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 August 31, 2019

 

☐	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 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 or a smaller reporting 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  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

State the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date. As of October 12, 2019, 13,598,909 shares of $0.01 par value common stock were issued and 7,803,333 were outstanding.

 

 

 

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  (Loss)			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			34
Item 3. Quantitative and Qualitative  Disclosures about Market Risk			44
Item 4. Controls and Procedures			44
PART II - OTHER  INFORMATION
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Mine Safety Disclosures			47
Item 5. Other Information			47
Item 6. Exhibits			48
SIGNATURES			49

 

2

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		(Unaudited) August 31, 2019				November 30, 2018
ASSETS
Current Assets
Cash and cash equivalents		$	7,338,789			$	6,040,033
Marketable securities			874,691				875,689
Accounts receivable (net of allowance for doubtful accounts of $2,535,513 and $2,264,848, respectively)			5,888,156				5,867,335
Prepaid expenses			526,288				461,815
Inventory, current portion			1,031,845				1,260,557
Other current assets			259,971				254,465
Total current assets			15,919,740				14,759,894
Property and Equipment-net			1,769,213				1,493,401
Other Assets
Investment—Tiahne Stock			308,000				308,000
Intangible assets, net			1,268,400				1,341,336
Inventory, net of current portion			12,646,000				14,775,316
Goodwill			1,941,411				1,941,411
Deferred tax assets			7,562,705				7,656,897
Deposits and other assets, net			412,287				113,888
Total other assets			24,138,803				26,136,848
Total assets		$	41,827,756			$	42,390,143
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable		$	1,013,037			$	1,261,653
Accrued expenses			1,372,539				2,702,788
Current portion of note payable			3,100,000				3,100,000
Deferred revenue			8,781,229				8,365,284
Total current liabilities			14,266,805				15,429,725
Other Liabilities
Deferred revenue, net of current portion			22,893,086				20,317,231
Contingent Consideration			3,601,697				4,282,975
Note payable, net of current portion and debt issuance costs			6,604,527				9,843,510
Long-term liability—revenue sharing agreements			1,425,000				1,425,000
Total other liabilities			34,524,310				35,868,716
Total liabilities			48,791,115				51,298,441
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; 13,598,909 issued and 7,803,333 outstanding as of August 31, 2019 and 13,596,409 issued and 7,800,833 outstanding as of November 30, 2018)			135,989				135,964
Additional paid-in capital			35,761,040				35,515,382
Treasury stock, at cost			(19,571,113	)			(19,571,113	)
Accumulated other comprehensive income			—				340,984
Accumulated deficit			(23,289,275	)			(25,329,515	)
Total stockholders’ deficit			(6,963,359	)			(8,908,298	)
Total liabilities and stockholders’ deficit		$	41,827,756			$	42,390,143

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

 

3

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		For the Three Month Ended								For the Nine Months Ended
		August 31, 2019				August 31, 2018				August 31, 2019				August 31, 2018
Revenue:
Processing and storage fees		$	7,606,624			$	7,237,053			$	22,621,520			$	19,732,575
Public banking revenue			160,561				65,575				529,041				65,575
Licensee and royalty income			423,173				539,286				625,001				742,445
Product revenue			33,035				29,308				70,795				84,208
Total revenue			8,223,393				7,871,222				23,846,357				20,624,803
Costs and Expenses:
Cost of sales			2,589,335				2,486,180				7,683,853				5,864,826
Selling, general and administrative expenses			3,556,602				4,390,614				10,949,831				11,513,190
Impairment of public inventory			—				—				2,332,763				—
Change in fair value of contingent consideration			34,649				—				(636,278	)			—
Research, development and related engineering			2,440				22,234				13,281				64,927
Depreciation and amortization			47,286				52,072				159,600				124,865
Total costs and expenses			6,230,312				6,951,100				20,503,050				17,567,808
Operating Income			1,993,081				920,122				3,343,307				3,056,995
Other Expense:
Other income (expense)			35,868				38,300				2,014				14,520
Interest expense			(413,942	)			(410,366	)			(1,245,154	)			(995,437	)
Total other expense			(378,074	)			(372,066	)			(1,243,140	)			(980,917	)
Income before income tax expense			1,615,007				548,056				2,100,167				2,076,078
Income tax expense			(498,748	)			(303,072	)			(654,358	)			(3,821,660	)
Net Income (Loss)		$	1,116,259			$	244,984			$	1,445,809			$	(1,745,582	)
Net income (loss) per common share—basic		$	0.14			$	0.03			$	0.19			$	(0.24	)
Weighted average common shares outstanding—basic			7,803,333				7,694,662				7,802,676				7,350,868
Net income (loss) per common share—diluted		$	0.13			$	0.03			$	0.17			$	(0.24	)
Weighted average common shares outstanding—diluted			8,445,237				8,375,675				8,430,251				7,350,868
Other Comprehensive Income
Unrealized gain on marketable securities (net of tax)		$	—			$	285,255			$	—			$	405,255
Comprehensive Income (Loss)		$	1,116,259			$	530,239			$	1,445,809			$	(1,340,327	)

