# Cryo Cell International Inc: Form 10-Q for the period ended May 31, 2013

- Company: [Cryo Cell International Inc](/companies/ccel.md) (CIK 862692)
- Form: 10-Q
- Filed: 2013-07-15
- Accepted by EDGAR: Jul 15, 2013, 21:20 ET
- Period: 2013-05-31
- Accession: 0001193125-13-290824
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/862692/000119312513290824/d542359d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/862692/000119312513290824/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-05-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-03-01 to 2013-05-31 | $4.9m | us-gaap:Revenues |
| Revenue | 6 months, 2012-12-01 to 2013-05-31 | $9.5m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2013-03-01 to 2013-05-31 | $1.4m | us-gaap:CostOfServices |
| Cost of revenue | 6 months, 2012-12-01 to 2013-05-31 | $2.7m | us-gaap:CostOfServices |
| Research and development | 3 months, 2013-03-01 to 2013-05-31 | $7.1k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2012-12-01 to 2013-05-31 | $18.0k | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2013-03-01 to 2013-05-31 | $3.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2012-12-01 to 2013-05-31 | $5.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-03-01 to 2013-05-31 | $88.8k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-12-01 to 2013-05-31 | $651.9k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-03-01 to 2013-05-31 | $262.2k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2012-12-01 to 2013-05-31 | $512.7k | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-03-01 to 2013-05-31 | $42.8k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2012-12-01 to 2013-05-31 | $85.1k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-03-01 to 2013-05-31 | −$243.7k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-12-01 to 2013-05-31 | $348 | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-03-01 to 2013-05-31 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2012-12-01 to 2013-05-31 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-03-01 to 2013-05-31 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2012-12-01 to 2013-05-31 | $0.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-03-01 to 2013-05-31 | 10,946,743 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2012-12-01 to 2013-05-31 | 11,082,564 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2012-12-01 to 2013-05-31 | $1.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2012-12-01 to 2013-05-31 | $230.4k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2012-12-01 to 2013-05-31 | $668.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2013-05-31 | $2.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-05-31 | $9.6m | us-gaap:AssetsCurrent |
| Total assets | at 2013-05-31 | $11.9m | us-gaap:Assets |
| Current liabilities | at 2013-05-31 | $10.7m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2013-05-31 | $2.3m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2013-05-31 | −$9.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,844 characters.

### 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) 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;

(v) 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;

(vi) 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;

(vii) any technological or medical breakthroughs that would render our business of stem cell preservation obsolete;

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

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

(x) the costs associated with defending or prosecuting litigation matters, particularly including litigation related to intellectual property, litigation resulting from the termination of the former Chairman and CEO, and any material adverse result from such matters;

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

(xii) the success of our licensing agreements and their ability to provide us with royalty fees;

(xiii) any difficulties and increased expense in enforcing our international licensing agreements;

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

(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 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;

(xx) the success of our global expansion initiatives;

(xxi) our actual future ownership stake in future therapies emerging from our collaborative research partnerships;

(xxii) the ability of our reproductive tissue storage services to generate new revenues;

(xxiii) our ability to minimize our future costs related to R&D initiatives and collaborations and the success of such initiatives and collaborations;

(xxiv) any inability to successfully identify and consummate strategic acquisitions;

(xxv) any inability to realize benefits from any strategic acquisitions;

(xxvi) the costs associated with proxy contests and its impact on our business and

(xxvii) 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.

