UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
for the transition period from _________ to _________
CORD BLOOD AMERICA, INC.
(Exact Name of Small Business Registrant as Specified in its Charter)
| FLORIDA | 000-50746 | 90-0613888 | ||
| (State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |
1857 HELM DRIVE LAS VEGAS, NV 89119 | 89119 | |
| (Address of principal executive offices) | (Zip Code) |
(702) 914-7250
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings for the past 90 days. Yes ☑ No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company filer | ☑ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.): Yes ☐ No ☑
Number of shares of Cord Blood America, Inc. common stock, $0.0001 par value, outstanding as of August 12, 2016, 1,272,066,146 exclusive of treasury shares.
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
| PART I. FINANCIAL INFORMATION | ||||
| Item 1. | Condensed Consolidated Financial Statements (unaudited) | 3 | ||
| Condensed Consolidated Balance Sheets June 30, 2016 (unaudited) and December 31, 2015 (audited) | 3 | |||
| Condensed Consolidated Statements of Income (unaudited) for the six months ended June 30, 2016 and June 30, 2015 | 4 | |||
| Condensed Consolidated Statements of Income (unaudited) for the three months ended June 30, 2016 and June 30, 2015 | 5 | |||
| Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2016 and June 30, 2015 | 6 | |||
| Notes to Condensed Consolidated Financial Statements (unaudited) | 7 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 | ||
| Item 4T. | Controls and Procedures | 20 | ||
| PART II. OTHER INFORMATION | ||||
| Item 1. | Legal Proceedings | 21 | ||
| Item 1A. | Risk Factors | 21 | ||
| Item 2. | Unregistered Sales Of Equity Securities And Use Of Proceeds | 21 | ||
| Item 3. | Defaults Upon Senior Securities | 21 | ||
| Item 4. | Mine Safety Disclosures | 21 | ||
| Item 5. | Other Information | 21 | ||
| Item 6. | Exhibits | 22 | ||
| Signatures | 26 | |||
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PART I. FINANCIAL INFORMATION
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2016 (unaudited) | December 31, 2015 | |
| Current assets: | ||
| Cash | $1,163,592 | $789,046 |
| Accounts receivable, net of allowance for doubtful accounts of $144,993 and $105,037, respectively | 135,505 | 349,859 |
| Other current assets | 120,578 | 126,352 |
| Note receivable – Banco Vida – current portion | -- | 58,709 |
Receivable – Biocells net of discount of $28,042 and $28,105, respectively - current portion | 56,957 | 16,895 |
| Prepaid expenses | 77,459 | 151,874 |
| Total current assets | 1,554,091 | 1,492,735 |
| Property and equipment, net of accumulated depreciation and amortization of $720,358 and $695,335, respectively | 94,386 | 119,189 |
| Customer contracts and relationships, net of accumulated amortization of $4,156,307 and $4,040,983, respectively | 1,475,292 | 1,637,409 |
| Note receivable – Banco Vida – long term portion | -- | 4,432 |
| Receivable - BioCells net of discount of $153,335 and $167,231, respectively - long term portion | 406,665 | 447,769 |
| Total assets | $3,530,434 | $3,701,534 |
| Liabilities and Stockholders’ equity | ||
| Accounts payable | $40,789 | $152,805 |
| Accrued expenses | 183,815 | 204,939 |
| Deferred revenue – current portion | 1,285,249 | 1,297,244 |
| Derivative liability – current portion | 269,035 | 182,213 |
| Interest on promissory notes | 171,257 | 128,607 |
| Promissory notes payable, net of unamortized discount of $146,384 and $113,778, respectively | 634,691 | 292,298 |
| Total current liabilities | 2,584,836 | 2,258,106 |
| Deferred revenue - long term portion | 286,190 | 304,188 |
| Derivative liability - long term portion | 66,797 | 255,290 |
| Promissory notes payable – long term portion – net of unamortized discount of $36,345 and $159,407, respectively | 157,580 | 409,517 |
| Total liabilities | 3,095,403 | 3,227,101 |
| Stockholders' equity: | ||
| Preferred stock, $.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding | -- | -- |
| Common stock, $.0001 par value, 2,890,000,000 shares authorized, 1,272,066,146 shares issued and outstanding, inclusive of treasury shares, respectively | 127,207 | 127,207 |
| Additional paid-in capital | 53,954,510 | 53,954,510 |
| Common stock held in treasury stock, 20,000 shares | (599,833) | (599,833) |
| Accumulated deficit | (53,046,853) | (53,007,451) |
| Total stockholders’ equity | 435,031 | 474,433 |
| Total liabilities and stockholders' equity | $3,530,434 | $3,701,534 |
See accompanying notes to these unaudited condensed consolidated financial statements
3
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015
SIX-MONTH PERIOD | SIX-MONTH PERIOD | |
ENDED | ENDED | |
JUNE 30, | JUNE 30, | |
2016 | 2015 | |
| Revenue | $1,779,587 | $2,687,990 |
| Cost of services | (541,819) | (911,133) |
| Gross profit | 1,237,768 | 1,776,857 |
| Administrative and selling expenses | (1,266,006) | (1,645,490) |
| Income (loss) from operations | (28,238) | 131,367 |
| Interest expense and change in derivative liability | (31,435) | (273,773) |
| Gain on recovery of loan receivable | -- | 10,000 |
| Gain on settlement payable | -- | 346,269 |
| Loss on legal settlement | -- | (28,652) |
| Other income | 20,271 | 3,000 |
| Income (loss) from continuing operations before provision for income taxes | (39,402) | 188,211 |
| Income Taxes | -- | -- |
| Net income (loss) | $(39,402) | $188,211 |
| Basic earnings per share | $(0.00) | $0.00 |
| Weighted average common shares outstanding | ||
| Basic weighted average common shares outstanding | 1,272,066,146 | 1,272,066,146 |
See accompanying notes to these unaudited condensed consolidated financial statements
4
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015
THREE-MONTH PERIOD | THREE-MONTH PERIOD | |
ENDED | ENDED | |
JUNE 30, | JUNE 30, | |
2016 | 2015 | |
| Revenue | $793,241 | $1,411,468 |
| Cost of services | (201,489) | (508,674) |
| Gross profit | 591,752 | 902,794 |
| Administrative and selling expenses | (600,655) | (871,884) |
| Income (loss) from operations | (8,904) | 30,910 |
| Interest expense and change in derivative liability | (29,980) | 36,890 |
| Gain on recovery of loan receivable | -- | 10,000 |
| Gain on settlement payable | -- | 346,269 |
| Loss on legal settlement | -- | (28,652) |
| Other income | 7,073 | 1,500 |
| Income (loss) from continuing operations before provision for income taxes | (31,811) | 396,917 |
| Income Taxes | -- | -- |
| Net income (loss) | $(31,811) | $396,917 |
| Basic earnings per share | $(0.00) | $0.00 |
| Weighted average common shares outstanding | ||
| Basic weighted average common shares outstanding | 1,272,066,146 | 1,272,066,146 |
See accompanying notes to these unaudited condensed consolidated financial statements
5
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX-MONTH | SIX-MONTH | |
PERIOD ENDED | PERIOD ENDED | |
JUNE 30, | JUNE 30, | |
2016 | 2015 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||
| Net income (loss) | $(39,402) | $188,211 |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||
| Amortization of loan discount | 90,457 | 283,779 |
| Amortization of loan receivable discount | (13,958) | -- |
| Depreciation and amortization | 186,920 | 204,408 |