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

 

4

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended
		August 31, 2019				August 31, 2018
Cash flows from operating activities:
Net income (loss)		$	1,445,809			$	(1,745,582	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense			304,463				214,275
Impairment of public inventory			2,332,763				—
Loss on disposal of property and equipment			—				153,756
Change in fair value of contingent consideration			(681,278	)			—
Compensatory element of stock options			239,983				323,798
Provision for doubtful accounts			587,716				539,365
Deferred income tax expense			—				3,117,263
Amortization of debt issuance costs			86,014				79,876
Changes in assets and liabilities:
Accounts receivable			(608,537	)			(805,183	)
Prepaid expenses			(64,473	)			(156,022	)
Inventory			25,265				182,466
Other current assets			(5,506	)			(3,066	)
Deposits and other assets, net			30,832				—
Accounts payable			(248,616	)			(808,839	)
Accrued expenses			(1,311,841	)			(99,555	)
Deferred revenue			2,991,800				3,496,790
Net cash provided by operating activities			5,124,394				4,489,342
Cash flows used in investing activities:
Purchases of property and equipment			(507,339	)			(408,297	)
Purchase of intangible asset			—				(200,000	)
Sales (purchases) of marketable securities and other investments, net			998				(105,186	)
Purchase of Cord Use			—				(10,500,000	)
Net cash used in investing activities			(506,341	)			(11,213,483	)
Cash flows from financing activities:
Repayments of note payable			(3,324,997	)			(1,516,666	)
Proceeds from the exercise of stock options			5,700				170,925
Proceeds from note payable			—				9,000,000
Issuance costs associated with the proceeds from the note payable			—				(169,300	)
Net cash (used in) provided by financing activities			(3,319,297	)			7,484,959
Increase in cash and cash equivalents			1,298,756				760,818
Cash and cash equivalents—beginning of period			6,040,033				6,279,154
Cash and cash equivalents—end of period		$	7,338,789			$	7,039,972
Supplemental non-cash investing activities:
Unrealized gain on marketable securities, net of tax		$	—			$	405,255
Cumulative-effect adjustment due to the adoption of ASU 2016-01		$	(340,984	)		$	—
Assets acquired and liabilities assumed in acquisitions:
Assets acquired in acquisition		$	—			$	20,103,661
Liabilities assumed in acquisition		$	—			$	1,405,406

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

 

