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RPBIF > SEC Filings for RPBIF > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for RESPONSE BIOMEDICAL CORP

Form 10-Q for RESPONSE BIOMEDICAL CORP


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes. Unless otherwise specified, all dollar amounts are Canadian dollars.

Overview

Response Biomedical develops, manufactures and sells diagnostic tests for use with its proprietary RAMP® System, a portable fluorescence immunoassay-based diagnostic testing platform. The RAMP® technology utilizes a unique method to account for sources of error inherent in conventional lateral flow immunoassay technologies, thereby providing the ability to quickly and accurately detect and quantify an analyte present in a liquid sample. Consequently, an end-user on-site or in a point-of-care setting can rapidly obtain important diagnostic information. Response Biomedical currently has thirteen tests available for clinical and environmental testing applications and the Company has plans to commercialize additional tests.

Our sales for any future periods are not predictable with a significant degree of certainty, and may depend on a number of factors outside of our control, including but not limited to the performance of our distributors including their inventory or timing considerations and/or their failure to meet minimum purchase commitments. We generally operate with a limited order backlog because our products are typically shipped shortly after orders are received. Product sales in any quarter are generally dependent on orders booked and shipped in that quarter. As a result, any such revenue shortfall would negatively affect our operating results and financial condition. In addition, our sales may be adversely impacted by pricing pressure from competitors. Our ability to be consistently profitable will depend, in part, on our ability to increase the sales volumes of our products and to successfully compete with other competitors. We believe that period to period comparisons of our results of operations are not necessarily meaningful indicators of future results.

Recent Developments

††† On July 2, 2012, Tim Shannon signed an employment agreement with the Company to become our Senior Vice President, World Wide Sales and Marketing.

††† On July 25, 2012, the Board of Directors, or the Board, approved the appointment of Jeffrey Purvin to the Board and named him Chief Executive Officer of the Company. In addition, Peter Thompson resigned from the Interim Chief Executive Officer position as of July 25, 2012 but remains Chairman of the Board.

††† On July 25, 2012, the Board of Directors approved the appointment of Jonathan Wang to the Board.

††† On August 8, 2012, the Board of Directors appointed W.J. Adams as Chief Financial Officer and Corporate Secretary effective August 13, 2012.

††† On September 24, 2012, we completed the consolidation of our issued and outstanding common shares on the basis of every twenty (20) common shares being consolidated into one (1) common share.

††† On October 2, 2012, we regained the worldwide rights to Flu A+B and RSV testing products as a result of the termination of our collaboration with 3M Company and 3M Innovative Properties Company ("3M"). For total consideration of USD$150,000, we acquired 3M's remaining inventory of RAMP® readers and peripheral devices, assignment of 3M's distributor network and all marketing materials used by 3M in marketing and sales of the products.

-17-

RESULTS OF OPERATIONS

For the three month period ended September 30, 2012 and 2011:

Revenue and Gross Margin

Revenue

                                               Three Months Ended September 30,                  Change 2011 to 2012
                                                                                             Increase /
                                                        2012                    2011         (Decrease)        Percent Change
Product Sales                                      2,678,757               1,563,841          1,114,916                    71 %
Cost of Sales                                      1,939,929               1,276,065            663,864                    52 %
Gross profit on product sales                        738,828                 287,776            451,052                   157 %
Gross margin                                            27.6 %                  18.4 %              9.2 %                  50 %

Revenues increased 71% or $1.1 million during the three month period ended September 30, 2012 as compared to September 30, 2011. The change in total revenue is due to the following:

· Cardiovascular sales have increased 80%, or $1.2 million, primarily due to:

· An increase of $1.1 million in sales to our two distributors in China as a result of a combination of price increases and volume increases from the comparative period; and

· A $0.1 million increase representing the sum of variances across several different markets.

· Infectious disease, biodefense, and environmental sales have decreased 32% or $0.04 million due to timing of orders by our biodefense and environmental distributors.

Gross Margin

Gross profit on product sales increased by $0.5 million during the three month period ended September 30, 2012 as compared to the comparative period ended September 30, 2011. The change in total gross profit is primarily due to the increase in gross margin. This increase is primarily due to the following:

· An increase in the price of our products to our distributors combined with a change in product mix to higher margin products;

· A 40% increase in the level of production during the three month period ended September 30, 2012 compared to September 30, 2011 resulting in a spreading of fixed manufacturing overhead costs over a larger base; and

· An increase in manufacturing efficiency during the three month period ended September 30, 2012 compared to September 30, 2011 resulting in lower material and labor costs per test produced.

These increases to gross margin were offset by $0.1 million of termination costs that were accrued during the period for manufacturing department terminations.

