Company Quick10K Filing
Cryo Cell
Price7.44 EPS0
Shares8 P/E109
MCap63 P/FCF12
Net Debt5 EBIT2
TEV68 TEV/EBIT30
TTM 2019-05-31, in MM, except price, ratios
10-Q 2020-02-29 Filed 2020-04-14
10-K 2019-11-30 Filed 2020-02-28
10-Q 2019-08-31 Filed 2019-10-15
10-Q 2019-05-31 Filed 2019-07-15
10-Q 2019-02-28 Filed 2019-04-15
10-K 2018-11-30 Filed 2019-02-28
10-Q 2018-08-31 Filed 2018-10-15
10-Q 2018-05-31 Filed 2018-07-16
10-Q 2018-02-28 Filed 2018-04-16
10-K 2017-11-30 Filed 2018-02-28
10-Q 2017-08-31 Filed 2017-10-16
10-Q 2017-05-31 Filed 2017-07-07
10-Q 2017-02-28 Filed 2017-04-13
10-K 2016-11-30 Filed 2017-02-28
10-Q 2016-08-31 Filed 2016-10-17
10-Q 2016-05-31 Filed 2016-07-11
10-Q 2016-02-29 Filed 2016-04-14
10-K 2015-11-30 Filed 2016-02-29
10-Q 2015-08-31 Filed 2015-10-15
10-Q 2015-05-31 Filed 2015-07-15
10-Q 2015-02-28 Filed 2015-04-14
10-K 2014-11-30 Filed 2015-03-02
10-Q 2014-08-31 Filed 2014-10-15
10-Q 2014-05-31 Filed 2014-07-03
10-Q 2014-02-28 Filed 2014-04-14
10-K 2013-11-30 Filed 2014-02-28
10-Q 2013-08-31 Filed 2013-10-15
10-Q 2013-05-31 Filed 2013-07-15
10-Q 2013-02-28 Filed 2013-04-15
10-K 2012-11-30 Filed 2013-02-28
10-Q 2012-08-31 Filed 2012-10-15
10-Q 2012-05-31 Filed 2012-07-16
10-Q 2012-02-29 Filed 2012-04-16
10-K 2011-11-30 Filed 2012-02-28
10-Q 2011-08-31 Filed 2011-10-17
10-Q 2011-05-31 Filed 2011-07-15
10-Q 2011-02-28 Filed 2011-04-14
10-K 2010-11-30 Filed 2011-02-28
10-Q 2010-08-31 Filed 2010-10-15
10-Q 2010-05-31 Filed 2010-07-15
10-Q 2010-02-28 Filed 2010-04-15
10-K 2009-11-30 Filed 2010-03-01
8-K 2020-06-09
8-K 2020-04-14
8-K 2020-02-27
8-K 2019-11-21
8-K 2019-10-15
8-K 2019-10-08
8-K 2019-10-01
8-K 2019-07-15
8-K 2019-04-15
8-K 2019-02-28
8-K 2018-12-06
8-K 2018-10-15
8-K 2018-08-13
8-K 2018-07-16
8-K 2018-06-11
8-K 2018-05-29
8-K 2018-05-21
8-K 2018-03-09
8-K 2018-02-28
8-K 2018-02-28

CCEL 10Q Quarterly Report

Note 1 - Description of Business, Basis of Presentation and Significant Accounting Policies
Note 2 - Goodwill
Note 3 - Segment Reporting
Note 4 - Inventory
Note 5 - Intangible Assets
Note 6 - Note Payable
Note 7 - Income per Common Share
Note 8 - Stockholders' Equity
Note 9 - License Agreements
Note 10 - Legal Proceedings
Note 11 - Share Repurchase Plan
Note 12 - Leases
Note 13 - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 d900507dex311.htm
EX-31.2 d900507dex312.htm
EX-31.3 d900507dex313.htm
EX-32 d900507dex32.htm

Cryo Cell Earnings 2020-02-29

Balance SheetIncome StatementCash Flow
4532196-7-202012201420172020
Assets, Equity
10.07.54.92.4-0.2-2.72012201420172020
Rev, G Profit, Net Income
10.05.00.0-5.0-10.0-15.02012201420172020
Ops, Inv, Fin

10-Q 1 d900507d10q.htm 10-Q 10-Q
Table of Contents

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended February 29, 2020

 

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

For the transition period from                      to                     

Commission File Number 0-23386

 

 

CRYO-CELL INTERNATIONAL, INC.

(Exact name of Registrant as Specified in its Charter)

 

 

 

DELAWARE   22-3023093

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

700 Brooker Creek Blvd. Oldsmar, FL 34677

(Address of Principal Executive Offices) (Zip Code)

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

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

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $0.01 par value   CCEL   OTCQB

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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

As of April 10, 2020, there were 7,545,613 shares of Common Stock outstanding.

 

 

 


Table of Contents

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

     PAGE  

PART I - FINANCIAL INFORMATION (UNAUDITED)

  

Item 1. Financial Statements

  

Consolidated Balance Sheets

     3  

Consolidated Statements of Comprehensive Income

     4  

Consolidated Statements of Cash Flows

     5  

Consolidated Statements of Stockholders’ Deficit

     6  

Notes to Consolidated Financial Statements

     7  

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

     33  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     40  

Item 4. Controls and Procedures

     40  

PART II - OTHER INFORMATION

  

Item 1. Legal Proceedings

     41  

Item 1A. Risk Factors

     42  

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

     42  

Item 3. Defaults Upon Senior Securities

     42  

Item 4. Mine Safety Disclosures

     42  

Item 5. Other Information

     42  

Item 6. Exhibits

     43  

SIGNATURES

     44  

 

2


Table of Contents

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     (Unaudited)
February 29,
2020
    November 30,
2019
 
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 8,415,639     $ 6,541,037  

Marketable securities

     959,001       904,053  

Accounts receivable (net of allowance for doubtful accounts of $2,631,883 and $2,584,091, respectively)

     5,766,684       6,097,331  

Prepaid expenses

     451,672       500,260  

Inventory, current portion

     1,102,824       1,084,533  

Other current assets

     199,064       260,397  
  

 

 

   

 

 

 

Total current assets

     16,894,884       15,387,611  
  

 

 

   

 

 

 

Property and Equipment-net

     1,774,587       1,846,467  
  

 

 

   

 

 

 

Other Assets

    

Investment - Tianhe stock

     308,000       308,000  

Intangible assets, net

     1,232,338       1,249,254  

Inventory, net of current portion

     12,557,315       12,646,000  

Goodwill

     1,941,411       1,941,411  

Deferred tax assets

     9,079,994       9,079,994  

Operating lease right-of-use asset

     496,284       —    

Deposits and other assets, net

     445,633       427,423  
  

 

 

   

 

 

 

Total other assets

     26,060,975       25,652,082  
  

 

 

   

 

 

 

Total assets

   $ 44,730,446     $ 42,886,160  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Current Liabilities

    

Accounts payable

   $ 1,381,242     $ 1,369,111  

Accrued expenses

     2,713,807       2,085,180  

Current portion of note payable

     3,100,000       3,100,000  

Current portion of operating lease liability

     264,798       —    

Deferred revenue

     8,610,304       8,875,138  
  

 

 

   

 

 

 

Total current liabilities

     16,070,151       15,429,429  
  

 

 

   

 

 

 

Other Liabilities

    

Deferred revenue, net of current portion

     24,454,967       23,633,373  

Contingent consideration

     3,443,645       3,495,057  

Note payable, net of current portion and debt issuance costs

     5,105,633       5,856,152  

Operating lease long-term liability

     231,677       —    

Long-term liability - revenue sharing agreements

     1,425,000       1,425,000  
  

 

 

   

 

 

 

Total other liabilities

     34,660,922       34,409,582  
  

 

 

   

 

 

 

Total liabilities

     50,731,073       49,839,011  
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

     —         —    

Stockholders’ Deficit

    

Preferred stock ($.01 par value, 500,000 authorized and none issued and outstanding)

     —         —    

Series A Junior participating preferred stock ($.01 par value, 20,000 authorized and none issued and outstanding)

     —         —    

Common stock ($.01 par value, 20,000,000 authorized; 13,633,638 issued and 7,545,613 outstanding as of February 29, 2020 and 13,598,909 issued and 7,510,884 outstanding as of November 30, 2019)

     136,336       135,989  

Additional paid-in capital

     36,183,738       35,918,827  

Treasury stock, at cost

     (20,563,357     (20,563,357

Accumulated deficit

     (21,757,344     (22,444,310
  

 

 

   

 

 

 

Total stockholders’ deficit

     (6,000,627     (6,952,851
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 44,730,446     $ 42,886,160  
  

 

 

   

 

 

 

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

 

3


Table of Contents

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     For the three months ended  
     February 29,
2020
    February 28,
2019
 

Revenue:

    

Processing and storage fees

   $ 7,406,288     $ 7,335,027  

Public banking revenue

     154,079       134,365  

Product revenue

     60,407       25,720  
  

 

 

   

 

 

 

Total revenue

     7,620,774       7,495,112  
  

 

 

   

 

 

 

Costs and Expenses:

    

Cost of sales

     2,503,144       2,466,227  

Selling, general and administrative expenses

     3,870,029       3,745,302  

Change in fair value of contingent consideration

     (51,412     367,057  

Research, development and related engineering

     5,722       5,884  

Depreciation and amortization

     44,221       56,980  
  

 

 

   

 

 

 

Total costs and expenses

     6,371,704       6,641,450  
  

 

 

   

 

 

 

Operating Income

     1,249,070       853,662  
  

 

 

   

 

 

 

Other Expense:

    

Unrealized gains (losses) on marketable securities

     54,948       (67,179

Other income (expense)

     627       986  

Interest expense

     (365,299     (406,925
  

 

 

   

 

 

 

Total other expense

     (309,724     (473,118
  

 

 

   

 

 

 

Income before income tax expense

     939,346       380,544  

Income tax expense

     (252,380     (104,667
  

 

 

   

 

 

 

Net Income and Comprehensive Income

   $ 686,966     $ 275,877  
  

 

