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CBAI > SEC Filings for CBAI > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for CORD BLOOD AMERICA, INC.

Form 10-Q for CORD BLOOD AMERICA, INC.


14-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

Forward Looking Statements

In addition to the historical information contained herein, the Company makes statements in this Quarterly Report on Form 10-Q that are forward-looking statements. Sometimes these statements will contain words such as "believes," "expects," "intends," "should," "will," "plans," and other similar words. Forward-looking statements include, without limitation, assumptions about the Company's future ability to increase income streams, reduce and control costs, to grow revenue and earnings, and ability to obtain additional debt and/or equity capital on commercially reasonable terms, none of which is certain. These statements are only predictions and involve known and unknown risks, uncertainties and other factors included in the Company's periodic reports with the SEC. Although forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect current judgment, actual results could differ materially from those anticipated in such statements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

The following information should be read in conjunction with the Company's September 30, 2013 condensed consolidated financial statements and related notes thereto included elsewhere in the quarterly report and with its condensed consolidated financial statements and notes thereto for the year ended December 31, 2012 and the related "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, as well as its quarterly reports and reports filed on Form 8-K for the relevant periods. The Company also urges you to review and consider itsdisclosures describing various risks that may affect its business, which are set forth under the heading "Risk Factors Related to the Company Business" in its Annual Report on Form 10-K for the year ended December 31, 2012.

Recent Developments During the Quarter

Tonaquint and St. George

Previously, the Company entered transactions with St. George Investments, LLC and with Tonaquint, Inc. On August 30, 2013, the Company filed a Complaint against these entities as described in greater detail in Item 1. Legal Proceedings.

Moreover, on September 25, 2013, the Company received from Tonaquint a Notice of Disposition of Collateral advising of Tonaquint's intent to sell all assets of the Company at a public auction on November 4, 2013 at 11:00 a.m. PST at 1857 Helm Drive, Las Vegas, Nevada, 89119. On October 18, 2013, the Company received from Tonaquint a Notification of Cancellation, which provided notice that the aforementioned auction to sell the Company's assets was cancelled.

Oustanding Shares

During the period ending September 30, 2013, the Company issued an additional 100,526,957 shares of common stock, and as of the date of this filing has an outstanding share amount of 890,000,000 with 890,000,000 common shares authorized.

Summary and Outlook of the Business

CBAI is primarily an umbilical cord blood and cord tissue stem cell processing and storage company with a particular focus on the acquisition of customers in need of family based products and services.


Cord

Cord's operations provide umbilical cord blood banking and cord tissue services to expectant parents throughout all 50 United States and Puerto Rico. The Company's corporate headquarters re-located to Las Vegas, NV from Los Angeles, CA in October 2009. Cord earns revenue through a one-time enrollment and processing fee, and through an annually recurring storage and maintenance fee. Cord processes and stores cord blood and cord tissue in its own facility. Cord provides the following services to each customer.

? Collection Materials. A medical kit that contains all of the materials and instructions necessary for collecting the newborn's umbilical cord blood and cord tissue at birth and packaging the unit for transportation. The kit also provides for collecting a maternal blood sample for infectious disease testing.

? Physician And Customer Support. 24-hour consulting services to customers as well as to physicians and labor and delivery personnel, providing any instruction necessary for the successful collection, packaging, and transportation of the cord blood and cord tissue and maternal blood samples.

? Transportation. Manage all logistics for transporting the cord blood and cord tissue unit to the Company's centralized facility immediately following birth. This procedure ensures chain-of-custody control during transportation for maximum security.

? Comprehensive Testing. The cord blood sample is tested for stem cell concentration levels and blood type. The maternal samples are tested for infectious diseases. Cord reports these results to the newborn's mother.

? Cord Blood Storage. After processing and testing, the cord blood and cord tissue unit is cryogenically frozen in a controlled manner and stored in liquid nitrogen for potential future use. Data indicates that cord blood retains viability and function for at least twenty five years when stored in this manner and theoretically could be maintained at least as long as the normal life span of an individual.

Going forward, management will continue to assess business opportunities, and plans to pursue customer acquisition, primarily through organic growth.