5

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

		For the Three Months Ended August 31, 2019
																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-In				Treasury				Comprehensive				Accumulated				Stockholders’
		Shares				Amount				Capital				Stock				Income/(Loss)				Deficit				Deficit
Balance at May 31, 2019			13,598,909			$	135,989			$	35,746,866			$	(19,571,113	)		$	—			$	(24,405,534	)		$	(8,093,792	)
Compensatory element of stock options											14,174																14,174
Net income																							1,116,259				1,116,259
Balance at August 31, 2019			13,598,909			$	135,989			$	35,761,040			$	(19,571,113	)		$	—			$	(23,289,275	)		$	(6,963,359	)
		For the Nine Months Ended August 31, 2019
										Additional								Other								Total
		Common Stock								Paid-In				Treasury				Comprehensive				Accumulated				Stockholders’
		Shares				Amount				Capital				Stock				Income/(Loss)				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											239,983																239,983
Cumulative-effect adjustment due to the adoption of ASU 2016-01																			(340,984	)			340,984				—
ASC 606 adoption adjustment, net of tax																							253,447				253,447
Net income																							1,445,809				1,445,809
Balance at August 31, 2019			13,598,909			$	135,989			$	35,761,040			$	(19,571,113	)		$	—			$	(23,289,275	)		$	(6,963,359	)
		For the Three Months Ended August 31, 2018
										Additional								Other								Total
		Common Stock								Paid-In				Treasury				Comprehensive				Accumulated				Stockholders’
		Shares				Amount				Capital				Stock				Income/(Loss)				Deficit				Deficit
Balance at May 31, 2018			13,069,483			$	130,695			$	31,644,654			$	(19,571,113	)		$	160,865			$	(26,465,257	)		$	(14,100,156	)
Common stock issued			527,026				5,270				3,660,735																3,666,005
Compensatory element of stock options											55,412																55,412
Unrealized gain on available for sale securities																			285,255								285,255
Net income																							244,984				244,984
Balance at August 31, 2018			13,596,509			$	135,965			$	35,360,801			$	(19,571,113	)		$	446,120			$	(26,220,273)			$	(9,848,500	)
		For the Nine Months Ended August 31, 2018
										Additional								Other								Total
		Common Stock								Paid-In				Treasury				Comprehensive				Accumulated				Stockholders’
		Shares				Amount				Capital				Stock				Income/(Loss)				Deficit				Deficit
Balance at November 30, 2017			12,899,517			$	128,995			$	31,373,048			$	(19,571,113	)		$	40,865			$	(24,474,691)			$	(12,502,896	)
Common stock issued			696,992				6,970				3,663,955																3,670,925
Compensatory element of stock options											323,798																323,798
Unrealized gain on available for sale securities																			405,255								405,255
Net loss																							(1,745,582	)			(1,745,582	)
Balance at August 31, 2018			13,596,509			$	135,965			$	35,360,801			$	(19,571,113	)		$	446,120			$	(26,220,273	)		$	(9,848,500	)

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

 

6

CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2019

(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 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 August 31, 2019 and November 30, 2018, the related Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended August 31, 2019 and August 31, 2018, Cash Flows for the nine months ended August 31, 2019 and 2018 and Stockholders’ Deficit for the three and nine months ended August 21, 2019 and August 31, 2018 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, 2018 Annual Report on Form 10-K. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows for all periods presented have been made. The results of operations for the three and nine months ended August 31, 2019 are not necessarily indicative of the results expected for any interim period in the future or the entire year ending November 30, 2019.

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. The Company recognized the cumulative effect of applying the new revenue standard to all contracts with customers that were not completed as of December 1, 2018 as an adjustment to the opening balance of stockholders’ deficit at the beginning of fiscal year 2019. The reported results for 2019

 

7

reflect the application of ASC 606 guidance while the reported results for 2018 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605). 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.

The adoption of ASC 606 did not have an impact on the amount of reported revenues with respect to the Company’s product or service revenues. In connection with the adoption of ASC 606, the Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid when contracts are signed and amortize these costs on a systematic basis, consistent with the pattern of transfer of the storage services provided over time for which the asset relates. As of December 1, 2018, the Company capitalized in deposits and other assets, net, $329,231 in incremental contract acquisition costs related to sales commissions on prepaid storage contracts and reversed $18,408 of its variable consideration that the Company determined to be fully constrained, with a corresponding change in the opening balance of stockholders’ deficit of $253,447, net of tax, of $94,192.

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 life-time 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 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.

