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
May 31, 2017
(Unaudited)
Note 1 Description
of Business, Basis of Presentation and Significant Accounting Policies
Cryo-Cell International, Inc. (the Company or
Cryo-Cell) was incorporated in Delaware on September 11, 1989 and is located in Oldsmar, Florida. The Company is organized in two reportable segments, cellular processing and cryogenic cellular storage, with a current focus on the
collection and preservation of umbilical cord blood stem cells for family use and the manufacture of PrepaCyte CB units, the processing technology used to process umbilical cord blood stem cells. Revenues recognized for the cellular processing and
cryogenic cellular storage represent sales of the umbilical cord blood stem cells program to customers, and income from licensees selling the umbilical cord blood stem cells program to customers outside the United States. Revenues recognized for the
manufacture of PrepaCyte CB units represent sales of the PrepaCyte CB units to customers. The 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 May 31, 2017 and November 30, 2016,
the related Consolidated Statements of Comprehensive Income for the three and six months ended May 31, 2017 and May 31, 2016 and the Consolidated Statements of Cash Flows for the six months ended May 31, 2017 and May 31, 2016
have been prepared by Cryo-Cell International, Inc. and its subsidiaries (the Company or Cryo-Cell) pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Certain
financial information and note disclosures, which are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to
those rules and regulations. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the 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 six months ended May 31, 2017 are not necessarily indicative of the results expected for any interim period in the future or the entire year ending November 30, 2017.
Revenue Recognition
Revenue
Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements, the Company allocates revenue to all
deliverables based on their relative selling prices. In such circumstances, accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective
evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when the Company sells the deliverable
separately and it is the price actually charged by the Company for that deliverable.
The Company has identified two deliverables
generally contained in the arrangements involving the sale of its umbilical cord blood product. The first deliverable is the processing of a specimen. The second deliverable is either the annual storage of a specimen, the 21-year storage fee charged
for a specimen or the life-time storage fee charged for a specimen. The Company has allocated revenue
6
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 and $2,301,000 as of May 31, 2017 and November 30, 2016, as the Company does not believe it
is more likely than not that all future income tax benefits will be realized. When the Company changes its determination as to the amount of deferred income tax assets that can be realized, the valuation allowance is adjusted with a
corresponding impact to income tax expense in the period in which such determination is made. The ultimate realization of the 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 $296,000 and $148,000, for the three
months ended May 31, 2017 and May 31, 2016, respectively. The Company recorded U.S. income taxes of approximately $602,000 and $148,000 for the six months ended May 31, 2017 and May 31, 2016, respectively.
The Company records foreign income taxes withheld from installment payments of non-refundable up-front license fees and royalty income earned
on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The Company recognized approximately $36,000 and $54,000 for the three months ended May 31, 2017 and 2016,
respectively, of foreign income tax expense. The Company recognized approximately $36,000 and $54,000 for the six months ended May 31, 2017 and 2016, respectively, of foreign income tax expense. Foreign income tax expense is included in income
tax expense in the accompanying consolidated statements of comprehensive income.
The Company recognizes the financial statement benefit
of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from 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 six months
ended May 31, 2017 and May 31, 2016, the Company had no provisions for interest or penalties related to uncertain tax positions.
Long-Lived
Assets
The Company evaluates the realizability of its long-lived assets, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment, such as reductions in demand or when significant economic slowdowns are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to
undiscounted expected future cash flows. If this comparison indicates that there is impairment and carrying value is in excess of fair value, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted
market prices or (ii) discounted expected future cash flows utilizing a discount rate. The Company did not note any impairment for the three and six months ended May 31, 2017 and 2016.
Goodwill
Goodwill represents the excess
of the purchase price of the assets acquired from CytoMedical Design Group LLC (CMDG) (Note 2) over the estimated fair value of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized but is tested for
impairment at least annually at the PrepaCyte CB reporting segment level or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment loss, if any, is recognized based on a comparison of the fair
value of the asset to its carrying value, without consideration of any recoverability. The annual impairment assessment is performed during the fourth quarter and at other times if an event occurs or indicators of impairment exist by first assessing
qualitative factors to determine whether it is more likely than not that the fair value of the reporting segment is less than its carrying amount. If we conclude it is more likely than not that the fair value of goodwill is less than its carrying
amount, a quantitative impairment test is performed. During the third quarter of fiscal 2016, the Company determined that
8
there were sufficient indicators to trigger an impairment analysis. During the fourth quarter of fiscal 2016, the Company performed its annual impairment analysis. The Company concluded that an
impairment of the PrepaCyte CB reporting segment existed during fiscal year 2016 and a goodwill impairment charge of $1,777,822 was recorded during fiscal year 2016.
