NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Note 1. Organization and Description of Business
Overview
Cord Blood America, Inc. ("CBAI" or the “Company”),
formerly D&A Lending, Inc., was incorporated in the State of
Florida on October 12, 1999. In October, 2009, CBAI re-located its
headquarters from Los Angeles, California to Las Vegas, Nevada.
CBAI's wholly-owned subsidiaries include Cord Partners, Inc.,
CorCell Companies, Inc., CorCell, Ltd., (Cord Partners, Inc.,
CorCell Companies, Inc. and CorCell, Ltd. are sometimes referred to
herein collectively as “Cord”), CBA Properties, Inc.
("Properties"), and Career Channel, Inc. formerly D/B/A Rainmakers
International. CBAI and its subsidiaries engage in the
following business activities:
●
|
CBAI
and Cord specialize in providing private cord blood and cord tissue
stem cell services. Additionally, the Company is in the
business of procuring birth tissue for organizations utilizing the
tissue in the transplantation and/or research of therapeutic based
products.
|
●
|
Properties
was formed to hold corporate trademarks and other intellectual
property.
|
Company Developments – Sale of Assets
On February 7, 2018, the Company announced that it entered into an
Asset Purchase Agreement, dated as of February 6, 2018 (the
“Purchase Agreement”), with California Cryobank Stem
Cell Services LLC (“FamilyCord”).
Pursuant to the terms of the Purchase Agreement, FamilyCord agreed
to acquire from CBAI substantially all of the assets of CBAI and
its wholly-owned subsidiaries and to assume certain liabilities of
CBAI and its wholly-owned subsidiaries. The sale does not include
CBAI’s cash and certain other excluded assets and
liabilities. FamilyCord agreed to pay a purchase price of
$15,500,000 in cash at closing with $3,000,000 of the purchase
price deposited into escrow to secure CBAI’s indemnification
obligations under the Purchase Agreement. The sale, which is
subject to the closing conditions described below, is expected to
close as soon as practicable, but likely during the second quarter
of 2018.
The Purchase Agreement contains customary representations,
warranties and covenants for a transaction of this type and nature.
Pursuant to the terms of the Purchase Agreement, CBAI shall
indemnify FamilyCord for breaches of its representations and
warranties, breaches of covenants, losses related to excluded
assets or excluded liabilities and certain other matters. The
representations and warranties set forth in the Purchase Agreement
generally survive for two years following the closing.
In connection with the sale, the parties will also enter into a
transition services agreement designed to ensure a smooth
transition of CBAI’s business from CBAI to
FamilyCord.
The consummation of the sale is dependent upon the satisfaction or
waiver of a number of closing conditions, including among other
things, approval by CBAI’s shareholders, receipt of certain
third-party consents and FamilyCord obtaining external financing.
The Purchase Agreement may be terminated at any time prior to the
date of closing by mutual agreement of the parties, or by either
party under certain circumstances set forth in the Purchase
Agreement, including by either party if the closing has not
occurred within six months of the execution of the Purchase
Agreement, by FamilyCord for CBAI’s failure to obtain its
shareholders’ approval of the asset sale, by FamilyCord if
CBAI pursues an alternative superior transaction or by FamilyCord
if it is unable to obtain necessary financing. The Purchase
Agreement also sets forth termination fees that may be payable by
one party to the other under certain circumstances of
termination.
Upon completion of the transaction, CBAI presently estimates it
will distribute a portion of the sale proceeds to its shareholders.
The initial distribution amount will be determined by CBAI’s
board of directors and will be subject to such factors as taxes
payable, operating expenses and other contingencies and estimates.
Additional monies may be distributed over time based on cash
available and the release of known and unknown liabilities. Given
cash needed for the aforementioned expenses and contingencies,
total proceeds paid out to shareholders are expected to be
significantly less than the gross purchase price.
A copy of the Purchase Agreement was attached as Exhibit 2.1 to the
Form 8-K filed February 8, 2018.
Company Developments – Banco Vida
On August 17, 2015, the Company received a notice of termination
from Cord Blood Caribbean, Inc. d/b/a Banco Vida (“Banco
Vida”) with regards to both the Tissue Agreement and the
Storage and Processing Agreement between the two companies,
effective February 2016. The Company reached an amendment to
the Tissue Agreement extending the agreement through February 7,
2018, and with automatic renewals for consecutive two (2) year
terms, in perpetuity unless terminated prior to a renewal term or
otherwise in accordance with the amendment. Although the
parties had not yet reached an agreement regarding the Storage and
Processing Agreement between the two companies, Banco Vida
continued to store samples with the Company until December 2016. In
December 2016, the Company and Banco Vida entered a Release
Agreement, pursuant to which the storage relationship between them
ceased. In connection with the Release Agreement, Banco Vida paid
the Company $20,000, and Banco Vida received from the Company
equipment used in the storage of samples. The Company recorded a
gain on settlement of $151,951 relating to release of deferred
revenue and sales of equipment in connection with the
transaction.
Note 2. Summary of Significant Accounting Policies
Financial Statement Presentation
The
preparation of the financial statements in conformity with U.S.
generally accepted accounting principles (U.S. GAAP) requires
management to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ from
these estimates. Certain prior year amounts have been reclassified
to conform to current year presentation.
Pursuant
to guidance in ASC 205-20, Presentation of Financial Statements,
and ASC 360-10-45-9 to 14, Property, Plant and Equipment, regarding
when the results of operations of a component of an entity that is
classified as held for sale would be reported as a discontinued
operation in the financial statements of the entity. The Company
determined that it met the threshold for reporting discontinued
operations due to a strategic business shift having a major effect
on an entity's operations and financial results. In February 2018,
the Company announced strategic repositioning actions which
resulted in agreements to sell cord blood and stem cell storage
business. For this reason, the results of operations for the cord
blood and cord tissue stem cell operations have been reclassified
into discontinued operations and the related assets and liabilities
are reflected as held-for-sale for all periods presented. See Note
3.
Basis of Consolidation
The
consolidated financial statements include the accounts of CBAI and
its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated upon
consolidation.
Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during
the reporting periods. Actual results could differ materially from
those estimates.
Cash
Cash
and cash equivalents include cash on hand, deposits in banks with
maturities of three months or less, and all highly liquid
investments which are unrestricted as to withdrawal or use, and
which have original maturities of three months or less at the time
of purchase.
Accounts Receivable
Accounts
receivable consist of the amounts due for facilitating the
processing and storage of umbilical cord blood and cord tissue, and
birth tissue procurement services. Accounts
receivable relating to deferred revenues are netted against
deferred revenue for presentation purposes. The allowance for
doubtful accounts is estimated based upon historical experience.
The allowance is reviewed quarterly and adjusted for accounts
deemed uncollectible by management. Amounts are written off when
all collection efforts have failed.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets. Routine maintenance and
repairs are charged to expense as incurred while major replacement
and improvements are capitalized as additions to the related
assets. Sales and disposals of assets are recorded by removing the
cost and accumulated depreciation from the related asset and
accumulated depreciation accounts with any gain or loss credited or
charged to income upon disposition.
