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| CCEL > SEC Filings for CCEL > Form 10-Q on 16-Jul-2012 | All Recent SEC Filings |
16-Jul-2012
Quarterly Report
Overview
The Company is engaged in cellular processing and cryogenic storage, with a current focus on the collection and preservation of umbilical cord blood stem cells for family use. The Company's principal sources of revenues are service fees for cord blood processing and preservation for new customers and
recurring annual storage fees. Effective February 1, 2012, the Company charges fees of $2,074 to new clients for the collection kit, processing and testing and return medical courier service, with discounts in the case of multiple children from the same family and in other circumstances. The Company currently charges an annual storage fee of $125 for new clients; storage fees for existing customers depend on the contracts with such customers. The Company also offers a one-time payment plan, where the client is charged $3,949 with 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 Company also receives other income from licensing fees and royalties from global affiliates.
In recent years, the Company has expanded its research and development activities to develop technologies related to stem cells harvested from sources beyond umbilical cord blood stem cells. In 2006, the Company discovered novel technology related to menstrual stem cells. During 2007, much of the Company's research and development activities focused on the development of proprietary technology related to maternal placental stem cells (MPSCs). In November 2007, the Company announced the commercial launch of the menstrual stem cell service related to this patent-pending technology. The Company continues to focus independently-funded research and development activities through a vast network of research collaboration partners.
In August 2011, there was a change in control of the Board of Directors. The Company is refocusing its efforts on the Company's umbilical cord blood and cord tissue business while continuing to develop the menstrual stem cell technology.
During the six months ended May 31, 2012, total revenue decreased 5% as compared to the same period in 2011. The Company reported a net loss of approximately $4,900,000, or ($.43) per basic common share for the six months ended May 31, 2012 compared to net income of approximately $411,000 or $.03 per basic common share for the same period in 2011. The decrease in net income for the six months ended May 31, 2012 principally resulted from the cancellation of certain interests in the Illinois Revenue Sharing Agreement and the Bio-Stor Revenue Sharing Agreement resulting in extinguishment of debt in the amount of approximately $1,300,000, a 40% increase in selling, general and administrative expenses, due mainly to an increase in stock option compensation and the increase in sales and marketing initiatives including the implementation of a national sales force. The increase in stock option expense is mainly the result of the Nomination of Solicitation Notice received from Mr. Ki Yong Choi on May 30, 2012 nominating himself and five other persons for election as directors to compete with the Company's board of directors at the 2012 Annual Meeting on July 10, 2012. Pursuant to the Co-CEOs employment agreements, if the Company receives a Nomination of Solicitation Notice, as defined by the Company's Bylaws, all of the service-based vesting condition options that have been issued to the Co-CEOs will immediately vest. Included in stock option expense is approximately $700,000 that is due to the immediate vesting of options issued to the Co-CEOs. Also, during the second quarter of fiscal 2012, the Company reserved approximately $1.7 million of its deferred tax assets. The decision to reserve the deferred tax asset is based on the accounting standards surrounding income taxes that require a company to consider whether it is more likely than not that the deferred tax assets will be realized. The Company has made certain strategic decisions in fiscal 2011 and fiscal 2012 concerning the negotiated termination of some of the perpetual Revenue Sharing Agreements, the impairment of internal use software that is being replaced with a technology platform that is better suited for the Company's business needs and the implementation of a national sales force in order to generate growth and future value of the stockholders. The strategic decisions, as well as the costs associated with the 2011 proxy contest and the accrual of severance associated with termination of the Company's former Chief Executive Officer, resulted in losses in the past few quarters in late fiscal 2011 and the first six months of fiscal 2012. Once a company has had cumulative losses in recent years, regardless if the loss was planned for strategic purposes, the accounting standard does not allow the Company to put significant reliance on future taxable income projections to overcome the more likely than not threshold that the deferred tax assets will be realized. This is partially offset by a 1% decrease in cost of sales. In addition, research and development expenses were approximately $22,000 for the six months ended May 31, 2012, a decrease of approximately $94,000 or 81% in comparison to the same period in 2011.
