# Cryo Cell International Inc: Form 10-Q for the period ended Aug 31, 2016

- Company: [Cryo Cell International Inc](/companies/ccel.md) (CIK 862692)
- Form: 10-Q
- Filed: 2016-10-17
- Accepted by EDGAR: Oct 17, 2016, 21:28 ET
- Period: 2016-08-31
- Accession: 0001193125-16-739879
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/862692/000119312516739879/d252389d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/862692/000119312516739879/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-06-01 to 2016-08-31 | $6.3m | us-gaap:Revenues |
| Revenue | 9 months, 2015-12-01 to 2016-08-31 | $17.3m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-06-01 to 2016-08-31 | $1.6m | us-gaap:CostOfServices |
| Cost of revenue | 9 months, 2015-12-01 to 2016-08-31 | $4.3m | us-gaap:CostOfServices |
| Research and development | 3 months, 2016-06-01 to 2016-08-31 | $13.8k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2015-12-01 to 2016-08-31 | $34.5k | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2016-06-01 to 2016-08-31 | $3.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2015-12-01 to 2016-08-31 | $10.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-06-01 to 2016-08-31 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-12-01 to 2016-08-31 | −$23.3k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-06-01 to 2016-08-31 | $199.4k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2015-12-01 to 2016-08-31 | $804.2k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-06-01 to 2016-08-31 | −$898.8k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2015-12-01 to 2016-08-31 | −$697.1k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-06-01 to 2016-08-31 | −$2.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-12-01 to 2016-08-31 | −$2.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-06-01 to 2016-08-31 | −$0.35 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2015-12-01 to 2016-08-31 | −$0.25 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-06-01 to 2016-08-31 | −$0.35 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2015-12-01 to 2016-08-31 | −$0.25 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-06-01 to 2016-08-31 | 7,583,771 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2015-12-01 to 2016-08-31 | 8,546,110 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2015-12-01 to 2016-08-31 | $2.4m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2015-12-01 to 2016-08-31 | $298.6k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2015-12-01 to 2016-08-31 | $10.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-08-31 | $2.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-08-31 | $10.1m | us-gaap:AssetsCurrent |
| Total assets | at 2016-08-31 | $17.5m | us-gaap:Assets |
| Current liabilities | at 2016-08-31 | $12.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-08-31 | $34.6m | us-gaap:Liabilities |
| Long-term debt | at 2016-08-31 | $1.4m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2016-08-31 | −$17.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,137 characters.

### Forward Looking Statements

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

(i) our future performance and operating results;

(ii) our future operating plans;

(iii) our liquidity and capital resources; and

(iv) our financial condition, accounting policies and management judgments.

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

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

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

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

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

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

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

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

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

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

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

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

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

(xiii) any adverse performance by or relations with any of our licensees;

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

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

(xvi) any inability to realize a return on an investment;

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

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

(xix) the success of our global expansion initiatives;

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

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

(xxii) any inability to successfully identify and consummate strategic acquisitions;

(xxiii) any inability to realize benefits from any strategic acquisitions;

(xxiv) the Company’s ability to realize a profit on the acquisition of Prepacyte-CB;

(xxv) the costs associated with proxy contests and its impact on our business and

(xxvi) other factors many of which are beyond our control.

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

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

### Overview

The Company’s principal sources of revenues are service fees for cord blood processing and preservation for new customers and recurring annual storage fees. Effective July 2015, the Company offers two pricing models, a standard plan and premium plan. The Company charges fees of $1,400 for the standard plan and $1,950 for the premium plan to new clients for the collection kit, processing, testing and return medical courier service, with discounts in the case of multiple children from the same family and in other circumstances. The Company charges an annual storage fee of $150 for new clients that enroll in the standard and premium plans; storage fees for existing customers depend on the contracts with such customers. The Company continues to offer a one-time payment plan for 21 years of storage and a life-time payment plan, pursuant to which the client is charged $3,799 for the standard plan and $4,249 for the premium plan and $6,000 for the standard plan and $7,000 for the premium plan, respectively, less discounts in the case of multiple children from the same family and in other circumstances. The one-time plan includes the collection kit, processing and testing, return medical courier service and 21 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 client. The Company also receives other income from licensing fees and royalties from global affiliates.

