UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2010
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to 0;
Commission File Number: 0-28034
AdvanSource Biomaterials Corporation
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
229 Andover Street, Wilmington, Massachusetts (Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No q
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes qNo x (the Registrant is not yet required to submit Interactive Data)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
q Large Accelerated Filer q Accelerated Filer
q Non-accelerated Filer x Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes q No x
As of February 11, 2011, there were 21,235,546 of the registrant’s Common Stock outstanding.
ADVANSOURCE BIOMATERIALS CORPORATION TABLE OF CONTENTS
| | | Page |
| PART I. | FINANCIAL INFORMATION | |
| | | |
| Item 1. | Condensed Financial Statements (unaudited) | |
| | Condensed Balance Sheets at December 31, 2010 and March 31, 2010 | 3 |
| | Condensed Statements of Operations for the three and nine months ended December 31, 2010 and 2009 | 4 |
| | Condensed Statements of Cash Flows for the nine months ended December 31, 2010 and 2009 | 5 |
| | Notes to Condensed Financial Statements | 6-12 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13-20 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 21 |
| Item 4. | Controls and Procedures | 21 |
| | | |
| PART II. | OTHER INFORMATION | |
| | | |
| Item 1. | Legal Proceedings | 22 |
| Item 1A. | Risk Factors | 22 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
| Item 3. | Defaults Upon Senior Securities | 22 |
| Item 4. | (Removed and Reserved) | 22 |
| Item 5. | Other Information | 22 |
| Item 6. | Exhibits | 23 |
| | Signatures | 24 |
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
| AdvanSource Biomaterials Corporation | |
| Condensed Balance Sheets | |
| (Unaudited - in thousands, except share and per share amounts) | |
| | | | | | | |
| | | December 31 | | | March 31, | |
| | | 2010 | | | 2010 | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 1,360 | | | $ | 3,055 | |
Accounts receivable-trade, net of allowance of $5 as of December 31, 2010 and March 31, 2010 | | | 62 | | | | 117 | |
| Accounts receivable-other | | | 110 | | | | 105 | |
| Inventories, net | | | 488 | | | | 456 | |
| Prepaid expenses and other current assets | | | 77 | | | | 92 | |
| Total current assets | | | 2,097 | | | | 3,825 | |
| Property, plant and equipment, net | | | 2,864 | | | | 3,049 | |
| Total assets | | $ | 4,961 | | | $ | 6,874 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 212 | | | $ | 187 | |
| Accrued expenses | | | 321 | | | | 207 | |
| Deferred revenue | | | 56 | | | | 64 | |
| Total current liabilities | | | 589 | | | | 458 | |
| | | | | | | | | |
| Commitments and contingencies (Note 10) | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity: | | | | | | | | |
Preferred stock; $.001 par value; 5,000,000 shares authorized; 500,000 shares issued and none outstanding as of December 31, 2010 and March 31, 2010 | | | - | | | | - | |
Common stock; $.001 par value; 50,000,000 shares authorized; 21,312,238 and 21,278,386 shares issued, and 21,235,546 and 21,201,694 shares outstanding as of December 31, 2010 and March 31, 2010, respectively | | | 21 | | | | 21 | |
| Additional paid-in capital | | | 37,909 | | | | 37,798 | |
| Accumulated deficit | | | (33,528 | ) | | | (31,373 | ) |
| | | | 4,402 | | | | 6,446 | |
Less: treasury stock, 76,692 shares at cost at December 31, 2010 and March 31, 2010 | | | (30 | ) | | | (30 | ) |
| Total stockholders' equity | | | 4,372 | | | | 6,416 | |
| Total liabilities and stockholders' equity | | $ | 4,961 | | | $ | 6,874 | |
The accompanying notes are an integral part of these unaudited condensed financial statements.
| AdvanSource Biomaterials Corporation | |
| Condensed Statements of Operations | |
| (Unaudited - in thousands, except per share amounts) | |
| | | | | | | | | | | | | |
| | | For the Three Months Ended December 31, | | | For the Nine Months Ended December 31, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Revenues: | | | | | | | | | | | | |
| Product sales | | $ | 264 | | | $ | 455 | | | $ | 1,027 | | | $ | 1,010 | |
| License, royalty and development fees | | | 163 | | | | 213 | | | | 394 | | | | 626 | |
| | | | 427 | | | | 668 | | | | 1,421 | | | | 1,636 | |
| Cost of sales | | | 348 | | | | 377 | | | | 1,070 | | | | 1,007 | |
| Gross profit | | | 79 | | | | 291 | | | | 351 | | | | 629 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Research, development and regulatory | | | 215 | | | | 158 | | | | 550 | | | | 499 | |
| Selling, general and administrative | | | 667 | | | | 676 | | | | 1,956 | | | | 2,072 | |
| | | | 882 | | | | 834 | | | | 2,506 | | | | 2,571 | |
| Loss from operations | | | (803 | ) | | | (543 | ) | | | (2,155 | ) | | | (1,942 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | |
| Interest income | | | - | | | | 1 | | | | - | | | | 5 | |
| Other expense | | | - | | | | - | | | | - | | | | (35 | ) |
| Other income (expense) | | | - | | | | 1 | | | | - | | | | (30 | ) |
| Net loss from continuing operations | | | (803 | ) | | | (542 | ) | | | (2,155 | ) | | | (1,972 | ) |
Income from discontinued operations - sale of subsidiaries, net of tax of $0 | | | - | | | | - | | | | - | | | | 942 | |
| Net loss | | $ | (803 | ) | | $ | (542 | ) | | $ | (2,155 | ) | | $ | (1,030 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss per common share, basic and diluted: | | | | | | | | | | | | | | | | |
| Net loss per share, continuing operations | | $ | (0.04 | ) | | $ | (0.03 | ) | | $ | (0.10 | ) | | $ | (0.09 | ) |
| Net income per share, discontinued operations | | | - | | | | - | | | | - | | | | 0.04 | |
| Net loss per common share, basic and diluted | | $ | (0.04 | ) | | $ | (0.03 | ) | | $ | (0.10 | ) | | $ | (0.05 | ) |
Shares used in computing net income (loss) per common share, basic and diluted | | | 21,312 | | | | 21,168 | | | | 21,293 | | | | 21,144 | |
The accompanying notes are an integral part of these unaudited condensed financial statements
| AdvanSource Biomaterials Corporation | |
| Condensed Statements of Cash Flows | |
| (Unaudited - in thousands) | |
| | | For The Nine Months Ended December 31, | |
| | | 2010 | | | 2009 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (2,155 | ) | | $ | (1,030 | ) |
| Net income from discontinued operations - sale of subsidiaries | | | - | | | | (942 | ) |
| Net loss from continuing operations | | | (2,155 | ) | | | (1,972 | ) |
Adjustments to reconcile net loss from continuing operations to net cash flows used in operating activities: | | | | | |
| Depreciation | | | 187 | | | | 203 | |
| Stock-based compensation | | | 103 | | | | 227 | |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable-trade | | | 55 | | | | (119 | ) |
| Accounts receivable-other | | | (5 | ) | | | 888 | |
| Inventories | | | (32 | ) | | | (66 | ) |
| Prepaid expenses and other current assets | | | 15 | | | | 3 | |
| Accounts payable | | | 25 | | | | (23 | ) |
| Accrued expenses | | | 114 | | | | (187 | ) |
| Deferred revenue | | | (8 | ) | | | (62 | ) |
| Net cash flows used in operating activities from continuing operations | | | (1,701 | ) | | | (1,108 | ) |
| Net cash flows used in operating activities from discontinued operations | | | - | | | | (149 | ) |
| Net cash flows used in operating activities | | | (1,701 | ) | | | (1,257 | ) |
| Cash flows from investing activities: | | | | | | | | |