Stock Compensation
As of May 31,
2017, the Company has two stock-based compensation plans, which are described in Note 8 to the unaudited consolidated financial statements. The Companys most recent stock-based employee compensation plan became effective December 1, 2011
as approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting. The Company recognized approximately $394,000 and $136,000 for the three months ended May 31, 2017 and May 31, 2016, respectively, of stock
compensation expense. The Company recognized approximately $471,000 and $388,000 for the six months ended May 31, 2017 and May 31, 2016, respectively, of stock compensation expense.
The Company recognizes stock-based compensation based on the fair value of the related awards. Under the fair value recognition guidance of
stock-based compensation accounting rules, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of
service-based vesting condition and performance-based vesting condition stock option awards is determined using the Black-Scholes valuation model. For stock option awards with only service-based vesting conditions and graded vesting features, the
Company recognizes stock compensation expense based on the graded-vesting method. To value awards with market-based vesting conditions the Company uses a binomial valuation model. The Company recognizes compensation cost for awards with market-based
vesting conditions on a graded-vesting basis over the derived service period calculated by the binomial valuation model. The use of these valuation models involves assumptions that are judgmental and highly sensitive in the determination of
compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Forfeitures are estimated at the time of valuation and reduce expense ratably
over the vesting period.
The estimation of stock awards that will ultimately vest requires judgment and to the extent that actual results
or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period they become known. The Company considered many factors when estimating forfeitures, including the recipient groups and
historical experience. Actual results and future changes in estimates may differ substantially from current estimates.
The Company issues
performance-based equity awards which vest upon the achievement of certain financial performance goals, including revenue and income targets. Determining the appropriate amount to expense based on the anticipated achievement of the stated goals
requires judgment, including forecasting future financial results. The estimate of the timing of the expense recognition is revised periodically based on the probability of achieving the required performance targets and adjustments are made as
appropriate. The cumulative impact of any revision is reflected in the period of the change. If the financial performance goals are not met, the award does not vest, so no compensation cost is recognized and any previously stock-recognized
stock-based compensation expense is reversed.
The Company issues equity awards with market-based vesting conditions which vest upon the
achievement of certain stock price targets. If the awards are forfeited prior to the completion of the derived service period, any recognized compensation is reversed. If the awards are forfeited after the completion of the derived service period,
the compensation cost is not reversed, even if the awards never vest.
9
Fair Value of Financial Instruments
Management uses a fair value hierarchy, which gives the highest priority to quoted prices in active markets. The fair value of financial
instruments is estimated based on market trading information, where available. Absent published market values for an instrument or other assets, management uses observable market data to arrive at its estimates of fair value. Management believes
that the carrying amount of cash and cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The Company believes that the fair value of
its Revenue Sharing Agreements (RSA) liability recorded on the balance sheet is between the recorded book value and up to the Companys previous settlement experience, due to the various terms and conditions associated with each
RSA.
The Company uses an accounting standard that defines fair value as an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure
fair value are as follows:
|
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
|
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
|
The following table summarizes the financial assets and liabilities measured at fair value on a recurring
basis as of May 31, 2017 and November 30, 2016, respectively, segregated among the appropriate levels within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
May 31, 2017
|
|
|
Fair Value Measurements
at May 31, 2017 Using
|
|
Description
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
112,976
|
|
|
$
|
112,976
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
365,364
|
|
|
|
365,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
478,340
|
|
|
$
|
478,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
November 30,
2016
|
|
|
Fair Value Measurements
at November 30, 2016 Using
|
|
Description
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities
|
|
$
|
304,142
|
|
|
$
|
304,142
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
320,081
|
|
|
|
320,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
624,223
|
|
|
$
|
624,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The following is a description of the valuation techniques used for these items, as well as the
general classification of such items pursuant to the fair value hierarchy:
Trading securities
Fair values for these
investments are based on quoted prices in active markets and are therefore classified within Level 1 of the fair value hierarchy. For trading securities, there was ($38,590) and ($823) in unrealized holding loss, respectively, recorded in other
income and expense on the accompanying consolidated statements of comprehensive income for the three months ended May 31, 2017 and 2016. For trading securities, there was ($65,210) and ($20,652) in unrealized holding loss, respectively,
recorded in other income and expense on the accompanying consolidated statements of comprehensive income for the six months ended May 31, 2017 and 2016.
Available-for-sale securities
These investments are classified as available for sale and consist of marketable equity
securities that we intend to hold for an indefinite period of time. Investments are stated at fair value and unrealized holding gains and losses are reported as a component of accumulated other comprehensive income until realized. Realized gains or
losses on disposition of investments are computed using the first in, first out (FIFO) method and reported as income or loss in the period of disposition in the accompanying consolidated statements of comprehensive income. For available-for-sale
securities, there was $33,701 and ($6,493) in unrealized holding gain and loss, net of tax, respectively, reported as comprehensive income on the accompanying statements of comprehensive income for the three months ended May 31, 2017 and 2016.