On June 11, 2015, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Cytomedical Design Group LLC (“CMDG”), for the purchase of certain assets and assumption of certain liabilities and contracts that CMDG used in the operation of its cord blood business. The Prepacyte-CB Processing System is used in cell processing laboratories to process and store stem cells from umbilical cord blood. The purchase price was $2,400,000, plus the value of inventory, comprised of $1,553,272 in cash and assumed liabilities less any prepayment made by the Company to CMDG ($966,597 at closing and $586,675 on or before September 30, 2015) and a note payable to the seller in the amount of $1,300,000. The closing was effective on June 30, 2015. On April 22, 2016 the Company paid $778,287 which constituted payment in full of the Company’s payment obligations to CMDG pursuant to the terms of the original APA and Promissory Note, as well as pursuant to the terms of the Loan/Promissory Note Sale Agreement and Mutual Release executed by the Company and CMDG on April 22, 2016. The difference between the remaining principal balance and the final payment made on April 22, 2016 was $300,593 which was recorded as a gain on extinguishment of debt during the second quarter of fiscal 2016 and reflected on the accompanying consolidated statements of comprehensive (loss) income.

During the fiscal quarter ended August 31, 2016, the Company determined that there were sufficient indicators to trigger an interim goodwill and intangible assets impairment analysis. The Company’s analysis indicated that the Prepacyte-CB reporting unit had a goodwill and intangible assets impairment as of the nine months ended August 31, 2016. Goodwill and intangible assets are included in the Prepacyte® CB reporting segment and the indicators included, among other factors: (1) decline in projected revenues, (2) decline in forecasted cash flows, and (3) loss of a key customer. The Company’s analysis indicated that the Prepacyte-CB reporting unit had a goodwill and intangible assets impairment as of the nine months ended August 31, 2016. Accordingly, the Company recorded a non-cash charge for the nine months ended August 31, 2016 to reduce the carrying value of goodwill and intangible assets by $1,877,995. The goodwill and intangible assets impairment analysis indicated that there was an impairment of goodwill related to Prepacyte-CB in the amount of $1,666,430 and an impairment of intangible assets related to Prepacyte-CB in the amount of $211,267 as of the nine months ended August 31, 2016. See Note 4, “Goodwill” and Note 5 “Intangible Assets” for further information regarding the process of assessing goodwill impairment.

During the nine months ended August 31, 2016, total revenue increased 13% as compared to the same period in 2015. The Company reported a net loss of ($2,130,105) or ($0.25) per basic common share for the nine months ended August 31, 2016, compared to net income of $8,326,000 or $0.86 per basic common share for the same period in 2015. The net loss for the nine months ended August 31, 2016 resulted from the cancellation of certain interests in the state of Florida Revenue Sharing Agreement and certain interests in the state of Texas Revenue Sharing Agreement resulting in extinguishment of revenue sharing agreement in the amount of $2,300,000, goodwill and intangible assets impairment of $1,878,000, as described above, a 28% increase in selling, general and administrative expenses and a 4% increase in cost of sales. This was offset by a 13% increase in total revenue, an income tax benefit of $842,000 and the $300,593 gain on extinguishment of debt as a result of the early payoff of the loan with CMDG. During the nine months ended August 31, 2015, the Company reversed $7.0 million of its valuation allowance for income taxes. The decision to reverse a portion of the allowance is based on the Company’s historical operating performance, which includes profitability in ten of the last eleven quarters, steadily improving operations and positive expectations for future taxable income.

