine months ended August 31,
2016. The income tax benefit as of the three and nine months ended August 31, 2016 was due to the reversal of the Companys accrual in the second quarter of fiscal 2016 of U.S income tax expense. This was due to the
Companys net operating losses as of August 31, 2016.
The Company records foreign income taxes withheld from installment
payments of
non-refundable
up-front
license fees and royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the
Company has license agreements. The Company recognized approximately $53,000 and $91,000 for the three months ended August 31, 2017 and 2016, respectively, of foreign income tax expense. The Company recognized approximately $89,000 and $145,000
for the nine months ended August 31, 2017 and 2016, respectively, of foreign income tax expense. Foreign income tax expense is included in income tax expense in the accompanying consolidated statements of comprehensive income (loss).
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions meeting the
more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from managements belief that a position can or cannot be
sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the three and nine months ended
August 31, 2017 and August 31, 2016, the Company had no provisions for interest or penalties related to uncertain tax positions.
Accounts
Receivable
Accounts receivable consist of uncollateralized amounts due from clients that have enrolled and processed in the umbilical
cord blood stem cell processing and storage programs and amounts due from license affiliates, and sublicensee territories. Accounts receivable are due within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering the length of time accounts receivable are past due, the Companys previous loss history, and the clients
current ability to pay its obligations. Therefore, if the financial condition of the Companys clients were to deteriorate beyond the estimates, the Company may have to increase the allowance for doubtful accounts which could have a negative
impact on earnings. The Company
writes-off
accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
8
Long-Lived Assets
The Company evaluates the realizability of its long-lived assets, which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment, such as reductions in demand or when significant economic slowdowns are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted
expected future cash flows. If this comparison indicates that there is impairment and carrying value is in excess of fair value, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or
(ii) discounted expected future cash flows utilizing a discount rate. The Company did not note any impairment for the three and nine months ended August 31, 2017 and 2016.
Goodwill
Goodwill represents the excess
of the purchase price of the assets acquired from CytoMedical Design Group LLC (CMDG) (Note 2) over the estimated fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized but is tested for
impairment at least annually at the PrepaCyte CB reporting segment level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment loss, if any, is recognized based on a comparison of the fair
value of the asset to its carrying value, without consideration of any recoverability. The annual impairment assessment is performed during the fourth quarter and at other times if an event occurs or indicators of impairment exist by first assessing
qualitative factors to determine whether it is more likely than not that the fair value of the reporting segment is less than its carrying amount. If we conclude it is more likely than not that the fair value of goodwill is less than its carrying
amount, a quantitative impairment test is performed. During the third quarter of fiscal 2016, the Company determined that there were sufficient indicators to trigger an impairment analysis. During the fourth quarter of fiscal 2016, the Company
performed its annual impairment analysis. The Company concluded that an impairment of the PrepaCyte CB reporting segment existed during fiscal year 2016 and a goodwill impairment charge of $1,777,822 was recorded during fiscal year 2016.
Stock Compensation
As of August 31,
2017, the Company has two stock-based compensation plans, which are described in Note 11 to the unaudited consolidated financial statements. The Companys third stock-based employee compensation plan became effective December 1, 2011 as
approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting. The Company recognized approximately $238,000 and $433,000 for the three months ended August 31, 2017 and August 31, 2016, respectively, of
stock-based option compensation expense. The Company recognized approximately $709,000 and $821,000 for the nine months ended August 31, 2017 and August 31, 2016, respectively, of stock compensation expense.
The Company recognizes stock-based compensation based on the fair value of the related awards. Under the fair value recognition guidance of
stock-based compensation accounting rules, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of
service-based vesting condition and performance-based vesting condition stock option awards is determined using the Black-Scholes valuation model. For stock option awards with only service-based vesting conditions and graded vesting features, the
Company recognizes stock compensation expense based on the graded-vesting method. To value awards with market-based vesting conditions the Company uses a binomial valuation model. The Company recognizes compensation cost for awards with market-based
vesting conditions on a graded-vesting basis over the derived service period calculated by the binomial valuation model. The use of these valuation models involves assumptions that are judgmental and highly sensitive in the determination of
compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Forfeitures are estimated at the time of valuation and reduce expense ratably
over the vesting period.
9
The estimation of stock awards that will ultimately vest requires judgment and to the extent that
actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period they become known. The Company considered many factors when estimating forfeitures, including the recipient
groups and historical experience. Actual results and future changes in estimates may differ substantially from current estimates.
The
Company issues performance-based equity awards which vest upon the achievement of certain financial performance goals, including revenue and income targets. Determining the appropriate amount to expense based on the anticipated achievement of the
stated goals requires judgment, including forecasting future financial results. The estimate of the timing of the expense recognition is revised periodically based on the probability of achieving the required performance targets and adjustments are
made as appropriate. The cumulative impact of any revision is reflected in the period of the change. If the financial performance goals are not met, the award does not vest, so no compensation cost is recognized and any previously stock-recognized
stock-based compensation expense is reversed.
The Company issues equity awards with market-based vesting conditions which vest upon the
achievement of certain stock price targets. If the awards are forfeited prior to the completion of the derived service period, any recognized compensation is reversed. If the awards are forfeited after the completion of the derived service period,
the compensation cost is not reversed, even if the awards never vest.
Fair Value of Financial Instruments
Management uses a fair value hierarchy, which gives the highest priority to quoted prices in active markets. The fair value of financial
instruments is estimated based on market trading information, where available. Absent published market values for an instrument or other assets, management uses observable market data to arrive at its estimates of fair value. Management believes
that the carrying amount of cash and cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The Company believes that the fair value of
its Revenue Sharing Agreements (RSA) liability recorded on the balance sheet is between the recorded book value and up to the Companys previous settlement experience, due to the various terms and conditions associated with each
RSA.