For available-for-sale securities, there was $26,640 and ($100,220) in unrealized holding gain and loss, net of tax, respectively, reported as a component of comprehensive income on the accompanying consolidated statements of comprehensive income
for the six month period ended May 31, 2017 and 2016.
Product Warranty and Cryo-Cell
Cares
TM
Program
In December 2005, the Company began providing its customers that
enrolled after December 2005 a payment warranty under which the Company agrees to pay $50,000 to its client if the umbilical cord blood product retrieved is used for a stem cell transplant for the donor or an immediate family member and fails to
engraft, subject to various restrictions. Effective February 1, 2012, the Company increased the $50,000 payment warranty to a $75,000 payment warranty to all of its new clients. Additionally, under the Cryo-Cell Cares
TM
program, the Company will pay $10,000 to the client to offset personal expenses if the umbilical cord blood product is used for bone marrow reconstitution in a myeloblative transplant procedure.
The product warranty and the Cryo-Cell Cares program are available to clients who enroll under this structure for as long as the specimen is stored with the Company. The Company has not experienced any claims under the warranty program nor has it
incurred costs related to these warranties. The Company does not maintain insurance for this warranty program and therefore maintains reserves to cover any estimated potential liabilities. The Companys reserve balance is based on the $75,000
or $50,000 (as applicable) maximum payment and the $10,000 maximum expense reimbursement multiplied by formulas to determine the projected number of units requiring a payout. The Company determined the estimated expected usage and engraftment
failure rates based on an analysis of the historical usage and 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
11
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 May 31, 2017 and November 30, 2016 the Company recorded reserves under these programs in the amounts of approximately $17,000 and $17,000, respectively, which are included in accrued expenses in the
accompanying consolidated balance sheets.
Recently Issued Accounting Pronouncements
In May 2017, the FASB issued Accounting Standards Update No. 2017-09,
Compensation Stock Compensation (Topic 718): Scope of
Modification Accounting.
This update provides clarity, reduces the diversity in practice, and the cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The new standard
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, although early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on our
financial statements.
Note 2 Goodwill
On June 11, 2015, the Company entered into an Asset Purchase Agreement (the APA) with CMDG, for the purchase of certain assets
and assumption of certain liabilities and contracts that CMDG used in the operation of its cord blood business, including the PrepaCyte CB Processing System which is used in cell processing laboratories to process and store stem cells from umbilical
cord blood (the Acquisition). This transaction was accounted for as a business combination. The purchase price was $2,400,000, plus the value of inventory, comprised of $1,553,272 in cash and assumed liabilities of the seller less any
prepayment made by the Company to CMDG ($966,597 at closing and $586,675 on or before September 30, 2015) and a note payable to the seller in the amount of $1,300,000. The closing was effective on June 30, 2015.
In connection with the APA, the Company assumed an exclusive perpetual license agreement which enables the Company to use licensed technology
in its umbilical cord blood processing and storage product for cord blood banking. Under the terms of the APA, the Company will pay a royalty of $5 per bag set unit sold, subject to minimum annual royalties totaling $35,000.
Goodwill represents the excess of the purchase price of the assets acquired from CMDG over the estimated fair value of the net tangible and
identifiable intangible assets acquired. The annual impairment assessment is performed as of September 30th each year, and an assessment is performed at other times if an event occurs or circumstances change that would more likely than not
reduce the fair value of the asset below its carrying value. Step one of the impairment assessment compares the fair value of the reporting unit to its carrying value and if the fair value exceeds its carrying value, goodwill is not impaired. If the
carrying value exceeds the fair value, the implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value exceeds the carrying value then goodwill is not impaired; otherwise, an impairment loss would be
recorded by the amount the carrying value exceeds the implied fair value.
During the third quarter of fiscal 2016, the Company determined
that there were sufficient indicators to trigger an interim goodwill impairment analysis. Goodwill is included in the PrepaCyte CB reporting segment and the indicators included, among other factors: (1) decline in projected revenues,
(2) decline in forecasted cash flows, and (3) loss of a key customer.
12
Goodwill impairment testing is a two-step process. Step one involves comparing the fair value of
the reporting unit to its carrying amount. If the carrying amount of the reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. Fair value can be determined using market, income or
cost-based approaches. Our determination of estimated fair value of the reporting unit is based on a combination of the income-based and market-based approaches. Under the income-based approach, the Company determined fair value based on estimated
discounted cash flows. The cash flows are discounted by an estimated weighted-average cost of capital, which is intended to reflect the overall level of inherent risk of the reporting unit. Determining the fair value of a reporting unit is
judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. Under the market-based approach, we determined fair
value using the Guideline Company Method, comparing our reporting unit to similar, publicly-traded companies, developing multiples and applying them to our earnings and revenue bases. As a result of the analysis, the Company concluded that the
carrying value of the reporting unit exceeded its estimated fair value. The second step of the process was then performed to measure the amount of impairment loss.