 

8

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 life-time. The life-time 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 life-time 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 financing component. For all plans being annual, twenty-one years and life-time, 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 pre-paid storage fees. The life-time plan includes the collection kit,

 

9

processing and testing, return medical courier service and pre-paid 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 life-time 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 August 31, 2019, the total aggregate transaction price allocated to the unsatisfied performance obligations was recorded as deferred revenue amounting to $31,674,315, which will be recognized ratably on a straight-line basis over the contractual period of which $8,781,229 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 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. 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.

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

 

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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

Prior to the adoption of ASC 606, the Company expensed in the period, all commissions paid to its internal and external sales representatives the Company employs and to its customers for generating new contracts. 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 and nine months ended August 31, 2019, the Company recorded $10,747 and $25,216, respectively, in 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 and nine months ended August 31, 2019, the Company capitalized additional contract acquisition costs of $23,180 and $67,668, 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.

 

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.

 

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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
		August 31, 2019				August 31, 2018
Processing and storage fees		$	7,606,624			$	7,237,053
Public banking revenue			160,561				65,575
Licensee and royalty income			423,173				539,286
Product revenue			33,035				29,308
		$	8,223,393			$	7,871,222

 

		Nine months ended
		August 31, 2019				August 31, 2018
Processing and storage fees		$	22,621,520			$	19,732,575
Public banking revenue			529,041				65,575
Licensee and royalty income			625,001				742,445
Product revenue			70,795				84,208
		$	23,846,357			$	20,624,803

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

 

		August 31, 2019				At Adoption
Contract assets (sales commissions)		$	383,399			$	329,231
Accounts receivables		$	5,888,156			$	5,867,335
Short-term contract liabilities (deferred revenue)		$	8,781,229			$	8,365,284
Long-term contract liabilities (deferred revenue)		$	22,893,086			$	20,317,231

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 and nine months ended August 31, 2019.

 

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The following table presents changes in the Company’s contract assets and liabilities during the nine months ended August 31, 2019:

 

		Balance at December 1, 2018				Additions				Deductions				Balance at August 31, 2019
Contract assets (sales commissions)		$	329,231			$	67,668			($	13,500	)		$	383,399
Accounts receivables		$	5,867,335			$	27,615,196			($	27,594,375	)		$	5,888,156
Contract liabilities (deferred revenue)		$	28,682,515			$	14,184,601			($	11,192,801	)		$	31,674,315

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, 2020 for Duke to receive, process, and store cord blood units for the Public Cord Blood Bank (“Duke Services”). As of August 31, 2019, the Company had 5,981 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 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. 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 and is included in the accompanying consolidated statements of comprehensive income (loss).

Income Taxes

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The Company has recorded a valuation allowance of $1,634,000 and $1,634,000 as of August 31, 2019 and November 30, 2018, as the Company does not believe it is “more

 

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likely than not” that all future income tax benefits will be realized. When the Company changes its determination as to the amount of deferred income tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made. The ultimate realization of the 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 recorded U.S. income taxes of approximately $453,000 and $245,000 for the three months ended August 31, 2019 and August 31, 2018, respectively. The Company recorded U.S. income taxes of approximately $587,000 and $3,741,000, for the nine months ended August 31, 2019 and August 31, 2018, respectively. Included in the $3,741,000 tax expense for the nine months ended August 31, 2018 is approximately $2,985,000 of expense related to the reduction of the federal tax rate to 21% as of January 1, 2018 as a result of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. The decrease in the federal tax rate caused a decrease in the Company’s deferred tax asset which resulted in an increase in the income tax expense.

The Company records foreign income taxes withheld from installment payments of non-refundable up-front license fees and royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The Company recognized approximately $46,000 and $58,000 for the three months ended August 31, 2019 and 2018, respectively, of foreign income tax expense. The Company recognized approximately $68,000 and $80,000 for the nine months ended August 31, 2019 and 2018, respectively, of foreign income tax expense. Foreign income tax expense is included in income tax expense in the accompanying consolidated statements of comprehensive income (loss).

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from 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 and nine months ended August 31, 2019 and August 31, 2018, the Company had no provisions for interest or penalties related to uncertain tax positions.

