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| CCEL > SEC Filings for CCEL > Form 10-Q on 15-Oct-2012 | All Recent SEC Filings |
15-Oct-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 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 nine months ended August 31, 2012, total revenue decreased 2% as compared to the same period in 2011. The Company reported a net loss of approximately ($5,500,000), or ($.48) per basic common share for the nine months ended August 31, 2012 compared to a net loss of approximately ($1,971,568) or ($.17) per basic common share for the same period in 2011. The increase in net loss for the
nine months ended August 31, 2012 principally resulted from the cancellation of certain interests in the Illinois Revenue Sharing Agreement, the Bio-Stor Revenue Sharing Agreement and the interest in the Revenue Sharing Agreement for the state of New York resulting in extinguishment of debt in the amount of approximately $1,600,000, a 3% 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 by the Company nominating six individuals for election as directors to compete with the Company's board of directors at the 2012 Annual Meeting. 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 were issued to the Co-CEOs 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 for the Company's 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 fiscal 2011 and the first nine 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 35% decrease in interest expense which is a result of the cancellation of certain interests in the Revenue Sharing Agreements. In addition, research and development expenses were approximately $88,000 for the nine months ended August 31, 2012, a decrease of approximately $80,000 or 48% in comparison to the same period in 2011.
At August 31, 2012, the Company had cash and cash equivalents of $2,707,608. The Company's cash decreased by approximately $3,600,000 during the first nine months of fiscal 2012, primarily as a result of the payment of $3,200,000 for the cancellation of certain interests in certain Revenue Sharing Agreements and the stock repurchase plan pursuant to which the Company has repurchased 705,150 shares of the Company's common stock for approximately $1,470,000. As of August 31, 2012, the Company had no long-term indebtedness.
Results of Operations - Nine Month Period Ended August 31, 2012 Compared to the Nine Month Period Ended August 31, 2011
Revenues. Revenues for the nine months ended August 31, 2012 were $13,146,429 as compared to $13,481,829 for the same period in 2011. The decrease in revenue was primarily attributable to a 3% decrease in processing and storage fees, which was partially offset by a 6% increase in licensee income which was largely due to timing of the execution of licensee agreements and payment terms of up-front fees.
Processing and Storage Fees. The decrease in processing and storage fee revenue is primarily attributable to a decrease in specimens processed of 28%, partially offset by a 7% increase in recurring annual storage fee revenue and a decrease in sales discounts of 29% 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 nine months ended August 31, 2012, was $1,017,256 as compared to $962,297 for the 2011 period. Licensee income for the nine months ended August 31, 2012 primarily consisted of $972,256 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 $45,000 related to installment payments of non-refundable up-front license fees from the licensees of the Company's umbilical cord blood program in Costa Rica and Nicaragua. Licensee income for the nine months ended August 31, 2011 primarily consisted of $926,545 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 $35,752 related to installment payments of non-refundable up-front license fees from the licensees of the Company's umbilical cord program in Costa Rica, Nicaragua and Germany.
Cost of Sales. Cost of sales for the nine months ended August 31, 2012 was $3,563,111 as compared to $3,459,570 for the same period in 2011, representing a 3% increase. Cost of sales was 27% of revenues for the nine months ended August 31, 2012 and 26% for the nine months ended August 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 $159,000 and $164,000 for the nine months ended August 31, 2012 and 2011, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended August 31, 2012 were $10,505,171 as compared to $10,175,920 for the 2011 period representing a 3% 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 $1,700,000 or 61% 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 $666,000 in noncash stock option expense. The increase in stock option expense is mainly the result of the Nomination of Solicitation Notice received by the Company nominating six individuals for election as directors to compete with the Company's board of directors at the 2012 Annual Meeting. 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 were issued to the Co-CEOs 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 $392,000 or 53% decrease in legal and investor relations services and a decrease of approximately $673,000 or 72% in fees associated with the annual meeting. The fees associated with the 2012 Annual Meeting were approximately $266,000 compared to approximately $940,000 for the 2011 Annual Meeting. The total fees expended for the 2011 Annual Meeting included the reimbursement by the Company to the Portnoy Group of its costs associated with the 2007 and 2011 Annual Meetings of approximately $528,000. In addition to this reimbursement, the Company incurred approximately $412,000 in fees associated with the 2011 Annual Meeting. Also included in selling, general and administrative expenses for the nine months ended August 31, 2011 was an approximate $950,000 accrual of severance in accordance with Mercedes Walton's, the Company's former Chairman and CEO's, employment agreement dated August 15, 2005, as amended July 16, 2007. Per the employment agreement, Ms. Walton could be entitled to severance in the amount up to $950,000 related to lost salary, bonuses and benefits. The Company believes that Ms. Walton was terminated for cause and therefore, the Company believes that Ms. Walton has not earned the right to this severance and intends to defend itself against the agreement.
