# Cryo Cell International Inc: Form 10-Q for the period ended Feb 28, 2010

- Company: [Cryo Cell International Inc](/companies/ccel.md) (CIK 862692)
- Form: 10-Q
- Filed: 2010-04-15
- Accepted by EDGAR: Apr 15, 2010, 01:50 ET
- Period: 2010-02-28
- Accession: 0001193125-10-083704
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/862692/000119312510083704/d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/862692/000119312510083704/

## Management's discussion and analysis

As filed, 32,221 characters.

### Overview

The Company is engaged in cellular processing and cryogenic storage, with a current focus on the collection and preservation of umbilical cord (U-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. The Company currently charges fees of $1,595 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 $3,495 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 revenue for processing and storage fees from certain licensees that ship specimens directly to the Company’s facility in Oldsmar, Florida for processing and storage. These processing and storage fees are at negotiated rates, as specified in the licensee agreements. 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. 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). Also in 2006, the Company discovered novel technology related to menstrual stem cells. In November 2007, the Company announced the commercial launch of C’elleSM 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. The Company expects to place greater promotional emphasis on its C’elle service in the future and increase its marketing expenditures related to C’elle.

During the three months ended February 28, 2010, the Company’s revenues decreased 2% as compared to the same period in 2009. The Company reported net income of approximately $319,000, or $.03 per basic common share for the three months ended February 28, 2010 compared to net income of approximately $554,000 or $.05 per basic common share for the same period in 2009. The decrease in net income for the three months ended February 28, 2010 principally resulted from a 11% increase in marketing, general and administrative expenses, due mainly to the increase in sales and marketing initiatives, which is partially offset by a 2% decrease in cost of sales primarily due to a decline in the number of specimens processed and operational efficiencies in the processing and storage process. In addition, research and development expenses were approximately $52,000 for the three months ended February 28, 2010, an increase of approximately 103% in comparison to the same period in 2009. Research and development expenses in 2009 were primarily comprised of expenses related to the continued commercialization of the Company’s new stem cell technology, C’elle, which was launched in November 2007.

At February 28, 2010, the Company had cash and cash equivalents of $6,566,159. The Company’s cash decreased by approximately $285,000 during the first three months of fiscal 2010, primarily as a result of cash used to purchase marketable securities in the amount of $190,000. As of April 14, 2010, the Company maintains no long-term indebtedness.

### Results of Operations

***Revenues.*** Revenues for the three months ended February 28, 2010 were $4,236,861 as compared to $4,255,018 for the same period in 2009. The decrease in revenue was primarily attributable to a 2% decrease in processing and storage fees, which was partially offset by a 15% 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 4%, in addition to an increase in sales discounts of 11% The decrease was partially offset by a 6% increase in recurring annual storage fee revenue for the three months ended February 28, 2010 compared to the 2009 period. Sales discounts represent discounts to returning clients and promotions offered to newly enrolled clients.

***Licensee Income.*** Licensee income for the three months ended February 28, 2010, was $447,142 as compared to $390,061 for the 2009 period. Licensee income for the three months ended February 28, 2010 primarily consisted of $292,142 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 related to installment payments of non-refundable up-front license fees from the licensees of the Company’s U-Cord program in Chile, Colombia, Peru, Nicaragua and Pakistan. Licensee income for the three months ended February 28, 2009 consisted of $290,061 in royalty income earned on the processing and storage of specimens in geographical areas where the Company has license agreements. The remaining licensee income related to an installment payment of a non-refundable up-front license fee from the licensee of the Company’s U-Cord program in Venezuela.

***Cost of Sales.*** Cost of sales for the three months ended February 28, 2010 was $1,092,668 as compared to $1,109,690 for the same period in 2009, representing a 2% decrease. Cost of sales was 29% of processing and storage fee revenue for the three months ended February 28, 2010 and 2009. 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 $72,000 and $71,000 for the three months ended February 28, 2010 and February 28, 2009, respectively. The decrease in cost of sales is primarily attributable to the decrease in operational expenses and the decrease in specimens processed during the three months ended February 28, 2010 compared to the 2009 period.

***Marketing, General and Administrative Expenses.*** Marketing, general and administrative expenses for the three months ended February 28, 2010 were $2,320,944 as compared to $2,095,243 for the 2009 period representing an 11% increase. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees. The increase was primarily attributable to a 17% increase in sales and marketing expenses relating to consumer advertising.

***Research, Development and Related Engineering Expenses.*** Research, development and related engineering expenses for the three months ended February 28, 2010 were $52,083 as compared to $25,640 for the three months ended February 28, 2009. The expenses for the three months ended February 28, 2010 and February 28, 2009 are primarily comprised of expenses related to the continued commercialization of the Company’s new stem cell technology, C’elle, which was launched in November 2007.