Intangible Assets (related to
cord blood and cord tissue stem cell
storage business)
Intangible assets consist primarily of customer contracts and
relationships as part of the acquisition of the CorCell and
CureSource assets in 2007. During 2011 the Company also foreclosed
and acquired assets from NeoCells, a subsidiary of ViviCells, as
satisfaction of outstanding receivables from Vivicells. Intangible
assets are stated at cost. Amortization of intangible assets is
computed using the sum of the years’ digits method, over an
estimated useful life of 18 years. Amortization expense included in
the discontinued operations for the years ended December 31, 2017
and 2016 was $295,486 and $345,348 respectively.
Impairment of Long-Lived Assets
Long-lived
assets, other than goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets might not be recoverable. Conditions that
would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate that the carrying
amount of an asset or group of assets is not
recoverable.
For
long-lived assets to be held and used, the Company recognizes an
impairment loss only if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment
loss based on the difference between the carrying amount and fair
value. The Company reviews goodwill for impairment at least
annually or whenever events or circumstances are more likely than
not to reduce the fair value of goodwill below its carrying
amount.
Inventory
Inventory,
comprised principally of finished goods, is stated at the lower of
cost or net realized value using the first-in, first-out
(“FIFO”) method. This policy requires the Company to
make estimates regarding the market value of its inventory,
including an assessment of excess or obsolete inventory. The
Company determines excess and obsolete inventory based on an
estimate of the future demand and estimated selling prices for its
products.
Notes Receivable
Notes
receivable consists of the notes due from Biocordcell Argentina
S.A. (BioCells) and Banco Vida. The notes receivable are recorded
at carrying-value on the financial statements.
For
note receivable from BioCells, since the Company agreed to finance
the sale of the shares in Biocordcell at no stated interest, in
accordance with ASC 500, the interest method was applied using a 6%
borrowing rate. The Company recorded an unamortized discount based
on the 6% borrowing rate and the discount is amortized throughout
the life of the note.
Deferred Revenue
(related to
cord blood and cord tissue
stem cell storage business)
Deferred
revenue consists of payments for enrollment in the program and
processing of umbilical cord blood and cord tissue by customers
whose samples have not yet been collected, as well as the pro-rata
share of annual storage fees for customers whose samples were
stored during the year.
Valuation of Derivative Instruments
ASC
815-40 requires that embedded derivative instruments be bifurcated
and assessed, along with free-standing derivative instruments such
as warrants, on their issuance date and in accordance with ASC
815-40-15 to determine whether they should be considered a
derivative liability and measured at their fair value for
accounting purposes. In determining the appropriate fair value, the
Company uses the Binomial option pricing formula and present value
pricing. At December 31, 2017 and December 31, 2016, the Company
adjusted its derivative liability to its fair value, and reflected
the change in fair value, in its consolidated statements of
operations.
Revenue Recognition
(related to
cord blood and cord tissue
stem cell storage business)
CBAI
recognizes revenue under the provisions of ASC 605. CBAI provides a
combination of products and services to customers. This combination
arrangement is evaluated under ASC 605. ASC 605 addresses certain
aspects of accounting for arrangements under multiple revenue
generating activities.
Cord
recognizes revenue from both enrollment fees and processing fees
upon the completion of processing while revenue from storage fees
are recognized ratably over the contractual storage
period.
Cost of Services
Costs
are incurred as umbilical cord blood, cord tissue and birth
tissue are collected. These costs include the transportation
of the umbilical cord blood, cord tissue and birthing tissue from
the hospital, direct material, costs for processing and cryogenic
storage of new samples by a third party laboratory, collection kit
materials and allocated rent, utility and general administrative
expenses. The Company expenses costs in the period
incurred.
Income Taxes
The
Company follows the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that
included the enactment date. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance based on the
portion of tax benefits that more likely than not will not be
realized.
The
Company follows guidance issued by the FASB with regard to its
accounting for uncertainty in income taxes recognized in the
financial statements. Such guidance prescribes a recognition
threshold of more likely than not and a measurement process for
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. In making this
assessment, a company must determine whether it is more likely than
not that a tax position will be sustained upon examination, based
solely on the technical merits of the position and must assume that
the tax position will be examined by taxing authorities. Our policy
is to include interest and penalties related to unrecognized tax
benefits in income tax expense. Interest and penalties totaled $0
for the years ended December 31, 2017 and 2016. The Company files
income tax returns with the Internal Revenue Service
(“IRS”) and various state jurisdictions.
Accounting for Stock Option Plan
The
Company’s share-based employee compensation plans are
described in Note 9. On January 1, 2006, the Company adopted
the provisions of ASC 718, “Accounting for Stock-based
Compensation (Revised 2004)” (“123(R)”), which
requires the fair value measurement and recognition of compensation
expense for all share-based payment awards made to employees and
directors, including employee stock options.
Earnings (Loss) Per Share
Basic
earnings per share (EPS) is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding. Diluted EPS is similar to
basic EPS except that the weighted average number of common shares
outstanding is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential
common shares had been exercised. The Company’s
common equivalent shares are excluded from the computation of
diluted EPS if the effect is anti-dilutive.
The
diluted weighted average common shares outstanding are
1,272,066,146 and
1,272,066,146
as of December 31, 2017
and 2016, respectively.
Concentration of Risk
Credit
risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off
balance sheet) that arise from financial instruments exist for
groups of customers or counterparties when they have similar
economic characteristics that would cause their ability to meet
their contractual obligations to be similarly affected by changes
in economic or other conditions described below.
Relationships
and agreements which could potentially expose the Company to
concentrations of credit risk consist of the use of one source for
the processing and storage of all umbilical cord blood and one
source for the development and maintenance of a website. The
Company believes that alternative sources are available for each of
these concentrations.
Financial
instruments that subject the Company to credit risk could consist
of cash balances maintained in excess of federal depository
insurance limits. The Company maintains its cash and cash
equivalent balances with high credit quality financial
institutions. At times, cash and cash equivalent balances may be in
excess of Federal Deposit Insurance Corporation limits, and as of
December 31, 2017, this was the case. To date, the Company has not
experienced any such losses.