### 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 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.

During the six months ended May 31, 2013, total revenue increased 10% as compared to the same period in 2012. The Company reported net income of approximately $350 or $0.00 per basic common share for the six months ended May 31, 2013 compared to a net loss of approximately ($4,907,000) or ($0.43) per basic common share for the same period in 2012. The net income for the six months ended May 31, 2013 principally resulted from the 10% increase in revenues and a 24% decrease in selling, general and administrative expenses. This was partially offset by a 19% increase in cost of sales. During the six months ended May 31, 2012, the cancellation of certain interests in the Illinois Revenue Sharing Agreement and the Bio-Stor Revenue Sharing Agreement resulted in extinguishment of debt in the amount of approximately $1,300,000. There was also approximately $700,000 in stock option expense that was due to the immediate vesting of options issued to the Co-CEOs. A Nomination of Solicitation Notice was received from Mr. Ki Yong Choi on May 30, 2012 nominating himself and five other persons for election as directors to compete with the Company’s board of directors at the 2012 Annual Meeting on July 10, 2012. Pursuant to the Co-CEOs employment agreements, if the Company receives a Nomination of Solicitation Notice, as defined by the Company’s Bylaws, all of the service-based vesting condition options that have been issued to the Co-CEOs will immediately vest. Also, during the six months ended May 31, 2012, the Company reserved approximately $1.7 million of its deferred tax assets. The decision to reserve the deferred tax asset was 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 made certain strategic decisions in fiscal 2011 and fiscal 2012 concerning the negotiated termination of some of the perpetual Revenue Sharing Agreements, the impairment of internal use software that is being replaced with a technology platform that is better suited for the Company’s business needs and the implementation of a national sales force in order to generate growth and future value of the stockholders. The strategic decisions, as well as the costs associated with the 2011 proxy contest and the accrual of severance associated with termination of the Company’s former Chief Executive Officer, resulted in losses in the past few quarters in late fiscal 2011 and the first six months of fiscal 2012. Once a company has had cumulative losses in recent years, regardless if the loss was planned for strategic purposes, the accounting standard does not allow the Company to put significant reliance on future taxable income projections to overcome the more likely than not threshold that the deferred tax assets will be realized.

At May 31, 2013, the Company had cash and cash equivalents of $2,904,464. The Company’s cash increased by approximately $227,000 during the first six months of fiscal 2013, primarily as a result of approximately $1,100,000 provided by operations which was partially offset by approximately $668,000 used for the stock repurchase plan pursuant to which the Company repurchased 300,391 shares of the Company’s common stock during the six months ended May 31, 2013. As of May 31, 2013, the Company had no long-term indebtedness.

### Results of Operations - Six Month Period Ended May 31, 2013 Compared to the Six Month Period Ended May 31, 2012

***Revenues.*** Revenues for the six months ended May 31, 2013 were $9,458,650 as compared to $8,604,138 for the same period in 2012. The increase in revenue was primarily attributable to an 11% increase in processing and storage fees, which was partially offset by a 1% decrease in licensee income.

*Processing and Storage Fees.* The increase in processing and storage fee revenue is primarily attributable to an increase in specimens processed of 18%, and a 4% increase in recurring annual storage fee revenue.

*Licensee Income.* Licensee income for the six months ended May 31, 2013, was $651,764 as compared to $660,875 for the 2012 period. Licensee income for the six months ended May 31, 2013 consisted of royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. Licensee income for the six months ended May 31, 2012 consisted of $645,875 in royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The remaining licensee income of $15,000 related to installment payments of non-refundable up-front license fees from the licensees of the Company’s umbilical cord blood program in Nicaragua.

***Cost of Sales.*** Cost of sales for the six months ended May 31, 2013 was $2,654,837 as compared to $2,236,803 for the same period in 2012, representing a 19% increase. Cost of sales was 28% of revenues for the six months ended May 31, 2013 and 26% for the six months ended May 31, 2012. 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 $104,000 and $107,000 for the six months ended May 31, 2013 and 2012, respectively.

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses for the six months ended May 31, 2013 were $5,653,246 as compared to $7,445,493 for the 2012 period representing a 24% decrease. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees. The decrease in selling, general and administrative expenses is primarily due to a decrease of approximately $956,000 or 30% in sales and marketing due to the Company’s refocus on sales initiatives and a decrease of approximately $858,000 or 84% in stock compensation expense for options. The stock option expense during the six months ended May 31, 2012 is mainly the result of the Nomination of Solicitation Notice received from Mr. Ki Yong Choi on May 30, 2012, please see Overview above.

***Abandonment of Patents.*** During the six months ended May 31, 2013, management decided to discontinue pursuing certain patents and trademarks resulting in a write-off of approximately $379,000, for abandoned patents and trademarks related to the Company’s menstrual stem cell technology which is reflected as abandonment of patents in the accompanying consolidated statements of operations. The impact to future operations is immaterial and it will not impact the Company’s core operations.

