Quarterly Results

Financial Statements And Related Announcement - Third Quarter Results

Financials Archive

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Income Statement

Comprehensive Income

Balance Sheet

Review Of Performance

COMPARING 9M2017 AGAINST 9M2016

Income Statement

Stemlife's financial results for 9M2017 have been included in the Group's financial results for 9M2017, while Stemlife's financial results for the period of December 2015 to March 2016 were included in the Group's financial results for 9M2016 as Stemlife became a subsidiary of the Group in December 2015.

Revenue

Revenue increased by 0.2% or S$79,000 from 9M2016 to 9M2017 mainly due to the inclusion of contribution from Stemlife, which became a subsidiary of the Group in December 2015. In 9M2017, there was an increase in deliveries to 19,000 from 17,000 in 9M2016, which is also largely contributed by Stemlife. Stemlife's deliveries for 9M2017 included cord tissue banking which is the banking of Wharton's jelly of the umbilical cord, a lower-priced service offering to cater to the mass audience. There was no such offering in 9M2016.

Revenue from diagnostic services also increased by S$404,000 in 9M2017 compared to 9M2016.

The increase is offset by a decrease in revenue contribution from Singapore, Hong Kong and India due to increased discounts given to clients in order to remain competitive in these markets.

Cost of sales

Cost of sales increased by 6.4% or S$956,000 in 9M2017 compared to 9M2016. The increase in cost of sales was due to the increase in client deliveries from 9M2016 to 9M2017. The increase in cost of sales was lesser than the increase in deliveries due to the lower cost of processing of the lower-priced cord tissue banking

Gross profit and gross profit margin

Gross profit decreased by 3.0% or S$877,000 and gross profit margin decreased from 66.2% in 9M2016 to 64.1% in 9M2017.

The drop in gross profit margin was mainly due to the increase in cost of quality and compliance in laboratory practices in order to adhere to best practices and provide the highest quality of service to our clients.

It was also due to lower margin attributable to the newly consolidated subsidiary, Stemlife, and the Group's new offering of cord tissue banking, which is a lower cost option with a lower margin, to cater to the mass audience. The drop in gross profit margin was also due to the increase in revenue contribution from diagnostic services, which has a lower gross profit margin than banking services.

Other operating income

Other operating income increased by approximately S$78,000 mainly due to an increase in investment income of S$191,000 arising from short-term investments. The increase is offset by a SPRING grant of approximately S$186,000 in 9M2016 for the Group's initiatives in training employees and investing in infrastructure relating to information technology (9M2017: a grant of approximately S$126,000 for employee training and development was recognised).

Selling and marketing expenses

Selling and marketing expenses increased by 6.9% or S$948,000 in 9M2017 compared to 9M2016. The increase is mainly due to the inclusion of selling and marketing expenses of Stemlife, which became a subsidiary of the Group in December 2015. Stemlife accounted for an increase in selling and marketing expenses of S$884,000. There was also an increase in selling and marketing expenses in the Group's Indonesian subsidiary by S$266,000 largely due to an increase the sales and marketing force to capture a bigger market share.

This was offset by the decrease in advertising and marketing expenses in Singapore by S$160,000 as the Singapore operations adopted more efficient marketing strategies by leveraging on technology to reduce cost drivers.

Administrative expenses

Administrative expenses increased by 14.0% or S$1.8 million in 9M2017 compared to 9M2016. Stemlife, which became a subsidiary of the Group in December 2015, accounted for S$1.1 million of the increase in administrative expenses. The amortisation of intangibles of Stemlife and an enterprise resource planning software in Singapore also contributed to an approximate S$496,000 increase in administrative expenses.

Finance income

Finance income increased by S$686,000 due to the placement of fixed deposits with reputable banks and financial institutions in line with the Group's cash management policy. Stemlife, which became a subsidiary of the Group in December 2015, accounted for S$335,000 of the increase in finance income.

Finance costs

Finance costs decreased by 15.6% or S$30,000 mainly due to lower interest-bearing borrowings as the Group made repayments of S$2,064,000 during 9M2017.

Profit before income tax from operations

As a result of the foregoing, our profit before income tax from operations for 9M2017 is lower than 9M2016 at S$1.0 million.

Share of results in associate

Our share of loss in associate was S$76,000 for 9M2016. There was no share of results of associate in 9M2017 as Stemlife was consolidated as a subsidiary in December 2015.

