L I F E B A N K
TMCorp.
Saving Life’s Most Precious Cells
Technology Place – BCIT Campus Suite 200 – 4475 Wayburne Drive Burnaby, British Columbia V5G 4X4 Tel: 604-738-2722 Fax:604-738-2726 info@lifebank.com
www.lifebank.com
Management Discussion and Analysis
dated August 24, 2010, to accompany the financial statements for the year ended May 31, 2010 Caution Regarding Forward Looking Statements –This discussion includes statements about our
expectations for the future. We believe that our expectations are reasonable; however, actual outcomes may differ materially from our expectations due to changes in operating performance, unexpected competition, advances in medical science, and other technical, market and economic factors.
Our Business
We, Lifebank Corp., or the “Company,” are a cryogenic facility engaged in the business of processing and cryopreserving umbilical cord blood stem cells for families. Our facilities and processes have been accredited by the AABB (formerly known as the American Association of Blood Banks) and by the Foundation for the Accreditation of Cellular Therapy (FACT). We are fully Health Canada compliant and are registered with the US Food and Drug Administration.
Our goal is to become the premier umbilical cord blood stem cell bank in Canada. We are already the first Canadian cord blood bank, the first AABB accredited cord blood bank in Canada, the first FACT accredited family cord blood bank in North America and the first Canadian bank to accept samples from across the country and internationally. We have been in continuous operation since 1996.
Stem Cells
There are two types of stem cells: adult stem cells (non-embryonic), and embryonic stem cells from aborted fetuses or human embryos grown in a laboratory.
Extraction of embryonic stem cells results in the death of the embryo, which raises serious ethical concerns. The use of embryonic stem cells is either illegal or highly restricted in many countries.
Adult stem cells are available from three sources: bone marrow, mobilized peripheral blood and umbilical cord blood. Stem cells are the building blocks of both the blood and immune systems. Collection of adult stem cells from either the bone marrow or peripheral blood is invasive and not without risk to the donor. After the birth of an infant, the umbilical cord is filled with blood that contains adult stem cells. This blood can be non-invasively and painlessly collected with no risk to the mother or the infant, resulting in a unit of adult stem cells that can be cryopreserved and stored for future use. Storing an infant’s adult stem cells at birth ensures a perfect tissue match for that infant with no chance of rejection, should the stem cells be required for medical treatment. The adult stem cells may also be suitable for siblings or parents. Not surprisingly, reports have suggested that the best results were achieved in patients who received cord blood stem cells from related donors. At present, umbilical cord blood is routinely discarded at birth. Adult stem cell transplants are used to treat a wide range of life threatening illnesses, including leukemia, metabolic disorders, immune deficiencies, bone marrow failure and some genetic disorders. Transplantation centers world-wide have accepted that cord blood is a clinically viable alternative to bone marrow and mobilized peripheral blood as a source of adult stem cells. Research studies indicate that adult stem cells could be used in the development of new treatments for repairing muscle, neural and liver tissue damaged by various human conditions. Recently, Lifebank clients have received a transfusion of their own cord blood sample for experimental procedures to reverse hyperglycemia in children with type 1 diabetes and treatment of cerebral palsy.
Stem Cell Banking
We currently process and store umbilical cord blood stem cells for families who pay for our services. We are also in discussion with federal and provincial governments regarding economic models for a Canadian public umbilical cord blood stem cell donor bank. Privately stored stem cells are only available to the family who paid to store them. Publically donated stem cells would be available on a medically as needed basis to all Canadians. It would be the goal of a Canadian public bank to store a cross-section of stem cells that reflects the unique, diverse, multi-ethnic make-up of Canadian society. While US and other foreign public stem cell banks may provide matches for Caucasians, Canada’s significant First Nations, Asian, South Asian and other populations, especially those who have racially-mixed parentage, are less likely to be matched. We remain committed to supporting a Canadian public donor bank, with appropriate governmental funding, so that all Canadians can benefit from significant medical advances in stem cell utilization. There is no assurance that the economic model adopted by the governments, if any, will directly benefit Lifebank.