| Purchases of property, plant and equipment | | | (2 | ) | | | (20 | ) |
| Decrease in other assets | | | - | | | | 6 | |
| Net cash flows used in investing activities from continuing operations | | | (2 | ) | | | (14 | ) |
| Net cash flows provided by investing activities from discontinued operations | | | - | | | | 801 | |
| Net cash flows provided by (used in) investing activities | | | (2 | ) | | | 787 | |
| Cash flows from financing activities: | | | | | | | | |
| Net proceeds from issuance of common stock | | | 8 | | | | 10 | |
| Net cash flows provided by financing activities | | | 8 | | | | 10 | |
| Net change in cash and cash equivalents | | | (1,695 | ) | | | (460 | ) |
| Cash and cash equivalents at beginning of period | | | 3,055 | | | | 3,873 | |
| Cash and cash equivalents at end of period | | $ | 1,360 | | | $ | 3,413 | |
| | | | | | | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
| Issuance of promissory note upon settlement with Medos (Note 1) | | $ | - | | | $ | 493 | |
The accompanying notes are an integral part of these unaudited condensed financial statements.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
| 1. | Description of Business |
AdvanSource Biomaterials Corporation (“AdvanSource” or the “Company”), develops advanced polymer materials which provide critical characteristics in the design and development of medical devices. The Company’s biomaterials are used in devices that are designed for treating a broad range of anatomical sites and disease states. The Company’s business model leverages its proprietary materials science technology and manufacturing expertise in order to expand product sales and royalty and license fee income.
The Company’s technology, notably products such as ChronoFlex®, HydroMed™, and HydroThane™, which have been developed to overcome a wide range of design and functional challenges such as the need for dimensional stability, ease of manufacture and demanding physical properties to overcoming environmental stress cracking and providing heightened lubricity for ease of insertion. The Company’s new product extensions customize proprietary polymers for specific customer applications in a wide range of device categories.
The Company’s corporate, development and manufacturing operations are located in Wilmington, Massachusetts.
Liquidity and Going Concern
The Company’s unaudited condensed financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. The Company has experienced negative operating margins and negative cash flows from operations and expects to continue to incur net losses in the foreseeable future. For the three and nine months ended December 31, 2010, the Company incurred a net loss of $803,000 and $2,155,000, and during the nine months ended December 31, 2010 used cash from operating activities of $1,701,000. For the year ended March 31, 2010, the Company incurred a net loss of $1,688,000 and used cash from operating activities of $1,613,000. The Company anticipates incurring losses a t least through fiscal 2011 as it continues its attempt to grow revenues, expand selling and marketing activities, expand into new sales territories, and expand research and development activities to promote new product introductions and enhancements to existing products. As of December 31, 2010, the Company had an accumulated deficit of $33,528,000 and cash and cash equivalents amounted to $1,360,000.
At December 31, 2010, the Company (i) continued to own its facility in Wilmington, Massachusetts, having a net book value of approximately $2,520,000 and unencumbered by mortgages or other obligations, and (ii) had no other corporate debt. The ability to attract future capital investments will depend on many factors, including the availability of credit, rate of revenue growth, the expansion of selling and marketing and research and development activities, and the timing of new product introductions and enhancements to existing products. The Company believes that as of December 31, 2010 its cash position and the potential availability of funding through a transaction using the value of the Wilmington facility, or another financing transaction of debt or equity, will be sufficient to fund the Company’s working capital and research and development activities for at least the next twelve months. Notwithstanding the aforementioned financing alternatives, there can be no assurance that a transaction using the value of the Wilmington facility will be consummated on terms acceptable to the Company, or at all. Additionally, any potential future sale of equity or debt securities may result in dilution to the Company’s stockholders, and the Company cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to the Company, or at all. On November 24, 2010, the NYSE Amex suspended trading in our common stock and filed Form 25 on December 6, 2010 notifying the Securities and Exchange Commission of their decision to delist us. On November 24, 2010, our common stock was quoted on the OTCQB tier of The OTC Markets under the ticker symbol “ASNB.” Although we are quoted on the OTCQB, the delisting of our common stock from the NYSE Amex could substantially limit our common stock’s liquidity and impair our ability to raise capital. If the Company is required to raise additional financing, but is unable to obtain such financing, the Company may be required to delay, reduce the scope of, or eliminate one or more aspects of its operations or business development activities.
The uncertainties described above raise substantial doubt at December 31, 2010 about the Company’s ability to continue as a going concern without additional financing. The accompanying unaudited condensed financial statements do not include any adjustments relating to the recoverability and classification of the carrying amount of recorded assets or to the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Sale of Gish
On July 6, 2007, the Company completed the sale of Gish Biomedical, Inc.(“Gish”), our former wholly-owned subsidiary that developed and manufactured single use cardiopulmonary bypass products, pursuant to a stock purchase agreement (the “Gish Purchase Agreement”) entered into with Medos Medizintechnik AG, a German corporation (“Medos”), on July 3, 2007. The Gish Purchase Agreement provided for the sale of Gish to Medos for a purchase price of approximately $7.5 million in cash, and contained representations, warranties and indemnities that are customary in a transaction involving the sale of all or substantially all of a company or its assets. After transaction expenses and certain post-closing adjustments, the Company realized approximately $6.1 million in proceeds from the sa le of Gish. Under the terms of the Gish Purchase Agreement, the Company owed Medos $149,000 as a result of the change in stockholder’s equity of Gish from March 31, 2007 to June 30, 2007, which amount was recorded as a current liability as of June 30, 2007.
Pursuant to the terms of the Gish Purchase Agreement, $1.0 million of the purchase price was placed in escrow as a reserve for any indemnity claims by Medos under the Gish Purchase Agreement. Under the terms of the escrow agreement, the Company’s right to receive the escrow funds was contingent upon the realization of the Gish accounts receivable and inventory that were transferred to Medos for one year from the sale date. The $1.0 million of proceeds paid into escrow was not included in the initial calculation of the loss on sale of Gish of $1.2 million.