-18-

Operating Expenses


                                               Three Months Ended September 30,                  Change 2011 to 2012
                                                                                             Increase /
                                                        2012                    2011         (Decrease)        Percent Change
Research and development                             838,294                 781,202             57,092                     7 %
General and administrative                         1,060,833               1,067,927             (7,094 )                  (1 %)
Sales and marketing                                  372,471                 221,890            150,581                    68 %
Total Operating Expenses                           2,271,598               2,071,019            200,579                    10 %

Research and Development Expenses

Research and Development Expenses increased by 7%, or $57,000 during the three month period ended September 30, 2012 in comparison to the same period ended September 30, 2011. The increase is primarily due to a $158,000 increase in product development costs as a result of the clinical development of a new assay for D-dimer that we expect to launch in the European Union now that we have CE Mark and enhancements to existing products, a $64,000 increase in professional and legal fees related to ongoing product development regulatory activities in China, the US and Europe, and $64,000 in increased facility and Information Technology ("IT") costs. These increases were offset by a $228,000 decrease in salaries and wages due to the termination of the Company's chief scientific officer in 2011 resulting in termination costs being accrued in 2011.

General and Administrative Expenses

General and Administrative Expenses decreased by 1%, or $7,000 during the three month period ended September 30, 2012 in comparison to the same period ended September 30, 2011. The decrease is mainly due to a $542,000 decrease in salaries and wages primarily the result of the resignation of the Company's former CEO in 2011. This decrease was offset by a $339,000 increase in stock based compensation, a $161,000 increase in professional fees for the interim CEO and CFO in addition to IT related consulting costs, a $32,000 increase in corporate communication, public filing fees and legal related expenses due to the share consolidation.

Sales and Marketing Expenses

Sales and Marketing Expenses increased by 68%, or $151,000 during the three month period ended September 30, 2012 in comparison to the same period ended September 30, 2011. The increase is primarily due to a $69,000 increase in legal and professional expenses related to business development, sales and marketing consulting work, and contracted sales and marketing personnel in China. In addition, there was a $30,000 increase in salaries and wages due to the addition of sales and marketing personnel including a Senior Vice President of Worldwide Sales and Marketing, a $26,000 increase in administrative expense and a $25,000 increase in travel related expenses due to the additional personnel.

Other Expense (Income), Net

                                               Three Months Ended September 30,                 Change 2011 to 2012
                                                                                            Increase /
                                                        2012                   2011         (Decrease)       Percent Change
Interest expense                                     181,873                190,085             (8,212 )                 (4 %)
Interest income                                       (3,915 )               (3,657 )            ( 258 )                 (7 %)
Foreign exchange (gain) loss                          94,817               (125,307 )          220,124                  175 %
Unrealized (gain) loss on revaluation of
warrant liability                                    854,475                      -            854,475                  100 %
Total Other Expenses / (Income)                    1,127,250                 61,121          1,066,129                 1744 %

-19-

Interest Expense

Interest expenses decreased by 4%, or $8,000 during the three month period ended September 30, 2012 compared to the same period ended September 30, 2011. The decrease is primarily due to a reduction in the interest paid on the repayable leasehold improvement allowance as a result of a decrease in principal in 2012 versus 2011.

Interest Income

Interest income increased by 7% during the three month period ended September 30, 2012 compared to the same period ended September 30, 2011. Interest is earned on our cash on hand and short term investments and has increased due to a higher average cash balance in the third quarter of 2012 versus the same quarter last year.

Foreign exchange (gain)/loss

Foreign exchange loss increased by $220,000 during the three month period ended September 30, 2012 compared to the same period ended September 30, 2011. Foreign exchange gains and losses are largely due to U.S. dollar balances of cash and cash equivalents, accounts receivable and accounts payable affected by the fluctuations in the value of the U.S. dollar as compared to the Canadian dollar. The loss this quarter is due the appreciation of the Canadian dollar against the U.S. dollar.

Unrealized loss on revaluation of warrant liability

The unrealized loss on revaluation of the warrant liability is solely due to the mark-to-market revaluation of the outstanding warrants each reporting period. The fair market value of the liability increased from June 30, 2012 resulting in an unrealized loss of $0.9 million. The fair market value is calculated using a Black-Scholes model with inputs for volatility, risk free interest rate, and expected life of the warrants. The primary reason for the increase in the value of the liability is the increase in the fair market value of the shares of the Company as of September 30, 2012 in comparison to June 30, 2012. A small change in the estimates used in the Black-Scholes pricing model may have a relatively large change in the estimated valuation of the common stock warrants.