Fair value changes on financial asset designated at fair value through profit or loss

The Group recorded fair value gain on its investment in China Cord Blood Corporation ("CCBC") designated at fair value through profit or loss of S$4.5 million in 9M2016. The fair value changes are computed based on the changes in CCBC's last traded price as at 30 June 2015 of US$6.16 (approximately S$8.32 at US$1:S$1.3508) and 30 October 2015, being the date of disposal of the investment in shares ("Sale Shares"), of US$6.37 (approximately S$8.94 at US$1:S$1.4038) for 9M2016. The fair value changes were recognised directly in profit or loss.

The Group disposed of its financial asset designated at fair value through profit or loss on 30 October 2015. As a result, there are no such fair value changes in 9M2017.

Fair value changes on derivative

On 10 November 2014, the Company and Magnum completed the acquisition of a 7% senior convertible note (the "Convertible Note") due 3 October 2017 issued by CCBC to Golden Meditech Holdings Limited in the principal amount of US$50 million (the "CGL Acquisition"). The Company and Magnum also entered into a facility agreement pursuant to which the Company agreed to lend Magnum funds in an aggregate amount of US$46,500,000.

The Group recorded fair value gain on derivative for 9M2016 of approximately S$2.5 million.

The Group disposed of its Convertible Note on 13 November 2015. As a result, there is no such fair value changes on derivative in 9M2017.

Exchange differences

Due to strengthening of the US$ against the S$, unrealised foreign exchange gain of approximately S$6.0 million was recognised on the Magnum Loan and the Convertible Note for 9M2016. No such exchange differences were recognised for 9M2017.

Gain on sale of shares

In 9M2016, the Group recognised the gain on the sale of the Sale Shares of S$151,000. The gain on the sale was computed based on the difference between the disposal price per Sale Share of US$6.40 (approximately S$8.98 at US$1:S$1.4038) and CCBC's last traded share price as at the date of disposal on 30 October 2015 of US$6.37 (approximately S$8.94 at US$1:S$1.4038). No such gain on sale of shares was recognised for 9M2017.

Gain on sale of convertible bond

Upon completion of the disposal of the Convertible Note on 13 November 2015, the Group recognised the gain on the sale of the Convertible Note of S$5.0 million in 9M2016. No such gain on sale of convertible bond was recognised in 9M2017.

Remeasurement loss on previously held equity interest in subsidiary

The Group recognised a loss of S$1.6 million as a result of measuring at fair value its 31.81% equity interest in Stemlife held before the business combination as at 31 December 2015. No such remeasurement loss was recognised for 9M2017.

Other expenses

Other expenses of S$1.9 million recorded in 9M2016 comprised one-time employee bonuses paid in respect of the realised gains on sale of the Sale Shares and Convertible Note. There was no such one-time employee bonus in 9M2017.

Note repurchase expense

On 16 December 2015, 6 January 2016 and 28 January 2016, the Company announced that it had repurchased S$51,750,000 in principal amount of the Notes, which resulted in note repurchase expenses of S$2.0 million for 9M2016. The Notes were repurchased at market value which was at a premium to the principal amount.

On 13 October 2016, the Group announced the commencement of a consent solicitation exercise (the "Exercise") in relation to the Notes. The Exercise was to seek approval to include a call option (the "Call Option") and replace the ratio of EBITDA to interest expense with a new financial covenant requiring the Company to ensure that, for so long as the Notes remain outstanding, unencumbered cash and cash equivalents will not at any time be less than S$75,000,000. This was approved at the meeting of the noteholders on 4 November 2016. The Group incurred fees of S$0.6 million in relation to the Exercise for 9M2017.

To reduce its debt-servicing obligations, the Group also exercised the Call Option and redeemed the remaining aggregate outstanding S$68,250,000 in principal amount of the Notes on 9 December 2016 at a premium to the principal amount. This resulted in additional expenses of S$1.5 million for 9M2017.

As a result of the foregoing, note repurchase expenses increased from S$2.0 million in 9M2016 to S$2.1 million in 9M2017.

Finance income

Finance income of approximately S$3.8 million was recognised for 9M2016 on the Magnum Loan and the Convertible Note. No such finance income was recognised for 9M2017.

Finance costs

Finance costs of approximately S$1.8 million were recognised on the Notes for 9M2017 (9M2016: S$4.3 million). The decrease was due to the repurchase of S$51,750,000 in principal amount of the Notes on 16 December 2015, 6 January 2016 and 28 January 2016, and the full redemption of the remaining aggregate outstanding S$68,250,000 in principal amount of the Notes on 9 December 2016.

Tax

In 9M2017, non-operational finance costs and note repurchase expenses were not deductible. In 9M2016, the share of results of associate was reported net of tax and fair value changes on financial asset designated at fair value through profit or loss, fair value changes on derivative, gain on sale of shares, gain on sale of convertible bond, remeasurement loss on previously held equity interest in subsidiary, other expenses, note repurchase expenses, non-operational finance income and costs and exchange differences were not taxable.