At May 31, 2012, the Company had cash and cash equivalents of $2,801,757. The Company's cash decreased by approximately $3,500,000 during the first six months of fiscal 2012, primarily as a result of the payment of $2,576,000 for the cancellation of certain interests in certain Revenue Sharing Agreements and the stock repurchase plan pursuant to which the Company has repurchased 674,379 shares of the Company's common stock for approximately $1,400,000. As of May 31, 2012, the Company had no long-term indebtedness.
Results of Operations-Six Month Period Ended May 31, 2012 Compared to the Six Month Period Ended May 31, 2011
Revenues. Revenues for the six months ended May 31, 2012 were $8,604,138 as compared to $9,073,831 for the same period in 2011. The decrease in revenue was primarily attributable to a 5% decrease in processing and storage fees, which was partially offset by a 5% increase in licensee income.
Processing and Storage Fees. The decrease in processing and storage fee revenue is primarily attributable to a decrease in specimens processed of 23%, partially offset by a 7% increase in recurring annual storage fee revenue and a decrease in sales discounts of 36% for the fiscal 2012 period compared to the 2011 period. Sales discounts represent discounts to returning clients and promotions offered to newly enrolled clients from time to time.
Licensee Income. Licensee income for the six months ended May 31, 2012, was $660,875 as compared to $627,390 for the 2011 period. Licensee income for the six months ended May 31, 2012 primarily consisted of $645,875 in royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The remaining licensee income of $15,000 related to installment payments of non-refundable up-front license fees from the licensees of the Company's umbilical cord blood program in Nicaragua. Licensee income for the six months ended May 31, 2011 primarily consisted of $557,621 in royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The remaining licensee income of $69,769 related to installment payments of non-refundable up-front license fees from the licensees of the Company's umbilical cord blood program in Nicaragua and Germany.
Cost of Sales. Cost of sales for the six months ended May 31, 2012 was $2,236,803 as compared to $2,265,278 for the same period in 2011, representing a 1% decrease. Cost of sales was 26% of revenues for the six months ended May 31, 2012 and 25% for the six months ended May 31, 2011. 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 $107,000 and $109,000 for the six months ended May 31, 2012 and 2011, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended May 31, 2012 were $7,445,493 as compared to $5,216,294 for the 2011 period representing a 43% increase. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees. The increase in selling, general and administrative expenses is primarily due to an increase of approximately $1,300,000 or 67% in sales and marketing due to the Company's new sales and marketing initiatives including the implementation of a national sales force and an increase of approximately $926,000 in noncash stock option expense. The increase in stock option expense is mainly the result of the Nomination of Solicitation Notice received from Mr. Ki Yong Choi on May 30, 2012 nominating himself and five other persons for election as directors to compete with the Company's board of directors at the 2012 Annual Meeting on July 10, 2012. Pursuant to the Co-CEOs employment agreements, if the Company receives a Nomination of Solicitation Notice, as defined by the Company's Bylaws, all of the service-based vesting condition options that have been issued to the Co-CEOs will immediately vest. Included in stock option expense is approximately $700,000 that is due to the immediate vesting of options issued to the Co-CEOs. The increase in selling, general and administrative expenses was partially offset by an approximate $291,000 or 53% decrease in legal and investor relations services and a decrease in consumer advertising of $400,000 or 36%.
Research, Development and Related Engineering Expenses. Research, development and related engineering expenses for the six months ended May 31, 2012 were $22,420 as compared to $116,279 for the 2011 period representing an 81% decrease. The expenses for the six months ended May 31, 2012 and 2011 are primarily comprised of expenses related to the continued commercialization of the Company's menstrual stem cell technology, which was launched in November 2007 and the Company's new product, cord tissue.