Loss

For the three month period ended September 30, 2012, the Company reported a loss of $2.7 million or $0.41 per basic and diluted share, compared to a loss of $1.8 million or $0.94 per basic and diluted share in 2011. The primary components of the difference as described above are higher gross profit offset by slightly higher operating expenses, a foreign exchange loss and the unrealized loss on the revaluation of our warrant liability. Excluding the impact of the revaluation of our warrant liability, which is a non-cash expense, our adjusted net loss for the three month period ended September 30, 2012 was $1.79 million compared to an adjusted net loss of $1.84 million for the same period in 2011.

-20-

For the nine month period ended September 30, 2012 and 2011:

                                               Nine Months Ended September 30,                 Change 2011 to 2012
                                                                                           Increase /
                                                       2012                   2011         (Decrease)       Percent Change
Product Sales                                     8,698,695              6,277,920          2,420,775                   39 %
Cost of Sales                                     5,540,465              5,053,453            487,012                   10 %
Gross profit on product sales                     3,158,230              1,224,467          1,933,763                  158 %
Gross margin                                           36.3 %                 19.5 %             16.8 %                 86 %

Revenue and Gross Margin

Revenue

Revenues increased 39% or $2.4 million during the nine month period ended September 30, 2012 in comparison to the same period ended September 30, 2011. The change in total revenue is due to the following:

· Cardiovascular sales have increased 61%, or $3.0 million primarily due to:

· An increase of $2.5 million in sales to our two distributors in China as a result of a combination of price increases and volume increases from the comparative period ;

· An increase of $0.5 million in sales to distributors in the rest of the world mainly as a result of volume increases.

· Infectious disease, biodefense, and environmental sales have decreased 48%, or $0.6 million, due to a reduction of orders by 3M during the current period versus the comparative period, a significant biodefense sale made in 2011 that did not repeat in 2012, and a weaker West Nile Virus season experienced by our distributor in the United States.

Gross Margin

Gross profit on product sales increased by $1.9 million during the nine month period ended September 30, 2012 as compared to the same period ended September 30, 2011. The change in total gross profit is primarily due to the increase in gross margin to 36.3% from a gross margin of 19.5% in 2011. This increase is primarily due to the following:

· An increase in the price of our products to our distributors combined with a change in product mix to higher margin products;

· A 26% increase in the level of production during the nine month period ended September 30, 2012 compared to 2011 a spreading of fixed manufacturing overhead costs over a larger base;

· An increase in manufacturing efficiency during the nine month period ended September 30, 2012 compared to 2011 resulting in lower material and labor costs per test produced; and

· A decrease of $0.3 million in inventory provisions to account for obsolescence and slow-moving inventory items and to reduce inventory values down to their net realizable value.

Gross profit was negatively impacted by $0.1 million of termination costs that were accrued during the period for manufacturing department terminations.

Contract Service Fees

                                           Nine Months Ended September 30,            Change 2011 to 2012
                                                                                  Increase /
                                                  2012                2011        (Decrease)       Percent Change
Contract service fees                                -             462,762          (462,762 )               (100 %)

-21-

Contract service fees decreased by 100%, or $0.46 million during the nine month period ended September 30, 2012 in comparison to the same period in 2011 due to the termination of a project agreement with Roche Diagnostics Ltd. in 2011. Upon termination, the Company recognized the remaining revenue under the contract to offset costs incurred in accordance with the agreement. There are no current contract service fee arrangements in progress.

Operating Expenses

                                               Nine Months Ended September 30,                Change 2011 to 2012
                                                                                          Increase /
                                                       2012                   2011        (Decrease)       Percent Change
Research and development                          2,435,115              2,056,003           379,112                   18 %
General and administrative                        3,296,868              2,478,060           818,808                   33 %
Sales and marketing                                 981,144                794,766           186,378                   23 %
Total Operating Expenses                          6,713,127              5,328,829         1,384,298                   26 %

Research and Development Expenses

Research and Development Expenses increased by 18%, or $379,000 during the nine month period ended September 30, 2012 in comparison to the same period ended September 30, 2011. The increase is primarily due to a $293,000 in product development and product enhancement costs, a $212,000 increase in consulting and legal expenses incurred due to clinical development projects and regulatory consulting, and a $164,000 increase in administrative and overhead expenses. These were offset by a $277,000 decrease in salaries and wages primarily due to the termination of the Company's chief scientific officer in Q3 of 2011 resulting in accrued severance being recorded and a $15,000 decrease in stock based compensation expense.

