ITEM 1. 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 ("Rain"). In September 2010, CBAI purchased a majority interest in Biocordcell Argentina S.A. (“Bio”). CBAI and its subsidiaries engage in the following business activities:
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CBAI and Cord specializes in providing private cord blood and cord tissue stem cell storage services to families throughout the United States and Puerto Rico.
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Biocordcell Argentina S.A. specializes in providing private cord blood stem cell storage to families in Argentina, Uruguay and Paraguay.
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Properties was formed to hold corporate trademarks and other intellectual property.
In March 2011, CBAI purchased a majority interest in Stellacure GmbH, a company providing private cord blood processing and storage services to families in Germany, Spain and Italy. On September 28, 2012, the Company sold its ownership interest in Stellacure. In conjunction with the disposition of Stellacure, the gain on the sale and results of historical operations are recorded as discontinued operations in the Company’s Consolidated Statements of Operations for the year ended December 31, 2012. Additionally, the cash flows from Stellacure are reflected separately as cash flows from discontinued operations in the Company’s Consolidated Statement of Cash Flows.
Events in 2013
Tangiers Investors, LP
The Company paid in full its six (6) convertible notes with Tangiers Investors, LP carrying a principal balance of $165,000 and $18,640 of interest. The Company issued 116,107,906 shares of common stock during the period ending March 31, 2013 to retire these notes.
New Service Offering
The Company announced on May 20, 2013 that it was now offering the collection and storage of mesenchymal stem cells through the cord tissue, and offers this service, branded CordMatrix, as both a stand-alone offering and in combination with the umbilical cord blood.
Tonaquint and St. George
Previously, the Company entered into transactions with St. George Investments, LLC and with Tonaquint, Inc. On August 30, 2013, the Company filed a Complaint against these entities as described in greater detail in Item 3. Legal Proceedings.
Moreover, on September 25, 2013, the Company received from Tonaquint a Notice of Disposition of Collateral advising of Tonaquint’s intent to sell all assets of the Company at a public auction on November 4, 2013 at 11:00 a.m. PST at 1857 Helm Drive, Las Vegas, Nevada, 89119. On October 18, 2013, the Company received from Tonaquint a Notification of Cancellation, which provided notice that the aforementioned auction to sell the Company’s assets was cancelled.
Outstanding Shares
During the period ending December 31, 2013, the Company issued an additional 513,765,592 shares of common stock, and as of the date of this filing has an outstanding share amount of 890,000,000 with 890,000,000 common shares authorized.
Change in Auditors
On December 30, 2013, Rose, Snyder & Jacobs LLP (the “Former Accountant”) was dismissed as the Registrant’s independent registered public accountants. 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. The Registrant’s Audit Committee approved the change in auditors.
Industry Background of Cord
Stem cells. The human body is comprised of many types of cells with individual characteristics and specific functions. Cells with a defined or specialized function are referred to as differentiated. Examples of differentiated cells include nerve cells, red blood cells and skin cells. Differentiated cells are replaced and renewed over time from a population of rare, undifferentiated cells known as stem cells. As stem cells grow and proliferate, they are capable of producing both additional stem cells as well as cells that have differentiated to perform a specific function. Stem cell differentiation is prompted by specific cell-to-cell interactions or other molecular signals. These signals trigger a change in the cell’s genetic profile, causing specific genes to become active and others to become inactive. As a result, the cell develops specialized structures, features and functions representative of its differentiated cell type.
There are many types of stem cells in the human body. These stem cells are found in different concentrations and in different locations in the body during a person’s lifetime. Current thinking suggests that each organ and tissue in the body is founded, maintained and possibly rejuvenated to different degrees, on a more or less continual basis, by specific stem cell populations naturally present in the body. Types of stem cells include:
Hematopoietic stem cells. Hematopoietic, or blood, stem cells reside in the bone marrow, umbilical cord and placenta. They can also be found in an infant’s umbilical cord as well as circulating in very small numbers in the blood. Hematopoietic stem cells generate all other blood and immune system cells in the body.
Neural stem cells. Neural stem cells can be found in the brain and spinal cord and are capable of differentiating into nerve and brain tissue.
Mesenchymal stem cells. Mesenchymal stem cells can be found in bone marrow, cord tissue and adipose tissue and differentiate into bone, cartilage, fat, muscle, tendon and other connective tissues.
Pancreatic islet stem cells. Pancreatic islet stem cells can be found in the pancreas and differentiate into specialized cells of the pancreas including cells that secrete insulin.
The ability of a stem cell to differentiate into multiple types of cells of a certain tissue is referred to as pluripotency. For example, a hematopoietic stem cell has the ability to differentiate into many types of blood and immune system cells. However, stem cells of one tissue type may also generate specialized cells of another tissue type, a characteristic referred to as plasticity. For example, under specific conditions, hematopoietic stem cells have been shown to generate specialized cells of other systems, including neural, endocrine, skeletal, respiratory and cardiac systems. These characteristics make stem cells highly flexible and very useful for a number of applications, including the potential use as therapeutics.
Cell therapy. Cell therapy is the use of live cells as therapeutic agents to treat disease. This therapy involves the introduction of cells to replace or initiate the production of other cells that are missing or damaged due to disease. Currently, the most common forms of cell therapy include blood and platelet transfusions and bone marrow transplants.
Bone marrow transplantation is a medical procedure in which hematopoietic stem cells are introduced into the body in order to regenerate healthy, functioning bone marrow. In this procedure, stem cells are obtained from a donor through a surgical procedure to remove approximately one liter of bone marrow. The donated bone marrow, including any “captured” stem cells, is then transfused into the patient. Stem cells for transplantation may also be obtained from peripheral blood or umbilical cord blood donations. Sometimes the stem cells used in the procedure are obtained from the patient’s own bone marrow or blood.
Bone marrow transplantation has been successfully employed in the treatment of a variety of cancers and other serious diseases since the 1960s. According to the International Bone Marrow Transplant Registry, over 45,000 bone marrow and other hematopoietic (blood) stem cell transplant procedures were performed worldwide in 2002.
The flexibility and plasticity of stem cells has led many researchers to believe that stem cells have tremendous promise in the treatment of diseases other than those currently addressed by stem cell procedures. Researchers have reported progress in the development of new therapies utilizing stem cells for the treatment of cancer, neurological, immunological, genetic, cardiac, pancreatic, liver and degenerative diseases.
Umbilical Cord Blood Banking
The success of current and emerging cell therapies is dependent on the presence of a rich and abundant source of stem cells. Umbilical cord blood has been emerging as an ideal source for these cells. As information about the potential therapeutic value of stem cells has entered the mainstream, and following the first successful cord blood transplant performed in 1988, cord blood collection has grown. In the past decade, multiple public and private cord blood banks have been established to provide for the collection and preservation of these cells. Public cord blood banks collect and store umbilical cord blood donated by women at the birth of the child. This blood is stored and made available for a significant fee to an unrelated individual who matches the blood stored. The Company does not currently collect or store donated cord blood units. Private, or family cord blood banks such as Cord, collect and store umbilical cord blood on a fee-for-service basis for families. This blood is stored and made available to the family in the event the family needs stem cells for a transplant. Stem cells have been successfully recovered from cord blood after at least twenty five years of storage in liquid nitrogen. However, these cells may be able to retain their usefulness at least as long as the normal life span of an individual.
CORD
Services Provided By Cord
Cord’s operations provide umbilical cord blood banking and cord tissue services to expectant parents throughout all 50 United States and Puerto Rico. The Company’s corporate headquarters re-located to Las Vegas, NV from Los Angeles, CA in October 2009. Cord earns revenue through a one-time enrollment and processing fee, and through an annually recurring storage and maintenance fee. Cord processes and stores cord blood and cord tissue in its own facility. Cord provides the following services to each customer.
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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.
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Physician And Customer Support. 24-hour consulting services to customers as well as to physicians and labor and delivery personnel, providing any instruction necessary for the successful collection, packaging, and transportation of the cord blood and cord tissue and maternal blood samples.
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Transportation. Manage all logistics for transporting the cord blood and cord tissue unit to the Company’s centralized facility immediately following birth. This procedure ensures chain-of-custody control during transportation for maximum security.
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Comprehensive Testing. The cord blood sample is tested for stem cell concentration levels and blood type. The maternal samples are tested for infectious diseases. Cord reports these results to the newborn’s mother.
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Cord Blood Storage. After processing and testing, the cord blood and cord tissue unit is cryogenically frozen in a controlled manner and stored in liquid nitrogen for potential future use. Data indicates that cord blood retains viability and function for at least twenty five years when stored in this manner and theoretically could be maintained at least as long as the normal life span of an individual.
Going forward, management will continue to assess business opportunities, and plans to pursue customer acquisition, primarily through organic growth.
Material Reclassification, Merger, Consolidation, or Purchase or Sale of Significant Assets
China Stem Cell Ltd. Investment
In March of 2010 the Company acquired pursuant to a License Agreement, a 10% non dilutable interest in what became, in December 2010, China Stem Cells, Ltd., a Cayman Islands Company (hereinafter "Cayman"), which indirectly holds a 100% capital interest in AXM Shenyang, a company organized to conduct a Stem Cell Storage Business in China. In exchange for issuance of equity interest in Cayman, under the terms of the Transfer of Technology Agreement the Company agreed to provide technology transfer, knowhow and training in the setup, marketing and operation of the China Stem Cell Storage business. In connection with the License Agreement, the Company will receive royalties equal to 8.5% of "Net Revenues" realized from the China Stem Cell Storage business, over the 15 year term of the agreement, with certain minimum annual royalties’ payable beginning in 2011. The Company has not been paid any royalty balance due to date, and it remains doubtful that any such royalties will be collected.
In December of 2010 the Company also acquired the option to provide up to $750,000 of additional capital funding to Cayman through the purchase of Cayman Secured Convertible Promissory Notes and attached Cayman Warrants to acquire its Common Stock. Other Cayman shareholders were granted similar options, with the intent of raising the aggregate up to $1.5 million in additional capital for Cayman and its subsidiaries.
As of December 31, 2012, Cord Blood has exercised this option in part, provided a total of $400,000 in additional capital to Cayman, and is to receive Cayman Secured Convertible Promissory Notes for this sum along with 50 Cayman (TBD) Warrants. The Secured Convertible Promissory Notes are convertible into Cayman stock at a conversion price of $1,500 per share, subject to certain adjustments. The Warrants have a five year term and are exercisable at an option exercise price of $0.05 per share per share, subject to certain adjustments. The Company recorded a reserve for the entire carrying value of the receivable of $458,706, including interest, as of December 31, 2012.
Stellacure Acquisition
In March 2010, the Company acquired 138,712 Series B Shares of Stellacure, GmbH, which represents an ownership percentage of 51%, a German Limited Liability Company that is in the business of privately collecting, processing, and storing cord blood samples. The purchase price paid by the Company was EUR 501,000. Stellacure operates primarily in Germany; however, it established sales channels in Spain and Italy in 2009.
On September 28, 2012, the Company sold its 51% ownership interest in Stellacure of Hamburg, Germany to Medivision mbH. In line with the Company’s strategy to focus on its cash producing operations in the US and Argentina, the sale included consideration of approximately $43,000 in a loan repayment, approximately $69,000 forgiveness of a remaining loan balance owed to Stellacure from Company, and a waiver against all past and future claims.
ViviCells International Acquisition
On May 5, 2010, the Company executed and funded a Debtor-In-Possession loan agreement with ViviCells International, Inc. a Florida corporation (“Vivi” or the “Debtor”), NeoCells, Inc., an Illinois corporation, and AdultCells, Inc., an Illinois corporation, (jointly and severally referred to as the “Subsidiaries”), for $200,000 secured by a super priority lien on the Debtor’s and Subsidiaries’ assets. As additional consideration for this loan, the Company received 21% of the Debtor’s outstanding Common Stock. The $200,000 loan carries interest at 10% per annum, with principal and all accrued interest all due and payable on March 15, 2011. In September 2010, the Company acquired an approximately $800,000 secured obligation of the Debtor held by a junior lien holder in ViviCell’s bankruptcy proceeding, in exchange for the private issuance of 111,111 restricted shares of its Common stock to the holder of this secured obligation.
On October 20, 2010, the Company as a co-proponent proposed a Plan of Reorganization for Vivi under the United States Bankruptcy Code, pursuant to which the Company proposed to acquire an additional 74% of the outstanding shares of Vivi, which would give it in excess of 94% ownership in ViVi, in exchange for the issuance of up to 644,888 shares of the Company’s common stock, and the Company’s agreement to make an additional senior secured loan in the amount of $300,000 to Vivi as working capital upon consummation of the Plan. Between June 16, 2010 and December 14, 2010, the Company accelerated the date of its loan commitment, and loaned $100,000 out of the proposed $300,000 loan amount to Vivi in advance of the Plan confirmation, secured under the super priority lien. On February 16, 2011, a hearing on Confirmation of this proposed plan of reorganization was heard and approved. The plan was scheduled to be Effective as of April 1, 2011. However, Vivi subsequently advised the Company that it would be unable to supply the full 94% plus ownership of Vivi’s outstanding capital stock to the Company as required under the Plan. On April 13, 2011, the Company filed a Non Consummation of Confirmed Plan with the United States Bankruptcy Court. The Company pursued its rights to foreclose as the holder of a super priority lien against all assets of NeoCells, ViviCells’ subsidiary. Then, on April 22, 2011, ViviCells filed an adversary proceeding against the Company, in the same United States Bankruptcy Court, Central District of California (Santa Ana), where ViviCells bankruptcy proceedings had been taking place (the “Adversary Proceeding”). ViviCells followed this by, in the Adversary Proceeding, filing a Motion for a temporary restraining order on April 25, 2011, seeking to halt the foreclosure by the Company on the assets of NeoCells. The complaint and the motion were amended on May 2, 2011, primarily by adding NeoCells, in addition to ViviCells, as a party to the adversary proceeding and the motion. The motion was heard on May 2, 2011. The motion was denied, and accordingly, the Company proceeded on May 2, 2011 at 1:00 pm (CST) to foreclose against all assets of NeoCells. At the public disposition of all property owned by NeoCells, the Company as a secured creditor bid $320,000 in offset debt, and acquired all right, title and interest in said property free and clear of any liens, security interests and encumbrances which are junior and subordinate to the Company’s security interest as a secured creditor. The tangible property acquired that the Company desired to retain was relocated to the Company’s Las Vegas facility.
On June 2, 2011, the Court entered an order dismissing the Adversary Proceeding, and on July 11, 2011, the Court entered an Order Closing Adversary Proceeding.
BioCells Acquisition
In September 2010, the Company entered into a Stock Purchase Agreement (the “Agreement”), with the Shareholders of Biocordcell Argentina S.A., a corporation organized under the laws of Argentina (“Bio”), providing for the Company’s acquisition of 50.1% of the outstanding shares of Bio (the “Shares).