The Company uses an accounting standard that defines fair value as an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure
fair value are as follows:
|
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
|
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data.
|
10
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
|
The following table summarizes the financial assets and liabilities measured at fair value on a
recurring basis as of August 31, 2017 and November 30, 2016, respectively, segregated among the appropriate levels within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Fair Value at
|
|
|
at August 31, 2017 Using
|
|
Description
|
|
August 31, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
117,760
|
|
|
$
|
117,760
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
406,118
|
|
|
|
406,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
523,878
|
|
|
$
|
523,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Fair Value at
|
|
|
at November 30, 2016 Using
|
|
Description
|
|
November 30, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
304,142
|
|
|
$
|
304,142
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
320,081
|
|
|
|
320,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
624,223
|
|
|
$
|
624,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a description of the valuation techniques used for these items, as well as the general
classification of such items pursuant to the fair value hierarchy:
Trading securities
Fair values for these investments are
based on quoted prices of identical securities in active markets and are therefore classified within Level 1 of the fair value hierarchy. For trading securities, there was $4,784 and ($29,371) in unrealized holding gain
and loss, respectively, recorded in other income and expense on the accompanying consolidated statements of comprehensive income (loss) for the three months ended August 31, 2017 and 2016. For trading securities, there was ($60,425) and
($50,023) in unrealized holding loss recorded in other income on the accompanying consolidated statements of comprehensive income (loss) for the nine months ended August 31, 2017 and 2016.
Available-for-sale
securities
These investments
are classified as available for sale and consist of marketable equity securities that we intend to hold for an indefinite period of time. Investments are stated at fair value and unrealized holding gains and losses are reported as a component of
accumulated other comprehensive income until realized. Realized gains or losses on disposition of investments are computed using the first in, first out (FIFO) method and reported as income or loss in the period of disposition in the accompanying
consolidated statements of comprehensive income (loss). For
available-for-sale
securities, there was $34,038 and ($14,122) in unrealized holding gain and loss, net of
tax, respectively, reported as comprehensive income (loss) on the accompanying statements of comprehensive income (loss) for the three months ended August 31, 2017 and 2016. For
available-for-sale
securities, there was $60,678 and ($114,342) in unrealized holding gain and loss, net of tax, respectively, reported as a component of comprehensive
income (loss) on the accompanying consolidated statements of comprehensive income (loss) for the nine month period ended August 31, 2017 and 2016.
11
Product Warranty and Cryo-Cell Cares
TM
Program
In December 2005, the Company began providing its customers that enrolled after December 2005 a payment warranty under which the Company agrees
to pay $50,000 to its client if the umbilical cord blood product retrieved is used for a stem cell transplant for the donor or an immediate family member and fails to engraft, subject to various restrictions. Effective February 1, 2012, the
Company increased the $50,000 payment warranty to a $75,000 payment warranty to all of its new clients. Effective June 5, 2017, the Company increased the $75,000 payment warranty to a $100,000 payment warranty to all of its new clients that
enroll in the Companys premium product, PrepaCyte CB. Clients that enroll in the standard product will receive a $75,000 payment warranty. Additionally, under the Cryo-Cell CaresTM program, the Company will pay $10,000 to the client to offset
personal expenses if the umbilical cord blood product is used for bone marrow reconstitution in a myeloblative transplant procedure. The product warranty and the Cryo-Cell Cares program are available to clients who enroll under this structure for as
long as the specimen is stored with the Company. The Company has not experienced any claims under the warranty program nor has it incurred costs related to these warranties. The Company does not maintain insurance for this warranty program and
therefore maintains reserves to cover any estimated potential liabilities. The Companys reserve balance is based on the $100,000, $75,000 or $50,000 (as applicable) maximum payment and the $10,000 maximum expense reimbursement multiplied by
formulas to determine the projected number of units requiring a payout. The Company determined the estimated expected usage and engraftment failure rates based on an analysis of the historical usage and failure rates and the historical usage and
failure rates in other private and public cord blood banks based on published data. The Companys estimates of expected usage and engraftment failure could change as a result of changes in actual usage rates or failure rates and such changes
would require an adjustment to the established reserves. The historical usage and failure rates have been very low and a small increase in the number of transplants or engraftment failures could cause a significant increase in the estimated rates
used in determining the Companys reserve. In addition, the reserve will increase as additional umbilical cord blood specimens are stored which are subject to the warranty. As of August 31, 2017 and November 30, 2016 the Company
recorded reserves under these programs in the amounts of approximately $18,000 and $17,000, respectively, which are included in accrued expenses in the accompanying consolidated balance sheets.
Recently Issued Accounting Pronouncements
In May 2017, the FASB issued Accounting Standards Update
No. 2017-09,
Compensation Stock
Compensation (Topic 718): Scope of Modification Accounting.
This update provides clarity, reduces the diversity in practice, and the cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a
share-based payment award. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, although early adoption is permitted. The Company is currently evaluating the effect
that the updated standard will have on our financial statements.
Note 2 Goodwill
On June 11, 2015, the Company entered into an Asset Purchase Agreement (the APA) with CMDG, for the purchase of certain assets
and assumption of certain liabilities and contracts that CMDG used in the operation of its cord blood business, including the PrepaCyte CB Processing System which is used in cell processing laboratories to process and store stem cells from umbilical
cord blood (the Acquisition). This transaction was accounted for as a business combination. The purchase price was $2,400,000, plus the value of inventory, comprised of $1,553,272 in cash and assumed liabilities of the
12
seller less any prepayment made by the Company to CMDG ($966,597 at closing and $586,675 on or before September 30, 2015) and a note payable to the seller in the amount of $1,300,000. The
closing was effective on June 30, 2015.