Step two involves comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying
amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. As a result of the analysis, the Company concluded that an impairment of the PrepaCyte CB
reporting segment existed as the carrying amount of the reporting unit exceeded the implied fair value. Applying ASC 350,
Intangibles-Goodwill and Other
guidance, the Company recorded a goodwill impairment charge of $1,666,430 as of
August 31, 2016.
The annual impairment assessment was performed as of September 30, 2016. The Company concluded that there was
an additional impairment of the PrepaCyte CB reporting segment as the carrying amount of the reporting unit exceeded the implied fair value. Applying ASC 350,
Intangibles-Goodwill and Other
guidance, the Company recorded an additional
goodwill impairment charge of $111,392 as of November 30, 2016.
As of May 31, 2017, and November 30, 2016, there is no
goodwill reflected on the consolidated balance sheets.
The operating results of PrepaCyte CB have been included in the consolidated
statements of comprehensive income since the date of acquisition.
Note 3 Inventory
The components of inventory at May 31, 2017 and November 30, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
|
November 30, 2016
|
|
Raw materials
|
|
$
|
|
|
|
$
|
9,100
|
|
Work-in-process
|
|
|
79,263
|
|
|
|
|
|
Finished goods
|
|
|
198,825
|
|
|
|
261,000
|
|
Collection kits
|
|
|
25,888
|
|
|
|
98,760
|
|
Inventory reserve
|
|
|
(7,718
|
)
|
|
|
(7,718
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
296,258
|
|
|
$
|
361,142
|
|
|
|
|
|
|
|
|
|
|
13
Note 4 Intangible Assets
The Company incurs certain legal and related costs in connection with patent and trademark applications. If a future economic benefit is
anticipated from the resulting patent or trademark or an alternate future use is available to the Company, such costs are capitalized and amortized over the expected life of the patent or trademark. The Companys assessment of future economic
benefit involves considerable management judgment. A different conclusion could result in the reduction of the carrying value of these assets.
During the quarter ended August 31, 2016, the Company determined that there were sufficient indicators to trigger an interim goodwill
impairment analysis (Note 2). The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment
loss occurred requires a comparison of the carrying amount to the sum of the future forecasted undiscounted cash flows expected to be generated by the asset per ASC 360,
Property, Plant and Equipment
. As a result of the Companys
two-step impairment analysis, an impairment of intangible assets within the PrepaCyte
®
CB reporting segment, license agreement and customer relationships, existed and an intangible asset
impairment charge of $211,267 during the third quarter of fiscal 2016.
Intangible assets were as follows as of May 31, 2017 and
November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives
|
|
|
May 31, 2017
|
|
|
November 30, 2016
|
|
Patents
|
|
|
10-20 years
|
|
|
$
|
34,570
|
|
|
$
|
34,570
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(10,869
|
)
|
|
|
(9,937
|
)
|
License agreement
|
|
|
10 years
|
|
|
|
470,000
|
|
|
|
470,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
|
|
(185,000
|
)
|
|
|
(185,000
|
)
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(76,028
|
)
|
|
|
(60,194
|
)
|
Customer relationships
|
|
|
15 years
|
|
|
|
41,000
|
|
|
|
41,000
|
|
Less: Intangible asset impairment
|
|
|
|
|
|
|
(26,267
|
)
|
|
|
(26,267
|
)
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(3,697
|
)
|
|
|
(3,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Intangible Assets
|
|
|
|
|
|
$
|
243,709
|
|
|
$
|
261,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangibles was approximately $9,000 and $13,000 for the three months ended
May 31, 2017 and May 31, 2016, respectively. Amortization expense of intangibles was approximately 17,000 and $25,000 for the six months ended May 31, 2017 and May 31, 2016, respectively.
Note 5 Notes Payable
On
June 30, 2015, the Company entered into a note payable in the amount of $1,300,000 in connection with the APA (Note 2). The note was payable in 48 monthly installments of $29,938 including principal and interest at the rate of 5% per
annum, commencing on July 31, 2015, and ending on June 30, 2019. Pursuant to the APA, the note was secured by all assets, inventory, molds and tools sold and transferred to the Company, tangible personal property held for sale or lease,
accounts, contract rights, and other rights to payment and general intangibles.