On June 30, 2008, Medos notified the Company of its claims in accordance with the procedure set forth in the Gish Purchase Agreement. On August 6, 2009, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement”) with Medos whereby Medos agreed to repay the Company approximately $580,000 of the escrow funds previously released to Medos in full and final settlement of the claims. In addition, the Company’s obligation with respect of the $149,000 post-closing adjustment, which was recorded as a current liability as of June 30, 2007 and up to the date of the execution of the Settlement Agreement, was eliminated. The parties also agreed to dismiss the previously filed demand for arbitration. As a result of the Settlement, the Company recorded a gain on the sale of Gish of $729,000 for the three and nine month periods ended December 31, 2009.
The terms of the settlement payment provided for Medos to (i) remit to the Company a cash payment of approximately $87,000 upon the execution of the Settlement and (ii) issue a promissory note to the Company in the approximate amount of $493,000, maturing on February 1, 2010 with equal monthly principal payments of approximately $70,000 plus accrued interest at the rate of 3.25% per annum. As of December 31, 2009, the principal balance remaining on the note receivable was approximately $353,000. During the three and nine month period ended December 31, 2009, the Company recorded approximately $4,000 of interest income in connection with the note receivable. The promissory note was paid in full in February 2010.
Sale of CDT
On March 28, 2008, the Company completed the sale of Catheter and Disposables Technology, Inc. (“CDT”), the Company’s former wholly-owned subsidiary engaged in contract manufacturing and the provision of engineering services, pursuant to a stock purchase agreement (the “CDT Purchase Agreement”) entered into with TACPRO, Inc. (“Tacpro”) on March 28, 2008. The CDT Purchase Agreement provided for the sale of CDT to Tacpro for a purchase price of approximately $1.2 million in cash. The CDT Purchase Agreement also contained representations, warranties and indemnities that are customary in a transaction involving the sale of all or substantially all of a company or its assets. The indemnifications include items such as compliance with legal and regulatory requirement s, product liability, lawsuits, environmental matters, product recalls, realization of accounts receivable and inventories at specified time periods, and tax audits. Pursuant to the terms of the CDT Purchase Agreement, the Company placed $240,000 in escrow as a reserve for our indemnification obligations to Tacpro if any, as described above. The $240,000 of proceeds held in escrow as of March 31, 2009 was not included in the calculation of the loss on sale of CDT of $690,000 recognized during the year ended March 31, 2008.
After transaction expenses, which included a non-cash expense of $76,000 related to warrants issued in connection with an investment bank that advised the Company, and certain post-closing adjustments, the Company realized approximately $696,000 in cash proceeds from the sale of CDT.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
In March 2009, Tacpro presented certain additional post-closing claims in the approximate amount of $17,000 related to uncollectible accounts receivable and unused inventory to which the Company was in agreement. Net of the post-closing claims, the remaining $224,000 of cash in the escrow account was released in April 2009 and the escrow account was closed. Upon receipt of the escrow cash, the Company paid approximately $11,000 in additional transaction costs to a former employee. The escrow amount, net of post-closing claims and additional transaction costs is reported as an additional gain of $213,000 on the sale of CDT during the nine-month period ended December 31, 2009.
CorNova
AdvanSource has partnered with CorNova, Inc. (“CorNova”), a privately-held, development stage company focused on the development of a next-generation drug-eluting stent. The Company owns common stock in CorNova and has an approximate ownership interest in the outstanding common and preferred stock of CorNova of 5.0% and 8.9% at December 31, 2010 and March 31, 2010, respectively.
As a result of several dilutive financings by CorNova resulting in a decreased ownership interest by the Company, the Company accounts for its investment in CorNova using the cost method. The Company has no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur.
| 2. | Interim Financial Statements and Basis of Presentation |
The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments), which the Company considers necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for the periods presented. The results of operations for the three and nine months ended December 31, 2010 and cash flows for the nine months ended December 31, 2010 may not necessarily be indi cative of results that may be expected for any succeeding quarter or for the entire fiscal year. The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements, included in our Annual Report on Form 10-K as of and for the year ended March 31, 2010 filed with the Securities and Exchange Commission (the “SEC”).
The balance sheet at March 31, 2010 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Significant accounting policies are described in Note A to the financial statements included in Item 8 of the Company’s Annual Report on Form 10-K as of March 31, 2010. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments, which are evaluated on an ongoing basis, that affect the amounts reported in the Company's condensed financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results could dif fer from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, allowance for doubtful accounts, useful lives of property and equipment, inventory reserves, and valuation of property and equipment.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
| 3. | Stock Based Compensation |
AdvanSource’s 1996 Employee, Director and Consultants Stock Option Plan (the “1996 Plan”) was approved by AdvanSource’s Board of Directors and Stockholders in March 1996. A total of 7,000,000 shares have been reserved for issuance under the 1996 Plan. Under the terms of the 1996 Plan the exercise price of Incentive Stock Options issued under the 1996 Plan must be equal to the fair market value of the common stock at the date of grant. In the event that Non Qualified Options are granted under the 1996 Plan, the exercise price may be less than the fair market value of the common stock at the time of the grant (but not less than par value). In October 2003, the Company’s shareholders approved the AdvanSource 2003 Stock Option Plan (the “2003 Plan”), whi ch authorizes the issuance of 3,000,000 shares of common stock with terms similar to the 1996 Plan. In January 2006, the Company filed Form S-8 with the Securities and Exchange Commission registering an additional 489,920 total shares of common stock in the 1996 Plan and 2003 Plan. Total shares of common stock registered under the 1996 Plan and 2003 Plan (collectively, the “Plans”) are 10,489,920. Substantially all of the stock options granted pursuant to the 1996 Plan provide for the acceleration of vesting of the shares of Common Stock subject to such options in connection with certain changes in control of the Company. A similar provision is not included in the 2003 Plan. Normally, options granted expire ten years from the grant date.