At August 31, 2016, the Company had cash and cash equivalents of $2,026,199. The Company’s cash decreased by approximately $2,126,000 during the first nine months of fiscal 2016, primarily as a result of approximately $10,668,000 used for the stock repurchase plan pursuant to which the Company repurchased 2,429,033 shares of the Company’s common stock during the nine months ended August 31, 2016, $501,000 of cash used to purchase property and equipment and marketable securities and approximately $876,000 used for the repayment of the Promissory Note to CMDG which were partially offset by cash flow from operations of approximately $2,425,000 and $204,000 of cash provided by the redemption of a Certificate of Deposit. 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. On July 1, 2016, TCB advanced the remaining principal amount of $7,999,900 per a promissory note dated May 20, 2016 between the Company and TCB. On May 20, 2016, the Company entered into a Subordination Agreement with Texas Capital Bank and CrowdOut Capital LLC (“CrowdOut”) for a subordinated loan of the principal amount of $650,000, which amount CrowdOut advanced to the Company on May 20, 2016. The proceeds of the subordinated loan will be used by the Company to fund continued repurchases of the Company’s common stock.

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 proceeds of the term loan were used by the Company to fund a portion of the Settlement Agreement and Release of All Claims with Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family Trust as described in Note 14.

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

### Results of Operations – Nine Month Period Ended August 31, 2016 Compared to the Nine Month Period Ended August 31, 2015

***Revenue.*** Revenue for the nine months ended August 31, 2016 was $17,257,192 as compared to $15,293,260 for the same period in 2015. The increase in revenue was primarily attributable to a 10% increase in processing and storage fees.

*Processing and Storage Fees.* The increase in processing and storage fee revenue is attributable to a 6% increase in domestic recurring annual storage fee revenue and a 12% increase in the number of new cord blood specimens processed in the first nine months of fiscal 2016 versus the same period in 2015.

*Product Revenue*. On June 11, 2015, the Company entered into an Asset Purchase Agreement as described in Note 2. For the nine months ended August 31, 2016, revenue from the product sales was $286,253 compared to $265,848 for the nine months ended August 31, 2015.

*Licensee Income.* Licensee income for the nine months ended August 31, 2016 was $965,977 as compared to $508,235 for the 2015 period. Licensee and royalty income for the nine months ended August 31, 2016 and August 31, 2015 consists of royalty income earned on the processing and storage of specimens in India where the Company has a definitive License and Royalty Agreement.

Per the License and Royalty Agreement with Lifecell, there is a $1,000,000 limit on the amount of royalties due to the Company per year and a $10,000,000 limit on the amount of royalties due to the Company for the term of the License and Royalty Agreement. The limit(s) are calculated based on Lifecell’s fiscal year end, March 31st. As of the end of the Company’s fiscal year ended November 30, 2015, Lifecell had reached the $1,000,000 limit and paid the Company in full for Lifecell’s fiscal year ended March 31, 2016. The Company began recording licensee income again during the second quarter of fiscal 2016. As of August 31, 2016, Lifecell has paid the Company $4,400,000 for royalties due under the terms of the License and Royalty Agreement.

***Cost of Sales.*** Cost of sales for the nine months ended August 31, 2016 was $4,330,622 as compared to $4, 158,767 for the same period in 2015, representing a 4% increase. Cost of sales was 25% of revenues for the nine months ended August 31, 2016 and 27% for the nine months ended August 31, 2015. Cost of sales includes wages and supplies associated with process enhancements to the existing production procedures and quality systems in the processing of cord blood specimens at the Company’s facility in Oldsmar, Florida and depreciation expense of approximately $99,000 and $114,000 for the nine months ended August 31, 2016 and 2015, respectively. Also, included in Cost of Sales is $257,329 and $191,243 for the nine months ended August 31, 2016 and August 31, 2015, respectively, related to the costs associated with production of the Prepacyte®-CB processing and storage system. The increase in cost of sales for the nine months ended August 31, 2016 versus August 31, 2015 is due to the costs associated with Prepacyte®-CB and the increased costs associated with the 12% increase in the number of new cord blood specimens processed in the first nine months of fiscal 2016 versus the same period in 2015