 

   

 

 

 

Net income per common share - basic

   $ 0.09     $ 0.04  
  

 

 

   

 

 

 

Weighted average common shares outstanding - basic

     7,541,113       7,801,333  
  

 

 

   

 

 

 

Net income per common share - diluted

   $ 0.08     $ 0.03  
  

 

 

   

 

 

 

Weighted average common shares outstanding - diluted

     8,128,257       8,424,905  
  

 

 

   

 

 

 

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

 

4


Table of Contents

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the three months ended  
     February 29,
2020
    February 28,
2019
 

Cash flows from operating activities:

    

Net income

   $ 686,966     $ 275,877  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization expense

     95,757       104,870  

Change in fair value of contingent consideration

     (51,412     367,057  

Unrealized (gains) losses on marketable securities

     (54,948     67,179  

Compensatory element of stock options

     224,258       138,982  

Provision for doubtful accounts

     152,991       240,643  

Amortization of debt issuance costs

     24,481       29,894  

Amortization of operating lease right-of-use asset

     66,491       —    

Changes in assets and liabilities:

    

Accounts receivable

     177,656       (67,470

Prepaid expenses

     48,588       1,261  

Inventory

     70,394       (96,712

Other current assets

     61,333       49,570  

Deposits and other assets, net

     (18,210     68,250  

Accounts payable

     12,131       (251,261

Accrued expenses

     628,627       217,220  

Operating lease liability

     (66,300     —    

Deferred revenue

     556,760       708,682  
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,615,563       1,854,042  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (6,961     (49,085
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,961     (49,085
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayments of note payable

     (775,000     (774,999

Proceeds from the exercise of stock options

     41,000       5,700  
  

 

 

   

 

 

 

Net cash used in financing activities

     (734,000     (769,299
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     1,874,602       1,035,658  

Cash and cash equivalents - beginning of period

     6,541,037       6,040,033  
  

 

 

   

 

 

 

Cash and cash equivalents - end of period

   $ 8,415,639     $ 7,075,691  
  

 

 

   

 

 

 

Supplemental non-cash operating activities:

    

Operating lease right-of-use asset recorded due to adoption of ASC 842

   $ 562,775     $ —    

Operating lease liability recorded due to adoption of ASC 842

   $ 562,775     $ —    

Supplemental non-cash investing activities:

    

Cumulative-effect adjustment due to the adoption of ASU 2016-01

   $ —       $ (340,984
  

 

 

   

 

 

 

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

 

5


Table of Contents

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

    For the Three Months Ended February 29, 2020  
                Additional           Other           Total  
  Common Stock     Paid-In     Treasury     Comprehensive     Accumulated     Stockholders’  
  Shares     Amount     Capital     Stock     Income     Deficit     Deficit  

Balance at November 30, 2019

    13,598,909     $ 135,989     $ 35,918,827     $ (20,563,357   $ —       $ (22,444,310   $ (6,952,851
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issued

    34,729       347       40,653             41,000  

Compensatory element of stock options

        224,258             224,258  

Net income

              686,966       686,966  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at February 29, 2020

    13,633,638     $ 136,336     $ 36,183,738     $ (20,563,357   $ —       $ (21,757,344   $ (6,000,627
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three Months Ended February 28, 2019  
                Additional           Other           Total  
    Common Stock     Paid-In     Treasury     Comprehensive     Accumulated     Stockholders’  
    Shares     Amount     Capital     Stock     Income     Deficit     Deficit  

Balance at November 30, 2018

    13,596,409     $ 135,964     $ 35,515,382     $ (19,571,113   $ 340,984     $ (25,329,515   $ (8,908,298
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common stock issued

    2,500       25       5,675             5,700  

Compensatory element of stock options

        138,982             138,982  

Cumulative-effect adjustment due to the adoption of ASU 2016-01

            (340,984     340,984       —    

ASC 606 adoption adjustment, net of tax ($94,192)

              253,447       253,447  

Net income

              275,877       275,877  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at February 28, 2019

    13,598,909     $ 135,989     $ 35,660,039     $ (19,571,113   $ —       $ (24,459,207   $ (8,234,292
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(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 headquartered in Oldsmar, Florida. The Company is organized in three 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, the manufacture of PrepaCyte® CB Processing System (“PrepaCyte CB”) units, the processing technology used to process umbilical cord blood stem cells and cellular processing and cryogenic storage of umbilical cord blood stem cells for public use. 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. Revenue recognized for the cryogenic storage of umbilical cord blood stem cells for public use is generated from the sale of the cord blood units to the National Marrow Donor Program (“NMDP”), which distributes the cord blood units to transplant centers located in the United States and around the world. The Company’s headquarters facility in Oldsmar, Florida handles all aspects of its U.S.-based business operations including the processing and storage of specimens, including specimens obtained from certain of its licensees’ customers. The specimens are stored in commercially available cryogenic storage equipment.

The unaudited consolidated financial statements including the Consolidated Balance Sheets as of February 29, 2020, the related Consolidated Statements of Comprehensive Income, Cash Flows and Stockholders’ Deficit for the three months ended February 29, 2020 and February 28, 2019 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 Company’s November 30, 2019 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 months ended February 29, 2020 are not necessarily indicative of the results expected for any interim period in the future or the entire year ending November 30, 2020.

Revenue Recognition

Effective December 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. ASC 606 also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

7


Table of Contents

Under ASC 606, revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised services are transferred to the customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring services to a customer (“transaction price”).

At contract inception, if the contract is determined to be within the scope of ASC 606, the Company evaluates its contracts with customers using the five-step model: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when (or as) each performance obligation is satisfied. The Company evaluates its contracts for legal enforceability at contract inception and subsequently throughout the Company’s relationship with its customers. If legal enforceability with regards to the rights and obligations exist for both the Company and the customer, then the Company has an enforceable contract and revenue recognition is permitted subject to the satisfaction of the other criteria. If, at the outset of an arrangement, the Company determines that a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met. The Company only applies the five-step model to contracts when it is probable that collection of the consideration that the Company is entitled to in exchange for the goods or services being transferred to the customer, will occur.

Under ASC 606, revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised services are transferred to the customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring services to a customer (“transaction price”).

At contract inception, if the contract is determined to be within the scope of ASC 606, the Company evaluates its contracts with customers using the five-step model: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when (or as) each performance obligation is satisfied. The Company evaluates its contracts for legal enforceability at contract inception and subsequently throughout the Company’s relationship with its customers. If legal enforceability with regards to the rights and obligations exist for both the Company and the customer, then the Company has an enforceable contract and revenue recognition is permitted subject to the satisfaction of the other criteria. If, at the outset of an arrangement, the Company determines that a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met. The Company only applies the five-step model to contracts when it is probable that collection of the consideration that the Company is entitled to in exchange for the goods or services being transferred to the customer, will occur.

Contract modifications exist when the modification either creates new or changes in the existing enforceable rights and obligations. The Company’s contracts are occasionally modified to account for changes in contract terms and conditions, which the Company refers to as an upgrade or downgrade. An upgrade occurs when a customer wants to pay for additional years of storage. A downgrade occurs when a customer originally entered into a long-term contract (such as twenty-one year or lifetime plan) but would like to change the term to a one-year contract. Upgrade modifications qualify for treatment as a separate contract as the additional services are distinct and the increase in contract price reflects the Company’s stand-alone selling price for the additional services and will be accounted for on a prospective basis. Downgrade modifications do not qualify for treatment as a separate contract as there is no increase in price over the original contract, thus failing the separate contract criteria. As such, the Company separately considers downgrade modifications to determine if these should be accounted for as a termination of the existing contract and creation of a new contract (prospective method) or as part of the existing contract (cumulative catch-up adjustment). ASC 606 requires that an entity account for the

 

8


Table of Contents

contract modification as if it were a termination of the existing contract, and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification. As the services after the modification were previously determined to be distinct, the Company concluded that downgrade modifications qualify under this method and will be accounted for on a prospective basis. Although contract modifications do occur, they are infrequent.

Performance Obligations

At contract inception, the Company assesses the goods and services promised in the contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. To identify the performance obligations, the Company considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the following distinct goods and services represent separate performance obligations involving the sale of its umbilical cord blood product:

 

   

Collection and processing services

 

   

Storage services

 

   

Public cord blood banking

 

   

License and royalties

 

   

Sale of PrepaCyte CB product

 

a)

Processing and Storage Fees

Processing and storage fees include the Company providing umbilical cord blood and tissue cellular processing and cryogenic cellular storage for private use. 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 who are selling the umbilical cord blood stem cells program to customers outside the United States.

The Company recognizes revenue from processing fees at the point in time of the successful completion of processing and recognizes storage fees over time, which is 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. The lifetime storage plan is based on a life expectancy of 81 years, which is the current estimate by the Center for Disease Control for United States women’s life expectancy and concluded that additional data analysis would result in an immaterial difference in revenue. Deferred revenue on the accompanying consolidated balance sheets includes the portion of the annual, the twenty-one-year and the lifetime storage fees that are being recognized over the contractual storage period as well as royalties received from foreign licensees relating to long-term storage contracts for 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 from the balance sheet date.

Significant financing

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant

 

9


Table of Contents

financing component. For all plans being annual, twenty-one years and lifetime, the storage fee is paid at the beginning of the storage period (prepaid plans). Alternatively, the Company offers payment plans (including a stated service fee) for customers to pay over time for a period of one to twenty-four plus months. The one-time plan includes the collection kit, processing and testing, return medical courier service and twenty-one years of prepaid storage fees. The lifetime plan includes the collection kit, processing and testing, return medical courier service and prepaid storage fees for the life of the customer. The Company concluded that a significant financing component is not present within either the prepaid or overtime payment plans. The Company has determined that the twenty-one year and lifetime prepayment options do not include a significant financing component as the payment terms were structured primarily for reasons other than the provision of financing and to maximize profitability.