Fair Value Measurements
Assets
and liabilities recorded at fair value in the consolidated balance
sheets are categorized based upon the level of judgment associated
with the inputs used to measure the fair value. Level inputs, as
defined by ASC 820, are as follows:
●
|
Level 1
– quoted prices in active markets for identical assets or
liabilities.
|
●
|
Level 2
– other significant observable inputs for the assets or
liabilities through corroboration with market data at the
measurement date.
|
●
|
Level 3
– significant unobservable inputs that reflect
management’s best estimate of what market participants would
use to price the assets or liabilities at the measurement
date.
|
The
following table summarizes fair value measurements by level at
December 31, 2017 for assets and liabilities measured at fair value
on a recurring basis:
|
|
|
|
|
Derivative
liability
|
$
--
|
$
--
|
$
--
|
$
--
|
Derivative
liability was valued under the Binomial model with the following
assumptions:
Risk free interest
rate
|
0
%
|
Expected
life
|
|
Dividend
Yield
|
0
%
|
Volatility
|
0
%
|
The
following table summarizes fair value measurements by level at
December 31, 2016 for assets and liabilities measured at fair value
on a recurring basis:
|
|
|
|
|
Derivative
liability
|
$
--
|
$
--
|
$
109,731
|
$
109,731
|
Derivative
liability was valued under the Binomial model, with the following
assumptions:
Risk
free interest rate
|
|
0.12%
to 0.47%
|
|
Expected
life
|
|
0 to
0.75 years
|
|
Dividend
Yield
|
|
0%
|
|
Volatility
|
|
0% to
109%
|
|
The
following table provides a roll-forward of the Company’s
derivative liabilities measured at fair value on a recurring basis
using unobservable level 3 inputs:
|
|
|
Balance
as of beginning of period
|
$
109,731
|
$
182,213
|
Change
in fair value of derivative
|
—
|
(72,482
)
|
Reversal
of derivative liability associated with payoff of the convertible
note payable
|
(109,731
)
|
—
|
Balance
as of end of period
|
$
—
|
$
109,731
|
There
were no financial instruments measured on a recurring basis as of
December 31, 2017 and 2016 and on a non-recurring basis for any of
the periods presented.
For
certain of the Company’s financial instruments, including
cash, accounts receivable, prepaid expenses and other assets,
accounts payable and accrued expenses, and deferred revenues, the
carrying amounts approximate fair value due to their short
maturities. The carrying amounts of the Company’s notes
receivable and notes payable approximates fair value based on the
prevailing interest rates.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers (Topic 606)” (ASU 2014-09) as
modified by ASU No. 2015-14, “Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date,” ASU
2016-08, “Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross
versus Net),” ASU No. 2016-10, “Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and
Licensing,” and ASU No. 2016-12, “Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients.” The revenue recognition principle in
ASU 2014-09 is that an entity should recognize revenue to depict
the transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In addition, new
and enhanced disclosures will be required. Companies may adopt the
new standard either using the full retrospective approach, a
modified retrospective approach with practical expedients, or a
cumulative effect upon adoption approach. The Company will adopt
the new standard effective January 1, 2018, using the full
retrospective approach. The adoption of ASU 2014-09 will not
have a material impact on the Company’s consolidated
financial position, results of operations, equity or cash
flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842)
and subsequently amended the guidance relating largely to
transition considerations under the standard in January 2017. The
objective of this update is to increase transparency and
comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. This ASU is effective for
fiscal years beginning after December 15, 2018, including interim
periods within those annual periods and is to be applied utilizing
a modified retrospective approach. The Company is currently
evaluating the new guidance to determine the impact it may have on
its financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement
of Cash Flows (Topic 230): Restricted Cash. The objective of this
ASU is to eliminate the diversity in practice related to the
classification of restricted cash or restricted cash equivalents in
the statement of cash flows. For public business entities, this ASU
is effective for annual and interim reporting periods beginning
after December 15, 2017, with early adoption permitted. The
amendments in this update should be applied retrospectively to all
periods presented. The Company will adopt this standard on January
1, 2018 and will not have a material impact on the Company’s
financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock
Compensation (Topic 718): Scope of Modification Accounting
(ASU 2016-09), which provides guidance about which changes to
the terms or conditions of a share-based payment award require an
entity to apply modification accounting in Topic 718. This
pronouncement is effective for annual reporting periods beginning
after December 15, 2017. The Company will adopt this standard on
January 1, 2018 and will not have a material impact on the
Company’s financial statements.
On December 22, 2017 the SEC staff issued Staff Accounting
Bulletin 118 (SAB 118), which provides guidance on
accounting for the tax effects of the Tax Cuts and Jobs Act (the
TCJA). SAB 118 provides a measurement period that should
not extend beyond one year from the enactment date for companies to
complete the accounting under ASC 740. In accordance with SAB
118, a company must reflect the income tax effects of those aspects
of the TCJA for which the accounting under ASC 740 is
complete. To the extent that a company’s accounting for
certain income tax effects of the TCJA is incomplete but for
which they are able to determine a reasonable estimate, it must
record a provisional amount in the financial
statements. Provisional treatment is proper in light of
anticipated additional guidance from various taxing authorities,
the SEC, the FASB, and even the Joint Committee on
Taxation. If a company cannot determine a provisional amount
to be included in the financial statements, it should continue to
apply ASC 740 on the basis of the provisions of the tax laws that
were in effect immediately before the enactment of the TCJA.
The Company has applied this guidance to its financial
statement
Note 3. Assets Held for Sale
-
Cord Blood and Cord Tissue Stem Cell Storage
Operations
Background
Pursuant to the terms of the Purchase Agreement dated as of
February 6, 2018, FamilyCord agreed to acquire from CBAI
substantially all of the assets of CBAI and its wholly-owned
subsidiaries and to assume certain liabilities of CBAI and its
wholly-owned subsidiaries. FamilyCord agreed to pay a purchase
price of $15,500,000 in cash at closing with $3,000,000 of the
purchase price deposited into escrow to secure CBAI’s
indemnification obligations under the Purchase Agreement. The sale,
which is subject to the closing conditions described below, is
expected to close as soon as practicable, but likely during the
second quarter of 2018. The sale does not include CBAI’s
cash, accounts receivables, and certain other excluded assets and
liabilities.
The consummation of the sale is dependent upon the satisfaction or
waiver of a number of closing conditions, including among other
things, approval by CBAI’s shareholders, receipt of certain
third-party consents and FamilyCord obtaining external financing.
The Purchase Agreement may be terminated at any time prior to the
date of closing by mutual agreement of the parties, or by either
party under certain circumstances set forth in the Purchase
Agreement, including by either party if the closing has not
occurred within six months of the execution of the Purchase
Agreement, by FamilyCord for CBAI’s failure to obtain its
shareholders’ approval of the asset sale, by FamilyCord if
CBAI pursues an alternative superior transaction or by FamilyCord
if it is unable to obtain necessary financing. The Purchase
Agreement also sets forth termination fees that may be payable by
one party to the other under certain circumstances of
termination.
The assets sold in the transaction are the sole revenue generating
assets of the Company. The results of operations associated with
the assets sold have been reclassified into discontinued operations
and the assets and liabilities are reflected as held-for-sale
(current and long-term) for all periods presented.
Assets and groups of assets and liabilities which comprise disposal
groups are classified as “held for sale” when all of
the following criteria are met: a decision has been made to sell,
the assets are available for sale immediately, the assets are being
actively marketed at a reasonable price in relation to the current
fair value, a sale has been or is expected to be concluded within
twelve months of the balance sheet date, and significant changes to
the plan to sell are not expected. Assets held for sale are not
depreciated.
Additionally, the operating results and cash flows related to these
assets and liabilities are included in discontinued operations in
the consolidated statements of operations and consolidated
statements of cash flows for the years ended December 31, 2017 and
December 31, 2016.