Results of Operations for the Three-Months Ended September 30, 2013

For the three months ended September 30, 2013, total revenue decreased to approximately $1.49 million from $1.51 million, a decrease of 2% over the same period of 2012. Revenues are generated primarily from new enrollment/processing fees and recurring storage fees. Other revenue consisted of primarily tissue related products which remained relatively consistent for the three month year over year period. Per segment, Cord had an increase of its total revenues of less than 1%, and Bio had a decrease in its revenues of 6% over the same period ending September 30, 2013. Bio's decrease in revenues were largely impacted by a year over year adjustment to the currency exchange rate of approximately 15%, an increase in the discounts provided for enrollment/processing fees even though the total number of units processed for the period was less than a 2% decrease from the prior period. The Company remains focused on strategic organic growth which management hopes will provide sustainable operating cash flows, and, positive operating and net income.

Cost of services as a percentage of revenue increased to 32% for the period ended September 30, 2013 compared to 28% the same prior period of 2012. The cost of services include transportation of the umbilical cord blood and cord tissue from the hospital to the lab, direct material plus labor costs for processing and cryogenic storage, and allocated rent, utility and general administrative expenses. Gross profit decreased by approximately $0.08 million or 7% to $1.01 million for the period ending September 30, 2013 from the prior three month period of 2012. Increases in Bio's expenses and currency adjustments were primary contributors to the reported decrease. The Company anticipates that through the growth and expansion of its Cord business, tighter cost controls and continuing efficiencies in its own facilities, direct costs should decrease and gross profits should improve.


Administrative and selling expenses for the three months ended September 30, 2013 were $1.27 million as compared to $1.12 million for the comparative period of 2012 representing a 13% increase. These expenses are primarily related to marketing/advertising, professional services, allocated facility related expenses and wages for personnel. The Company continues to evaluate its expenses and their relationship to revenues for alignment. Depreciation and amortization are included as an administrative expense. For the three month period ending September 30, 2013 depreciation and amortization was $0.19 million and in September 30, 2012, depreciation and amortization was approximately $0.20 million.

The Company's loss from operations was $0.25 million versus an operating loss of $0.03 million for the comparative period. The Company's net loss was $0.59 million for the period ended September 30, 2013, a decrease of $0.43 million compared to the comparative period net loss of $1.02 million or a decrease of 42%.

Results of Operations for the Nine-Months Ended September 30, 2013

For the nine months ended September 30, 2013, the Company's total revenue decreased to approximately $4.43 million from $4.64 million, for a 5.0% decrease over the same period of 2012. Revenues are generated primarily from new enrollment/processing fees and recurring storage fees. The remaining revenue consisted primarily of tissue related products which increased by 17% in the year over year nine month period. Per segment, Cord's revenues decreased less than 1% and Bio's revenues decreased by 12% over the prior comparative period. Bio's decrease in revenues were largely impacted by a year over year adjustment to the currency exchange rate of approximately 15%, along with an increase in the discounts provided for enrollment/processing fees even though the total number of units processed for the period was consistent with the prior period. Cord remains focused on strategic organic growth which management hopes will provide sustainable operating cash flows and net income.

Cost of services as a percentage of revenue increased to 31% for the period ended September 30, 2013 compared to 27% the same prior period of 2012. The cost of services includes transportation of the umbilical cord blood and cord tissue from the hospital to the lab, direct material plus labor costs for processing and cryogenic storage, and allocated rent, utility and general administrative expenses. Gross profit decreased by approximately $0.33 million or 10 % to $3.04 million from the prior comparative nine month period. Increases in Bio's expenses and currency adjustments were primary contributors to the reported decrease. The Company anticipates that through the growth and expansion of its Cord business, tighter cost controls and continuing efficiencies in its own facilities, direct costs should decrease and gross profits should improve.

Administrative and selling expenses for the nine months ended September 30, 2013 were $3.54 million as compared to $3.64 million for the comparative period of 2012 representing a 3% decrease. These expenses are primarily related to marketing/advertising, professional services, allocated facility, including utilities, expenses, and wages for personnel. Generally, each functional unit within administrative and selling expenses has reduced expenses. The Company continues to evaluate its expenses and their relationship to revenues for alignment. Depreciation and amortization are included as an administrative expense. For the nine month period, depreciation and amortization was $0.58 million versus $0.60 million for the prior comparative period of 2012.