Adjusting for these non-taxable items, the effective tax rate for 9M2017 was 37.1%, compared to an effective tax rate for 9M2016 of 22.0%. The increase in effective tax rate in 9M2017 was due to under-provision of income tax in respect of FY2016 of S$167,000 that was recognised in 9M2017, deferred tax assets not recognised on tax losses and increased profit contribution by subsidiaries in tax regimes with higher tax rates in 9M2017. The increase was offset by the reversal of over-provision of income tax of S$277,000 in Singapore in 9M2017.

COMPARING 3Q2017 AGAINST 3Q2016

Income Statement

Revenue

Revenue decreased by 4.8% or S$713,000 from S$14.9 million in 3Q2016 to S$14.2 million in 3Q2017. In 3Q2017, there was a decrease in revenue contribution from Singapore, Hong Kong and India due to increased discounts given to clients in order to remain competitive in these markets.

The decrease is offset by an increase in deliveries to 6,000 in 3Q2017 from 5,800 in 3Q2016, which is partly contributed by the lower-priced service offering of cord tissue banking in Stemlife, as well as an increase in revenue contribution of diagnostic services by S$125,000.

Cost of sales

Cost of sales decreased by 3.3% or S$171,000 in 3Q2017 compared to 3Q2016. The decrease was mainly attributed to lower cost of processing lower-priced cord tissue banking.

Gross profit and gross profit margin

Gross profit decreased by 5.6% or S$542,000 and gross profit margin decreased from 65.3% in 3Q2016 to 64.8% in 3Q2017.

The drop in gross profit margin was mainly due to the increase in cost of quality and compliance in laboratory practices in order to adhere to best practices and provide the highest quality of service to our clients.

It was also due to lower margin attributable to Stemlife and the Group's new offering of cord tissue banking, which is a lower-priced option with a lower margin, as well as an increase in revenue contribution by diagnostic services offered by the Group which has a lower gross profit margin.

Other operating income

Other operating income decreased by 44.8% or S$162,000 due to a grant from SPRING of approximately S$186,000 in 3Q2016. There was no such grant in 3Q2017. The decrease is offset by an increase in investment income of S$65,000 in 3Q2017 from 3Q2016, arising from short-term investments.

Selling and marketing expenses

Selling and marketing expenses increased by 4.1% or S$197,000 in 3Q2017 compared to 3Q2016. The increase is due to an increase in advertising and marketing expenses in India amounting to S$277,000 for below-the-line client acquisition costs in order to gain market share in the highly competitive market there.

The increase was offset by the decrease in selling and marketing expenses in Singapore by S$53,000 as the Singapore operations adopted more efficient marketing strategies by leveraging on technology to reduce cost drivers.

Administrative expenses

Administrative expenses increased by 17.0% or S$738,000 in 3Q2017 compared to 3Q2016. The increase is mainly due to an increase in foreign exchange losses of S$550,000 in 3Q2017 compared to 3Q2016, arising mainly from the depreciation of US$ against S$ during 3Q2017 for the Group's bank balances held in US$.

The increase was also due to an increase in amortisation expenses of S$164,000 in 3Q2017 due to the amortisation of an enterprise resource planning software for Singapore. There was no such software amortisation in 3Q2016.

Finance income

Finance income decreased by S$162,000 due to partial redemption of the fixed deposits placed with reputable banks and financial institutions to redeem the Notes payable.

Finance costs

Finance costs decreased by 20.9% or S$14,000 mainly attributable to lower interest bearing borrowings as the Group made principal repayments of S$2,064,000 in 9M2017.

Profit before income tax from operations

As a result of the foregoing, our loss before income tax from operations for 3Q2017 is S$394,000 (3Q2016: profit before income tax from operations of S$1.4 million).

Other expenses

Other expenses of S$1.9 million recorded in 3Q2016 comprised one-time employee bonuses paid in respect of the realised gains on sale of the Sale Shares and the Convertible Note. There was no such one-time employee bonus in 3Q2017.

Note repurchase expense

On 6 January 2016 and 28 January 2016, the Company announced that it had repurchased S$4,750,000 in principal amount of the Notes, which resulted in note repurchase expenses of S$186,000 for 3Q2016. The Notes were repurchased at market value which was at a premium to the principal amount. Following the full redemption and cancellation of the Notes on 9 December 2016, there was no such note repurchase expense in 3Q2017.