| Change in value of derivative liability | (101,671) | (381,142) |
| Bad debt | 11,644 | 49,215 |
| Gain on recovery of loan receivable | -- | (10,000) |
| Other income from loan receivable | (6,313) | -- |
| Changes in accounts receivable | 202,710 | (262,467) |
| Changes in other current assets | -- | (22,566) |
| Changes in inventory | 5,774 | 12,859 |
| Changes in prepaid | 74,415 | (18,548) |
| Changes in accounts payable | (112,016) | (67,433) |
| Changes in accrued expenses | (21,125) | (184,551) |
| Changes in accrued interest | 42,650 | 71,136 |
| Changes in deferred revenue | (29,993) | 128,220 |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF CONTINUING OPERATIONS | 290,092 | (8,879) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||
| Payments for purchase of property and equipment | -- | (17,861) |
| Payment for loan receivable - Biocells | 15,000 | 10,000 |
| Payment for loan receivable - Banco Vida | 69,454 | -- |
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS | 84,454 | (7,861) |
| CASH FLOWS FROM FINANCING ACTIVITIES | ||
| Proceeds from share issuance | -- | 724,000 |
| Repayment of notes payable | -- | (750,000) |
| NET CASH USED IN FINANCING ACTIVITIES OF CONTINUING OPERATIONS | -- | (26,000) |
| NET INCREASE (DECREASE) IN CASH | 374,546 | (42,740) |
| Cash balance at beginning of period | $789,046 | $750,886 |
| Cash balance at end of period | $1,163,592 | $708,146 |
See accompanying notes to these unaudited condensed consolidated financial statements
6
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
(UNAUDITED)
Note 1. Organization and Description of Business
Overview
Cord Blood America, Inc. ("CBAI" or the “Company”), formerly D&A Lending, Inc., was incorporated in the State of Florida on October 12, 1999. In October, 2009, CBAI re-located its headquarters from Los Angeles, California to Las Vegas, Nevada. CBAI's wholly-owned subsidiaries include Cord Partners, Inc., CorCell Companies, Inc., CorCell, Ltd., (Cord Partners, Inc., CorCell Companies, Inc. and CorCell, Ltd. are sometimes referred to herein collectively as “Cord”), CBA Properties, Inc. ("Properties"), and Career Channel, Inc. formerly D/B/A Rainmakers International. CBAI and its subsidiaries engage in the following business activities:
| ● | CBAI and Cord specialize in providing private cord blood and cord tissue stem cell services. Additionally, the Company is in the business of procuring birth tissue for organizations utilizing the tissue in the transplantation and/or research of therapeutic based products. |
| ● | Properties was formed to hold corporate trademarks and other intellectual property. |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete annual financial statements. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. Operating results for the three months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or for any other future period. The condensed consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements of the Company for the period ended December 31, 2015 and notes thereto included in the Company's annual report on Form 10-K. The Company follows the same accounting policies in the preparation of interim reports as noted in the Company's annual report on Form 10-K.
Note 2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of CBAI and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated upon consolidation.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
7
Cash
Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.
The company maintains cash and cash equivalents at several financial institutions.
Accounts Receivable
Accounts receivable consist of the amounts due for facilitating the processing and storage of umbilical cord blood and cord tissue, and birth tissue procurement services. Accounts receivable relating to deferred revenues are netted against deferred revenue for presentation purposes. The allowance for doubtful accounts is estimated based upon historical experience. The allowance is reviewed quarterly and adjusted for accounts deemed uncollectible by management. Amounts are written off when all collection efforts have failed.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Routine maintenance and repairs are charged to expense as incurred while major replacement and improvements are capitalized as additions to the related assets. Sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the related asset and accumulated depreciation accounts with any gain or loss credited or charged to income upon disposition.
Impairment of Long-Lived Assets
Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. The Company reviews goodwill for impairment at least annually or whenever events or circumstances are more likely than not to reduce the fair value of goodwill below its carrying amount.
Inventory
Inventory, comprised principally of finished goods, is stated at the lower of cost or market using the first-in, first-out (“FIFO”) method. This policy requires the Company to make estimates regarding the market value of its inventory, including an assessment of excess or obsolete inventory. The Company determines excess and obsolete inventory based on an estimate of the future demand and estimated selling prices for its products.
Loans Receivable
Loan receivable consists of the loans due from Biocordcell Argentina S.A. (BioCells) and Banco Vida (Note 4). The loans receivable are recorded at carrying-value on the financial statements.
For loan receivable from BioCells, since the Company agreed to finance the sale of the shares in Biocordcell at no stated interest, in accordance with ASC 500, the interest method was applied using a 6% borrowing rate. The Company recorded an unamortized discount based on the 6% borrowing rate and the discount amortized throughout the life of the loan.
Deferred Revenue
Deferred revenue consists of payments for enrollment in the program and processing of umbilical cord blood and cord tissue by customers whose samples have not yet been collected, as well as the pro-rata share of annual storage fees for customers whose samples were stored during the year.
8
Valuation of Derivative Instruments
ASC 815-40 (formerly SFAS No. 133 "Accounting for derivative instruments and hedging activities"), requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and in accordance with ASC 815-40-15 (formerly EITF 00-19 "Accounting for derivative financial instruments indexed to, and potentially settled in, a company's own stock") to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Binomial option pricing formula and present value pricing. At June 30, 2016 and December 31, 2015, the Company adjusted its derivative liability to its fair value, and reflected the change in fair value, in its consolidated statement of operations.
Revenue Recognition
CBAI recognizes revenue under the provisions of ASC 605-25 (previously Staff Accounting Bulletin 104 “Revenue Recognition”). CBAI provides a combination of products and services to customers. This combination arrangement is evaluated under ASC 605-25-25 (previously Emerging Issues Task Force Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"). ASC 605-25-25 addresses certain aspects of accounting for arrangements under multiple revenue generating activities.