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses for the nine months ended August 31, 2016 were $10,914,524 as compared to $8,549,722 for the 2015 period representing a 28% increase. These expenses are primarily comprised of selling and marketing expenses, salaries and wages for personnel and professional fees. The increase in selling, general and administrative expenses is primarily due to an increase of $563,000, or 15%, increase in selling and marketing expenses of which $375,000 is related to the implementation of a new consumer marketing campaign, an increase of $410,000 in professional fees due to legal fees and fees associated with obtaining the credit and subordination agreements with Texas Capital Bank, National Association and CrowdOut Capital LLC as described in Note 15 and a $467,000 increase in salaries, wages and bonuses and $517,000 increase in stock compensation expense mainly due to the accrual of executive bonuses per previously disclosed employment agreements.

***Impairment of Goodwill and Intangible Assets***. At August 31, 2016, management determined that there were sufficient indicators to trigger an interim goodwill and intangible assets impairment analysis. The

Company’s analysis indicated that the Prepacyte-CB reporting unit had a goodwill and intangible assets impairment as of the nine months ended August 31, 2016. Accordingly, the Company recorded a non-cash charge for the nine months ended August 31, 2016 to reduce the carrying value of goodwill and intangible assets by $1,877,697. The goodwill and intangible assets impairment analysis indicated that there was an impairment of goodwill related to Prepacyte-CB in the amount of $1,666,430 and an impairment of intangible assets related to Prepacyte-CB in the amount of $211,267 as of the nine months ended August 31, 2016. See Note 4, “Goodwill” and Note 5 “Intangible Assets” for further information regarding the process of assessing goodwill impairment.

***Research, Development and Related Engineering Expenses.*** Research, development and related engineering expenses for the nine months ended August 31, 2016 were $34,452 as compared to $32,471 for the 2015 period representing slight increase.

***Depreciation and Amortization***. Depreciation and amortization (not included in Cost of Sales) for the nine months ended August 31, 2016 was $123,166 compared to $60,702 for the 2015 period.

***Interest Expense.*** Interest expense during the nine months ended August 31, 2016, was $804,236 compared to $1,024,621 during the comparable period in 2015. Interest expense for the nine months ended August 31, 2016 and August 31, 2015 was $22,265 and $10,731, respectively, related to the repayment of the note payable as a result of the Asset Purchase Agreement (Note 2 and Note 6) and $45,763 and $0, respectively, related to the credit and subordination agreements with Texas Capital Bank, National Association and CrowdOut Capital LLC as described in Note 15. The remaining interest expense is comprised of amounts due to the parties to the Company’s revenue sharing agreements based on the Company’s storage revenue collected.

***Equity in Losses of Affiliate.*** Equity in losses of affiliate was $0 for the nine months ended August 31, 2016, compared to $17,660 for the 2015 period. Equity in losses of affiliate for the nine months ended August 31, 2015 solely consists of amounts related to compensation expense for stock option awards that were granted by Saneron to certain consultants and employees

***Gain on extinguishment of Debt.*** Gain on extinguishment of debt was $300,593 for the nine months ended August 31, 2016 which is the difference between the remaining principal balance and the payment made on April 22, 2016 constituting payment in full of the Company’s payment obligations to CMDG pursuant to the terms of the original APA and Promissory Note, as well as pursuant to the terms of the Loan/Promissory Note Sale Agreement and Mutual Release executed by the Company and CMDG (see Note 6) on April 22, 2016.