Our Services
We provide three services related to umbilical cord blood stem cell banking: education and registration, processing (extracting the stem cells from the umbilical cord blood) and cryogenic (ultra-low temperature) storage. Expectant parents contact us to process and store their baby’s cord blood stem cells. We provide educational materials and answers to their questions and concerns on cord blood banking, using a no-pressure, “informed consent” model to assist in their decision to bank their baby’s cord blood.
After the parents register, we provide them a collection kit and further educational materials which are used by their delivering physician or mid-wife to collect the umbilical cord blood. Once the baby is born and the blood has been collected, we arrange to have the collection kit couriered back to us for processing and storage within 48 hours of birth. We charge separate fees for registration, processing and storage and re-bill courier costs to the client.
Our Facilities
We have occupied our current facility on the campus of the British Columbia Institute of Technology since December 2001. It is centrally located within a half-hour drive of all major hospitals in the Greater Vancouver metropolitan area and the Vancouver International Airport.
Our operations and laboratory facilities have been accredited by the AABB and FACT, are fully Health Canada compliant and are registered with the US Food and Drug Administration. This is important as it provides assurance to our clients and their physicians that the stem cells have been processed and stored according to stringent medical criteria and best laboratory practice procedures.
Our current laboratory facility is sufficient to process the cord blood stem cells from over 400 new clients every month. We continue to purchase additional storage tanks as the number of samples collected increases. We increased our laboratory and office space this year to accommodate additional tanks and increased administrative staff.
Discussion of Operations and Financial Condition
You should refer to our financial statements for the year ended May 31, 2010 while you read this discussion. Those financial statements summarize the financial impact of our financings, investments and operations and provide significant, material information that is not meant to be, nor is it, included in this discussion. This discussion is meant to provide information not included in the financial statements and an explanation of some of the financial statement information.
Our sample processing volumes increased by 38% during the year ended May 31, 2010 over the previous year. This is the result of additional marketing activities started in 2009. The additional marketing activities caused us to experience a loss of $292,301, compared to $105,559 last year. Future storage fees from the additional samples brought in during the year are expected to offset these losses in later years.
Selected Annual Information
(Unaudited)We have summarized selected financial information from the Company’s financial statements, which are prepared in Canadian dollars and in accordance with Canadian generally accepted accounting principles.
Years ended May 31,
Operating Results 2010 2009 2008
% of % of % of
$ sales $ sales $ sales
Revenue 3,390,816 100.0 2,574,853 100.0 2,232,166 100.0
Direct operating expenses 1,441,788 42.5 1,106,408 43.0 987,702 44.3
Marketing expenses 910,653 26.9 490,779 19.1 221,062 9.9
Other expenses 1,382,318 40.8 1,094,868 42.5 878,012 39.3 Net (loss) income before tax (343,943) -10.2 (117,202) -4.6 145,390 6.5
Future income tax recovery (51,642) -1.5 (11,643) -0.5 (640,123) -28.7 Net (loss) income (292,301) -8.7 (105,559) -4.1 785,513 35.2 Net (loss) income per share,
basic diluted (0.030) (0.030) (0.011) (0.011) 0.081 0.079 Cash dividends declared per common share nil nil nil
Operating Results -$500,000 $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 2006 2007 2008 2009 2010 Revenue
Direct operating expenses
Marketing and other expenses
Net income (loss), before tax
May 31, Financial Position 2010 2009 2008 $ $ $ Current assets 1,728,214 1,262,511 775,218 Other assets 1,723,109 1,626,477 1,467,636 Total assets 3,451,323 2,888,988 2,242,854
Current portion of unearned revenue 737,237 609,043 500,000
Long-term portion of unearned revenue 2,323,947 1,661,277 1,209,388
Other current liabilities 457,878 418,511 274,269
Other long-term liabilities 5,183 34,478 56,350
Summary of Quarterly Results
(Unaudited)We have summarized selected financial information from the Company’s interim financial statements, which are prepared in Canadian dollars and in accordance with Canadian generally accepted accounting principles.