On April 22, 2016 the Company paid $778,287 which
constituted payment in full of the Companys payment obligations to CMDG pursuant to the terms of the original APA and Promissory
14
Note, as well as pursuant to the terms of the Loan/Promissory Note Sale Agreement and Mutual Release executed by the Company and CMDG on April 22, 2016. Prior to making the payment in full,
the Company made payments totaling $269,443 pursuant to the terms of the original APA and Promissory Note. The difference between the remaining principal balance and the final payment made on April 22, 2016 was $300,593 which was recorded as
gain on extinguishment of debt for the three and six months ended May 31, 2016 on the accompanying consolidated statements of comprehensive income. As of the three months ended May 31, 2016, the Company recognized $7,874 of interest
expense related to the note payable. As of the six months ended May 31, 2016, the Company recognized $22,265 of interest expense related to the note payable.
On May 20, 2016, the Company entered into a Credit Agreement (Agreement) with Texas Capital Bank, National Association
(TCB) for a term loan of $8.0 million in senior credit facilities. The proceeds of the term loan were used by the Company to fund repurchases of the Companys common stock. Subject to the terms of the Agreement, on May 20,
2016, TCB advanced the Company $100.00. On July 1, 2016, TCB advanced the remaining principal amount of $7,999,900 per a promissory note dated May 20, 2016 between the Company and TCB, at a rate of 3.75% per annum plus LIBOR, payable
monthly with a maturity date of July 2021. On August 26, 2016, the Company entered into a First Amendment to Credit Agreement with TCB. Pursuant to terms of the First Amendment to Credit Agreement, on August 26, 2016, TCB made an
additional advance to the Company in principal amount of $2,133,433 per an Amended and Restated Promissory Note dated August 26, 2016 between the Company and TCB. The additional proceeds of the term loan were used by the Company to fund a
portion of the Settlement Agreement and Release of All Claims with Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family. As of May 31, 2017 and November 30, 2016, principal paid to date is $1,633,000
and $633,000, respectively, at a rate of 3.75% per annum plus LIBOR. As of the three month and six months ended May 31, 2017, the Company paid interest of $104,030 and $206,518, respectively, which is reflected in interest expense on the
accompanying consolidated statements of comprehensive income. As of the three and six months ended May 31, 2016, the Company paid interest of $0 and $0, respectively.
On May 20, 2016, the Company also entered into a Subordination Agreement with TCB and CrowdOut Capital LLC (CrowdOut) for a
subordinated loan of the principal amount of $650,000, which amount CrowdOut advanced to the Company on May 20, 2016. The proceeds of the subordinated loan were to be used by the Company to fund continued repurchases of the 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 six months ended May 31, 2017, the Company paid interest of
$19,933 and $39,433, respectively which is reflected in interest expense on the accompanying consolidated statements of comprehensive income. As of the three and six months ended May 31, 2016, the Company paid interest of $0 and $0,
respectively.
Collateral of the term and subordinated loans includes all money, securities and property of the Company.
The Company incurred debt issuance costs related to the term loan in the amount of $378,785 which is recorded as a direct reduction of the
carrying amount of the note payable and amortized over the life of the loan. As of the three and six months ended May 31, 2017, $32,289 and $66,442, respectively, of the debt issuance costs were amortized and are reflected in interest expense
on the accompanying consolidated statements of comprehensive income. As of the three and six months ended May 31, 2016, $0 and $0, respectively, of the debt issuance costs were amortized.
15
As of May 31, 2017 and November 30, 2016, the note payable obligation was as follows:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
|
November 30, 2016
|
|
Note payable
|
|
$
|
9,150,100
|
|
|
$
|
10,150,100
|
|
Unamortized debt issuance costs
|
|
|
(263,908
|
)
|
|
|
(330,350
|
)
|
|
|
|
|
|
|
|
|
|
Net note payable
|
|
$
|
8,886,192
|
|
|
$
|
9,819,750
|
|
|
|
|
|
|
|
|
|
|
Current portion of note payable
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
Long-term note payable, net of debt issuance costs
|
|
|
6,886,192
|
|
|
|
7,819,750
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,886,192
|
|
|
$
|
9,819,750
|
|
|
|
|
|
|
|
|
|
|
Interest expense on the note payable for the three and six months ended May 31, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three
months ended
May 31, 2017
|
|
|
For the six
months ended
May 31, 2017
|
|
Interest expense on notes payable
|
|
$
|
123,963
|
|
|
$
|
245,951
|
|
Debt issuance costs
|
|
|
32,289
|
|
|
|
66,442
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
156,252
|
|
|
$
|
312,393
|
|
|
|
|
|
|
|
|
|
|
There was $0 interest expense related to the note payable for the three and six months ended May 31,
2016.