***Extinguishment of Revenue Sharing Agreement***. During the nine months ended August 31, 2016, the Company entered into a Settlement and Release of Claims Agreement with certain investors canceling their interest in the Florida and Texas Revenue Sharing Agreements. Pursuant to the terms of the Settlement and Release of Claims Agreement, the Company made a one-time, lump-sum payment in the amount of $3,400,000 to the investors and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their interests in the RSAs. The payment amount of $3,400,000 was offset by the carrying amount of the short-term liability related to the RSAs in the amount of $875,000 and accrued expenses in the amount of $272,612 to reflect the extinguishment of revenue sharing agreements in the amount of $2,252,388 for the nine months ended August 31, 2016.

***Income Taxes***. The Company recorded an income tax benefit of $697,103, net of foreign income taxes for the nine months ended August 31, 2016. The U.S. income tax benefit as of the nine months ended August 31, 2016 was $842,000 due to the Company’s net operating losses as of August 31, 2016. The Company recorded an income tax benefit of $6,880,599, net of foreign income taxes for the nine months ended August 31, 2015. During the third quarter August 31, 2015, the Company reversed a portion of its valuation allowance for U.S. income taxes of approximately $6,957,000. The reversal of a portion of the deferred tax valuation allowance is based upon the Company’s historical operating performance which includes profitability in ten of the last eleven quarters, steadily improving operations and positive expectations for future taxable income.

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

The Company records foreign income taxes withheld from installment payments of non-refundable up-front license fees and royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The Company recorded $144,897 and $76,235 for the nine months ended August 31, 2016 and 2015, respectively, of foreign income tax expense which is included in income tax expense in the accompanying consolidated statements of comprehensive (loss) income.

### Results of Operations - Three Month Period Ended August 31, 2016 Compared to the Three Month Period Ended August 31, 2015

***Revenue.*** Revenue for the three months ended August 31, 2016 was $6,331,938 as compared to $5,435,990 for the same period in 2015, an increase of 16%. The increase in revenue was primarily attributable to a 13% increase in processing and storage fees and a 260% increase in license and royalty income.

*Processing and Storage Fees.* The increase in processing and storage fee revenue is primarily attributable to a 17% increase in the number of new cord blood specimens processed for three months ended August 31, 2016 versus the same period in 2015.

*Product Revenue*. On June 11, 2015, the Company entered into an Asset Purchase Agreement as described in Note 2. For the three months ended August 31, 2016, revenue from the product sales was $88,135 compared to $265,848 for the three months ended August 31, 2015.

*Licensee Income.* Licensee income for the three months ended August 31, 2016, was $609,045 as compared to $169,411 for the 2015 quarter. Licensee income for the three months ended August 31, 2016 and August 31, 2015 consisted of royalty income earned on the processing and storage of cord blood stem cell specimens in India where the Company has a definitive License and Royalty Agreement.

The Company changed the methodology used to record the processing and storage royalty income during the fourth quarter of fiscal year 2015 from recognizing royalty income based on historical estimates of specimens processed and stored to utilizing actual specimens processed and stored. The Company accounted for this change as a change in accounting estimate.

Per the License and Royalty Agreement with Lifecell, there is a $1,000,000 limit on the amount of royalties due to the Company per year and a $10,000,000 limit on the amount of royalties due to the Company for the term of the License and Royalty Agreement. The limit(s) are calculated based on Lifecell’s fiscal year end, March 31st. As of the end of the Company’s fiscal year ended November 30, 2015, Lifecell had reached the $1,000,000 limit and paid the Company in full for Lifecell’s fiscal year ended March 31, 2016. The Company began recording licensee income again during the second quarter of fiscal 2016. As of August 31, 2016, Lifecell has paid the Company $4,400,000 for royalties due under the terms of the License and Royalty Agreement.