Depreciation and Amortization. Depreciation and amortization (not included in Cost of Sales) for the six months ended May 31, 2012 was $101,090 compared to $160,016 for the 2011 period. The decrease was caused by a portion of the Company's property and equipment becoming fully depreciated during fiscal 2011.
Extinguishment of Revenue Sharing Agreements. In December 2011, the Company entered into an Asset Purchase Agreement with Bio-Stor canceling the Bio-Stor Revenue Sharing Agreement. Pursuant to the terms of the Asset Purchase Agreement, on December 6, 2011, the Company made a one-time, lump-sum payment in the amount of $2.3 million to Bio-Stor, and Bio-Stor sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in the Bio Stor Revenue Sharing Agreement. In May 2012, the Company entered into Asset Purchase Agreements with two investors who each had a
22% interest in 45% of the Illinois Revenue Sharing Agreement ("Illinois RSA"). Pursuant to the terms of the Asset Purchase Agreements, in May 2012, the Company made a one-time, lump-sum payment in the amount of $138,000 to each of the investors, and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their 22% interest of 45% of the Illinois RSA. The total payment amount of $2,576,000 was offset by the carrying amount of the short-term liability related to Bio-Stor and the Illinois Revenue Sharing Agreements in the amount of $1,100,000 and an accrued expense in the amount of $194,055 to reflect the extinguishment of revenue sharing agreements in the amount of $1,281,945 for the six months ended May 31, 2012.
Interest Expense. Interest expense during the six months ended May 31, 2012, was $576,416 compared to $791,430 during the comparable period in 2011. Interest expense is mainly comprised of amounts due to the parties to the Company's revenue sharing agreements ("RSAs") based on the Company's storage revenue. The decrease of 27% is a result of the extinguishment of the revenue sharing agreements. Also included in interest expense is the amortization of the present value of a deferred consulting agreement in the amount of $5,533 for both the six months ended May 31, 2012 and 2011.
Equity in Losses of Affiliate. Equity in losses of affiliate was $77,664 for the six months ended May 31, 2012, compared to $56,212 for the 2011 period. Equity in losses of affiliate for the six months ended May 31, 2012 and 2011, solely consists of amounts related to compensation expense for Saneron stock option awards that were granted by Saneron to certain consultants and employees.
Income Taxes. 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 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 $82,029 and $69,880 for the six months ended May 31, 2012 and 2011, respectively, of foreign income tax expense which is included in income tax expense in the accompanying consolidated statements of operations for the three and six months ended May 31, 2012.
The Company has made certain strategic decisions during 2011 and 2012 concerning the negotiated termination of some of the perpetual Revenue Sharing Agreements ("RSA's"), the impairment of internal use software that is being replaced with a technology platform that is better suited for the Company's business needs and the implementation of a national sales force in order to generate growth and future value for the Company's stockholders. These strategic decisions, including the decision to terminate the former CEO's employment, resulted in losses in the past few quarters in late fiscal 2011 and the first six months of fiscal 2012. The accounting standards surrounding income taxes require a company to consider whether it is more likely than not that the deferred tax assets will be realized. Once a company has had cumulative losses in recent years, regardless of the nature of the loss, the accounting standards do not allow the Company to put significant reliance on future taxable income projections to overcome the more likely than not threshold that the deferred tax assets will be realized. As a result of these recent cumulative losses, the Company reserved approximately $1,700,000 as of May 31, 2012 resulting in a charge to earnings during the three months ended May 31, 2012.
There was $1,718,919 of U.S. income tax expense recorded for the three and six months ended May 31, 2012 as a result of the Company's decision to record a valuation allowance associated with certain of the Company's deferred tax assets during the second quarter of 2012, as it is more likely than not that the deferred tax assets will not be realized.
There was no U.S. income tax expense or benefit for the six months ended May 31, 2011. The Company did not record U.S. income tax expense or benefit during the six months ended May 31, 2011 due to the utilization of net operating losses and foreign tax credit carryforwards, which were previously reserved through valuation allowances in the Company's financial statements.