***Research, Development and Related Engineering Expenses.*** Research, development and related engineering expenses for the six months ended May 31, 2013 were $17,986 as compared to $22,420 for the 2012 period representing a 20% decrease. The expenses for the six months ended May 31, 2013 and 2012 are primarily comprised of expenses related to the Company’s cord tissue product.

***Depreciation and Amortization***. Depreciation and amortization (not included in Cost of Sales) for the six months ended May 31, 2013 was $101,855 compared to $101,090 for the 2012 period.

***Extinguishment of Revenue Sharing Agreements***. In December 2011, the Company entered into an Asset Purchase Agreement with Bio-Stor canceling the Bio-Stor Revenue Sharing Agreement. Pursuant to the terms of the Asset Purchase Agreement, on December 6, 2011, the Company made a one-time, lump-sum payment in the amount of $2.3 million to Bio-Stor, and Bio-Stor sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in the Bio Stor Revenue Sharing Agreement. In May 2012, the Company entered into Asset Purchase Agreements with two investors who each had a 22% interest in 45% of the Illinois Revenue Sharing Agreement (“Illinois RSA”). Pursuant to the terms of the Asset Purchase Agreements, in May 2012, the Company made a one-time, lump-sum payment in the amount of $138,000 to each of the investors, and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their 22% interest of 45% of the Illinois RSA. The total payment amount of $2,576,000 was offset by the carrying amount of the short-term liability related to Bio-Stor and the Illinois Revenue Sharing Agreements in the amount of $1,100,000 and an accrued expense in the amount of $194,055 to reflect the extinguishment of revenue sharing agreements in the amount of $1,281,945 for the six months ended May 31, 2012.

***Interest Expense.*** Interest expense during the six months ended May 31, 2013, was $512,749 compared to $576,416 during the comparable period in 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. The decrease of 11% is a result of the extinguishment of the revenue sharing agreements.

***Equity in Losses of Affiliate.*** Equity in losses of affiliate was $76,900 for the six months ended May 31, 2013, compared to $77,664 for the 2012 period. Equity in losses of affiliate for the six months ended May 31, 2013 and 2012, solely consists of amounts related to compensation expense for Saneron stock option awards that were granted by Saneron to certain consultants and employees.

***Income Taxes***. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance, the Company must project future levels of taxable income. This assessment requires significant judgment. The Company examined the evidence related to the recent history of tax losses, the economic conditions in 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 $85,118 and $82,029 for the six months ended May 31, 2013 and 2012, 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 the past few quarters in late fiscal 2011 and the first six months of fiscal 2012. The accounting standards surrounding income taxes require a company to consider whether it is more likely than not that the deferred tax assets will be realized. Once a company has had cumulative losses in recent years, regardless of the nature of the loss, the accounting standards do not allow the Company to put significant reliance on future taxable income projections to overcome the more likely than not threshold that the deferred tax assets will be realized. As a result of these recent cumulative losses, the Company reserved approximately $1,700,000 as of May 31, 2012 resulting in a charge to earnings during the six months ended May 31, 2012.

The Company did not record U.S. income tax expense or benefit during the six months ended May 31, 2013 due to the utilization of net operating losses and foreign tax credit carryforwards, which were previously reserved through valuation allowances in the Company’s financial statements.

### Results of Operations - Three Month Period Ended May 31, 2013 Compared to the Three Month Period Ended May 31, 2012

***Revenues.*** Revenues for the three months ended May 31, 2013 were $4,858,563 as compared to $4,425,549 for the same period in 2012. The increase in revenue was primarily attributable to a 10% increase in processing and storage fees and a 3% increase in licensee income.

*Processing and Storage Fees.* The increase in processing and storage fee revenue is primarily attributable to an increase in specimens processed of 23%, and a 4% increase in recurring annual storage fee revenue.

*Licensee Income.* Licensee income for the three months ended May 31, 2013, was $328,230 as compared to $319,133 for the 2012 period. Licensee income for the three months ended May 31, 2013 consisted of royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. Licensee income for the three months ended May 31, 2012 consisted of $309,133 in royalty income earned on the processing and storage of cord blood stem cell specimens in geographic areas where the Company has license agreements. The remaining licensee income of $10,000 related to installment payments of non-refundable up-front license fees from the licensees of the Company’s umbilical cord blood program in Nicaragua.

