Item 1.
Description of Business
Cautionary Note Regarding Forward Looking Statements
This Report on Form 10-K 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 Report on Form 10-K. 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 important 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. In addition, you should read and carefully consider the Risk Factors discussed in Part I, Item 1A
Item 1A.
Risk Factors
You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties occurs, our business, financial condition or operating results could be materially harmed. In that case the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we may face. We believe that this filing contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to regulatory risks and clinical uncertainties. Such statements are based on management’s current expectations and are subject to facts that could cause results to differ materially from the forward-looking statements. See Item 1. Description of Business - “Cautionary Note Regarding Forward Looking Statements.”
Risks Related to Liquidity
We have reported net losses in the last nine fiscal years and may continue to report net losses in the future. There can be no assurance that our revenue will be maintained at the current level or increase in the future.
Our future growth may depend on our ability to raise capital for acquisitions, to support research and development activities for modification of existing biomaterials and development of new biomaterials, including advanced applications for our biomaterials, and to market and sell our advanced biomaterials. Our capital requirements depend on numerous factors, including but not limited to, our results of operations; the progress of our research and development programs; the cost of filing, prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in our development of commercialization activities and arrangements; and the purchase of additional facilities and capital equipment.
Risks Related to Our Growth Strategy
If we cannot obtain the additional capital required to fund our operations on favorable terms or at all, we may have to delay or reconsider our growth strategy.
Our growth strategy may require additional capital for, among other purposes, completing acquisitions of companies and customers’ product lines and manufacturing assets, integrating acquired companies and assets, acquiring new equipment and maintaining the condition of existing equipment. If cash generated internally is insufficient to fund capital requirements, or if we desire to make additional acquisitions, we will require additional debt or equity financing. Adequate financing may not be available or, if available, may not be available on terms satisfactory to us. If we raise additional capital by issuing equity or convertible debt securities, the issuance may dilute the share ownership of the existing investors. In addition, we may grant future investors rights that are superior to those of our existing investors. If we fail to obtain sufficient additional capital in the future, we could be forced to curtail our growth strategy by reducing or delaying capital expenditures and acquisitions, selling assets or restructuring or refinancing our indebtedness, or delaying plans for clinical trials.
Adverse economic and geopolitical conditions could have a material adverse effect on our ability to raise capital to fund future growth and product development.
Our business may be affected by the ongoing volatility and illiquidity in the financial and credit markets, the general global economic recession, and other market or economic challenges experienced by the U.S. economy. If economic conditions persist or deteriorate and our licensing and product revenue is insufficient to support our product development and growth strategies, then reduced liquidity in the capital markets may impair our ability to access capital on terms and conditions that we find acceptable, or at all. In addition, the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits.
Risks Related to Our Business
We have incurred substantial operating losses and we may never be profitable.
Our revenues were $2,117,000 and $3,265,000 for the years ended March 31, 2010 and 2009, respectively. We had net losses of $1,688,000 and $2,517,000 for the years ended March 31, 2010 and 2009, respectively. There is a risk that we will never be profitable. Our ability to generate enough revenues to achieve profits will depend on a variety of factors, many of which are outside our control, including:
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size of market;
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competition and other solutions;
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extent of patent and intellectual property protection afforded to our products;
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demand for our advanced biomaterials by existing and potential developers of medical devices and both the time for development of devices by medical device developers and their success in obtaining regulatory approvals and commercialization of medical devices which incorporate our advanced biomaterials;
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cost and availability of raw material and intermediate component supplies;
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changes in governmental (including foreign governmental) initiatives and requirements;
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changes in domestic and foreign regulatory requirements;
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costs associated with equipment development, repair and maintenance; and
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our ability to manufacture and deliver products at prices that exceed our costs.
Our operating results fluctuate significantly from period-to-period and may not be indicative of future results.
Our operating results have fluctuated in the past from quarter to quarter and are likely to fluctuate significantly in the future due to a variety of factors, many of which are beyond our control, including:
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changing demand for our products and services;
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the timing of actual customer orders and requests for product shipment and the accuracy of our customers’ forecasts of future production requirements;
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the reduction, rescheduling or cancellation of product orders and development and design services requested by customers;
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difficulties in forecasting demand for our products and the planning and managing of inventory levels;
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the introduction and market acceptance of our customers’ new products and changes in demand for our customers’ existing products;
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changes in the relative portion of our revenue represented by our various products, services and customers, including the relative mix of our business across our target markets;
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changes in competitive or economic conditions generally or in our customers’ markets;
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competitive pressures on selling prices;
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the amount and timing of costs associated with product warranties and returns;
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changes in availability or costs of raw materials or supplies;
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fluctuations in manufacturing yields and yield losses and availability of production capacity;
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changes in our product distribution channels and the timeliness of receipt of distributor resale information;
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the amount and timing of investments in research and development;
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difficulties in integrating acquired assets and businesses into our operations;
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charges to earnings resulting from the application of the purchase method of accounting following acquisitions; and
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pressure on our selling prices as a result of healthcare industry cost containment measures.
As a result of these factors, many of which are difficult to control or predict, as well as the other risk factors discussed in this report, we may experience material adverse fluctuations in our future operating results on a quarterly or annual basis.
The medical device industry is cyclical, and an industry downturn could adversely affect our operating results.
Business conditions in the medical device industry have rapidly changed between periods of strong and weak demand. The industry is characterized by:
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periods of overcapacity and production shortages;
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cyclical demand for products;
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changes in product mix in response to changes in demand of products;
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variations in manufacturing costs and yields;
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rapid technological change and the introduction of new products by customers;
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price erosion; and
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expenditures for product development.
These factors could harm our business and cause our operating results to suffer.
The failure of our customers and potential customers, who utilize our advanced biomaterials in their medical devices, to complete development of their medical technology, obtain government approvals, including required FDA approvals, or to comply with ongoing governmental regulations could delay or limit introduction of their proposed products, thereby negatively impacting our ability to generate future revenues from product sales and royalty and development fees.
Research, development and production activities undertaken by our customers and potential customers engaged in the development of medical devices which utilize our advanced biomaterials, are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and abroad.
Before receiving FDA approval to market their medical devices utilizing our advanced biomaterials, our customers and potential customers will have to demonstrate that their medical devices are safe and effective on the patient population. Clinical trials, manufacturing and marketing of medical devices are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statutes and regulations govern and influence the testing, manufacture, labeling, advertising, distribution and promotion of drugs and medical devices. As a result, clinical trials and regulatory approval of medical devices can take a number of years or longer to accomplish and require the expenditure of substantial financial, managerial and other resources.
In order to be commercially viable, our customers and potential customers must successfully research, develop, obtain regulatory approval, manufacture, market and distribute their medical devices. For each medical device incorporating our advanced biomaterials, our customers and potential customers must successfully meet a number of critical developmental milestones, including:
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demonstrate benefit from the use of their medical devices in various contexts;
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demonstrate through pre-clinical and clinical trials that their medical devices are safe and effective; and
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establish a viable Good Manufacturing Process capable of potential scale up.
The time frame necessary to achieve these developmental milestones may be long and uncertain, and our customers and potential customers may not successfully complete these milestones for any of their intended products in development.
In order to conduct clinical trials that are necessary to obtain approval by the FDA to market a product, it is necessary to receive clearance from the FDA to conduct such clinical trials. The FDA can halt clinical trials at any time for safety reasons or because clinical investigators do not follow the FDA’s requirements for conducting clinical trials. If our customers or potential customers are unable to receive clearance to conduct clinical trials or the trials are halted by the FDA, we would not be able to achieve any revenue from the sale of biomaterials or royalty and development fees from our customers’ or potential customers’ products as it is illegal to sell any medical device for human consumption without FDA approval.
More generally, the manufacture and sale of medical devices, including products currently sold by our customers or potential customers and their other potential products, are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state agencies, such as the CDHS. In order for them to market their products for clinical use in the United States, they must obtain clearance from the FDA of a 510(k) pre-market notification or PMA application. In addition, certain material changes to medical devices also are subject to FDA review and clearance or approval. The process of obtaining FDA and other required regulatory clearances and approvals is lengthy, expensive and uncertain, frequently requiring from one to several years from the date of FDA submission if pre-market clearance or approval is obtained at all. Securing FDA clearances and approvals may require the submission of extensive clinical data and supporting information to the FDA.
