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, 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 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, 2020, 13,633,638 shares of $0.01 par value common stock were issued and 7,545,613 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

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

43

 

 

Item 4. Controls and Procedures

43

 

 

PART II - OTHER INFORMATION

44

 

 

Item 1. Legal Proceedings

44

 

 

Item 1A.  Risk Factors

44

 

 

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

44

 

 

Item 3. Defaults Upon Senior Securities

44

 

 

Item 4. Mine Safety Disclosures

45

 

 

Item 5. Other Information

45

 

 

Item 6. Exhibits

46

 

 

SIGNATURES

47

 

 

 

2


CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

(Unaudited)

 

 

 

 

 

 

 

August 31,

 

 

November 30,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,107,608

 

 

$

6,541,037

 

Marketable securities

 

 

62,716

 

 

 

904,053

 

Accounts receivable (net of allowance for doubtful accounts of $2,772,550 and $2,584,091, respectively)

 

 

6,503,550

 

 

 

6,097,331

 

Prepaid expenses

 

 

599,429

 

 

 

500,260

 

Inventory, current portion

 

 

1,203,328

 

 

 

1,084,533

 

Other current assets

 

 

287,032

 

 

 

260,397

 

Total current assets

 

 

16,763,663

 

 

 

15,387,611

 

Property and Equipment-net

 

 

1,663,892

 

 

 

1,846,467

 

Other Assets

 

 

 

 

 

 

 

 

Investment - Tianhe stock

 

 

308,000

 

 

 

308,000

 

Patent option agreement

 

 

350,000

 

 

 

 

Intangible assets, net

 

 

1,198,504

 

 

 

1,249,254

 

Inventory, net of current portion

 

 

12,289,477

 

 

 

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

 

 

365,696

 

 

 

 

Deposits and other assets, net

 

 

479,526

 

 

 

427,423

 

Total other assets

 

 

26,012,608

 

 

 

25,652,082

 

Total assets

 

$

44,440,163

 

 

$

42,886,160

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

899,951

 

 

$

1,369,111

 

Accrued expenses

 

 

1,048,762

 

 

 

2,085,180

 

Current portion of note payable

 

 

3,100,000

 

 

 

3,100,000

 

Current portion of operating lease liability

 

 

271,932

 

 

 

 

Deferred revenue

 

 

9,107,027

 

 

 

8,875,138

 

Total current liabilities

 

 

14,427,672

 

 

 

15,429,429

 

Other Liabilities

 

 

 

 

 

 

 

 

Deferred revenue, net of current portion

 

 

26,201,441

 

 

 

23,633,373

 

Contingent consideration

 

 

3,280,316

 

 

 

3,495,057

 

Note payable, net of current portion and debt issuance costs

 

 

3,598,164

 

 

 

5,856,152

 

Operating lease long-term liability

 

 

93,904

 

 

 

 

Long-term liability - revenue sharing agreements

 

 

875,000

 

 

 

1,425,000

 

Total other liabilities

 

 

34,048,825

 

 

 

34,409,582

 

Total liabilities

 

 

48,476,497

 

 

 

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 August 31, 2020 and 13,598,909 issued and 7,510,884 outstanding as of November 30, 2019)

 

 

136,336

 

 

 

135,989

 

Additional paid-in capital

 

 

36,410,226

 

 

 

35,918,827

 

Treasury stock, at cost

 

 

(20,563,357

)

 

 

(20,563,357

)

Accumulated deficit

 

 

(20,019,539

)

 

 

(22,444,310

)

Total stockholders' deficit

 

 

(4,036,334

)

 

 

(6,952,851

)

Total liabilities and stockholders' deficit

 

$

44,440,163

 

 

$

42,886,160

 

 

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

3


CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

August 31,

 

 

August 31,

 

 

August 31,

 

 

August 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Processing and storage fees

 

$

7,486,858

 

 

$

7,606,624

 

 

$

22,292,220

 

 

$

22,621,520

 

Public banking revenue

 

 

116,826

 

 

 

160,561

 

 

 

484,547

 

 

 

529,041

 

Licensee and royalty income

 

 

427,874

 

 

 

423,173

 

 

 

629,702

 

 

 

625,001

 

Product revenue

 

 

82,800

 

 

 

33,035

 

 

 

200,507

 

 

 

70,795

 

Total revenue

 

 

8,114,358

 

 

 

8,223,393

 

 

 