Note 6
Segment Reporting
During the third quarter of fiscal 2015, the Company purchased certain assets and assumed certain liabilities and contracts that CytoMedical
used in the operation of its cord blood business (See Note 2). The Company evaluated and determined that this acquisition qualifies as a separate segment.
The Company is organized in two reportable segments:
|
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).
|
16
The following table shows, by segment: net revenue, cost of sales, operating profit, depreciation
and amortization, interest expense, income tax benefit (expense) and other comprehensive income for the three months and six months ended May 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended May 31, 2017
|
|
|
For the six months
ended May 31, 2017
|
|
Net revenue
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
6,174,896
|
|
|
$
|
11,786,720
|
|
PrepaCyte
®
-CB
|
|
|
61,855
|
|
|
|
226,655
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
6,236,751
|
|
|
$
|
12,013,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,517,078
|
|
|
$
|
2,909,873
|
|
PrepaCyte
®
-CB
|
|
|
74,888
|
|
|
|
198,190
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
1,591,966
|
|
|
$
|
3,108,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
22,873
|
|
|
$
|
45,439
|
|
PrepaCyte
®
-CB
|
|
|
9,063
|
|
|
|
18,127
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
31,936
|
|
|
$
|
63,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,214,346
|
|
|
$
|
2,298,038
|
|
PrepaCyte
®
-CB
|
|
|
(22,096
|
)
|
|
|
10,338
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
1,192,250
|
|
|
$
|
2,308,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
325,314
|
|
|
$
|
622,358
|
|
PrepaCyte
®
-CB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
325,314
|
|
|
$
|
622,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
(331,737
|
)
|
|
$
|
(637,454
|
)
|
PrepaCyte
®
-CB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
(331,737
|
)
|
|
$
|
(637,454
|
)
|
|
|
|
|
|
|
|
|
|
The following table shows the assets by segment as of May 31,
2017 and November 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
|
As of November 30,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
20,562,496
|
|
|
$
|
18,960,261
|
|
PrepaCyte
®
-CB
|
|
|
474,121
|
|
|
|
578,207
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,036,617
|
|
|
$
|
19,538,468
|
|
|
|
|
|
|
|
|
|
|
17
The following table shows, by segment: net revenue, cost of sales, operating profit, depreciation
and amortization, interest expense, income tax benefit (expense) and other comprehensive income for the three months and six months ended May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended May 31, 2016
|
|
|
For the six months
ended May 31, 2016
|
|
Net revenue
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
5,706,677
|
|
|
$
|
10,727,136
|
|
PrepaCyte
®
-CB
|
|
|
66,379
|
|
|
|
198,118
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
5,773,056
|
|
|
$
|
10,925,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
1,345,370
|
|
|
$
|
2,590,393
|
|
PrepaCyte
®
-CB
|
|
|
85,730
|
|
|
|
188,998
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
1,431,100
|
|
|
$
|
2,779,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
28,555
|
|
|
$
|
57,233
|
|
PrepaCyte
®
-CB
|
|
|
13,317
|
|
|
|
26,187
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
41,872
|
|
|
$
|
83,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
915,052
|
|
|
$
|
1,056,069
|
|
PrepaCyte
®
-CB
|
|
|
(32,668
|
)
|
|
|
(17,263
|
)
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
882,384
|
|
|
$
|
1,038,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
335,589
|
|
|
$
|
582,532
|
|
PrepaCyte
®
-CB
|
|
|
7,874
|
|
|
|
22,265
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
343,463
|
|
|
$
|
604,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income expense
|
|
|
|
|
|
|
|
|
Umbilical cord blood and cord tissue stem cell service
|
|
$
|
(201,735
|
)
|
|
$
|
(201,735
|
)
|
PrepaCyte
®
-CB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income expense
|
|
$
|
(201,735
|
)
|
|
$
|
(201,735
|
)
|
|
|
|
|
|
|
|
|
|
Note 7 Income per Common Share
The following table sets forth the calculation of basic and diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
496,940
|
|
|
$
|
637,132
|
|
|
$
|
983,863
|
|
|
$
|
514,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding-basic
|
|
|
7,144,775
|
|
|
|
9,087,807
|
|
|
|
7,024,280
|
|
|
|
9,029,909
|
|
Dilutive common shares issuable upon exercise of stock options
|
|
|
581,785
|
|
|
|
309,423
|
|
|
|
558,255
|
|
|
|
306,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares-diluted
|
|
|
7,726,560
|
|
|
|
9,397,230
|
|
|
|
7,582,535
|
|
|
|
9,336,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
For the three and six months ended May 31, 2017, the Company included the effect of all
outstanding options in the computation of diluted earnings per share, as all of the outstanding stock options were in the money.