Activity under the Plans for the nine months ended December 31, 2010 is as follows:
| | | Options Outstanding | | | Weighted Average Exercise Price per Share | | | Weighted Average Remaining Contractual Term in Years | | | Aggregate Intrinsic Value (in thousands) | |
| Options outstanding as of April 1, 2010 | | | 2,409,562 | | | $ | 1.24 | | | | | | | |
| Granted | | | 400,000 | | | | 0.28 | | | | | | | |
| Exercised | | | - | | | | - | | | | | | | |
| Cancelled | | | (127,625 | ) | | | 1.81 | | | | | | | |
| Options outstanding as of December 31, 2010 | | | 2,681,937 | | | | 1.07 | | | | 6.82 | | | $ | - | |
| Options exercisable as of December 31, 2010 | | | 2,140,496 | | | | 1.27 | | | | 6.23 | | | $ | - | |
Options vested or expected to vest as of December 31, 2010 | | | 2,681,937 | | | | 1.07 | | | | 6.82 | | | $ | - | |
The Company’s condensed statements of operations include stock-based compensation expense related to the Company’s stock option plans for employee and non-employee director awards and employee participation in the Company’s employee stock purchase plan in the amount of $27,000 and $48,000 for the three months ended December 31, 2010 and 2009, respectively, and $103,000 and $227,000 for the nine months ended December 31, 2010 and 2009, respectively. There was no income tax benefit related to these costs. As of December 31, 2010, the total amount of unrecognized stock-based compensation expense was approximately $108,000 which will be recognized over a weighted average period of 2.19 years.
| 4. | Related Party Transactions |
On January 1, 2007, the Company entered into a consulting agreement with Michael L. Barretti, a member of its Board of Directors, for an annualized fee of $50,000. During each of the three and nine months ended December 31, 2010 and 2009, the Company recognized $13,000 and $38,000, respectively, of expense related to services incurred under this agreement, which was recorded as selling, general and administrative expense. In April 2010, the Company and Mr. Barretti mutually agreed to terminate the consulting agreement as of December 31, 2010. Mr. Barretti will continue as a director of the Company.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Inventories, net, are stated at the lower of cost (first in, first out) or net realizable value and consist of the following:
| | | December 31, | | | March 31, | |
| (in thousands) | | 2010 | | | 2010 | |
| Raw materials | | $ | 212 | | | $ | 207 | |
| Work in progress | | | 22 | | | | 20 | |
| Finished goods | | | 254 | | | | 229 | |
| Total inventories, net | | $ | 488 | | | $ | 456 | |
| 6. | Property, Plant and Equipment |
Property, plant and equipment consists of the following:
| | | December 31, | | | March 31, | |
| (in thousands) | | 2010 | | | 2010 | |
| Land | | $ | 500 | | | $ | 500 | |
| Building | | | 2,705 | | | | 2,705 | |
| Machinery, equipment and tooling | | | 1,451 | | | | 1,451 | |
| Furniture, fixtures and office equipment | | | 285 | | | | 283 | |
| | | | 4,941 | | | | 4,939 | |
| Less: accumulated depreciation | | | (2,077 | ) | | | (1,890 | ) |
| | | $ | 2,864 | | | $ | 3,049 | |
For the three months ended December 31, 2010 and 2009, depreciation expense was $61,000 and $67,000, respectively. For the nine months ended December 31, 2010 and 2009, depreciation expense was $187,000 and $203,000, respectively.
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares outstanding of common stock and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of dilutive shares issuable upon the exercise of outstanding stock options and warrants, computed using the treasury stock method. For both the three and nine months ended December 31, 2010, potentially dilutive shares of 2,901,235 were excluded from the earnings per share calculation because their effect would be antidilutive. For both the three and nine months ended December 31, 2009, pote ntially dilutive shares of 2,741,610 were excluded from the earnings per share calculation because their effect would be antidilutive. Shares deemed to be antidilutive include stock options and warrants.
Warrants
At December 31, 2010 and March 31, 2010, there were warrants to purchase 219,298 shares of common stock outstanding at an exercise price of $0.874 per share, which are exercisable until March 31, 2015.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Employee Stock Purchase Plan
During the nine months ended December 31, 2010, the Company issued 33,852 shares of its common stock to its employees pursuant to the terms of the Employee Stock Purchase Plan (the “ESP Plan”) and received cash proceeds of approximately $8,000. The Company also recorded stock-based compensation of $1,000 during the nine months ended December 31, 2010 to reflect the benefit received by the employees for the issuance of common stock at a 15% discount to the fair market value of the Company’s common stock on settlement date. During the nine months ended December 31, 2009, the Company issued 39,364 shares of its common stock to its employees pursuant to the terms of the ESP Plan and received cash proceeds of approximately $10,000. The Company also recorded stock-based compensat ion of $2,000 during the nine months ended December 31, 2009. The Company issued no stock pursuant to the ESP Plan during the three months ended December 31, 2010 and 2009, accordingly, no stock based compensation with respect to the ESP Plan was recorded in either of the three month periods.
The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. The Company evaluates the realizability of our deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates this tax position on a quarterly basis. The Company also accrues for potential interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense.
The Company is not a party to any legal proceedings, other than ordinary routine litigation incidental to its business, which the Company believes will not have a material affect on its financial position or results of operations.
| 11. | Concentrations of Credit Risk and Major Customers |
For the three months ended December 31, 2010, three customers represented 59% of the Company’s total revenues. For the three months ended December 31, 2009, two customer represented 78% of the Company’s total revenues. For the nine months ended December 31, 2010, three customers represented 64% of the Company’s total revenues. For the nine months ended December 31, 2009, two customer represented 80% of the Company’s total revenues.
As of December 31, 2010, the Company had $110,000 due from three customers related to receivables on royalties, license and annual usage fees. These amounts are classified as accounts receivable-other in the accompanying condensed balance sheets. As of December 31, 2010, the Company had accounts receivable-trade, net of $38,000, or 62%, due from 4 customers.
Because of the concentration of the Company’s credit risk and customers, the Company’s results are susceptible to significant fluctuation from period-to-period, and we caution investors that past results may not be indicative of future performance.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
| 12. | New Accounting Pronouncements |
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 Fair Value Measurements and Disclosures (amends ASC Topic 820) which improves disclosures about fair value measurements. More specifically, ASU 2010-06 updates Topic 820-10 to require disclosure of transfers in and out of Levels 1 and 2 and the reason for the transfers. Additionally, it requires separate reporting of purchases, sales, issuances and settlements for Level 3. This update is effective for periods beginning after December 15, 2009. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.
In April 2010, the FASB issued an amendment to the current revenue recognition guidance which provides additional guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. The amendment is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If an entity elects early adoption and the period of adoption is not the beg inning of the entity’s fiscal year, the entity must apply the amendments retrospectively from the beginning of the year of adoption. Entities may also elect to adopt this amendment retrospectively for all prior periods. The Company does not expect the adoption of this amendment to have a material impact on the Company’s financial position or results of operations.