In connection with the APA, the Company assumed an exclusive perpetual license agreement
which enables the Company to use licensed technology in its umbilical cord blood processing and storage product for cord blood banking. Under the terms of the APA, the Company was to pay a royalty of $5 per bag set unit sold, subject to minimum
annual royalties totaling $35,000. On July 12, 2017, the Company entered into a First Amendment to License Agreement (the Amendment) to pay $100,000 as royalties for the licenses granted and per the Amendment the license will be
fully paid and no further royalty payments or license fees will be due or owed now or in the future. As of the three and nine months ended August 31, 2017, royalty expense was $94,800 and $112,830, respectively, and is reflected in Cost of
Sales on the accompanying comprehensive statements of income (loss). As of the three and nine months ended August 31, 2016, royalty expense associated with PrepaCyte CB was $8,425 and $22,755, respectively, and is reflected in Cost of Sales on
the accompanying comprehensive statements of income (loss).
Goodwill represents the excess of the purchase price of the assets acquired
from CMDG over the estimated fair value of the net tangible and identifiable intangible assets acquired. The annual impairment assessment is performed as of September 30th each year, and an assessment is performed at other times if an event occurs
or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. Step one of the impairment assessment compares the fair value of the reporting unit to its carrying value and if the fair value
exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds the fair value, the implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value exceeds the carrying value then goodwill
is not impaired; otherwise, an impairment loss would be recorded by the amount the carrying value exceeds the implied fair value.
During
the third quarter of fiscal 2016, the Company determined that there were sufficient indicators to trigger an interim goodwill impairment analysis. Goodwill is included in the PrepaCyte CB reporting segment and the indicators included, among other
factors: (1) decline in projected revenues, (2) decline in forecasted cash flows, and (3) loss of a key customer.
Goodwill
impairment testing is a
two-step
process. Step one involves comparing the fair value of the reporting unit to its carrying amount. If the carrying amount of the reporting unit is greater than zero and its fair
value is greater than its carrying amount, there is no impairment. Fair value can be determined using market, income or cost-based approaches. Our determination of estimated fair value of the reporting unit is based on a combination of the
income-based and market-based approaches. Under the income-based approach, the Company determined fair value based on estimated discounted cash flows. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended
to reflect the overall level of inherent risk of the reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA
margins, discount rates and future market conditions, among others. Under the market-based approach, we determined fair value using the Guideline Company Method, comparing our reporting unit to similar, publicly-traded
companies, developing multiples and applying them to our earnings and revenue bases. As a result of the analysis, the Company concluded that the carrying value of the reporting unit exceeded its estimated fair value. The second step of the process
was then performed to measure the amount of impairment loss.
Step two involves comparing the implied fair value of the reporting unit
goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
13
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. As a result of the analysis, the Company concluded that an impairment of the PrepaCyte CB
reporting segment existed as the carrying amount of the reporting unit exceeded the implied fair value. Applying ASC 350,
Intangibles-Goodwill and Other
guidance, the Company recorded a goodwill impairment charge of $1,666,430 as of
August 31, 2016.
The annual impairment assessment was performed as of September 30, 2016. The Company concluded that there was
an additional impairment of the PrepaCyte CB reporting segment as the carrying amount of the reporting unit exceeded the implied fair value. Applying ASC 350,
Intangibles-Goodwill and Other
guidance, the Company recorded an additional
goodwill impairment charge of $111,392 as of November 30, 2016.
As of August 31, 2017, and November 30, 2016, there is no
goodwill reflected on the consolidated balance sheets.
The operating results of PrepaCyte CB have been included in the consolidated
statements of comprehensive income (loss) since the date of acquisition.
Note 3 Inventory
The components of inventory at August 31, 2017 and November 30, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
November 30, 2016
|
|
Raw materials
|
|
$
|
|
|
|
$
|
9,100
|
|
Work-in-process
|
|
|
123,232
|
|
|
|
|
|
Finished goods
|
|
|
194,943
|
|
|
|
261,000
|
|
Collection kits
|
|
|
25,300
|
|
|
|
98,760
|
|
Inventory reserve
|
|
|
(7,718
|
)
|
|
|
(7,718
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
335,757
|
|
|
$
|
361,142
|
|
|
|
|
|
|
|
|
|
|
Note 4 Intangible Assets
The Company incurs certain legal and related costs in connection with patent and trademark applications. If a future economic benefit is
anticipated from the resulting patent or trademark or an alternate future use is available to the Company, such costs are capitalized and amortized over the expected life of the patent or trademark. The Companys assessment of future economic
benefit involves considerable management judgment. A different conclusion could result in the reduction of the carrying value of these assets.
During the quarter ended August 31, 2016, the Company determined that there were sufficient indicators to trigger an interim goodwill
impairment analysis (Note 2). The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment
loss occurred requires a comparison of the carrying amount to the sum of the future forecasted undiscounted cash flows expected to be generated by the asset per ASC 360,
Property, Plant and Equipment
. As a result of the Companys
two-step
impairment analysis, an impairment of intangible assets within the Prepacyte
®
CB reporting segment, license agreement and customer relationships,
existed and an intangible asset impairment charge of $211,267 was recorded as of August 31, 2016.
14
Intangible assets were as follows as of August 31, 2017 and November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives
|
|
|
August 31, 2017
|
|
|
November 30, 2016
|
|
Patents
|
|
|
10-20 years
|
|
|
$
|
34,570
|
|
|
$
|
34,570
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(11,335
|
)
|
|
|
(9,937
|
)
|
License agreement
|
|
|
10 years
|
|
|
|
470,000
|
|
|
|
470,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
|
|
(185,000
|
)
|
|
|
(185,000
|
)
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(83,944
|
)
|
|
|
(60,194
|
)
|
Customer relationships
|
|
|
15 years
|
|
|
|
41,000
|
|
|
|
41,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
|
|
(26,267
|
)
|
|
|
(26,267
|
)
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(3,961
|
)
|
|
|
(3,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Intangible Assets
|
|
|
|
|
|
$
|
235,063
|
|
|
$
|
261,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangibles was $8,646 and $12,902 for the three months ended August 31, 2017 and
August 31, 2016, respectively. Amortization expense of intangibles was $25,936 and $38,252 for the nine months ended August 31, 2017 and August 31, 2016, respectively.