***Depreciation and Amortization***. Depreciation and Amortization (not included in Cost of Sales) for the three months ended February 28, 2010 was $73,739 compared to $100,299 for the 2009 period. The decrease was caused by a portion of the Company’s property and equipment becoming fully depreciated during fiscal 2009.

***Interest Expense.*** Interest expense during the three months ended February 28, 2010, was $334,121 compared to $324,241 during the comparable period in 2009. Interest expense is mainly comprised of payments made to the other 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 $4,471 and $6,039 for the three months ended February 28, 2010 and 2009, respectively.

***Equity in Losses of Affiliate.*** Equity in losses of affiliate was $16,941 for the three months ended February 28, 2010, compared to $31,867 for the 2009 period. Equity in losses of affiliate for the three months ended February 28, 2010 and February 28, 2009, 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 approximately $33,000 and $34,000 for the three months ended February 28, 2010 and 2009, respectively, of foreign income tax expense.

There was no U.S. income tax expense for the three months ended February 28, 2010 and for the same period in 2009. The Company did not record income tax expense during the first quarter of 2010 or 2009 due to the utilization of net operating losses and foreign tax credit carryforwards, which were not previously benefited in the Company’s financial statements. It is managements’ current belief it is “more likely than not” that future tax benefits will not be realized and, as a result, no net deferred tax asset is reflected in the Company’s financial statements.

### Liquidity and Capital Resources

Through February 28, 2010, the Company’s principal source of cash has been from sales of its U-Cord® program to customers, the sale of license agreements and proceeds from licensees. Currently, the Company’s cash flow is derived primarily from sales relating to its storage services, including the initial fee and ongoing storage fees, as well as licensee income. The Company does not expect a change in its principal source of cash flow.

At February 28, 2010, the Company had cash and cash equivalents of $6,566,159 as compared to $6,850,765 at November 30, 2009. The decrease in cash and cash equivalents during the three months ended February 28, 2010 was primarily attributable to the following:

Net cash used in operating activities for the three months ended February 28, 2010 was $62,063, which was primarily attributable to the $100,000 payment to MOSI for the sponsorship of a stem cell exhibit in “The Amazing You” exhibition in Tampa, Florida.

Net cash provided by operating activities for the three months ended February 28, 2009 was $1,053,666, which was primarily attributable to the Company’s operating activities, including the receipt of the second $100,000 installment payment from the sale of the Cryo-Cell de Venezuela licensee agreement, the timing of payments for accrued expenses and the collection of accounts receivable.

Net cash used in investing activities for the three months ended February 28, 2010 was $222,543, which was primarily attributable to the purchase of marketable securities.

Net cash used in investing activities for the three months ended February 28, 2009 was $61,594, which was attributable to the costs associated with the application and development of patents.

There was no cash provided by or used in financing activities during the first three months of fiscal 2010 and 2009.

The Company does not have a line of credit or other type of financing instrument. The Company owes the remaining balance of $184,224 to be paid to Red Rock for the acquisition of Safti-Cell, which is secured by the assets purchased by the Company. The balance is to be paid in quarterly installments of principal and interest of $95,388 during fiscal 2010.

The Company anticipates making non-discretionary capital expenditures of approximately $500,000 over the next twelve months. 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 cellular storage services and the C’elle service, and controlling 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 the 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

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.

#### Revenue Recognition

The Company records revenue from processing and storage of specimens. The Company recognizes revenue from processing fees upon completion of processing and cellular 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. Deferred revenue on the accompanying 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 well as royalties received from foreign licensees related to long-term storage contracts in which the Company has future obligations under the license agreement. The Company classifies deferred revenue as current if the Company expects to recognize the related revenue over the next 12 months. As of February 28, 2010 and November 30, 2009, the current and long-term portion of deferred revenue is approximately $5,400,000 and $7,400,000, respectively. The Company also records revenue from shipping and handling billed to customers when earned. Shipping and handling costs that the Company incurs are expensed and included in cost of sales.

#### License and Royalty Agreements

The Company has entered into licensing agreements with certain investors in various international markets in an attempt to capitalize on the Company’s technology. The investors typically pay a licensing fee to receive Company marketing programs, technology and know-how in a selected area. The investor may be given a right to sell sub-license agreements as well. As part of the accounting for the up-front license revenue, revenue from the up-front license fee is recognized based on such factors as when the payment is due, collectibility and when all material services or conditions relating to the sale have been substantially performed based on the terms of the agreement. The Company has seventeen active licensing agreements. The following areas each have one license agreement: Mexico, El Salvador, Guatemala, Nicaragua, Ecuador, Panama, Honduras, Venezuela, China, Pakistan, Chile, Colombia and Peru. The following areas each have two license agreements: China and Germany.