For the
three and six months ended May 31, 2016, the Company excluded the effect of 40,000 and 40,000, respectively, outstanding options from the computation of diluted earnings per share, as the effect of potentially dilutive shares from the
outstanding stock options would be anti-dilutive.
Note 8 Stockholders Equity
Employee Stock Incentive Plan
The
Company maintains the 2006 Stock Incentive Plan (the 2006 Plan) under which it has reserved 1,000,000 shares of the 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 May 31, 2017 and November 30, 2016, there were 540,500 and 572,281 options issued, but not yet exercised, under
the 2006 Plan, respectively. As of May 31, 2017, there were 231,929 shares available for future issuance under the 2006 Plan.
The
Company also maintains the 2012 Equity Incentive Plan (the 2012 Plan) which became effective December 1, 2011 as approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting on July 10, 2012.
The 2012 Plan originally reserved 1,500,000 shares of the 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 May 31, 2017, there were 569,729 service-based options issued, 129,729
service-based restricted common shares granted, 640,970 performance-based and 116,240 market-based restricted common shares granted under the 2012 Plan. As of May 31, 2017, there were 1,043,332 shares available for future issuance under the
2012 Plan.
Service-based vesting condition options
The fair value of each option award is estimated on the date of the grant using the Black-Scholes valuation model that uses the assumptions
noted in the following table. Expected volatility is based on the historical volatility of the 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 0 and 169,729 options granted during the three and six months ended May 31, 2017 and May 31, 2016,
respectively.
19
Variables used to determine the fair value of the options granted for the three and six months
ended May 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
May 31, 2016
|
|
|
May 31, 2016
|
|
Weighted average values:
|
|
|
|
|
|
|
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
84.7
|
%
|
|
|
84.7
|
%
|
Risk free interest rate
|
|
|
1.24
|
%
|
|
|
1.24
|
%
|
Expected life
|
|
|
6 years
|
|
|
|
6 years
|
|
Stock option activity for options with only service-based vesting conditions for the six months ended
May 31, 2017, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at November 30, 2016
|
|
|
1,142,010
|
|
|
$
|
2.36
|
|
|
|
4.99
|
|
|
$
|
2,157,112
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(26,781
|
)
|
|
|
1.92
|
|
|
|
|
|
|
|
78,149
|
|
Expired/forfeited
|
|
|
(5,000
|
)
|
|
|
1.36
|
|
|
|
|
|
|
|
21,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2017
|
|
|
1,110,229
|
|
|
$
|
2.38
|
|
|
|
4.60
|
|
|
$
|
3,590,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 31, 2017
|
|
|
1,037,405
|
|
|
$
|
2.32
|
|
|
|
4.35
|
|
|
$
|
3,411,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the total value of the difference between the 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 May 31, 2017 or May 31, 2016, as applicable. The intrinsic value of the Companys stock options changes based on the closing price of the Companys stock.
For the three and six months ended May 31, 2017, the Company issued 7,500 and 26,781 common shares to option holders who exercised
options for $17,900 and $51,396, respectively.
There were no options exercised during the three and six months ended May 31, 2016.
Significant option groups outstanding and exercisable at May 31, 2017 and related price and contractual life information are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
$1.01 to $2.00
|
|
|
425,000
|
|
|
|
4.42
|
|
|
$
|
1.73
|
|
|
|
425,000
|
|
|
$
|
1.73
|
|
$2.01 to $3.00
|
|
|
458,000
|
|
|
|
3.05
|
|
|
$
|
2.58
|
|
|
|
458,000
|
|
|
$
|
2.58
|
|
$3.01 to $4.00
|
|
|
227,229
|
|
|
|
8.07
|
|
|
$
|
3.18
|
|
|
|
154,405
|
|
|
$
|
3.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110,229
|
|
|
|
4.60
|
|
|
$
|
2.38
|
|
|
|
1,037,405
|
|
|
$
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
A summary of the status of the Companys non-vested options as of May 31, 2017, and
changes during the six months ended May 31, 2017, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average
Grant-Date
Fair Value
|
|
Non-vested at November 30, 2016
|
|
|
97,406
|
|
|
$
|
1.84
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(24,582
|
)
|
|
|
1.85
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at May 31, 2017
|
|
|
72,824
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017, there was approximately $91,000 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the 2006 Plan and the 2012 Plan. The cost is expected to be recognized over a weighted-average period of .53 years as of May 31, 2017. The total fair value of shares vested during
the six months ended May 31, 2017 was approximately $45,000.