23,606,976

 

 

 

23,846,357

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

2,360,324

 

 

 

2,589,335

 

 

 

7,344,011

 

 

 

7,683,853

 

Selling, general and administrative expenses

 

 

3,375,807

 

 

 

3,556,602

 

 

 

10,804,404

 

 

 

10,949,831

 

Impairment of public inventory

 

 

 

 

 

 

 

 

 

 

 

2,332,763

 

Change in fair value of contingent consideration

 

 

(145,752

)

 

 

34,649

 

 

 

(169,741

)

 

 

(636,278

)

Research, development and related engineering

 

 

1,248

 

 

 

2,440

 

 

 

16,791

 

 

 

13,281

 

Depreciation and amortization

 

 

42,510

 

 

 

47,286

 

 

 

130,034

 

 

 

159,600

 

Total costs and expenses

 

 

5,634,137

 

 

 

6,230,312

 

 

 

18,125,499

 

 

 

20,503,050

 

Operating Income

 

 

2,480,221

 

 

 

1,993,081

 

 

 

5,481,477

 

 

 

3,343,307

 

Other Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Losses) gains on marketable securities

 

 

(134,626

)

 

 

34,882

 

 

 

(133,250

)

 

 

(998

)

Other income

 

 

17

 

 

 

986

 

 

 

749

 

 

 

3,012

 

Interest expense

 

 

(338,675

)

 

 

(413,942

)

 

 

(1,069,345

)

 

 

(1,245,154

)

Loss on extinguishment of revenue sharing agreement

 

 

(1,070,900

)

 

 

 

 

 

(1,070,900

)

 

 

 

Total other expense

 

 

(1,544,184

)

 

 

(378,074

)

 

 

(2,272,746

)

 

 

(1,243,140

)

Income before income tax expense

 

 

936,037

 

 

 

1,615,007

 

 

 

3,208,731

 

 

 

2,100,167

 

Income tax expense

 

 

(151,570

)

 

 

(498,748

)

 

 

(783,960

)

 

 

(654,358

)

Net Income and Comprehensive Income

 

$

784,467

 

 

$

1,116,259

 

 

$

2,424,771

 

 

$

1,445,809

 

Net income per common share - basic

 

$

0.10

 

 

$

0.14

 

 

$

0.32

 

 

$

0.19

 

Weighted average common shares outstanding - basic

 

 

7,545,613

 

 

 

7,803,333

 

 

 

7,544,124

 

 

 

7,802,676

 

Net income per common share - diluted

 

$

0.10

 

 

$

0.13

 

 

$

0.30

 

 

$

0.17

 

Weighted average common shares outstanding - diluted

 

 

8,179,465

 

 

 

8,445,237

 

 

 

8,137,463

 

 

 

8,430,251

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

August 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,424,771

 

 

$

1,445,809

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

284,689

 

 

 

304,463

 

Impairment of public inventory

 

 

 

 

 

2,332,763

 

Loss on disposal of property and equipment

 

 

1,032

 

 

 

 

Change in fair value of contingent consideration

 

 

(169,741

)

 

 

(636,278

)

Losses on marketable securities

 

 

133,250

 

 

 

998

 

Compensatory element of stock options

 

 

450,746

 

 

 

239,983

 

Provision for doubtful accounts

 

 

501,312

 

 

 

587,716

 

Loss on extinguishment of revenue sharing agreements

 

 

1,070,900

 

 

 

 

Amortization of debt issuance costs

 

 

67,010

 

 

 

86,014

 

Amortization of operating lease right-of-use asset

 

 

197,079

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(907,531

)

 

 

(608,537

)

Prepaid expenses

 

 

(99,169

)

 

 

(64,473

)

Inventory

 

 

237,728

 

 

 

25,265

 

Other current assets

 

 

(26,635

)

 

 

(5,506

)

Deposits and other assets, net

 

 

(52,103

)

 

 

30,832

 

Accounts payable

 

 

(469,160

)

 

 

(248,616

)

Accrued expenses

 

 

(757,318

)

 

 

(1,311,841

)

Operating lease liability

 

 

(196,939

)

 

 

 

Deferred revenue

 

 

2,799,957

 

 

 

2,991,800

 

Net cash provided by operating activities

 

 

5,489,878

 

 

 

5,170,392

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(52,396

)

 

 

(507,339

)

Purchase of patent option agreement

 

 

(350,000

)

 

 