The Company has determined that the majority of plans that are paid over time are paid in less than a year. When considered over a twenty-four-month payment plan, the difference between the cash selling price and the consideration paid is nominal. As such, the Company believes that its payment plans do not include significant financing components as they are not significant in the aggregate when considered in the context of all contracts entered into nor significant at the individual contract level.

The Company elected to apply the practical expedient where the Company does not need to assess whether a significant financing component exists if the period between when it performs its obligations under the contract and when the customer pays is one year or less.

As of February 29, 2020, the total aggregate transaction price allocated to the unsatisfied performance obligations was recorded as deferred revenue amounting to $33,065,271, which will be recognized ratably on a straight-line basis over the contractual period of which $8,610,304 will be recognized over the next twelve months.

Variable consideration

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 1, 2017, the Company increased the payment warranty to $100,000 to all new clients who choose the premium processing method, PrepaCyte CB. 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 myeloablative transplant procedure. The product warranty and the Cryo-Cell CaresTM program are available to clients who enroll under this structure for as long as the specimen is stored with the Company. In the processing and storage agreements, the Company provides limited rights which are offered to customers automatically upon contract execution. The Company has determined that the payment warranty represents variable consideration payable to the customer.

Based on the Company’s historical experience to date, the Company has determined the payment warranty to be fully constrained under the most likely amount method. Consequently, the transaction price does not currently reflect any expectation of service level credits. At the end of each reporting period, the Company will update the estimated transaction price related to the payment warranty including updating its assessment of whether an estimate of variable consideration is constrained to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period.

 

10


Table of Contents

Allocation of transaction price

As the Company’s processing and storage agreements contain multiple performance obligations, ASC 606 requires an allocation of the transaction price based on the estimated relative standalone selling prices of the promised services underlying each performance obligation. The Company has selected an adjusted market assessment approach to estimate the stand-alone selling prices of the processing services and storage services and concluded that the published list price is the price that a customer in that market would be willing to pay for those goods or services. The Company also considered the fact that all customers are charged the list prices current at the time of their enrollment where the Company has separately stated list prices for processing and storage.

Costs to Obtain a Contract

With the adoption of ASC 606 as of December 1, 2018, the Company capitalizes commissions that are incremental in obtaining customer contracts and the costs incurred to fulfill a customer contract if those costs are not within the scope of another topic within the accounting literature and meet the specified criteria. These costs are deferred in other current or long-term assets and are expensed to selling, general and administrative expenses as the Company satisfies the performance obligations by transferring the service to the customer. These assets will be periodically assessed for impairment. As a practical expedient, the Company elected to recognize the incremental costs of obtaining its annual contracts as an expense when incurred, as the amortization period of the asset recognized would have been one year.

The Company has determined that payments under the Company’s refer-a-friend program (“RAF program”) are incremental costs of obtaining a contract as they provide an incentive for existing customers to refer new customers to the Company and is referred to as commission. The amount paid under the RAF program (either through issuance of credits to customers or check payments) which exceeds the typical commission payment to a sales representative is recorded as a reduction to revenue under ASC 606. During the three months ended February 29, 2020 and February 28, 2019, the Company has recorded $11,535 and $6,643, respectively, commission payments to customers under the RAF program as a reduction to revenue. As of December 1, 2018, the Company capitalized $329,231 in incremental contract acquisition costs related to contracts that were not completed, net of the cumulative amortization expense of $66,533 through the adoption date. The Company did not record any impairment losses in relation to costs capitalized. For the three months ended February 29, 2020 and February 28, 2019, the Company capitalized additional contract acquisition costs of $23,320 and $20,954, respectively, net of amortization expense.

 

b)

Public Banking Revenue

The Company sells and provides units not likely to be of therapeutic use for research to qualified organizations and companies operating under Institutional Review Board approval. Control is transferred at the point in time when the shipment has occurred, at which time, the Company records revenue.

 

c)

Licensee and Royalty Income

Licensee and royalty income consist of royalty income earned on the processing and storage of cord blood stem cell specimens by an affiliate where the Company has a License and Royalty Agreement. The Company records revenue from processing and storage of specimens and pursuant to agreements with licensees. The Company records the royalty revenue in same period that the related processing and storage is being completed by the affiliate.

 

11


Table of Contents
d)

Product Revenue

The Company records revenue from the sale of the PrepaCyte CB product line upon shipment of the product to the Company’s customers.

 

e)

Shipping and Handling

The Company elected to apply the practical expedient to account for shipping and handling activities performed after the control of a good has been transferred to the customer as a fulfillment cost. Shipping and handling costs that the Company incurs are therefore expensed and included in cost of sales.

The adoption of ASC 606 did not have an impact on the timing of revenue recognition for any of the Company’s revenue streams.

Disaggregation of Revenue

The following table provides information about disaggregated revenue by products and services:

 

     Three months ended  
     February 29, 2020      February 28, 2019  

Processing and storage fees

   $ 7,406,288      $ 7,335,027  

Public banking revenue

     154,079        134,365  

Product revenue

     60,407        25,720  
  

 

 

    

 

 

 
   $ 7,620,774      $ 7,495,112  
  

 

 

    

 

 

 

The following table provides information about assets and liabilities from contracts with customers:

 

     February 29, 2020      November 30, 2019  

Contract assets (sales commissions)

   $ 416,745      $ 398,535  

Accounts receivables

   $ 5,766,684      $ 6,097,331  

Short-term contract liabilities (deferred revenue)

   $ 8,610,304      $ 8,875,138  

Long-term contract liabilities (deferred revenue)

   $ 24,454,967      $ 23,633,373  

The Company, in general, requires the customer to pay for processing and storage services at the time of processing. Contract assets include deferred contract acquisition costs, which will be amortized along with the associated revenue. Contract liabilities include payments received in advance of performance under the contract and are realized with the associated revenue recognized under the contract. Accounts receivable consists of amounts due from clients that have enrolled and processed in the umbilical cord blood stem cell processing and storage programs related to renewals of annual plans and amounts due from license affiliates, and sublicensee territories. The Company did not have asset impairment charges related to contract assets in the three months ended February 29, 2020 and February 28, 2019.

The following table presents changes in the Company’s contract assets and liabilities during the three months ended February 29, 2020:

 

     Balance at
December 1, 2019
     Additions      Deductions      Balance at
February 29, 2020
 

Contract assets (sales commissions)

   $ 398,535      $ 23,320      ($ 5,110    $ 416,745  

Accounts receivables

   $ 6,097,331      $ 8,438,904      ($ 8,769,551    $ 5,766,684  

Contract liabilities (deferred revenue)

   $ 32,508,511      $ 4,142,651      ($ 3,585,891    $ 33,065,271  

 

12


Table of Contents

The following table presents changes in the Company’s contract assets and liabilities during the three months ended February 28, 2019:

 

     Balance at
December 1, 2018
     Additions      Deductions      Balance at
February 28, 2019
 

Contract assets (sales commissions)

   $ 329,231      $ 20,954      ($ 4,428    $ 345,757  

Accounts receivables

   $ 5,867,335      $ 9,017,603      ($ 9,190,776    $ 5,694,162  

Contract liabilities (deferred revenue)

   $ 28,682,515      $ 4,467,979      ($ 3,759,297    $ 29,391,197  

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 Company’s previous loss history, and the client’s current ability to pay its obligations. Therefore, if the financial condition of the Company’s 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.

Inventories

As part of the Asset Purchase Agreement, (see Note 2), the Company has an agreement with Duke University (“Duke”) expiring on January 31, 2025 for Duke to receive, process, and store cord blood units for the Public Cord Blood Bank (“Duke Services”). As of February 29, 2020, the Company had approximately 6,000 cord blood units in inventory. These units are valued at the lower of cost or net realizable value. Costs include the cost of collecting, transporting, processing and storing the unit. Costs charged by Duke for their Duke Services are based on a monthly fixed fee for processing and storing 12 blood units per month. The Company computes the cost per unit for these Duke Services and capitalizes the unit cost on all blood units shipped and stored in a year at Duke. If the Company ships and stores less than 144 blood units with Duke in a one-year period, a portion of these fixed costs are expensed and included in facility operating costs. Certain costs of collection incurred, such as the cost of collection staff and transportation costs incurred to ship Public Bank units from hospitals to the stem cell laboratory are allocated to banked units based on an average cost method. The change in the number of expected units to be sold could have a significant impact on the estimated net realizable value of banked units which could have a material effect on the value of the inventory. Costs incurred related to cord blood units that cannot be sold are expensed in the period incurred and are included in facility operating costs in the accompanying statements of operations. The Company records a reserve against inventory for units which have been processed and frozen but may not ultimately become distributable (see Note 4). Due to changes in sales trends and estimated recoverability of cost capitalized into inventory, an impairment charge of $2,332,763 was recognized during the second quarter of fiscal 2019 to reduce inventory from cost to net realizable value.

 

13


Table of Contents

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 records a valuation allowance when it is “more likely than not” that all of the future income tax benefits will not be realized. When the Company changes its determination as to the amount of deferred income tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made. The ultimate realization of the Company’s deferred income tax assets depends upon generating sufficient taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance, the Company projects future levels of taxable income. This assessment requires significant judgment. The Company examines the evidence related to the recent history of losses, the economic conditions in which the Company operates and forecasts and projections to make that determination.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from management’s belief that a position can or cannot be sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the three months ended February 29, 2020 and February 28, 2019, 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 months ended February 29, 2020 and February 28, 2019.

Goodwill

Goodwill represents the excess of the purchase price of the assets acquired from Cord:Use (Note 2) over the estimated fair value of the net tangible, intangible and identifiable assets acquired. The annual assessment of the reporting unit is performed as of September 1st, 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. The Company first performs a qualitative

 

14


Table of Contents

assessment to test goodwill for impairment and concludes if it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the qualitative assessment concludes that it is not more likely than not that the fair value is less than the carrying value, the two-step goodwill impairment test is not required. If the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than the carrying value, then the two-step goodwill impairment test is required. 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.

Leases

Effective December 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), using the modified retrospective approach and utilizing the effective date as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases (“ASC 840”). The Company has elected to apply the ‘package of practical expedients’ which allows the Company to not reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as a right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases.

Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company believes it could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.

The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew.

Stock Compensation

As of February 29, 2020, the Company has two stock-based compensation plans, which are described in Note 8 to the consolidated financial statements. The Company’s stock-based employee compensation plan that became effective December 1, 2011 was approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting. The Company recognized approximately $224,000 and $139,000 for the three months ended February 29, 2020 and February 28, 2019, respectively, of stock-based compensation expense.

 

15


Table of Contents

The Company recognizes stock-based compensation based on the fair value of the related awards. Under the fair value recognition guidance of stock-based compensation accounting rules, stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of service-based vesting condition and performance-based vesting condition stock option awards is determined using the Black-Scholes valuation model. For stock option awards with only service-based vesting conditions and graded vesting features, the Company recognizes stock compensation expense based on the graded-vesting method. To value awards with market-based vesting conditions the Company uses a binomial valuation model. The Company recognizes compensation cost for awards with market-based vesting conditions on a graded-vesting basis over the derived service period calculated by the binomial valuation model. The use of these valuation models involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.

The estimation of stock awards that will ultimately vest requires judgment and to the extent that actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period they become known. The Company considered many factors when estimating forfeitures, including the recipient groups and historical experience. Actual results and future changes in estimates may differ substantially from current estimates.

The Company issues performance-based equity awards which vest upon the achievement of certain financial performance goals, including revenue and income targets. Determining the appropriate amount to expense based on the anticipated achievement of the stated goals requires judgment, including forecasting future financial results. The estimate of the timing of the expense recognition is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any revision is reflected in the period of the change. If the financial performance goals are not met, the award does not vest, so no compensation cost is recognized and any previously stock-recognized stock-based compensation expense is reversed.

The Company issues equity awards with market-based vesting conditions which vest upon the achievement of certain stock price targets. If the awards are forfeited prior to the completion of the derived service period, any recognized compensation is reversed. If the awards are forfeited after the completion of the derived service period, the compensation cost is not reversed, even if the awards never vest.

Fair Value of Financial Instruments

Management uses a fair value hierarchy, which gives the highest priority to quoted prices in active markets. The fair value of financial instruments is estimated based on market trading information, where available. Absent published market values for an instrument or other assets, management uses observable market data to arrive at its estimates of fair value. Management believes that the carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The Company believes that the fair value of its Revenue Sharing Agreements (”RSA”) liability recorded on the balance sheet is between the recorded book value and up to the Company’s previous settlement experience, due to the various terms and conditions associated with each RSA.

The Company uses an accounting standard that defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based

 

16


Table of Contents

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 February 29, 2020 and November 30, 2019, respectively, segregated among the appropriate levels within the fair value hierarchy:

 

     Fair Value at      Fair Value Measurements
at February 29, 2020 Using
 

Description

   February 29,
2020
     Level 1      Level 2      Level 3  

Assets:

           

Marketable Securities

   $ 959,001      $ 959,001        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 959,001      $ 959,001        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration

   $ 3,443,645      $ —          —        $ 3,443,645  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,443,645      $ —          —        $ 3,443,645  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent Consideration:

           

Beginning Balance as of November 30, 2019

   $ 3,495,057           

Additions – Cord:Use earnout

     —             

Fair value adjustment as of February 29, 2020

     (51,412         
  

 

 

          

Ending balance as of February 29, 2020

   $ 3,443,645           
  

 

 

          
     Fair Value at      Fair Value Measurements
at November 30, 2019 Using
 

Description

   November 30,
2019
     Level 1      Level 2      Level 3  

Assets:

           

Marketable securities

   $ 904,053      $ 904,053        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 904,053      $ 904,053        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration

   $ 3,495,057      $ —          —        $ 3,495,057  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,495,057      $ —          —        $ 3,495,057  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

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:

Marketable securities - Effective December 1, 2018, the Company adopted ASU 2016-01, which requires equity securities with readily determinable fair values to be measured at fair value with the changes in fair value recognized through net income. Such securities are no longer reflected as trading or available-for-sale but are noted as marketable securities. As a result of this accounting change, in the first quarter of 2019, the Company recognized a cumulative-effect adjustment from accumulated other comprehensive income to accumulated deficit of approximately $341,000 in the consolidated statements of stockholders’ deficit as of the date of adoption. Prior periods were not restated for the impact of this accounting change. There was a $55,000 and ($67,000) in unrealized holding (losses) gains recorded in other income and expense on the accompanying consolidated statements of comprehensive income for the three months ended February 29, 2020 and February 28, 2019, respectively.

Contingent consideration - The contingent consideration is the earnout that Cord:Use is entitled to from the Company’s sale of the public cord blood inventory from and after closing. See Note 2. The estimated fair value of the contingent earnout was determined using a Monte Carlo analysis examining the frequency and mean value of the resulting earnout payments. The resulting value captures the risk associated with the form of the payout structure. The risk-neutral method is applied, resulting in a value that captures the risk associated with the form of the payout structure and the projection risk. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liability.

Product Warranty and Cryo-Cell CaresTM 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 1, 2017, the Company increased the payment warranty to $100,000 to all new clients who choose the premium processing method, PrepaCyte CB. 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.

As discussed above, the Company has determined that the payment warranty represents variable consideration payable to the customer. Upon the adoption of ASC 606, the Company has concluded the

 

18


Table of Contents

payment warranty be fully constrained under the most likely amount method, therefore, the transaction price does not reflect any expectation of service level credits at February 29, 2020. At the end of each reporting period, the Company shall update the estimated transaction price related to the payment guarantee including updating its assessment of whether an estimate of variable consideration is constrained to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles – Goodwill and Other Internal-Use Software (Topic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This update addresses how a customer should account for the costs of implementing a cloud computing service arrangement (also referred to as a “hosting arrangement”). Entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract in the same way as accounting for implementation costs incurred to develop or obtain software for internal use using the guidance in Topic 350-40. The amendments address when costs should be capitalized rather than expensed, the term to use when amortizing capitalized costs, and how to evaluate the unamortized portion of these capitalized implementation costs for impairment. The ASU also includes guidance on how to present implementation costs in the financial statements and creates additional disclosure requirements. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within that reporting period. The Company is currently evaluating the effect that the updated standard will have on our financial statements.

In June 2018, the FASB issued Accounting Standards Update No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update simplifies the accounting for nonemployee share-based payment transactions by expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within that reporting period. The Company is currently evaluating the effect that the updated standard will have on our financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update removes Step 2 from the goodwill impairment test. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, 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, 2018, Cryo-Cell completed its acquisition of substantially all of the assets (the “Cord Purchase”) of Cord:Use Cord Blood Bank, Inc., a Florida corporation (“Cord:Use”), in accordance with the definitive Asset Purchase Agreement between Cryo-Cell and Cord:Use (the “Purchase Agreement”), including without limitation Cord:Use’s inventory of public cord blood units existing as of the closing date (the “Public Cord Blood Inventory”) and Cord:Use’s shares of common stock of Tianhe Stem Cell Biotechnologies, Inc., an Illinois corporation (the “Tianhe Capital Stock”). Cord:Use was in the business of public and private cord blood and tissue, collection, processing, storage and banking.

 

19


Table of Contents

The aggregate consideration payable at closing under the Purchase Agreement was $14,000,000, with $10,500,000 paid in cash and the balance paid through the delivery to Seller of 465,426 shares of Cryo-Cell’s common stock, par value $0.01 per share (“Common Stock”), at $7.52 per share. In addition, Cryo-Cell assumed certain limited liabilities incurred by Cord:Use in connection with its business that were unpaid as of the closing date and that directly relate to the services to be provided after closing by Cryo-Cell. Cryo-Cell also assumed certain of Cord:Use’s contracts and the obligations arising therefrom after the closing.

Additionally, Cord:Use is entitled to an earnout from Cryo-Cell’s sale of the public cord blood inventory from and after closing. Each calendar year after the closing, Cryo-Cell will pay to Cord:Use 75% of all gross revenues, net of any returns, received from the sale of public cord blood inventory in excess of $500,000. Such payments will be made quarterly, within 30 days of the end of the last month of each calendar quarter, until the public cord blood inventory is exhausted. In addition, each calendar year after closing, until the public cord blood inventory is exhausted, for every $500,000 of retained gross revenues, net of any returns, received and retained by Cryo-Cell in excess of the initial $500,000 retained by Cryo-Cell during such year, Cryo-Cell will deliver $200,000 worth of Cryo-Cell Common stock to Cord:Use, up to an aggregate value of $5,000,000. Cord:Use is also entitled to a portion of the gross profits generated, or deemed to have been generated, by Cryo-Cell from its ownership of the Tianhe Capital Stock.

Goodwill represents the excess of the purchase price of the assets acquired from Cord:Use over the estimated fair value of the net tangible, intangible and identifiable assets acquired. The annual assessment of the reporting unit is performed as of September 1st, 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. The Company first performs a qualitative assessment to test goodwill for impairment and concludes if it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the qualitative assessment concludes that it is not more likely than not that the fair value is less than the carrying value, the two-step goodwill impairment test is not required. If the qualitative assessment concludes that it is more likely than not that the fair value of the reporting unit is less than the carrying value, then the two-step goodwill impairment test is required. 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.

The annual impairment assessment was performed as of September 1, 2019. The Company concluded that there was no impairment the assets acquired from Cord:Use.

As of both February 29, 2020 and November 30, 2019 goodwill is reflected at $1,941,411 on the consolidated balance sheets.

The operating results of Cord:Use have been included in the consolidated statements of comprehensive income since the date of the acquisition.

Note 3Segment Reporting

During the third quarter of fiscal 2018, the Company purchased the assets and assumed contracts that Cord:Use 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.

 

20


Table of Contents

The Company is organized in three 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”).

 

  3.

The cellular processing and cryogenic storage of umbilical cord blood stem cells for public use. Revenue is generated from the sale of the cord blood units to the National Marrow Donor Program (“NMDP”), which distributes the cord blood units to transplant centers located in the United States, and around the world.