Under the Agreement, the Company paid $375,000 in cash at the closing, and was obligated to pay an additional $350,000 in October, 2010, $150,000 of which is part of the fixed portion of the purchase price for the shares, for a total minimum purchase price of $525,000. The remaining $200,000 of this payment represents advances against the contingent payments due based on Bio’s 2010 and 2011 net income performances.
The Agreement provides that the Shareholders are to be paid contingent “earn-out” compensation in 2011 based on achieving certain levels of net income in 2010 of which the Shareholders were paid $500,000. As of June 22, 2012, the Company entered into an Agreement with the shareholders of Bio from whom the Company purchased its majority ownership interest in Bio in 2010 (the "Sellers") relating to the 2011 earnout. Under the Agreement, the Company will pay the Sellers the following: $25,000 on or before June 30, 2012; $10,000 on or before July 31, 2012; and $25,000 on or before September 30, 2012, for a total cash payment of $60,000. In addition, the Sellers will collect the Company’s portion of BioCells shareholder dividends for fiscal years 2012 and 2013, up to a maximum amount of $440,000, if any. Also, if BioCells is sold before April 2014 and certain thresholds for purchase price and payment are met or exceeded, then the Sellers could receive additional compensation, specifically an amount which equals $705,000 minus any amounts paid pursuant to the cash payments and payments from the Company’s shareholder dividends, which are detailed above. That sum would be paid to the Sellers out of the proceeds of such a sale.
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 are incurring annual storage fees. The second tranche provides 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). The Company loaned $153,092 (US) to VidaPlus during the year ended December 31, 2011 and $93,396 during the quarter ended March 31, 2012 in connection with the second tranche of this agreement. Converting the investment from a loan into equity for tranche two will take place within 24 months, and the obligation will have been met in full after 1,000 samples have been processed and stored. 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). VidaPlus contracts through Stellacure and their relationship with the German Red Cross for their processing and storage.
In connection with the VidaPlus Stock Purchase Agreement entered into on January 24, 2011, the Company is 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.
On January 19, 2012, the Company notified VidaPlus 2007, S.L. that effective January 24, 2012 it was exercising its right under the Stock Purchase Agreement executed January 24, 2011, Tranche 1, to convert its loan into 6% of the outstanding shares such that the Company will own 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 Tranche 2. CBAI holds 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 holds that pledge until such time as it converts the monies paid to Vidaplus under Tranche 2 of the Stock Purchase Agreement with Vidaplus into equity into Vidaplus, in accordance with the formulas set forth in the Stock Purchase Agreement. CBAI must 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 means that such conversion shall 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 as described more fully in Note 17. Subsequent Events.
As of December 31, 2012, the Company holds 7% of the outstanding shares of VidaPlus and has a balance of convertible loans receivable amounting to $246,525. The Company wrote-down the book value of the equity to $0 as of December 31, 2012. The Company also wrote-down the convertible loan receivable from $123,263 to $0 as of December 31, 2013. See Note 9.
Reproductive Genetics Institute
On February 24, 2011, the Company acquired the following assets; 593 umbilical cord blood samples and all related file documents, four (4) cryogenic storage tanks, and two computers from Reproductive Genetics Institute, Inc. (RGI) for $76,000 in cash. The Company paid an additional $48,885 to RGI to cover claims related to ViviCells International for a total $124,885. In March 2011, the assets acquired were relocated to the Company’s Las Vegas laboratory.
Competition
The Company is one of an estimated thirty (30) firms in the US providing private cord blood banking services, with approximately one half of those providing cord tissue related services. Internationally there are an estimated one hundred and twenty (120) additional firms offering these services. The Company has built its business in the United States (“US”) via a model of organic growth and accretive acquisitions.
Management believes that in the US an organic differentiator for the company is its emphasis on strategic relationships with larger health insurance providers. This approach differs from its major competitors who tend to focus on a traditional pharmaceutical model by having sales representatives cover a geographical market by visiting ob/gyn practices. By focusing on the health insurance relationships, while the sales cycle is longer, once established, management believes the sales approach builds loyalty and recurring sales. The Company also in parallel is increasing its marketing efforts direct to the consumer via its digital presence. Management believes as the industry matures, and parents become increasingly educated on stem cell banking, more decisions will be made directly between the parents and the Company.
The Company officially opened its own laboratory operations at its new facility in Las Vegas, Nevada in March, 2010. Previously the Company has outsourced these key scientific elements to a third party and was primarily a reseller of cord blood services. Now, with this key expertise in house, the Company has the ability to continue making advancements on existing and new services related to stem cells as well as better manage laboratory costs and vendor relationships related to processing and storage. The Company at the present does not engage in clinical research and development activities at its laboratory facility, but continues to evaluate the advancing science for opportunities that may exist in the future.
Management may add acquisitions that increase the recurring storage based revenues, assuming cost effective new sources of capital can be located to make such accretive acquisitions. To date, the Company has concluded seven acquisitions, and management believes multiple opportunities may exist in the future to acquire smaller competitors who do not have the financial resources or a large enough recurring revenue base from storage to compete on a go forward basis.
Patents, Trademarks, Licenses or Royalty Agreements.
Patent License Agreement
PharmaStem Therapeutics claims 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, potentially 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, 2013, 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.
Trademarks and Other Intellectual Property
The Company relies upon a combination of trade secret, copyright and trademark laws, license agreements, confidentiality procedures, nondisclosure agreements and technical measures to protect the intellectual property used in its business. The Company generally enters into confidentiality agreements with its employees, consultants, vendors and others. The Company also seeks to control access to and distribution of its technology, documentation and other proprietary information. The Company uses numerous trademarks, trade names and service marks for its products and services. CBAI also from time to time relies on a variety of intellectual property rights that the Company licenses from third parties. Although the Company believes that alternative technologies are generally available to replace such licensed intellectual property, these third party properties and technologies may not continue to be available to the Company on commercially reasonable terms.
The steps the Company has taken to protect its copyrights, trademarks, service marks and other intellectual property may not be adequate, and third parties could infringe, misappropriate or misuse our intellectual property. If this were to occur, it could harm its reputation and adversely affect its competitive position or results of operations.
The Company and CBA Properties, Inc. own various trademarks utilized by the Company and its subsidiaries. These trademarks include, among other marks, word marks registered with the United States Patent and Trademark Office (“USPTO”) in two international classes for the words “Cord Blood America,” as well as design marks which incorporate the words “Cord Blood America” registered with the USPTO in two international classes, a design mark registered with the USPTO utilizing the word “CorCell,” along with other trademarks registered with the USPTO. The Company also claims intellectual property rights in other words and designs not currently registered with the USPTO.
Environmental Remediation
The Company does not currently have any material capital expenditure commitments for environmental compliance or environmental remediation for any of its properties. The Company does not believe compliance with federal, state and local provisions that have been enacted or adopted regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material effect on its capital expenditures, potential earnings or competitive position.
Employees
As of December 31, 2013, the Company had fifteen full-time employees, and two part time employees. This includes the Company’s Chairman of the Board and President, Vice President and General Counsel, and its Tissue Bank Director, operations, laboratory, administrative, accounting, customer service and sales personnel. The Company believes its relations with all of its employees are good.
Exchange Act Reports
The Company makes available free of charge through its Internet website, www.cordblood-america.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, (both XBRL compliant), current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission (SEC). The SEC maintains an Internet website, www.sec.gov, which contains reports, proxy and information statements, and other information filed electronically with the SEC. Any materials that the Company files with the SEC may also be read and copied at the SEC’s Public Reference Room, 100 F Street, N.E., Room 1580, Washington, D. C. 20549.
Information on the operations of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The information provided on the Company’s website is not part of this report and is not incorporated herein by reference.
Transactions Subsequent To Year End
None.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Related To Our Business
The Company Has Been The Subject Of A Going Concern Opinion By Its Independent Auditors Who Have Raised Substantial Doubt As To Our Ability To Continue As A Going Concern
The accompanying financial statements of Cord Blood America, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. CBAI has experienced recurring net losses from operations, which losses have caused an accumulated deficit of approximately $53.26 million as of December 31, 2013. In addition, CBAI has produced cash in its operating activities of approximately $0.49 million for the year ending December 31, 2013 and has notes and loans payable of approximately $1.44 million at year end 2013. These factors, among others, raise substantial doubt about CBAI's ability to continue as a going concern.
Since inception, the Company has primarily financed cash flow requirements through the issuance of common stock and warrants for cash, services and loans. However, over the past seven quarters, the Company has reduced operating expenses, ended investment in its unconsolidated affiliates, including the sale of its 51% ownership in Stellacure GmbH, and received no additional funding from outside sources for working capital. The Company plans to continue to operate on its cash flows from operations by aligning its expenses with its revenues. If cash flows from operations are significantly less than projected, then the company would need to either cut back on its budgeted spending, look to outside sources for additional funding or a combination of the two. The Company currently does not have any financing agreements in place for additional funding. If the Company is unable to access sufficient funds when needed, obtain additional external funding or generate sufficient revenue from the sale of its products, the Company could be forced to curtail or possibly cease operations.
The Company May Not Be Able To Increase Sales Or Otherwise Successfully Operate Its Business, Which Could Have A Significant Negative Impact On Its Financial Condition
The Company believes that the key to its success is to increase sales of its cord blood and cord tissue preservation services and thereby increase its revenues and available cash. CBAI’s success with regard to cord blood and cord tissue preservation services will depend in large part on widespread market acceptance of cryo-preservation of cord blood and tissue, and its efforts to educate potential customers and sell its services. Broad use and acceptance of the Company’s service requires marketing expenditures and education and awareness of consumers and medical practitioners. CBAI may not have the resources required to promote its services and their potential benefits. Continued commercialization of the Company services will also require that it satisfactorily address the needs of various medical practitioners that constitute a target market to reach consumers of its services and to address potential resistance to recommendations for its services. If CBAI is unable to increase market acceptance of its services, the Company may be unable to generate enough additional revenue to maintain profitability or to continue its operation.
The DTC Previously Effectuated a “Chill” On The Company’s Stock, Since Removed, The Results Of Which Have An Adverse Impact On The Cost To The Company Of Utilizing Existing Capital Sources.
In December, 2010, the DTC unilaterally and without consultation with the Company “chilled” all newly issued shares of the Company’s common stock which were entitled to be freely traded in the market and whose holders expected to utilize the DTC Electronic Trading System. Under what the DTC calls a “chill,” the DTC precludes shares which it has unilaterally “chilled” from utilizing its Electronic Stock Transfer System, thereby putting the holders of such “chilled shares” at a disadvantage in the trading market when they go to sell their shares.
As a result of the “chill,” existing sources of funding for the Company became more costly. Namely, the Company was forced to negotiate a settlement agreement with investor Tangiers Capital, LLC (“Tangiers”) to settle an alleged breach of contract as a result of this DTC “chill.” Specifically: on January 19, 2011, the Company entered into a settlement and liquidated damages agreement (the “Agreement”) with Tangiers. Execution of the Agreement became necessary because under the existing agreement with Tangiers, entered June 27, 2008, the Company was obligated to deliver registered shares which could be “immediately” placed into the Automated System for Deposits and withdrawals of Securities (known as “DWAC”).
The Agreement provided that as Liquidated Damages, the Company will remit a specified sum (the “Penalty Sum”) to Tangiers on each share the investor has previously purchased and currently holds, and on each share purchased by Tangiers for cash in the future, until such time as the shares held by Tangiers can again be deposited into the DWAC system. The Company currently owes no damages for shares purchased by Tangiers in the past. As to potential future damages, shares can only be purchased by Tangiers for cash in the future at the Company’s election, as the June 27, 2008 agreement works in a manner similar to a credit line. Thus, it is possible no such damages will become due. In the event the Company elects to allow Tangiers to purchase shares for cash in the future, Tangiers may argue that a Penalty Sum may be due from the Company to Tangiers, even though the DTC “chill” has been removed, because the Company is not eligible for the DTC’s FAST program, including DWAC, which would thereby make this capital source more costly to the Company. The Tangiers Notes have been retired in full as of December 31, 2013.
The Company was forced to enter into the February 8, 2011 settlement agreement with JMJ Financial (“JMJ”) due to the “chill” for the same or similar reasons the Company was forced to enter the above described settlement agreement with Tangiers, which resulted in $671,385 as monetary damages. The Company did not incur additional monetary damages to JMJ under that settlement agreement, however, under the settlement agreement, the discount rate on JMJ’s conversions of the notes governed by the settlement agreement was changed in JMJ’s favor, and in addition, the settlement agreement added a prepayment penalty for any previously funded portions of any JMJ note and added a cancellation fee for any portion of any past or future JMJ note which has not yet been funded. The JMJ Notes have been retired in full.
St. George Investments, LLC was not a capital source for the Company prior to the DTC effectuating the “chill,” and as such, is described more fully in Note 9. Commitments and Contingencies.
Tonaquint, Inc. was not a capital source for the Company prior to the DTC effectuating the “chill,” and as such, is described more fully in Note 9. Commitments and Contingencies.
Though the “chill” described herein has been removed by the DTC, it remains possible the DTC could again institute a “chill,” which could result in sources of funding for the Company becoming more costly, to the extent such funding existed or was desired by the Company at any such point in time that a “chill” was effectuated.
The Company May Be Liable To Its Customers And May Lose Customers If It Provides Poor Service, If Its Services Do Not Comply With Its Agreements Or If Its Storage Facilities Fail.
The Company must meet its customers’ service level expectations and its contractual obligations with respect to its services. Failure to do so could subject the Company to liability, as well as cause it to lose customers. In some cases, the Company relies upon third party contractors to assist in providing its services. CBAI’s ability to meet its contractual obligations and customer expectations may be impacted by the performance of its third party contractors and their ability to comply with applicable laws and regulations.
The Company Storage Systems Are Subject To The Risk Of Material Disruption; Insurance Risks
Any material disruption in the Company's ability to maintain continued, uninterrupted and fully operating storage systems could have a material adverse effect on the Company business, operating results and financial condition. The Company systems and operations are vulnerable to damage or interruption from fire, flood, break-ins, tornadoes and similar events. The Company may not carry sufficient business interruption insurance and/or liability insurance to compensate us for losses and claims that might occur in the event of such an interruption.
If The Company Does Not Obtain And Maintain Necessary Domestic Regulatory Registrations, Approvals And Comply With Ongoing Regulations, It May Not Be Able To Market Its Cord Blood and Cord Tissue Banking Services.