The following is summary of aggregate carrying amounts of the major
classes of assets and liabilities classified as held-for-sale as of
December 31, 2017 and 2016:
|
|
|
ASSETS
|
|
|
Inventory
|
$
45,762
|
$
58,376
|
Property and
equipment, net of accumulated depreciation
|
35,152
|
52,168
|
Customer contracts
and relationships, net of accumulated amortization
|
1,049,118
|
1,322,056
|
Total
assets
|
$
1,130,032
|
$
1,432,600
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Deferred
revenue
|
$
1,381,215
|
$
1,430,206
|
Total
liabilities
|
$
1,381,215
|
$
1,430,206
|
Income / (Loss) of Discontinued Operations
The proposed sale of majority of the assets and liabilities related
to the cord blood and cord tissue stem cell operation represents a
strategic shift in the Company’s business. For this reason,
the results of operations related to the assets and liabilities
held for sale for all periods are classified as discontinued
operations.
The
following is a summary of the results of operations related to the
assets held for sale for the years ended December 31, 2017 and
2016:
|
|
|
|
|
|
Revenue
|
$
2,994,676
|
$
3,288,291
|
Cost of
services
|
(680,750
)
|
(904,863
)
|
Gross
profit
|
2,313,926
|
2,383,428
|
Depreciation and
Amortization
|
(289,953
)
|
(357,893
)
|
Net income from
discontinued operations
|
$
2,023,973
|
$
2,025,535
|
The
following is a summary of net cash provided by operating activities
for the assets held for sale for the years ended December 31, 2017
and 2016:
|
|
|
|
|
|
Cash provided by
operating activities
|
$
2,277,550
|
$
2,389,003
|
Note 4. Property and Equipment
At
December 31, 2017 and 2016, property and equipment consist
of:
|
|
|
|
Furniture and
fixtures
|
1-5
|
$
17,597
|
$
17,597
|
Computer
equipment
|
5
|
124,466
|
124,466
|
Laboratory
Equipment
|
1-5
|
5,837
|
5,837
|
Freezer
equipment
|
7-15
|
34,699
|
34,699
|
Leasehold
Improvements
|
5
|
102,862
|
102,862
|
|
|
285,461
|
285,461
|
Less: accumulated
depreciation and amortization
|
|
(276,369
)
|
(271,001
)
|
|
|
$
9,092
|
$
14,460
|
Assets
held for sale:
|
|
|
|
Furniture
and fixtures
|
1-5
|
$
5,432
|
$
5,432
|
Computer
equipment
|
5
|
93,339
|
93,339
|
Laboratory
Equipment
|
1-5
|
92,351
|
92,351
|
Freezer
equipment
|
7-15
|
329,526
|
329,526
|
|
|
520,648
|
520,648
|
Less: accumulated
depreciation and amortization
|
|
(485,496
)
|
(468,480
)
|
|
|
$
35,152
|
$
52,168
|
For the
years ended December 31, 2017 and 2016, depreciation expense
totaled $5,368 and $5,324, respectively for continuing operations
and $22,383 and $47,865, respectively for discontinued
operations.
Note 5. Notes and Loans Payable, and Derivative
Liabilities
At
December 31, 2017 and 2016, notes and loans payable consist
of:
|
|
|
|
|
|
Secured Convertible
Promissory Note to Tonaquint, Inc. 7.5% per annum; due on or before
September 17, 2017.
|
--
|
400,000
|
|
|
|
|
|
|
Less: Unamortized
Discount
|
--
|
(43,432
)
|
|
$
--
|
$
356,568
|
Total
interest expense was $54,488 and $305,640 during the years ended
December 31, 2017 and 2016, respectively. The gains from changes in
derivative liability were $109,731 and $327,772 during the years
ended December 31, 2017 and 2016, respectively.
Tonaquint, Inc.
On
August 30, 2013, Cord Blood America, Inc. (the
“Company”) filed a Complaint in the United States
District Court for the District of Utah, Central Division against
Tonaquint, Inc. (“Tonaquint”) and St. George
Investments, LLC (“St. George”) (collectively
“Defendants”), case number 2:13-cv-00806-PMW (the
“Action”), and on May 7, 2014, the Company filed an
amended complaint.
On September 25, 2013, Defendants
each filed their Answer and Counterclaim in the Action, which they
amended on March 22, 2014.
On
December 17, 2014, in settlement of the Action, the parties entered
into a Settlement and Exchange Agreement (the "Settlement
Agreement"). Pursuant to the Settlement Agreement, the Secured
Convertible Promissory Note and the Warrant to Purchase Shares of
Common Stock issued by the Company to St. George on or around March
10, 2011, as well as the SGI Purchase Agreement, and all other
documents that made up the March 2011 transaction between the
Company and St. George, all of which have been set forth in detail
in prior filings by the Company, were terminated, cancelled or
otherwise extinguished. Further pursuant to the
Settlement Agreement, the Tonaquint Note was exchanged for a
Secured Convertible Promissory Note of the Company in the principal
amount of $2,500,000 (the "Company Note"), and certain of the other
documents that were part of the June 27, 2012 transaction between
the Company and Tonaquint (the “June 2012 Tonaquint
Transaction”) were terminated, cancelled or otherwise
extinguished, and certain of them were amended, as set forth
below.
Under
the Company Note, the Company shall make monthly payments to
Tonaquint, with the first payment due on or before April
17, 2015, and with payments continuing thereafter until the
Company's Note is paid in full, with a maturity date that is 33
calendar months after the effective date of December 17, 2014. The
amount of the monthly payments is $100,000 (the “Installment
Amount”);
provided,
however,
that if the remaining amount owing under the
Company Note as of the applicable Installment Date (defined in the
Company Note) is less than $100,000, then the Installment Amount
for such Installment Date shall be equal to the outstanding amount.
The Company may prepay any or all of the outstanding amount of the
Company Note at any time, without penalty. In the event the Company
prepays an amount that is less than the outstanding amount, then
the prepayment amount shall be applied to the next Installment
Amount(s) due under the Company Note.
For
each monthly payment, the Company may elect to designate all or any
portion of the Installment Amount then due as a conversion
eligible amount (hereafter “Conversion Eligible
Amount”); provided that the total outstanding Conversion
Eligible Amount that has not been converted by Tonaquint, as set
forth below, at any given time may not exceed one hundred thousand
dollars ($100,000) without Tonaquint’s prior written consent
and subject to additional restrictions set forth in the Company
Note. In the event the Company designates any portion of any
monthly payment amount as a Conversion Eligible Amount, the
applicable monthly payment shall be reduced by an amount equal to
the portion thereof designated as a Conversion Eligible Amount. The
Conversion Eligible Amount shall continue to be included in and be
deemed to be a part of the Outstanding Balance (defined in the
Company Note) of the Company Note unless and until such amount is
either paid in cash by the Company or converted into Common Stock
by Tonaquint. The Company may pay the Conversion Eligible Amount in
cash, provided that no prepayments of cash shall reduce the
Conversion Eligible Amount until the Outstanding Balance is equal
to or less than the Conversion Eligible Amount.