Note 5 Notes Payable
On
June 30, 2015, the Company entered into a note payable in the amount of $1,300,000 in connection with the APA (Note 2). The note was payable in 48 monthly installments of $29,938 including principal and interest at the rate of 5% per annum,
commencing on July 31, 2015, and ending on June 30, 2019. Pursuant to the APA, the note was secured by all assets, inventory, molds and tools sold and transferred to the Company, tangible personal property held for sale or lease, accounts,
contract rights, and other rights to payment and general intangibles.
On April 22, 2016 the Company paid $778,287 which constituted
payment in full of the Companys payment obligations to CMDG pursuant to the terms of the original APA and Promissory Note, as well as pursuant to the terms of the Loan/Promissory Note Sale Agreement and Mutual Release executed by the Company
and CMDG on April 22, 2016. Prior to making the payment in full, the Company made payments totaling $269,443 pursuant to the terms of the original APA and Promissory Note. The difference between the remaining principal balance and the final
payment made on April 22, 2016 was $300,593 which was recorded as gain on extinguishment of debt for the nine months ended August 31, 2016 on the accompanying consolidated statements of comprehensive income (loss).
As of the three months ended August 31, 2016, the Company recognized $0 of interest expense related to the note payable. As of the nine months ended August 31, 2016, the Company recognized $22,265 of interest
expense related to the note payable.
On May 20, 2016, the Company entered into a Credit Agreement (Agreement) with Texas
Capital Bank, National Association (TCB) for a term loan of $8.0 million in senior credit facilities. The proceeds of the term loan were used by the Company to fund repurchases of the Companys common stock. Subject to the
terms of the Agreement, on May 20, 2016, TCB advanced the Company $100.00. On July 1, 2016, TCB advanced the remaining principal amount of $7,999,900 per a promissory note dated May 20, 2016 between the Company and TCB, at a rate of
3.75% per annum plus LIBOR, payable monthly with a maturity date of July 2021. On August 26, 2016, the Company entered into a First Amendment to Credit Agreement with TCB. Pursuant to terms of the First Amendment to Credit Agreement, on
August 26, 2016, TCB made an additional advance to the Company in principal amount of $2,133,433 per an Amended and Restated Promissory Note dated August 26, 2016 between the Company and TCB. The additional proceeds of the term loan were
used by the Company to fund a portion of the Settlement
15
Agreement and Release of All Claims with Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family. As of August 31, 2017 and November 30, 2016,
principal paid to date is $2,133,000 and $633,000, respectively, at a rate of 3.75% per annum plus LIBOR. As of the three month and nine months ended August 31, 2017, the Company paid interest of $102,868 and $309,385, respectively, which is
reflected in interest expense on the accompanying consolidated statements of comprehensive income (loss). As of the three and nine months ended August 31, 2016, the Company paid interest of $29,947 and $29,947, respectively.
On May 20, 2016, the Company also entered into a Subordination Agreement with TCB and CrowdOut Capital LLC (CrowdOut) for a
subordinated loan of the principal amount of $650,000, which amount CrowdOut advanced to the Company on May 20, 2016. The proceeds of the subordinated loan were to be used by the Company to fund continued repurchases of the Companys
common stock. Per a promissory note dated May 20, 2016 between the Company and CrowdOut, interest at 12% per annum on the principal sum of $650,000 was payable monthly with a maturity date of July 2021, at which time, the principal amount of
$650,000 was payable. On June 5, 2017, the principal sum of $650,000 plus interest of $867 was paid to CrowdOut and the subordinated loan was paid in full. As of the three and nine months ended August 31, 2017, the Company paid interest of
$867 and $40,300, respectively which is reflected in interest expense on the accompanying consolidated statements of comprehensive income. As of the three and nine months ended August 31, 2016, the Company paid interest of $15,817 and $15,817
respectively.
Collateral of the term and subordinated loans includes all money, securities and property of the Company.
The Company incurred debt issuance costs related to the term loan in the amount of $378,785 which is recorded as a direct reduction of the
carrying amount of the note payable and amortized over the life of the loan. As of the three and nine months ended August 31, 2017, $30,427 and $96,870, respectively, of the debt issuance costs were amortized and are reflected in interest
expense on the accompanying consolidated statements of comprehensive income. As of the three and nine months ended August 31, 2016, $0 and $0, respectively, of the debt issuance costs were amortized.
As of August 31, 2017 and November 30, 2016, the note payable obligation was as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
November 30, 2016
|
|
Note payable
|
|
$
|
8,000,100
|
|
|
$
|
10,150,100
|
|
Unamortized debt issuance costs
|
|
|
(233,481
|
)
|
|
|
(330,350
|
)
|
|
|
|
|
|
|
|
|
|
Net note payable
|
|
$
|
7,766,619
|
|
|
$
|
9,819,750
|
|
|
|
|
|
|
|
|
|
|
Current portion of note payable
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
Long-term note payable, net of debt issuance costs
|
|
|
5,766,619
|
|
|
|
7,819,750
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,766,619
|
|
|
$
|
9,819,750
|
|
|
|
|
|
|
|
|
|
|
Interest expense on the note payable for the three and nine months ended August 31, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three
months ended
August 31, 2017
|
|
|
For the nine
months ended
August 31, 2017
|
|
Interest expense on notes payable
|
|
$
|
103,735
|
|
|
$
|
349,685
|
|
Debt issuance costs
|
|
|
30,427
|
|
|
|
96,869
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
134,162
|
|
|
$
|
446,554
|
|
|
|
|
|
|
|
|
|
|
16
Note 6 Segment Reporting
During the third quarter of fiscal 2015, the Company purchased certain assets and assumed certain liabilities and contracts that CMDG used in
the operation of its cord blood business (See Note 2). The Company evaluated and determined that this acquisition qualifies as a separate segment.