Sales of medical devices outside of the United States are subject to international regulatory requirements that vary from country to country. The time required to obtain approval for sales internationally may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. There can be no assurance that our customers or potential customers will be able to obtain approval in a particular country for any of their future products.
Regulatory clearances or approvals, if granted, may include significant limitations on the indicated uses for which the product may be marketed. In addition, to obtain such clearances or approvals, the FDA and certain foreign regulatory authorities impose numerous other requirements with which medical device manufacturers must comply.
FDA enforcement policy strictly prohibits the marketing of cleared or approved medical devices for uncleared or unapproved uses. In addition, product clearances or approvals could be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing. Our customers and potential customers will be required to adhere to applicable FDA GMP regulations and similar regulations in other countries, which include testing, control, and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirements, including marketing products for unapproved uses, could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of clearances or approvals and criminal prosecution. Changes in existing regulations or adoption of new governmental regulations or policies could prevent or delay regulatory approval of their products.
There can be no assurance that our customers or potential customers will be able to obtain FDA 510(k) clearance or PMA for their products under development or other necessary regulatory approvals or clearances on a timely basis or at all. Delays in receipt of or failure to receive U.S. or foreign clearances or approvals, the loss of previously obtained clearance or approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business with respect of our ability to generate revenues from product sales to and royalty and development fees from our customers and potential customers utilizing our advanced biomaterials in their medical devices.
Our markets are subject to technological change and our success depends on our ability to modify existing advanced biomaterials and develop and introduce new advanced biomaterials for use by customers and potential customers in their medical devices.
The medical device market for our products is characterized by:
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changing technologies;
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changing customer needs;
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frequent new product introductions and enhancements;
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increased integration with other functions; and
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product obsolescence.
Our success is dependent in part on the modification of existing advanced biomaterials and the design and development of new advanced biomaterials for use in the medical device industry. To modify existing advanced biomaterials and develop new advanced biomaterials and designs for the medical device market, we must develop, gain access to and use leading technologies in a cost effective and timely manner and continue to expand our technical and design expertise. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Our failure to modify existing advanced biomaterials, develop new advanced biomaterials, or successfully market existing and potential new advanced biomaterials; and the failure of our customers and potential customers in obtaining necessary regulatory clearances or approvals for medical devices using our advanced biomaterials, could have a material adverse effect on our business, financial condition and results of operations.
We depend on outside suppliers and subcontractors, and our production and reputation could be harmed if they are unable to meet our volume and quality requirements and alternative sources are not available.
We have various “sole source” suppliers who supply key components for our products. Our outside suppliers may fail to develop and supply us with products and components on a timely basis, or may supply us with products and components that do not meet our quality, quantity or cost requirements. If any of these problems occur, we may be unable to obtain substitute sources of these products and components on a timely basis or on terms acceptable to us, which could harm our ability to: i) manufacture our own products and components profitably or on time, and ii) ship products to customers on time and generate revenues. In addition, if the processes that our suppliers use to manufacture products and components are proprietary, we may be unable to obtain comparable components from alternative suppliers.
During fiscal 2010, our sole supplier of a polymer component used in the manufacture of certain advanced polymers discontinued the sale of the polymer component. We have identified two (2) additional sources for this polymer component which we believe could be used as an alternative. We are currently performing qualification analysis so that the polymer component from the new sources could be substituted in our production process for advances polymers. We believe we have adequate supply of the original polymer component to meet production requirements during fiscal 2011 and have also begun using the alternative polymer component in our production. Although we believe the alternative polymer component will be suitable for our customer needs, there can be no assurance that our customers will accept the substitution of the alternative polymer component in certain of our advanced polymers.
During the year ended March 31, 2010, two (2) vendors represented $100,000 and $80,000, or 42% and 34%, respectively, of material purchases used in the production process. During the year ended March 31, 2009, two (2) vendors represented $63,000 and $24,000, or 47% and 18%, respectively, of material purchases used in the production process.
A significant portion of our royalty and development fee sales comes from one large customer, and any loss, cancellation or delay in sales to this customer could harm our operating results.
A limited number of customers have, historically, accounted for a significant portion of our revenues. For the fiscal year ended March 31, 2010, two customers represented 45% and 30% of revenues, respectively. For the fiscal year ended March 31, 2009, one customer represented 81% of our revenue. Although we are working to expand our customer base, the medical device industry is concentrated, with relatively few companies accounting for a large percentage of sales in the surgical, interventional and cardiovascular markets that are targeted by our disposable medical device and contract manufacturing operations. Accordingly, our revenue and profitability are dependent on our relationships with a limited number of large medical device companies, and we expect that the majority of our revenues will continue to depend on sales of our products to a limited number of customers for the foreseeable future, particularly if there is further consolidation within the medical device industry. We cannot assure you that there will not be a loss or reduction in business from our existing significant customers. In addition, we cannot assure you that revenues from our customers that have accounted for significant revenues in the past, either individually or as a group, will reach or exceed historical levels in any future period. We may not be able to offset any decline in revenues from our existing major customers with revenues from new customers or other existing customers. Because of our reliance on a limited number of customers, any decrease in revenues from, or loss of, one or more of these customers without a corresponding increase in revenues from other customers would harm our business, operating results and financial condition. In addition, any negative developments in the business of our existing significant customers could result in significantly decreased sales to this customer, which could seriously harm our business, operating results and financial condition.
Our ability to grow and sustain growth levels may be adversely affected by slowdowns in the U.S. economy.
Due to the recent decrease in corporate profits, capital spending and consumer confidence, we have experienced weakness in certain of our end markets. We are primarily susceptible when customers stop placing orders for us to supply advanced biomaterials or when customers experience reduced sales of their medical devices for which we receive royalties on product sales. The medical commercial markets, including bio-medical research and development and medical device manufacturing, could be affected by the past and present slowdown in the U.S. economy. If the economic slowdown persists and capital spending for research and development from our customers decreases, our business, financial condition and results of operations may be adversely affected.
We could be harmed by litigation involving patents and other intellectual property rights.
None of our patents or other intellectual property rights has been successfully challenged to date. However, in the future, we could be accused of infringing the intellectual property rights of other third parties. We also have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our products. No assurance can be provided that any future infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted or that assertions of infringement, if proven to be true, will not harm our business.
In the event of any adverse ruling in any intellectual property litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations by us.
Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, is costly and may divert the efforts and attention of our management and technical personnel.
We may not be able to protect our intellectual property rights adequately.
Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is substantially similar or superior to our technology. More specifically, we cannot assure you that any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties. Nor can we assure you that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design their products around any patents that may be issued to us.
Our future success depends on the continued service of management, engineering and sales personnel and our ability to identify, hire and retain additional personnel.
Our success depends, to a significant extent, upon the efforts and abilities of members of senior management. The loss of the services of one or more of our senior management or other key employees could adversely affect our business. We do not maintain key person life insurance on any of our officers, employees or consultants.
There is intense competition for qualified employees in the medical industry, particularly for highly skilled design, applications, engineering and sales people. We may not be able to continue to attract and retain technologists, managers, or other qualified personnel necessary for the development of our business or to replace qualified individuals who could leave us at any time in the future. Our anticipated growth is expected to place increased demands on our resources, and will likely require the addition of new management and engineering staff as well as the development of additional expertise by existing management employees. If we lose the services of or fail to recruit engineers or other technical and management personnel, our business could be harmed.
Periods of rapid growth and expansion could place a significant strain on our resources, including our employee base.
To manage our possible future growth effectively, we will be required to continue to improve our operational, financial and management systems. In doing so, we will periodically implement new software and other systems that will affect our internal operations regionally or globally.
Future growth will also require us to successfully hire, train, motivate and manage our employees. In addition, our continued growth and the evolution of our business plan will require significant additional management, technical and administrative resources. We may not be able to effectively manage the growth and evolution of our current business.
We are exposed to product liability and clinical and pre-clinical liability risks which could place a substantial financial burden on us, if we are sued. Although we have 5 million dollars in product liability insurance coverage, that amount may not be sufficient to cover all potential claims made against us. Additionally, we face the risk of financial exposure to product liability claims alleging that the use of devices that incorporate our products resulted in adverse effects.