***Cost of Sales.*** Cost of sales for the three months ended August 31, 2016 was $1,551,231 as compared to $1,507,393 for the same period in 2015, representing a 3% increase. Cost of sales was 24% of revenues for the three months ended August 31, 2016 and 28% for the three months ended August 31, 2015. Cost of sales includes wages and supplies associated with process enhancements to the existing production procedures and quality systems in the processing of cord blood specimens at the Company’s facility in Oldsmar, Florida and depreciation expense of approximately $35,000 and $36,000 for the three months ended August 31, 2016 and 2015, respectively. Also, included in Cost of Sales is $68,331 and $191,243 related to the costs associated with production of the Prepacyte®-CB processing and storage system for the three months ended August 31, 2016 and August 31, 2015, respectively.

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses for the three months ended August 31, 2016 were $3,911,559 as compared to $2,628,970 for the 2015 period, representing a 49% increase. Selling, general and administrative expenses is primarily comprised of expenses for selling and marketing expenses, salaries and wages for personnel and professional fees. The increase in selling, general and administrative expenses is primarily due to approximately $272,000 increase in professional fees in professional fees due to legal fees and fees associated with obtaining the credit and subordination agreements with Texas Capital Bank, National Association and CrowdOut Capital LLC as described in Note 15, $272,000 increase in salaries, wages and bonuses and $374,000 increase in stock compensation expense mainly due to the accrual of executive bonuses per previously disclosed employment agreements and $151,000 increase in selling and marketing expenses.

***Impairment of Goodwill and Intangible Assets***. At August 31, 2016, management determined that there were sufficient indicators to trigger an interim goodwill and intangible assets impairment analysis. The Company’s analysis indicated that the Prepacyte-CB reporting unit had a goodwill and intangible assets impairment as of the three months ended August 31, 2016. Accordingly, the Company recorded a non-cash charge for the three months ended August 31, 2016 to reduce the carrying value of goodwill and intangible assets by $1,877,697. The goodwill and intangible assets impairment analysis indicated that there was an impairment of goodwill related to Prepacyte-CB in the amount of $1,666,430 and an impairment of intangible assets related to Prepacyte-CB in the amount of $211,267 as of the three months ended August 31, 2016. See Note 4, “Goodwill” and Note 5 “Intangible Assets” for further information regarding the process of assessing goodwill impairment.

***Research, Development and Related Engineering Expenses.*** Research, development and related engineering expenses for the three months ended August 31, 2016 were $13,780 as compared to $9,952 for the 2015 period.

***Depreciation and Amortization***. Depreciation and amortization (not included in Cost of Sales) for the three months ended August 31, 2016 was $39,746 compared to $25,359 for the 2015 period.

***Interest Expense.*** Interest expense during the three months ended August 31, 2016, was $199,439 compared to $353,534 during the comparable quarter in 2015. Interest expense for the three months ended August 31, 2016 and August 31, 2015 consists of $0 and $10,731, respectively, related to the repayment of the note payable as a result of the Asset Purchase Agreement (Note 2 and Note 6) and $45,763 and $0, respectively, related to the credit and subordination agreements with Texas Capital Bank, National Association and CrowdOut Capital LLC as described in Note 15. The remaining interest expense is comprised of amounts due to the parties to the Company’s revenue sharing agreements based on the Company’s storage revenue collected.

***Equity in Losses of Affiliate.*** Equity in losses of affiliate was $0 for the three months ended August 31, 2016, compared to $1,164 for the 2015 period. Equity in losses of affiliate for the three months ended August 31, 2016 and August 31, 2015 consists solely of amounts related to compensation expense for stock option awards that were granted by Saneron to certain consultants and employees.

***Extinguishment of Revenue Sharing Agreement***. During the three months ended August 31, 2016, the Company entered into a Settlement and Release of Claims Agreement with certain investors canceling their interest in the Florida and Texas Revenue Sharing Agreements. Pursuant to the terms of the Settlement and Release of Claims Agreement, the Company made a one-time, lump-sum payment in the amount of $3,400,000 to the investors and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their interests in the RSAs. The payment amount of $3,400,000 was offset by the carrying amount of the short-term liability related to the RSAs in the amount of $875,000 and accrued expenses in the amount of $272,612 to reflect the extinguishment of revenue sharing agreements in the amount of $2,252,388 for the three months ended August 31, 2016.