The cord blood banking services that the Company provides are currently subject to FDA regulations requiring infectious disease testing. The cord blood facility the Company operates has registered with the FDA as a cord blood banking service, listed its products with the FDA, and will be subject to FDA inspection. In addition, the FDA has proposed new good tissue practice regulations that would establish a comprehensive regulatory program for human cellular and tissue-based products as well as proposed rules for donor suitability. Consistent with industry practice, the Company’s cord blood collection kits have not been cleared as a medical device. The FDA has announced that it will implement more regulatory procedures for cord blood banking in 2006. This new regulation may require medical device pre-market notification clearance or approval for the collection kits. Securing any necessary medical device clearance or approval for the cord blood collection kits may involve the submission of a substantial volume of data and may require a lengthy substantive review. This would increase costs and could reduce profitability. The FDA could also require that we cease using the collection kit and require medical device pre-market notification clearance or approval prior to further use of the kits. This could cause us to cease operations for some period of time.
The Company may not be able to comply with any future regulatory requirements, including product standards that may be developed after the date hereof. Moreover, the cost of compliance with government regulations may adversely affect revenue and profitability.
Failure to comply with applicable regulatory requirements can result in, among other things, injunctions, operating restrictions, and civil fines and criminal prosecution. Delays or failure to obtain registrations could have a material adverse effect on the marketing and sales of services and impair the ability to operate profitably in the future.
Of the states in which the Company provides cord blood banking services, only California, New Jersey, New York, and Maryland currently require that cord blood banks be licensed. CBAI maintains the required procurement service licenses of the states of California, New York and New Jersey and Maryland. If other states adopt requirements for the licensing of cord blood and cord tissue banking services, the Company may have to obtain licenses to continue providing services in those states.
Because The Industry Is Subject To Rapid Technological And Therapeutic Changes And New Developments, The Company’s Future Success Will Depend On The Continued Viability Of The Use Of Stem Cells And Its Ability To Respond To The Changes.
The use of stem cells in the treatment of disease is a relatively new technology and is subject to potentially revolutionary technological, medical and therapeutic changes. Future technological and medical developments could render the use of stem cells obsolete. In addition, there may be significant advances in other treatment methods, such as genetics, or in disease prevention techniques, which could significantly reduce the need for the services the Company provides. Therefore, changes in technology could affect the market for the Company's services and necessitate changes to those services. CBAI believes that its future success will depend largely on its ability to anticipate or adapt to such changes, to offer on a timely basis, services that meet these evolving standards and demand of its customers. Expectant parents may not use Company services and its services may not provide competitive advantages with current or future technologies. Failure to achieve increased market acceptance could have a material adverse effect on Company business, financial condition and results of operations.
The Company’s Markets Are Increasingly Competitive And, In The Event Its Unable To Compete Against Larger Competitors, Its Business Could Be Adversely Affected.
Cord blood and cord tissue banking and stem cell preservation is becoming an increasingly competitive business. The Company business faces competition from other operators of cord blood cord tissue and cord tissue stem cell preservation businesses and providers of cord blood and stem cell storage services. Competitors with greater access to financial resources may enter Company markets and compete with CBAI for increased market share. Many competitors have longer operating histories, larger customer bases, longer relationships with clients, and significantly greater financial, technical, marketing, and public relations resources than Company currently has. The Company does not have any research and development underway, while other competitors have established budgets for such R&D. Established competitors, who have substantially greater financial resources and longer operating histories than the Company, are able to engage in more substantial advertising and promotion and attract a greater number of customers and business than the Company currently attracts. While this competition is already intense, if it increases, it could have an even greater adverse impact on CBAI revenues and profitability. In the event that the Company is unable to compete successfully, its business will be adversely affected and competition may make it more difficult for CBAI to grow its revenue and maintain its existing business.
The Company Information Systems Are Critical To Its Business And A Failure Of Those Systems Could Materially Harm CBAI.
CBAI depends on its ability to store, retrieve, process and manage a significant amount of information. If Company information systems fail to perform as expected, or if the Company suffers an interruption, malfunction or loss of information processing capabilities, it could have a material adverse effect on its business.
The Company’s Sales Can Be Impacted By The Health And Stability Of The General Economy.
Unfavorable changes in general economic conditions, such as the current recession, or economic slowdown in the geographic markets in which the Company does business, may have the temporary effect of reducing the demand for the Company’s services. For example, economic forces may cause consumers to withhold discretionary dollars that might otherwise be spent on our services. Adverse economic conditions could also increase the likelihood of customer delinquencies and bankruptcies, which would increase the risk of uncollectibility of certain accounts. Each of these factors could adversely affect the Company’s revenue, price realization, gross margins and overall financial condition and operating results.
Volatility In The Financial Market May Negatively Impact The Company’s Ability To Access The Credit Markets.
Capital and credit markets have become increasingly volatile for micro cap companies. If the capital and credit markets continue to experience volatility and availability of funds remains limited or prohibitively expensive, it is possible that the Company’s ability to raise additional capital through the private placement of shares, debt and/or convertible debt may be limited by these factors if the Company requires such sources of additional capital in order to continue its operations, fund negative cash flow, and implement its business plans.
The Company Could Fail To Attract Or Retain Key Personnel, Which Could Be Detrimental To Its Operations.
CBAI’s success largely depends on the efforts and abilities of its President & Chairman Joseph Vicente and Vice President and General Counsel Stephen Morgan. The loss of either’s services could materially harm the Company’s business because of the cost and time necessary to find their successor. Such a loss would also divert management’s attention away from operational issues. CBAI does not presently maintain key-man life insurance policies on either Executive Officer. The Company also has other key employees who manage its operations and if the Company were to lose their services, senior management would be required to expend time and energy to find and train their replacements. To the extent that the Company is smaller than its competitors and has fewer resources, the Company may not be able to attract sufficient number and quality of staff.
The Company is Involved in a Legal Proceeding, and an Adverse Outcome Therein Could Subject the Company to Substantial Damages and the Company’s Assets Being Sold or Seized.
The Company is involved in a lawsuit, as set forth in detail in Item 3. Legal Proceedings. An adverse outcome in the lawsuit could result in significant damages being awarded against the Company, which could also lead to the sale or seizure of Company assets. Such an adverse outcome could be significant to the Company’s results of operations and may limit the Company’s ability to engage in its business activities
Trading Of The Company Stock May Be Restricted By The Securities Exchange Commission’s Penny Stock Regulations, Which May Limit A Stockholder’s Ability To Buy And Sell The Company Stock.
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. CBAI securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade Company securities. The Company believes that the penny stock rules discourage investor interest in and limit the marketability of its common stock.
Failure To Establish And Maintain Effective Internal Controls Over Financial Reporting Could Have An Adverse Effect On The Company’s Business, Operating Results and Stock Price.
Maintaining effective internal control over financial reporting is necessary for the Company to produce reliable financial reports and is important in helping to prevent financial fraud. If CBAI is unable to maintain adequate internal controls, its business and operating results could be harmed.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES.
In October, 2009, the Company re-located its headquarters from Los Angeles, California to Las Vegas, Nevada. The Company’s new principal office and laboratory operations are located at 1857 Helm Drive, Las Vegas, NV 89119. This facility encompasses approximately 17,000 square feet. The property is leased from an unaffiliated third party, whereby the original lease was for a period of five years ending September 2014 and the monthly lease payments are approximately $15,303, which includes Common Area Maintenance (CAM) charges. On January 21, 2014, the Company amended its current lease to include an extension through September 30, 2019. The monthly lease payments will be adjusted in accordance with the amendment, along with possible adjustments to the CAM charges and potential rent abatement associated with total lease square footage and other factors, all as set forth more fully in Note 17. Subsequent Events.
The Company maintains fire and casualty insurance on its leased property in an amount deemed adequate by management.
The Argentina subsidiary leases a facility for operations in Buenos Aires, Argentina.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On August 30, 2013, Cord Blood America, Inc. (the “Company”) filed a Complaint (the “Complaint”) in the United States District Court for the District of Utah, Central Division against Tonaquint, Inc. (“Tonaquint”) and St. George Investments, LLC (“St. George”) (collectively ”Defendants”), along with summonses in connection therewith, case number 2:13-cv-00806-PMW (the “Action”). The Company brought the Action against the Defendants alleging Fraud in the Inducement, Breach of Agreement, Breach of Implied Covenant of Good Faith and Fair Dealing and Unjust Enrichment. In particular, among other things, the Complaint alleges that Defendants have fraudulently induced the Company to enter into the June 27, 2012 Secured Convertible Promissory Note (“Tonaquint Note”), Securities Purchase Agreement (“Tonaquint Purchase Agreement”) and related documentation through misrepresentations including but by no means limited to: (i) representing that the Tonaquint Note would be consecutively amortized with the March 10, 2011 Secured Convertible Promissory Note issued to St. George by the Company (“St. George Note”), and that these would not become due and owing simultaneously, and (ii) that the St. George Note would be replaced by an amended note to be paid off according to a set amortization schedule.
The Company seeks relief in the form of rescission or reformation of the Tonaquint Note, St. George Note, the Warrant issued to St. George as part of the March 10, 2011 transaction, as well as related agreements and documents, an order enjoining Defendants from foreclosing on the Notes or selling the Company’s assets, punitive and other damages in an unspecified amount, costs, attorneys’ fees, interest and such other relief as the Court deems just and proper.
Subsequently, on September 25, 2013, Defendants each filed their Answer and Counterclaim in the Action. In their Counterclaims, Defendants allege causes of action against the Company for Breach of the March 10, 2011 Note and Warrant Purchase Agreement between St. George and the Company (“SGI Purchase Agreement”), Breach of the Tonaquint Purchase Agreement and Tonaquint Note, Breach of the Implied Covenant of Good Faith and Fair Dealing, and Unjust Enrichment. Defendants claim that the Company purportedly breached the SGI Purchase Agreement, Tonaquint Purchase Agreement, and Tonaquint Convertible Note, by, among other things, failing to maintain a share reserve, failing to increase the number of authorized shares, failing to call or hold a meeting to increase the authorized shares of Common Stock of the Company, and failing to make installment payments under the Tonaquint Convertible Note. Defendants seek relief in the form of damages in an unspecified amount and an order from the Court requiring the Company to establish and maintain a share reserve for the benefit of the Defendants, along with costs, attorneys’ fees and such other relief as the Court deems just and proper. On October 15, 2013, the Company filed its Reply to Counterclaim.
Also on September 25, 2013, the Company received from Tonaquint a Notice of Disposition of Collateral advising of Tonaquint’s intent to sell all assets of the Company at a public auction on November 4, 2013 at 11:00 a.m. PST at 1857 Helm Drive, Las Vegas, Nevada, 89119. On October 18, 2013, the Company received from Tonaquint a Notification of Cancellation, which provided notice that the aforementioned auction to sell the Company’s assets was cancelled.
The Company intends to vigorously pursue its claims and defend itself against Defendants' counterclaims, as well as Tonaquint’s attempt to sell assets, and will continue to take legal action to protect the interests of the Company and its shareholders.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information. The Company Common Stock is traded on the OTC Bulletin Board, under the symbol CBAI.OB.
The following table sets forth the high and low bid prices of the Company’s Common Stock traded on the OTC Bulletin Board for fiscal years ended December 31, 2013, and December 31, 2012. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
(b) Holders. As of March 15, 2013, our Common Stock was held by approximately 661 shareholders of record. Our transfer agent is Interwest Transfer Company, Inc., with offices at 1981 Murray Holiday Road, Suite 100, PO Box 17136, Salt Lake City, Utah 84117, phone number 801-272-9294. The transfer agent is responsible for all record-keeping and administrative functions in connection with the common shares of stock.
(c) Dividends. The Company has never declared or paid a cash dividend. There are legal restrictions which preclude the Company's ability to pay cash dividends on its common shares so long as it has an accumulated deficit. The Company does not anticipate declaring or paying any cash dividends in the foreseeable future.
(d) Securities Authorized for Issuance Under Equity Compensation Plans.
Equity Compensation Plan Information
The following table sets forth the information indicated with respect to the Company's compensation plans as of December 31, 2013, under which its common stock is authorized for issuance.
(1)
The warrants shown were issued in discreet transactions from time to time as compensation for services rendered by debt holders, consultants, advisors or other third parties, and do not include warrants sold in private placement transactions. The material terms of such warrants were determined based upon arm’s-length negotiations with the service providers. The warrant exercise prices approximated the market price of our common stock at or about the date of grant, and the warrant terms are five years from the grant date. The warrants contain customary anti-dilution adjustments in the event of a stock split, reverse stock split, reclassification or combination of our outstanding common stock and similar events and certain of the warrants contain anti-dilution adjustments triggered by other corporate events, such as dividends and sales of equity below market price.
Recent Issuances of Unregistered Securities
In the instances described under this sub-heading, the Company relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, in issuing securities.
Tangiers Investors, LP
On December 6, 2011, December 27, 2011 and January 6, 2012, the Company issued three (3) separate $25,000 “Convertible Notes” to Tangiers Investors with interest accruing at 10% per annum due one year from the issuance date. On January 20, 2012 the Company issued one (1) $50,000 “Convertible Note” to Tangiers Investors with interest accruing at 10% per annum due one year from the issuance date. On January 27, 2012 and February 3, 2012 the Company issued two (2) separate $20,000 “Convertible Note” to Tangiers Investors with interest accruing at 10% per annum due one year from the issue date. The Payee at its option could elect to convert all or part of the principal and any accrued unpaid interest on these notes at any time or times on or before the aforementioned maturity dates. The conversion price was the lower of (a) seventy percent (70%) of the lowest volume weighted average price (the “VWAP”) price during the ten (10) trading days prior to conversion or (b) seventy percent (70%) of the average of the lowest five (5) closing prices during the twenty (20) days prior to conversion, subject to adjustment pursuant to this Article “4” of this Note. Due to adjustments, Tangiers conversion ratio became 60% in the aforementioned formula, rather than 70%, in October 2012. In total for the period ending December 31, 2013, the Company issued 116,107,906 shares to retire $183,640 of principal and interest in convertible debt which had a fair market value of $473,078. The Company paid in full the six (6) Convertible Notes and has no remaining obligations.
St. George Investments, LLC
On March 10, 2011, the Company entered into a Note and Warrant Purchase Agreement (the "Purchase Agreement") with St. George Investments, LLC, (“St. George”) an Illinois limited liability company (the "Investor") whereby the Company issued and sold, and the Investor purchased: (i) Secured Convertible Promissory Notes of the Company in the principal amount of $1,105,500 (the "Company Note") and (ii) a Warrant to purchase common stock of the Company (the "Warrant"). The Investor paid $250,000 in cash as an initial payment to the Company and executed and delivered six separate “Secured Buyer Notes” (the “Buyer Notes”), as consideration in full for the issuance and sale of the Company Note and Warrants.
The principal amount of the Company Note is $1,105,500 ("Maturity Amount") and the Company Note is due 48 months from the issuance date of March 10, 2011. The Company Note has an interest rate of 6.0%, which would increase to a rate of 12.0% on the happening of certain Trigger Events, including but not limited to: a decline in the 10-day trailing average daily dollar volume of the common shares in the Company’s primary market to less than $30,000 of volume per day at any time; the failure by the Company or its transfer agent to deliver Conversion Shares (defined in the Company Note) within 5 days of Company’s receipt of a Conversion Notice (defined in the Company Note). The total amount funded (in cash and notes) at closing was $1,000,000, representing the Maturity Amount less an original issue discount of $100,500 and the payment of $5,000 to the Investor to cover its fees, with payment consisting of $250,000 advanced at closing and $750,000 in a series of six secured convertible Buyer Notes of $125,000 each, with interest rates of 5.0%. To date, St. George has paid the total amount due.
