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| CCEL > SEC Filings for CCEL > Form 10-K on 28-Feb-2013 | All Recent SEC Filings |
28-Feb-2013
Annual Report
The following discussion and analysis of the financial condition and results of operations of the Company for the two years ended November 30, 2012, should be read in conjunction with the consolidated financial statements and related notes as well as other information contained in this Annual Report on Form 10-K. This section of the Form 10-K contains forward-looking statements that involve substantial risks and uncertainties, such as statements about our plans, objectives, expectations and intentions. We use words such as "expect", "anticipate", "plan", "believe", "seek", "estimate", "intend", "future" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including as a result of some of the factors described below and in the section titled "Risk Factors". You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-K.
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 less discounts in the case of multiple children from the same family and in other circumstances. The one-time plan includes the collection kit, processing and testing, return medical courier service and 21 years of pre-paid storage fees. The 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. Subsequent to this change, 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 year ended November 30, 2012, the Company's total revenue increased slightly as compared to the same period in 2011. The Company reported a net loss of approximately ($6,308,000), or ($.56) per basic common share for fiscal 2012 compared to a net loss of approximately ($2,096,000) or ($.18) per basic common share for fiscal 2011. The increase in net loss 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 12% 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 income tax assets. The decision to reserve the deferred income tax assets 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 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 income tax assets will be realized. This is partially offset by a 30% 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 $110,000 for the twelve months ended November 30, 2012, a decrease of approximately $74,000 or 40% in comparison to the same period in 2011.
As of November 30, 2012, the Company had cash and cash equivalents of $2,677,382. The Company's cash decreased by approximately $3,600,000 during 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 792,374 shares of the Company's common stock for approximately $1,703,000 offset by cash flows from operations and the sale of certain marketable securities. As of November 30, 2012, the Company had no long-term indebtedness.
Results of Operations
Revenue. For the fiscal year ended November 30, 2012, the Company had revenue of $17,969,855 compared to $17,918,270 for the fiscal year ended November 30, 2011. The increase in revenue was primarily attributable to a slight increase in processing and storage fees, which was partially offset by a 2% decrease in licensee income.
Processing and Storage Fees. For fiscal year ended November 30, 2012, processing and storage fees were $16,628,037 compared to $16,554,565 for the fiscal year ended November 30, 2011. The increase in processing and storage fee revenue is primarily attributable to an 8% increase in recurring annual storage fee revenue and a decrease in sales discounts of 23% for fiscal 2012 compared to the 2011 period. Sales discounts represent discounts to returning clients and promotions offered to newly enrolled clients from time to time. The Company had a 12% decrease in the number of new specimens processed year-over-year, however, the average selling price per newly enrolled client has increased with the implementation of the price increase during fiscal 2012 resulting in higher net revenues per specimen. Also, the decrease in the number of new specimens processed is offset by the increase in the Company's new cord tissue service.
Licensee Income. For the fiscal year ended November 30, 2012, licensee income was $1,341,818 as compared to $1,363,705 for the 2011 period. Licensee income for the fiscal year ended November 30, 2012 primarily consisted of $1,296,818 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 fiscal year ended November 30, 2011 primarily consisted of $1,322,953 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 $40,752 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, Nicaragua and Germany.
Cost of Sales. For the fiscal year ended November 30, 2012, cost of sales was $4,888,414, as compared to $4,399,444 for the fiscal year ended November 30, 2011, representing an 11% increase. Cost of sales was 27% and 25% of revenues in fiscal 2012 and 2011, respectively. 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 $210,052 for the year ended November 30, 2012 compared to $218,614 for the 2011 period.