The Company evaluated all events or transactions that occurred after the balance sheet date through the date when the Company issued these financial statements. During this period the Company did not have any material recognizable subsequent events.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain statements that are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. For example, we may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market our products; the market may not accept our existing and future products; we may not be able to retain our customers; we may be unable to retain existing key management personnel; and there may be other material adverse changes in our operations or business. Certain imp ortant factors affecting the forward-looking statements made herein also include, but are not limited to (i) continued downward pricing pressures in our targeted markets, (ii) the continued acquisition of our customers by certain of our competitors, and (iii) continued periods of net losses, which could require us to find additional sources of financing to fund operations, implement our financial and business strategies, meet anticipated capital expenditures and fund research and development costs. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our financial position and results of operations. For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof. We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law. For further information you are encouraged to review our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 and the risk factors discussed therein under Part I. Item 1A and the risk factors discussed under Part II. Item 1A of this Quarterly Report on Form 10-Q.
Overview
We develop advanced polymer materials which provide critical characteristics in the design and development of medical devices. Our biomaterials are used in devices that are designed for treating a broad range of anatomical sites and disease states. Our business model leverages our proprietary materials science technology and manufacturing expertise in order to expand our product sales and royalty and license fee income.
Our leading edge technology, notably products such as ChronoFlex®, HydroMed™, and HydroThane™, has been developed to overcome a wide range of design and functional challenges, from the need for dimensional stability, ease of manufacturability and demanding physical properties to overcoming environmental stress cracking and providing heightened lubricity for ease of insertion. Our polymer product lines are compliant with measures applying to the processing of certain animal waste to protect against transmissible spongiform encephalopathies as set forth in European Council Decision 1999/534/EC. Our new product extensions allow us to customize our proprietary polymers for specific customer applications in a wide range of device categories.
We also have an antimicrobial extension line that complements the ChronoFlex® and HydroMed™ product families. Through proprietary manufacturing techniques, we have produced materials which allow for full homogenous dispersion throughout the polymer, thus resulting in long lasting and consistent activity and the prevention of leaching. The end result is a technologically advanced antimicrobial material which reduces the potential for foreign body patient infections and is less susceptible to bacterial growth and bio-film formations.
In January 2007, we began clinical trials in Europe for our CardioPass™ synthetic coronary artery bypass graft (“SynCAB”). We developed our 4mm and 5mm SynCAB grafts, which were used in connection with the clinical trials, using specialized ChronoFlex polyurethane materials designed to provide improved performance in the treatment of arterial disorders.
During the fourth quarter of fiscal 2009 we concluded the clinical trials which we believe demonstrated clinical success. However, our clinical investigators noted full patient enrollment in these clinical trials was very slow due to limitations resulting from the large size of the 4mm and 5mm SynCAB grafts. Our clinical investigators advised us there is a greater clinical need for SynCAB grafts having an inner bore diameter of 2mm, 2-1/2mm and 3mm. In response to these observations, we evaluated the feasibility of developing a SynCAB graft having smaller inner bore diameters as recommended. Based upon our evaluation, we determined further development would not be feasible, accordingly, the Company suspended any further clinical trials or development of the SynCAB graft in the fourth quarter of fiscal 2010.
History
We were founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”). In June 1996, PMI distributed all of the shares of CardioTech International, Inc.’s (“CardioTech”) common stock, par value $0.01 per share, which PMI owned, to PMI stockholders of record. Our materials science technology is principally based upon the ChronoFlexTM proprietary polymers which represent our core technology.
In July 1999, we acquired the assets of Tyndale-Plains-Hunter (“TPH”), a manufacturer of specialty hydrophilic polyurethanes.
In July 1999, Dermaphylyx International, Inc. (“Dermaphylyx”) was formed by certain of our affiliates to develop advanced wound healing products. Dermaphylyx was merged with and into us, effective March 2004, as a wholly-owned subsidiary. In June 2006, our Board of Directors decided to cease the operations of Dermaphylyx. We considered the net assets of Dermaphylyx to be immaterial.
In April 2001, we acquired Catheter and Disposables Technology, Inc. (“CDT”). CDT, which was located in Minnesota, was an original equipment manufacturer and supplier of private-label advanced disposable medical devices from concept to finished packaged and sterilized products, providing engineering services and contract manufacturing. In the development of our business model, we reviewed the strategic fit of our various business operations and determined that CDT did not fit our strategic direction. CDT was sold in March 2008.
In April 2003, we acquired Gish Biomedical, Inc. (“Gish”). Gish was located in southern California and manufactured single use cardiopulmonary bypass products having a disposable component. In the development of our business model, we reviewed the strategic fit of our various business operations and determined that Gish did not fit our strategic direction. Gish was sold in July 2007.
In March 2004, we joined with Implant Sciences Corporation (“Implant”) to participate in the funding of CorNova. CorNova was initially formed to develop a novel coronary drug eluting stent using the combined capabilities and technology of CorNova, Implant Sciences and CardioTech. We currently have an 8.9% equity interest in the issued and outstanding common stock of CorNova, based on the assumed conversion of all outstanding CorNova preferred stock into common stock. Although CorNova is expected to incur future operating losses, we have no obligation to fund CorNova.
At our 2007 Annual Meeting, our stockholders approved our reincorporation from Massachusetts to Delaware. Our Articles of Charter Surrender in Massachusetts and Certificate of Incorporation and Certificate of Conversion in Delaware were effective as of October 26, 2007.
In June 2008, we reorganized our product line as part of our re-branding effort and launched a new website at www.advbiomaterials.com. The information available on or through our website is not a part of this report on Form 10-K. At our 2008 annual meeting of stockholders on October 15, 2008, our stockholders approved the change of our name from CardioTech International, Inc. to AdvanSource Biomaterials Corporation to better reflect our strategic plan. Our Certificate of Amendment to our Certificate of Incorporation filed with the Secretary of State of the State of Delaware effecting this name change was effective October 15, 2008.
Sale of Gish and CDT
On July 6, 2007, we completed the sale of Gish Biomedical, Inc. (“Gish”), our former wholly-owned subsidiary that developed and manufactured single use cardiopulmonary bypass products, pursuant to a stock purchase agreement (the “Gish Purchase Agreement”) entered into with Medos Medizintechnik AG, a German corporation (“Medos”), on July 3, 2007. The Gish Purchase Agreement provided for the sale of Gish to Medos for a purchase price of approximately $7.5 million in cash. After transaction expenses and certain post-closing adjustments, we realized approximately $6.1 million in proceeds from the sale of Gish.
Pursuant to the terms of the Gish Purchase Agreement, $1.0 million of the purchase price was placed in escrow as a reserve for any indemnity claims by Medos under the Gish Purchase Agreement. Under the terms of the escrow agreement, our right to receive the escrow funds was contingent upon the realization of the Gish accounts receivable and inventory that were transferred to Medos for one year from the sale date. The $1.0 million of proceeds paid into escrow was not included in the calculation of the original loss on sale of Gish of $1.2 million.