The Buyer Notes are secured by an Irrevocable Standby Letter of Credit (“Letter of Credit”). The Investor has also received a five year warrant entitling it to purchase 1,392,354 shares of common stock of the Company at an exercise price of $0.179. The warrant also contains a net exercise /cashless exercise provision. St. George may elect to convert all or part of the principal and any accrued unpaid interest on the Company Note on or before the aforementioned maturity date, subject to certain limitations. The conversion price under the Company Note is eighty percent (80%) of the average of the closing bid prices for the three (3) Trading Days (defined in the Purchase Agreement) with the lowest closing bids over the twenty (20) Trading Days immediately preceding the Conversion Date (defined in the Company Note), subject to adjustments as set forth in the Company Note. Due to adjustments, St. George’s current conversion ratio inserts fifty-five percent (55%) in the aforementioned formula, in place of eighty percent (80%). Pursuant to conversions made by St. George under the above-described notes in 2013, the Company issued 397,657,686 total shares to St. George to retire $776,502 of principal and interest in convertible debt which had a fair market value of $1,350,130. The principal balance due on the Note was $248,039 as of December 31, 2013.
Repurchase of Shares
The Company did not repurchase any of its shares during the year ended December 31, 2013.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Summary and Outlook of the Business
CBAI is primarily an umbilical cord blood and cord tissue stem cell processing and storage company with a particular focus on the acquisition of customers in need of family based products and services.
Cord
Cord’s operations provide umbilical cord blood banking and cord tissue services to expectant parents throughout all 50 United States and Puerto Rico. The Company’s corporate headquarters re-located to Las Vegas, NV from Los Angeles, CA in October 2009. Cord earns revenue through a one-time enrollment and processing fee, and through an annually recurring storage and maintenance fee. Cord processes and stores cord blood and cord tissue in its own facility. Cord provides the following services to each customer.
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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.
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Physician And Customer Support. 24-hour consulting services to customers as well as to physicians and labor and delivery personnel, providing any instruction necessary for the successful collection, packaging, and transportation of the cord blood and cord tissue and maternal blood samples.
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Transportation. Manage all logistics for transporting the cord blood and cord tissue unit to the Company’s centralized facility immediately following birth. This procedure ensures chain-of-custody control during transportation for maximum security.
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Comprehensive Testing. The cord blood sample is tested for stem cell concentration levels and blood type. The maternal samples are tested for infectious diseases. Cord reports these results to the newborn’s mother.
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Cord Blood Storage. After processing and testing, the cord blood and cord tissue unit is cryogenically frozen in a controlled manner and stored in liquid nitrogen for potential future use. Data indicates that cord blood retains viability and function for at least twenty five years when stored in this manner and theoretically could be maintained at least as long as the normal life span of an individual.
Going forward, management will continue to assess business opportunities, and plans to pursue customer acquisition, primarily through organic growth.
Stellacure GmbH
In March 2011, CBAI purchased a majority interest in Stellacure GmbH, a company providing private cord blood processing and storage services to families in Germany, Spain and Italy. On September 28, 2012, the Company sold its ownership interest in Stellacure, and the results of Stellacure and its disposal are reported as discontinued operations.
Biocordcell Argentina S.A.
Based in Buenos Aires, Biocordcell Argentina S.A., collects, processes and stores cord blood samples as a private bank for use in current or future medical therapies in Argentina, Uruguay and Paraguay.
Critical Accounting Policies
CBAI defines critical accounting policies as those that are important to the portrayal of its financial condition and results of operations and require estimates and assumptions based on the Company's judgment of changing market conditions and the performance of its assets and liabilities at any given time. In determining which accounting policies meet this definition, the Company considered its policies with respect to the valuation of its assets and liabilities and estimates and assumptions used in determining those valuations. The Company believes the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations include the following:
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determination of the level of allowance for bad debt
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deferred revenue
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revenue recognition
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valuation of derivative instruments
Accounts Receivable
Accounts receivable consist of the amounts due for the processing and storage of umbilical cord blood and cord tissue, other tissue procurement services and whole cord blood collection. 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.
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.
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, Stellacure and Bio recognize 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.
Franchise revenues are recognized in accordance with ASC 952-605-3, according to requirements for recognizing franchise revenues after “franchise agreement” services are completed and substantially performed. Further, in accordance with ASC 952-605-25-7, the installment or cost recovery accounting method is used to account for franchise fee revenue only in those exceptional cases when revenue is collectible over an extended period and no reasonable basis exists for estimated collectability. During the year ended December 31, 2012, the Company recognized $112,191 of franchise revenues.
Results of Operations for the Year Ended December 31, 2013 Compared To the Year Ended December 31, 2012
For the year ended December 31, 2013, the Company's total revenue slightly decreased to $5.97 million from $5.99 million, over the same period of 2012. Revenues are generated primarily from new enrollment/processing fees and recurring storage fees. The processing fees decreased approximately 11%, and the recurring revenues increased approximately 14% for the year ended December 31, 2013 versus the prior comparative period December 31, 2012. As a mix of total revenue, recurring revenues account for 51% of total revenues, and processing fees 42% of the total revenues. Two secondary sources of revenue are franchise fees and tissue related sales. As a percentage of revenue in 2013 these two sources were approximately 7% of sales compared to 8% in the comparative year ending period of 2012. Per segment, Cord’s revenues were level at $3.80 million and Bio decreased its revenues by 1% for the prior comparative twelve month period. Bio's decrease in revenues were largely impacted by year over year adjustments to the current exchange rate of approximately 16% and an increase in the discounts provided for enrollment and processing fees. Cord remains focused on strategic organic growth which management hopes will provide sustainable operating cash flows and net income.
Cost of services as a percentage of revenue increased from 30% to 34% for the comparative year ending 2013 versus 2012. The cost of services includes transportation of the umbilical cord blood from the hospital to the lab, direct material plus labor costs for processing and cryogenic storage, and allocated rent, utility and general administrative expenses. Gross profit decreased by approximately $0.23 million or 5% to $3.97 million from year ending 2012 to year ending 2013. Per segment, Cord’s cost of services as a percentage of revenue remained consistent at approximately 28%, and Bio increased from 32% to 42%. The Company anticipates that through the growth and expansion of its Cord business, and continuing efficiencies in its own facilities, direct costs should continue to decrease and gross profits will continue to improve.
Administrative and selling expenses for the year ended December 31, 2013 were $5.12 million as compared to $5.63 million for the comparative period of 2012 representing a 10% decrease. These expenses are primarily related to marketing/advertising, professional services, allocated facility, including utilities, expenses, and wages for personnel. Generally, each functional unit within administrative and selling expenses has reduced expenses. The Company continues to evaluate its expenses and their relationship to revenues for alignment. Depreciation and amortization are included as an administrative expense. For the year ended 2013, depreciation and amortization remained consistent with the 2012 year ending period total of $0.79 million.
The Company's loss from continuing operations was $3.04 million versus a loss of $2.39 million for the comparative period, resulting in an increase of 26% primarily attributable to an increase in the interest expense and change in derivative liability of $0.63 million. The Company's net loss was $2.98 million for the year ended December 31, 2013 a decrease of $0.52 million from an overall net loss for the year ended 2012, which included a loss of $1.10 million for discontinued operations.
Liquidity and Capital Resources
Total assets at December 31, 2012 were $6.08 million, compared to $6.35 at December 31, 2012. The decrease in the total assets is primarily related to the long term customer contracts and relationships which decreased by $0.63 million while current assets increased by $0.62. The total liabilities at December 31, 2013 were $6.4 million consisting primarily of Promissory Notes, Accounts Payable and Deferred Revenue $1.41 million, $0.59 million and $2.61 million respectively. At December 31, 2012, total liabilities were $6.35 million consisting primarily of Promissory Notes, Accounts Payable and Deferred Revenue $1.80 million, $0.54 million and $2.34 million respectively. Total liabilities increased by $0.61 million due to an increase in deferred revenue by $0.62 million. The net impact of these changes resulted in total liabilities exceeding total assets by $0.37 million for the period ending December 31, 2013.
At December 31, 2013, the company had $0.71 million in cash, an increase by $0.32 million or 80% from the prior comparative period of 2012. The Company currently collects cash receipts from operations through Cord and its subsidiary Bio. Cash flows from operations are currently sufficient to fund operations as net cash used provided by operating activities for the year ended December 31, 2013, increased $0.41 million or 509% from the prior comparative period of 2012, and resulted in Company operations generating $0.50 of cash for the year ending 2013. During the last 12 months of 2013 there was no increase in notes payable for purposes of working capital or investment in affiliate companies. As a result, net cash used in investing activities decreased by $0.26 million and net cash provided by financing activities decreased from $0.43 million for the year ended December 31, 2013 to $0.00 million for the year ended 2013.
Since inception, the Company has financed cash flow requirements through the issuance of common stock and warrants for cash, services and loans. Over the past twelve months, the Company has reduced operating expenses, ended investment in its unconsolidated affiliates, and received no additional funding from outside sources for working capital. The Company plans to continue to operate on its cash flows from operations by aligning its expenses with its revenues. If cash flows from operations are significantly less than projected, then the company would need to either cut back on its budgeted spending, look to outside sources for additional funding or a combination of the two. The Company currently does not have any financing agreements in place for additional funding. If the Company is unable to access sufficient funds when needed, obtain additional external funding or generate sufficient revenue from the sale of its products, the Company could be forced to curtail or possibly cease operations.
Off-Balance Sheet Arrangements
The Company does not have any 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 are material to investors.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, ("ASU 2013-02"). ASU 2013-02 amends Accounting Standards Codification ("ASC") 220, Comprehensive income ("ASC 220"), and requires entities to present the changes in the components of accumulated other comprehensive income for the current period. Entities are required to present separately the amount of the change that is due to reclassifications, and the amount that is due to current period other comprehensive income. These changes are permitted to be shown either before or net-of-tax and can be displayed either on the face of the financial statements or in the footnotes. ASU 2013-02 was effective for our interim and annual periods beginning January 1, 2013. The adoption of ASU 2013-02 did not have a material effect on the Company's consolidated financial position or results of operations.
In March 2013, the FASB issued new guidance related to the release of cumulative translation adjustment related to an entity's investment in a foreign entity. The guidance clarifies that the guidance in Subtopic 830-30, Foreign Currency Matters - Translation of Financial Statements, applies to the release of cumulative translation adjustment into net income when a reporting entity either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets that constitute a business within a foreign entity. This guidance is effective for us prospectively for reporting periods beginning October 1, 2014. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In April 2013, the FASB issued ASU 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. ASU 2013-07 clarifies when an entity should apply the liquidation basis of accounting. ASU 2013-07 also provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. ASU 2013-07 is effective for fiscal years and interim periods within those years beginning after December 15, 2013. The Company does not expect amendments in ASU 2013-07 to impact the Company's financial statements, results of operations or liquidity.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which eliminates diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from disallowance of a tax position. ASU 2013-11 affects only the presentation of such amounts in an entity’s balance sheet and is effective for fiscal years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company’s consolidated financial statements and supplemental schedule and notes thereto as of December 31, 2013 and 2012, and for each of the two years then ended, together with the independent registered public accounting firm’s reports thereon, are set forth on pages to of this Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
It is management's responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company’s management, including its President and Chief Financial Officer, have reviewed and evaluated the effectiveness of its disclosure controls and procedures as of December 31, 2013. Following this review and evaluation, management collectively determined that its disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in reports that it files or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including its president, vice president, and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
The deficiency in the Company’s disclosure controls and procedures is related to a lack of segregation of duties due to the size of the accounting department and the lack of experienced accountants due to the limited financial resources of the Company. The Company continues to actively develop the controls and resources necessary in order to be in position to remediate this lack of segregation of duties.
Changes in Internal Control over Financial Reporting
There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of its assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that its receipts and expenditures are being made only in accordance with authorizations of its management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of its assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company assessed the effectiveness of its internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.
Based upon management’s assessment using the criteria contained in COSO, and for the reasons discussed below, management has concluded that, as of December 31, 2013, its internal control over financial reporting was not effective.
Based on its evaluation, the Company's President and Chief Financial Officer identified a major deficiency that existed in the design or operation of its internal control over financial reporting that it considers to be a “material weakness”. The Public Company Accounting Oversight Board has defined a material weakness as a “significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.” The material weakness was first identified at the beginning of 2007 and remained unchanged through December 31, 2013.
The deficiency in the Company's internal control 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.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The following table sets forth the names and positions of the Company’s executive officers and directors. The Company Directors shall serve until his or her successors are elected and qualify or until his or her earlier death, resignation or removal. The Company Board of Directors elects its officers, and their terms of office are at the discretion of the Board, except to the extent governed by an employment contract.
The Company's directors, executive officers and other significant employees, their ages and positions are as follows:
Joseph R. Vicente has been a director of the Company since April 2004. Mr. Vicente has occupied different positions at the Company since November 2004, and was appointed on May 15, 2012 as the Company President and Chairman. From July 2002 through October 2004, Mr. Vicente was an independent consultant where he provided strategic consulting services to organizations on acquisitions, operational practices and efficiencies, and sales management. From July 1993 through April 2002, he was a Senior Vice President at TMP Worldwide, Inc. where he held various strategic, operational, and sales management positions.
Stephen Morgan currently serves as Vice President, General Counsel, and Secretary. He has been General Counsel of the Company since August 2010. Prior to his employment with the Company, Mr. Morgan worked for law firms in Los Angeles, California, representing clients in a broad range of transactional and litigation matters. Mr. Morgan earned his Bachelor of Science degree from the University of Minnesota and his Juris Doctor from Loyola Law School in Los Angeles, California.
Timothy McGrath has been a director of the Company since March 2006. Mr. McGrath has served in an executive capacity for the past thirteen years. Mr. McGrath is currently serving as Controller for LogicInfo, a technology services company. From January 2006 to February 2008 Mr. McGrath served as the Vice President of Finance and Accounting at BioE, Inc. From October 1999 through September 2005 Mr. McGrath served as Vice President and Chief Financial Officer of Orphan Medical, Inc.
Involvement In Certain Legal Proceedings
None of the Company's officers, directors, promoters or control persons has been involved in the past five years in any of the following:
(1)
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(2)
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3)
Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, or any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(4)
Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Committees; Audit Committee Financial Expert.
The Company board has an Audit Committee made up solely of Timothy McGrath.