Results of Operations-Three Month Period Ended May 31, 2012 Compared to the Three Month Period Ended May 31, 2011
Revenues. Revenues for the three months ended May 31, 2012 were $4,425,549 as compared to $4,601,026 for the same period in 2011. The decrease in revenue was primarily attributable to a 4% decrease in processing and storage fees offset by a 5% increase in licensee income.
Processing and Storage Fees. The decrease in processing and storage fee revenue is primarily attributable to a decrease in specimens processed of 23%, partially offset by a 32% decrease in sales discounts as well a 7% increase in recurring annual storage fee revenue for the three months ended May 31, 2012 compared to the 2011 period. Sales discounts represent discounts to returning clients and promotions offered to newly enrolled clients.
Licensee Income. Licensee income for the three months ended May 31, 2012, was $319,133 as compared to $304,370 for the 2011 period. Licensee income for the three months ended May 31, 2012 primarily consisted of $309,133 in royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The remaining licensee income of $10,000 related to installment payments of non-refundable up-front license fees from the licensees of the Company's umbilical cord blood program in Nicaragua. Licensee income for the three months ended May 31, 2011 primarily consisted of $239,601 in royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The remaining licensee income of $64,769 related to installment payments of non-refundable up-front license fees from the licensees of the Company's umbilical cord blood program in Nicaragua and Germany.
Cost of Sales. Cost of sales for the three months ended May 31, 2012 was $1,209,900 as compared to $1,103,758 for the same period in 2011, representing a 10% increase. Cost of sales was 27% of revenues for the three months ended May 31, 2012 and 24% for the three months ended May 31, 2011. 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 $53,000 and $54,000 for the three months ended May 31, 2012 and 2011, respectively. The increase in cost of sales is primarily attributable to process enhancements during the three months ended May 31, 2012 compared to the 2011 period.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended May 31, 2012 were $4,284,696 as compared to $2,698,209 for the 2011 period representing a 59% increase. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees. The increase in selling, general and administrative expenses is primarily due to an increase of approximately $823,000 or 82% in sales and marketing due to Company's new sales initiatives including the implementation of a national sales force and an increase of approximately $726,000 in non-cash stock option expense. The increase in stock option expense is mainly the result of the Nomination of Solicitation Notice received from Mr. Ki Yong Choi on May 30, 2012 nominating himself and five other persons for election as directors to compete with the Company's board of directors at the 2012 Annual Meeting on July 10, 2012. Pursuant to the Co-CEOs employment agreements, if the Company receives a Nomination of Solicitation Notice, as defined by the Company's Bylaws, all of the service-based vesting condition options that have been issued to the Co-CEOs will immediately vest. Included in stock option expense is approximately $700,000 that is due to the immediate vesting of options issued to the Co-CEOs. The increase in selling, general and administrative expenses was partially offset by an approximate $179,000 or 62% decrease in legal and investor relations services and a decrease in consumer advertising of $425,000 or 88%.
Research, Development and Related Engineering Expenses. Research, development and related engineering expenses for the three months ended May 31, 2012 were $7,841 as compared to $80,657 for the 2011 period. The expenses for the three months ended May 31, 2011 and 2010 are primarily comprised of expenses related to the continued commercialization of the Company's menstrual stem cell technology, which was launched in November 2007 and the Company's new product, cord tissue.
Depreciation and Amortization. Depreciation and amortization (not included in Cost of Sales) for the three months ended May 31, 2012 was $44,835 compared to $88,190 for the 2011 period. The decrease was caused by a portion of the Company's property and equipment becoming fully depreciated during fiscal 2011.
Extinguishment of Revenue Sharing Agreements. In May 2012, the Company entered into Asset Purchase Agreements with two investors who each had a 22% interest in 45% of the Illinois Revenue Sharing Agreement ("Illinois RSA"). Pursuant to the terms of the Asset Purchase Agreements, in May 2012, the Company made a one-time, lump-sum payment in the amount of $138,000 to each of the investors, and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their 22% interest of 45% of the Illinois RSA. The payment amounts of $276,000 was offset by the carrying amount of the short-term liability related to the Illinois Revenue Sharing Agreements in the amount of $200,000 and an accrued expense in the amount of $21,445 to reflect the extinguishment of revenue sharing agreements in the amount of $54,555 for the three months ended May 31, 2012.