The
Company is organized in two reportable segments:
|
1.
|
The cellular processing and cryogenic storage of umbilical cord blood and cord tissue stem cells for family use. Revenue is generated from the initial processing and testing fees and the annual
storage fees charged each year for storage (the Umbilical cord blood and cord tissue stem cell service).
|
|
2.
|
The manufacture of Prepacyte
®
CB units, the processing technology used to process umbilical cord blood stem cells. Revenue is generated from the sales of the
Prepacyte
®
CB units (the Prepacyte
®
-CB).
|
The following table shows, by segment: net revenue, cost of sales, depreciation and amortization, operating profit, interest expense, and income tax (expense)
benefit for the three months and nine months ended August 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended August 31,
2017
|
|
|
For the nine months
ended August 31, 2017
|
|
Net revenue
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
6,780,565
|
|
|
$
|
18,567,285
|
|
Prepacyte
®
-CB
|
|
|
115,376
|
|
|
|
342,031
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
6,895,941
|
|
|
$
|
18,909,316
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,771,403
|
|
|
$
|
4,681,276
|
|
Prepacyte
®
-CB
|
|
|
206,072
|
|
|
|
404,262
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
1,977,475
|
|
|
$
|
5,085,538
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
24,295
|
|
|
$
|
69,734
|
|
Prepacyte
®
-CB
|
|
|
9,064
|
|
|
|
27,191
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
33,359
|
|
|
$
|
96,925
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,552,168
|
|
|
$
|
3,850,206
|
|
Prepacyte
®
-CB
|
|
|
(99,935
|
)
|
|
|
(89,597
|
)
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
1,452,233
|
|
|
$
|
3,760,609
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
314,890
|
|
|
$
|
937,248
|
|
Prepacyte
®
-CB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
314,890
|
|
|
$
|
937,248
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
(490,558
|
)
|
|
$
|
(1,128,012
|
)
|
Prepacyte
®
-CB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
(490,558
|
)
|
|
$
|
(1,128,012
|
)
|
|
|
|
|
|
|
|
|
|
17
The following table shows the assets by segment as of August 31, 2017 and November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2017
|
|
|
As of November 30,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
20,761,483
|
|
|
$
|
18,960,261
|
|
Prepacyte
®
-CB
|
|
|
555,328
|
|
|
|
578,207
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,316,811
|
|
|
$
|
19,538,468
|
|
|
|
|
|
|
|
|
|
|
The following table shows, by segment: net revenue, cost of sales, depreciation and amortization, operating profit, interest
expense, and income tax (expense) benefit for the three months and nine months ended August 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended August 31,
2016
|
|
|
For the nine months
ended August 31, 2016
|
|
Net revenue
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
6,243,803
|
|
|
$
|
16,970,939
|
|
Prepacyte
®
-CB
|
|
|
88,135
|
|
|
|
286,253
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
6,331,938
|
|
|
$
|
17,257,192
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,482,900
|
|
|
$
|
4,073,293
|
|
Prepacyte
®
-CB
|
|
|
68,331
|
|
|
|
257,329
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
1,551,231
|
|
|
$
|
4,330,622
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
27,310
|
|
|
$
|
84,542
|
|
Prepacyte
®
-CB
|
|
|
12,436
|
|
|
|
38,624
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
39,746
|
|
|
$
|
123,166
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
808,254
|
|
|
$
|
1,864,325
|
|
Prepacyte
®
-CB
|
|
|
(1,870,329
|
)
|
|
|
(1,887,594
|
)
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
$
|
(1,062,075
|
)
|
|
$
|
(23,269
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
199,439
|
|
|
$
|
781,971
|
|
Prepacyte
®
-CB
|
|
|
|
|
|
|
22,265
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
199,439
|
|
|
$
|
804,236
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
898,838
|
|
|
$
|
697,103
|
|
Prepacyte
®
-CB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
$
|
898,838
|
|
|
$
|
697,103
|
|
|
|
|
|
|
|
|
|
|
18
Note 7 Income (Loss) per Common Share
The following table sets forth the calculation of basic and diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
August 31, 2017
|
|
|
August 31, 2016
|
|
|
August 31, 2017
|
|
|
August 31, 2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
652,019
|
|
|
($
|
2,644,361
|
)
|
|
$
|
1,635,882
|
|
|
($
|
2,130,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding-basic
|
|
|
7,100,232
|
|
|
|
7,583,771
|
|
|
|
7,049,782
|
|
|
|
8,546,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares issuable upon exercise of stock options
|
|
|
694,623
|
|
|
|
|
|
|
|
613,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares-diluted
|
|
|
7,794,855
|
|
|
|
7,583,771
|
|
|
|
7,663,366
|
|
|
|
8,546,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
($
|
0.35
|
)
|
|
$
|
0.23
|
|
|
($
|
0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.08
|
|
|
($
|
0.35
|
)
|
|
$
|
0.21
|
|
|
($
|
0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
For the three and nine months ended August 31, 2017, the Company excluded the effect of
22,500 and 22,500 options from the computation of diluted earnings per share, as the effect of potentially dilutive shares from the outstanding stock options would be anti-dilutive.
For the three and nine months ended August 31, 2016, the Company excluded the effect of all outstanding stock options from the
computation of diluted earnings per share, as the effect of potentially dilutive shares from the outstanding stock options would be anti-dilutive.
Note 8 Stockholders Equity
Employee Stock Incentive Plan
The
Company maintains the 2006 Stock Incentive Plan (the 2006 Plan) under which it has reserved 1,000,000 shares of the Companys common stock for issuance pursuant to stock options, restricted stock, stock-appreciation rights (commonly
referred to as SARs) and stock awards (i.e. performance options to purchase shares and performance units). As of August 31, 2017 and November 30, 2016, there were 560,500 and 572,281 options issued, but not yet exercised, under
the 2006 Plan, respectively. As of August 31, 2017, there were 211,929 shares available for future issuance under the 2006 Plan.