***Cost of Sales.*** Cost of sales for the three months ended May 31, 2013 was $1,375,024 as compared to $1,209,900 for the same period in 2012, representing a 14% increase. Cost of sales was 28% of revenues for the three months ended May 31, 2013 and 27% for the three months ended May 31, 2012. Cost of sales includes wages and supplies associated with process enhancements to the existing production procedures and quality systems in the processing of cord blood specimens at the Company’s facility in Oldsmar, Florida and depreciation expense of approximately $53,000 and $53,000 for the three months ended May 31, 2013 and 2012, respectively. The increase in cost of sales is primarily attributable to process enhancements during the three months ended May 31, 2013 compared to the 2012 period.

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses for the three months ended May 31, 2013 were $2,957,968 as compared to $4,284,696 for the 2012 period representing a 31% decrease. These expenses are primarily comprised of expenses for consumer advertising, salaries and wages for personnel and professional fees. The decrease in selling, general and administrative expenses is primarily due to a decrease of approximately $643,000 or 35% in sales and marketing due to Company’s refocus on sales initiatives and a decrease of approximately $688,000 in stock compensation expense for options, see Overview above.

***Abandonment of Patents.*** During the three months ended May 31, 2013, management decided to discontinue pursuing certain patents and trademarks resulting in a write-off of approximately $379,000, for abandoned patents and trademarks related to the Company’s menstrual stem cell technology which is reflected as abandonment of patents in the accompanying consolidated statement of operations. The impact to future operations is immaterial and it will not impact the Company’s core operations.

***Research, Development and Related Engineering Expenses.*** Research, development and related engineering expenses for the three months ended May 31, 2013 were $7,065 as compared to $7,841 for the 2012 period. The expenses for each period primarily relate to the implementation of the Company’s cord tissue service.

***Depreciation and Amortization***. Depreciation and amortization (not included in Cost of Sales) for the three months ended May 31, 2013 was $50,841 compared to $44,835 for the 2012 period.

***Extinguishment of Revenue Sharing Agreements***. In May 2012, the Company entered into Asset Purchase Agreements with two investors who each had a 22% interest in 45% of the Illinois Revenue Sharing Agreement (“Illinois RSA”). Pursuant to the terms of the Asset Purchase Agreements, in May 2012, the Company made a one-time, lump-sum payment in the amount of $138,000 to each of the investors, and the investors sold, assigned, conveyed, transferred, and delivered to the Company all of its rights, interest and title in their 22% interest of 45% of the Illinois RSA. The payment amounts of $276,000 was offset by the carrying amount of the short-term liability related to the Illinois Revenue Sharing Agreements in the amount of $200,000 and an accrued expense in the amount of $21,445 to reflect the extinguishment of revenue sharing agreements in the amount of $54,555 for the three months ended May 31, 2012.

***Interest Expense.*** Interest expense during the three months ended May 31, 2013, was $262,211 compared to $277,251 during the comparable period in 2012. Interest expense is mainly comprised of payments made to the other parties to the Company’s RSAs based on the Company’s storage revenue. The decrease of 5% is a result of the extinguishment of the revenue sharing agreements.

***Equity in Losses of Affiliate.*** Equity in losses of affiliate was $38,450 for the three months ended May 31, 2013, compared to $38,832 for the 2012 period. Equity in losses of affiliate for the three months ended May 31, 2013 and 2012, 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, the Company must project future levels of taxable income. This assessment requires significant judgment. The Company examined the evidence related to the recent history of tax losses, the economic conditions in 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 $42,794 and $24,884 for the three months ended May 31, 2013 and 2012, respectively, of foreign income tax expense, which is included in income tax expense in the accompanying consolidated statements of operations. The increase in foreign tax expense is attributable to the increase in royalties recognized during the period ended May 31, 2013 compared to May 31, 2012.