Finance costs

The Company incurred S$961,000 of interest expense on the Notes in 3Q2016. Following the full redemption and cancellation of the Notes on 9 December 2016, there was no such finance cost in 3Q2017.

Tax

In 3Q2016, non-operational other expenses, note repurchase expenses and non-operational finance costs were not taxable.

Adjusting for these non-taxable items, the effective tax rate of 6.6% against loss before tax of S$394,000 in 3Q2017 was higher than 3Q2016 at 26.7%. The higher effective tax rate in 3Q2017 was due to deferred tax assets not recognised on tax losses and increased profit contribution by subsidiaries in tax regimes with higher tax rates.

Balance sheet

Cash and cash equivalents, fixed deposits and short term investments

As at 31 March 2017, the Group maintained a strong balance sheet, with cash and cash equivalents, fixed deposits and short-term investments of S$61.2 million (30 June 2016: S$138.1 million).

The decrease in cash and cash equivalents was mainly due to net cash used in financing activities of S$77.9 million, which comprised the repurchase of Notes of S$69.8 million, interest payment on Notes of S$2.1 million, repayment of interest-bearing borrowings of S$2.1 million and further acquisition of the non-controlling interest of Stemlife with consideration of S$4.0 million.

The decrease is offset by the net cash generated from operating activities of S$1.9 million comprising mainly operating cash inflows before movements in working capital of S$1.2 million, offset by net working capital outflow of S$0.8 million, net interest received of S$1.3 million and net income tax recovered of S$213,000.

Net working capital outflow of approximately S$0.8 million was due to the following:

  • increase in trade receivables of approximately S$3.9 million;
  • increase in other receivables, deposits and prepayments of approximately S$0.4 million;
  • increase in inventory of approximately S$167,000;
  • decrease in trade and other payables of approximately S$1.1 million; and
  • increase in deferred revenue of approximately S$4.8 million.

Available-for-sale asset

The Group purchased approximately 4.2 million ordinary shares of CellResearch Corporation Pte. Ltd. ("CRC") for S$4.2 million to strengthen the strategic alliance with CRC and to enhance value-add of the Group's clinical and quality assurance capacity. The ordinary shares are carried at cost less impairment, if any.

Property, plant and equipment

As at 31 March 2017, the Group recorded S$12.8 million on the balance sheet for property, plant and equipment (30 June 2016: S$13.3 million).

Investment properties

As at 31 March 2017, the Group recorded S$8.9 million on the balance sheet for investment properties (30 June 2016: S$9.2 million).

Intangible assets

Intangible assets comprise customer contracts acquired in business combinations and computer software.

Deferred tax asset

As at 31 March 2017, the Group recorded a deferred tax asset of S$220,000 (30 June 2016: $220,000) due to temporary differences.

Trade receivables, non-current

Non-current trade receivables represents cord blood and cord lining banking service revenues receivable under instalment payment plans that have yet to be billed to the customers. Upon billing, the billed amount will be receivable under the same terms as the current trade receivables.

Other receivables, non-current

The Group subscribed for a Class A Redeemable Convertible Note ("RCN") maturing 3 years from the issue date in the principal amount of S$4.2 million from CRC. The yielding interest is at a rate of 3 month SIBOR plus 7% per annum payable annually in arrears. The RCN is carried at cost less impairment, if any.

Fixed deposits, current and non-current

As of 31 March 2017, the Group recorded fixed deposits of S$16.8 million (30 June 2016: S$53.4 million). The decrease was due to the redemption of fixed deposits to redeem the Notes payable.

Short term investments

As of 31 March 2017, the Group recorded short term investments of S$21.6 million (30 June 2016: S$15.0 million). The increase in short term investments was due to the Group placing more short term investments due to favourable interest rates.

Trade receivables, current

As at 31 March 2017, the Group recorded current trade receivables of S$22.8 million (30 June 2016: $21.0 million).

Other receivables, current

Other receivables include non-trade receivables and interest receivable on the RCN.

Prepayments

Prepayments increased from S$1.7 million as at 30 June 2016 to S$2.0 million as at 31 March 2017 due to the prepayment of insurance premiums for the Group.

Inventories

Inventories increased from S$1.1 million as at 30 June 2016 to S$1.2 million as at 31 March 2017, mainly arising from an increase in inventory balances in Indonesia and the Philippines to support increased operations.

Trade and other payables, current and non-current

As at 31 March 2017, the Group recorded current and non-current trade and other payables of S$12.2 million (30 June 2016: $13.6 million). Trade and other payables comprise mainly trade and non-trade payables to third parties, provisions and accrued expenses.