Long-Lived Assets

The Company evaluates the realizability of its long-lived assets, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment, such as reductions in demand or when significant economic slowdowns are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment and carrying value is in excess of fair value, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing a discount rate. The Company did not note any impairment for the three and nine months ended August 31, 2019 and 2018.

 

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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 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. 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. As of August 31, 2019, and November 30, 2018, goodwill, is reflected on the consolidated balance sheets at $1,941,411 and $1,941,411.

Stock Compensation

As of August 31, 2019, the Company has two stock-based compensation plans, which are described in Note 8 to the unaudited consolidated financial statements. The Company’s stock-based employee compensation plan became effective December 1, 2011 as approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting. The Company recognized approximately $240,000 and $324,000 for the nine months ended August 31, 2019 and August 31, 2018 respectively, of stock compensation expense. The Company reversed $444,000 of stock compensation expense during the nine months ended August 31, 2018 as the Co-CEOs each opted to receive a lump sum cash payment in lieu of 30,000 shares of earned common stock pursuant to the terms of their Employment Agreements. The reversal had no impact on the accompanying consolidated statements of comprehensive income (loss) as other compensation expense was recognized to offset the reversal.

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

 

15

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 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:

 

 

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The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of August 31, 2019 and November 30, 2018, respectively, segregated among the appropriate levels within the fair value hierarchy:

 

						Fair Value Measurements
		Fair Value at				at August 31, 2019 Using
Description		August 31, 2019				Level 1				Level 2				Level 3
Assets:
Marketable securities		$	874,691			$	874,691				—				—
Total		$	874,691			$	874,691				—				—
Liabilities:
Contingent consideration		$	3,601,697			$	—				—			$	3,601,697
Total		$	3,601,697			$	—				—			$	3,601,697
Contingent Consideration:
Beginning Balance as of November 30, 2018		$	4,282,975
Subtractions – Cord:Use earnout			(45,000	)
Fair value adjustment as of August 31, 2019			(636,278	)
Ending balance as of August 31, 2019		$	3,601,697
		Fair Value at				Fair Value Measurements at November 30, 2018 Using
Description		November 30, 2018				Level 1				Level 2				Level 3
Assets:
Trading securities		$	68,816			$	68,816				—				—
Available-for-sale securities			806,873				806,873				—				—
Total		$	875,689			$	875,689				—				—
Liabilities
Contingent consideration		$	4,282,975			$	—				—			$	4,282,975
Total		$	4,282,975			$	—				—			$	4,282,975

The following is a description of the valuation techniques used for these items, as well as the general classification of such items pursuant to the fair value hierarchy:

Trading securities – Fair values for these investments are based on quoted prices of identical securities in active markets and are therefore classified within Level 1 of the fair value hierarchy. For trading securities, there was $37,536 in unrealized holding gains recorded in other income and expense on the accompanying consolidated statements of comprehensive income (loss) for the three months ended August 31, 2018. For trading securities, there was $12,328 in unrealized holding gains recorded in other income on the accompanying consolidated statements of comprehensive income (loss) for the nine months ended August 31, 2018.

Available-for-sale securities – These investments are classified as available for sale and consist of marketable equity securities that we intend to hold for an indefinite period of time. Investments are stated at fair value and unrealized holding gains and losses are reported as a component of accumulated other comprehensive income until realized. Realized gains or losses on disposition of investments are computed using the first in, first out (FIFO) method and reported as income or loss in the period of disposition in the

 

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accompanying consolidated statements of comprehensive income (loss). For available-for-sale securities, there was $285,255 unrealized holding gains, net of tax, reported as comprehensive income (loss) on the accompanying statements of comprehensive income (loss) for the three months ended August 31, 2018. For available-for-sale securities, there was $405,255 unrealized holding gains, net of tax, reported as a component of comprehensive income (loss) on the accompanying consolidated statements of comprehensive income (loss) for the nine-month period ended August 31, 2018.