Cord recognizes revenue from both enrollment fees and processing fees upon the completion of processing while revenue from storage fees are recognized ratably over the contractual storage period.
Cost of Services
Costs are incurred as umbilical cord blood, cord tissue and birth tissue are collected. These costs include the transportation of the umbilical cord blood, cord tissue and birthing tissue from the hospital, direct material, costs for processing and cryogenic storage of new samples by a third party laboratory, collection kit materials and allocated rent, utility and general administrative expenses. The Company expenses costs in the period incurred.
Accounting for Stock Option Plan
The Company’s share-based employee compensation plans are described in Note 6. On January 1, 2006, the Company adopted the provisions of ASC 718 , “Accounting for Stock-based Compensation (Revised 2004)” (“123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options.
Earnings (Loss) Per Share
Basic earnings per share (EPS) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised. The Company’s common equivalent shares are excluded from the computation of diluted EPS if the effect is anti-dilutive. The Company has net loss for the period ended June 30, 2016, the effect is anti-dilutive.
Concentration of Risk
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet their contractual obligations to be similarly affected by changes in economic or other conditions described below.
Relationships and agreements which could potentially expose the Company to concentrations of credit risk consist of the use of one source for the processing and storage of all umbilical cord blood and one source for the development and maintenance of a website. The Company believes that alternative sources are available for each of these concentrations.
9
Financial instruments that subject the Company to credit risk could consist of cash balances maintained in excess of federal depository insurance limits. The Company maintains its cash and cash equivalent balances with high credit quality financial institutions. At times, cash and cash equivalent balances may be in excess of Federal Deposit Insurance Corporation limits. To date, the Company has not experienced any such losses.
Fair Value Measurements
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure the fair value. Level inputs, as defined by ASC 820-10, are as follows:
| ● | Level 1 – quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date. |
| ● | Level 3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date. |
The following table summarizes fair value measurements by level at June 30, 2016 for assets and liabilities measured at fair value on a recurring basis:
Level 1 | Level 2 | Level 3 | Total | |
| Cash | $1,163,592 | $-- | $-- | $1,163,592 |
| Derivative liability | -- | -- | (335,832) | (335,832) |
Derivative liability was valued under the Binomial model with the following assumptions:
| Risk free interest rate | 0.58% |
| Expected life | 1.25 years |
| Dividend Yield | 0% |
| Volatility | 109% |
The following table summarizes fair value measurements by level at December 31, 2015 for assets and liabilities measured at fair value on a recurring basis:
Level 1 | Level 2 | Level 3 | Total | |
| Cash | $789,046 | $-- | $-- | $789,046 |
| Derivative liability | -- | -- | (437,503) | (437,503) |
Derivative liability was valued under the Binomial model, with the following assumptions:
| Risk free interest rate | 0.63% |
| Expected life | 1.75 years |
| Dividend Yield | 0% |
| Volatility | 103% |
For certain of the Company’s financial instruments, including cash, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses, and deferred revenues, the carrying amounts approximate fair value due to their short maturities. The carrying amounts of the Company’s notes receivable and notes payable approximates fair value based on the prevailing interest rates.
10
Reclassification
Certain amounts in the condensed consolidated statements of income for the three and six months ended June 30, 2015 have been reclassified to be consistent with the current year presentation. The reclassification had no impact on the Company’s financial condition, result of operations, or cash flows.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued an accounting standard update on revenue recognition that will be applied to all contracts with customers. The update requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will be required to be applied on a retrospective basis, using one of two methodologies, and will be effective for fiscal years beginning after December 15, 2016, with early application not being permitted. The Company is currently assessing the impact that the guidance will have on the Company's financial condition and results of operations.
In April 2015, the FASB issued an accounting standard update on simplifying the presentation of debt issuance costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. Updates are effective for financial statements issued for fiscal years beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.
Note 3. Notes and Loans Payable
At June 30, 2016 and December 31, 2015 notes and loans payable consist of:
June 30, 2016 | December 31, 2015 | |
| Secured Convertible Promissory Note to Tonaquint, Inc., 7.5% per annum; due on or before September 17, 2017 | $975,000 | $975,000 |
975,000 | 975,000 | |
| Less: Unamortized Discount | (182,729) | (273,185) |
$792,271 | $701,815 |
Tonaquint, Inc.
On August 30, 2013, Cord Blood America, Inc. (the “Company”) filed a 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”), case number 2:13-cv-00806-PMW (the “Action”), and on May 7, 2014, the Company filed an amended complaint. On September 25, 2013, Defendants each filed their Answer and Counterclaim in the Action, which they amended on March 22, 2014.
On December 17, 2014, in settlement of the Action, the parties entered into a Settlement and Exchange Agreement (the "Settlement Agreement"). Pursuant to the Settlement Agreement, the Secured Convertible Promissory Note and the Warrant to Purchase Shares of Common Stock issued by the Company to St. George on or around March 10, 2011, as well as the SGI Purchase Agreement, and all other documents that made up the March 2011 transaction between the Company and St. George, all of which have been set forth in detail in prior filings by the Company, were terminated, cancelled or otherwise extinguished. Further pursuant to the Settlement Agreement, the Tonaquint Note was exchanged for a Secured Convertible Promissory Note of the Company in the principal amount of $2,500,000 (the "Company Note"), and certain of the other documents that were part of the June 27, 2012 transaction between the Company and Tonaquint (the “June 2012 Tonaquint Transaction”) were terminated, cancelled or otherwise extinguished, and certain of them were amended, as set forth below.
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Under the Company Note, the Company shall make monthly payments to Tonaquint, with the first payment due on or before April 17, 2015, and with payments continuing thereafter until the Company's Note is paid in full, with a maturity date that is 33 calendar months after the effective date of December 17, 2014. The amount of the monthly payments is $100,000 (the “Installment Amount”); provided, however, that if the remaining amount owing under the Company Note as of the applicable Installment Date (defined in the Company Note) is less than $100,000, then the Installment Amount for such Installment Date shall be equal to the outstanding amount. The Company may prepay any or all of the outstanding amount of the Company Note at any time, without penalty. In the event the Company prepays an amount that is less than the outstanding amount, then the prepayment amount shall be applied to the next Installment Amount(s) due under the Company Note.