Research, Development and Related Engineering Expenses. Research, development and related engineering expenses for the nine months ended August 31, 2012 were $88,466 as compared to $168,515 for the 2011 period representing a 48% decrease. The expenses for the nine months ended August 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 nine months ended August 31, 2012 was $152,906 compared to $264,700 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. During the nine months ended August 31, 2012, the Company entered into Asset Purchase Agreements with certain investors canceling their respective Revenue Sharing Agreements. Pursuant to the terms of the Asset Purchase Agreements, the Company made one-time, lump-sum payments in the amount of $3,054,000 to the investors. The remaining balance of $194,000 is due to the investors one-year from the date of the Asset Purchase Agreements, and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their interests in the RSAs. The total payment amount of $3,248,000 was offset by the carrying amount of the short-term liability related to the Revenue Sharing Agreements in the amount of $1,450,000 and an accrued expense in the amount of $202,394 to reflect the extinguishment of revenue sharing agreements in the amount of $1,595,606 for the nine months ended August 31, 2012.
Interest Expense. Interest expense during the nine months ended August 31, 2012, was $782,130 compared to $1,200,927 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. Also included in interest expense is the amortization of the present value of a deferred consulting agreement in the amount of $1,663 and $7,437 for the nine months ended August 31, 2012 and 2011, respectively. During the third quarter of fiscal 2012, the Company fulfilled its obligation of the deferred consulting agreement.
Equity in Losses of Affiliate. Equity in losses of affiliate was $116,114 for the nine months ended August 31, 2012, compared to $92,214 for the 2011 period. Equity in losses of affiliate for the nine months ended August 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. 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 $126,887 and $108,831 for the nine months ended August 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 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 fiscal 2011 and the first nine 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 during the second quarter of fiscal 2012 resulting in a charge to earnings during the nine months ended August 31, 2012.
There was $1,718,919 of U.S. income tax expense recorded for the nine months ended August 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 for the nine months ended August 31, 2011 as the Company incurred a tax loss which resulted in an increase to the net operating loss deferred tax asset, which was offset by an increase to the valuation allowance.
Results of Operations - Three Month Period Ended August 31, 2012 Compared to the Three Month Period Ended August 31, 2011
Revenues. Revenues for the three months ended August 31, 2012 were $4,542,291 as compared to $4,407,998 for the same period in 2011. The increase in revenue was primarily attributable to a 3% increase in processing and storage fees.
Processing and Storage Fees. The increase in processing and storage fee revenue is primarily attributable to an increase in the average selling price of specimens processed during the three months ended August 31, 2012 compared to the same period in 2011 and an increase of 6% in recurring annual storage fees compared to the three months ended August 31, 2011. This is partially offset by a decrease in specimens processed of 26% for the three months ended August 31, 2012 compared to the 2011 period.
Licensee Income. Licensee income for the three months ended August 31, 2012, was $356,381 as compared to $334,907 for the 2011 period. Licensee income for the three months ended August 31, 2011 primarily consisted of $326,381 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 $30,000 related to installment payments of non-refundable up-front license fees from the licensee of the Company's umbilical cord blood program in Costa Rica. Licensee income for the three months ended August 31, 2011 primarily consisted of $318,924 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 $15,983 related to installment payments of non-refundable up-front license fees from the licensee of the Company's umbilical cord blood program in Costa Rica.