 

21


Table of Contents

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 ended February 29, 2020 and February 28, 2019:

 

     For the three
months
ended February 29,
2020
     For the three months
ended February 28,
2019
 

Net revenue

     

Umbilical cord blood and cord tissue stem cell service

   $ 7,406,288      $ 7,335,027  

PrepaCyte®-CB

     60,407        25,720  

Public cord blood banking

     154,079        134,365  
  

 

 

    

 

 

 

Total net revenue

   $ 7,620,774      $ 7,495,112  
  

 

 

    

 

 

 

Cost of sales

     

Umbilical cord blood and cord tissue stem cell service

   $ 2,055,075      $ 2,038,616  

PrepaCyte®-CB

     41,117        160,006  

Public cord blood banking

     406,952        267,605  
  

 

 

    

 

 

 

Total cost of sales

   $ 2,503,144      $ 2,466,227  
  

 

 

    

 

 

 

Depreciation and amortization

     

Umbilical cord blood and cord tissue stem cell service

   $ 37,327      $ 47,917  

PrepaCyte®-CB

     6,894        9,063  

Public cord blood banking

     —          —    
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 44,221      $ 56,980  
  

 

 

    

 

 

 

Operating income

     

Umbilical cord blood and cord tissue stem cell service

   $ 1,489,548      $ 1,130,251  

PrepaCyte®-CB

     12,396        (143,349

Public cord blood banking

     (252,874      (133,240
  

 

 

    

 

 

 

Total operating income

   $ 1,249,070      $ 853,662  
  

 

 

    

 

 

 

Interest expense

     

Umbilical cord blood and cord tissue stem cell service

   $ 365,299      $ 406,925  

PrepaCyte®-CB

     —          —    

Public cord blood banking

     —          —    
  

 

 

    

 

 

 

Total interest expense

   $ 365,299      $ 406,925  
  

 

 

    

 

 

 

Income tax expense

     

Umbilical cord blood and cord tissue stem cell service

   $ 252,380      $ 104,667  

PrepaCyte®-CB

     —          —    

Public cord blood banking

     —          —    
  

 

 

    

 

 

 

Total income tax expense

   $ 252,380      $ 104,667  
  

 

 

    

 

 

 

The following table shows the assets by segment as of February 29, 2020 and November 30, 2019:

 

     As of February 29,
2020
     As of November 30,
2019
 

Assets

     

Umbilical cord blood and cord tissue stem cell service

   $ 31,001,108      $ 28,975,002  

PrepaCyte®-CB

     270,095        289,804  

Public cord blood banking

     13,459,243        13,621,354  
  

 

 

    

 

 

 

Total assets

   $ 44,730,446      $ 42,886,160  
  

 

 

    

 

 

 

 

22


Table of Contents

Note 4 – Inventory

Inventory is comprised of public cord blood banking specimens, collection kits, finished goods, work-in-process and raw materials. Collection kits are used in the collection and processing of umbilical cord blood and cord tissue stem cells, finished goods include products purchased or assumed for resale and for the use in the Company’s processing and storage service. Inventory in the Public Cord Blood Bank includes finished goods that are specimens that are available for resale. The Company considers inventory in the Public Cord Blood Bank that has not completed all testing to determine viability to be work in process. Due to changes in sales trends and estimated recoverability of cost capitalized into inventory, an impairment charge of $2,332,763 was recognized during the second quarter of fiscal 2019 to reduce inventory from cost to net realizable value. The components of inventory at February 29, 2020 and November 30, 2019 are as follows:

 

     February 29, 2020      November 30, 2019  

Raw materials

   $ —        $ —    

Work-in-process

     148,918        149,972  

Work-in-process – Public Bank

     —          —    

Finished goods

     64,203        52,451  

Finished goods – Public Bank

     13,403,049        13,491,375  

Collection kits

     51,687        44,453  

Inventory reserve

     (7,718      (7,718
  

 

 

    

 

 

 

Total inventory

   $ 13,660,139      $ 13,730,533  
  

 

 

    

 

 

 

Note 5– Intangible Assets

The Company incurs certain legal and related costs in connection with patent and trademark applications. If a future economic benefit is anticipated from the resulting patent or trademark or an alternate future use is available to the Company, such costs are capitalized and amortized over the expected life of the patent or trademark. The Company’s assessment of future economic benefit involves considerable management judgment. A different conclusion could result in the reduction of the carrying value of these assets.

Intangible assets were as follows as of February 29, 2020 and November 30, 2019:

 

     Useful lives      February 29, 2020      November 30, 2019  

Patents and Domain Names

     10-20 years      $ 234,570      $ 234,570  

Less: Accumulated amortization

        (38,431      (35,526

License agreement

     10 years        470,000        470,000  

Less: Intangible asset impairment

        (185,000      (185,000

Less: Accumulated amortization

        (161,007      (155,194

Customer relationships-PrepaCyte®CB

     15 years        41,000        41,000  

Less: Intangible asset impairment

        (26,267      (26,267

Less: Accumulated amortization

        (6,527      (6,329

Brand

        31,000        31,000  

Less: Accumulated amortization

        (31,000      (31,000

Customer relationships – Cord:Use

        960,000        960,000  

Less: Accumulated amortization

        (56,000      (48,000
     

 

 

    

 

 

 

Net Intangible Assets

      $ 1,232,338      $ 1,249,254  
     

 

 

    

 

 

 

 

23


Table of Contents

Amortization expense of intangibles was approximately $17,000 and $27,000 for the three months ended February 29, 2020 and February 28, 2019, respectively.

Note 6– Note Payable

On May 20, 2016, the Company entered into a Credit Agreement (“Agreement”) with Texas Capital Bank, National Association (“TCB”) for a term loan of $8.0 million in senior credit facilities. The proceeds of the term loan were used by the Company to fund repurchases of the Company’s common stock. Subject to the terms of the Agreement, on May 20, 2016, TCB advanced the Company $100.00. On July 1, 2016, TCB advanced the remaining principal amount of $7,999,900 per a promissory note dated May 20, 2016 between the Company and TCB, at a rate of 3.75% per annum plus LIBOR, payable monthly with a maturity date of July 2021. On August 26, 2016, the Company entered into a First Amendment to Credit Agreement with TCB. Pursuant to terms of the First Amendment to Credit Agreement, on August 26, 2016, TCB made an additional advance to the Company in principal amount of $2,133,433 per an Amended and Restated Promissory Note dated August 26, 2016 between the Company and TCB. The additional proceeds of the term loan were used by the Company to fund the extinguishment of revenue sharing agreements. On June 11, 2018, the Company entered into a Second Amendment to Credit Agreement with TCB. Pursuant to the terms of the Second Amendment to Credit Agreement, TCB increased the current outstanding principal amount of the loan from TCB by $9,000,000 to finance a portion of the purchase price of the Cord:Use Purchase. In connection therewith, Cryo-Cell executed and delivered to TCB a Second Amended and Restated Promissory Note, in the principal amount of $15,500,000. As of the three months ended February 29, 2020 and February 28, 2019, the Company paid interest of $109,780 and $180,244, respectively, which is reflected in interest expense on the accompanying consolidated statements of comprehensive income.

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 and subordinated loans in the amount of $548,085 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 months ended February 29, 2020 and February 28, 2019, $24,481 and $29,894, respectively, of the debt issuance costs were amortized and are reflected in interest expense on the accompanying consolidated statements of comprehensive income.

As of February 29, 2020 and November 30, 2019, the note payable obligation was as follows:

 

     February 29, 2020      November 30, 2019  

Note payable

   $ 8,333,433      $ 9,108,433  

Unamortized debt issuance costs

     (127,800      (152,281
  

 

 

    

 

 

 

Net note payable

   $ 8,205,633      $ 8,956,152  
  

 

 

    

 

 

 

Current portion of note payable

   $ 3,100,000      $ 3,100,000  

Long-term note payable, net of debt issuance costs

     5,105,633        5,856,152  
  

 

 

    

 

 

 

Total

   $ 8,205,633      $ 8,956,152  
  

 

 

    

 

 

 

 

24


Table of Contents

Interest expense on the note payable for the three months ended February 29, 2020 and February 28, 2019 was as follows:

 

     February 29, 2020      February 28, 2019  

Interest expense on notes payable

   $ 109,780      $ 180,244  

Debt issuance costs

     24,481        29,894  
  

 

 

    

 

 

 

Total interest expense

   $ 134,261      $ 210,138  
  

 

 

    

 

 

 

Note 7 –Income per Common Share

The following table sets forth the calculation of basic and diluted earnings per share:

 

     For the three months ended
February 29, 2020
     For the three months ended
February 28, 2019
 

Numerator:

     

Net Income

   $ 686,966      $ 275,877  

Denominator:

     

Weighted-average shares outstanding-basic

     7,541,113        7,801,333  

Dilutive common shares issuable upon exercise of stock options

     587,144        623,572  
  

 

 

    

 

 

 

Weighted-average shares-diluted

     8,128,257        8,424,905  
  

 

 

    

 

 

 

Earnings (Loss) per share:

     

Basic

   $ 0.09      $ 0.04  
  

 

 

    

 

 

 

Diluted

   $ 0.08      $ 0.03  
  

 

 

    

 

 

 

For the three months ended February 29, 2020, the Company excluded the effect of 232,737 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. For the three months ended February 28, 2019, the Company excluded the effect of 51,636 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

The Company maintains the 2006 Stock Incentive Plan (the “2006 Plan”) under which it has reserved 1,000,000 shares of the Company’s common stock for issuance pursuant to stock options, restricted stock, stock-appreciation rights (commonly referred to as “SARs”) and stock awards (i.e. performance options to purchase shares and performance units). As of February 29, 2020, and November 30, 2019, there were 305,000 and 325,000 options issued, but not yet exercised, under the 2006 Plan, respectively. As of February 29, 2020, there were 0 shares available for future issuance under the 2006 Plan.