While we are not aware of any claim at this time, our business exposes us to potential product liability, recalls and other liability risks that are inherent in the testing, manufacturing and marketing of medical products. We cannot assure you that such potential claims will not be asserted against us. In addition, the use in our clinical trials of medical products that our potential collaborators may develop and the subsequent sale of these products by us or our potential collaborators may cause us to bear a portion of or all product liability risks. A successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.
We cannot assure you that we will be able to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against our potential liabilities. Furthermore, our current and potential partners with whom we have collaborative agreements or our future licensees may not be willing to indemnify us against these types of liabilities and may not themselves be sufficiently insured or have a net worth sufficient to satisfy any product liability claims. Claims or losses in excess of any product liability insurance coverage that may be obtained by us could have a material adverse effect on our business, financial condition and results of operations. We do not currently carry recall insurance and we may be subject to significant recall costs in the event of a recall.
We may be affected by environmental laws and regulations.
We are subject to a variety of laws, rules and regulations in the United States related to the use, storage, handling, discharge and disposal of certain chemical materials such as isocyanates, alcohols, dimethylacetamide, and glycols used in our research and manufacturing process. Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them. If we incur substantial additional expenses, product costs could significantly increase. Our failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations.
If we fail to implement new or improved internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to comply with the requirements of Section 404 in a timely manner. This could result in investors losing confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K. This report is required to contain an assessment by management of the effectiveness of such company’s internal controls over financial reporting. In addition, the public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. While we are expending significant resources in developing the necessary documentation and testing procedures required by Section 404 and our management has concluded that our internal control over financial reporting was effective as of March 31, 2010, there is a risk that as we continue to implement our internal controls that we may identify previously unknown deficiencies or weaknesses in our internal controls. If we fail to implement required new or improved controls, we may be unable to comply with the requirements of Section 404 in a timely manner. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations.
Under current rules, we are required to report on the effectiveness of our internal controls for the year ended March 31, 2010. In the fiscal year ending March 31, 2011, our independent registered public accounting firm will be required to report on the effectiveness of our internal controls.
Risks Related to Competition
The medical device industry, in general, is intensely competitive and characterized by rapid innovation and technological advances. Product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the medical device industry. We expect the current high levels of competition and technological change in the medical device industry in general. Most of our competitors have longer operating histories and significantly greater financial, technical, research, marketing, sales, distribution and other resources. In addition, our competitors may have greater name recognition than us and frequently offer discounts as a competitive tactic. There can be no assurance that our current competitors or potential future competitors will not succeed in developing or marketing technologies and products that are more effective or commercially attractive than those that have been and are being developed by us or that would render our technologies and products obsolete or noncompetitive, or that such companies will not succeed in obtaining regulatory approval for, introducing or commercializing any such products prior to us. Any of the above competitive developments could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Pricing Pressure
We face aggressive cost-containment pressures from governmental agencies and third party payors. There can be no assurances that we will be able to maintain current prices in the face of continuing pricing pressures. Over time, the average price for our products may decline as the markets for these products become more competitive. Any material reduction in product prices could negatively affect our gross margin, necessitating a corresponding increase in unit sales to maintain net sales.
Risks Related to Our Securities
Our stock price is volatile.
The market price of our common stock has fluctuated significantly to date. In the past fiscal year, our stock price ranged from $0.13 to $0.51. The future market price of our common stock may also fluctuate significantly due to:
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variations in our actual or expected quarterly operating results;
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announcements or introductions of new products;
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technological innovations by our competitors or development setbacks by us;
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the commencement or adverse outcome of litigation;
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changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers;
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announcements of acquisition or acquisition transactions; or
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general economic and market conditions.
In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many medical and biotechnology companies. These fluctuations have often been unrelated or disproportionate to the operating performance of companies in our industry, and could harm the market price of our common stock.
Additional authorized shares of our common stock and preferred stock available for issuance may adversely affect the market.
We are authorized to issue 50,000,000 shares of our common stock. As of March 31, 2010, there were 21,278,386 shares of common stock issued and 21,201,694 shares of common stock outstanding. As of March 31, 2010, there were 76,692 shares of treasury stock acquired through open market purchases during the fiscal year ended March 31, 2009. The total number of shares of our common stock issued and outstanding does not include shares reserved in anticipation of the exercise of options and warrants. As of March 31, 2010, we had outstanding stock options and warrants to purchase approximately 2,628,860 shares of our common stock, the exercise price of which range between $0.16 per share to $5.40 per share, and we have reserved shares of our common stock for issuance in connection with the potential exercise thereof. To the extent such options, warrants or additional investment rights are exercised; the holders of our common stock will experience further dilution. Stockholders will also experience dilution upon the exercise of options granted under our stock option plans. In addition, in the event that any future financing or consideration for a future acquisition should be in the form of, be convertible into or exchangeable for, equity securities investors will experience additional dilution.
The exercise of the outstanding derivative securities will reduce the percentage of common stock held by our current stockholders. Further, the terms on which we could obtain additional capital during the life of the derivative securities may be adversely affected, and it should be expected that the holders of the derivative securities would exercise them at a time when we would be able to obtain equity capital on terms more favorable than those provided for by such derivative securities. As a result, any issuance of additional shares of common stock may cause our current stockholders to suffer significant dilution which may adversely affect the market. In addition to the above referenced shares of common stock which may be issued without stockholder approval, we have 5,000,000 shares of authorized preferred stock, the terms of which may be fixed by our Board, of which 500,000 preferred shares were previously issued, but none are currently outstanding. While we have no present plans to issue any additional shares of preferred stock, our Board has the authority, without stockholder approval, to create and issue one or more series of such preferred stock and to determine the voting, dividend and other rights of holders of such preferred stock. The issuance of any of such series of preferred stock may have an adverse effect on the holders of common stock.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one year holding period may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by our stockholders that are non-affiliates that have satisfied a two year holding period. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have material adverse effect on the market price of our securities.
There is a limitation on director and officer liability.
As permitted by Delaware law, our Restated Articles of Organization limit the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our charter provision and Delaware law, stockholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our bylaws provide that we shall indemnify our directors, officers, employees and agents if such persons acted in good faith and reasoned that their conduct was in our best interest.
The anti-takeover provisions of our Restated Articles of Organization, the Delaware General Corporation Law and our Stockholder Rights Plan may delay, defer or prevent a change of control.
Our board of directors has the authority to issue up to 4,500,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control because the terms of any issued preferred stock could potentially prohibit our consummation of any acquisition, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction, without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.
Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action. In addition, our bylaws and Delaware law provide for staggered board members with each member elected for three years. In addition, directors may be removed by stockholders only for cause and by a vote of 80% of the stock.
In addition, we have adopted a stockholder rights plan that may discourage any potential acquirer from acquiring more than 15% of our outstanding common stock since, upon this type of acquisition without approval of our board of directors, all other common stockholders will have the right to purchase a specified amount of common stock at a substantial discount from market price.
Risk of Market Withdrawal or Product Recall
There can be no assurance that we will be able to successfully take corrective actions if required, nor can there be any assurance that any such corrective actions will not force us to incur significant costs. In addition, there can be no assurance any future recalls will not cause us to face increasing scrutiny from its customers, which could cause us to lose market share or incur substantial costs in order to maintain existing market share. We do not currently carry recall insurance and we may be subject to significant recall costs in the event of a recall.
Risks Associated with Healthcare Reform Proposals
Political, economical and regulatory influences are subjecting the healthcare industry in the United States to fundamental change. Potential reforms proposed over the last several years have included mandated basic healthcare benefits, controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups and fundamental changes in the healthcare delivery system. In addition, some states in which we operate are also considering various healthcare reform proposals. We anticipate that federal and state governments will continue to review and assess alternative healthcare delivery systems and payment methodologies and public debate of these issues will likely continue in the future. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, we cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted or what impact they may have on us, and there can be no assurance that the adoption of reform proposals will not have a material adverse effect on our business, operating results or financial condition. In addition, the actual announcement of reform proposals and the investment community’s reaction to such proposals, as well as announcements by competitors and third-party payors of their strategies to respond to such initiatives, could produce volatility in the trading and market price of our common stock.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Description of Properties
Our corporate headquarters, polymer development and manufacturing operations, are located in an approximate 22,700 square foot building, which we own, is located at 229 Andover Street, Wilmington, MA, and was purchased for $1,750,000 in cash.
Item 3.