The Company's loss from operations was $0.51 million versus an operating loss of $0.08 million for the comparative period. Included in the income from operations total for 2012 was one-time $0.19 million reversal in the accrual for the Bio 2011 earn out. The Company's net loss was $1.69 million for the period ended September 30, 2013, a decrease of $0.46 million compared to the comparative period net loss of $2.15 million. Contributing to the net loss in the nine month period ending September 30, 2013 was an increase in the interest expense and derivative liability associated with claims of default made by Tonaquint, and disputed by the Company. Successful resolution of the dispute could result in a reduction to the accrued interest and derivative liability balances. In the nine month period ending September 30, 2013, the Company expensed $44,227 relating to previously unpaid fees from October 2009 through December 2011 as discovered in the state of Nevada sales and abatement tax audit, which covered the period through March 2013. The Company is current with its obligations to the state, and anticipates no further expenses for past due obligations.


Liquidity and Capital Resources

Total assets at September 30, 2013 were $6.41 million compared to $6.35 million at December 31, 2012. Total liabilities at September 30, 2013 were $6.31 million consisting primarily of Promissory Notes, Accounts Payable and Deferred Revenue of $1.42 million, $0.52 million and $2.67 million respectively. At December 31, 2012, total liabilities were $5.84 million consisting primarily of Promissory Notes, Accounts Payable and Deferred Revenue of $1.75 million, $0.54 million and $2.37 million respectively.

For the period ending September 30, 2013, the company had $0.60 million in cash, an increase of 61% from $0.39 million at December 31, 2012. The Company currently collects cash receipts from operations through Cord and its subsidiary, Bio-cells. During the nine month period ended September 30, 2013 there was no increase in notes payable for purposes of working capital or investment in affiliate companies. Net cash provided by operating activities for the nine month period ending September 30, 2013 was $0.33 million, versus a net use of cash of $0.23 million from the prior comparative period of 2012, an improvement of $0.60 million or 247%. Net cash used in investing activities decreased by $0.13 million. Net cash provided by financing activities decreased $0.43 million from the prior comparative period ending September 30, 2012. The Company did not have any financing activities during the nine month period ending September 30, 2013, and cash flow from operations continue to be sufficient to fund operations.

Since inception, the Company has financed cash flow requirements through the issuance of common stock and warrants for cash, services and loans. Over the past six consecutive quarters, the Company has reduced operating expenses, ended investment in its foreign affiliates and received no additional funding from outside sources for working capital. The Company plans to continue to operate on its cash flows from operations by aligning its expenses with its revenues. If cash flows from operations are significantly less than projected, then the company would need to either cut back on its budgeted spending, look to outside sources for additional funding or a combination of the two. The Company currently does not have any financing agreements in place for additional funding. If the Company is unable to access sufficient funds when needed, obtain additional external funding or generate sufficient revenue from the sale of our products, we could be forced to curtail or possibly cease operations.

Inflation

In the opinion of management, inflation has not and will not have a material effect on the Company's US operations in the immediate future. However, with its Bio subsidiary, the Company is seeing inflationary pressures on a year over year basis. Management will continue to monitor inflation and evaluate the possible future effects of inflation on the Company's business and operations.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosure not applicable to smaller reporting companies.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

It is management's responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company's management, including its president and chief financial officer, have reviewed and evaluated the effectiveness of its disclosure controls and procedures as of September 30, 2013. Following this review and evaluation, management collectively determined that its disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in reports that it files or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including its president, vice president, and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

The deficiency in the Company's disclosure controls and procedures is related to a lack of segregation of duties due to the size of the accounting department and the lack of experienced accountants due to the limited financial resources of the Company. The Company continues to actively develop the controls and resources necessary in order to be in position to remediate this lack of segregation of duties.