Selling, General and Administrative Expenses. Selling, general and administrative expenses during the fiscal year ended November 30, 2012 were $14,426,444 as compared to $12,413,082 for the fiscal year ended November 30, 2011 representing a 16% 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 $2,300,000 or 62% 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 $996,000 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 44% decrease in legal fees and a decrease of approximately $700,000 or 73% in fees associated with the annual meeting. The fees associated with the 2012 Annual Meeting were approximately $256,000 compared to approximately $957,000 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 $429,000 in fees associated with the 2011 Annual Meeting. Also included in selling, general and administrative expenses for the twelve months ended November 30, 2011 was an approximate $950,000 accrual of severance in accordance with Mercedes Walton's, the Company's former Chairman and CEO 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 fiscal year ended November 30, 2012, were $109,640 as compared to $184,047 in 2011. The expenses for the years ended November 30, 2012 and 2011 are primarily comprised of expenses related to the implementation of the Company's cord tissue service and the continued commercialization of the Company's new menstrual stem cell technology, which was launched in November 2007.
Impairment of Internal Use Software. During fiscal 2011, the Company determined that previously capitalized costs associated with the development of internal use computer software would be of no further use to the Company and should be written off. The asset is fully impaired and this decision resulted in an impairment charge during fiscal 2011 in the amount of $627,034.
Abandonment of Patents. During 2012 and 2011, management decided to discontinue pursuing certain patents and trademarks resulting in a write-off of approximately $53,000 and $211,000, respectively, for abandoned patents and trademarks which is reflected as abandonment of patents in the accompanying consolidated statement of operations for the years ended November 30, 2012 and November 30, 2011.
Depreciation and Amortization.Depreciation and amortization (not included in Cost of Sales) for the year ended November 30, 2012 was $204,149 compared to $361,234 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 twelve months ended November 30, 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 $3,248,000 to the investors and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their interests in the RSAs. The total payment amount of $3,248,000 was offset by the carrying amount of the 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 twelve months ended November 30, 2012.
Interest Expense. Interest expense during the fiscal year ended November 30, 2012, was $1,022,429 compared to $1,456,737 in 2011. The decrease is mainly due to the extinguishment of certain revenue sharing agreements during fiscal 2012. 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. If the Company's storage revenues continue to increase in areas covered by RSAs, the Company's interest expense related to the RSA payments will also increase. Also included in interest expense is the amortization of the present value of a deferred consulting agreement in the amount of $1,663 and $9,128 for the years ended November 30, 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 $154,564 for the fiscal year ended November 30, 2012 compared to $227,016 in 2011. Equity in losses of affiliate for the year ended November 30, 2012 solely consists of amounts related to compensation expense for stock and warrant awards that were granted by Saneron at below fair market value to certain employees, consultants and members of Saneron management who represent owners of Saneron and serve on its board of directors. Equity in losses of affiliate for the year ended November 30, 2011 consists of approximately $133,000 related to compensation expense for stock and warrant awards that were granted by Saneron at below fair market value to certain employees, consultants and members of Saneron management who represent owners of Saneron and serve on its board of directors as well as approximately $94,000 of historical losses from Saneron that have been realized in prior periods and were not material to any periods presented.
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 certain geographic areas where the Company has license agreements. The Company recorded approximately $169,000 and $172,000 for the years ended November 30, 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 fiscal 2012. The accounting standards surrounding income taxes require a company to consider whether it is more likely than not that the
deferred income 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 the cumulative losses, the Company reserved $1,718,919 during the second quarter of 2012 resulting in U.S. tax expense being recorded for the fiscal year ended November 30, 2012 due to the Company's decision in the second quarter of 2012 to record a valuation allowance associated with certain of the Company's deferred income tax assets, as it is more likely than not that the deferred income tax assets will not be realized. There was no U.S. income tax expense for fiscal 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.
The effective tax rate of 41.1% and 8.2% for the fiscal years ended November 30, 2012 and 2011, respectively, differs from the statutory rate, due primarily to the establishment of a full valuation allowance of approximately $1,719,000 during 2012 and the effect of foreign income taxes related to licensee income in 2012 and 2011.