Item 3. Legal Proceedings
We are not a party to any 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.
Item 4.
Item 4. (Removed and Reserved)
PART II
Item 5.
Item 5. Market Information for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the NYSE Amex under the symbol “ASB.” The following table sets forth the high and low sales prices of the common stock for each of the last two fiscal years, as reported on the NYSE Amex.
As of June 1, 2010, there were approximately 368 stockholders of record. The last sale price as reported by the NYSE Amex on June 15, 2010, was $0.30. We have never paid a cash dividend on our common stock and do not anticipate the payment of cash dividends in the foreseeable future. We submitted an unqualified 2009 Corporate Governance Certification to the American NYSE Amex in connection with our fiscal year 2009.
Securities Authorized for Issuance under Equity Compensation Plans as of the End of Fiscal 2010 Equity Compensation Plan Information
_______________
(1)
This total includes shares to be issued upon exercise of outstanding options under the equity compensation plans that have been approved by our stockholders (i.e., the 2003 Plan). We did not have any equity compensation plans that were not approved by stockholders.
Recent Sales of Unregistered Securities
None.
Stock Repurchase Plan
In June 2001, the Board of Directors adopted a share repurchase program authorizing the repurchase by the Company of up to 250,000 of its shares of common stock. In June 2004, the Board of Directors authorized the purchase of an additional 500,000 shares of common stock. On December 17, 2008, in light of the current market conditions, the Board of Directors authorized the repurchase of up to $30,000 of common stock from the shares available for repurchase under the program. In January 2009, the Company repurchased 76,692 shares of its common stock at an approximate cost of $30,000. Since June 2001, a total of 251,379 shares have been repurchased by the Company under the share repurchase program, leaving 498,621 shares remaining to purchase under the share repurchase program. No repurchases were made during the year ended March 31, 2010. The share repurchase program authorizes repurchases from time to time in open market transactions, through privately negotiated transactions, block transactions or otherwise, at times and prices deemed appropriate by management, is not subject to an expiration date.
Stockholder Rights Plan
The Company’s board of directors approved the adoption of a stockholder rights plan (the “Rights Plan”) under which all stockholders of record as of February 8, 2008 will receive rights to purchase shares of a new series of preferred stock (the “Rights”). The Rights will be distributed as a dividend. Initially, the Rights will attach to, and trade with, the Company’s common stock. Subject to the terms, conditions and limitations of the Rights Plan, the Rights will become exercisable if (among other things) a person or group acquires 15% or more of the Company’s common stock. Upon such an event, and payment of the purchase price, each Right (except those held by the acquiring person or group) will entitle the holder to acquire shares of the Company’s common stock (or the economic equivalent thereof) having a value equal to twice the purchase price. The Company’s board of directors may redeem the Rights prior to the time they are triggered. In the event of an unsolicited attempt to acquire the Company, the Rights Plan is intended to facilitate the full realization of stockholder value in the Company and the fair and equal treatment of all Company stockholders. The Rights Plan will not prevent a takeover attempt. Rather, it is intended to guard against abusive takeover tactics and encourage anyone seeking to acquire the Company to negotiate with the board of directors. The Company did not adopt the Rights Plan in response to any particular proposal.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and do not expect to pay any dividends for the foreseeable future. We currently intend to retain any future earnings to fund the operation, development and expansion of our business. Any future determination to pay dividends will be at the sole discretion of our board of directors and will depend upon a number of factors, including our results of operations, capital requirements, financial condition, future prospects, contractual arrangements, restrictions imposed by applicable law, any limitations on payments of dividends present in our current and future debt arrangements, and other factors our board of directors may deem relevant.
Item 6.
Item 6.
Selected Consolidated Financial Data
Not Applicable.
Item 7.
Item 7.
Management’s Discussion and Analysis or Plan of Operation
Forward-Looking Statements
This Report on Form 10-K 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 Report on Form 10-K. 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 important 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. In addition, you should read and carefully consider the Risk Factors discussed in Part I, Item 1A of this Form 10-K. 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.
Overview
We develop advanced polymer biomaterials 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.
Fiscal Year
Our fiscal year ends on March 31. Reference in this annual report on Form 10-K to a fiscal year is reference to the fiscal year ended March 31. For example, references to “fiscal 2010” or our “2010 fiscal year” refer to the fiscal year ended March 31, 2010.
Critical Accounting Policies
Our significant accounting policies are summarized in Note B to our consolidated financial statements. 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 consolidated 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 from the estimates contained in our consolidated financial statements. Our critical accounting policies are as follows:
·
Revenue Recognition. We recognize revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed reasonably assured. If uncertainties regarding customer acceptance exist, we recognize revenue when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. We also receive license, royalty and development fees for the use of our proprietary biomaterials. We recognize these fees as revenue in accordance with the terms of the contracts in the period they are earned.
·
Accounts Receivable Valuation. We perform various analyses to evaluate accounts receivable balances and record an allowance for bad debts based on the estimated collectability of the accounts such that the amounts reflect estimated net realizable value. Account balances are charged off against the allowance after significant collection efforts have been made and potential for recovery is not considered probable.
·
Inventory Valuation. We value our inventory at the lower of our actual cost or the current estimated market value. We regularly review inventory quantities on hand and inventory commitments with suppliers and record a provision for excess and obsolete inventory based primarily on our historical usage for the prior twelve month period. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
·
Long-Lived Assets. We evaluate our long-lived assets, which include property and equipment, for impairment as events and circumstances indicate that the carrying amount may not be recoverable. We evaluated the realizability of our long-lived assets based primarily on reviews of results of sales of similar assets and independent appraisals. As a result of the indicators of impairment described above, we evaluated the recoverability of our property and equipment as of March 31, 2010 and determined that no impairment existed.
·
Stock-Based Compensation. We make certain assumptions in order to value our stock-based compensation. The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, an option pricing model is utilized to derive an estimated fair value. In calculating the estimated fair value of our stock options we use the Black-Scholes pricing model, which requires the consideration of the following six variables for purposes of estimating fair value:
·
the stock option exercise price;
·
the expected term of the option;
·
the grant price of our common stock, which is issuable upon exercise of the option;
·
the expected volatility of our common stock;
·
the expected dividends on our common stock (we do not anticipate paying dividends in the foreseeable future); and
·
the risk free interest rate for the expected option term.
We are also required to estimate the level of pre-vesting award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest. This requirement applies to all awards that are not yet vested. Due to the limited number of unvested options outstanding, the majority of which are held by executives and members of the Company’s Board of Directors, the Company has estimated a zero forfeiture rate. The Company will revisit this assumption periodically and as changes in the composition of our option pool dictate.
Changes in the inputs and assumptions, as described above, can materially affect the estimated fair value of our share-based awards. The Company anticipates the amount of stock-based compensation to increase in the future as additional options are granted. As of March 31, 2010, there was approximately $117,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted-average period of 1.66 years.
Results of Operations
Fiscal Year Ended March 31, 2010 vs. March 31, 2009
Revenues
Total revenues for the fiscal year ended March 31, 2010 were $2,117,000 as compared with $3,265,000 for the comparable prior year period, a decrease of $1,148,000, or 35.2%.
Product sales of our biomaterials for the fiscal year ended March 31, 2010 were $1,351,000 as compared with $932,000 for the comparable prior year period, an increase of $419,000, or 45.0%. Product sales increased primarily due to an increase in the demand for biomaterials from our existing customer base and new customers.
Royalties and development fees for the fiscal year ended March 31, 2010 were $766,000 as compared with $2,333,000 for the comparable prior year period, a decrease of $1,567,000 or 67.2%. 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 fiscal year ended March 31, 2010 is primarily a result of i) an amendment to an agreement with a major customer from whom we derived a majority of our license, royalty and development fee revenue, which affect of the amendment was to reduce the royalty fees paid to us per unit of sale of that customer’s product, and ii) the termination of a licensing agreement with a second customer.
For the year ended March 31, 2010, two customers represented 45% and 30% of our total revenues, respectively. For the year ended March 31, 2009, one customer represented 81% of our total revenues. We expect that this concentration of our customer base will continue for the foreseeable future.
Gross Profit
Gross profit on total revenues for the fiscal year ended March 31, 2010 was $761,000, or 36.0% of total revenues, compared with $1,915,000, or 58.7% 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 the decrease of license, royalty and development fees. This decrease was partly offset by increased absorption of fixed overhead costs due to increased product sales.