On June 30, 2008, Medos notified us of its claims in accordance with the procedure set forth in the Gish Purchase Agreement. On August 6, 2009, we entered into a Settlement Agreement and Mutual Release (the “Settlement”) with Medos whereby Medos agreed to repay to us approximately $580,000 of the escrow funds previously released to Medos in full and final settlement of the claims. In addition, the Company’s obligation with respect of a $149,000 post-closing adjustment was eliminated. The parties also agreed to dismiss a previously filed demand for arbitration.
The terms of the settlement payment provided for Medos to (i) remit a cash payment of approximately $87,000 upon the execution of the Settlement and (ii) issue a promissory note to us in the approximate amount of $493,000, maturing on February 1, 2010 with equal monthly principal payments of approximately $70,000 plus accrued interest at the rate of 3.25% per annum. As of December 31, 2009, the principal balance remaining on the note receivable was approximately $353,000. Both the payment upon execution of the Settlement and repayment of the promissory note were satisfied in full by Medos during the fiscal year ended March 31, 2010.
On March 28, 2008, we completed the sale of Catheter and Disposables Technology, Inc. (“CDT”), our former wholly-owned subsidiary engaged in contract manufacturing and the provision of engineering services, pursuant to a stock purchase agreement (the “CDT Purchase Agreement”) entered into with TACPRO, Inc. (“Tacpro”) on March 28, 2008. The CDT Purchase Agreement provided for the sale of CDT to Tacpro for a purchase price of approximately $1.2 million in cash. The CDT Purchase Agreement also contained representations, warranties and indemnities that are customary in a transaction involving the sale of all or substantially all of a company or its assets. The indemnifications include items such as compliance with legal and regulatory requirements, product liability, law suits, environmental matters, product recalls, realization of accounts receivable and inventories at specified time periods, and tax audits. Pursuant to the terms of the CDT Purchase Agreement, we placed $240,000 in escrow as a reserve for our indemnification obligations to Tacpro, if any, as described above. The $240,000 of proceeds held in escrow as of March 31, 2009 was not included in the calculation of the loss on sale of CDT of $690,000 recognized during the year ended March 31, 2008.
After transaction expenses, which included a non-cash expense of $76,000 related to warrants issued in connection with an investment bank that advised us, and certain post-closing adjustments, we realized approximately $696,000 in cash proceeds from the sale of CDT.
In March 2009, Tacpro presented certain additional post-closing claims in the approximate amount of $17,000 related to uncollectible accounts receivable and unused inventory to which we were in agreement. Net of the post-closing claims, the remaining $224,000 of cash in the escrow account was released to us in April 2009 and the escrow account was closed. Upon receipt of the escrow cash, we paid approximately $11,000 in additional transaction costs to a former employee. The escrow amount, net of post-closing claims and additional transaction costs is reported as an additional gain of $213,000 on the sale of CDT during the three months ended June 30, 2009.
Technology and Intellectual Property
Our unique materials science strengths are embodied in our family of proprietary polymers. We manufacture and sell our custom polymers under the trade names ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, ChronoSil, HydroThane, and PolyBlend. The ChronoFlex family of polymers has the potential to be marketed beyond our existing customer base. Our goal is to fulfill the market’s need for advanced materials science capabilities, thereby enabling customers to improve devices that utilize polymers. Our chemists continue to develop the ChronoFlex family of medical-grade polymers. Conventional polymers are susceptible to degradation resulting in catastrophic failure of long-term implantable devices such as pacemaker leads. ChronoFlex and ChronoThane polymers are desig ned to overcome such degradation and reduce the incidents of infections associated with invasive devices.
Key characteristics of our polymers are i) optional use as lubricious coatings for smooth insertion of a device into the body, ii) antimicrobial properties that are part of the polymer itself, and iii) mechanical properties, such as hardness and elasticity sufficient to meet engineering requirements. We believe our technology has wide application in increasing biocompatibility, drug delivery, infection control and expanding the utility of complex devices in the hospital and clinical environment.
We also manufacture and sell our proprietary HydroThane polymers to medical device manufacturers that are evaluating HydroThane for use in their products. HydroThane is a thermoplastic, water-absorbing, polyurethane elastomer possessing properties which we believe make it well suited for the complex requirements of a variety of catheters. In addition to its physical properties, we believe HydroThane exhibits an inherent degree of bacterial resistance, clot resistance and biocompatibility. When hydrated, HydroThane has elastic properties similar to living tissue.
We also manufacture specialty hydrophilic polyurethanes that are primarily sold to customers as part of exclusive arrangements. Specifically, one customer is supplied tailored, patented hydrophilic polyurethanes in exchange for a multi-year, royalty-bearing exclusive supply contract which generates royalty income for the Company.
ChronoFilm is a registered trademark of PMI. ChronoFlex is our registered trademark. ChronoThane, ChronoPrene, ChronoSil, HydroThane, and PolyBlend are our tradenames. CardioPass is our trademark.
We own or license four patents relating to our vascular graft manufacturing and polymer technology and products. While we believe our patents secure our exclusivity with respect to certain of our technologies, there can be no assurance that any patents issued would not afford us adequate protection against competitors which sell similar inventions or devices, nor can there be any assurance that our patents will not be infringed upon or designed around by others. However, we intend to vigorously enforce all patents issued to us.
In June 2007, we filed for a U.S. patent on our proprietary antimicrobial formulation for ChronoFlex. Current technology in the marketplace uses antibiotic drugs. The antimicrobial component of our polymers has been designed to be non-leaching as a result of the polymerization process.
In October 2009, we filed for a U.S. patent on ChronoSil, our silicone-urethane copolymer product, and methods for making ChronoSil. ChronoSil can have many physical properties which are usually associated with polyurethanes, but also the feel and characteristics of silicones.
In addition, PMI has granted us an exclusive, perpetual, worldwide, royalty-free license for the use of one polyurethane patent and related technology in the field consisting of the development, manufacture and sale of implantable medical devices and biodurable polymer material to third parties for the use in medical applications (the “Implantable Device and Materials Field”). PMI also owns, jointly with Thermedics, Inc., an unrelated company that manufactures medical grade polyurethane, the ChronoFlex polyurethane patents relating to the ChronoFlex technology. PMI has granted us a non-exclusive, perpetual, worldwide, royalty-free sublicense of these patents for use in the Implantable Devices and Materials Field.
Critical Accounting Policies
Our critical accounting policies are summarized in Note A to our financial statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2010. However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our financial statements. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly f rom the estimates contained in our financial statements. There has been no change to our critical accounting policies during the fiscal quarter ended December 31, 2010.
Results of Operations
Three Months Ended December 31, 2010 vs. December 31, 2009
Revenues
Total revenues for the three months ended December 31, 2010 were $427,000 as compared with $668,000 for the comparable prior year period, a decrease of $241,000, or 36.1%.
Product sales of our biomaterials for the three months ended December 31, 2010 were $264,000 as compared with $455,000 for the comparable prior year period, a decrease of $191,000, or 42.0%. Product sales decreased primarily due to decreased product demand by two major customers. Management believes these two significant customers will begin ordering at increased levels during the remainder of fiscal 2011.