The Company Board of Directors has determined that Cord Blood has one Audit Committee financial expert, Mr. McGrath, On April 6, 2006; the board adopted its written Audit Committee charter.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires that Company officers and directors, and persons who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership with the Securities and Exchange Commission and with any exchange on which the Company's securities are traded. Officers, directors and persons owning more than ten percent of such securities are required by Commission regulation to file with the Commission and furnish the Company with copies of all reports required under Section 16(a) of the Exchange Act. To the Company’s knowledge, based solely upon our review of the copies of such reports furnished to us, during the fiscal year ended December 31, 2013, all Section 16(a) filing requirements applicable to its officers and directors were complied with.
Code of Ethics
The Company adopted a Code of Ethics on April 13, 2005 that applies to all of its directors, officers and employees, including principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics was attached as Exhibit 14.1 to our registration statement filed on Form SB-2 on May 2, 2005.
Changes in Nominating Procedures
None.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Company accrued or paid compensation to the executive officers as a group for services rendered to the Company in all capacities during the 2013 and 2012 fiscal years as shown in the following table.
SUMMARY COMPENSATION TABLE
Overview
The following is a discussion of the Company program for compensating its named executive officers and directors. Currently, the Company does not have a compensation committee, and as such, the Board of Directors is responsible for determining the compensation of the Company’s named executive officers.
Compensation Program Objectives and Philosophy
The primary goals of the Company policy of executive compensation are to attract and retain the most talented and dedicated executives possible, to assure that its executives are compensated effectively in a manner consistent with Company strategy and competitive practice, and to align executive’s compensation with the achievement of the Company’s short and long term business objectives.
The Board of Directors considers a variety of factors in determining compensation of executives, including their particular background and circumstances, such as their training and prior relevant work experience, their success in attracting and retaining savvy and technically proficient managers and employees, increasing its revenues, broadening the Company product line offerings, managing costs and otherwise helping to lead the Company through a period of profitable growth.
In the future, the Company expects that the Board of Directors will form a compensation committee charged with the oversight of executive compensation plans, policies and programs of the Company and with the full authority to determine and approve the compensation of the Company’s President and Vice President and make recommendations with respect to the compensation of other executive officers. CBAI expects that its compensation committee will continue to follow the general approach to executive compensation that we have followed to date, rewarding superior individual and company performance with commensurate cash compensation.
Elements of Compensation
The Company’s compensation program for the named executive officers consists primarily of base salary. There is no retirement plan, long-term incentive plan or other such plans, although Mr. Vicente’s and Mr. Morgan’s agreements have a bonus plan, subject to the Board’s discretion. The base salary provided is intended to equitably compensate the named executive officers based upon their level of responsibility, complexity and importance of role, leadership and growth potential, and experience.
Base Salary
The Company’s named executive officers receive base salaries commensurate with their roles and responsibilities, while considering the financial condition of the Company. Base salaries and subsequent adjustments, if any, are reviewed and approved by the Company’s Board of Directors annually, based on an informal review of relevant market data and each executive’s performance for the prior year, as well as each executive’s experience, expertise and position. The base salaries paid to the Company’s named executive officers in 2013 are reflected in the Summary Compensation Table below.
Stock-Based Awards under the Equity Incentive Plan
The Company previously provided equity awards as a component of compensation. No such awards were provided in 2013, but the Company retains the position of providing such compensation considering a host of performance based criteria that will encourage executives to remain employed by the Company and also to attract persons of exceptional ability to become executives of the Company.
Employment Agreements
On September 12, 2011 (the “Company”), entered into an Executive Employment Agreement with Joseph R. Vicente, then the Company’s Chief Operating Officer and Vice President and appointed Chairman and President on May 15, 2012 by the Board of Directors, which was effective as of August 1, 2011 and shall terminate as of December 31, 2014, unless earlier terminated by the Company or Mr. Vicente. Mr. Vicente’s Executive Employment Contract has an initial term from August 1, 2011 through December 31, 2011, and is renewable annually thereafter for up to three additional, successive years, and provides for a base salary equal to his previous year’s annual salary, which said salary was set under the provisions of the previous employment agreement entered between Mr. Vicente and the Company in July of 2008. Mr. Vicente voluntarily reduced his annual salary by 12.5% until otherwise determined by Mr. Vicente, along with the advice and consent of the Company’s Board of Directors. It also provides for an annual bonus, payable at the discretion of the Board of Directors, equal to 25% of Mr. Vicente’s prior year base salary. The Agreement provides for a change of control termination bonus, which provide that if Mr. Vicente is terminated, his compensation reduced, or Mr. Vicente terminates his employment within one year after a change of control, then Mr. Vicente is entitled to a termination benefit in an amount equal to the average annual cash compensation over the three (3) year period preceding the Triggering Event (defined in the agreements) multiplied (2.00). The Agreement also provides for termination payments in the absence of a change of control in the event the Company terminates Mr. Vicente without cause in an amount equal to all compensation paid by the Company to Mr. Vicente for the 24 months preceding the termination, along with health plan and 401k incentives, as stated in the agreement.
The Company entered into an Executive Employment Agreement with Stephen Morgan (the “Employee”) on August 10, 2012, with July 1, 2012 as the effective date of the Agreement. The Agreement provides for a change of control termination bonus, whereby if the Employee is terminated, his compensation reduced, or the Company terminates the Employee’s employment within one year after a change in control, then the Employee is entitled to a termination benefit in an amount equal to the employee’s cash compensation over the one (1) year preceding the Triggering Event (defined in the Agreement). The Agreement also provides for termination payments in the absence of a change of control in the event the Company terminates the Employee without cause in an amount equal to all compensation paid by the Company to the Employee for the 12 months preceding the termination, along with health plan and 401k incentives (if any were to be offered - the Company terminated its 401k earlier in 2012), as stated in the Agreement.
The Agreement provides for an annual salary of $125,000, along with a bonus, payable at the discretion of the Board of Directors of up to an annual amount of 20% of the Employee’s salary. Mr. Morgan’s compensation, as set forth in the Agreement has not increased as a result of his election to the officer positions of Vice President and Secretary on May 15, 2012 in addition to his retention of his previous position, General Counsel. The Company believes the assumption of additional roles by existing management and other individuals in leadership positions, including filling recently vacated roles, will reduce overall management costs while also leading to greater efficiency within the organization.
Perquisites
The Company did not provide its named executive officers with any perquisites and other personal benefits. The Company does not view perquisites as a significant element of its compensation structure, but does believe that perquisites can be useful in attracting, motivating and retaining the executive talent for which it competes. It is expected that the current practice regarding perquisites will continue and will be subject to periodic review by its Board of Directors.
The following table sets forth the compensation paid to the Company’s President and one other highly compensated executive officer for each of its last two completed fiscal years. No other officer received compensation greater than $100,000 for either fiscal year.
Summary Compensation Table
(1)
Bonuses to the named executive officers reported above relating to 2013 were paid in December 2013 for achieving twelve month EBITDA performance standards as established by the Board of Directors. Bonuses to the named executive officers reported above relating to 2012 were paid in between June through December 2012 for achieving six month EBITDA performance standards as established by the Board of Directors.
(2)
The values shown in this column represent the aggregate grant date fair value of equity-based awards granted during the fiscal year, in accordance with ASC 718, “Share Based-Payment”. The fair value of the stock options at the date of grant was estimated using the Black-Scholes option-pricing model, based on the assumptions described in Note 10 of the Notes to Financial Statements included in this Annual Report.
Outstanding Equity Awards at Fiscal Year End.
The following table sets forth information with respect to the outstanding equity awards of the Company’s principal executive officers during 2013, and each person who served as an executive officer of CBAI as of December 31, 2013 (No grants were made during 2013):
2013 Grants of Plan-Based Awards
Holdings of Previously Awarded Equity
2013 Outstanding Equity Awards at Fiscal Year-End
Option Exercises and Stock Vested
COMPENSATION OF DIRECTORS
Director Compensation for year ending December 31, 2013
The following table sets forth with respect to the named director, compensation information inclusive of equity awards and payments made in the year ended December 31, 2013.
On January 26, 2006 the Company’s board of directors approved a board compensation plan through 2011. In 2013 the Company did not issue any shares related to its Board of Directors Compensation.
Compensation Committee Interlocks and Insider Participation
The Company did not have a compensation committee during the year ended December 31, 2013. During the fiscal year ended December 31, 2013, none of the Company’s executive officers served on the Board of Directors of any entities whose directors or officers serve on its Board of Directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 15, 2014, except as otherwise noted, with respect to the beneficial ownership of our common stock and is based on 890,000,000 shares of common stock issued and outstanding and entitled to vote as of said date as to:
●
Each person known by the Company to own beneficially more than five percent of our issued and outstanding common stock;
●
Each director and prospective director of the Company;
●
The Company’s President and each person who serves as an executive officer of the Company; and all executive officers and directors of the Company as a group.
Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
-------
*
Less than 1% of the outstanding common stock.
(1)
Except as noted above, the address for the above identified officers and directors of the Company is c/o Helm Drive, Las Vegas, NV 89119. Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants, or convertible debt currently exercisable or convertible, or exercisable or convertible within 60 days of March 15, 2013 are deemed outstanding for computing the percentage of the person holding such option or warrant. Percentages are based on a total of 890,000,000 shares of common stock outstanding on March 15, 2013 and shares issuable upon the exercise of options, warrants exercisable, and debt convertible on or within 60 days of March 15, 2013 as described above. The inclusion in the aforementioned table of those shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, to our knowledge based upon information produced by the persons and entities named in the table, each person or entity named in the table has sole voting power and investment power, or shares voting and/or investment power with his or her spouse, with respect to all shares of capital stock listed as owned by that person or entity.
(2)
Includes 2,067,657 currently exercisable options held by Mr. Vicente. Percentage calculation considers additional outstanding of the potential options listed herein
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
China Stem Cells, Ltd.
In March of 2010 the Company acquired pursuant to a License Agreement, a 10% non dilutable interest in what became, in December 2010, China Stem Cells, Ltd., a Cayman Islands Company (hereinafter "Cayman"), which indirectly holds a 100% capital interest in AXM Shenyang, a company organized to conduct a Stem Cell Storage Business in China. In exchange for issuance of an equity interest in Cayman, under the terms of the Transfer of Technology Agreement the Company agreed to provide technology transfer, knowhow and training in the setup, marketing and operation of the China Stem Cell Storage business. In connection with the License Agreement, the Company is to receive royalties equal to 8.5% of "Net Revenues" realized from the China Stem Cell Storage business, over the 15 year term of the agreement, with certain minimum annual royalties’ payable beginning in 2011. The Company has not been paid any royalty balance due to date, and it remains doubtful that any such royalties will be collected.
In December of 2010 the Company also acquired the option to provide up to $750,000 of additional capital funding to Cayman through the purchase of Cayman Secured Convertible Promissory Notes and attached Cayman Warrants to acquire its Common Stock. Other Cayman shareholders were granted similar options, with the intent of raising the aggregate up to $1.5 million in additional capital for Cayman and its subsidiaries. CBAI has exercised this option in part, provided a total of $400,000 in additional capital to Cayman, and is to receive Cayman Secured Convertible Promissory Notes for this sum along with 80 Cayman (TBD) Warrants. The Secured Convertible Promissory Notes are convertible into Cayman stock at a conversion price of $1,500 per share, subject to certain adjustments. The Warrants have a five year term and are exercisable at an option exercise price of $0.05 per share per share, subject to certain adjustments. The Company has recorded a reserve for the entire carrying amount of the receivable, including interest. The Company’s current President, Joseph Vicente was appointed as a Director of China Stem Cells Ltd. in July 2012
VidaPlus
The Company holds 7% 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 wrote-down $123,263 of the net convertible loan receivable, leaving a loan balance, net book value of $123,262. On February 14, 2014, CBAI delivered to VidaPlus its election to convert its loan under Tranche 2 into shares of stock in VidaPlus as described more fully in Note 17. Subsequent Events.
Consulting Agreement with Pyrenees Consulting, LLC
On January 1, 2010, the Company entered into a consulting agreement with Pyrenees Consulting, LLC (“Pyrenees Consulting”), mislabeled in the agreement as Pyrenees Capital, LLC. To the best of the Company’s knowledge, at all relevant times herein, Pyrenees Consulting was owned 50% by Stephanie Schissler, who is the spouse of the Company’s former Officer and Director Matthew Schissler, and 50% by Matthew Schissler. The consulting agreement was entered for consulting services provided by Pyrenees Consulting, to be performed by Stephanie Schissler. The agreement expired two years after the date of the agreement, but Pyrenees continued providing services for the Company at a monthly rate of $13,125. Effective May 14, 2012, the Company and Pyrenees Consulting, LLC terminated their arrangement, and Pyrenees no longer provides services for the Company, nor is owed any additional monies or other obligations.
Frozen Food Gift Group, Inc.
CBAI engaged Frozen Food Gift Group, Inc. (“FFGG”) as a vendor, prepaying for $45,000 in products during the year ended December 31, 2011. The remaining balance on that account is $30,655 as of December 31, 2013, not including additional interest and fees to which the Company may be entitled. The Company’s former CEO and Chairman of the Board, Matthew Schissler who resigned effective May 14, 2012, owned 36.2% of the outstanding shares of FFGG based on an S-1 filing made by that company with the SEC on July 31, 2012, and on information and belief is FFGG’s Chairman of the Board. CBAI’s former COO, and now President Joseph Vicente served on the Board of Directors of FFGG, but resigned effective as of January 26, 2012.
The Company ceased doing business with FFGG in 2012, and has made demands for the return of its monies. In March 2014, the Company entered into a Claim Purchase Agreement with a third party calling for payment to the Company in exchange for the Company’s claims against Frozen Food Gift Group, Inc. (“FROZ”), as set forth in a Mutual General Release described more fully in Note 17. Subsequent Events.
HaVi Enterprises, LLC
On January 12, 2012, HaVi Enterprises, LLC, in which the Company’s President, Joseph Vicente owns a 50% interest, loaned $50,000 to the Company through a Secured Promissory Note with an interest rate of 12% per annum and a 6-month repayment schedule. The balance of this note was paid in full at September 30, 2012.
Director Independence
Mr. McGrath is independent as that term is defined under the NASDAQ Marketplace Rules.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
De Joya Griffith, LLC serves as the Company’s independent registered public accounting firm and audited its financial for the year ended December 31, 2013. Rose, Snyder, Jacobs LLP served as the Company's independent registered public accounting firm and audited its financial statements for the year ended December 31, 2012.
The Audit Committee pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be paid in connection with such services in order to assure that the provision of such services does not impair the auditor’s independence.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this report or incorporated herein by reference:
(1)
The Company’s Consolidated Financial Statements are listed on page of this Annual Report.
(2)
Financial Statement Schedules.