The Company has made certain strategic decisions during 2011 and 2012 concerning the negotiated termination of some of the perpetual Revenue Sharing Agreements (“RSA’s”), the impairment of internal use software that is being replaced with a technology platform that is better suited for the Company’s business needs and the implementation of a national sales force in order to generate growth and future value for the Company’s stockholders. These strategic decisions, including the decision to terminate the former CEO’s employment, resulted in losses in the past few quarters in late fiscal 2011 and the first six months of fiscal 2012. The accounting standards surrounding income taxes require a company to consider whether it is more likely than not that the deferred tax assets will be realized. Once a company has had cumulative losses in recent years, regardless of the nature of the loss, the accounting standards do not allow the Company to put significant reliance on future taxable income projections to overcome the more likely than not threshold that the deferred tax assets will be realized. As a result of these recent cumulative losses, the Company reserved approximately $1,700,000 as of May 31, 2012 resulting in a charge to earnings during the three months ended May 31, 2012.

The Company did not record U.S. income tax expense or benefit during the three months ended May 31, 2013 due to the utilization of net operating losses and foreign tax credit carryforwards, which were previously reserved through valuation allowances in the Company’s financial statements.

### Liquidity and Capital Resources

Through May 31, 2013, the Company’s principal source of cash has been from sales of its umbilical cord blood program to customers, the sale of license agreements and royalties from licensees. The Company does not expect a change in its principal source of cash flow.

At May 31, 2013, the Company had cash and cash equivalents of $2,904,464 as compared to $2,677,382 at November 30, 2012. The increase in cash and cash equivalents during the six months ended May 31, 2013 was primarily attributable to the following:

Net cash provided by operating activities for the six months ended May 31, 2013 was $1,089,396 which was primarily attributable to the Company’s operating results. The positive operating results were principally due to a 10% increase in revenues and a 24% decrease in selling, general and administrative expenses. This was partially offset by a 19% increase in cost of sales.

Net cash used in operating activities for the six months ended May 31, 2012 was $434,346 which was primarily attributable to the Company’s net loss, partially offset by non-cash expenses and implementation of interest-free financing plans and increases in working capital components.

Net cash used in investing activities for the six months ended May 31, 2013 was $206,173, which was primarily attributable to the purchases of property and equipment.

Net cash provided by investing activities for the six months ended May 31, 2012 was $907,479, 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 financing activities for the six months ended May 31, 2013 was $656,141, which was primarily attributable the stock repurchase plan pursuant to which the Company has repurchased 300,391 shares of the Company’s common stock for approximately $668,000.

Net cash used in financing activities for the six months ended May 31, 2012 was $3,976,471, which was primarily attributable to the payment of $2,576,000 for the cancellation of certain interests in certain Revenue Sharing Agreements and the stock repurchase plan pursuant to which the Company has repurchased 674,379 shares of the Company’s common stock for approximately $1,400,000.

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 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

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 1 to the Consolidated Financial Statements included in our 2012 Annual Report on Form 10-K filed with the SEC. Our most critical accounting policies and estimates include: recognition of revenue and the related allowance for doubtful accounts, stock-based compensation, income taxes and license and revenue sharing agreements. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, *Management’s Discussion and Analysis of Financial Condition and Results of Operations* included in our 2012 Annual Report on Form 10-K.

### Recently Issued Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, *Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“*ASU 2013-02”). This update will require companies to present information about amounts reclassified out of accumulated other comprehensive income and their corresponding effect on net income in one place and reference the amounts to the related footnote disclosures. Current accounting standards present this information in different places throughout the financial statements. ASU 2013-02 is effective for interim and annual periods beginning after December 15, 2012, with early adoption permitted. The adoption of ASU 2013-02 will only impact disclosure requirements and will not have any effect on the Company’s consolidated financial statements or on its financial condition.

### Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably 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.

## Controls and procedures

As filed, 3,301 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 effective, and 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 effective 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

There were no changes in the Company’s internal controls over financial reporting during the three months ended May 31, 2013 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 co-CEOs 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, controls 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, 31.2 and 31.3 to this report there are Certifications of the Co-CEO’s 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, 390 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, 2012, 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.

Filed Jul 15, 2013.
Source: SEC EDGAR, the filing index for accession 0001193125-13-290824. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.