For each monthly payment, the Company may elect to designate all or any portion of the Installment Amount then due as a conversion eligible amount (hereafter “Conversion Eligible Amount”); provided that the total outstanding Conversion Eligible Amount that has not been converted by Tonaquint, as set forth below, at any given time may not exceed one hundred thousand dollars ($100,000) without Tonaquint’s prior written consent and subject to additional restrictions set forth in the Company Note. In the event the Company designates any portion of any monthly payment amount as a Conversion Eligible Amount, the applicable monthly payment shall be reduced by an amount equal to the portion thereof designated as a Conversion Eligible Amount. The Conversion Eligible Amount shall continue to be included in and be deemed to be a part of the Outstanding Balance (defined in the Company Note) of the Company Note unless and until such amount is either paid in cash by the Company or converted into Common Stock by Tonaquint. The Company may pay the Conversion Eligible Amount in cash, provided that no prepayments of cash shall reduce the Conversion Eligible Amount until the Outstanding Balance is equal to or less than the Conversion Eligible Amount.
Once the Company has designated amounts as Conversion Eligible Amount, Tonaquint may convert all or any portion of that amount into shares of the Company's Common Stock. In the event of a conversion by Tonaquint of a Conversion Eligible Amount, the number of Common Stock shares delivered to Tonaquint upon conversion will be calculated by dividing the amount of the Company Note that is being converted by 70% of the average of the three (3) lowest Closing Bid Prices of the Common Stock (as defined in the Company Note) in the twenty (20) Trading Days immediately preceding the applicable Conversion.
The Company records debt discounts in connection with the issuance of convertible debt and the initial valuation of the derivative liability. The discounts are amortized to non-cash interest expense over the life of the debt.
The Company Note has an interest rate of 7.5%, compounding daily, which would increase to a rate of 15.0% on the happening of certain Events of Default (defined in the Company Note) that are not considered a Payment Default (defined in the Company Note), provided that the Company may cure the default in accordance with and subject to the terms set forth in the Company Note. Where a Payment Default occurs, including where (i) Borrower shall fail to pay any principal, interest, fees, charges, or any other amount when due and payable under that Company Note; or (ii) Borrower shall fail to deliver any Conversion Shares in accordance with the terms of the Company Note, late fees shall accrue as set forth in the Company Note, and in addition, the Company shall have ninety (90) days from delivery of notice of default from Tonaquint to cure the default, as set forth in more detail in the Company Note. If the Company fails to cure the Payment Default, Tonaquint may accelerate the Company Note by written notice to the Company, with the Outstanding Balance becoming immediately due and payable in cash at the Mandatory Default Amount (defined in the Company Note) equal to (i) the Outstanding Balance as of the date of acceleration (which Outstanding Balance, for the avoidance of doubt, will include all Late Fees that accrue until any applicable Payment Default is cured) multiplied by (ii) two hundred fifty percent (250%), along with other remedies, as set forth in the Company Note.
As of December 31, 2015, the principal balance on the Tonaquint note was $975,000, and there was $128,607 of accrued interest. As of June 30, 2016, the principal balance on the Tonaquint note was $975,000, and there was $171,257 of accrued interest.
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Note 4: Investment and Notes Receivable, Related Parties
At June 30, 2016 and December 31, 2015, notes receivable consist of:
June 30, 2016 | December 31, 2015 | |
| Effective August 14, 2014, Company entered into a Secured Promissory Note with Banco Vida which carries 8% interest per annum. Interest only payments for first 12 months; thereafter principal and interest on standard amortization schedule due on or before February 1, 2017. | $-- | $63,141 |
| On September 29, 2014, the Company closed a transaction selling its stake in BioCells to Diego Rissola; current President. Payments are to be annually, after June of 2015, and the last payment due on or before June 1, 2025. | 645,000 | 660,000 |
| Unamortized discount on BioCells note receivable | (181,378) | (195,336 ) |
| Allowance of doubtful accounts on BioCells note receivable | -- | -- |
$463,622 | $527,805 |
Under the Agreement with the Purchaser of BioCells, BioCells is to make payments as follows: $5,000 on or before October 12, 2014 (amount paid in 2014); $10,000 on or before December 1, 2014 (amount paid in 2015); $15,000 on or before March 1, 2015 (amount paid in 2015); $15,000 on or before June 1, 2015 (amount paid in 2015); $45,000 on or before June 1, 2016 ($15,000 has been paid as of June 30, 2016); $55,000 on or before June 1, 2017; $55,000 on or before June 1, 2018; $55,000 on or before June 1, 2019; $65,000 on or before June 1, 2020; $75,000 on or before June 1, 2021; $75,000 on or before June 1, 2022; $75,000 on or before June 1, 2023; $80,000 on or before June 1, 2024; $80,000 on or before June 1, 2025. As of June 30, 2016, the Purchaser has paid $15,000 of the $45,000 payment due on June 1, 2016. The Purchaser made an additional payment after June 30, 2016, as described in Note 8 Subsequent Events. This loan receivable is secured, non-interest bearing, and subject to a 6% discount rate. As of June 30, 2016, the receivable has a balance of $463,622.
As of March 15, 2016, Cord Blood Caribbean, Inc. d/b/a Banco Vida paid the entirety of the remaining amount owed to the Company pursuant to the Secured Promissory Note that was entered into and effective as of August 1, 2014 such that there is no remaining balance on that loan.
Note 5. Commitments and Contingencies
VidaPlus
On January 24, 2011, the Company entered into a Stock Purchase Agreement to acquire up to 51% of the capital stock in VidaPlus, an umbilical cord processing and storage company headquartered in Madrid, Spain. The Agreement is organized into three tranches; the first executed at closing with an initial investment of approximately $204,000 (150,000 Euro) for an amount equivalent to 7% as follows; 1% of share capital in initial equity or approximately $30,000 and 6% or an estimated $174,000 as a loan convertible into equity within 12 months of closing. The initial investment was secured by a Pledge Agreement on 270 VidaPlus samples that were incurring annual storage fees. The second tranche provided the opportunity for an additional 28% in share capital through monthly investments based on the number of samples processed in that month (up to a maximum of 550,000 EUR). In connection with Tranche 2, the Company loaned VidaPlus $246,525. Converting the investment from a loan into equity was to take place within 24 months of the date the amount of shares due to the Company pursuant to the second tranche is calculated. According to the Stock Purchase Agreement, the third tranche follows a similar loan to equity agreement as tranche two but for an additional 16% equity at the option of the Company (up to a maximum of 550,000 EUR).
In connection with the VidaPlus Stock Purchase Agreement entered into on January 24, 2011, the Company was obligated to make monthly loans to VidaPlus based on the number of new samples processed and up to a maximum of 550,000 Euro for each of Tranche 2 and 3 of the Agreement. Tranche 2 did contain provisions that provided the Company an option to discontinue funding if certain performance targets were not met.