The Company maintains the 2012 Equity Incentive Plan (the “2012 Plan”) which became effective December 1, 2011 as approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting on July 10, 2012. The 2012 Plan originally reserved 1,500,000 shares of the Company’s common stock for issuance pursuant to stock options, restricted stock, SARs, and other stock awards (i.e. performance shares and performance units). In May 2012, the Board of Directors approved an amendment to the 2012 Plan to increase the number of shares of the Company’s common stock reserved for issuance to 2,500,000 shares. In October 2019, the Board of Directors approved amendments to the

 

25


Table of Contents

plan, subject to ratification by the stockholders, which occurred at the Company’s 2019 Annual Meeting of Stockholders on November 21, 2019. See the Company’s Proxy Statement filed with the Securities and Exchange Commission on October 29, 2019 in connection with the Company’s 2019 Annual Meeting (the “2019 Proxy Statement”). As of February 29, 2020, there were 808,243 service-based options issued, 129,729 service-based restricted common shares granted, 530,851 performance-based and 116,218 market-based restricted common shares granted under the 2012 Plan. As of February 29, 2020, there were 622,510 shares available for future issuance under the 2012 Plan.

Service-based vesting condition options

The fair value of each option award is estimated on the date of the grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock over the most recent period commensurate with the expected life of the Company’s stock options. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted to employees is based upon historical exercise data. Expected dividends are based on the historical trend of the Company not issuing dividends.

There were 44,969 and 0 options granted during the three months ended February 29, 2020 and February 28, 2019, respectively.

Variables used to determine the fair value of the options granted for the three months ended February 29, 2020 are as follows:

 

     Three months ended February 29, 2020  

Weighted average values:

  

Expected dividends

     0

Expected volatility

     64.25

Risk free interest rate

     1.90

Expected life

     9.0 years  

Stock option activity for the three months ended February 29, 2020, was as follows:

 

     Options      Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at November 30, 2019

     1,089,774      $ 3.30        3.91      $ 4,648,111  

Granted

     44,969        7.26           813  

Exercised

     (20,000      2.05           102,800  

Expired/forfeited

     —          —             —    
  

 

 

          

Outstanding at February 29, 2020

     1,114,743      $ 3.49        3.94      $ 4,192,762  
  

 

 

          

 

 

 

Exercisable at February 29, 2020

     1,006,623      $ 3.06        3.39      $ 4,191,626  
  

 

 

          

 

 

 

The aggregate intrinsic value represents the total value of the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied

 

26


Table of Contents

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 February 29, 2020 or November 30, 2019, as applicable. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s stock.

For the three months ended February 29, 2020, the Company issued 20,000 common shares to an option holder who exercised options for $41,000.

For the three months ended February 28, 2019, the Company issued 2,500 common shares to an option holder who exercised options for $5,700.

Significant option groups exercisable at February 29, 2020 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     422,500       1.85     $ 1.73       422,500     $ 1.73  
$2.01 to $3.00     245,000       1.85     $ 2.78       245,000     $ 2.78  
$3.01 to $4.00     204,729       5.98     $ 3.14       204,729     $ 3.14  
$6.01 to $7.00     3,833       6.35     $ 6.52       2,111     $ 6.51  
$7.01 to $8.00     238,681       7.99     $ 7.57       132,283     $ 7.62  
 

 

 

       

 

 

   

 

 

 
    1,114,743       3.94     $ 3.49       1,006,623     $ 3.06  
 

 

 

       

 

 

   

A summary of the status of the Company’s non-vested options as of February 29, 2020, and changes during the three months ended February 29, 2020, is presented below:

 

     Options      Weighted Average
Grant-Date
Fair Value
 

Non-vested at November 30, 2019

     125,234      $ 4.70  

Granted

     44,969        5.03  

Vested

     (62,083      4.51  

Forfeited

     —          —    
  

 

 

    

Non-vested at February 29, 2020

     108,120      $ 4.95  
  

 

 

    

As of February 29, 2020, there was approximately $521,000 of total unrecognized compensation cost related to non-vested service-related 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 1.21 years as of February 29, 2020. The total fair value of shares vested during the three months ended February 29, 2020 was approximately $280,000.

During the second fiscal quarter of 2018, the Company entered into Amended and Restated Employment Agreements (“2018 Employment Agreements”) with each of the Company’s Co-CEOs.

 

27


Table of Contents

Per the Employment Agreements, each of the Co-CEOs is to receive base grant equity awards in the form of qualified stock options of the Company’s common stock. As of December 20, 2019, David Portnoy and Mark Portnoy were granted 23,636 and 20,000 stock options of the Company’s common stock, respectively. The options were issued under the Company’s 2012 Stock Plan and will vest 1/3 upon grant, 1/3 on December 1, 2020 and the remaining 1/3 on November 30, 2021. The fair value of the options vested through the three months ended February 29, 2020 was approximately $73,000 and is reflected as selling, general and administrative expenses in the accompanying statement of comprehensive income. As of February 29, 2020, there was approximately $147,000 of total unrecognized compensation cost related to the non-vested options of common stock.

Performance and market-based vesting condition options

Per the 2018 Employment Agreements, based upon certain performance criteria, the Company shall grant David Portnoy and Mark Portnoy a percentage of up to 47,273 and 40,000, respectively, of qualified stock options of the Company’s common stock. For market-based vesting condition options, accounting principles do not require that the market condition be met in order for the compensation cost to be recognized. Fair value of these options has been determined using a Monte Carlo valuation approach. During fiscal 2019, 15,756 and 13,332, respectively, of qualified stock options were forfeited as certain market conditions were not met by the end of the requisite service period. The fair value of these options expensed as of the three months ended February 28, 2019 was approximately $45,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income. There were no market-based vesting condition options for the three months ended February 29, 2020. For performance-based vesting condition options, the Company estimates the fair value of the qualified stock options that met certain performance targets by the end of the fiscal 2018 requisite service period using a Black-Scholes valuation model. As of August 30, 2019, the Company granted David Portnoy and Mark Portnoy 26,243 and 22,222 of non-qualified stock options of the Company’s common stock based upon certain performance criteria met by the end of the fiscal 2018 service period. These options were issued under the Company’s 2012 Stock Plan and will vest 1/3 upon date of grant, 1/3 on December 1, 2019 and 1/3 on November 30, 2020. The fair value of the options that vested through the three months ended February 29, 2020 was approximately $86,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income. As of February 29, 2020, there was approximately $86,000 of total unrecognized compensation cost related to the non-vested options of common stock.

Per the Amendment Agreement, based upon certain performance criteria, the Company shall grant Oleg Mikulinsky a percentage of up to 8,000 of qualified stock options of the Company’s common stock. For market-based vesting condition options, accounting principles do not require that the market condition be met in order for the compensation cost to be recognized. Fair value of these options was determined using a Monte Carlo valuation approach. During fiscal 2019, 2,666, of qualified stock options were forfeited as certain market conditions were not met by the end of the requisite service period. The fair value of these options expensed as of three months ended February 28, 2019 was approximately $4,800 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income. There were no market-based vesting condition options for the three months ended February 29, 2020. For performance-based vesting condition options, the Company estimates the fair value of the qualified stock options that met certain performance targets by the end of the requisite service period using a Black-Scholes valuation model. As of September 4, 2019, the Company granted Oleg Mikulinsky 4,444 of qualified stock options of the Company’s common stock based upon certain performance criteria met by the end of the fiscal 2018 service period and per the Amendment Agreement. These options were issued under the Company’s 2012 Stock Plan and will vest 1/3 upon date of grant, 1/3 on December 1, 2019

 

28


Table of Contents

and 1/3 on November 30, 2020. The fair value of the options that vested through the three months ended February 29, 2020 was approximately $7,600 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income. As of February 27, 2020, the Company granted Oleg Mikulinsky 1,333 of qualified stock options of the Company’s common stock based upon certain performance criteria met by the end of the fiscal 2019 service period and per the Amendment Agreement. These options were issued under the Company’s 2012 Stock Plan and will vest 1/3 upon date of grant, 1/3 on December 1, 2020 and 1/3 on November 30, 2021. The fair value of the options vested through the three months ended February 29, 2020 was approximately $2,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income. As of February 29, 2020, there was approximately $11,500 of total unrecognized compensation cost related to the non-vested options of common stock.

Restricted common shares

Based upon performance measures being obtained during prior fiscal years, David Portnoy and Mark Portnoy earned 304,946 and 265,172 shares of common stock, respectively. Pursuant to the terms of the Employment Agreements, the Co-CEOs each opted to receive a lump sum cash payment in lieu of 30,000 shares of earned common stock which amounted to approximately $444,000 each paid in fiscal 2018. Per the recommendation of the DCCL, as described above, David Portnoy and Mark Portnoy surrendered 157,472 and 134,977 commons shares, respectively, for cash which amounted to $534,917 and $457,327, respectively, in 2019.

Based upon performance measures being obtained during prior fiscal years, Oleg Mikulinsky was granted 34,349 shares of common stock.

Note 9 – License Agreements

The Company enters into two types of licensing agreements and in both types, the Company earns revenue on the initial license fees. Under the technology agreements, the Company earns processing and storage royalties from the affiliates that process in their own facility. Under the marketing agreements, the Company earns processing and storage revenues from affiliates that store specimens in the Company’s facility in Oldsmar, Florida.

Technology Agreements

The Company has entered into a definitive License and Royalty Agreement with LifeCell International Private Limited, formerly Asia Cryo-Cell Private Limited, (“LifeCell”) to establish and market its umbilical cord blood and menstrual stem cell programs in India.

Per the License and Royalty Agreement with Lifecell, there is a $1 Million cap on the amount of royalty 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. Since inception of the License and Royalty Agreement, the Company has recorded $9,300,000 in royalty income due under the terms of the License and Royalty Agreement, of which, Lifecell has paid the Company $8,500,000 as of February 29, 2020. The balance of $800,000 is reflected as Accounts Receivable on the accompanying consolidated balance sheets.

 

29


Table of Contents

Marketing Agreements

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

For the three months ended February 29, 2020 and February 28, 2019, the Company recognized $0 and $0, respectively, for initial license fees and processing and storage royalties.

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 February 29, 2020.