Gross profit on product sales for the fiscal year ended March 31, 2010 was a loss of $5,000, or less than 1.0% of product sales, compared with a loss of $418,000, or 44.8% of product sales, for the comparable prior year period. The improvement in gross profit dollars on product sales and gross profit as a percentage of product revenues is attributable, in part, to i) continued overhead cost containment and control measures, ii) improved efficiencies in the production process, and iii) increased absorption of fixed overhead costs, which are relatively stable, by the increased product sales.
Research, Development and Regulatory Expenses
Research and development expenses for the fiscal year ended March 31, 2010 were $657,000 as compared with $760,000 for the comparable prior year period, a decrease of $103,000 or 13.6%. 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. Although we increased research and development expenditures in the development of new biomaterials and related applications during the fiscal year ended March 31, 2010, these increases were partially offset by decreases in expenditures related to the CardioPass clinical trials, which further development was suspended in the fourth quarter of fiscal 2010, and the resignation of our vice president of science and technology during the second quarter of fiscal 2010.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal year ended March 31, 2010 were $2,727,000 as compared with $3,233,000 for the comparable prior year period, a decrease of $506,000 or 15.7%. The decrease is primarily attributable to our cost containment measures which included reductions in outside consultants and insurance costs. These decreases were offset by an approximate $117,000 increase in stock-based compensation incurred in connection with the issuance of stock options issued to employees, directors and a consultant.
Other Income (Expense), Net
Other expense for the fiscal year ended March 31, 2010 was $7,000 as compared with other income of $48,000 for the comparable prior year period. Interest income of $6,000 reported for the fiscal year ended March 31, 2010 was a result of interest income earned on a note receivable. Interest income of $48,000 reported for the fiscal year ended March 31, 2009 was a result of interest income earned on available cash balances. Other income of approximately $22,000 reported for the fiscal year ended March 31, 2010 was a result of an insurance refund related to fiscal 2009 and received in fiscal 2010. Other expense reported for the fiscal year ended March 31, 2010 was primarily a result of an infrequently occurring write-off of approximately $35,000.
Income from Discontinued Operations-Sale of Subsidiaries
Income from discontinued operations - sale of subsidiaries during the fiscal year ended March 31, 2010 is a result 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 fiscal year ended March 31, 2010 of approximately $213,000, net of post-closing adjustments and additional transaction costs.
Upon the settlement of the dispute with Medos in August of 2009, 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.
Income Taxes
We did not record a tax provision in either of the years ended March 31, 2010 and 2009.
As of March 31, 2010, we had federal and state net operating loss carry forwards available to offset future taxable income of approximately $20,025,000, expiring between 2011 and 2030, and $8,662,000, expiring between 2011 and 2015, respectively. As of March 31, 2010, we had a capital loss carry forward available to offset future taxable income of approximately $9,066,000, expiring between 2014 and 2015. As of March 31, 2010, we had federal and state investment and research tax credit carry forwards available to offset future taxable income of approximately $86,000, expiring between 2011 and 2030, and $195,000, expiring between 2011 and 2015, respectively.
Liquidity and Capital Resources
As of March 31, 2010, we had cash and cash equivalents of $3,055,000, a decrease of $818,000 when compared with a balance of $3,873,000 as of March 31, 2009.
During the year ended March 31, 2010 and 2009, we had net cash outflows from operating activities of $1,613,000 and $2,723,000, respectively. The net cash outflows used in operating activities during the year ended March 31, 2010 is primarily a result of the net loss from continuing operations, increases in accounts receivable, inventory build-up to meet planned customer orders for the first half of fiscal 2011, a significant reduction in accrued expenses, and decreases in deferred revenue. These cash outflows were offset by a significant decrease in accounts receivable-other reflecting collection of royalties receivable that were outstanding at the end of fiscal 2009; and non-cash items related to depreciation and stock-based compensation charges.
During the year ended March 31, 2010, we had net cash outflows of $17,000 from investing activities from continuing operations primarily as a result of the purchase of approximately $23,000 in equipment.
During the year ended March 31, 2010, we had net cash inflows of approximately $793,000 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 $580,000 in cash and payments on a note receivable.
There were no options or warrants exercised during the years ended March 31, 2010 and 2009. During the fiscal year ended March 31, 2010, we issued 72,987 shares of our common stock to employees pursuant to our Employee Stock Purchase Plan and received cash proceeds of approximately $19,000. During March 31, 2009, we issued 138,086 shares of our common stock to employees pursuant to our Employee Stock Purchase Plan and received cash proceeds of approximately $37,000. In addition, during March 31, 2009 we repurchased 76,692 shares of our common stock in an open market purchase at a cost of approximately $30,000. No repurchases of our common stock were made during the fiscal year ended March 31, 2010.
At March 31, 2010, we had no debt. We believe our March 31, 2010 cash position will be sufficient to fund our working capital and research and development activities for at least the next twelve months.
Our future growth may depend on our ability to raise capital for acquisitions, to support research and development activities for modification of existing biomaterials and development of new biomaterials, including advanced applications for our biomaterials, and to market and sell our advanced biomaterials. Our capital requirements depend on numerous factors, including but not limited to, the progress of our research and development programs, including the cost of filing, prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in our development of commercialization activities and arrangements; and the purchase of additional facilities and capital equipment.
With respect to the Exchange and Venture Agreement with CorNova, we have no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur.
Off-Balance Sheet Arrangements
As of March 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 consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The following documents are filed as part of this report on Form 10-K
Item 9.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 9A.
Item 9A.
Controls and Procedures
The certificates of our Chief Executive Officer and Acting Chief Financial Officer attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures, and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 9A for a more complete understanding of the matters covered by such certifications.
Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 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 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit 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, controls 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 our disclosure controls and procedures as of March 31, 2010, our Chief Executive Officer and Acting Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the interim or annual consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2010 based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that, as of March 31, 2010, our internal control over financial reporting was effective.
This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the fourth quarter ended March 31, 2010 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item 10 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.
Item 11.
Item 11.
Executive Compensation
The information required by this Item 11 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.
Item 14.
Item 14.
Principal Accounting Fees and Services
The information required by this Item 14 will be incorporated by reference from our definitive proxy statement or will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
The following are filed as part of this Form 10-K:
(1)
Financial Statements: For a list of financial statements which are filed as part of this Form 10-K, See Page 31.
(2)
Exhibits
________________
**
Filed herewith
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of AdvanSource Biomaterials Corporation:
We have audited the accompanying consolidated balance sheets of AdvanSource Biomaterials Corporation as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AdvanSource Biomaterials Corporation as of March 31, 2010 and 2009 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Caturano and Company, Inc.
Boston, Massachusetts
July 1, 2010
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Nature of Business
AdvanSource Biomaterials Corporation, formerly CardioTech International, Inc. (“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.
In June 2008, the Company reorganized its product line as part of its re-branding effort and launched a new website. At the Company’s 2008 annual meeting of stockholders on October 15, 2008, the stockholders approved the change of the Company’s name from CardioTech International, Inc. to AdvanSource Biomaterials Corporation to better reflect the Company’s strategic plan. The Company filed a Certificate of Amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware effecting this name change effective October 15, 2008.
The Company’s corporate, development and manufacturing operations are located in Wilmington, Massachusetts.
Fiscal Year
The Company’s fiscal year ends on March 31. References herein to fiscal 2010 and fiscal 2009 refer to the year ended March 31, 2010 and 2009, respectively.
Liquidity
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. However, the Company had no debt as of March 31, 2010. The Company believes that it has the resources to fund projected operating requirements at least through the next twelve months. Future capital requirements 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. 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. If the Company is required to raise additional financing, but are 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.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED 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 sale 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, and was reflected as a current liability of discontinued operations as of March 31, 2009.
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 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 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 fiscal year ended March 31, 2010.
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 to the Company a promissory note 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 March 31, 2010, the promissory note was paid in full. The Company recorded approximately $6,000 of interest income in connection with the promissory note during the fiscal year ended March 31, 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, 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. Pursuant to the terms of the CDT Purchase Agreement, we placed $240,000 in escrow as a reserve for the Company’s indemnification obligations to Tacpro, if any. 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 to an investment bank, and certain post-closing adjustments, the Company realized approximately $696,000 in cash proceeds from the sale of CDT.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED 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 to the Company 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 was reported as an additional gain on the sale of CDT during the fiscal year ended March 31, 2010.