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In January 2012, the Company exercised its right to convert its Tranche 1 loan into 6% of the outstanding shares of VidaPlus, and as a result, the Company owned a total of 7% of the outstanding shares. At the time of the equity conversion, the Company no longer maintained its Pledge on the 270 VidaPlus samples associated with Tranche 1; however, the Company maintained a liquidation preference in VidaPlus over the money invested by the Company in VidaPlus. Additionally, the Company declined to make any further investment (loan or otherwise) to VidaPlus under either Tranche 2, Tranche 3 or otherwise. Pursuant to the Agreement, CBAI held a pledge over the umbilical cord blood maintenance and storage contracts between VidaPlus and certain of its customers, and all rights contained therein, including but not limited to the rights to administer those contracts and the rights to collect the revenues derived from those contracts, for 328 samples. CBAI held that pledge until such time as it converted the monies paid to VidaPlus under Tranche 2 of the Stock Purchase Agreement into equity into VidaPlus, in accordance with the formulas set forth in the Stock Purchase Agreement. CBAI was required to make that conversion within two years of when the calculation was made as to the amount of shares to which CBAI is entitled pursuant to Tranche 2, which meant that such conversion would take place around or before February 2014. CBAI also holds a liquidation preference in VidaPlus for the money the Company invested in VidaPlus. On February 14, 2014, CBAI delivered to VidaPlus its election to convert its loan under Tranche 2 into shares of stock in VidaPlus, including Anti-Dilution shares. The Company is entitled to an additional ownership stake of approximately 2.24% in connection with the forgoing, bringing its total ownership percentage to approximately 9.24%.
The Company holds approximately 9.24% of the outstanding shares of VidaPlus, and has a balance of convertible loans receivable amounting to $246,525. During the year ended December 31, 2012, the Company reviewed the recoverability of the equity investment and loans receivable and the carrying amount exceeds the fair value of the investment as a result of recurring and continued operating losses at VidaPlus. Fair value of the loans receivable is determined based on the discounted future net cash flows expected to be generated by assets pledged against the loans. The Company recorded an impairment of 100% of the book value of the equity investment and convertible loan receivable.
Patent License Agreement
PharmaStem Therapeutics claimed to hold certain patents relating to the storage, expansion and use of hematopoietic stem cells. In the past several years, PharmaStem has commenced suit against numerous companies involved in cord blood collection and preservation alleging infringement of its patents. In October 2003, after a jury trial, judgment was entered against certain of our competitors and in favor of PharmaStem in one of those suits. In February 2004, PharmaStem commenced suit against Cord Partners and certain of its competitors alleging infringement of its patents. Management of Cord Partners determined to settle, rather than to litigate, this matter. As a result, PharmaStem and Cord Partners entered into a Patent License Agreement in March 2004. Pursuant to the Patent License Agreement, Cord Partners could, on a non-exclusive basis, collect, process and store cord blood utilizing PharmaStem’s claimed technology and processes allegedly covered by its patents for so long as the patents may remain in effect. Most of the patents at issue expired in 2010. PharmaStem could claim, arguendo, Cord Partners is obligated under the Patent License Agreement to pay royalties to PharmaStem of 15% of all revenues generated by Cord Partners from the collection and storage of cord blood on and after January 1, 2004. Other than potential royalties, which would be disputed by Cord, no amount is payable by Cord Partners to PharmaStem. All litigation between the parties was dismissed and all prior claims were released. As of 2008, Cord ceased paying all royalties to PharmaStem. The patents have been declared void under a final decision on appeal, and as such, there is no pending litigation in this matter. As of December 31, 2014, the Company included approximately $226,000 in accounts payable and $120,000 included in accrued expenses to account for this liability since 2008, though the Company disputes that it owes any royalties to Pharmastem. As of September 30, 2015, the Company made a one-time adjustment of the previously held amount of approximately $226,000 in accounts payable and $120,000 in accrued expenses, to its income statement as a gain on a settlement payable of $346,269.
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Employment Agreement
On March 31, 2015, the Company entered into an Executive Employment Agreement with Stephen Morgan, the Company’s Vice President, General Counsel and Corporate Secretary, which is effective as of April 1, 2015 and shall terminate as of March 31, 2017, unless earlier terminated by the Company or Mr. Morgan in accordance with the agreement (the “Morgan Employment Agreement”).
The Morgan Employment Agreement provides for a base salary equal to $130,000, as well as an annual bonus opportunity, payable at the discretion of the Board of Directors, equal to 25% of Mr. Morgan’s base salary for that calendar year, provided that Mr. Morgan has the option to receive any portion of his salary and bonus in stock of the Company, in lieu of cash, at a value determined by the Board of Directors in their reasonable discretion and otherwise in accordance with the Employment Agreement.
Amended Employment Agreement
Effective April 9, 2015, the Company entered into an Amendment to Executive Employment Agreement with Stephen Morgan amending his employment agreement, such that Mr. Morgan no longer has the option, in his sole discretion, to receive his salary and bonus amounts in the form of Company stock, rather than cash.
Effective February 12, 2016, the Company entered into a Second Amendment to Executive Employment Agreement with Mr. Morgan (the “Second Amendment”), amending his original, April 1, 2015 employment agreement. Concurrent with the Second Amendment, Mr. Morgan commenced serving as Interim President of the Company. Mr. Morgan no longer serves as Vice President of the Company, but remains in his positions as Corporate Secretary and General Counsel. The Second Amendment reflects a five thousand dollar ($5,000) increase in Mr. Morgan’s annual salary during the period Mr. Morgan serves as interim President, which period commenced on February 12, 2016 and shall end at any time on three (3) days’ notice by the Company (the “Interim Term”). The Amendment further provides that the increase in Mr. Morgan’s salary shall not be included in any severance calculations, including the severance calculations set forth in Sections 5(e) and 5(f) of his original agreement, and that upon termination of the Interim Term for any reason, Mr. Morgan’s employment, duties and salary shall revert back to what they were prior to the Second Amendment.
Vicente Agreements
On December 18, 2014, the Company entered into an Executive Employment Agreement with Joseph R. Vicente, the Company’s former President and Chairman of the Board, which was effective as of January 1, 2015 and was to terminate as of December 31, 2017, unless earlier terminated by the Company or Mr. Vicente in accordance with the agreement (the “Vicente Employment Agreement”).