During the second fiscal quarter of 2016, the Company entered into
Amended and Restated Employment Agreements (2016 Employment Agreements) with each of the Companys Co-CEOs. Per the 2016 Employment Agreements, each of the Co-CEOs is to receive base grant equity awards in the form of qualified
options of the 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 May 31, 2017 was approximately $182,000 and is reflected as selling, general and
administrative expenses in the accompanying consolidated statement of comprehensive income. As of May 31, 2017, there was approximately $62,000 of total unrecognized compensation cost related to the non-vested options of common stock and these
will continue to vest as notated above and per the 2016 Employment Agreements through November 30, 2017.
Performance and
market-based vesting condition options
There were no performance-based or market-based vesting condition options granted during the
three and six months ended May 31, 2017 and May 31, 2016. As of May 31, 2017 and May 31, 2016, there were no performance or market-based vesting condition options outstanding.
21
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 May 31, 2016,
there was $0 of total unrecognized compensation cost related to the issuance of these shares of restricted common shares.
As of
April 15, 2016, the Company entered into Amended and Restated Employment Agreements (Employment Agreements) with each of the 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 May 31, 2017. As of May 31, 2017, the Company has recognized approximately $362,000 of
compensation cost related to the fiscal 2017 performance measures and there was approximately $362,000 in unrecognized compensation cost related to the fiscal 2017 performance measures.
As of April 18, 2016, the Company entered into a second Amendment Agreement (the Amendment), with the 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 May 31, 2017.
Note 9 License
Agreements
The Company enters into two types of licensing agreements and in both types, the Company earns revenue on the initial
license fees. Under the technology agreements, the Company earns processing and storage royalties from the affiliates that process in their own facility. Under the marketing agreements, the Company earns processing and storage revenues from
affiliates that store specimens in the Companys facility in Oldsmar, Florida.
Technology Agreements
The Company has entered into a definitive License and Royalty Agreement with LifeCell International Private Limited, formerly Asia Cryo-Cell
Private Limited, (LifeCell) to establish and market its umbilical cord blood and menstrual stem cell programs in India.
22
Per the License and Royalty Agreement with Lifecell, there is a $1 Million cap on the amount of
royalties due to the Company per year and a $10 Million cap on the amount of royalties due to the Company for the term of the License and Royalty Agreement. As of May 31, 2017, Lifecell has paid the Company $5.1 Million for royalties due under
the terms of the License and Royalty Agreement.
Marketing Agreements
The Company has definitive license agreements to market the 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 six months ended May 31, 2017 and May 31, 2016. The initial license fees and processing and storage royalties are reflected
in licensee and royalty income in the accompanying consolidated statements of operations.
|
|
|
|
|
|
|
|
|
Processing and Storage Royalties
|
|
|
|
|
|
|
Three Months Ended
May 31, 2017
|
|
|
Six Months Ended
May 31, 2017
|
|
India
|
|
$
|
328,669
|
|
|
$
|
328,669
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
328,669
|
|
|
$
|
328,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31, 2016
|
|
|
Six Months Ended
May 31, 2016
|
|
India
|
|
$
|
356,932
|
|
|
$
|
356,932
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
356,932
|
|
|
$
|
356,932
|
|
|
|
|
|
|
|
|
|
|
Note 10 Legal Proceedings
On December 3, 2015, a complaint styled
Gary T. Brotherson, M.D., et al. v. Cryo-Cell International, Inc.,
Case
No. 15-007461-CI, Circuit Court, Sixth Judicial Circuit, Pinellas County, Florida, was served on the Company, naming it as defendant and alleging, among other things, that the Company breached certain agreements with plaintiffs and seeking
damages in excess of $15,000, the jurisdictional amount of the court in which the action is pending. On January 12, 2016, the Company served its answer, affirmative defenses, and counterclaim against the plaintiffs. The Company
believes the plaintiffs claims are without merit and it intends to contest the action vigorously. At this time, it is not possible for the Company to estimate the loss or the range of possible loss in the event of an unfavorable outcome,
as the ultimate resolution of the complaint is uncertain at this time. No amounts have been accrued as of May 31, 2017.
In
addition, from time to time the Company is subject to proceedings, lawsuits, contract disputes and other claims in the normal course of its business. The Company believes that the ultimate resolution of current matters should not have a material
adverse effect on the 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.
23
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 May 31, 2017, the Company had repurchased a
total of 5,794,113 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 79,942 and 143,793 shares of the Companys common stock
during the six months ended May 31, 2017 and May 31, 2016, respectively, at an average price of $5.05 per share and $3.08 per share, respectively.
The repurchased shares will be held as treasury stock and have been removed from common shares outstanding as of May 31, 2017 and
November 30, 2016. As of May 31, 2017 and November 30, 2016, 5,794,810 and 5,714,868 shares, respectively, were held as treasury stock.
Subsequent to the balance sheet date, the Company repurchased an additional 2,823 shares of the Companys common stock at an average
price of $5.77 per share through open market and privately negotiated transactions.
24