The
Company also maintains the 2012 Equity Incentive Plan (the 2012 Plan) which became effective December 1, 2011 as approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting on July 10, 2012.
The 2012 Plan originally reserved 1,500,000 shares of the Companys common stock for issuance pursuant to stock options, restricted stock, SARs, and other stock awards (i.e. performance shares and performance units). In May 2012, the Board of
Directors approved an amendment to the 2012 Plan to increase the number of shares of the Companys common stock reserved for issuance to 2,500,000 shares. As of August 31, 2017, there were 569,729 service-based options issued, 129,729
service-based restricted common shares granted, 640,970 performance-based and 116,240 market-based restricted common shares granted under the 2012 Plan. As of November 30, 2016, there were 569,729 service-based options issued, 129,729
service-based restricted common shares granted, 630,970 performance-based and 116,240 market-based restricted common shares granted under the 2012 Plan. As of August 31, 2017, there were 1,043,332 shares available for
future issuance under the 2012 Plan.
Service-based vesting condition options
The fair value of each option award is estimated on the date of the grant using the Black-Scholes valuation model that uses the assumptions
noted in the following table. Expected volatility is based on the historical volatility of the Companys stock over the most recent period commensurate with the expected life of the Companys stock options. The Company uses historical data
to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of
options granted to employees is calculated, in accordance with the simplified method for plain vanilla stock options allowed under GAAP. Expected dividends are based on the historical trend of the Company not issuing
dividends.
There were 22,500 options granted during the three and nine months ended August 31, 2017, respectively.
There were 35,000 and 204,729 options granted during the three and nine months ended August 31, 2016, respectively.
20
Variables used to determine the fair value of the options granted for the three and nine months
ended August 31, 2017 and August 31, 2016, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
August 31, 2017
|
|
|
August 31, 2016
|
|
|
August 31, 2017
|
|
|
August 31, 2016
|
|
Weighted average values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividends
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
52.06%
|
|
|
|
66.09%
|
|
|
|
52.06%
|
|
|
|
66.39%
|
|
Risk free interest rate
|
|
|
1.82%
|
|
|
|
1.09%
|
|
|
|
1.82%
|
|
|
|
1.22%
|
|
Expected life
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
|
|
5.6 years
|
|
Stock option activity for options with only service-based vesting conditions for the nine months ended
August 31, 2017, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term (Years)
|
|
|
Intrinsic
Value
|
|
Outstanding at November 30, 2016
|
|
|
1,142,010
|
|
|
$
|
2.36
|
|
|
|
4.99
|
|
|
$
|
2,157,112
|
|
|
|
|
|
|
Granted
|
|
|
22,500
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(26,781
|
)
|
|
|
1.92
|
|
|
|
|
|
|
|
78,149
|
|
Expired/forfeited
|
|
|
(7,500
|
)
|
|
|
1.66
|
|
|
|
|
|
|
|
38,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2017
|
|
|
1,130,229
|
|
|
$
|
2.47
|
|
|
|
4.41
|
|
|
$
|
4,844,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 31, 2017
|
|
|
1,044,697
|
|
|
$
|
2.34
|
|
|
|
4.12
|
|
|
$
|
4,610,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the nine months ended August 31,
2017 and August 31, 2016 was $3.25 and $1.86, respectively.
The aggregate intrinsic value represents the total value of the
difference between the Companys closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of
in-the-money
stock options that would have been received by the option holders had all option holders exercised their options on either August 31, 2017 or
November 30, 2016, as applicable. The intrinsic value of the Companys stock options changes based on the closing price of the Companys stock.
During the three and nine months ended August 31, 2017, the Company issued 0 and 26,781 common shares to option holders who exercised
options for $0 and $51,396, respectively.
During the three and nine months ended August 31, 2016, the Company issued 23,399 common
shares to option holders who exercised options for $40,340, respectively.
21
Significant option groups outstanding and exercisable at August 31, 2017 and related price
and contractual life information are as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Contractual
Life (Years)
|
|
|
Average
Exercise Price
|
|
|
Outstanding
|
|
|
Average
Exercise Price
|
|
$1.01 to $ 2.00
|
|
|
425,000
|
|
|
|
4.17
|
|
|
$
|
1.73
|
|
|
|
425,000
|
|
|
$
|
1.73
|
|
$2.01 to $ 3.00
|
|
|
455,500
|
|
|
|
2.81
|
|
|
|
2.58
|
|
|
|
455,500
|
|
|
|
2.58
|
|
$3.01 to $4.00
|
|
|
227,229
|
|
|
|
7.82
|
|
|
|
3.18
|
|
|
|
162,325
|
|
|
|
3.19
|
|
$6.01 to $7.00
|
|
|
22,500
|
|
|
|
6.89
|
|
|
|
7.00
|
|
|
|
1,872
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,130,229
|
|
|
|
4.41
|
|
|
$
|
2.47
|
|
|
|
1,044,697
|
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys
non-vested
options as of
August 31, 2017, and changes during the nine months ended August 31, 2017, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested
at November 30, 2016
|
|
|
97,406
|
|
|
$
|
1.84
|
|
|
|
|
Granted
|
|
|
22,500
|
|
|
|
3.25
|
|
Vested
|
|
|
(34,374
|
)
|
|
|
1.92
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
at August 31, 2017
|
|
|
85,532
|
|
|
$
|
2.18
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2017, there was approximately $109,000 of total unrecognized compensation cost related
to
non-vested
share-based compensation arrangements granted under the 2006 Plan and the 2012 Plan. The cost is expected to be recognized over a weighted-average period of .65 years as of August 31, 2017.