Once
the Company has designated amounts as Conversion Eligible Amount,
Tonaquint may convert all or any portion of that amount into
shares of the Company's Common Stock. In the event of a conversion
by Tonaquint of a Conversion Eligible Amount, the number of Common
Stock shares delivered to Tonaquint upon conversion will be
calculated by dividing the amount of the Company Note that is being
converted by 70% of the average of the three (3) lowest Closing Bid
Prices of the Common Stock (as defined in the Company Note) in the
twenty (20) Trading Days immediately preceding the applicable
Conversion.
The
Company records debt discounts in connection with the issuance of
convertible debt and the initial valuation of the derivative
liability. The discounts are amortized to non-cash interest expense
over the life of the debt.
The
Company Note has an interest rate of 7.5%, compounding daily, which
would increase to a rate of 15.0% on the happening of certain
Events of Default (defined in the Company Note) that are not
considered a Payment Default (defined in the Company Note),
provided that the Company may cure the default in accordance with
and subject to the terms set forth in the Company Note. Where a
Payment Default occurs, including where (i) Borrower shall fail to
pay any principal, interest, fees, charges, or any other amount
when due and payable under that Company Note; or (ii) Borrower
shall fail to deliver any Conversion Shares in accordance with the
terms of the Company Note, late fees shall accrue as set forth in
the Company Note, and in addition, the Company shall have ninety
(90) days from delivery of notice of default from Tonaquint to cure
the default, as set forth in more detail in the Company Note. If
the Company fails to cure the Payment Default, Tonaquint may
accelerate the Company Note by written notice to the Company, with
the Outstanding Balance becoming immediately due and payable in
cash at the Mandatory Default Amount (defined in the Company Note)
equal to (i) the Outstanding Balance as of the date of acceleration
(which Outstanding Balance, for the avoidance of doubt, will
include all Late Fees that accrue until any applicable Payment
Default is cured) multiplied by (ii) two hundred fifty percent
(250%), along with other remedies, as set forth in the Company
Note.
As of December 31, 2016, the principal balance on the Tonaquint
note was $400,000, and there was $204,494 of accrued
interest.
As of
December 31, 2017, the principal balance on the Tonaquint note was
$0, and there was $0
of accrued
interest.
Note 6. Investment and Notes Receivable, Related
Parties
At
December 31, 2017 and 2016, notes receivable consists
of:
|
|
|
On September 29,
2014, the Company closed a transaction selling its stake in
BioCells to Diego Rissola; current President. Payments
are to be annually, after June of 2015, and the last payment due on
or before June 1, 2025.
|
560,000
|
615,000
|
|
|
|
Unamortized
discount on BioCells note receivable
|
(140,040
)
|
(167,582
)
|
|
$
419,960
|
$
447,418
|
Under
the Agreement with Purchaser of BioCells, BioCells is to make
payments as follows: $5,000 on or before October 12, 2014; $10,000
on or before December 1, 2014; $15,000 on or before March 1, 2015;
$15,000 on or before June 1, 2015; $45,000 on or before June 1,
2016; $55,000 on or before June 1, 2017; $55,000 on or before June
1, 2018; $55,000 on or before June 1, 2019; $65,000 on or before
June 1, 2020; $75,000 on or before June 1, 2021; $75,000 on or
before June 1, 2022; $75,000 on or before June 1, 2023; $80,000 on
or before June 1, 2024; $80,000 on or before June 1, 2025. As of
December 31, 2017, the Purchaser is current on all
payments.
This
loan receivable is secured, non-interest bearing, and subject to a
6% discount rate. As of December 31, 2016, the receivable has a
balance of $447,418, net of unamortized discount of $167,582 and
allowance of doubtful accounts of $0. As of December 31, 2017,
the receivable has a balance of $419,960, net of unamortized
discount of $140,040 and allowance of doubtful accounts of
$0. The Purchaser is current with payments as of
December 31, 2017. The Company incurred interest income from the
amortized discount of $27,542 and $28,104 during the years ended
December 31, 2017 and 2016, respectively.
Note 7. Commitments and Contingencies
VidaPlus
On
January 24, 2011, the Company entered into a Stock Purchase
Agreement to acquire up to 51% of the capital stock in VidaPlus, an
umbilical cord processing and storage company headquartered in
Madrid, Spain. The Agreement is organized into three tranches; the
first executed at closing with an initial investment of
approximately $204,000 (150,000 Euro) for an amount equivalent to
7% as follows; 1% of share capital in initial equity or
approximately $30,000 and 6% or an estimated $174,000 as a loan
convertible into equity within 12 months of closing. The initial
investment was secured by a Pledge Agreement on 270 VidaPlus
samples that were incurring annual storage fees. The second tranche
provided the opportunity for an additional 28% in share capital
through monthly investments based on the number of samples
processed in that month (up to a maximum of 550,000 EUR). In
connection with Tranche 2, the Company loaned VidaPlus $246,525.
Converting the investment from a loan into equity was to take place
within 24 months of the date the amount of shares due to the
Company pursuant to the second tranche is calculated. According to
the Stock Purchase Agreement, the third tranche follows a similar
loan to equity agreement as tranche two but for an additional 16%
equity at the option of the Company (up to a maximum of 550,000
EUR).
In
connection with the VidaPlus Stock Purchase Agreement entered into
on January 24, 2011, the Company was obligated to make monthly
loans to VidaPlus based on the number of new samples processed and
up to a maximum of 550,000 Euro for each of Tranche 2 and 3 of the
Agreement. Tranche 2 did contain provisions that provided the
Company an option to discontinue funding if certain performance
targets were not met.
In
January 2012, the Company exercised its right to convert its
Tranche 1 loan into 6% of the outstanding shares of VidaPlus, and
as a result, the Company owned a total of 7% of the outstanding
shares. At the time of the equity conversion, the Company no longer
maintained its Pledge on the 270 VidaPlus samples associated with
Tranche 1; however, the Company maintained a liquidation preference
in VidaPlus over the money invested by the Company in VidaPlus.
Additionally, the Company declined to make any further investment
(loan or otherwise) to VidaPlus under either Tranche 2, Tranche 3
or otherwise. Pursuant to the Agreement, CBAI held a pledge over
the umbilical cord blood maintenance and storage contracts between
VidaPlus and certain of its customers, and all rights contained
therein, including but not limited to the rights to administer
those contracts and the rights to collect the revenues derived from
those contracts, for 328 samples. CBAI held that pledge until such
time as it converted the monies paid to VidaPlus under Tranche 2 of
the Stock Purchase Agreement into equity into VidaPlus, in
accordance with the formulas set forth in the Stock Purchase
Agreement. CBAI was required to make that conversion within two
years of when the calculation was made as to the amount of shares
to which CBAI is entitled pursuant to Tranche 2, which meant that
such conversion would take place around or before February 2014.
CBAI also holds a liquidation preference in VidaPlus for the money
the Company invested in VidaPlus. On February 14, 2014, CBAI
delivered to VidaPlus its election to convert its loan under
Tranche 2 into shares of stock in VidaPlus, including Anti-Dilution
shares. The Company is entitled to an additional
ownership stake of approximately 2.24% in connection with the
forgoing, bringing its total ownership percentage to approximately
9.24%.