In addition to the license fee, the Company earns royalties on subsequent processing and storage revenues received by the licensee in the selected area and a fee on any sub-license agreements that are sold by the licensee where applicable. The Company also processes and stores specimens sent directly from customers of sub-licensees in Mexico, Central America, Ecuador, Pakistan and Venezuela. These fees are included in processing and storage fees on the consolidated statements of operations. As part of the accounting for licensee income, the Company uses estimates and judgments based on historical processing and storage volume in determining the timing and amount of licensee income to recognize. The Company periodically reviews license and royalty receivables for collectibility and, if necessary, will record an expense for an allowance for uncollectible accounts. If the financial condition of the Company’s licensees and sub-licensees were to deteriorate beyond the estimates, the Company may have to increase the allowance for doubtful accounts which could have a negative impact on earnings. If the licensee’s customer base were to decrease, it would negatively impact the Company’s ongoing license income.

#### Accounts Receivable

Accounts receivable consist of the amounts due from clients that have enrolled and processed in the U-Cord® processing and storage program and amounts due from licensee affiliates and do not require collateral. Accounts receivable due from clients are due within 30 days and are stated at amounts due from clients net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering the length of time accounts receivable are past due, the Company’s previous loss history, and the customer’s current ability to pay its obligations. Therefore, if the financial condition of the Company’s clients were to deteriorate beyond the estimates, the Company may have to increase the allowance for doubtful accounts which could have a negative impact on earnings. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

#### Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. A valuation allowance covering the deferred tax assets of the Company as of February 28, 2010 and November 30, 2009, has been provided as the Company does not believe it is “more likely than not” that the future income tax benefits will be realized.

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 approximately $33,000 and $34,000 for the three months ended February 28, 2010 and 2009, respectively, of foreign income tax expense.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from management’s belief that a position can or cannot be sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of February 28, 2010 and November 30, 2009 the Company had no provisions for interest or penalties related to uncertain tax positions.

#### Investment in Saneron

The Company made a significant investment in an entity that is involved in the area of stem cell research. The Company accounts for this investment under the equity method, and reviews annually to determine if an other than temporary impairment exists. The Company previously recorded equity in losses of affiliate until the investment balance was zero and only goodwill remained. The investment is reviewed annually to determine if an other than temporary impairment exists. The Company does not believe that an impairment exists as of February 28, 2010 and November 30, 2009. If actual future results are not consistent with the Company’s assumptions and estimates, the Company may be required to record impairment charges in the future which could have a negative impact on earnings.

#### Patents

The Company incurs certain legal and related costs in connection with patent applications. If a future economic benefit is anticipated from the resulting patent or an alternate future use is available to the Company, such costs are capitalized and amortized over the expected life of the patent. The Company’s assessment of future economic benefit involves considerable management judgment. A different conclusion could result in the reduction of the carrying value of these assets.

Patent costs are capitalized on the date that the utility patent was filed and are amortized over a period of 20 years. Capitalized patent costs, net of accumulated amortization, as of February 28, 2010 and November 30, 2009 are $409,248 and $401,206, respectively, and are included in deposits and other assets in the accompanying consolidated balance sheets. Amortization expense was approximately $6,000 and $4,000 for the three months ended February 28, 2010 and February 28, 2009, respectively, and is included in depreciation and amortization in the accompanying consolidated statements of operations.

#### Revenue Sharing Agreements

The Company has entered into revenue sharing agreements (“RSAs”) with various parties whereby these parties contracted with the Company for a percentage of future storage revenues the Company generates from clients in specific geographical areas. The RSAs have no definitive term or termination provisions. The sharing applies to the storage fees for all specified specimens in the area up to the number covered in the contract. When the number of specimens is filled, any additional specimens stored in that area are not subject to revenue sharing. As there are empty spaces resulting from attrition, the Company agrees to fill them as soon as possible. The parties typically pay the Company a non-refundable up-front fee for the rights to these future payments. The Company had recognized these non-refundable fees as a long-term liability. Given the criteria under which these RSAs are established, cash payments on these contracts can fluctuate from period to period. All payments made to the other parties to the RSAs are recognized as interest expense. At such time as the total payments can be determined, the Company will commence amortizing these liabilities under the effective interest method. The Company does not intend to enter into additional RSAs.

### Recently Issued Accounting Pronouncements

### Revenue Arrangements with Multiple Deliverables

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2009-13, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit and modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. The ASU significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. The ASU will be effective for the first annual reporting period beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption is permitted, provided that the guidance is retroactively applied to the beginning of the year of adoption. The Company has not determined if it will adopt this new update during fiscal year 2010. The Company is currently evaluating the impact this update may have on its consolidated financial statements upon its required adoption on December 1, 2010.

### Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonable likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

### Forward Looking Statements

This Form 10-Q, press releases and certain information provided periodically in writing or orally by the Company’s officers or its agents may contain statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The terms “Cryo-Cell International, Inc.,” “Cryo-Cell,” “Company,” “we,” “our” and “us” refer to Cryo-Cell International, Inc. The words “expect,” “anticipate”, “believe,” “goal,” “strategy”, “plan,” “intend,” “estimate” and similar expressions and variations thereof, if used, are intended to specifically identify forward-looking statements. Those statements appear in a number of places in this Form 10-Q and in other places, and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things:

(i) our future performance and operating results;

(ii) our future operating plans;

(iii) our liquidity and capital resources; and

(iv) our financial condition, accounting policies and management judgments.

Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, the risk factors set forth in Part I, “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K and the following:

(i) any adverse effect or limitations caused by recent increases in government regulation of stem cell storage facilities;

(ii) any increased competition in our business including increasing competition from public cord blood banks particularly in overseas markets but also in the U.S.;

(iii) any decrease or slowdown in the number of people seeking to store umbilical cord blood stem cells or decrease in the number of people paying annual storage fees;

(iv) market acceptance of the Company’s C’elle service will require publication of scientific studies, consumer awareness, and the development of new therapies from the C’elle technology, none of which are certain;

(v) any new services relating to other types of stem cells that have not yet been offered commercially, and there is no assurance that other stem cell services will be launched or will gain market acceptance;

(vi) any adverse impacts on revenue or operating margins due to the costs associated with increased growth in our business, including the possibility of unanticipated costs relating to the operation of our facility and costs relating to the commercial launch of the placental stem cell service offering or any other new types of stem cells;

(vii) any unique risks posed by our international activities, including but not limited to local business laws or practices that diminish our affiliates’ ability to effectively compete in their local markets;

(viii) any technological or medical breakthroughs that would render the Company’s business of stem cell preservation obsolete;

(ix) any material failure or malfunction in our storage facilities; or any natural disaster or act of terrorism that adversely affects stored specimens;

(x) any adverse results to our prospects, financial condition or reputation arising from any material failure or compromise of our information systems;

(xi) the costs associated with defending or prosecuting litigation matters, particularly including litigation related to intellectual property, and any material adverse result from such matters;

(xii) any negative consequences resulting from deriving, shipping and storing specimens at a second location;

(xiii) current market, business and economic conditions in general and in our industry in particular;

(xiv) any adverse performance by or relations with any of our licensees; and

(xv) any inability to enter into new licensing arrangements including arrangements with non-refundable upfront fees;

(xvi) any inability to realize cost savings as a result of recent acquisitions;

(xvii) any inability to realize a return on an investment;

(xviii) any increased U.S. income tax expense as a result of inability to utilize or exhaustion of net operating losses;

(xix) any adverse impact on our revenues as a result of greater emphasis in the future on the promotion of our C’elle service and any shifting of our marketing dollars towards our C’elle service;

(xx) any adverse impact on our revenues and operating margins as a result of discounting of our services in order to generate new business in tough economic times where consumers are selective with discretionary spending

(xxi) other factors many of which are beyond our control

We undertake no obligation to publicly update or revise the forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Cryo-Cell International, Inc. undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K filed by the Company and any Current Reports on Form 8-K filed by the Company.

## Controls and procedures

As filed, 4,730 characters.

### Evaluation of Disclosure Controls and Procedures

Based on their most recent review, as of the end of the period covered by this report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are ineffective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are ineffective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

### Changes in Internal Control Over Financial Reporting

As previously disclosed in our Form 10-K filed on March 1, 2010, during the November 30, 2009, year end closing process, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures and internal controls over financial reporting were not effective, due to a material weakness surrounding the estimated accrual of processing and storage royalties earned from licensees and the deferral of the long-term storage royalties.

Prior to the identification of such material weakness, management had already undertaken, or was in the process of undertaking, a number of steps to design and implement more effective internal controls, including:

- Restructuring the Company’s licensee agreements to work directly with each licensee;
- Adding staffing resources with the primary responsibility being the licensee affiliates;
- Refining the estimate of licensee income going forward.

The changes in the Company’s internal control over financial reporting described in the previous paragraph were implemented prior to the Company reporting its results for the quarter ended February 28, 2010 and as a result of such changes we believe we have remediated the material weakness described above, however the new controls have not been operating for a long enough period of time to conclude that the Company’s disclosure controls are effective. There were no other changes in the Company’s internal controls over financial reporting during the quarter ended February 28, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

### Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

### CEO and CFO Certifications

Appearing as exhibits 31.1 and 31.2 to this report there are Certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this report is the information concerning the evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

## Risk factors

As filed, 591 characters.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended November 30, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Filed Apr 15, 2010.
Source: SEC EDGAR, the filing index for accession 0001193125-10-083704. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.