Interest Expense. Interest expense during the three months ended May 31, 2012, was $277,251 compared to $399,416 during the comparable period in 2011. Interest expense is mainly comprised of payments made to the other parties to the Company's RSAs based on the Company's storage revenue. The decrease of 31% is a result of the extinguishment of the revenue sharing agreements. Also included in interest expense is the amortization of the present value of a deferred consulting agreement in the amount of $2,743 for both the three months ended May 31, 2012 and 2011.
Equity in Losses of Affiliate. Equity in losses of affiliate was $38,832 for the three months ended May 31, 2012, compared to $28,122 for the 2011 period. Equity in losses of affiliate for the three months ended May 31, 2012 and 2011, solely consists of amounts related to compensation expense for stock option awards that were granted by Saneron to certain consultants and employees.
Income Taxes. 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 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 $24,884 and $31,019 for the three months ended May 31, 2012 and 2011, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of operations. The decrease in foreign tax expense is attributable to the decrease in royalties recognized during the period ended May 31, 2012 compared to May 31, 2011.
The Company has made certain strategic decisions during 2011 and 2012 concerning the negotiated termination of some of the perpetual Revenue Sharing Agreements ("RSA's"), the impairment of internal use software that is being replaced with a technology platform that is better suited for the
Company's business needs and the implementation of a national sales force in order to generate growth and future value for the Company's stockholders. These strategic decisions, including the decision to terminate the former CEO's employment, resulted in losses in the past few quarters in late fiscal 2011 and the first six months of fiscal 2012. The accounting standards surrounding income taxes require a company to consider whether it is more likely than not that the deferred tax assets will be realized. Once a company has had cumulative losses in recent years, regardless of the nature of the loss, the accounting standards do not allow the Company to put significant reliance on future taxable income projections to overcome the more likely than not threshold that the deferred tax assets will be realized. As a result of these recent cumulative losses, the Company reserved approximately $1,700,000 as of May 31, 2012 resulting in a charge to earnings during the three months ended May 31, 2012.
There was $1,718,919 of U.S. income tax expense recorded for the three months ended May 31, 2012 as a result of the Company's decision to record a valuation allowance associated with certain of the Company's deferred tax assets during the second quarter of 2012, as it is more likely than not that the deferred tax assets will not be realized.
There was no U.S. income tax expense or benefit for the three months ended May 31, 2011. The Company did not record U.S. income tax expense or benefit during the three months ended May 31, 2011 due to the utilization of net operating losses and foreign tax credit carryforwards, which were previously reserved through valuation allowances in the Company's financial statements.
Liquidity and Capital Resources
Through May 31, 2012, the Company's principal source of cash has been from sales of its umbilical cord blood program to customers, the sale of license agreements and royalties from licensees. The Company does not expect a change in its principal source of cash flow.
At May 31, 2012, the Company had cash and cash equivalents of $2,801,757 as compared to $6,305,095 at November 30, 2011. The decrease in cash and cash equivalents during the six months ended May 31, 2012 was primarily attributable to the following:
Net cash used in operating activities for the six months ended May 31, 2012 was $384,979 which was primarily attributable to the Company's net loss, partially offset by non-cash expenses and implementation of interest-free financing plans and increases in working capital components.
Net cash provided by operating activities for the six months ended May 31, 2011 was $238,538, which was primarily attributable to the Company's net income and non-cash expenses, partially offset by increases in working capital components.
Net cash provided by investing activities for the six months ended May 31, 2012 was $858,112, which was primarily attributable to the sale of marketable securities which was partially offset by the purchase of property and equipment and the investment in patents and trademarks.
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