Changes in Internal Control over Financial Reporting

There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 30, 2013, Cord Blood America, Inc. (the "Company") filed a Complaint (the "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"), along with summonses in connection therewith, case number 2:13-cv-00806-PMW (the "Action"). The Company brought the Action against the Defendants alleging Fraud in the Inducement, Breach of Agreement, Breach of Implied Covenant of Good Faith and Fair Dealing and Unjust Enrichment. In particular, among other things, the Complaint alleges that Defendants have fraudulently induced the Company to enter into the June 27, 2012 Secured Convertible Promissory Note ("Tonaquint Note"), Securities Purchase Agreement ("Tonaquint Purchase Agreement") and related documentation through misrepresentations including but by no means limited to:
(i) representing that the Tonaquint Note would be consecutively amortized with the March 10, 2011 Secured Convertible Promossory Note issued to St. George by the Company ("St. George Note"), and that these would not become due and owing simultaneously, and (ii) that the St. George Note would be replaced by an amended note to be paid off according to a set amortization schedule.

The Company seeks relief in the form of rescission or reformation of the Tonaquint Note, St. George Note, the Warrant issued to St. George as part of the March 10, 2011 transaction, as well as related agreements and documents, an order enjoining Defendants from foreclosing on the Notes or selling the Company's assets, punitive and other damages in an unspecified amount, costs, attorneys' fees, interest and such other relief as the Court deems just and proper.

Subsequently, on September 25, 2013, Defendants each filed their Answer and Counterclaim in the Action. In their Counterclaims, Defendants allege causes of action against the Company for Breach of the March 10, 2011 Note and Warrant Purchase Agreement between St. George and the Company ("SGI Purchase Agreement"), Breach of the Tonaquint Purchase Agreement and Tonaquint Note, Breach of the Implied Covenant of Good Faith and Fair Dealing, and Unjust Enrichment. Defendants claim that the Company purportedly breached the SGI Purchase Agreement, Tonaquint Purchase Agreement, and Tonaquint Convertible Note, by, among other things, failing to maintain a share reserve, failing to increase the number of authorized shares, failing to call or hold a meeting to increase the authorized shares of Common Stock of the Company, and failing to make installment payments under the Tonaquint Convertible Note.Defendants seek relief in the form of damages in an unspecified amount and an order from the Court requiring the Company to establish and maintain a share reserve for the benefit of the Defendants, along with costs, attorneys' fees and such other relief as the Court deems just and proper.On October 15, 2013, the Company filed its Reply to Counterclaim.

Also on September 25, 2013, the Company received from Tonaquint a Notice of Disposition of Collateral advising of Tonaquint's intent to sell all assets of the Company at a public auction on November 4, 2013 at 11:00 a.m. PST at 1857 Helm Drive, Las Vegas, Nevada, 89119. On October 18, 2013, the Company received from Tonaquint a Notification of Cancellation, which provided notice that the aforementioned auction to sell the Company's assets was cancelled.

The Company intends to vigorously pursue its claims and defend itself against Defendants' counterclaims, as well as Tonaquint's attempt to sell assets, and will continue to take legal action to protect the interests of the Company and its shareholders.


ITEM 1A.RISK FACTORS.

A description of the Company's risk factors can be found in " Risk Factors" of its Annual Report on Form 10-K for the year ended December 31, 2012. There were no material changes to those risk factors during the three months ended September 30, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In the instances described under this sub-heading, the Company relied upon
Section 4(2) of the Securities Act in issuing securities.

St. George Investments

On March 10, 2011, the Company entered into a Note and Warrant Purchase Agreement (the "Purchase Agreement") with St. George Investments, LLC, ("St. George") an Illinois limited liability company (the "Investor") whereby the Company issued and sold, and the Investor purchased: (i) Secured Convertible Promissory Note of the Company in the principal amount of $1,105,500 (the "Company Note") and (ii) a Warrant to purchase common stock of the Company (the "Warrant"). The Investor paid $250,000 in cash as an initial payment to the Company and executed and delivered six separate "Secured Buyer Notes" (the "Buyer Notes"), as consideration in full for the issuance and sale of the Company Note and Warrants.