In addition, from time to time the Company is subject to proceedings, lawsuits, contract disputes and other claims in the normal course of its business. The Company believes that the ultimate resolution of current matters should not have a material adverse effect on the Company’s business, consolidated financial position or results of operations. It is possible, however, that there could be an unfavorable ultimate outcome for or resolution which could be material to the Company’s results of operations for a particular quarterly reporting period. Litigation is inherently uncertain and there can be no assurance that the Company will prevail. The Company does not include an estimate of legal fees and other related defense costs in its estimate of loss contingencies.

Note 11– Share Repurchase Plan

In December 2011, the Company’s Board of Directors authorized management at its discretion to repurchase up to one million (1,000,000) shares of the Company’s outstanding common stock. On June 6, 2012, the Board of Directors of the Company increased the number of shares of the Company’s outstanding common stock that management is authorized to repurchase to up to three million (3,000,000). On April 8, 2015, the Board of Directors of the Company increased the number of shares of the Company’s outstanding common stock that management is authorized to repurchase to up to six million (6,000,000) shares. On October 6, 2016, the Board of Directors of the Company increased the number of shares of the Company’s outstanding common stock that management is authorized to repurchase to up to eight million (8,000,000) shares. The repurchases must be effectuated through open market purchases, privately negotiated block trades, unsolicited negotiated transactions, and/or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission or in such other manner as will comply with the provisions of the Securities Exchange Act of 1934.

In March 2018, the Company received notice that shares of the Company’s common stock issued to certain executive officers pursuant to the Company’s 2012 Stock Incentive Plan had purportedly been issued in excess of the shares reserved for issuance under the Plan. The Company established an independent committee of the Board of Directors to review this issue. After completing its investigation, the independent committee determined that certain restricted stock awards and certain performance-based awards were granted in violation of the 2012 Plan. See the Company’s 2019 Proxy Statement. The Company repurchased 292,449 shares that were surrendered.

 

30


Table of Contents

As of February 29, 2020, the Company had repurchased an aggregate of 6,093,535 shares of the Company’s common stock at an average price of $3.37 per share through open market and privately negotiated transactions. The Company did not repurchase any of the Company’s common stock during the first quarter of fiscal 2020.

The repurchased shares will be held as treasury stock at cost and have been removed from common shares outstanding as of February 29, 2020 and November 30, 2019. As of February 29, 2020, and November 30, 2019, 6,093,535 and 6,093,535 shares, respectively, were held as treasury stock.

Subsequent to the balance sheet date, the Company has not repurchased any additional shares of the Company’s common stock.

Note 12– Leases

Effective December 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), using the modified retrospective approach and utilizing the effective date as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases (“ASC 840”). The Company has elected to apply the ‘package of practical expedients’ which allows the Company to not reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as a right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases.

Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company believes it could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.

The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew.

 

31


Table of Contents

The following table presents the right-of-use asset and short-term and long-term lease liabilities amounts recorded on the consolidated balance sheets as of February 29, 2020:

 

     February 29, 2020  

Assets

  

Operating lease right-of-use asset

   $ 496,284  

Liabilities

  

Current portion of operating lease liabilities

   $ 264,798  

Operating lease long term liabilities

     231,677  
  

 

 

 

Total lease liability

   $ 496,475  
  

 

 

 

The maturity of the Company’s lease liabilities at February 29, 2020 were as follows:

 

     Future Operating  

Fiscal Year Ending November 30,

   Lease Payments  

2020 (remaining 9 months)

   $ 213,635  

2021

     284,846  

2022

     23,737  

Less: Imputed interest

     (25,743
  

 

 

 

Present value of lease liabilities

   $ 496,475  
  

 

 

 

The remaining lease term and discount rates are as follows:

 

     February 29, 2020  

Lease Term and Discount Rate

  

Remaining lease term (years)

  

Operating lease

     1.8  

Discount rate (percentage)

  

Operating lease

     5.3

Supplemental cash flow information related to leases is as follows:

 

     Three Months Ended  
     February 29, 2020  

Operating cash outflows from operating leases

   $ 66,300  

Note 13– Subsequent Event

In March 2020, subsequent to the Company’s balance sheet date, the World Health Organization declared a pandemic related to the rapidly spreading coronavirus (“COVID-19”) outbreak. The Company has maintained operations, but the impact of the outbreak currently is unknown and rapidly evolving. The related health crisis could adversely affect the global economy, resulting in an economic downturn that could impact the demand for our services.

 

32


Table of Contents
Item 2.

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

Forward Looking Statements

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

 

  (i)

our future performance and operating results;

 

  (ii)

our future operating plans;

 

  (iii)

our liquidity and capital resources; and

 

  (iv)

our financial condition, accounting policies and management judgments.

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

 

  (i)

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

 

  (ii)

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

 

  (iii)

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

 

  (iv)

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

 

  (v)

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

 

  (vi)

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

 

  (vii)

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

 

  (viii)

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

 

33


Table of Contents
  (ix)

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

 

  (x)

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

 

  (xi)

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

 

  (xii)

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

 

  (xiii)

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

 

  (xiv)

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

 

  (xv)

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

 

  (xvi)

any inability to realize a return on an investment;

 

  (xvii)

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

 

  (xviii)

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

 

  (xix)

the success of our global expansion initiatives;

 

  (xx)

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

 

  (xxi)

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

 

  (xxii)

any inability to successfully identify and consummate strategic acquisitions;

 

  (xxiii)

any inability to realize benefits from any strategic acquisitions;

 

  (xxiv)

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

 

  (xxv)

the Company’s ability to realize a profit on the acquisition of Cord:Use,

 

  (xxvi)

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

 

  (xxvii)

the impact of the COVID-19 pandemic on our sales, operations and supply chain and

 

  (xxviii)

other factors many of which are beyond our control.

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

 

34


Table of Contents

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

Overview

The Company is engaged in cellular processing and cryogenic storage, with a current focus on the collection and preservation of umbilical cord blood stem cells for family use. The Company’s principal sources of revenues are service fees for cord blood processing and preservation for new customers and recurring annual storage fees. Effective April 2016, the Company offers two pricing models, a standard plan and premium plan. The Company charges fees of $1,675 for the standard plan and $2,025 for the premium plan to new clients for the collection kit, processing, testing and return medical courier service, with discounts in the case of multiple children from the same family and in other circumstances. The Company charges an annual storage fee of $175 for new clients that enroll in the standard and premium plans; storage fees for existing customers depend on the contracts with such customers. The Company continues to offer a one-time payment plan for 18 years of storage and a lifetime payment plan, pursuant to which the client is charged $4,650 for the standard plan and $5,000 for the premium plan and approximately $5,800 for the standard plan and approximately $6,100 for the premium plan, respectively, less discounts in the case of multiple children from the same family and in other circumstances. The one-time plan includes the collection kit, processing and testing, return medical courier service and 18 years of prepaid storage fees. The lifetime plan includes the collection kit, processing and testing, return medical courier service and prepaid storage fees for the life of the client. The Company also receives other income from licensing fees and royalties from global affiliates.

On June 11, 2018, Cryo-Cell completed its acquisition of substantially all of the assets (the “Cord Purchase”) of Cord:Use Cord Blood Bank, Inc., a Florida corporation (“Cord:Use”), in accordance with the definitive Asset Purchase Agreement between Cryo-Cell and Cord:Use (the “Purchase Agreement”), including without limitation Cord:Use’s inventory of public cord blood units existing as of the closing date (the “Public Cord Blood Inventory”) and Cord:Use’s shares of common stock of Tianhe Stem Cell Biotechnologies, Inc., an Illinois corporation (the “Tianhe Capital Stock”). Cord:Use was in the business of public and private cord blood and tissue, collection, processing, storage and banking. The aggregate consideration payable at closing under the Purchase Agreement was $14,000,000, with $10,500,000 paid in cash and the balance paid through the delivery to Seller of 465,426 shares of Cryo-Cell’s common stock, par value $0.01 per share (“Common Stock”), at $7.52 per share. In addition, Cryo-Cell assumed certain limited liabilities incurred by Cord:Use in connection with its business that were unpaid as of the closing date and that directly relate to the services to be provided after closing by Cryo-Cell. Cryo-Cell also assumed certain of Cord:Use’s contracts and the obligations arising therefrom after the closing. Additionally, Cord:Use is entitled to an earnout from Cryo-Cell’s sale of the Public Cord Blood Inventory from and after closing. Each calendar year after the closing, Cryo-Cell is required to pay to Cord:Use 75% of all gross revenues, net of any returns, received from the sale of public cord blood inventory in excess of $500,000. Such payments are to be made quarterly, within 30 days of the end of the last month of each calendar quarter, until the public cord blood inventory is exhausted. In addition, each calendar year after closing, until the public cord blood inventory is exhausted, for every $500,000 of retained gross revenues, net of any returns, received and retained by Cryo-Cell in excess of the initial $500,000 retained

 

35


Table of Contents

by Cryo-Cell during such year, Cryo-Cell is to deliver $200,000 worth of Cryo-Cell Common stock to Cord:Use, up to an aggregate value of $5,000,000. Cord:Use is also entitled to a portion of the gross profits generated, or deemed to have been generated, by Cryo-Cell from its ownership of the Tianhe Capital Stock.

During the three months ended February 29, 2020, the Company’s revenues increased 2% as compared to the same period in 2019. The Company reported net income of $687,000 or $0.09 per basic common share for the three months ended February 29, 2020 compared to net income of approximately $276,000, or $0.04 per basic common share for the three months ended February 28, 2019. Net income for the three months ended February 29, 2020 was the result of a 2% increase in revenue offset by a 2% increase in cost of sales and a 3% increase in selling, general and administrative expenses. Net income for the three months ended February 28, 2019 resulted in a 20% increase in revenue offset by a 54% increase in cost of sales and a 4% increase in selling, general and administrative expenses.

At February 29, 2020, the Company had cash and cash equivalents of $8,415,639. The Company’s cash increased by $1,875,000 during the first three months of fiscal 2020. Cash provided by operations was approximately $2,616,000 which was offset by approximately $775,000 used to repay the note payable.