The Vicente Employment Agreement provided for a base salary equal to $135,000, as well as an annual bonus opportunity, payable at the discretion of the Board of Directors, equal to 30% of Mr. Vicente’s base salary for that calendar year. Mr. Vicente had the option to receive any portion of his salary and bonus in stock of the Company, which was amended effective April 9, 2015 pursuant to an Amendment to Executive Employment Agreement whereby Mr. Vicente no longer had the option in his sole discretion to receive his salary and bonus amounts in stock. The Vicente Employment Agreement includes two-year restrictions on competition and solicitation of customers following termination of the agreement.
Effective February 12, 2016 (the “Separation Date”), the Company entered a Mutual Separation Agreement with Mr. Vicente (the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. Vicente stepped down from his positions as President and as a member of the Board. Under the Separation Agreement, Mr. Vicente is entitled to receive a severance, payable in equal monthly installments over the twenty four month period post separation, in an amount equal to all compensation paid by the Company to Mr. Vicente for the 24 months preceding the termination, including salary and bonus received by Mr. Vicente. Additionally, the Company will pay for the value of his health insurance premiums, in monthly installments, until the earlier of twenty-four months after the Separation Date or until Mr. Vicente or his dependents become eligible for group health insurance coverage through a new employer. Mr. Vicente is also entitled to payment of his salary through the Separation Date, payment for unused vacation days, payment for any unreimbursed expenses, and a bonus payment for work performed in calendar year 2015, payable within sixty (60) days of the Company completing its fiscal 2015 audit.
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Mr. Vicente remains subject to the restrictive covenants contained in the Vicente Employment Agreement, including a covenant not to compete and a non-solicitation provision, and is subject to additional restrictive covenants in the Separation Agreement.
Operating Leases
On January 21, 2014, the Company entered a First Amendment to Lease, which extended its lease at the property located at 1857 Helm Drive, Las Vegas (the “Property”), Nevada through September 30, 2019. In connection with the amendment, the Company received an abatement of the entire amount of its rent for January 2014, except for CAM charges. In addition, as of October 1, 2014, the Company’s monthly lease payments reverted back to their rates as they existed in June 2009, other than CAM charges, with annual adjustments thereafter as set forth in the Amendment. Moreover, the Landlord had the option to lease a portion of the premises then occupied by the Company to a third party, and if this portion is leased to a third party, the Company’s monthly rent amount was to be reduced pro rata with the portion of the space leased to a third party. If the Landlord is unable to or elects not to lease a portion of the premises to a third party by November 30, 2015 and by each subsequent anniversary thereof, the Company shall receive an additional abatement of one month rent, excluding CAM charges, in December 2015, December 2016 and December 2017, respectively and as applicable. Effective May 15, 2016, the Company entered a Second Amendment to Lease. The Second Amendment to Lease sets forth that the square footage of the Property has been reduced by 380 square feet, such that the Property now consists of 16,523 square feet, confirms the abatements set forth in the First Amendment to Lease, sets forth that the Company’s Common Area Maintenance Expenses and HOA costs shall be calculated based on the reduced square footage amount, and confirms that the Company’s monthly rent amounts will remain unchanged from the First Amendment to Lease.
Commitments for future minimum rental payments, by year, and in the aggregate, to be paid under such operating lease as of June 30, 2016, are as follows:
Rent | |
to be paid | |
| 2016 | 92,662 |
| 2017 | 188,600 |
| 2018 | 193,088 |
| 2019 | 147,397 |
| Total | $621,747 |
Note 6. Share Based Compensation
Stock Option Plan
The Company's Stock Option Plan permits the granting of stock options to its employees, directors, consultants and independent contractors for up to 8.0 million shares of its common stock. The Company believes that such awards encourage employees to remain employed by the Company and also to attract persons of exceptional ability to become employees of the Company. On July 13, 2009, the Company registered its 2009 Flexible Stock Plan, which increased the total shares available to 4 million common shares. The plan allows the Company to issue either stock options or common shares from this Plan.
On June 3, 2011, the Company registered its 2011 Flexible Stock Option plan, and reserved 1,000,000 shares of the Company's common stock for future issuance under the Plan. The Company canceled the Company's 2010 Flexible Stock Plan, and returned 501,991 reserved but unused common shares back to its treasury.
Stock options that vest at the end of a one-year period are amortized over the vesting period using the straight-line method. For stock options awarded using graded vesting, the expense is recorded at the beginning of each year in which a percentage of the options vests. The Company did not issue any stock options for the period ended June 30, 2016 and the year ended December 31, 2015.
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The Company’s stock option activity was as follows
Stock Options | Weighted Average Exercise Price | Weighted Avg. Contractual Remaining Life | |
| Outstanding, December 31, 2015 | 4,609,364 | 0.67 | 3.87 |
| Granted | -- | -- | -- |
| Exercised | -- | -- | -- |
| Forfeited/Expired | -- | -- | -- |
| Outstanding June 30, 2016 | 4,609,364 | 0.67 | 3.37 |
| Exercisable June 30, 2016 | 4,609,364 | 0.67 | 3.37 |
The following table summarizes significant ranges of outstanding stock options under the stock option plan at June 30, 2016:
Range of Exercise Prices | Number of Options | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Number of Options Exercisable | Weighted Average Exercise Price | |||||||||||||||||
| $ | 0.33 — 1.11 | 4,609,364 | 3.37 | $ | 0.67 | 4,609,364 | $ | 0.67 | ||||||||||||||
| 4,609,364 | 3.37 | $ | 0.67 | 4,609,364 | $ | 0.67 | ||||||||||||||||
Note 7. Stockholder’s Equity
Preferred Stock
The Company has 5,000,000 shares of $.0001 par value preferred stock authorized. As of June 30, 2016 and December 31, 2015, the Company had no shares of preferred stock issued and outstanding.
Common Stock
The Company has 2,890,000,000 shares of $.0001 par value common stock authorized. As of June 30, 2016 and December 31, 2015, the Company had 1,272,066,146 shares of common stock issued and outstanding. 20,000 shares remain in the Company’s treasury.
Note 8. Subsequent Events
Pursuant to the Company’s September 2014 agreement selling its ownership stake in Biocordcell Argentina S.A., the purchaser was to make a payment in the amount of $45,000 on or before June 1, 2016. The purchaser paid $15,000 of that amount in June 2016 and an additional $15,000 of that amount in July 2016. On July 14, 2016, the Company sent a notice of default to the purchaser demanding payment for the remaining amount due for the June 1, 2016 payment.
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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 our 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 our 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 June 30, 2016 unaudited condensed consolidated financial statements and related notes thereto included elsewhere in the quarterly report and with its consolidated financial statements and notes thereto for the year ended December 31, 2015 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, 2015, 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 its disclosures 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, 2015.