Insurance contract liabilities

Insurance contract liabilities represent outstanding claim liabilities and liabilities for expected future claims to be incurred as a result of the Group entering into insurance arrangements with customers during the year.

Deferred revenue, current and non-current

Deferred revenue represents revenue received in advance for services to be rendered under cord blood and cord lining banking contracts.

Tax payable

Tax payable increased from S$0.6 million as at 30 June 2016 to S$1.2 million as at 31 March 2017 due to increased profit contribution from countries in tax regimes with higher tax rates.

Interest-bearing borrowings, current and non-current

Interest-bearing borrowings decreased by S$2.1 million from S$10.9 million as at 30 June 2016 to S$8.8 million as at 31 March 2017 due to repayments made during the financial period.

Deferred tax liabilities

As at 31 March 2017, the Group recognised deferred tax liabilities of S$3.9 million (30 June 2016: S$4.1 million) comprising deferred tax liabilities on temporary differences and on intangible assets recognised on business combination.

Notes payable

The Notes are carried at amortised cost using the effective interest rate and are classified as "Notes Payable" on the balance sheet. As at 31 March 2017, all the outstanding Notes were redeemed (30 June 2016: S$67.4 million).

Commentary

The Group remains cautiously optimistic about the market potential of its core business. The global stem cell banking market is expected to grow at a compound annual growth rate ("CAGR") of 25.76% from 2017 to 2025, with Asia Pacific, the fastest growing region, anticipated to grow at a CAGR of 26.23%. The growth is driven by an increase in neurodegenerative ailments, increasing awareness regarding storage of cord blood and tissue stem cells, the use of stem cells in the field of therapeutics and higher government subsidies.1

Capitalising on these growth opportunities, the Group remains focused on its key strategies to reinforce its core competencies to unlock network value and expand through both scale and scope, whilst rationalising its business operations to drive both top and bottom line growth.

Focus on core competencies

The Group's value to its clients lies in being a trusted provider of consumer healthcare products and services, especially to the mother and child segment. The Group strives for excellence in quality, professionalism and technical expertise, whilst enhancing other key areas of competency such as marketing, customer service and product innovation.

To this end, as part of its commitment to adhere to best practices and provide the highest quality of service to its clients, the Group continues to invest resources to upkeep its quality and compliance in laboratory practices, even as it expands its operations and customer base.

The Group also continues to ensure continuous improvement within the organisation through the attraction of the right talents to develop new service lines as well as new capabilities.

Unlocking network value and synergies

The Group continues to gain progress in its efforts to deepen its engagement with its existing network of stakeholders and partners in fast-growing economies – parents, doctors, other healthcare professionals and healthcare institutions, to raise awareness of the potential of the Group's banking and diagnostic services to benefit members of this network. These initiatives include educational marketing activities as well as marketing campaigns, resulting in higher sales in the Group's key growth markets such as India, Indonesia and the Philippines.

The Group will continue to build on this momentum in these key growth markets as well as replicate the success of this strategy in Malaysia to drive top-line growth.

Rationalisation of business operations

The Group continues to drive cost efficiencies by rationalising various business operations, whilst staying true to its mission to deliver the highest level of quality standards to its clients.

Some of the initiatives are to explore cost-effective marketing efforts which include the intensification of the use of digital and social media platforms and reliance on technology through the adoption of an enterprise resource planning software to reduce cost drivers. This has translated into lower advertising and marketing costs in its Singapore market.

Concurrently, the Group also intends to tap on its regional footprint to lower costs and offer more service options to its clients.

Expansion through scale and scope

Amid the growing demand for healthcare services in the Asia Pacific region, the Group continues to work towards expanding its presence in the Asian markets.

Following the Group's recent expansion into Myanmar, the Group also entered the Vietnam market, extending its geographical presence in more Asian countries.

The Group's consolidation of Stemlife has allowed it to achieve higher earnings as a result of increased penetration in the Malaysian market. As at 26 April 2017, the Group's total interest in Stemlife was approximately 99.03%. Leveraging on the Group's experience, expertise and resources, Stemlife intends to expand its geographical presence, especially in Sabah and Sarawak, by increasing its number of products and services as well as public awareness through greater investment in educational and promotional activities.

In addition, the Group will continue to expand its diagnostics business, which has been growing steadily, by building on its product and service offerings.

Backed by a strong cash position, the Group is also actively exploring potential mergers and acquisitions opportunities to enhance its market leadership in the consumer healthcare industry.

Barring any unforeseen circumstances and excluding non-core finance costs, note repurchase expenses and any other one-off items, the Group expects its core business to remain profitable for FY2017.