The COVID-19 global pandemic may pose risks to our business. It is too early to quantify the impact this situation will have on revenue and profits for the remainder of our fiscal year ended November 30, 2020 or beyond. The Company has maintained operations, but the impact of the outbreak currently is unknown and rapidly evolving. We have taken appropriate steps to minimize the risk to our employees and to maintain normal business operations. The related health crisis could adversely affect the global economy, resulting in an economic downturn that could impact the demand for our services.

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

Results of Operations

Revenues. Revenues for the three months ended February 29, 2020 were $7,620,774 compared to $7,495,112 for the same period in 2019, a 2% increase. The increase in revenue was primarily attributable to a 1% increase in processing and storage fees.

Processing and Storage Fees. The increase in processing and storage fee revenue is attributable to a 7% increase in recurring annual storage fee revenue.

Public Banking Revenue. For the three months ended February 29, 2020, revenue from public banking was $154,079 compared to $134,365 for the three months ended February 28, 2019.

Product Revenue. For the three months ended February 29, 2020, revenue from the PrepaCyte CB product sales was $60,407 compared to $25,720 for the three months ended February 28, 2019.

 

36


Table of Contents

Licensee Income. Licensee income for the three months ended February 29, 2020, was $0 as compared to $0 for the 2019 period.

Per the License and Royalty Agreement with Lifecell, there is a $1 Million cap on the amount of royalty 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. Since inception of the License and Royalty Agreement, the Company has recorded $9,300,000 in royalty income due under the terms of the License and Royalty Agreement, of which, Lifecell has paid the Company $8,500,000 as of February 29, 2020. The balance of $800,000 is reflected as Accounts Receivable on the accompanying consolidated balance sheets.

Cost of Sales. Cost of sales for the three months ended February 29, 2020 was $2,503,144 as compared to $2,466,227 for the same period in 2019, representing a 2% increase. Cost of sales includes wages and supplies associated with process enhancements to the existing production procedures and quality systems in the processing of cord blood specimens at the Company’s facility in Oldsmar, Florida and depreciation expense of approximately $52,000 and $48,000 for the three months ended February 29, 2020 and February 28, 2019, respectively. Also included in Cost of Sales is $41,117 and $160,006 related to the costs associated with production of the PrepaCyte®-CB processing and storage system for the three months ended February 29, 2020 and February 28, 2019, respectively. Also included in Cost of Sales is $406,953 and $267,605 for the three months ended February 29, 2020 and February 28, 2019, respectively, related to the public banking due to the Purchase Agreement with Cord:Use. The increase in cost of sales for the three months ended February 29, 2020 versus February 28, 2019 is due to the increased costs due to the public cord blood bank.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended February 29, 2020 were $3,870,029 as compared to $3,745,302 for the 2019 period, representing a 3% increase. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees. The slight increase in selling, general and administrative expenses is due in part to an increase in salaries and stock compensation expense of $167,151 or 66%, offset by a $88,000 or 36% decrease in bad debt expense.

Research, Development and Related Engineering Expenses. Research, development and related engineering expenses for the three months ended February 29, 2020 were $5,722 as compared to $5,884 for the three months ended February 28, 2019.

Depreciation and Amortization. Depreciation and Amortization (not included in Cost of Sales) for the three months ended February 29, 2020 was $44,221 compared to $56,980 for the 2019 period.

Change in the Fair Value of Contingent Consideration. Change in the fair value of the contingent consideration for the three months ended February 29, 2020 was a decrease of $51,412 compared to an increase of $367,057 for the 2019 period. The contingent consideration is the earnout that Cord:Use is entitled to from the Company’s sale of the public cord blood inventory from and after closing, described above. The contingent consideration was remeasured to fair value as of February 29, 2020. The estimated fair value of the contingent earnout was determined using a Monte Carlo analysis examining the frequency and mean value of the resulting earnout payments. The resulting value captures the risk associated with the form of the payout structure. The risk-neutral method is applied, resulting in a value that captures the risk associated with the form of the payout structure and the projection risk. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liability.

 

37


Table of Contents

Interest Expense. Interest expense for the three months ended February 29, 2020 was $365,299 compared to $406,925 for the three months ended February 28, 2019, of which, $134,261 and $210,138, respectively, related to the credit and subordination agreements with Texas Capital Bank, National Association as described in Note 6. The remaining interest expense is mainly comprised of amounts due to the parties to the Company’s revenue sharing agreements (“RSAs”) based on the Company’s storage revenue collected.

Income Taxes. Income tax expense for the three months ended February 29, 2020 was $252,380 compared to $104,667 for the three months ended February 28, 2019.

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

The Company records foreign income taxes withheld from installment payments of non-refundable up-front license fees and royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The Company recorded $0 for both of the three months ended February 29, 2020 and February 28, 2019, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of comprehensive income.

Liquidity and Capital Resources

On May 20, 2016, the Company entered into a Credit Agreement (“Agreement”) with Texas Capital Bank, National Association (“TCB”) for a term loan of $8.0 million in senior credit facilities. The proceeds of the term loan were used by the Company to fund repurchases of the Company’s common stock. Subject to the terms of the Agreement, on May 20, 2016, TCB advanced the Company $100.00. On July 1, 2016, TCB advanced the remaining principal amount of $7,999,900 per a promissory note dated May 20, 2016 between the Company and TCB.

On 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 the extinguishment of revenue sharing agreements.

On June 11, 2018, the Company entered into a Second Amendment to Credit Agreement with TCB. Pursuant to the terms of the Second Amendment to Credit Agreement, TCB made an additional advance to the Company in principal amount of $9,000,000 per an Amended and Restated Promissory Note dated June 11, 2018 between the Company and TCB in the principal amount of $15,500,000. The proceeds were used to finance a portion of the purchase price of the Cord:Use Purchase.

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

At February 29, 2020, the Company had cash and cash equivalents of $8,415,639 as compared to $6,541,037 at November 30, 2019. The increase in cash and cash equivalents during the three months ended February 28, 2019 was primarily attributable to the following:

 

38


Table of Contents

Net cash provided by operating activities for the three months ended February 29, 2020 was $2,615,563 which was primarily attributable to the Company’s operating results and an increase in the Company’s new clients choosing the prepaid storage plans versus the annual storage fee plan.

Net cash provided by operating activities for the three months ended February 28, 2019 was $1,854,042 which was primarily attributable to the Company’s operating results and an increase in the Company’s new clients choosing the prepaid storage plans versus the annual storage fee plan.

Net cash used in investing activities for the three months ended February 29, 2020 was $6,961, which was primarily attributable to the purchases of property and equipment.

Net cash used in investing activities for the three months ended February 28, 2019 was $49,085 which was primarily attributable to the purchases of property and equipment.

Net cash used by financing activities for the three months ended February 29, 2020 was $734,000 which was primarily attributable to the payments of $775,000 to repay the note payable described above offset by the receipt of $41,000 from the exercise of stock options.

Net cash used by financing activities for the three months ended February 28, 2019 was $769,299 which was primarily attributable to the payments of $774,999 to repay the note payable described above offset by the receipt of $5,700 from the exercise of stock options.

The Company does not have a line of credit.

The Company will closely monitor its liquidity and capital resources due to any potential impact that the COVID-19 pandemic may have on operations.

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

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

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and

 

39


Table of Contents

disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 1 to the Consolidated Financial Statements included in our 2019 Annual Report on Form 10-K filed with the SEC on February 28, 2020. Our most critical accounting policies and estimates include: recognition of revenue and the related allowance for doubtful accounts, stock-based compensation, income taxes and license and revenue sharing agreements. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Annual Report on Form 10-K. Please refer to Note 1 to the Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements.

Off-Balance Sheet Arrangements

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

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their most recent review, as of the end of the period covered by this report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective, and that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In March 2018, the Company received notice that shares of the Company’s common stock issued to certain executive officers pursuant to the Company’s 2012 Stock Incentive Plan had purportedly been issued in excess of the shares reserved for issuance under the Plan. The Company established an independent committee of the Board of Directors to review this issue. Management has implemented the proper disclosure controls and procedures.

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

 

40


Table of Contents

Changes in Internal Control Over Financial Reporting

Other than as disclosed in “Evaluation of Disclosure Controls and Procedures” above with respect to the matters reviewed in March 2018, there were no other changes in the Company’s internal controls over financial reporting during the three months ended February 29, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

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

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

CEO and CFO Certifications

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

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

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 February 29, 2020.

 

41


Table of Contents

In addition, from time to time the Company is subject to proceedings, lawsuits, contract disputes and other claims in the normal course of its business. The Company believes that the ultimate resolution of current matters should not have a material adverse effect on the Company’s business, consolidated financial position or results of operations. It is possible, however, that there could be an unfavorable ultimate outcome for or resolution which could be material to the Company’s results of operations for a particular quarterly reporting period. Litigation is inherently uncertain and there can be no assurance that the Company will prevail. The Company does not include an estimate of legal fees and other related defense costs in its estimate of loss contingencies.

 

ITEM 1A.

RISK FACTORS

Not applicable.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASE OF EQUITY SECURITIES

 

Period

   Total Number of
Shares Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
 

December 1 – 31, 2019

     —        $ —          —          1,906,465  

January 1 – 31, 2020

     —        $ —          —          1,906,465  

February 1 – 29, 2020

     —        $ —          —          1,906,465  

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

 

ITEM 5.

OTHER INFORMATION

None.

 

42


Table of Contents
ITEM 6.

EXHIBITS

 

  (a)

Exhibits

 

31.1    Certification of Co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2    Certification of Co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.3    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

43


Table of Contents

SIGNATURES

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

 

Cryo-Cell International, Inc.

/s/ DAVID PORTNOY

David Portnoy
Co-Chief Executive Officer
Cryo-Cell International, Inc.

/s/ MARK PORTNOY

Mark Portnoy
Co-Chief Executive Officer
Cryo-Cell International, Inc.

/s/ JILL M. TAYMANS

Jill M. Taymans
Vice President, Finance, Chief Financial Officer

Date: April 14, 2020

 

44