Quarters ended
May 31 Feb 28 Nov 30 Aug 31 May 31 Feb 28 Nov 30 Aug 31 2010 2010 2009 2009 2009 2009 2008 2008 $ 000’s Revenue 825 788 899 878 783 602 589 601 Operating expenses 347 337 383 375 335 258 254 259 Gross margin 478 451 516 503 448 344 335 342 Marketing expenses 154 241 262 253 227 126 87 51 Other expenses 367 370 356 289 293 260 296 246
Net (loss) income before tax (43) (160) (102) (39) (72) (42) (48) 45 Future income tax
expense (recovery) 14 (38) (21) (5) (12) (7) (8) 16
Net (loss) income (57) (122) (81) (34) (60) (35) (40) 29 Net (loss) income per share
basic $ diluted $ (0.006) (0.006) (0.012) (0.012) (0.008) (0.008) (0.003) (0.003) (0.006) (0.006) (0.004) (0.004) (0.004) (0.004) 0.003 0.003 Percent of Revenue Operating expenses 42.0% 42.7% 42.6% 42.7% 43.0% 42.9% 43.2% 43.1% Gross Margin 58.0% 57.3% 57.4% 57.3% 57.0% 57.1% 56.8% 56.9% Results of Operations
We incurred a net loss after tax of $292,301 during the year ended May 31, 2010, compared to $105,559 net during the year ended May 31, 2009. We incurred a net loss of $56,542 during the three months ended May 31, 2010, compared to $59,870 for the same period last year.
Revenue increases during 2010 were offset by increased direct operating and other expenses. Revenues
Our revenues for year ended May 31, 2010 were 32% higher than the previous year. Revenues for the three months ended May 31, 2010 were 5% higher than for the same period last year. The growth in revenues is attributable to the increasing volume of samples processed and to the increasing total number of samples in storage. This growth is due to the increased public awareness of cord blood stem cell banking and our marketing activities.
Three months ended May 31 Year ended May 31 Revenue 2010 2009 2010 2009 $ $ $ $ Storage Fees 340,248 277,774 1,271,433 1,042,580 Registration Fees 62,465 69,905 274,361 187,705 Processing Fees 372,323 396,438 1,642,175 1,196,523 Other Fees 50,340 38,711 202,847 148,045 Total Revenue 825,376 782,828 3,390,816 2,574,853
Direct Operating Expenses
Operating expenses are expected to vary in direct relation to the number of samples processed, although fluctuations in the ratios normally occur from period to period. Labour efficiencies that result from higher sample processing volumes are the most significant variable. Labour included in direct costs ranged from 12% to 16% of revenue over the last eight quarters and averaged 13.1% during 2010 compared to 14.4% during 2009. Processing supplies and services are also significant variables, and have ranged from an average of 24% of revenues to an average of 21% over the last eight quarters.
Other Expenses
Marketing costs have increased in the current periods over previous periods from increased advertising and participation in industry events. Amortization of property and equipment increased from the addition of new equipment and leasehold improvements. Interest on capital leases decreased because the principal portion of the leases is being repaid. Office and administration expenses increased from higher credit card processing fees, the set-up of improved data processing and storage systems and higher rent from increased lab and office space. General corporate expenses increased because of additional web-site costs, accounts receivable written off and higher insurance premiums. Administrative personnel costs are higher in 2010 than in 2009 because of higher salary rates and additional office staff.
Liquidity, Financial Position and Capital Resources
At May 31, 2010 we had cash of $1,364,063, working capital of $533,099 and a shareholders’ deficiency of $72,922. The working capital is net of a $737,237 current liability from storage fees billed in advance. We will recognize these fees as revenue over the next year. This is an improvement over May 31, 2009 of an additional $298,142 in working capital, including a reduction of $128,194 from an increase in unearned revenue.