The
Company holds approximately 9.24% of the outstanding shares of
VidaPlus, and has a balance of convertible loans receivable
amounting to $246,525. During the year ended December 31, 2012, the
Company reviewed the recoverability of the equity investment and
loans receivable and the carrying amount exceeds the fair value of
the investment as a result of recurring and continued operating
losses at VidaPlus. Fair value of the loans receivable is
determined based on the discounted future net cash flows expected
to be generated by assets pledged against the loans. The Company
recorded an impairment of 100% of the book value of the equity
investment and convertible loan receivable.
Employment Agreement
Vicente Agreements
On
December 18, 2014, the Company entered into an Executive Employment
Agreement with Joseph R. Vicente, the Company’s former
President and Chairman of the Board, which was effective as of
January 1, 2015 and was to terminate as of December 31, 2017,
unless earlier terminated by the Company or Mr. Vicente in
accordance with the agreement (the “Vicente Employment
Agreement”).
The
Vicente Employment Agreement provided for a base salary
equal to $135,000, as well as an
annual bonus opportunity, payable at the discretion of the Board of
Directors, equal to 30% of Mr. Vicente’s base salary for
that calendar year. Mr. Vicente had the option to receive any
portion of his salary and bonus in stock of the Company, which was
amended effective April 9, 2015 pursuant to
an Amendment to
Executive Employment Agreement whereby Mr. Vicente no longer had
the option in his sole discretion to receive his salary and bonus
amounts in stock
. The Vicente Employment Agreement includes
two-year restrictions on competition and solicitation of customers
following termination of the agreement.
Effective February 12, 2016 (the “Separation Date”),
the Company entered a Mutual Separation Agreement with Mr. Vicente
(the “Separation Agreement”). Pursuant to
the Separation Agreement, Mr. Vicente stepped down from his
positions as President and as a member of the
Board. Under the Separation Agreement, Mr. Vicente is
entitled to receive a severance, payable in equal monthly
installments over the twenty four month period post separation, in
an amount equal to all compensation paid by the Company to Mr.
Vicente for the 24 months preceding the termination, including
salary and bonus received by Mr. Vicente. Additionally,
the Company will pay for the value of his health insurance
premiums, in monthly installments, until the earlier of twenty-four
months after the Separation Date or until Mr. Vicente or his
dependents become eligible for group health insurance coverage
through a new employer. Mr. Vicente is also entitled to
payment of his salary through the Separation Date, payment for
unused vacation days, payment for any unreimbursed expenses, and a
bonus payment for work performed in calendar year 2015, payable
within sixty (60) days of the Company completing its fiscal 2015
audit.
Mr. Vicente remains subject to the restrictive covenants contained
in the Vicente Employment Agreement, including a covenant not to
compete and a non-solicitation provision, and is subject to
additional restrictive covenants in the Separation Agreement. In
2017, the Company paid Mr. Vicente
$142,724 in connection
with the severance, and the remaining amount payable as of December
31, 2017 is $23,787.
Operating Leases
On
January 21, 2014, the Company entered a First Amendment to Lease,
which extended its lease at the property located at 1857 Helm
Drive, Las Vegas (the “Property”), Nevada through
September 30, 2019. In connection with the amendment,
the Company received an abatement of the entire amount of its rent
for January 2014, except for CAM charges. In addition,
as of October 1, 2014, the Company’s monthly lease payments
reverted back to their rates as they existed in June 2009, other
than CAM charges, with annual adjustments thereafter as set
forth in the Amendment. Moreover, the Landlord had the option to
lease a portion of the premises then occupied by the Company to a
third party, and if this portion is leased to a third party, the
Company’s monthly rent amount was to be
reduced
pro
rata
with the portion of the space leased to a third
party. If the Landlord is unable to or elects not to
lease a portion of the premises to a third party by November 30,
2015 and by each subsequent anniversary thereof, the Company shall
receive an additional abatement of one month rent, excluding CAM
charges, in December 2015, December 2016 and December 2017,
respectively and as applicable. Effective May 15, 2016, the
Company entered a Second Amendment to Lease. The Second Amendment
to Lease sets forth that the square footage of the Property has
been reduced by 380 square feet, such that the Property now
consists of 16,523 square feet, confirms the abatements set forth
in the First Amendment to Lease, sets forth that the
Company’s Common Area Maintenance Expenses and HOA costs
shall be calculated based on the reduced square footage amount, and
confirms that the Company’s monthly rent amounts will remain
unchanged from the First Amendment to Lease.
The Company’s
monthly rent payments are approximately $15,451, which includes
Common Area Maintenance (CAM)
charges.
Commitments
for future minimum rental payments, by year, and in the aggregate,
to be paid under such operating lease as of December 31, 2017, are
as follows:
|
|
|
|
2018
|
191,006
|
2019
|
145,835
|
Total
|
$
336,841
|
The
Company’s rent expense was $162,899 and $177,394 during the
years ended December 31, 2017 and 2016, respectively.
Note 8. Stock Option Plan
Stock Option Plan
The
Company's Stock Option Plan permits the granting of stock options
to its employees, directors, consultants and independent
contractors for up to 8.0 million shares of its common stock. The
Company believes that such awards encourage employees to remain
employed by the Company and also to attract persons of exceptional
ability to become employees of the Company. On July 13, 2009, the
Company registered its 2009 Flexible Stock Plan, which increases
the total shares available to 4 million common shares. The
agreement allows the Company to issue either stock options or
common shares from this Plan.
On June
3, 2011, the Company registered its 2011 Flexible Stock Option
plan, and reserved 1,000,000 shares of the Company's common stock
for future issuance under the Plan. The Company canceled the
Company's 2010 Flexible Stock Plan and returned 501,991 reserved
but unused common shares back to its treasury.
Stock
options that vest at the end of a one-year period are amortized
over the vesting period using the straight-line method. For stock
options awarded using graded vesting, the expense is recorded at
the beginning of each year in which a percentage of the options
vests. The Company did not issue any stock options for the years
ended December 31, 2017 and 2016.
The
Company’s stock option activity was as follows:
|
|
Weighted
Average Exercise Price
|
Weighted Avg.