Liquidity and Capital Resources
Through November 30, 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 November 30, 2012, the Company had cash and cash equivalents of $2,677,382 as compared to $6,305,095 at November 30, 2011. The decrease in cash and cash equivalents in 2012 was primarily attributable to the following:
Net cash provided by operating activities in fiscal 2012 was $360,901, which was primarily attributable to the Company's operating activities, partially offset by increases in working capital components.
Net cash provided by operating activities in fiscal 2011 was $819,122, which was primarily attributable to the Company's operating activities.
Net cash provided by investing activities in fiscal 2012 was $962,356 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 in fiscal 2011 was $2,964,500 which was primarily attributable to the funding of a trust in the amount of $2,500,000 to escrow amounts that may become payable to the Company's former Chief Executive Officer and other executive officers of the Company under their respective Employment Agreements as a result of a change in control of the Company pursuant to the proxy contest.
Net cash used in financing activities in fiscal 2012 was $4,950,970, which was primarily attributable to the payment of $3,248,000 for the cancellation of certain interests in certain Revenue Sharing Agreements and the stock repurchase plan pursuant to which the Company has repurchased 792,374 shares of the Company's common stock for approximately $1,703,000.
Net cash provided by financing activities in fiscal 2011 was $80,936 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 securities and cash flows from future operations will be sufficient to fund its known cash needs for at least the next 12 months. Cash flows from operations will depend primarily upon increasing revenues from sales of its umbilical cord blood and cord tissue cellular storage services and the menstrual stem cell service, and managing discretionary expenses. If expected increases in revenues are not realized, or if expenses are higher than anticipated, the Company may be required to reduce or defer cash expenditures or otherwise manage its cash resources during the next 12 months so that they are sufficient to meet the Company's cash needs for that period. In addition, the Company may consider seeking equity or debt financing if deemed appropriate for its plan of operations, and if such financing can be obtained on acceptable terms. There is no assurance that any reductions in expenditures, if necessary, will not have an adverse effect on the Company's business operations, including sales activities and the development of new services and technology.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company believes that its estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. For further discussion of the Company's significant and critical accounting policies, refer to Note 1 - "Description of Business and Summary of Critical and Significant Accounting Policies" to the Consolidated Financial Statements contained in Item 8 of this document.
Revenue Recognition
Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("ESP"). VSOE generally exists only when the Company sells the deliverable separately and it is the price actually charged by the Company for that deliverable.
The Company has identified two deliverables generally contained in the arrangements involving the sale of its umbilical cord blood product. The first deliverable is the processing of a specimen. The
second deliverable is either the annual storage of a specimen or the 21 year storage fee charged for a specimen. The Company has allocated revenue between these deliverables using the relative selling price method. The Company has VSOE for its annual storage fees as the Company renews storage fees annually with its customers on a standalone basis. Because the Company has neither VSOE nor TPE for the processing and 21 year storage deliverables, the allocation of revenue has been based on the Company's ESPs. Amounts allocated to processing a specimen are recognized at the time of sale. Amounts allocated to the storage of a specimen are recognized ratably over the contractual storage period. Any discounts given to the customer are recognized by applying the relative selling price method whereby after the Company determines the selling price to be allocated to each deliverable (processing and storage), the sum of the prices of the deliverables is then compared to the arrangement consideration, and any difference is applied to the separate deliverables ratably.
The Company's process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing the ESPs for its processing and 21 year storage fee include the Company's historical pricing practices as well as expected profit margins.
The Company records revenue from processing and storage of specimens and pursuant to agreements with licensees. The Company recognizes revenue from processing fees upon completion of processing and recognizes storage fees ratably over the contractual storage period, as well as, other income from royalties paid by licensees related to long-term storage contracts which the Company has under license agreements. Contracted storage periods can range from one to twenty-one years. Deferred revenue on the accompanying consolidated balance sheets includes the portion of the annual storage fee and the twenty-one year storage fee that is being recognized over the contractual storage period as . . .
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