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. As of March 31, 2010, the Company owns common stock in CorNova and has an approximate 8.9% ownership interest in the outstanding common and preferred stock of CorNova (See Note O).
B. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of the Company reflecting its operations in Massachusetts. As a result of the July 6, 2007 sale of Gish and March 28, 2008 sale of CDT pursuant to the respective purchase agreements, the Company’s financial statements reflect the statement of operations of Gish and CDT as discontinued operations for the year ended March 31, 2010. Additionally, the following notes to the consolidated financial statements include disclosures related to the Company’s continuing operations unless specifically identified as disclosures related to discontinued operations.
Accounting Principles
The consolidated financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
In July 2009, the Company adopted a newly issued accounting standard which codified prior pronouncements, the Accounting Standards Codification (“ASC”), and is the source of authoritative accounting principles recognized by the Financial Accounting Standards Board (“FASB”) to be applied by non-governmental entities in preparation of financial statements in conformity with U.S. GAAP for interim and annual periods. Adoption of this new standard during the second quarter of fiscal 2010 did not have a material impact on the Company’s financial position, results of operations or cash flows however, it changes the way in which U.S. GAAP is referenced.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, CardioTech Realty, LLC, which was involuntarily dissolved by the Commonwealth of Massachusetts on April 30, 2009.
Use of Accounting Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Uncertainties
The Company is subject to risks common to companies in the medical device industry including, but not limited to, development of new technology innovations by competitors of the Company, dependence on key personnel, protection of proprietary technology, and compliance with FDA regulations.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments with maturities of three months or less when acquired. Cash and cash equivalents are deposited at one area bank and exceed federally insured limits.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
The Company generally recognizes revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed reasonably assured. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. The Company also receives license, royalty and development fees for the use of its proprietary biomaterials. The Company recognizes these fees as revenue in accordance with the terms of the contracts.
The Company sells to domestic and international customers. During the years ended March 31, 2010 and 2009, product sales to foreign customers were $173,000 and $126,000, respectively.
Generally, the customer specifies the delivery method and is responsible for delivery costs. However, in certain situations, the customer specifies the delivery method and requests the Company pay the delivery costs and then invoice the delivery costs to the customer or include an estimate of the delivery costs in the price of the product. Delivery costs billed to customers by the Company for the years ended March 31, 2010 and 2009 of approximately $24,000 and $15,000, respectively, have been recorded as revenue, and the costs have been recorded in cost of goods sold.
Research, Development and Regulatory Expense
Research, development and regulatory expenditures for the years ended March 31, 2010 and 2009 were $657,000 and $760,000, respectively, and consisted primarily of salaries and related costs and are expensed as incurred. The Company has four full time research and development employees that work on a variety of projects, including production support.
Advertising Costs
Advertising costs are expensed as incurred or at the first time the advertising takes place. Advertising costs for the years ended March 31, 2010 and 2009 were $96,000 and $34,000, respectively.
Reporting Comprehensive Loss
Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity including such items as unrealized holding gains (losses) on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. For the years ended March 31, 2010 and 2009, comprehensive loss is equal to net loss.
Basic and Diluted Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversion of potential shares. At March 31, 2010 and 2009, potentially dilutive shares of 2,628,860 and 3,058,729, respectively, were excluded from the loss per share calculations because their effect would be antidilutive. Shares deemed to be antidilutive include stock options and warrants.
Accounts Receivable
We perform various analyses to evaluate accounts receivable balances and record an allowance for bad debts based on the estimated collectability of the accounts such that the amounts reflect estimated net realizable value. Account balances are charged off against the allowance after significant collection efforts have been made and potential for recovery is not considered probable. As of March 31, 2010 and 2009, the Company’s allowance for doubtful accounts was $5,000.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
We value our inventory at the lower of our actual cost or the current estimated market value. We regularly review inventory quantities on hand and inventory commitments with suppliers and record a provision for excess and obsolete inventory based primarily on our historical usage for the prior twelve month period. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. As of March 31, 2010 and 2009, the Company’s allowance for obsolete and excess inventory was $33,000 and $25,000, respectively.
Property and Equipment
Property and equipment are stated at cost. Equipment is depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Building improvements are amortized using the straight-line method over the remaining estimated life of the building at the time the improvement is put into service. The Company’s building is depreciated using the straight-line method over 40 years. Expenditures for repairs and maintenance are charged to expense as incurred. The Company records construction in process in the appropriate asset category and commences depreciation upon completion and commencement of use of the asset.
Income Taxes
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. (See Note G).
Investment in CorNova
The Company’s investment in CorNova is accounted for using the cost method of accounting. (See Note O).
Goodwill
At March 31, 2008, the Company had $487,000 of goodwill, which was attributable to the Company’s only reporting unit. Under the provisions of the accounting standard, the Company evaluates recorded goodwill for impairment on at least an annual basis, or more frequently if indicators of impairment exist. During the quarter ended December 31, 2008, the Company’s market capitalization fell below the reporting unit’s carrying value. Due to the significance of the deficit between market capitalization and carrying value and the length of time for which the deficit existed, management determined during the quarter ended December 31, 2008 that an indicator of impairment existed and that an interim impairment test was required. After completing the interim impairment test, the Company determined that the goodwill balance of $487,000 was impaired in its entirety. The fair value of the Company’s reporting unit was estimated using the expected present value of future cash flows. Accordingly, the goodwill balance of $487,000 was charged to the consolidated statement of operations during the fiscal year ended March 31, 2009; and as of March 31, 2010 and 2009 there was no remaining goodwill recorded.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, which include property and equipment, for impairment as events and circumstances indicate that the carrying amount may not be recoverable and at a minimum at each balance sheet date. The Company evaluates the realizability of its long-lived assets based on profitability and undiscounted cash flow expectations for the related asset. As a result of the indicators of impairment described above, the Company evaluated the recoverability of its property and equipment as of March 31, 2010 and determined that no impairment existed.
Stock-Based Compensation
Effective April 1, 2006, the Company adopted the fair value recognition provisions of the accounting standards, using the modified prospective transition method. Under this transition method, compensation cost recognized in the statement of operations includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions; and (b) compensation cost for all share-based payments granted, modified or settled subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of the accounting standards on a straight-line basis over the requisite service period.
For the fiscal years ended March 31, 2010 and 2009, the Company recorded stock-based compensation expense for options that vested of approximately $255,000 and $134,000, respectively. As of March 31, 2010, the Company has approximately $117,000 of unrecognized compensation cost related to stock options that is expected to be recognized as expense over a weighted-average period of 1.66 years.
The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, the Black-Scholes option pricing model is utilized to derive an estimated fair value. The Black-Scholes pricing model requires the consideration of the following six variables for purposes of estimating fair value:
·
the stock option exercise price;
·
the expected term of the option;
·
the grant price of the Company’s common stock, which is issuable upon exercise of the option;
·
the expected volatility of the Company’s common stock;
·
the expected dividends on the Company’s common stock (the Company does not anticipate paying dividends in the foreseeable future); and
·
the risk free interest rate for the expected option term.
The fair value of each option granted during fiscal years 2010 and 2009 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected Dividends. The Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.
Expected Volatility. The expected volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate during the expected term of options granted. The Company determines the expected volatility solely based upon the historical volatility of its common stock over a period commensurate with the option’s expected term. The Company does not believe that the future volatility of its common stock over an option’s expected term is likely to differ significantly from the past.
Risk-Free Interest Rate. The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the option’s expected term on the grant date.
Expected Term. For option grants subsequent to the adoption of the fair value recognition provisions of the accounting standards, the expected life of stock options granted is based on the simplified method prescribed under the accounting standard. Accordingly, the expected term is presumed to be the midpoint between the vesting date and the end of the contractual term.
Stock Option Exercise Price and Grant Date Price of Common Stock. The closing market price of the Company’s common stock on the date of grant.
The Company is required to estimate the level of award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest. This requirement applies to all awards that are not yet vested. Due to the limited number of unvested options outstanding, the majority of which are held by executives and members of the Company’s Board of Directors, the Company has estimated a zero forfeiture rate. The Company will revisit this assumption periodically and as changes in the composition of the option pool dictate.