Summary and Outlook of the Business
CBAI primarily facilitates umbilical cord blood and cord tissue stem cell services, with a particular focus on the acquisition of customers in need of family based products and services.
Cord
Services Provided By Cord
Cord’s operations facilitate umbilical cord blood banking and cord tissue services to expectant parents. 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 facilitates processing and storage of cord blood and cord tissue for new customers through an engagement with a third party laboratory. Cord provides or facilitates 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 instruction 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 third party facility immediately following birth. This procedure ensures chain-of-custody control during transportation for maximum security. |
| ● | Comprehensive Testing. The cord blood sample is tested by third parties engaged by Cord for stem cell concentration levels and blood type. The maternal samples are tested for infectious diseases. Cord reports 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. For new customers, this process is conducted at a third party laboratory. 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. |
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Additionally, the Company is procuring birth tissue for organizations utilizing the tissue in the transplantation and/or research of therapeutic based products. The Company receives a one-time recovery fee per tissue. Associated services provided by the Company with this offering may include arranging for transportation, providing collection materials, facilitating information used to determine donor eligibility and arranging for infectious disease testing of the maternal blood.
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 June 30, 2016
For the three months ended June 30, 2016, total revenue decreased to approximately $0.79 million from $1.41 million, a 43.8% decrease over the same period of 2015. Revenues are generated primarily from three sources: new enrollment/processing fees; recurring storage fees (both from cord blood and cord tissue); and services related to the procurement of birth tissue for organizations utilized in the transplantation and/or research of therapeutic products. The decrease in revenue is due primarily to a reduction in orders for services related to procurement of birth tissue. Recurring storage revenues increased approximately 3.7% to $0.68 million for the three month period ended June 30, 2016, versus $0.66 million for the prior comparative year ended June 30, 2015. Revenues from the procurement of birth tissue decreased to $0.0 million for the three month period ended June 30, 2016 from $0.52 million for the three month period ended June 30, 2015.
Cost of services as a percentage of revenue decreased to 25.4% for the three month period ending June 30, 2016 compared to 36.0% the same prior period of 2015. The cost of services include transportation of the umbilical cord blood and tissue from the hospital to the lab, direct material, costs for processing and cryogenic storage of new samples by a third party laboratory, and allocated rent, utility and general administrative expenses. Gross profit decreased by approximately $0.31 million or 34.5% to approximately $0.59 million for the three month period ending June 30, 2016 from the comparable three month period of 2015.
The Company’s loss from operations and net loss was $0.03 million versus income from operations and net gain of $0.40 million for the three month comparative period of 2016 from 2015.
Results of Operations for the Six-Months Ended June 30, 2016
For the six months ended June 30, 2016, total revenue decreased to approximately $1.78 million from $2.69 million, a 33.8% decrease over the same period of 2015. Revenues are generated primarily from three sources: new enrollment/processing fees; recurring storage fees (both from cord blood and cord tissue); and services related to the procurement of birth tissue for organizations utilized in the transplantation and/or research of therapeutic products. The decrease in revenue is due primarily to a reduction in orders for services related to procurement of birth tissue. Recurring storage revenues increased approximately 3.3% to $1.35 million for the six month period ended June 30, 2016, versus $1.31 million for the prior comparative year ended June 30, 2015. Revenues from the procurement of birth tissue decreased to $0.17 million for the six month period ended June 30, 2016 from $0.94 million for the six month period ended June 30, 2015, a decrease of 81.6%.
Cost of services as a percentage of revenue decreased to 30.4% for the three month period ending June 30, 2016 compared to 33.9% the same prior period of 2015. The cost of services include transportation of the umbilical cord blood and tissue from the hospital to the lab, direct material, costs for processing and cryogenic storage of new samples by a third party laboratory, and allocated rent, utility and general administrative expenses. Gross profit decreased by approximately $0.54 million or 30.3% to approximately $1.24 million for the three month period ending June 30, 2016 from the comparable six month period of 2015.
The Company’s loss from operations and net loss was $0.04 million versus income from operations and net gain of $0.19 million for the six month comparative period of 2016 from 2015.
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Liquidity and Capital Resources
Total assets at June 30, 2016 were $3.53 million, compared to $3.70 million at December 31, 2015. Total liabilities at June 30, 2016 were $3.10 million consisting primarily of promissory notes and deferred revenue of $0.79 million and $1.57 million respectively. At December 31, 2015, total liabilities were $3.23 million consisting primarily of promissory notes and deferred revenue of $0.70 million and $1.60 million respectively.
At June 30, 2016, the company had $1.16 million in cash, an increase of $0.37 million from the December 31, 2015 cash balance of $0.79 million. Cash flows from operations are currently sufficient to fund operations as net cash provided by operating activities for the six months ended June 30, 2016, was $0.29 million, compared to a cash use of $0.009 million for the prior comparative period of 2015. During the six month period of 2016 there was no increase in notes payable for purposes of working capital.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred losses since its inception through December 31, 2014, as development and infrastructure costs were incurred in advance of obtaining customers. However, the Company has net income and cash flow from operations for the year ended December 31, 2015. Starting in 2014, the Company's management commenced a plan to reduce operating expenses to be commensurate with operating cash flows. Prior to 2015, the Company has relied on debt to provide capital for working capital needs.
Management has taken several actions to ensure that the Company will continue as a going concern, including the divesture of its investment in its unconsolidated affiliates, including the sale of its 51% ownership in Stellacure GmbH and 50.004% interest in Biocordcell Argentina S.A., headcount reductions, and reductions in discretionary expenditures. These changes effected by the Company's management resulted in the Company generating cash flow from operations in 2015, and the Company did not require additional debt or equity capital from external sources. Further, the Company has reduced its debt via the repayment of the principal balance. Management plans to continue to implement its business plan and to fund operations through operating revenue and a corresponding increase in the amount of net income from its operations. The Company expects that cash flow from operations over the next 12 months will be sufficient to meet its working capital needs. Management's objective is to continue to monitor and manage expenses relative to its revenue such that it will continue to generate operating cash flows to meet its operating cash requirements. Management believes that these actions will enable the Company to continue as a going concern through June 30, 2017.
Inflation
In the opinion of management, inflation has not and will not have a material effect on the Company operations in the immediate future. 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
Not applicable.
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 has reviewed and evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2016. 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 submits 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 and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
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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
NONE
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, 2015. There were no material changes to those risk factors for the three months ended June 30, 2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a-b) Not applicable.