Cost of Sales. Cost of sales for the three months ended August 31, 2012 was $1,326,308 as compared to $1,194,292 for the same period in 2011, representing an 11% increase. Cost of sales was 29% of revenues for the three months ended August 31, 2012 and 27% for the three months ended August 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 $52,000 and $55,000 for the three months ended August 31, 2012 and 2011, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended August 31, 2012 were $3,059,678 as compared to $4,959,626 for the 2011 period representing a 38% decrease. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees. The decrease in selling, general and
administrative expenses is due in part to an approximate $101,000 or 53% decrease in legal and investor relations services. Also contributing to the decrease in selling, general and administrative expenses are the fees associated with the 2012 Annual Meeting which were approximately $266,000 compared to approximately $940,000 for the 2011 Annual Meeting. The total fees expended for the 2011 Annual Meeting included the reimbursement by the Company to the Portnoy Group of its costs associated with the 2007 and 2011 Annual Meetings of approximately $528,000. In addition to this reimbursement, the Company incurred approximately $412,000 in fees associated with the 2011 Annual Meeting. Also included in selling, general and administrative expenses for the three months ended August 31, 2011 was an approximate $950,000 accrual of severance in accordance with Mercedes Walton's, the Company's former Chairman and CEO's, employment agreement dated August 15, 2005, as amended July 16, 2007. Per the employment agreement, Ms. Walton could be entitled to severance in the amount up to $950,000 related to lost salary, bonuses and benefits. The Company believes that Ms. Walton was terminated for cause and therefore, the Company believes that Ms. Walton has not earned the right to this severance and intends to defend itself against the agreement. For the three months ended August 31, 2011, a write-off of approximately $208,000 was included in selling, general and administrative expenses for the abandonment of certain patents and trademarks that management made the decision not to pursue. The decrease in selling, general and administrative expenses for the three months ended August 31, 2012 was partially offset by an increase of approximately $435,000 or 48% in sales and marketing due to the Company's new sales initiatives including the implementation of a national sales force.
Research, Development and Related Engineering Expenses. Research, development and related engineering expenses for the three months ended August 31, 2012 were $66,046 as compared to $52,236 for the 2011 period. The expenses for the three months ended August 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 three months ended August 31, 2012 was $51,816 compared to $104,684 for the 2012 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. During the three months ended August 31, 2012, the Company entered into Asset Purchase Agreements with certain investors canceling their respective Revenue Sharing Agreements. Pursuant to the terms of the Asset Purchase Agreements, the Company made one-time, lump-sum payments in the amount of $478,000 to the investors. The remaining balance of $194,000 is due to the investors one-year from the date of the Asset Purchase Agreements, and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their interests in the RSAs. The total payment amount of $672,000 was offset by the carrying amount of the short-term liability related to the Revenue Sharing Agreements in the amount of $350,000 and an accrued expense in the amount of $8,339 to reflect the extinguishment of revenue sharing agreements in the amount of $313,661 for the three months ended August 31, 2012.
Interest Expense. Interest expense during the three months ended August 31, 2012, was $205,714 compared to $409,497 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. Also included in interest expense is the amortization of the present value of a deferred consulting agreement in the amount of $74 and $1,904 for the three months ended August 31, 2012 and 2011, respectively. During the three months ended August 31, 2012, the Company fulfilled its obligation of the deferred consulting agreement.
Equity in Losses of Affiliate. Equity in losses of affiliate was $38,450 for the three months ended August 31, 2012, compared to $36,002 for the 2011 period. Equity in losses of affiliate for the three months ended August 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. 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 $44,858 and $38,951 for the three months ended August 31, 2012 and 2011, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of operations.
There was no U.S. income tax expense for the three months ended August 31, 2012 and August 31, 2011. The Company did not record U.S. income tax expense during the third quarter of 2012 or 2011 due to the utilization of net operating losses and foreign tax credit carry forwards, which were not previously benefited in the Company's financial statements.
Liquidity and Capital Resources
Through August 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 August 31, 2012, the Company had cash and cash equivalents of $2,707,608 as compared to $6,305,095 at November 30, 2011. The decrease in cash and cash equivalents during the nine months ended August 31, 2012 was primarily attributable to the following:
Net cash provided by operating activities for the nine months ended August 31, 2012 was $39,596, which was primarily attributable to non-cash expenses, partially offset by increases in working capital components.
Net cash provided by operating activities for the nine months ended August 31, 2011 was $459,741, which was primarily attributable to the Company's operating activities.
Net cash provided by investing activities for the nine months ended August 31, 2012 was $887,643, 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.
Net cash used in investing activities for the nine months ended August 31, 2011 was $2,978,550, which was primarily attributable to the funding a trust in the amount of $2,500,000 to escrow amounts that may become payable to certain participants under their respective Employment Agreements as a result of a change in control.
Net cash used in financing activities for the nine months ended August 31, 2012 was $4,524,726, which was primarily attributable to the payment of $3,054,000 for the cancellation of certain interests in certain Revenue Sharing Agreements and the stock repurchase plan pursuant to which the Company has repurchased 705,150 shares of the Company's common stock for approximately $1,471,000.
Net cash provided by financing activities for the nine months ended August 31, 2011 was $22,762 due to the exercise of stock options.
The Company does not have a line of credit.
The Company anticipates making discretionary capital expenditures of approximately $750,000 over the next twelve months for software enhancements and purchases of property and equipment. The Company anticipates funding future property and equipment purchases with cash-on-hand and cash flows from future operations.
The Company anticipates that its cash and cash equivalents, marketable . . .
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