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 retained earnings of approximately $341,000 in the consolidated statements of stockholders’ deficit as of the date of adoption. Prior periods have not been restated for the impact of this accounting change. There was $35,000 and ($1,000) in unrealized holding gain (losses), respectively, recorded in other income and expense on the accompanying consolidated statements of comprehensive income (loss) for the three and nine months ended August 31, 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 Cares^TM Program

In December 2005, the Company began providing its customers that enrolled after December 2005 a payment warranty under which the Company agrees to pay $50,000 to its client if the umbilical cord blood product retrieved is used for a stem cell transplant for the donor or an immediate family member and fails to engraft, subject to various restrictions. Effective February 1, 2012, the Company increased the $50,000 payment warranty to a $75,000 payment warranty to all of its new clients. Effective June 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 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 August 31, 2019. 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.

 

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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): Customer’s 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.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). This update requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. It also requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated balance sheets and related disclosures.

Note 2 – Acquisition

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.

 

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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.

The Company incurred $580,000 in costs associated with the acquisition of Cord:Use.

The following summarizes the fair value of the consideration of the Acquisition:

 

Consideration
Cash		$	10,500,000
Cryo-Cell common stock			3,500,000
Cord blood inventory earnout			4,698,255
Consideration		$	18,698,255

The following summarizes the preliminary allocation of the total purchase price for the Acquisition:

 

Accounts receivable		$	188,019
Inventory			16,037,957
Prepaid expenses			68,867
Property and equipment			568,407
Other asset - Tiahne capital stock			308,000
Brand			31,000
Customer relationships			960,000
Total identifiable net assets acquired			18,162,250
Less: Deferred revenue			(1,405,406	)
Goodwill			1,941,411
Total		$	18,698,255

The Company has assigned goodwill to the segment reporting unit for cellular processing and cryogenic storage of umbilical cord blood and cord tissue stem cells for family use. Goodwill includes the fair value of the assembled workforce. The fair value of the assembled workforce was estimated by applying a cost approach, representing a level 2 measurement. The goodwill is not deductible for income tax purposes.

The property and equipment are stated at an estimate of fair value.

 

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The Tiahne capital stock is an investment that is valued based on fair value. Cord:Use had a supply and equity participation agreement with Tiahne who is engaged in medical and life science research that involves the use of stem cells derived from umbilical cord blood units in clinical trials for humans.

The fair value of the company brand and customer relationships were estimated by applying an income approach, representing a level 3 measurement. The fair value estimates are based on (1) an assumed discount rate of 19%, (2) long-term sustainable growth rate of 3%, (3) market royalty rate of 1% and (4) one and thirty-year lives for the brand and customer relationships, respectively.

The fair values of the assets acquired includes public cord blood banking inventory of $16,037,957 which the Company expects to sell to outside customers. The Company also acquired accounts receivable of $188,019 and prepaid expenses of $68,867.

The fair values of the license agreement and customer relationships reflect the anticipated cash flows over their expected lives.

The fair value of deferred revenue is valued based on the cost method. Deferred revenues are pre-payment fees for future storage of umbilical cord blood and/or cord tissue specimens. The short- and long-term deferred revenue is $330,508 and $1,074,898, respectively.

Unaudited Pro forma Results

The following table provides the Company’s consolidated unaudited pro forma revenues, net income per basic and diluted common share had the results of the acquired businesses’ operations been included in its operations commencing on December 1, 2016, based on available information related to the respective operations. This proforma information presented is not necessarily indicative either of the combined results of operations that actually would have been realized by the Company had the acquisition been consummated at the beginning of the period for which the pro forma information is presented, or of future results, and does not account for any operation improvements to be made by the Company post-acquisition.

 

		Three months ended August 31, 2018				Nine months ended August 31, 2018
Revenue		$	7,871,222			$	22,794,591
Net income (loss)		$	244,984			($	3,797,189	)
Earnings (loss) per share:
Basic		$	0.03			($	0.52	)
Diluted		$	0.03			($	0.52	)

Note 3 – Segment 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.

 

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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.