None
(3)
Exhibits
The following documents are included as exhibits to this Annual Report:
(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 February 26, 2009
(7) Filed as an exhibit to the Current Report on Form 8-K filed on March 31, 2009
(8) Filed as an exhibit to the Current Report on Form 8-K filed on July 17, 2009
(9) Filed as an exhibit to Current Report on Form 8-K filed on January 7, 2010
(10) Filed as an exhibit to Current Report on Form 8-K filed on March 29, 2010
(11) Filed as an exhibit to Current Report on Form 10-K filed on March 31, 2010
(12) Filed as an exhibit to Current Report on Form 10Q filed on May 5, 2010
(13) Filed as an exhibit to Current Report on Form 8-K filed on July 7, 2010
(14) Filed as an exhibit to Current Report on Form 8-K filed on September 23, 2010
(15) Filed as an exhibit to Current Report on Form 8-K filed on March 21, 2011
(16) Filed as an exhibit to Current Report on Form 10Q filed on May 23, 2011
(17) Filed as an exhibit to Current Report on Form S-8 filed on June 3, 2011
(18) Filed as an exhibit to Current Report on Form 8K filed on September 12, 2011
(19) Filed as an exhibit to Current Report on Form 8-K filed on May 15, 2012
(20) Filed as an exhibit to Current Report on Form 8-K filed on June 25, 2012
(21) Filed as an exhibit to Current Report on Form 8-K filed on July 6, 2012.
(22) Filed as an exhibit to Current Report on Form 10Q filed on August 14, 2012
(23) Filed as an exhibit to Current Report on Form 8K filed on September 27, 2012
(24) Filed as an exhibit to Current Report on Form 8K filed on October 4, 2012.
(25) Filed as an exhibit to Current Report on Form 8K filed on May 20, 2013.
(26) Filed as an exhibit to Current Report on Form 8K filed on September 3, 2013
(27) Filed as an exhibit to Current Report on Form 8K filed on October 1, 2013
(28) Filed as an exhibit to Current Report on Form 8K filed on October 22, 2013
(29) Filed as an exhibit to Current Report on Form 8K filed on January 10, 2014
(30) Filed as an exhibit to Current Report on Form 10K filed on March 31, 2014
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 31st day of March, 2014.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Joseph R. Vicente
Joseph R. Vicente
March 31, 2014
President and Chairman
(Principal Executive Officer,
Principal Financial Officer,
Principal Accounting Officer, and Director)
/s/ Timothy McGrath
Timothy McGrath
March 31, 2014
Director
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Cord Blood America, Inc.
We have audited the accompanying consolidated balance sheet of Cord Blood America, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Cord Blood America, Inc. and subsidiaries as of December 31, 2012, and for the year then ended were audited by other auditors and whose report, dated March 27, 2013, on those financial statements included an explanatory paragraph that expressed substantial doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cord Blood America, Inc. and subsidiaries as of December 31, 2013 and the related statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ De Joya Griffith, LLC
Henderson, Nevada
March 23, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Cord Blood America, Inc.
We have audited the accompanying consolidated balance sheet of Cord Blood America, Inc. and Subsidiaries as of December 31, 2012, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years ended December 31, 2012. Cord Blood America, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cord Blood America, Inc. and Subsidiaries as of December 31, 2012 and the results of their operations and their cash flows for the year ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has sustained recurring operating losses and has an accumulated deficit at December 31, 2012. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Rose, Snyder & Jacobs, LLP
Encino, California
March 27, 2013
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See the accompanying notes to consolidated financial statements.
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (AUDITED)
See the accompanying notes to consolidated financial statements.
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2013 AND 2012
See the accompanying notes to consolidated financial statements.
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AUDITED)
See the accompanying notes to consolidated financial statements.
CORD BLOOD AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
Note 1. Organization and Description of Business
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 ("Rain"). In September 2010, CBAI purchased a majority interest in Biocordcell Argentina S.A. (“Bio”). CBAI and its subsidiaries engage in the following business activities:
●
CBAI and Cord specializes in providing private cord blood and cord tissue stem cell storage services to families to families throughout the United States and Puerto Rico.
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Biocordcell Argentina S.A. specializes in providing private cord blood stem cell storage to families in Argentina, Uruguay and Paraguay.
●
Properties was formed to hold corporate trademarks and other intellectual property.
In March 2011, CBAI purchased a majority interest in Stellacure GmbH, a company providing private cord blood processing and storage services to families in Germany, Spain and Italy. On September 28, 2012, the Company sold its ownership interest in Stellacure, and the results of Stellacure and its disposal are reported as discontinued operations.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Going Concern
The accompanying financial statements of CBAI and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has experienced recurring net losses from operations, which losses have caused an accumulated deficit of approximately $53.26 million as of December 31, 2013. In addition, CBAI has notes and loans payable of approximately $1.44 million as of December 31, 2013. The Company has no available common stock outstanding as of December 31, 2013, and as such, the Company may not be able to issue common stock to retire debt until such time as the shareholders approve an increase in the number of shares authorized. These factors, among others, raise substantial doubt about CBAI's ability to continue as a going concern.
Since inception, the Company has financed cash flow requirements through the issuance of common stock and warrants for cash, services and loans. However, over the past six quarters, the Company has reduced operating expenses, ended investment in its unconsolidated affiliates and Stellacure, and received no additional funding from outside sources for working capital. During the year ended December 31, 2013 the Company had positive cash flow from operations of $0.49 million. The Company plans to continue to operate on its cash flows from operations by aligning its expenses with its revenues. If cash flows from operations are significantly less than projected, then the Company would need to either cut back on its budgeted spending, look to outside sources for additional funding or a combination of the two. The Company currently does not have any financing agreements in place for additional funding. If the Company is unable to access sufficient funds when needed, obtain additional external funding or generate sufficient revenue from the sale of our products, it could be forced to curtail or possibly cease operations.
In view of these conditions, CBAI's ability to continue as a going concern is dependent upon its ability to meet its financing requirements, and to ultimately achieve profitable operations. Management believes that its current and future plans provide an opportunity to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that may be necessary in the event CBAI cannot continue as a going concern.
Basis of Consolidation
The consolidated financial statements include the accounts of CBAI and its wholly-owned and majority-owned subsidiaries, Cord and Biocordcell Argentina S.A. 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.
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 the processing and storage of umbilical cord blood and cord tissue, other tissue procurement services and whole cord blood collection. 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.
Intangible Assets
Intangible assets consist primarily of customer contracts and relationships as part of the acquisition of the CorCell and CureSource assets in 2007 in addition to the acquisition of Biocordcell in 2010 (Note 3). During 2011 the Company also foreclosed and acquired assets from NeoCells, a subsidiary of ViviCells, as satisfaction of outstanding receivables from Vivicells. Intangible assets are stated at cost. Amortization of intangible assets is computed using the sum of the years’ digits method, over an estimated useful life of 18 years. Amortization expense for the years ended December 31, 2013 and 2012 was $636,383 and $631,759 respectively
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.
Equity Investments
Cord had a non-controlling equity investment in ViviCells International, Inc., a privately held company in the business of providing cord blood stem cell and adult peripheral blood stem cell preservation services. The Company utilized the equity method of accounting as it owned more than 20% of the outstanding common stock and had the ability to exercise significant influence over this company. As such, the investment was carried at cost less Cord's proportionate share of ViviCells net loss for the period since investment. During 2011 the Company foreclosed on and acquired all the assets of Neocells, a subsidiary of ViviCells, as satisfaction on the outstanding receivable from ViviCells. There is no remaining investment in ViviCells as of December 31, 2012 because of this action.
Cord has a minority equity investment in China Stem Cells, Ltd., a Cayman Islands Company, a privately held company organized to conduct a stem cell storage business in China. In 2011, Cord acquired a minority equity investment in VidaPlus, an umbilical cord processing and storage company. The Company utilizes the cost method of accounting as it owns less than 20% of the outstanding common stock and only has the ability to exercise nominal, not significant, influence over these companies. The cost of this investment was $204,062 and represents 7% equity in Vivicells. At December 31, 2012 the Company has an outstanding loan to Vivicells in the amount of $246,525. During the year ended December 31, 2012, the Company recognized an impairment loss on the Vidaplus investments and wrote-down its equity interest to $0 and the value of its notes receivable to $123,262.
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.
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 Black-Scholes option pricing formula. At December 31, 2013, the Company adjusted its derivative liability to its fair value, and reflected the change in fair value, in its consolidated statement of operation and comprehensive loss.
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, Stellacure and Bio recognize 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.
Franchise revenues are recognized in accordance with ASC 952-605-3, according to requirements for recognizing franchise revenues after “franchise agreement” services are completed and substantially performed. Further, in accordance with ASC 952-605-25-7, the installment or cost recovery accounting method is used to account for franchise fee revenue only in those exceptional cases when revenue is collectible over an extended period and no reasonable basis exists for estimated collectability. During the year end December 31, 2012, the Company recognized $112,191 of franchise revenue.
Cost of Services
Costs are incurred as umbilical cord blood and cord tissue are collected. For Cord and Bio these costs include the transportation of the umbilical cord blood and cord tissue from the hospital to the lab, direct material plus labor costs for processing and cryogenic storage, and allocated rent, utility and general administrative expenses. The Company expenses costs in the period incurred.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that included the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the portion of tax benefits that more likely than not will not be realized. There was a valuation allowance equal to 100% of deferred tax assets as of December 31, 2013.
The Company follows guidance issued by the FASB with regard to its accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $0 for the years ended December 31, 2013 and 2012. The Company files income tax returns with the Internal Revenue Service (“IRS”) and various state jurisdictions. For jurisdictions in which tax filings are prepared, the Company is no longer subject to income tax examinations by state tax authorities for years through 2007 and by the IRS for years through 2008.
Accounting for Stock Option Plan
The Company’s share-based employee compensation plans are described in Note 11. On January 1, 2006, the Company adopted the provisions of ASC 718 (previously SFAS 123(R), “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, non-employee directors, and consultants, including employee stock options.
Net Loss Per Share
Net loss per common share is calculated in accordance with ASC 260, Earnings per Share. Basic net loss per share is computed by dividing the net loss by the weighted average common shares outstanding 747,129,414 and 252,661,081 for the years ended December 31, 2013 and December 31, 2012, respectively. Outstanding options to acquire common stock and warrants are not included in the computation of net loss per common share because the effects of inclusion are 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.
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:
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Level 1 - quoted prices in active markets for identical assets or liabilities.
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Level 2 - other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.
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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 December 31, 2013 for assets and liabilities measured at fair value on a recurring basis:
Derivative liability was valued under the Black-Scholes model with the following assumptions:
The following table summarizes fair value measurements by level at December 31, 2012 for assets and liabilities measured at fair value on a recurring basis:
Derivative liability was valued under the Black-Scholes model, with the following assumptions:
The following is a reconciliation of the derivative liability:
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.
Reclassification
Certain amounts in the prior year have been reclassified to conform to the current year’s presentation.
Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, ("ASU 2013-02"). ASU 2013-02 amends Accounting Standards Codification ("ASC") 220, Comprehensive income ("ASC 220"), and requires entities to present the changes in the components of accumulated other comprehensive income for the current period. Entities are required to present separately the amount of the change that is due to reclassifications, and the amount that is due to current period other comprehensive income. These changes are permitted to be shown either before or net-of-tax and can be displayed either on the face of the financial statements or in the footnotes. ASU 2013-02 was effective for our interim and annual periods beginning January 1, 2013. The adoption of ASU 2013-02 did not have a material effect on the Company's consolidated financial position or results of operations.
In March 2013, the FASB issued new guidance related to the release of cumulative translation adjustment related to an entity's investment in a foreign entity. The guidance clarifies that the guidance in Subtopic 830-30, Foreign Currency Matters - Translation of Financial Statements, applies to the release of cumulative translation adjustment into net income when a reporting entity either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets that constitute a business within a foreign entity. This guidance is effective for us prospectively for reporting periods beginning October 1, 2014. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In April 2013, the FASB issued ASU 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. ASU 2013-07 clarifies when an entity should apply the liquidation basis of accounting. ASU 2013-07 also provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. ASU 2013-07 is effective for fiscal years and interim periods within those years beginning after December 15, 2013. The Company does not expect amendments in ASU 2013-07 to impact the Company's financial statements, results of operations or liquidity.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which eliminates diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from disallowance of a tax position. ASU 2013-11 affects only the presentation of such amounts in an entity’s balance sheet and is effective for fiscal years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Note 3. Summary of Acquisitions
Stellacure GmbH
In March 2010, the Company acquired a 51% ownership interest in Stellacure, GmbH, and a German Limited Liability Company that is in the business of collecting, processing, and storing cord blood samples. Stellacure operates primarily in Germany; however, it established sales channels in Spain and Italy in 2009.
On September 28, 2012, the Company sold its 51% ownership interest in Stellacure of Hamburg, Germany to Medivision mbH. In line with the Company’s strategy to focus on its cash producing operations in the US and Argentina, the sale included consideration of approximately $43,000 in a loan repayment, approximately $69,000 forgiveness of a remaining loan balance owed to Stellacure from the Company, and a waiver against all past and future claims. See Note 5.
Biocordcell Argentina S.A.
In September 2010, the Company entered into a Stock Purchase Agreement (the “Agreement”), with the Shareholders of Biocordcell Argentina S.A., a corporation organized under the laws of Argentina (‘Bio”), providing for the Company’s acquisition of 50.1% of the outstanding shares of Bio (the “Shares).
Under the Agreement, the Company paid $375,000 in cash at the closing, and paid an additional $350,000 in October, 2010, $150,000 of which is part of the fixed portion of the purchase price for the shares, for a total minimum purchase price of $525,000. The remaining $200,000 of this payment represents advances against the contingent payments due based on Bio’s 2010 and 2011 net income performance. A portion of the advancement ($100,000) was carried as a loan against performance outcomes that may not be met.
The Agreement provides that the Shareholders are to be paid contingent “earn-out” compensation in 2011 based on achieving certain levels of net income in 2010; and additional contingent “earn-out” compensation in 2012 based on achieving certain levels of net income in 2011.
The Agreement provides that the Shares purchased will be converted into Class Preferred A shares which in event of liquidation will have a right to a priority return of capital equal to the purchase price paid for the Shares after the payment of all Bio creditors, and then will share pro rata in any remaining capital of Bio. The Shares are pledged by the Company to secure its performance under the Agreement, and the Company is given a first right of refusal in the even the Shareholders proposed to sell their remaining shares.