Contractual
Remaining
Life
|
Outstanding,
December 31, 2016
|
4,458,679
|
0.68
|
2.98
|
Granted
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
Forfeited/Expired
|
150,685
|
0.33
|
-
|
Outstanding,
December 31, 2017
|
4,307,994
|
0.69
|
2.06
|
Exercisable at
December 31, 2017
|
4,307,994
|
0.69
|
2.06
|
The
following table summarizes significant ranges of outstanding stock
options under the stock option plan at December 31,
2017:
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Weighted
Average
Exercise
Price
|
Number
of
Options
Exercisable
|
Weighted
Average
Exercise
Price
|
$
0.53 — 1.11
|
4,307,994
|
2.06
|
$
0.69
|
4,307,994
|
$
0.69
|
|
4,307,994
|
2.06
|
$
0.69
|
4,307,994
|
$
0.69
|
Note 9. Income Tax
The
components of income (loss) consists of the following:
|
|
|
|
|
Loss
from continuing operations
|
$
(1,616,561
)
|
$
(1,923,293
)
|
Income
from discontinued operations
|
2,023,973
|
2,025,535
|
Income
before taxes
|
$
407,412
|
$
102,242
|
The
difference between the provision for income taxes (benefit) and the
amount computed by applying the U.S. federal income tax rate for
the years ended December 31, 2017 and 2016 are as
follows:
|
|
|
|
|
Federal
income tax benefit/expense at statutory rate (34%)
|
34.0
%
|
34.0
%
|
State
income tax, net of federal benefit
|
--
|
--
|
Permanent
differences
|
2.1
|
(42.0
)
|
Federal rate
reduction under tax reform
|
1,314.0
|
--
|
Other
|
(220.5
)
|
(76.0
)
|
Change in valuation
allowance
|
(1,129.6
)
|
84.0
|
Effective income
tax rate
|
0.0
%
|
0.0
%
|
The
major components of the Company’s deferred tax assets as of
December 31, 2017 and 2016 are shown below.
|
|
|
Net
operating loss carryforwards
|
$
9,016,972
|
$
13,365,813
|
Other
deferred tax assets
|
22,350
|
475,280
|
Deferred
tax liabilities, long-lived assets
|
(391,532
)
|
(591,003
)
|
Valuation
allowance
|
(8,647,790
)
|
(13,250,090
)
|
Net
deferred tax assets
|
$
—
|
$
—
|
The
Company has evaluated the positive and negative evidence bearing
upon the realizability of its deferred tax assets. Under
applicable accounting standards, management has considered the
Company’s operational history and concluded that it is more
likely than not the Company will not recognize the benefits of its
deferred tax assets. Accordingly, a valuation allowance
of $8,647,790 and $13,250,090 was established at December 31, 2017
and 2016 respectively, to offset the net deferred tax assets. When
and if management determines that it is more likely than not that
the Company will be able to utilize a portion of the deferred tax
assets prior to their expiration, the valuation allowance may be
reduced or eliminated. The decrease in valuation allowance to
$204,578 for the year ending December 31, 2017 is primarily related
to the use of net operating loss carryforwards to offset current
year income. Additionally, the valuation allowance had a
reduction as a result of deferred tax assets revalued at the
reduced federal tax rate under the U.S. Tax Cuts and Jobs Act
enacted in December of 2017.
The
Company has U.S. federal net operation loss, or NOL, carryforwards
available at December 31, 2017 of approximately $42,937,966 that
will begin to expire in 2025. The Company has its operations in the
state of Nevada, which does not have state income taxes. The State
of Nevada has a gross receipts tax, which is included as a
component of operating expenses.
Utilization
of the net operating loss and research and development credit
carryforwards may be subject to a substantial annual limitation
under Section 382 of the Internal Revenue Code of 1986 due to
ownership change limitations that could occur in the
future. These future ownership changes may limit the
amount of net operating loss carryforwards that can be utilized
annually to offset future taxable income and tax,
respectively. To the extent an ownership change may
occur, the net operating loss, credit carryforwards and other
deferred tax assets may be subject to limitations.
On
December 22, 2017, President Trump signed into law the “Tax
Cuts and Jobs Act,” or TCJA, which significantly reforms the
Internal Revenue Code of 1986, as amended. The TCJA, among other
things, includes changes to U.S. federal tax rates, imposes
significant additional limitations on the deductibility of interest
and net operating loss carryforwards, allows for the expensing of
capital expenditures, and puts into effect the migration from a
“worldwide” system of taxation to a territorial
system.
The
TCJA permanently lowers the corporate federal income tax rate to
21% from the existing maximum rate of 35%, effective for tax years
including or commencing on January 1, 2018. As a result
of the reduction of the corporate federal income tax rate to 21%,
U.S. GAAP requires companies to revalue their deferred tax assets
and deferred tax liabilities as of the date of enactment, with the
resulting tax effects accounted for in the reporting period of
enactment. This revaluation resulted in a provision of
$4,602,300 to income tax expense in continuing operations and a
corresponding reduction of the Company’s valuation
allowance. As a result of the offsetting valuation
allowance, there is no impact to the Company’s income
statement for the year ended December 31, 2017 from the reduction
in federal income tax rates. The Company’s
preliminary estimate of the TCJA and the remeasurement of its
deferred tax assets and liabilities is subject to the finalization
of management’s analysis related to certain matters, such as
developing interpretations of the provisions of the TCJA, changes
to certain estimates and the filing of its tax
returns. U.S. Treasury regulations, administrative
interpretations or court decisions interpreting TCJA may require
further adjustments and changes to the Company’s
estimates. The final determination of TCJA and the
remeasurement of the Company’s deferred tax assets and
liabilities will be completed as additional information becomes
available, but no later than one year from the enactment of the
TCJA.
For the
years ending December 31, 2017 and 2016, the Company is not aware
of any uncertain tax positions or benefits. The Company’s
policy is to record estimated interest and penalties related to
uncertain tax benefits as income tax expense. As of
December 31, 2017, and 2016, the Company had no accrued interest or
penalties recorded related to uncertain tax positions.
The tax
years 2013 through 2017 remain open to examination by major taxing
jurisdictions to which the Company is subject, which are primarily
in the U.S. The statute of limitations for U.S. net operating
losses utilized in future years will remain open beginning in the
year of utilization.
Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted income tax rates in effect
for the year the temporary differences are expected to be recovered
or settled. Tax rate changes affecting deferred tax assets and
liabilities are recognized in the statement of operations at the
enactment date.
In 2017
and 2016, the Company incurred a tax effected net income of
$
407,412
and $
102,242
, respectively. At that time, the
Company neither had nor anticipated sufficient income to absorb the
benefits from net operating loss carryforwards, and established a
full valuation allowance. In 2018, if the sale of assets is
consummated, the portion of valuation allowance released related
due to a capital gain resulting from the sale of the cord blood and
stem cell operations would be a benefit and will be recorded in
continuing operations.
The
Company recognizes interest and/or penalties related to uncertain
tax positions in income tax expense. There were no uncertain tax
positions as of December 31, 2017 and 2016, and as such, no
interest or penalties were recorded to income tax
expense.
The tax
reform bill that Congress voted to approve December 20, 2017, also
known as the “Tax Cuts and Jobs Act”, made sweeping
modifications to the Internal Revenue Code, including a much lower
corporate tax rate, changes to credits and deductions, and a move
to a territorial system for corporations that have overseas
earnings.
The act
replaced the prior-law graduated corporate tax rate, which taxed
income over $10 million at 34%, with a flat rate of
21%.
The
Company files a U.S. federal income tax return and gross
receipts tax return in Nevada. The U.S. federal income tax returns
for years 2013 and prior are not subject to further examination by
the U.S. Internal Revenue Service. With few exceptions, the
Company is no longer subject to state and local or non-U.S. income
tax examinations by tax authorities for years before
2013.