License, royalty and development fees for the three months ended December 31, 2010 were $163,000 as compared with $213,000 for the comparable prior year period, a decrease of $50,000 or 23.5%. We have agreements to license our proprietary biomaterial technology to medical device manufacturers and develop biomaterials for incorporation into medical devices under development by our customers. Royalties are earned when these manufacturers sell medical devices which use our biomaterials. The decrease in license, royalty and development fees during the three months ended December 31, 2010 is primarily a result of a reduction in the royalty rate pursuant to an amended agreement with a major customer from whom we derived a majority of our license, royalty and development fee revenue. This decrease was offset by (i) annual usage fees from supply agreements entered into with two new customers, and (ii) the recognition of $75,000 upon achieving the final milestone pursuant to a development agreement entered into in June 2009.
Gross Profit
Gross profit on total revenues for the three months ended December 31, 2010 was $79,000, or 18.5% of total revenues, compared with $291,000, or 43.6% of total revenues, for the comparable prior year period. The decrease in gross profit dollars and gross profit as a percentage of total revenues is primarily due to (i) the decrease in license, royalty and development fees, and (ii) lack of absorption of fixed overhead costs incurred in the production of polymer products due to the decrease in product sales.
Gross profit on product sales for the three months ended December 31, 2010 was a loss of ($84,000), or (31.8%) of product sales, compared with a gross profit of $78,000, or 17.1% of product sales, for the comparable prior year period. The decrease in gross profit dollars and gross profit as a percentage of product sales is primarily due to (i) the decrease in product sales, and (ii) the increase in overhead costs incurred in the production of polymer products.
Research, Development and Regulatory Expenses
Research and development expenses for the three months ended December 31, 2010 were $215,000 as compared with $158,000 for the comparable prior year period, an increase of $57,000 or 36.1%. Our research and development efforts are focused on developing new applications for our biomaterials. Research and development expenditures consisted primarily of the salaries of full time employees and related expenses, and are expensed as incurred. The increase in research and development costs is primarily a result of increased outside laboratory testing services which was required to evaluate a specific raw material that is expected to be used in connection with the manufacture of our finished polymer products. We believe testing of these materials was substantially complete as of December 31, 2010 an d believe our research and development expenditures will return levels consistent with recent quarters.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended December 31, 2010 were $667,000 as compared with $676,000 for the comparable prior year period, a decrease of $9,000 or 1.3%. The decrease is primarily due to the elimination of two administrative positions and continued cost containment efforts.
Other Income (Expense), Net
Other income (expense), net for the three months ended December 31, 2010 was $0 as compared to $1,000 for the comparable prior year period.
Nine Months Ended December 31, 2010 vs. December 31, 2009
Revenues
Total revenues for the nine months ended December 31, 2010 were $1,421,000 as compared with $1,636,000 for the comparable prior year period, a decrease of $215,000, or 13.1%.
Product sales of our biomaterials for the nine months ended December 31, 2010 were $1,027,000 as compared with $1,010,000 for the comparable prior year period, an increase of $17,000, or 1.7%. Product sales increased primarily due to increase in the demand for biomaterials from our existing customer base and expansion of our customer base through the addition of new customers. The increase in product sales was partially offset by the effect of the decreased demand for polymer products by two significant customers during the quarter ended December 31, 2010. Management believes these two significant customers will begin ordering at increased levels during the remainder of fiscal 2011.
License, royalty and development fees for the nine months ended December 31, 2010 were $394,000 as compared with $626,000 for the comparable prior year period, a decrease of $232,000 or 37.1%. We have agreements to license our proprietary biomaterial technology to medical device manufacturers and develop biomaterials for incorporation into medical devices under development by our customers. Royalties are earned when these manufacturers sell medical devices which use our biomaterials. The decrease in license, royalty and development fees during the nine months ended December 31, 2010 is primarily a result of a (i) reduction in the royalty rate pursuant to an amended agreement with a major customer from whom we derived a majority of our license, royalty and development fee revenue, and (ii) the terminati on of a licensing agreement with a second customer. This decrease was offset by (i) annual usage fees from supply agreements entered into with two new customers, and (ii) the recognition of $75,000 upon achieving the final milestone pursuant to a development agreement entered into in June 2009.
Gross Profit
Gross profit on total revenues for the nine months ended December 31, 2010 was $351,000, or 24.7% of total revenues, compared with $629,000, or 38.5% of total revenues, for the comparable prior year period. The decrease in gross profit dollars and gross profit as a percentage of total revenues is primarily due to (i) the decrease in license, royalty and development fees, and (ii) the lack of absorption of fixed overhead costs incurred in the production of polymer products due to the decrease in product sales.
Gross profit on product sales for the nine months ended December 31, 2010 was a loss of ($43,000), or (4.2%) of product sales, compared with a profit of $3,000, or less than 1.0% of product sales, for the comparable prior year period. The decrease in gross profit dollars and gross profit as a percentage of product sales is primarily due to (i) the decrease in product sales, and (ii) the increase in overhead costs incurred in the production of polymer products.
Research, Development and Regulatory Expenses
Research and development expenses for the nine months ended December 31, 2010 were $550,000 as compared with $499,000 for the comparable prior year period, an increase of $51,000 or 10.2%. Our research and development efforts are focused on developing new applications for our biomaterials. Research and development expenditures consisted primarily of the salaries of full time employees and related expenses, and are expensed as incurred. The increase in research and development costs is primarily a result of increased outside laboratory testing services which was required to evaluate a specific raw material that is expected to be used in connection with the manufacture of our finished polymer products. We believe testing of these materials was substantially complete as of December 31, 2010 and believe our research and development expenditures will return levels consistent with recent quarters.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended December 31, 2010 were $1,956,000 as compared with $2,072,000 for the comparable prior year period, a decrease of $116,000 or 5.6%. The decrease is primarily attributable to our cost containment measures which included continued reductions in outside consultants, legal and accounting costs, and elimination of two administrative positions. These decreases were offset by (i) increased costs in sales and marketing to continue to promote our products and acquire new customers, both domestically and internationally and (ii) engagement of a strategic consultant.
Other Income (Expense), Net
Other expense, net for the nine months ended December 31, 2009 was $30,000 and includes interest income earned on a note receivable of $5,000; offset by other expense of an infrequently occurring write-off of approximately $35,000. There was no other income or expense reported for the nine months ended December 31, 2010.
Net Income from Discontinued Operations – Sale of Subsidiary
Net income from discontinued operations – sale of subsidiary during the nine months ended December 31, 2009 was $942,000 and consists of (i) the settlement in April 2009 of the escrow account established in connection with our March 2008 sale of CDT and (ii) the settlement in August 2009 of our dispute with Medos in connection with our July 2007 sale of Gish.