The Company was involved in a dispute with the shareholders of BioCells from whom the Company purchased its ownership stake in BioCells (the "Sellers") over the amount of the 2011 earn-out to be paid to Sellers based on the interpretation of the terms of the agreements relevant to the aforementioned purchase. As of June 22, 2012, the Company entered into an Agreement with the Sellers. Under the Agreement, the Company was to pay the Sellers the following: $25,000 on or before June 30, 2012; $10,000 on or before July 31, 2012; and $25,000 on or before September 30, 2012, for a total cash payment of $60,000. In addition, the Sellers will collect the Company’s portion of BioCells shareholder dividends for fiscal years 2012 and 2013, up to a maximum amount of $440,000. Also, if BioCells is sold before April 2014 and certain thresholds for purchase price and payment are met or exceeded, then the Sellers could receive additional compensation, specifically an amount which equals $705,000 minus any amounts paid pursuant to the cash payments and payments from the Company’s shareholder dividends, which are detailed above. That sum would be paid to the Sellers out of the proceeds of such a sale. As a result of this Agreement with the Sellers of BioCells, the Company has paid the total cash amount due of $60,000 as of December 31, 2012 and there have been no earned portion of Company’s dividends paid to Sellers for fiscal year 2013.
Note 4. Property and Equipment
At December 31, 2013, property and equipment consists of:
For the years ended December 31, 2013 and 2012, depreciation expense totaled $150,945 and $160,958 respectively.
Note 5. Discontinued Operations
Stellacure GmbH
On September 28, 2012, the Company sold its 51% ownership interest in Stellacure of Hamburg, Germany to Medivision mbH. In line with the Company’s strategy to focus on its cash producing operations in the US and Argentina, the sale included consideration of approximately $43,000 in a loan repayment, approximately $69,000 forgiveness of a remaining loan balance owed to Stellacure from Company, and a waiver against all past and future claims.
In conjunction with the disposition of Stellacure, the gain on the sale and results of historical operations are recorded as discontinued operations in the Company’s Consolidated Statements of Operations. Additionally, the cash flows from Stellacure are reflected separately as cash flows from discontinued operations in the Company’s Consolidated Statements of Cash Flows.
Note 6. Accrued Expenses
The components of accrued expenses at December 31, 2013 and 2012 are summarized as follows:
Note 7. Notes and Loans Payable, and Derivative Liabilities
At December 31, 2013 and December 31, 2012, notes and loans payable consist of:
Note 8. Investment and Notes Receivable, Related Parties
At December 31, 2013 and 2012, notes receivable consist of:
During the year ended December 31, 2012, the Company converted $174,00 of the Vidaplus note receivable into equity. The Company also recorded a reserve for the entire balance of the note receivable from China Stem Cells, Ltd., and $123,263 of the balance of the note receivable from Vidaplus. In addition, the Company fully impaired its equity investment in Vidaplus during the year ended December 31, 2012, and fully impaired its note receivable from VidaPlus during the year ended December 31, 2013..
Note 9. Commitments and Contingencies
St. George Investments
On March 10, 2011, the Company entered into a Note and Warrant Purchase Agreement (the "Purchase Agreement") with St. George Investments, LLC, (“St. George”) an Illinois limited liability company (the "Investor") whereby the Company issued and sold, and the Investor purchased: (i) Secured Convertible Promissory Notes of the Company in the principal amount of $1,105,500 (the "Company Note") and (ii) a Warrant to purchase common stock of the Company (the "Warrant"). The Investor paid $250,000 in cash as an initial payment to the Company and executed and delivered six separate “Secured Buyer Notes” (the “Buyer Notes”), as consideration in full for the issuance and sale of the Company Note and Warrants.
The principal amount of the Company Note is $1,105,500 ("Maturity Amount") and the Company Note is due 48 months from the issuance date of March 10, 2011. The Company Note has an interest rate of 6.0%, which would increase to a rate of 12.0% on the happening of certain Trigger Events, including but not limited to: a decline in the 10-day trailing average daily dollar volume of the common shares in the Company’s primary market to less than $30,000 of volume per day at any time; the failure by the Company or its transfer agent to deliver Conversion Shares (defined in the Company Note) within 5 days of Company’s receipt of a Conversion Notice (defined in the Company Note). Due to a triggering event occurring, the current interest rate is 12%. The total amount funded (in cash and notes) was $1,000,000, representing the Maturity Amount less an original issue discount of $100,500 and the payment of $5,000 to the Investor to cover its fees, with payment consisting of $250,000 advanced at closing and $750,000 in a series of six secured convertible Buyer Notes of $125,000 each, with interest rates of 5.0%. To date, St. George has paid the total amount due.
The Buyer Notes are secured by an Irrevocable Standby Letter of Credit (“Letter of Credit”). The warrant also contains a net exercise /cashless exercise provision. St. George may elect to convert all or part of the principal and any accrued unpaid interest on the Company Note on or before the aforementioned maturity date, subject to certain limitations. The conversion price under the Company Note is eighty percent (80%) of the average of the closing bid prices for the three (3) Trading Days (defined in the Purchase Agreement) with the lowest closing bids over the twenty (20) Trading Days immediately preceding the Conversion Date (defined in the Company Note), subject to adjustments as set forth in the Company Note. Due to adjustments, St. George’s current conversion ratio inserts fifty-five percent (55%) in the aforementioned formula, in place of eighty percent (80%).
The Investor has also received a five year warrant entitling it to purchase shares of common stock of the Company at an exercise price determined under the terms of the Warrant. The warrant also contains a net exercise /cashless exercise provision.
As of December 31, 2013 the balance due to St. George Investments was $248,039 in principal and $8,735 in accrued interest.
The Company Note, Warrant and related documentation, including any amounts owed by the Company to St. George based thereon, are in dispute and are the subject of litigation, as described more fully in Note 15. Legal Proceedings.
Tonaquint, Inc.
In a transaction that closed on June 29, 2012, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with Tonaquint, Inc. (“Tonaquint”) a Utah corporation whereby the Company issued and sold, and Tonaquint purchased a Secured Convertible Promissory Note of the Company in the principal amount of $1,252,000 (the "Company Note").
The Company Note was issued June 27, 2012 and is due 20 calendar months after the issuance date. The Company Note has an interest rate of 6.0%, which would increase to a rate of 18.0% on the happening of certain Events of Default (defined in the Company Note), including but not limited to: failure to pay and the failure by the Company or its transfer agent to deliver Conversion Shares (defined in the Company Note) within 3 Trading Days of the Company’s receipt of a Conversion Notice (defined in the Company Note). As of March 31, 2013, Tonaquint claimed an interest rate of 18%, which is being disputed by the Company. The total amount funded in cash at closing was $1,120,000, representing the principal amount less an original issue discount of $112,000 and the payment of $20,000 to Tonaquint to cover its fees.
Tonaquint has the right to convert, subject to restrictions described in the Company Note, all or a portion of the outstanding amount of the Company Note into shares of the Company’s common stock at a price of $0.03. So long as Tonaquint has not extinguished the Company Note in its entirety pursuant to such conversions, the Company shall make monthly payments to Tonaquint on the Company Note, through either the issuance of shares of the Company’s common stock or by payment in cash, at the election of the Company. Payments commence six months from the date of issuance of the Company Note and continue until the Company Note has been paid in full. The amount of the monthly payments is the greater of (i) $100,000, plus the sum of any accrued and unpaid interest as of the applicable Installment Date (defined in the Company Note) and accrued and unpaid Late Charges (defined in the Company Note), if any, under the Company Note as of the applicable Installment Date (defined in the Company Note), and any other amounts accruing or owing to Investor under the Company Note as of such Installment Date, or (ii) the then-outstanding balance of the Company Note divided by the number of Installment Dates remaining prior to the Maturity Date.
In the event the Company is unable to make payments in cash or otherwise elects not to make a payment or payments in cash, the number of common shares delivered to the Investor upon conversion will be calculated by dividing the amount of the Company Note that is being converted by the market price of the common stock, which is defined as 80% of the arithmetic average of the three (3) lowest volume weighted average prices of the shares of the Company’s common stock during the twenty three (23) consecutive trading day period immediately preceding the date as of which such price determination is required (such as the effective date of a conversion).
As of December 31, 2013, the amount owed to Tonaquint was $1,252,000 of principal and $320,420 in accrued interest in accordance with Tonaquint’s claim which is being disputed by the Company.
The Company Note, Purchase Agreement and other related documents, including any amounts owed by the Company to Tonaquint based thereon, are in dispute and are the subject of litigation, as described more fully in Note 15. Legal Proceedings.
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 are incurring annual storage fees. The second tranche provides 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 has loaned VidaPlus $246,525 to date. Converting the investment from a loan into equity will take place within 24 months of the date the amount of shares due to the Company pursuant to the second tranche is calculated. 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). VidaPlus contracts through Stellacure and their relationship with the German Red Cross for their processing and storage.
In connection with the VidaPlus Stock Purchase Agreement entered into on January 24, 2011, the Company is 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.
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 owns 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 whether Tranche 2, Tranche 3 or otherwise. CBAI holds 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 holds that pledge until such time as it converts 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 must 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 means that such conversion shall 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 as described more fully in Note 17. Subsequent Events.
Patent License Agreement
PharmaStem Therapeutics claims 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, potentially 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, 2013, 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.
Contingencies
Lindsay Bays
On or around September 21, 2011, Lindsay Bays, et. al filed a case against the Company, along with additional defendants Corcell, Inc., Progenitor Cell Therapy, LLC, and Bergen Community Blood Center in the Circuit Court of Kanawha County, West Virginia, case number 11-C-1664, alleging claims of breach of contract, negligence, and other related claims. After the filing, the case was removed by the defendants to the United States District Court for the Southern District of West Virginia, where it was Civil Action No. 2:11-0939. The Plaintiff alleged that she entered into a contract with Corcell, Inc. for the collection and storage of her child’s cord blood. She claimed that though her child was accepted as a candidate for auto reinfusion treatment of her child’s cerebral palsy in the Duke University Pediatric Blood and Marrow Transplant Program, her child was unable to participate, purportedly due to the defendants’ actions in labeling and shipping the blood. She sought monetary damages for injuries and losses, punitive damages, interest and attorneys’ fees. On or around December 5, 2011, the Company filed a Motion to Dismiss the action. Defendants Progenitor Cell Therapy, LLC and Bergen Community Blood Center also filed motions to dismiss.
On or around May 8, 2012, the Court denied the Company’s Motion to Dismiss, without prejudice, and further ordered that the Plaintiffs be given leave until July 16, 2012 to conduct jurisdictional discovery regarding the Company’s and CorCell’s contacts with the state of West Virginia and granting the Company leave to, by motion, renew its challenge to personal jurisdiction no later than July 23, 2012. The Court granted motions to dismiss for lack of personal jurisdiction filed by defendants Progenitor Cell Therapy, LLC and Bergen Community Blood Center. On July 18, 2012, Plaintiff and the Company filed a Stipulation of Dismissal Pursuant to Rule 41(A), dismissing the case against Cord Blood America, Inc., without prejudice. In the event Plaintiff files another case involving these circumstances, the Company will continue to vigorously defend against the claims.
BioCells
In September 2010, the Company entered into a Stock Purchase Agreement (the “Agreement”), with the Shareholders of Biocordcell Argentina S.A., a corporation organized under the laws of Argentina (“Bio”), providing for the Company’s acquisition of 50.1% of the outstanding shares of Bio (the “Shares).
Under the Agreement, the Company paid $375,000 in cash at the closing, and was obligated to pay an additional $350,000 in October, 2010, $150,000 of which is part of the fixed portion of the purchase price for the shares, for a total minimum purchase price of $525,000. The remaining $200,000 of this payment represents advances against the contingent payments due based on Bio’s 2010 and 2011 net income performances. In 2011, the Company negotiated and paid out the amount of $500,000 in connection with the 2010 earn out.
As of June 22, 2012, the Company entered into an Agreement with the shareholders of Bio from whom the Company purchased its majority ownership interest in Bio in 2010 (the "Sellers") relating to the 2011 earn out. Under the Agreement, the Company was to pay the Sellers the following: $25,000 on or before June 30, 2012; $10,000 on or before July 31, 2012; and $25,000 on or before September 30, 2012, for a total cash payment of $60,000. In addition, the Sellers will collect the Company’s portion of BioCells shareholders’ dividends for fiscal years 2012 and 2013, up to a maximum amount of $440,000, if any. There were no shareholder dividends earned or paid for the 2012 and 2013 fiscal years. Also, if BioCells is sold before April 2014 and certain thresholds for purchase price and payment are met or exceeded, then the Sellers could receive additional compensation, specifically an amount which equals $705,000 minus any amounts paid pursuant to the cash payments and payments from the Company’s shareholder dividends, which are detailed above. That sum would be paid to the Sellers out of the proceeds of such a sale. As a result of this Agreement with the Sellers of BioCells, the Company has paid the total cash amount due of $60,000 as of December 31, 2012 and there have been no earned portion of Company’s dividends paid to Sellers for fiscal years 2012 and 2013.
Employment Agreements
On September 12, 2011 (the “Company”), entered into an Executive Employment Agreement with Joseph R. Vicente, then the Company’s Chief Operating Officer and Vice President and appointed Chairman and President on May 15, 2012 by the Board of Directors, which was effective as of August 1, 2011 and shall terminate as of December 31, 2014, unless earlier terminated by the Company or Mr. Vicente. Mr. Vicente’s Executive Employment Contract had an initial term from August 1, 2011 through December 31, 2011, and is renewable annually thereafter for up to three additional, successive years, and provides for a base salary equal to his previous year’s annual salary, which said salary was set under the provisions of the previous employment agreement entered between Mr. Vicente and the Company in July of 2008. Mr. Vicente voluntarily reduced his annual salary by 12.5% until otherwise determined by Mr. Vicente, along with the advice and consent of the Company’s Board of Directors. It also provides for an annual bonus, payable at the discretion of the Board of Directors, equal to 25% of Mr. Vicente’s prior year base salary. The Agreement provides for a change of control termination bonus, which provide that if Mr. Vicente is terminated, his compensation reduced, or Mr. Vicente terminates his employment within one year after a change of control, then Mr. Vicente is entitled to a termination benefit in an amount equal to the average annual cash compensation over the three (3) year period preceding the Triggering Event (defined in the agreements) multiplied (2.00). The Agreement also provides for termination payments in the absence of a change of control in the event the Company terminates Mr. Vicente without cause in an amount equal to all compensation paid by the Company to Mr. Vicente for the 24 months preceding the termination, along with health plan and 401k incentives (if any were to be offered - the Company terminated its 401k earlier in 2012), as stated in the agreement.
The Company entered into an Executive Employment Agreement with Stephen Morgan (the “Employee”) on August 10, 2012, with July 1, 2012 as the effective date of the Agreement. The Agreement provides for a change of control termination bonus, whereby if the Employee is terminated, his compensation reduced, or the Company terminates the Employee’s employment within one year after a change in control, then the Employee is entitled to a termination benefit in an amount equal to the employee’s cash compensation over the one (1) year preceding the Triggering Event (defined in the Agreement). The Agreement also provides for termination payments in the absence of a change of control in the event the Company terminates the Employee without cause in an amount equal to all compensation paid by the Company to the Employee for the 12 months preceding the termination, along with health plan and 401k incentives (if any were to be offered - the Company terminated its 401k earlier in 2012), as stated in the Agreement. The Agreement provides for an annual salary of $125,000, along with a bonus, payable at the discretion of the Board of Directors of up to an annual amount of 20% of the Employee’s salary. Mr. Morgan’s compensation, as set forth in the Agreement has not increased as a result of his election to the officer positions of Vice President and Secretary on May 15, 2012 in addition to his retention of his previous position, General Counsel. The Company believes the assumption of additional roles by existing management and other individuals in leadership positions, including filling recently vacated roles, will reduce overall management costs while also leading to greater efficiency within the organization.