Fair Value of Financial Instruments
The Company adopted a newly issued accounting standard for fair value measurements for financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis on April 1, 2008 and adopted this provision for all other assets and liabilities on April 1, 2009. The accounting standard defines and establishes a framework for measuring fair value and expands disclosure about fair value measurements. The accounting standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
Subsequent Events
During the third quarter of fiscal 2010, the Company adopted a new accounting standard which established general standards of accounting and disclosure of events which occur after the balance sheet date. 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.
Recent 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 will not have an impact on the Company’s financial position or results of operations.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. 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 fiscal years ended March 31, 2010 and 2009, the Company recognized $50,000 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 November 30, 2010. A lump-sum payment of approximately $33,000, representing the prorated consulting fee for the remaining eight (8) months through November 30, 2010, was paid in April 2010. Mr. Barretti will continue as a director of the Company subsequent to the end of the term of the consulting relationship.
D. License Agreements
PolyMedica Corporation granted to AdvanSource an exclusive, perpetual, worldwide, royalty-free license for AdvanSource to use all of the necessary patent and other intellectual property owned by PLMD in the implantable devices and materials field (collectively, “Licensed Technology”). AdvanSource, at its own expense, will file patents or other applications for the protection of all new inventions formulated, made, or conceived by AdvanSource during the term of the license that related to Licensed Technology and all such inventions shall be exclusively licensed to PolyMedica for use by PolyMedica in fields other than the implantable devices and materials field. There are no financial commitments of AdvanSource related to this license.
E. Inventories
Inventories, net are stated at the lower of cost (first-in, first-out) or net realizable value and consist of the following:
F. Property, Plant and Equipment
Property, plant and equipment consist of the following:
Depreciation expense for the fiscal years ended March 31, 2010 and 2009 was approximately $269,000 and $360,000, respectively.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. Income Taxes
The Company adopted the accounting standard relating to uncertainty in income taxes recognized in an enterprise’s financial statements on April 1, 2007. The accounting standard prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The accounting standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At the adoption date and as of March 31, 2010, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties have been recognized by the Company to date.
Tax years 2007 through 2010 are subject to examination by the federal and state taxing authorities. There are no income tax examinations currently in process.
Reconciliation between the Company’s effective tax rate and the United States statutory rate is as follows:
Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of the assets and liabilities using the enacted tax rate in effect in the years in which the differences are expected to reverse. A valuation allowance has been recorded against the deferred tax asset as it is more likely than not, based upon the analysis by the Company of all available evidence, that the tax benefit of the deferred tax asset will not be realized.
The following is a summary of the significant components of the Company’s deferred tax assets as of March 31, 2010 and 2009:
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A valuation allowance has been recorded to offset all deferred tax assets due to uncertainty of realizing the tax benefits of the underlying operating loss and tax credit carry forwards over their carry forward periods. The Company had no significant deferred tax liabilities as of March 31, 2010 and 2009.
As of March 31, 2010, the Company has the following unused net operating loss and tax credit carry forwards available to offset future federal and state taxable income, both of which expire at various times as noted below:
The Company’s net operating loss carry forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities.
The Company also has approximately $1,367,000 of net operating loss carry forwards related to stock compensation. The related tax benefit of approximately $550,000 will be credited to additional paid-in capital upon realization.
H. Contingencies
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.
I. Concentration of Credit Risk and Major Customers
For the year ended March 31, 2010, two customers represented 45% and 30% of revenues, respectively. For the year ended March 31, 2009, one customer represented 81% of our revenues.
As of March 31, 2010 and 2009, the Company had $105,000 and $997,000, respectively, due from one customer related to receivables on royalties. These amounts are classified as accounts receivable-other in the accompanying consolidated balance sheets.
As of March 31, 2010, the Company had accounts receivable-trade of $75,000, or 62%, from two (2) customers. As of March 31, 2009, the Company had accounts receivable-trade of $26,000, or 62%, due from one customer.
During the year ended March 31, 2010, two (2) vendors represented $100,000 and $80,000, or 42% and 34%, respectively, of material purchases used in the production process. During the year ended March 31, 2009, two (2) vendors represented $63,000 and $24,000, or 47% and 18%, respectively, of material purchases used in the production process.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. Stockholders' Equity
Preferred Stock
The Company has authorized 5,000,000 shares, $0.001 par value, Preferred Stock (the Preferred Stock”) of which 500,000 shares have been issued but none are outstanding. In addition, 500,000 shares of Preferred Stock have been designated as Series A Junior Participating Preferred Stock (the “Junior Preferred Stock”) with the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions specified in the Certificate of Designation of the Junior Preferred Stock filed with the Delaware Department of State on January 28, 2008. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Junior Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Junior Preferred Stock.
Common Stock Options and Warrants
Effective April 1, 2009, the Company adopted a new accounting standard specifying that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. The accounting standard provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for certain scope exceptions. The Company’s adoption of this standard resulted in the identification of certain warrants that were determined to require liability classification because of certain provisions that may result in an adjustment to their exercise price. Accordingly, these warrants were reclassified through a cumulative effect adjustment to liabilities as of April 1, 2009. The result was a decrease in additional paid in capital as of April 1, 2009 of approximately $1,223,000, a reduction of accumulated deficit of $1,223,000, and a de minimus liability. The warrants requiring liability classification expired on December 22, 2009, accordingly, no additional calculation of the change in liability as of the expiration date was required. During the fiscal year ended March 31, 2010 there was no charge to other income. The Company used the Black-Scholes pricing model to calculate fair value of its warrant liabilities. Key assumptions used to apply this model are as follows:
On December 22, 2004, the Company issued 1,139,586 shares of its common stock to investors in a private placement raising gross proceeds of $2,735,000, before transaction costs. In connection with this private placement, the Company issued warrants to investors and a placement agent to purchase an aggregate of 740,731 shares of common stock at exercise prices ranging from$2.40 to $3.00 per share. The warrants expired on December 22, 2009.
On July 12, 2005, the Company issued warrants to a consultant for 140,000 shares of common stock, with an exercise price of $2.40. The warrants expired on July 11, 2008.
On March 31, 2008, the Company issued to the investment bankers who assisted in the sale of CDT warrants to purchase 219,298 shares of common stock at an exercise price of $0.874 per share, which are exercisable until March 31, 2015. The warrants were valued at $76,000 using the Black-Scholes model and treated as permanent equity.
There were no exercises of options or warrants by employees and consultants during the year ended March 31, 2010 and 2009.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plan
During the fiscal years ended March 31, 2010 and 2009, the Company issued 72,987 and 138,086 shares of its common stock, respectively, to its employees pursuant to the terms of the Employee Stock Purchase Plan, as amended, and received cash proceeds of approximately $19,000 and $37,000, respectively. During the fiscal years ended March 31, 2010 and 2009, the Company also recorded stock compensation of $3,000 and $7,000, respectively, to reflect the effect of 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 the settlement date.
Treasury Stock and Other Transactions
In June 2001, the Board of Directors adopted a share repurchase program authorizing the repurchase by the Company of up to 250,000 of its shares of common stock. In June 2004, the Board of Directors authorized the purchase of an additional 500,000 shares of common stock. On December 17, 2008, in light of the current market conditions, the Board of Directors authorized the repurchase of up to $30,000 of common stock from the shares available for repurchase under to the program. In January 2009, the Company repurchased 76,692 shares of its common stock at an approximate cost of $30,000. Since June 2001, a total of 251,379 shares have been repurchased by the Company under the share repurchase program, leaving 498,621 shares remaining to purchase under the share repurchase program. No repurchases were made during the year ended March 31, 2010. The share repurchase program authorizes repurchases from time to time in open market transactions, through privately negotiated transactions, block transactions or otherwise, at times and prices deemed appropriate by management, is not subject to an expiration date.
Stockholder Rights Plan
The Company’s board of directors approved the adoption of a stockholder rights plan (the “Rights Plan”) under which all stockholders of record as of February 8, 2008 will receive rights to purchase shares of the Junior Preferred Stock (the “Rights”). The Rights will be distributed as a dividend. Initially, the Rights will attach to, and trade with, the Company’s common stock. Subject to the terms, conditions and limitations of the Rights Plan, the Rights will become exercisable if (among other things) a person or group acquires 15% or more of the Company’s common stock. Upon such an event, and payment of the purchase price, each Right (except those held by the acquiring person or group) will entitle the holder to acquire shares of the Company’s common stock (or the economic equivalent thereof) having a value equal to twice the purchase price. The Company’s board of directors may redeem the Rights prior to the time they are triggered. In the event of an unsolicited attempt to acquire the Company, the Rights Plan is intended to facilitate the full realization of stockholder value in the Company and the fair and equal treatment of all Company stockholders. The Rights Plan does not prevent a takeover attempt.