Upon the settlement of the escrow account established in connection with the sale of CDT we realized a gain during the three months ended June 30, 2009 of approximately $213,000, net of post-closing adjustments and additional transaction costs.
Upon the settlement of the dispute with Medos, we realized a gain of $729,000 composed of $580,000 in the form of cash and a note receivable, and the elimination of a former post-closing obligation to Medos in the amount of $149,000.
Liquidity and Capital Resources
As of December 31, 2010, we had cash and cash equivalents of $1,360,000, a decrease of $1,695,000 when compared with a balance of $3,055,000 as of March 31, 2010.
During the nine months ended December 31, 2010, we had net cash outflows of $1,701,000 from operating activities as compared with net cash outflows of $1,257,000 for the comparable prior year period. The net cash outflows used in operating activities during the nine months ended December 31, 2010 is primarily a result of the net loss, increase in inventories and decrease in deferred revenues. These cash outflows were offset by cash received on accounts receivable and increases in accounts payable and accrued expenses. In addition, net cash outflows was offset by non-cash items related to depreciation and stock-based compensation expenses.
During the nine months ended December 31, 2010, we had net cash outflows of $2,000 from investing activities from continuing operations as compared to net cash outflows of $14,000 from investing activities from continuing operations for the comparable prior year period. The net cash outflows from investing activities from continuing operations is primarily a result of minor purchases of equipment.
During the nine months ended December 31, 2009, we had net cash inflows of $801,000 from investing activities from discontinued operations as a result of (i) the net cash of $213,000 realized upon the settlement of the escrow account established in connection with the March 2008 sale of CDT, and (ii) the settlement of the Medos dispute resulting in the receipt of $87,000 in cash and payments on the note receivable of $501,000.
During the nine months ended December 31, 2010 we had net cash inflows of $8,000 from financing activities in connection with the issuance of 33,852 shares of our common stock pursuant to our employee stock purchase plan. During the nine months ended December 31, 2009 we had net cash inflows of $10,000 from financing activities in connection with the issuance of 39,364 shares of our common stock pursuant to our employee stock purchase plan.
Our unaudited condensed financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. We have experienced negative operating margins and negative cash flows from operations and expects to continue to incur net losses in the foreseeable future. For the three and nine months ended December 31, 2010, we incurred a net loss of $803,000 and $2,155,000, and during the nine months ended December 31, 2010 used cash from operating activities of $1,701,000. For the year ended March 31, 2010, we incurred a net loss of $1,688,000 and used cash from operating activities of $1,613,000. We anticipate incurring losses at least through fiscal 2011 as we continue our attem pt to grow revenues, expand selling and marketing activities, expand into new sales territories, and expand research and development activities to promote new product introductions and enhancements to existing products. As of December 31, 2010, we had an accumulated deficit of $33,528,000 and cash and cash equivalents amounted to $1,360,000.
At December 31, 2010, we (i) continued to own our facility in Wilmington, Massachusetts, having a net book value of approximately $2,520,000 and unencumbered by mortgages or other obligations, and (ii) have no other corporate debt.
The ability to attract future capital investments will depend on many factors, including the availability of credit, rate of revenue growth, the expansion of selling and marketing and research and development activities, and the timing of new product introductions and enhancements to existing products. We believe that as of December 31, 2010 our cash position and the potential availability of funding through a transaction using the value of the Wilmington facility, or another financing transaction of debt or equity, will be sufficient to fund the our working capital and research and development activities for at least the next twelve months. Notwithstanding the aforementioned financing alternatives, there can be no assurance that a transaction using the value of the Wilmington facility will be consummated on terms acceptable to us, or at all. Additionally, any potential future sale of equity or debt securities may result in dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, or at all. On November 24, 2010, the NYSE Amex suspended trading in our common stock and filed Form 25 on December 6, 2010 notifying the Securities and Exchange Commission of their decision to delist us. On November 24, 2010, our common stock was quoted on the OTCQB tier of The OTC Markets under the ticker symbol “ASNB.” Although we are quoted on the OTCQB, the delisting of our common stock from the NYSE Amex could substantially limit our common stock’s liquidity and impair our ability to raise capital. If we are required to raise additional financing, but are unable to obtain such financing, we may be required to delay, reduce the scope of, or eliminate one or mor e aspects of our operations or business development activities. The uncertainties described above raise substantial doubt at December 31, 2010 about our ability to continue as a going concern without additional financing.
Off-Balance Sheet Arrangements
As of December 31, 2010, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Not required pursuant to Item 305(e) of Regulation S-K.
The certificates of the Company’s principal executive officer and principal financial and accounting officer attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning the Company’s disclosure controls and procedures, and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications.
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s chief executive officer and acting chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, con trols and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions to be made regarding required disclosure. It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of December 31, 2010, the Company’s chief executive officer and acting chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at t he reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes to the Company’s internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
We are not a party to any other legal proceedings, other than ordinary routine litigation incidental to our business, which we believe will not have a material affect on our financial position or results of operations.
Other than as stated below, there have not been any other material changes from the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2010.
We have received notification from the NYSE Amex that we are not in compliance with a listing standard for continued listing of our common stock. Our inability to regain compliance with the NYSE Amex’s continued listing standards could adversely affect our business and ability to raise capital.
On August 17, 2010, the NYSE Amex indicated we were not in compliance with one of the continued listing standards. Specifically, we were not in compliance with Section 1003(a)(iii) of the NYSE Amex Company Guide with stockholders’ equity of less than $6,000,000 and losses from continuing operations and net losses in its five most recent fiscal years.
On September 16, 2010, we submitted to the NYSE Amex our plan to regain compliance with the listing standard by February 17, 2012. On November 9, 2010, the NYSE Amex notified us that after its review of the plan the decision was made to initiate delisting procedures. On November 24, 2010, the NYSE Amex suspended trading in our common stock and filed Form 25 on December 6, 2010 notifying the Securities and Exchange Commission of their decision to delist us. On November 24, 2010, our common stock was quoted on the OTCQB tier of The OTC Markets under the ticker symbol “ASNB.” Although we are quoted on the OTCQB, the delisting of our common stock from the NYSE Amex could substantially limit our common stock’s liquidity and impair our ability to raise capital.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Defaults Upon Senior Securities |
None.
None.
Exhibit No.
| 31.1 | Certification of Principal Executive Officer pursuant to Section 3.02 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Principal Financial and Accounting Officer pursuant to Section 3.02 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AdvanSource Biomaterials Corporation
By: /s/ Michael F. Adams
Michael F. Adams
President & Chief Executive Officer
(Principal Executive Officer)
By: /s/ David Volpe
David Volpe
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: February 14, 2011