***Income Taxes***. The Company recorded an income tax benefit of $898,838 net of foreign taxes, for the three months ended August 31, 2016. The U.S. income tax benenfit us of the three months ended August 31, 2016 was $990,000 due to the Company’s net operating losses as of August 31, 2016. The Company recorded an income tax benefit of $6,931,423, net of foreign income taxes for the three months ended August 31, 2015. During the third quarter August 31, 2015, the Company reversed a portion of its valuation allowance for U.S. income taxes of approximately $6,957,000. The reversal of a portion of the deferred tax valuation allowance is based upon the Company’s historical operating performance which includes profitability in ten of the last eleven quarters, steadily improving operations and positive expectations for future taxable income.

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

The Company records foreign income taxes withheld from installment payments of non-refundable up-front license fees and royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The Company recorded $91,357 and $25,411 for the three months ended August 31, 2016 and 2015, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of comprehensive (loss) income.

### Liquidity and Capital Resources

On May 20, 2016, the Company entered into a Credit Agreement (“Agreement”) with Texas Capital Bank, National Association (“TCB”) for a term loan of $8.0 million in senior credit facilities. The proceeds of the term loan were used by the Company to fund repurchases of the Company’s common stock. Subject to the terms of the Agreement, on May 20, 2016, TCB advanced the Company $100.00. On July 1, 2016, TCB advanced the remaining principal amount of $7,999,900 per a promissory note dated May 20, 2016 between the Company and TCB. On May 20, 2016, the Company entered into a Subordination Agreement with Texas Capital Bank and CrowdOut Capital LLC (“CrowdOut”) for a subordinated loan of the principal amount of $650,000, which amount CrowdOut advanced to the

Company on May 20, 2016. The proceeds of the subordinated loan will be used by the Company to fund continued repurchases of the Company’s common stock. Per a promissory note dated May 20, 2016 between the Company and CrowdOut, interest at 12% per annum on the principal sum of $650,000 is payable monthly with a maturity date of July 2021, at which time, the principal amount of $650,000 is payable.

On August 26, 2016, the Company entered into a First Amendment to Credit Agreement with TCB. Pursuant to terms of the First Amendment to Credit Agreement, on August 26, 2016, TCB made an additional advance to the Company in principal amount of $2,133,433 per an Amended and Restated Promissory Note dated August 26, 2016 between the Company and TCB. The additional proceeds of the term loan were used by the Company to fund a portion of the Settlement Agreement and Release of All Claims with Charles D. Nyberg and Mary J. Nyberg, individually and as Trustees of the CDMJ Nyberg Family Trust as described in Note 14.

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

At August 31, 2016, the Company had cash and cash equivalents of $2,026,199 as compared to $4,152,162 at November 30, 2015. The decrease in cash and cash equivalents during the nine months ended August 31, 2015 was primarily attributable to the following:

Net cash provided by operating activities for the nine months ended August 31, 2016 was $2,424,902, which was attributable to the Company’s operating activities and an increase in the Company’s new clients choosing the prepaid storage plans versus the annual storage fee plan.

Net cash provided by operating activities for the nine months ended August 31, 2015 was $2,863,508, which was attributable to an increase in the Company’s new clients choosing the prepaid storage plans versus the annual storage fee plan, a 4% decrease in cost of sales and a 4% decrease in selling, general and administrative expenses.

Net cash used in investing activities for the nine months ended August 31, 2016 was $297,184 which was primarily attributable to the purchases of property and equipment in the amount of $298,600 and sales and purchases of marketable securities and other investments in the amount of $202,928 which were partially offset by the redemption of a Certificate of Deposit in the amount of $204,344.