Our operating cash flows were a surplus of $628,467 during the year ended May 31, 2010. $790,864 of the cash flows were from an increase in storage fees paid in advance. Many of our customers are choosing to prepay for 15 to 18 years of storage when the sample is processed.
We continue to expect improvements in our operating cash flow as a result of increased revenues and improved operating margins.
New laboratory equipment of up to $150,000 will be required over the next year. We plan to pay for this equipment through operating cash flows.
Portions of our cash are on deposit in accounts and guaranteed investment certificates that bear interest at current market rates. At the levels on deposit at May 31, 2010, a 1% change in the rate of interest would result in a $10,000 increase or decrease in our annual operating cash flow and net income or loss before income tax. We manage liquidity risk by ensuring that sufficient cash is available to pay financial liabilities within their stated credit terms.
New Accounting Policies
We did not adopt any new accounting standards during the year ended May 31, 2010 that had a significant effect on our financial statements.
We will adopt International Financial Reporting Standards (“IFRS”) effective June 1, 2011. There are several differences between IFRS and Canadian GAAP. The differences that could have the most significant impact on our financial statements are the presentation layout, the values assigned to property and equipment, and expanded note disclosure.
IFRS require the financial statements comprise a Statement of Financial Position (Balance Sheet), a Statement of Comprehensive Income, a Statement of Changes in Equity, a Statement of Cash Flows and Notes. The Statement of Financial Position is presented in order of relevant importance to the company, not necessarily in order of liquidity as in Canadian GAAP. The Statement of Comprehensive Income is presented with expenses classified either by function (e.g., direct operating expenses, marketing, general and administrative) or by nature (e.g., supplies, labour, depreciation) but not both (which is how our Canadian GAAP Statement of Income and Comprehensive Income is presented). Note disclosure is made of the nature of expenses if the expenses are classified by function. The Statement of Changes in Equity, which is not required under Canadian GAAP, provides a reconciliation between the opening and ending balances of each component of equity. The Statement of Cash Flows under IFRS is similar to Canadian GAAP. Over the next year, we will evaluate the presentation format most suitable to Lifebank. Property and equipment is more rigorously analysed and evaluated under IFRS than under Canadian GAAP. Depreciation rates, expected useful lives and residual values are estimated and adjusted, if necessary, at each reporting period. Depreciation under IFRS commences when the asset is available for use rather than when it is actually placed into use under Canadian GAAP. Impairment losses are recognized under IFRS if the present value of future cash flows (discounted) expected from an asset or group of assets exceeds its carrying amount and losses may be reversed later if the value recovers. Canadian GAAP uses undiscounted cash flows to determine impairment and recognized losses may not be reversed later. The initial adoption rules for IFRS permit us to use the current fair value of our plant and equipment at June 1, 2010 as “cost”, rather than requiring the onerous task of revaluing 14 years worth of transactions. We will evaluate the most appropriate method of valuing our property and equipment at June 1, 2010 over the next year. The amount shown for property and equipment under IFRS might be materially different from the amount shown under Canadian GAAP. Any difference will be reflected in retained earnings at June 1, 2010.
Share Capital
The company has only one class of share capital, common shares without par value. The number of shares authorized is unlimited. The Company also has a stock option plan that permits the directors of the Company to grant incentive options to the employees, directors, officers and consultants of the Company. The maximum number of shares issuable under the stock option plan is 1,943,000, of which 430,000 have been issued.
The following are outstanding at August 24, 2010:
Common shares 10,148,361
Shares issuable on the exercise of outstanding stock options 1,235,000 Shares available for future stock option grants 278,000
Related Party Transactions
Professional fees during the year ended May 31, 2010 include $27,973 paid to DuMoulin Black LLP, a law firm in which J. Douglas Seppala, one of our directors, is a partner. The payments represent fees for legal services provided to the Company at rates normally charged by unrelated parties.