Note 10. Other
Certain U.S. Federal Income Tax Consequences of the Sale of
Assets
The proposed sale of assets to FamilyCord will be a transaction
taxable to the Company for United States federal income tax
purposes. In general, the Company will recognize taxable gain in an
amount equal to the difference, if any, between (i) the total
amount realized by the Company on the Sale and (ii) the
Company’s aggregate adjusted tax basis in the assets sold.
The total amount realized by the Company on the Sale will equal the
cash the Company receives in exchange for the assets sold, plus the
amount of related liabilities assumed by the Buyer or cancelled in
the transaction. The Company expects that a portion of the taxable
gain recognized on the Sale will be offset by current year losses
from operations and available net operating loss carry forwards, as
currently reflected on our consolidated U.S. federal income tax
returns. However, the Company believes that a significant portion
of its net operating loss carryforwards will never be fully
utilized and will expire unused.
Shareholders will not be subject to U.S. federal income tax on the
Sale. However, as discussed below, Shareholders will be subject to
U.S. federal income tax upon the receipt of any distribution of
Sale proceeds made by the Company to the Shareholders.
Certain U.S. Federal Income Tax Consequences of the Sale of Assets
to U.S. Shareholders
For purposes of this discussion, a “U.S. shareholder”
is a beneficial owner of shares of Company stock who or that is,
for U.S. federal income tax purposes:
●
an
individual who is a citizen or resident of the United
States;
●
corporation,
or any other entity taxable as a corporation, created or organized
in or under the laws of the United States, any state thereof or the
District of Columbia;
●
an
estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
●
any
trust (i) if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons (as defined in the United States
Internal Revenue Code of 1986) have the authority to control all
substantial decisions of the trust, or (ii) if a valid election is
in place to treat the person as a United States
person.
Pursuant to the Asset Purchase Agreement, the Company may not
dissolve or liquidate for at least two years following closing of
the transaction. Therefore, prior to the Company’s adoption
of a plan of liquidation, each distribution made by the Company to
a U.S. shareholder is characterized as a dividend to the extent of
the Company’s current and accumulated earnings and profits
(as determined under U.S. federal income tax principles). Provided
that certain holding period requirements are satisfied, a dividend
received by a U.S. shareholder who is an individual, trust or
estate may qualify as “qualified dividend income” that
is currently subject to U.S. federal income tax at a maximum rate
of 20%. Dividends received by corporate U.S. shareholders may be
eligible for a dividend received deduction (subject to applicable
exceptions and limitations). Any portion of a distribution that
exceeds the Company’s current and accumulated earnings and
profits is treated as a non-taxable return of capital, reducing
such U.S. shareholder’s adjusted tax basis in its shares of
Company stock and, thereafter as gain from the sale or exchange of
Company stock.
If the Company adopts of a plan of liquidation in the future, the
tax consequences of each distribution to a U.S. shareholder will
change. The Company will provide an additional discussion of U.S.
federal income tax considerations if the Company adopts of a plan
of liquidation in the future.
Note 11. Stockholders’ Equity
Preferred Stock
The
Company has 5,000,000 shares of $0.0001 par value preferred stock
authorized. As of December 31, 2017 and 2016, the Company had no
preferred stock issued and outstanding.
Common Stock
As of
December 31, 2017 the Company had 2,890,000,000 shares of $$0.0001
par value common stock authorized. As of December 31, 2017 and
2016, the Company had 1,272,066,146 shares of common stock issued
and outstanding, and 20,000 shares remain in the Company’s
treasury.
Note 12. Subsequent Events
On February 7, 2018, Cord Blood America, Inc. (“CBAI”
or the “Company” or “We”) announced that it
entered into an Asset Purchase Agreement, dated as of February 6,
2018 (the “Purchase Agreement”), with California
Cryobank Stem Cell Services LLC
(“FamilyCord”).
Pursuant to the terms of the Purchase Agreement, FamilyCord agreed
to acquire from CBAI substantially all of the assets of CBAI and
its wholly-owned subsidiaries and to assume certain liabilities of
CBAI and its wholly-owned subsidiaries. The sale does not include
CBAI’s cash and certain other excluded assets and
liabilities. FamilyCord agreed to pay a purchase price of
$15,500,000 in cash at closing with $3,000,000 of the purchase
price deposited into escrow to secure CBAI’s indemnification
obligations under the Purchase Agreement. The sale, which is
subject to the closing conditions described below, is expected to
close as soon as practicable, but likely during the second quarter
of 2018.
The Purchase Agreement contains customary representations,
warranties and covenants for a transaction of this type and nature.
Pursuant to the terms of the Purchase Agreement, CBAI shall
indemnify FamilyCord for breaches of its representations and
warranties, breaches of covenants, losses related to excluded
assets or excluded liabilities and certain other matters. The
representations and warranties set forth in the Purchase Agreement
generally survive for two years following the closing.
In connection with the sale, the parties will also enter into a
transition services agreement designed to ensure a smooth
transition of CBAI’s business from CBAI to
FamilyCord.
The consummation of the sale is dependent upon the satisfaction or
waiver of a number of closing conditions, including among other
things, approval by CBAI’s shareholders, receipt of certain
third-party consents and FamilyCord obtaining external financing.
The Purchase Agreement may be terminated at any time prior to the
date of closing by mutual agreement of the parties, or by either
party under certain circumstances set forth in the Purchase
Agreement, including by either party if the closing has not
occurred within six months of the execution of the Purchase
Agreement, by FamilyCord for CBAI’s failure to obtain its
shareholders’ approval of the asset sale, by FamilyCord if
CBAI pursues an alternative superior transaction or by FamilyCord
if it is unable to obtain necessary financing. The Purchase
Agreement also sets forth termination fees that may be payable by
one party to the other under certain circumstances of
termination.
A copy of the Purchase Agreement was attached as Exhibit 2.1 to the
Form 8-K filed by the Company on February 8, 2018.
The Red
Oak Fund, LP, The Red Oak Long Fund, LP and Pinnacle Opportunities
Fund, LP (collectively, the “Shareholders”), which own
164,073,684, 76,226,316 and 140,752,632 shares of CBAI’s
common stock, respectively, or approximately 30.0% of CBAI’s
issued and outstanding common stock in the aggregate, and each of
which are affiliates of Red Oak Partners, LLC, entered into a
voting agreement (the “Voting Agreement”) with
FamilyCord and CBAI on February 6, 2018, pursuant to which the
Shareholders have agreed, among other things, to vote their shares
(the “Covered Shares”) in favor of the asset sale and
grant to FamilyCord an irrevocable proxy with respect to their
respective Covered Shares.
Assets
and liabilities included in the Purchase Agreement are now
classified as assets and liabilities held for sale and operations
related to these assets and liabilities are classified as
discontinued operations for all years presented.
Upon
closing of the transaction, the Company will have no or nominal
operations and no or nominal assets and will therefore considered
to be a “Shell Company” as that term is defined in Rule
12b-2 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).