The total fair value of shares vested during the nine months ended August 31, 2017 was approximately $66,000.
During the second
fiscal quarter of 2016, the Company entered into Amended and Restated Employment Agreements (2016 Employment Agreements) with each of the Companys
Co-CEOs.
Per the Employment Agreements, each
of the
Co-CEOs
is to receive base grant equity awards in the form of qualified options of the Companys common stock. As of April 15, 2016, David Portnoy and Mark Portnoy were granted 70,270 and
59,459 options of the Companys common stock, respectively. The options were issued under the Companys 2012 Stock Plan and will vest 1/3 upon grant, 1/3 on December 1, 2016 and the remaining 1/3 on November 30, 2017. The fair
value of these options vested as of August 31, 2017 was approximately $213,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income (loss). As of August 31,
2017, there was approximately $31,000 of total unrecognized compensation cost related to the
non-vested
options of common stock and these will continue to vest as notated above and per the 2016 Employment
Agreements through November 30, 2017.
Performance and market-based vesting condition options
There were no performance-based or market-based vesting condition options granted during the three months and nine months ended August 31,
2017 and August 31, 2016, respectively. As of August 31, 2017 and August 31, 2016, there were no performance or market-based vesting condition options outstanding.
22
Restricted common shares
During the first fiscal quarter of 2014, the Company entered into Amended and Restated Employment Agreements (Employment
Agreements) with each of the Companys
Co-CEOs.
The Employment Agreements provide for the grant of restricted shares of the Companys common stock based on certain performance measures being
attained by each of the Companys
Co-CEOs.
The Employment Agreements provide that if David Portnoy and Mark Portnoy are employed by the Company on November 30, 2015, then no later than
February 15, 2016, the Company will grant up to 186,487 and 162,163 shares of restricted common shares, respectively, based on certain performance thresholds, as defined in the agreements. The Company issued David Portnoy 118,062 shares and
Mark Portnoy 102,663 shares during the first quarter of fiscal 2016. As of August 31, 2016, there was $0 of total unrecognized compensation cost related to the issuance of these shares of restricted common shares.
As of April 15, 2016, the Company entered into Amended and Restated Employment Agreements (Employment Agreements) with each
of the Companys
Co-CEOs.
The Employment Agreements provide for the grant of shares of the Companys common stock based on certain performance measures being attained by each of the Companys
Co-CEOs
during fiscal year 2016. The Employment Agreements state if David Portnoy and Mark Portnoy are employed by the Company on November 30, 2016, then no later than February 28, 2017, the Company will
grant up to 186,487 and 162,163 shares of common stock. Based upon the performance measures being attained, the Company granted 183,145 and 159,257 shares of common stock to David Portnoy and Mark Portnoy, respectively. The fair value of the shares
granted for fiscal 2016 was approximately $1,252,000 and was reflected as selling, general and administrative expense in the consolidated statements of comprehensive income (loss) for the year ended November 30, 2016. There was $0 of total
unrecognized compensation cost related to the fiscal 2016 performance measures as of August 31, 2017. As of August 31, 2017, the Company has recognized approximately $542,000 of compensation cost related to the fiscal 2017 performance
measures and there was approximately $181,000 in unrecognized compensation cost related to the fiscal 2017 performance measures.
As of
April 18, 2016, the Company entered into a second Amendment Agreement (the Amendment), with the Companys CIO Oleg Mikulinsky effective December 1, 2015, amending certain terms of the Amendment Agreement dated May 1,
2013 and Mikulinsky Employment Agreement dated March 5, 2012. The Amendment provides for the grant of shares of the Companys common stock based on certain performance measures being attained by the Company during fiscal year 2016. The
Amendment states if Executive is employed by the Company on November 30, 2016, then no later than February 28, 2017, the Company will grant Executive up to 20,000 shares of restricted stock based on performance as set forth in the
Amendment. Based upon performance measures being attained, the Company granted 19,620 shares of common stock to Oleg Mikulinksy. The fair value of the shares granted was approximately $78,000. There was $0 of total unrecognized compensation cost as
of August 31, 2017.
Note 9 License Agreements
The Company enters into two types of licensing agreements and in both types, the Company earns revenue on the initial license fees. Under the
technology agreements, the Company earns processing and storage royalties from the affiliates that process in their own facility. Under the marketing agreements, the Company earns processing and storage revenues from affiliates that store specimens
in the Companys facility in Oldsmar, Florida.
23
Technology Agreements
The Company has entered into a definitive License and Royalty Agreement with LifeCell International Private Limited, formerly Asia Cryo-Cell
Private Limited, (LifeCell) to establish and market its umbilical cord blood and menstrual stem cell programs in India.
Per
the License and Royalty Agreement with Lifecell, there is a $1 Million cap on the amount of royalties due to the Company per year and a $10 Million cap on the amount of royalties due to the Company for the term of the License and Royalty Agreement.
As of August 31, 2017, Lifecell has paid the Company $5.325 Million for royalties due under the terms of the License and Royalty Agreement.
Marketing Agreements
The Company has
definitive license agreements to market the Companys umbilical cord blood stem cell programs in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama and Pakistan.
The following table details the initial license fees for the technology and marketing agreements and processing and storage royalties earned
under the technology agreements for the three and nine months ended August 31, 2017 and August 31, 2016. The initial license fees and processing and storage royalties are reflected in licensee and royalty income in the accompanying
consolidated statements of comprehensive income (loss).
Processing and Storage Royalties
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August 31, 2017
|
|
|
Nine Months
Ended
August 31, 2017
|
|
India
|
|
$
|
492,208
|
|
|
$
|
820,877
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
492,208
|
|
|
$
|
820,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August 31, 2016
|
|
|
Nine Months
Ended
August 31, 2016
|
|
India
|
|
$
|
609,045
|
|
|
$
|
965,977
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
609,045
|
|
|
$
|
965,977
|
|
|
|
|
|
|
|
|
|
|
Note 10 Legal Proceedings
On December 3, 2015, a complaint styled
Gary T. Brotherson, M.D., et al. v. Cryo-Cell International, Inc.,
Case No.