Net cash used in investing activities for the nine months ended August 31, 2015 was $481,562 which was primarily attributable to the purchase of Prepacyte®-CB (See Note 2 to the consolidated financial statements) in the amount of $212,203 and the sales and purchases of marketable securities and other investments of $214,520.

Net cash used in financing activities for the nine months ended August 31, 2016 was $4,253,681, which was primarily attributable to the stock repurchase plan pursuant to which the Company has repurchased 2,429,033 shares of the Company’s common stock for $10,668,347, the repayments of the note payables for $1,009,107 and the payment of $3,400,000 for the cancellation of certain interests in certain Revenue Sharing Agreements, which was partially offset by the term and subordinated loan in the amount of $10,783,433.

Net cash used in financing activities for the nine months ended August 31, 2015 was $2,941,750, which was primarily attributable to the stock repurchase plan and tender offer pursuant to which the Company has repurchased 968,302 shares of the Company’s common stock for $2,946,705.

The Company does not have a line of credit.

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

On June 20, 2016, the Company entered into a repurchase agreement of 2,179,068 shares from Ki Yong Choi and 13,416 shares from Michael Cho for $4.50 per share, $9,866,178 in the aggregate, which was funded in part with the $8.0 million term loan advanced by TCB. On May 20, 2016, TCB advanced the Company $100 and on July 1, 2016, TCB advanced the remaining principal amount of $7,999,900. 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 proceeds of the term loan were used by the Company to fund a portion of the Settlement Agreement and Release of All Claims described in Note 14.

The subordinated loan of $650,000 received in May 2016, will also be used by the Company to fund continued repurchases of the Company’s common stock.

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

### Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 1 to the Consolidated Financial Statements included in our 2015 Annual Report on Form 10-K filed with the SEC. Our most critical accounting policies and estimates include: recognition of revenue and the related allowance for doubtful accounts, stock-based compensation, income taxes and license and revenue sharing agreements. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, *Management’s Discussion and Analysis of Financial Condition and Results of Operations* included in our 2015 Annual Report on Form 10-K.

### Recently Issued Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements.

### Off-Balance Sheet Arrangements

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

## Controls and procedures

As filed, 5,620 characters.

### Evaluation of Disclosure Controls and Procedures

Based on their most recent review, as of the end of the period covered by this report, the Company’s principal executive officers and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive officers and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

As previously disclosed in the Company’s 10-K filed February 29, 2016 and the Company’s 10-Qs filed April 14, 2016 and July 11, 2016, the Company’s principal executive officers and principal financial officer concluded that the Company’s internal controls over financial reporting were not effective, due to a material weakness surrounding the Company’s identification and application of the appropriate accounting treatment for non-routine transactions and related documentation thereof. The Company’s controls over non-routine transactions were not conducive to identify certain items with sufficient precision. Management has undertaken steps to design and implement more effective internal controls over financial reporting, including the implementation of a review process of non-routine transactions and has engaged qualified consultants to assist the Company with the application of the appropriate accounting treatment of non-routine transactions when necessary.

During the quarter ended November 30, 2015, the Company’s principal executive officers and principal financial officer concluded that the Company’s internal controls over financial reporting were not effective, due to a material weakness surrounding manual controls related to storage revenue for customers that are on a payment plan. The Company’s control over the manual process was not conducive to identify the timeliness of recording the revenue. Management has undertaken steps to design and implement more effective internal controls, including the implementation of a more comprehensive review process of manual invoicing procedures.

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

### Changes in Internal Control Over Financial Reporting

The changes in the Company’s internal control over financial reporting described in the previous paragraph were implemented during the quarter ended November 30, 2015 and were remediated during the quarters ended May 31, 2016 and August 31, 2016.

There were no other changes in the Company’s internal controls over financial reporting during the nine months ended August 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

### Limitations on the Effectiveness of Controls

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

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

### CEO and CFO Certifications

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

Filed Oct 17, 2016.
Source: SEC EDGAR, the filing index for accession 0001193125-16-739879. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.