 

Liquidation of marketable securities

 

 

708,087

 

 

 

 

Net cash provided by (used in) investing activities

 

 

305,691

 

 

 

(507,339

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Extinguishment of revenue sharing agreements

 

 

(1,900,000

)

 

 

 

Repayments of note payable

 

 

(2,324,998

)

 

 

(3,324,997

)

Proceeds from the exercise of stock options

 

 

41,000

 

 

 

5,700

 

Payment of Cord:Use earnout

 

 

(45,000

)

 

 

(45,000

)

Net cash used in financing activities

 

 

(4,228,998

)

 

 

(3,364,297

)

Increase in cash and cash equivalents

 

 

1,566,571

 

 

 

1,298,756

 

Cash and cash equivalents - beginning of period

 

 

6,541,037

 

 

 

6,040,033

 

Cash and cash equivalents - end of period

 

$

8,107,608

 

 

$

7,338,789

 

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

 

 

$

 

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


CRYO-CELL INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(Unaudited)

 

 

 

For the Three Months Ended August 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Treasury

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Income

 

 

Deficit

 

 

Deficit

 

Balance at May 31, 2020

 

 

13,633,638

 

 

$

136,336

 

 

$

36,248,232

 

 

$

(20,563,357

)

 

$

 

 

$

(20,804,006

)

 

$

(4,982,795

)

Compensatory element of stock options

 

 

 

 

 

 

 

 

 

 

161,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

161,994

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

784,467

 

 

 

784,467

 

Balance at August 31, 2020

 

 

13,633,638

 

 

$

136,336

 

 

$

36,410,226

 

 

$

(20,563,357

)

 

$

 

 

$

(20,019,539

)

 

$

(4,036,334

)

 

 

 

For the Nine Months Ended August 31, 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

 

 

 

 

 

 

 

 

 

 

450,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

450,746

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,424,771

 

 

 

2,424,771

 

Balance at August 31, 2020

 

 

13,633,638

 

 

$

136,336

 

 

$

36,410,226

 

 

$

(20,563,357

)

 

$

 

 

$

(20,019,539

)

 

$

(4,036,334

)

 

 

 

For the Three Months Ended August 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Treasury

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Income

 

 

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

 

 

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 ($94,192)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

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, 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 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, 2020 and November 30, 2019, the related Consolidated Statements of Comprehensive Income for the three and nine months ended August 31, 2020 and August 31, 2019, Cash Flows for the nine months ended August 31, 2020 and 2019 and Stockholders’ Deficit for the three and nine months ended August 21, 2020 and 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 and nine months ended August 31, 2020are 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.

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").

7


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 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, 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.  

9


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, 2020, the total aggregate transaction price allocated to the unsatisfied performance obligations was recorded as deferred revenue amounting to $35,308,468, which will be recognized ratably on a straight-line basis over the contractual period of which $9,107,027, 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 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 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.

10


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, 2020, the Company recorded $14,261 and $37,405, respectively, in commission payments to customers under the RAF program as a reduction to revenue.  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, 2020, the Company capitalized additional contract acquisition costs of $22,351 and $68,152, respectively, net of amortization.  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.

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.

11


Disaggregation of Revenue

The revenue as reflected in the statements of comprehensive income is disaggregated by products and services.

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

 

 

 

August 31,

2020

 

 

At

Adoption

 

Contract assets (sales commissions)

 

$

450,638

 

 

$

329,231

 

Accounts receivables

 

$

6,503,550

 

 

$

5,867,335

 

Short-term contract liabilities (deferred revenue)

 

$

9,107,027

 

 

$

8,365,284

 

Long-term contract liabilities (deferred revenue)

 

$

26,201,441

 

 

$

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, 2020.

The following table presents changes in the Company’s contract assets and liabilities during the nine months ended August 31, 2020:

 

 

 

Balance at

December 1,

2019

 

 

Additions

 

 

Deductions

 

 

Balance at

August 31,

2020

 

Contract assets (sales commissions)

 

$

398,535

 

 

$

68,152

 

 

$

(16,049

)

 

$

450,638

 

Accounts receivables

 

$

6,097,331

 

 

$

28,361,238

 

 

$

(27,955,019

)

 

$

6,503,550

 

Contract liabilities (deferred revenue)

 

$

32,508,511

 

 

$

13,045,728

 

 

$

(10,245,771

)

 

$

35,308,468

 

 

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