The following table shows, by segment: net revenue, cost of sales, depreciation and amortization, operating profit, interest expense, and income tax (expense) benefit for the three months and nine months ended August 31, 2019 and August 31, 2018:

 

		For the three months ended August 31, 2019				For the three months ended August 31, 2018
Net revenue
Umbilical cord blood and cord tissue stem cell service		$	8,029,797			$	7,776,339
Prepacyte®-CB			33,035				29,308
Public cord blood banking			160,561				65,575
Total net revenue		$	8,223,393			$	7,871,222
Cost of sales
Umbilical cord blood and cord tissue stem cell service		$	2,240,257			$	2,149,778
Prepacyte®-CB			25,180				27,740
Public cord blood banking			323,898				308,662
Total cost of sales		$	2,589,335			$	2,486,180
Depreciation and amortization
Umbilical cord blood and cord tissue stem cell service		$	38,223			$	43,008
Prepacyte®-CB			9,063				9,064
Public cord blood banking			—				—
Total depreciation and amortization		$	47,286			$	52,072
Operating (loss) income
Umbilical cord blood and cord tissue stem cell service		$	2,175,563			$	1,170,704
Prepacyte®-CB			(19,146	)			( 7,496	)
Public cord blood banking			(163,336	)			(243,086	)
Total operating income		$	1,993,081			$	920,122
Interest expense
Umbilical cord blood and cord tissue stem cell service		$	413,942			$	410,366
Prepacyte®-CB			—				—
Public cord blood banking			—				—
Total interest expense		$	413,942			$	410,366
Income tax expense
Umbilical cord blood and cord tissue stem cell service		$	498,748			$	303,072
Prepacyte®-CB			—				—
Public cord blood banking			—				—
Total income tax expense		$	498,748			$	303,072

 

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		For the nine months ended August 31, 2019				For the nine months ended August 31, 2018
Net revenue
Umbilical cord blood and cord tissue stem cell service		$	23,246,521			$	20,475,020
Prepacyte®-CB			70,795				84,208
Public cord blood banking			529,041				65,575
Total net revenue		$	23,846,357			$	20,624,803
Cost of sales
Umbilical cord blood and cord tissue stem cell service		$	6,497,788			$	5,431,359
Prepacyte®-CB			189,806				124,805
Public cord blood banking			996,259				308,662
Total cost of sales		$	7,683,853			$	5,864,826
Depreciation and amortization
Umbilical cord blood and cord tissue stem cell service		$	132,409			$	97,674
Prepacyte®-CB			27,191				27,191
Public cord blood banking			—				—
Total depreciation and amortization		$	159,600			$	124,865
Operating (loss) income
Umbilical cord blood and cord tissue stem cell service		$	6,307,426			$	3,521,625
Prepacyte®-CB			(164,141	)			(67,788	)
Public cord blood banking			(2,799,978	)			(243,087	)
Total operating income		$	3,343,307			$	3,056,995
Interest expense
Umbilical cord blood and cord tissue stem cell service		$	1,245,154			$	995,437
Prepacyte®-CB			—				—
Public cord blood banking			—				—
Total interest expense		$	1,245,154			$	995,437
Income tax expense
Umbilical cord blood and cord tissue stem cell service		$	654,358			$	3,821,660
Prepacyte®-CB			—				—
Public cord blood banking			—				—
Total income tax expense		$	654,358			$	3,821,660

 

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The following table shows the assets by segment as of August 31, 2019 and November 30, 2018:

 

		As of August 31, 2019				As of November 30, 2018
Assets
Umbilical cord blood and cord tissue stem cell service		$	28,132,949			$	26,239,260
Prepacyte®-CB			202,408				319,802
Public cord blood banking			13,492,399				15,831,081
Total assets		$	41,827,756			$	42,390,143

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. The components of inventory at August 31, 2019 and November 30, 2018 are as follows:

 

		As of August 31, 2019				As of November 30, 2018
Raw materials		$	—			$	—
Work-in-process			130,217				188,085
Work-in-process – Public Bank			—				—
Finished goods			23,811				5,262
Finished goods – Public Bank			13,492,398				15,831,081
Collection kits			39,137				19,163
Inventory reserve			(7,718	)			(7,718	)
Total inventory		$	13,677,845			$	16,035,873
Inventory, current portion			1,031,845				1,260,557
Inventory, long-term portion			12,646,000				14,775,316
Total inventory		$	13,677,845			$	16,035,873

During the second quarter of fiscal 2019, due to changes in sales trends and estimated recoverability of cost capitalized into inventory for the public banking inventory, the Company prepared an analysis and determined that the value of the public inventory should be reduced from cost to net realizable value and this led to an impairment charge to the public inventory of $2,332,763.