The principal amount of the Company Note is $1,105,500 ("Maturity Amount") and the Company Note is due 48 months from the issuance date of March 10, 2011. The Company Note has an interest rate of 6.0%, which would increase to a rate of 12.0% on the happening of certain Trigger Events, including but not limited to:
a decline in the 10-day trailing average daily dollar volume of the common shares in the Company's primary market to less than $30,000 of volume per day at any time; the failure by the Company or its transfer agent to deliver Conversion Shares (defined in the Company Note) within 5 days of Company's receipt of a Conversion Notice (defined in the Company Note). Due to a triggering event occurring, the current interest rate is 12%. The total amount funded (in cash and notes) was $1,000,000, representing the Maturity Amount less an original issue discount of $100,500 and the payment of $5,000 to the Investor to cover its fees, with payment consisting of $250,000 advanced at closing and $750,000 in a series of six secured convertible Buyer Notes of $125,000 each, with interest rates of 5.0%. To date, St. George has paid the total amount due.

The Buyer Notes are secured by an Irrevocable Standby Letter of Credit ("Letter of Credit"). The Investor has also received a five year warrant entitling it to purchase shares of common stock of the Company at an exercise price as determined under the terms of the Warrant. The warrant also contains a net exercise /cashless exercise provision. St. George may elect to convert all or part of the principal and any accrued unpaid interest on the Company Note on or before the aforementioned maturity date, subject to certain limitations. The conversion price under the Company Note is eighty percent (80%) of the average of the closing bid prices for the three (3) Trading Days (defined in the Purchase Agreement) with the lowest closing bids over the twenty (20) Trading Days immediately preceding the Conversion Date (defined in the Company Note), subject to adjustments as set forth in the Company Note. Due to adjustments, St. George's current conversion ratio inserts fifty-five percent (55%) in the aforementioned formula, in place of eighty percent (80%). For the three month period ending September 30, 2013, the Company issued 100,526,957 shares of common stock for a total value of $126,529. As of September 30, 2013 the balance due to St. George Investments was $259,530.


Repurchase of Shares

The Company did not repurchase any of our shares during the Quarter ended September 30, 2013.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE

ITEM 4. RESERVED

ITEM 5. OTHER INFORMATION

NONE


ITEM 6. EXHIBITS

The following documents are included as exhibits to this Form 10Q:

EXHIBIT    DESCRIPTION

2.0        Form of Common Stock Share Certificate of Cord Blood America,
           Inc. (1)

3.1(i)     Amended and Restated Articles of Incorporation of Cord Blood
           American, Inc. (1)

3.1(ii)    Articles of Amendment to Articles of Incorporation (5)

3.1(iii)   Articles of Amendment to the Articles of Incorporation of Cord
           Blood America, Inc.(7)

3.1(iv)    Articles of Amendment to the Articles of Incorporation of Cord
           Blood America, Inc. (16)

3.1(v)     Articles of Amendment to the Articles of Incorporation of Cord
           Blood America, Inc. (16)

3.1(vi)    Articles of Amendment to the Articles of Incorporation of Cord
           Blood America, Inc. (23)

3.2(i)     Amended and Restated Bylaws of Cord Blood America, Inc. (1)

10.0       Patent License Agreement dated as of January 1, 2004 between
           PharmaStem Therapeutics, Inc. and Cord Partners, Inc. (2)

10.1       Board Compensation Plan (3)

10.2       Employment Agreement between the Company and Joseph Vicente (18)

10.3       Lease for Las Vegas Facility (11)

10.4       2011 Flexible Stock Option Plan (17)

10.5       Compensatory Arrangement for Certain Officers Effective July 13,
           2009, Stock Options (8)


10.6    Compensatory Arrangement for Certain Officers Effective December
        31, 2009, Stock Options (9)

10.7    Entered on March 24, 2010 into Investment Agreement to Acquire
        Majority Interest in Stellacure (10)

10.8    License and Cooperation Agreement with AXM Pharma effective
        March 31, 2010 (12)

10.9    Compensatory Arrangement for Certain Officers Executed July 1,
        2010. Stock Options (13)

10.10   Executed Stock Purchase Agreement on September 20, 2010 to
        Acquire Majority Interest in BioCordcell Argentina, SA. (14)

. . .
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