K. 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 Plan. Under the terms of the Plan, the exercise price of Incentive Stock Options issued under the 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 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”), which 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. In February 2008, the Company filed two Forms S-8 to register 360,000 shares of common stock in connection with previously granted stock options to two executives who received grants of unregistered shares under Rule 711 of AMEX. Normally, options granted expire ten years from the grant date.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity under the Plans for the year ended March 31, 2010 is as follows:
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of the common stock on March 31, 2010 of $0.30 and the exercise price of each in-the-money option) that would have been received by the option holders had all option holders exercised their options on March 31, 2010. There were no stock options exercised under the Plan for the fiscal years ended March 31, 2010 and 2009. The total fair value of stock options that vested during the fiscal years ended March 31, 2010 and 2009 were $255,000 and $384,000, respectively.
At March 31, 2010, there were no shares remaining to be granted under the 1996 Stock Option Plan and 2,215,562 shares were available for grant under the 2003 Stock Option Plan.
L. Discontinued Operations
Gish Biomedical, Inc.
The accompanying consolidated statements of operations present the results of Gish as discontinued operations. The Company’s Board of Directors approved a plan to sell Gish in June 2007. The Company executed the Gish Purchase Agreement on July 3, 2007, effective as of June 30, 2007, and closed on July 6, 2007. The Company has (i) eliminated Gish’s financial results from its ongoing operations, (ii) determined that Gish, which operated as a separate subsidiary, was a separate component of its aggregated business as, historically, management reviewed separately the Gish financial results and cash flows apart from its ongoing continuing operations, and (iii) determined that it will have no further continuing involvement in the operations of Gish or cash flows from Gish after the sale.
The current liabilities of discontinued operations of $149,000 as of March 31, 2009 is comprised of the amounts owed to Medos due to the change in the stockholder’s equity of Gish from March 31, 2007 through June 30, 2007 in accordance with the terms of the Gish Purchase Agreement. In connection with the Settlement, as discussed in Note A, the $149,000 obligation was eliminated and there are no additional obligations owed to Medos as of March 31, 2010.
Income from discontinued operations for the fiscal year ended March 31, 2010 related to the sale of Gish is composed of the aggregate of i) approximately $580,000 of escrow funds which Medos agreed to repay in connection with the Settlement, and ii) the elimination of the previously recorded obligation to Medos in the approximate amount of $149,000. (See Note A).
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Catheter and Disposables Technology, Inc.
The accompanying consolidated statements of operations present the results of CDT as discontinued operations. As noted above, the Company executed the CDT Purchase Agreement and simultaneously closed the transaction on March 28, 2008. The Company has (i) eliminated CDT’s financial results from its ongoing operations, (ii) determined that CDT, which operated as a separate subsidiary, was a separate component of its aggregated business as, historically, management reviewed separately the CDT financial results and cash flows apart from its ongoing continuing operations, and (iii) determined that it will have no further continuing involvement in the operations of CDT or cash flows from CDT after the sale.
Income from discontinued operations for the fiscal year ended March 31, 2010 related to the sale of CDT is composed of cash received of approximately $213,000, net of post-closing adjustments and additional transaction costs. (See Note A).
M. Valuation and Qualifying Accounts
N. Benefit Plans and Employment Agreements of Executive Officers
The Company has the AdvanSource 401(k) Retirement Savings Plan established under Section 401(k) of the Internal Revenue Code. All full-time employees who are twenty-one years of age are eligible to participate on the beginning of the first month after 30 days of employment. The Company’s contributions are discretionary and the Company made no matching contributions during either fiscal 2010 or 2009.
The Company entered into a Separation Agreement and General Release (the “Separation Agreement”) with Eric G. Walters, the former Vice President and Chief Financial Officer, on February 28, 2009. Under the terms of the Separation Agreement, which superseded any previous employment agreement, and beginning on February 28, 2009, Mr. Walters: (i) received a severance payment of approximately $129,000 which was paid over 34 weeks on the Company’s regularly scheduled paydays, and (ii) was eligible for COBRA health benefits, which premiums were paid by Mr. Walters and the Company for a period of 34 weeks in accordance with our health benefit contribution policies. During the fiscal years ended March 31, 2010 and 2009, Mr. Walters received severance payments of $118,000 and $11,000, respectively. As of March 31, 2010, the Company had no further severance obligation.
ADVANSOURCE BIOMATERIALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 7, 2006, the Company appointed Michael F. Adams as Chief Executive Officer and President of the Company. Mr. Adams has been a director of the Company since May 1999 and joined the Company as its Vice President of Regulatory Affairs and Business Development on April 1, 2006. The Company entered into an employment agreement with Mr. Adams (the “Adams Agreement”) on September 13, 2006. Under the terms of the Adams Agreement, Mr. Adams will be employed by the Company for two years and receive an annual base salary of $290,000, as amended, which is subject to annual review by the Company’s Board of Directors. During the Employment Period, as defined in the Adams Agreement, Mr. Adams may receive an annual bonus to be determined at the sole discretion of the Compensation Committee of the Board of Directors. The Company may renew the Adams Agreement at the end of the initial term, however, lacking any express agreement between the parties at the end of the Employment Period, the Adams Agreement shall be deemed to continue on a month-to-month basis. Either party has the right to terminate the Adams Agreement upon thirty (30) days written notice. Mr. Adams is eligible for participation in all executive benefit programs, including health insurance, life insurance, and stock-based compensation. If Mr. Adams’ employment is terminated without cause, the Company is obligated to (i) pay Mr. Adams an amount equal to two (2) times his annual base salary upon such termination, (ii) provide Mr. Adams with health insurance benefits for a period of 18 months after such termination, of which the premiums for the first six (6) months after such termination shall be paid by the Company, and (iii) provide Mr. Adams life insurance benefits for one (1) year after such termination at the Company’s expense. Subsequent to the fiscal year ended March 31, 2010, the Compensation Committee of the Board of Directors approved an increase in Mr. Adams’ annual base salary to $320,000 and awarded a bonus of approximately $39,000. The bonus award is included in accrued expenses on the consolidated balance sheet as of March 31, 2010.
O. Investment in CorNova, Inc.
In March 2004, the Company entered into an Exchange and Venture Agreement by and among the Company, Implant Sciences Corporation and CorNova. During the fiscal years ended March 31, 2004 and 2005, the Company contributed, in the aggregate, 321,573 shares of its common stock, valued at approximately $825,000, which provided the Company a 30% ownership interest in the common stock of CorNova. The Company used the equity method of accounting; accordingly, it recorded 30% of the net loss of CorNova in its consolidated financial statements through the fiscal year ended March 31, 2007. During the fiscal year ended March 31, 2007, the Company recorded equity in the net loss of CorNova of $279,000, and equity in comprehensive income of CorNova of $40,000 (related to unrealized holding gains on securities classified as available-for-sale), which reduced the Company’s investment in CorNova to $0. Therefore, no additional losses were recorded from the Company’s equity ownership in CorNova since the fiscal year ended March 31, 2007.
As a result of several dilutive financings by CorNova, the Company has an 8.9% ownership interest in CorNova as of March 31, 2010. As a result of its decreased ownership interest, the equity method is no longer appropriate and the Company now uses 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 1, 2010
AdvanSource Biomaterials Corporation
By:
/s/ Michael F. Adams
Michael F. Adams
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: July 1, 2010
/s/ Michael F. Adams
Michael F. Adams
Chief Executive Officer and President
(Principal Executive Officer)
Dated: July 1, 2010
/s/ William J. O’Neill
William J. O’Neill, Jr.
Chairman
Dated: July 1, 2010
/s/ Anthony J. Armini
Anthony J. Armini
Director
Dated: July 1, 2010
/s/ Michael L. Barretti
Michael L. Barretti
Director
Dated: July 1, 2010
/s/ David Volpe
David Volpe
Acting Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)