(c) Repurchase of Shares. The Company did not repurchase any of its shares during the quarter ended June 30, 2016.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION
NONE
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ITEM 6. EXHIBITS
The following documents are included as exhibits to this Form 10Q:
| EXHIBIT | DESCRIPTION | |
2.0 3.1(i) | Form of Common Stock Share Certificate of Cord Blood America, Inc. (1) Amended and Restated Articles of Incorporation of Cord Blood America, Inc. (1) | |
3.1(ii) 3.1(iii) | Articles of Amendment to Articles of Incorporation (5) Articles of Amendment to the Articles of Incorporation of Cord Blood America, Inc. (6) | |
| 3.1(iv) | Articles of Amendment to the Articles of Incorporation of Cord Blood America, Inc. (12) | |
| 3.1(v) | Articles of Amendment to the Articles of Incorporation of Cord Blood America, Inc. (12) | |
| 3.1(vi) | Articles of Amendment to the Articles of Incorporation of Cord Blood America, Inc. (17) | |
| 3.1 (vii) | Articles of Amendment to the Articles of Incorporation of Cord Blood America, Inc. (31) | |
3.2(i) 3.2(ii) | Amended and Restated Bylaws of Cord Blood America, Inc. (1) Second Amended and Restated Bylaws of Cord Blood America, Inc. (29) | |
| 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 (22) | |
| 10.3 | Lease for Las Vegas Facility (9) | |
| 10.4 | 2011 Flexible Stock Option Plan (17) |
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| 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) | |
| 10.8 | Compensatory Arrangement for Certain Officers Executed July 1, 2010, Stock Options (11) | |
| 10.9 | Departure of Directors or Appointment Certain Officers; Election and of Directors, Appointment of Certain Officers on May 15, 2012 (15) | |
| 10.10 | Employment Agreement between the Company and Stephen Morgan (23) | |
| 10.11 | On May 20, 2013 Cord Blood America, Inc. announced a new service offering. (18) |
| 10.12 | On December 30, 2013, the Company engaged De Joya Griffith, LLC (the “New Accountant”) to serve as the Registrant’s independent registered public accountants for the fiscal year ended December 31, 2013. (19) | |
| 10.14 | On September 29, 2014, the Company announced it had sold its ownership interest in Biocordcell Argentina S.A. (BioCells) to a current shareholder and President, Diego Rissola. (21) | |
| 10.15 | On December 17, 2014, the Company entered into a Settlement Agreement with St. George Investments, LLC and Tonaquint (22) | |
| 10.16 | On April 9, 2015, the Company announced it had executed a Purchase Agreement with Red Oak Partners, LLC and its affiliates for a preferred equity investment. (24) | |
| 10.17 | On April 9, 2015, the Company entered into an Amendment to the Executive Employment Agreement with Joseph R. Vicente and Stephen Morgan. (25) | |
| 10.18 | Effective April 15, 2015, pursuant to the Preferred Stock Red Oak Transaction, three (3) Directors were elected to the Board of the Company, David Sandberg, Anthony Snow and Adrian Pertierra. (26) | |
| 10.19 | On April 17, 2015, the Company established compensation for non-management Directors. (27) | |
| 10.20 | Effective May 22, 2015, the Board of Directors unanimously approved and adopted the Second Amended and Restated By-Laws of the Company. (29) | |
| 10.21 | Reserved | |
| 10.22 | On August 6, 2015, the Company shareholders approved an amendment to the Amended and Restated Articles of Incorporation (31) | |
| 10.23 | The Company’s Audit Committee approved the change in the Company’s auditors to RBSM LLP. The former auditor, De Joya Griffith resigned. (32) | |
| 10.24 | On February 12, 2016, the Company and Stephen Morgan entered into a Second Amendment to Executive Employment Agreement. (33) | |
| 10.25 | On February 12, 2016, the Company and Joseph Vicente entered into a Mutual Separation Agreement. (33) | |
| 21 | List of Subsidiaries (4) | |
| 31.1 | Certification of the registrant’s Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed Herewith) | |
| 32.1 | Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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(1) Filed as an exhibit to Registration Statement on Form 10-SB filed on May 6, 2004
(2) Filed as an exhibit to Amendment No. 1 to Form 10-SB filed on August 23, 2004
(3) Filed as an exhibit to Current Report on Form 8-K filed on February 8, 2006
(4) Filed as an exhibit to Current Report on Form 8-K filed on June 13, 2008
(5) Filed as an exhibit to Current Report on Form 8-K filed on August 29, 2008
(6) Filed as an exhibit to the Current Report on Form 8-K filed on March 31, 2009
(7) Reserved
(8) Filed as an exhibit to Current Report on Form 8-K filed on January 7, 2010
(9) Filed as an exhibit to Current Report on Form 10-K filed on March 31, 2010
(10) Reserved
(11) Filed as an exhibit to Current Report on Form 8-K filed on July 7, 2010
(12) Filed as an exhibit to Current Report on Form 10Q filed on May 23, 2011
(13) Reserved
(14) Reserved
(15) Filed as an exhibit to Current Report on Form 8-K filed on May 15, 2012
(16) Reserved
(17) Filed as an exhibit to Current Report on Form 8K filed on September 27, 2012
(18) Filed as an exhibit to Current Report on Form 8K filed on May 20, 2013.
(19) Filed as an exhibit to Current Report on Form 8K filed on January 10, 2014
(20) Reserved
(21) Filed as an exhibit to Current Report on Form 8K filed on October 3, 2014
(22) Filed as an exhibit to Current Report on Form 8K filed on December 23, 2014
(23) Filed as an exhibit to Current Report on Form 10K filed on March 31, 2015
(24) Filed as an exhibit to the Current Report on Form 8K filed on April 14, 2015
(25) Filed as an exhibit to the Current Report on Form 8K filed on April 14, 2015
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(26) Filed as an exhibit to the Current Report on Form 8K filed on April 16, 2015
(27) Filed as an exhibit to the Current Report on Form 8K filed on April 22, 2015
(28) Filed as an exhibit to the Current Report on Form 8K filed on May 13, 2015
(29) Filed as an exhibit to the Current Report on Form 8K filed on May 29, 2015
(30) Reserved
(31) Filed as an exhibit to the Current Report on Form 8K filed on August 10, 2015
(32) Filed as an exhibit to the Current Report on Form 8K filed on August 13, 2015
(33) Filed as an exhibit to the Current Report on Form 8K file on February 19, 2016
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 12th day of August, 2016.
| CORD BLOOD AMERICA, INC. | |||
| By: | /s/Stephen Morgan | ||
| Interim President, General Counsel and Corporate Secretary | |||
(Principal Executive Officer, Principal Financial and Accounting Officer) | |||
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