15-007461-CI,
Circuit Court, Sixth Judicial Circuit, Pinellas County, Florida, was served on the Company, naming it as defendant and alleging, among other things, that the
Company breached certain agreements with plaintiffs and seeking damages in excess of $15,000, the jurisdictional amount of the court in which the action is pending. On January 12, 2016, the Company served its answer, affirmative defenses,
and counterclaim against the plaintiffs. The Company believes the plaintiffs claims are without merit and it intends to contest the action vigorously. At this time, it is not possible for the
24
Company to estimate the loss or the range of possible loss in the event of an unfavorable outcome, as the ultimate resolution of the complaint is uncertain at this time. No amounts have been
accrued as of August 31, 2017.
In addition, from time to time the Company is subject to proceedings, lawsuits, contract disputes and
other claims in the normal course of its business. The Company believes that the ultimate resolution of current matters should not have a material adverse effect on the Companys business, consolidated financial position or results of
operations. It is possible, however, that there could be an unfavorable ultimate outcome for or resolution which could be material to the Companys results of operations for a particular quarterly reporting period. Litigation is inherently
uncertain and there can be no assurance that the Company will prevail. The Company does not include an estimate of legal fees and other related defense costs in its estimate of loss contingencies.
Note 11 Share Repurchase Plan
In December 2011, the Companys Board of Directors authorized management at its discretion to repurchase up to one million (1,000,000)
shares of the Companys outstanding common stock. On June 6, 2012, the Board of Directors of the Company increased the number of shares of the Companys outstanding common stock that management is authorized to repurchase to up to
three million (3,000,000). On April 8, 2015, the Board of Directors of the Company increased the number of shares of the Companys outstanding common stock that management is authorized to repurchase to up to six million (6,000,000)
shares. On October 6, 2016, the Board of Directors of the Company increased the number of shares of the Companys outstanding common stock that management is authorized to repurchase to up to eight million (8,000,000) shares. The
repurchases must be effectuated through open market purchases, privately negotiated block trades, unsolicited negotiated transactions, and/or pursuant to any trading plan that may be adopted in accordance with Rule
10b5-1
of the Securities and Exchange Commission or in such other manner as will comply with the provisions of the Securities Exchange Act of 1934.
On June 30, 2015, the Company commenced a partial tender offer to purchase up to 750,000 shares of its common stock, at a price of $3.25
per share. The maximum number of shares proposed to be purchased in the tender offer represented 7.76% of Cryo-Cells outstanding common shares (including shares of unvested restricted stock) as of June 30, 2015. On June 29, 2015, the
last trading day prior to the commencement of the tender offer, the last sale price of Cryo-Cells shares reported on the OTCBB was $2.29 per share. The tender offer expired on July 28, 2015. Cryo-Cell accepted for purchase 557,805 shares
of its common stock, including all odd lots properly tendered, at a purchase price of $3.25 per share, for an aggregate cost of $1,812,866 excluding fees and expenses relating to the tender offer.
On June 20, 2016, the Company entered into a Stock Purchase Agreement with Ki Yong Choi and Michael Cho. Pursuant to the Stock Purchase
Agreement, the Company purchased 2,179,068 Shares from Ki Yong Choi and 13,416 Shares from Michael Cho for $4.50 per share, $9,866,178 in the aggregate, that was funded through the proceeds of a term loan for approximately $8 million in senior
credit facilities and the remainder through the working capital of the Company.
As of August 31, 2017, the Company had repurchased
an aggregate of 5,801,086 shares of the Companys common stock at an average price of $3.37 per share through open market and privately negotiated transactions. The Company purchased 86,915 and 2,429,033 shares of the Companys common
stock during the nine months ended August 31, 2017 and August 31, 2016, respectively, at an average price of $5.14 per share and $4.39 per share, respectively.
25
The repurchased shares will be held as treasury stock and have been removed from common shares
outstanding as of August 31, 2017 and November 30, 2016. As of August 31, 2017 and November 30, 2016, 5,801,086 and 5,714,868 shares, respectively, were held as treasury stock.
Subsequent to the balance sheet date, the Company has not repurchased any additional shares of the Companys common stock.
Note 12 Cancellation of Revenue Sharing Agreements
On July 27, 2016 the Company entered into a Settlement Agreement and Release of All Claims (Agreement) with Charles D. Nyberg
and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family Trust (collectively, the Nybergs). Pursuant to the terms of the Agreement, on August 26, 2016, the Company made a
one-time
lump-sum
payment in the amount of $3.4 million (the Settlement Payment). In consideration of the Settlement Payment, all legal claims brought
against the Company by the Nybergs pursuant to a lawsuit, will be settled. Additionally, in consideration of the Settlement Payment, the Nybergs, who owned the rights to and interests in 50% of each of the Florida Revenue Sharing Agreement and the
Texas Revenue Sharing Agreement (together, the RSAs) terminated their rights to these interests in the RSAs, resulting in a 50% reduction in the Companys ongoing payment obligations under the RSAs. Pursuant to the terms of the
Agreement, the Nybergs no longer have the rights to share in a portion of the Companys storage revenues derived from specimens which originated in the states of Florida and Texas, including all rights to any storage revenues generated and
unpaid prior to the date of the Agreement including entitlements that were due for the quarter ended May 31, 2016. The payment amount of $3.4 million was offset by the carrying amount of the long-term liability related to the RSAs in the
amount of $875,000 and accrued expenses in the amount of $272,612 to reflect the extinguishment of revenue sharing agreements in the amount of $2,252,388 for the three and nine months ended August 31, 2016.