Operating Leases
CBAI and its subsidiaries lease office space in Las Vegas, NV under a non-cancelable operating lease expiring in 2014. The lease for the facility in Las Vegas has two options to renew for an additional five years each, extending the term to 2024. On January 21, 2014, the Company amended its current lease to include an extension through September 30, 2019. The monthly lease payments will be adjusted in accordance with the amendment, along with possible adjustments to the CAM charges and potential rent abatement associated with total lease square footage and other factors, all as set forth more fully in Note 17. Subsequent Events. CBAI's subsidiaries lease office and warehouse space in Argentina (Bio). The lease for Bio is for three years ending in April 2014. Commitments for future minimum rental payments, by year, and in the aggregate, to be paid (and received) under such operating leases as of December 31, 2013, are as follows:
Total rent expense for 2013 and 2012 under the operating leases amounted to $232,829 and $237,390 respectively.
Note 10. Related Party Transactions and Commitments
Related Party Transactions
China Stem Cells, Ltd.
In March of 2010 the Company acquired pursuant to a License Agreement, a 10% non dilutable interest in what became, in December 2010, China Stem Cells, Ltd., a Cayman Islands Company (hereinafter "Cayman"), which indirectly holds a 100% capital interest in AXM Shenyang, a company organized to conduct a Stem Cell Storage Business in China. In exchange for issuance of an equity interest in Cayman, under the terms of the Transfer of Technology Agreement the Company agreed to provide technology transfer, knowhow and training in the setup, marketing and operation of the China Stem Cell Storage business. In connection with the License Agreement, the Company is to receive royalties equal to 8.5% of "Net Revenues" realized from the China Stem Cell Storage business, over the 15 year term of the agreement, with certain minimum annual royalties’ payable beginning in 2011. The Company has not been paid any royalty balance due to date, and it remains doubtful that any such royalties will be collected.
In December of 2010 the Company also acquired the option to provide up to $750,000 of additional capital funding to Cayman through the purchase of Cayman Secured Convertible Promissory Notes and attached Cayman Warrants to acquire its Common Stock. Other Cayman shareholders were granted similar options, with the intent of raising the aggregate up to $1.5 million in additional capital for Cayman and its subsidiaries. CBAI has exercised this option in part, provided a total of $400,000 in additional capital to Cayman, and is to receive Cayman Secured Convertible Promissory Notes for this sum along with 80 Cayman (TBD) Warrants. The Secured Convertible Promissory Notes are convertible into Cayman stock at a conversion price of $1,500 per share, subject to certain adjustments. The Warrants have a five year term and are exercisable at an option exercise price of $0.05 per share per share, subject to certain adjustments. The Company has recorded a reserve for the entire carrying amount of the receivable, including interest. The Company’s current President, Joseph Vicente was appointed as a Director of China Stem Cells Ltd. in July 2012
VidaPlus
The Company holds 7% 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 wrote-down the net convertible loan receivable to $123,262 which the Company fully impaired the note receivable during the year ended December 31, 2013. On February 14, 2014, CBAI delivered to VidaPlus its election to convert its loan under Tranche 2 into shares of stock in VidaPlus as described more fully in Note 17. Subsequent Events.
Consulting Agreement with Pyrenees Consulting, LLC
On January 1, 2010, the Company entered into a consulting agreement with Pyrenees Consulting, LLC (“Pyrenees Consulting”), mislabeled in the agreement as Pyrenees Capital, LLC. To the best of the Company’s knowledge, at all relevant times herein, Pyrenees Consulting was owned 50% by Stephanie Schissler, who is the spouse of the Company’s former Officer and Director Matthew Schissler, and 50% by Mathew Schissler. The consulting agreement was entered for consulting services provided by Pyrenees Consulting, to be performed by Stephanie Schissler. The agreement expired two years after the date of the agreement, but Pyrenees continued providing services for the Company at a monthly rate of $13,125. Effective May 14, 2012, the Company and Pyrenees Consulting, LLC terminated their arrangement, and Pyrenees no longer provides services for the Company, nor is owed any additional monies or other obligations.
Frozen Food Gift Group, Inc.
CBAI engaged Frozen Food Gift Group, Inc. (“FFGG”) as a vendor, prepaying for $45,000 in products during the year ended December 31, 2011. The remaining balance on that account is $30,655 as of September 30, 2013, not including additional interest and fees to which the Company may be entitled. The Company’s former CEO and Chairman of the Board, Mathew Schissler who resigned effective May 14, 2012, owned 36.2% of the outstanding shares of FFGG based on an S-1 filing made by that company with the SEC on July 31, 2012, and on information and belief is FFGG’s Chairman of the Board. CBAI’s former COO, and now President Joseph Vicente served on the Board of Directors of FFGG, but resigned effective as of January 26, 2012.
The Company ceased doing business with FFGG in 2012, and has made demands for the return of its monies. In March 2014, the Company entered into a Claim Purchase Agreement with a third party calling for payment to the Company in exchange for the Company’s claims against Frozen Food Gift Group, Inc. (“FROZ”), as set forth in a Mutual General Release described more fully in Note 17. Subsequent Events.
HaVi Enterprises, LLC
On January 12, 2012, HaVi Enterprises, LLC, in which the Company’s President, Joseph Vicente owns a 50% interest, loaned $50,000 to the Company through a Secured Promissory Note with an interest rate of 12% per annum and a 6-month repayment schedule. The balance of this note was paid in full at September 30, 2012.
Note 11. Stock Option Plan
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 increases the total shares available to 4 million common shares. The agreement 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 years ended December 31, 2013 and 2012.
The Company’s stock option activity was as follows
The following table summarizes significant ranges of outstanding stock options under the stock option plan at December 31, 2013:
A summary of the activity for unvested employee stock options as of December 31, 2013 and changes during the year is presented below:
Weighted Average Grant Date Fair Value per Share
Note 12. Warrant Agreements
On March 10, 2011 the Company issued a Promissory Note for $1,105,000 to St. George Investments along with 1,392,354 five year warrants at $0.01 per share.
The Company has not issued any warrants since January 1, 2012.
The following table summarizes the warrants outstanding and exercisable at December 31, 2013 (post split):
Note 13. Income Tax
As of December 31, 2013, the Company had net operating loss of $3,040,731 that may be available to reduce future years’ federal taxable income through 2032. Future tax benefits for Cord Blood America which may arise as a result of these losses have not been recognized in these consolidated financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carryforwards. However, the future tax benefits for Biocordcell which may arise as a result of these losses have been recognized in these consolidated financial statements, as their realization is determined likely to occur and accordingly, the Company has recorded the deferred tax asset relating to these tax loss carryforwards of $61,845.
A reconciliation of the expected consolidated income tax expense, computed by applying a 35% U.S. Federal corporate income tax rate and 35% Argentina corporate tax rate to income before taxes to income tax expense is as follows December 31, 2013:
Note 14. Stockholders’ Equity
Preferred Stock
CBAI has 5,000,000 shares of $.0001 par value preferred stock authorized.
Common Stock
On March 25, 2009, the Company’s Articles of Incorporation were amended to increase the authorized common stock to 6,945,000,000 shares, par value $0.0001, up from 950,000,000. This amendment was adopted by the Company’s Board of Directors on February 12, 2009, and its Shareholders at a Special Meeting of Shareholders called for this purpose on March 23, 2009.
On May, 9, 2011, the Company consummated a one (1) for one hundred (100) reverse split of its outstanding common stock, with the result that the outstanding shares of common stock of the Company were reversed from 6,812,886,600 shares pre-split, to 68,128,866 outstanding common shares post split. At the same time, the Company’s Articles of Incorporation were amended to fix authorized capital stock at 255,000,000 shares, par value $.0.0001 of which 5,000,000 shares are preferred shares and 250,000,000 shares are common shares. These actions were adopted by its Shareholders at a Special Meeting of Shareholders called for this purpose on April 21, 2011.
On September 25, 2012, the Company’s Articles of Incorporation were amended to increase the authorized common stock to 890,000,000 shares, par value $0.0001, up from 250,000,000. This amendment was adopted by the Company’s Board of Directors on July 11, 2012, and its Shareholders at a Special Meeting of Shareholders called for this purpose on September 25, 2012.
During the year ended December 31, 2012, the Company issued 237,430,005 shares of common stock to retire $1,876,119 of principal an interest of convertible debt which has a fair market value of $3,070,486.
During the year ended December 31, 2013, the Company issued 513,765,592 shares of common stock to retire $776,502 of principal and interest in convertible debt which had a fair market value of $1,823,206.
As of December 31, 2013 CBAI had 890,000,000 shares of Common Stock outstanding. 20,000 shares remain in the Company's treasury.
Note 15. Legal Proceedings
On August 30, 2013, Cord Blood America, Inc. (the “Company”) filed a Complaint (the “Complaint”) in the United States District Court for the District of Utah, Central Division against Tonaquint, Inc. (“Tonaquint”) and St. George Investments, LLC (“St. George”) (collectively ”Defendants”), along with summonses in connection therewith, case number 2:13-cv-00806-PMW (the “Action”). The Company brought the Action against the Defendants alleging Fraud in the Inducement, Breach of Agreement, Breach of Implied Covenant of Good Faith and Fair Dealing and Unjust Enrichment. In particular, among other things, the Complaint alleges that Defendants have fraudulently induced the Company to enter into the June 27, 2012 Secured Convertible Promissory Note (“Tonaquint Note”), Securities Purchase Agreement (“Tonaquint Purchase Agreement”) and related documentation through misrepresentations including but by no means limited to: (i) representing that the Tonaquint Note would be consecutively amortized with the March 10, 2011 Secured Convertible Promissory Note issued to St. George by the Company (“St. George Note”), and that these would not become due and owing simultaneously, and (ii) that the St. George Note would be replaced by an amended note to be paid off according to a set amortization schedule.
The Company seeks relief in the form of rescission or reformation of the Tonaquint Note, St. George Note, the Warrant issued to St. George as part of the March 10, 2011 transaction, as well as related agreements and documents, an order enjoining Defendants from foreclosing on the Notes or selling the Company’s assets, punitive and other damages in an unspecified amount, costs, attorneys’ fees, interest and such other relief as the Court deems just and proper.
Subsequently, on September 25, 2013, Defendants each filed their Answer and Counterclaim in the Action. In their Counterclaims, Defendants allege causes of action against the Company for Breach of the March 10, 2011 Note and Warrant Purchase Agreement between St. George and the Company (“SGI Purchase Agreement”), Breach of the Tonaquint Purchase Agreement and Tonaquint Note, Breach of the Implied Covenant of Good Faith and Fair Dealing, and Unjust Enrichment. Defendants claim that the Company purportedly breached the SGI Purchase Agreement, Tonaquint Purchase Agreement, and Tonaquint Convertible Note, by, among other things, failing to maintain a share reserve, failing to increase the number of authorized shares, failing to call or hold a meeting to increase the authorized shares of Common Stock of the Company, and failing to make installment payments under the Tonaquint Convertible Note. Defendants seek relief in the form of damages in an unspecified amount and an order from the Court requiring the Company to establish and maintain a share reserve for the benefit of the Defendants, along with costs, attorneys’ fees and such other relief as the Court deems just and proper. On October 15, 2013, the Company filed its Reply to Counterclaim.
Also on September 25, 2013, the Company received from Tonaquint a Notice of Disposition of Collateral advising of Tonaquint’s intent to sell all assets of the Company at a public auction on November 4, 2013 at 11:00 a.m. PST at 1857 Helm Drive, Las Vegas, Nevada, 89119. On October 18, 2013, the Company received from Tonaquint a Notification of Cancellation, which provided notice that the aforementioned auction to sell the Company’s assets was cancelled.
The Company intends to vigorously pursue its claims and defend itself against Defendants' counterclaims, as well as Tonaquint’s attempt to sell assets, and will continue to take legal action to protect the interests of the Company and its shareholders.
Note 16. Segment Reporting
Guidance issued by the FASB requires that public business enterprises report financial and descriptive information about its reportable operating segments. The Company generates revenues related to the processing and preservation of umbilical cord blood and cord tissue. The Company’s long lived assets are located in, and substantially all of its revenues are generated from the United States of American and Argentina.
The table below presents certain financial information by business segment for the year ended December 31, 2013:
The table below presents certain financial information by business segment for the year ended December 31, 2012:
Note 17. Subsequent Events
AABB Accreditation
The Company announced effective January 1, 2014, it had received its AABB accreditation for cell therapy activity associated with cord blood processing, storage and distribution.
Lease
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, 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 shall revert 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 has the option to lease a portion of the premises currently occupied by the Company to a third party, and if this portion is leased to a third party, the Company’s monthly rent amount shall 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.
Commitments for future minimum rental payments, by year, and in the aggregate, to be paid under such operating lease as of December 31, 2013, are as follows:
Cord Blood America, Inc. v. Tonaquint and St. George
In the action described in detail in Item 3. Legal Proceedings, on March 22, 2014, Defendants filed an Amended Counterclaim. The Amended Counterclaim adds a claim for declaratory judgement, wherein Defendents seek that the Court declare the Security Agreement entered into by the Company and Tonaquint secured repayment for the Company’s purported obligations to both Tonaquint and St. George.
On March 21, 2014, the Company filed a Motion for Leave to File Amended Complaint and Memorandum, seeking to amend its Complaint to add an additional claim for breach of contract, as well as a claim for promissory estoppel. No hearing date has been set for that motion.
VIDAPLUS 2007 S.L.
In accordance with the terms for Tranche 2 of the Stock Purchase Agreement between VidaPlus and CBAI entered in January 2011, 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 to which CBAI is entitled pursuant to the conversion. CBAI is entitled to an additional ownership stake of approximately 2.24% in connection with the foregoing, bringing its total ownership percentage to approximately 9.24%.
FROZ
Effective as of March 12, 2014 the Company entered into a Claim Purchase Agreement with a third party calling for payment by the third party to the Company in exchange for the Company’s claims against Frozen Food Gift Group, Inc. (“FROZ”), as set forth in a Mutual General Release described below (“Release”). Payment shall be made by the third party to the Company upon the happening of certain events, provided that both parties have the right to cancel the agreement if those events have not taken place within 90 days of the effective date of the Claim Purchase Agreement.
The Company entered a Mutual General Release with FROZ effective as of March 5, 2014, with the mutual releases and negative covenants contained therein not taking effect until such time as the Company receives payment under the Claim Purchase Agreement as described above.