Due to the nature of the units of public inventory, the net realizable value of those units that are expected to be sold during the next twelve months are included in current inventory. The remaining balance of the public inventory is considered to be long-term. In order to conform to the current period presentation, the Company made certain reclassifications to the Public Bank inventory prior period balance in the Consolidated Balance Sheets. This reclassification had no effect on the previously reported total assets or liabilities, net income or cash flows from operating activities.

 

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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 August 31, 2019 and November 30, 2018:

 

		Useful lives		August 31, 2019				November 30, 2018
Patents and Domain Names		10-20 years			234,570				234,570
Less: Accumulated amortization					(32,560	)			(23,663	)
License agreement		10 years			470,000				470,000
Less: Intangible asset impairment					(185,000	)			(185,000	)
Less: Accumulated amortization					(147,277	)			(123,528	)
Customer relationships-Prepacyte CB		15 years			41,000				41,000
Less: Intangible asset impairment					(26,267	)			(26,267	)
Less: Accumulated amortization					(6,066	)			(5,276	)
Brand		1 year			31,000				31,000
Less: Accumulated amortization					(31,000	)			(15,500	)
Customer relationships-Cord:Use		30 years			960,000				960,000
Less: Accumulated amortization					(40,000	)			(16,000	)
Net Intangible Assets				$	1,268,400			$	1,341,336

Amortization expense of intangibles was approximately $19,000 and $27,000 for the three months ended August 31, 2019 and August 31, 2018, respectively. Amortization expense of intangibles was approximately $73,000 and $49,000 for the nine months ended August 31, 2019 and August 31, 2018, respectively.

Note 6 – Notes 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 and nine months ended August 31, 2019, the Company paid interest of $162,134 and $523,818, respectively, which is reflected in interest expense on the accompanying consolidated statements of comprehensive income (loss). As of the three month and nine months ended August 31, 2018, the Company paid interest of $204,609 and $393,254, respectively, which is reflected in interest expense on the accompanying consolidated statements of comprehensive income (loss).

 

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Collateral of the term and subordinated loans includes all money, securities and property of the Company.

The Company incurred debt issuance costs related to the term loan in the amount of $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 and nine months ended August 31, 2019, $28,014 and $86,014, respectively, of the debt issuance costs were amortized and are reflected in interest expense on the accompanying consolidated statements of comprehensive income (loss). As of the three and nine months ended August 31, 2018, $28,337 and $79,876, respectively, of the debt issuance costs were amortized and are reflected in interest expense on the accompanying consolidated statements of comprehensive income.

As of August 31, 2019 and November 30, 2018, the note payable obligation was as follows:

 

		August 31, 2019				November 30, 2018
Note payable		$	9,883,433			$	13,208,433
Unamortized debt issuance costs			(178,906	)			(264,923	)
Net note payable		$	9,704,527			$	12,943,510
Current portion of note payable		$	3,100,000			$	3,100,000
Long-term note payable, net of debt issuance costs			6,604,527				9,843,510
Total		$	9,704,527			$	12,943,510

Interest expense on the note payable for the three and nine months ended August 31, 2019 and August 31, 2018 was as follows:

 

		For the three months ended August 31, 2019				For the nine months ended August 31, 2019
Interest expense on notes payable		$	162,134			$	523,818
Debt issuance costs			28,014				86,014
Total interest expense		$	190,148			$	609,832
		For the three months ended August 31, 2018				For the nine months ended August 31, 2018
Interest expense on notes payable		$	204,609			$	393,254
Debt issuance costs			28,337				79,876
Total interest expense		$	232,946			$	473,130

 

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