General and Administrative Expenses

General and Administrative Expenses increased by 33%, or $819,000 during the nine month period ended September 30, 2012 in comparison to the same period ended September 30, 2011. The increase is primarily due to a $540,000 increase in stock based compensation expenses due to stock options granted during 2012 and the significant reversal of stock based compensation related to unvested options upon the resignation of our former CEO in 2011, a $491,000 increase in professional fees for our interim CEO, CFO, and IT related services, a $298,000 increase in legal expenses incurred, a $150,000 increase in recruitment expenses for new senior executive positions in the Company, and a $41,000 increase in corporate communication and public filing fees due to the share consolidation. These increases were offset by a $673,000 decrease in salaries and wages due to the severance accrued upon the former CEO's resignation and lower headcounts and a $30,000 decrease in administrative and overhead costs.

Sales and Marketing Expenses

Sales and Marketing Expenses increased by 23%, or $186,000 during the nine month period ended September 30, 2012 in comparison to the same period ended September 30, 2011. The increase is primarily due to a $240,000 increase in legal and professional expenses related to business development, review of agreements, and sales and marketing consulting services. In addition, there was an $89,000 increase in bad debt expenses due to the estimated allowance for doubtful accounts, a $29,000 increase in administrative and overhead expenses, and a $9,000 increase in travel expense. These increases were offset by a $110,000 decrease in salaries and wages due to the timing of the hiring of the Senior Vice President of Worldwide Sales and Marketing and lower headcounts during the period, a $54,000 decrease in selling expenses as a result of a reduction in marketing support provided to a key distributor, and a $17,000 decrease in stock based compensation expense.

-22-

Other Expense (Income), Net

                                              Nine Months Ended September 30,                 Change 2011 to 2012
                                                                                          Increase /
                                                        2012                 2011         (Decrease)       Percent Change
Interest expense                                     553,884              589,046            (35,162 )                 (6 %)
Interest income                                      (18,575 )            (14,047 )            4,528                   32 %
Foreign exchange (gain)loss                           23,730              (59,233 )          (82,963 )                140 %
Unrealized loss on revaluation of
warrant liability                                  1,860,703                    -          1,860,703                  100 %
Total Other Expenses                               2,419,742              515,766          1,903,976                  369 %

Interest Expense

Interest expenses decreased by 6%, or $35,000 during the nine month period ended September 30, 2012 compared to the same period ended September 30, 2011. The decrease is due to a reduction in the interest paid on the repayable leasehold improvement allowance as a result of a decrease in principal in 2012 versus 2011.

Interest Income

Interest income increased by 32%, or $5,000, during the nine month period ended September 30, 2012 compared to the same period ended September 30, 2011. The increase is due to a higher average cash balance in 2012 in comparison to 2011.

Foreign exchange (gain)/loss

Foreign exchange loss increased by $83,000 during the nine month period ended September 30, 2012 compared to a foreign exchange gain in the same period in 2011. Foreign exchange gains and losses are largely due to U.S. dollar balances of cash and cash equivalents, accounts receivable and accounts payable affected by the fluctuations in the value of the U.S. dollar as compared to the Canadian dollar.

Unrealized loss on revaluation of warrant liability

The unrealized loss on revaluation of the warrant liability is solely due to the mark-to-market revaluation of the outstanding warrants each reporting period. The change in fair market value increased from December 31, 2011 resulting in an unrealized loss of $1.9 million. The fair market value is calculated using a Black-Scholes model with inputs for volatility, risk free interest rate, and expected life of the warrants. The primary reason for the increase in the value of the liability is the increase in the fair market value of the shares of the Company as of September 30, 2012. A small change in the estimates used in the Black-Scholes pricing model may have a relatively large change in the estimated valuation of the common stock warrants.

Loss

For the nine month period ended September 30, 2012, the Company reported a loss of $6.0 million or $0.93 per basic and diluted share, compared to a loss of $4.2 million or $2.13 per basic and diluted share in 2011. The primary components of the difference as described above are higher gross profit offset by slightly higher operating expenses, a foreign exchange loss and the unrealized loss on the revaluation of our warrant liability. Excluding the impact of the revaluation of our warrant liability, which is a non-cash expense, our adjusted net loss for the nine month period ended September 30, 2012 was $4.10 million compared to an adjusted net loss of $4.16 million for the same period in 2011.

-23-

LIQUIDITY AND CAPITAL RESOURCES

Total cash and cash equivalents and working capital at September 30, 2012, and
December 31, 2011 were as follows:

                               As at September 30, 2012       As at December 31, 2011
Cash and cash equivalents    $                2,731,509     $               7,354,802
Percentage of total assets                           18 %                          35 %
Working capital              $               (1,531,324 )   $               3,815,281

As at September 30, 2012, the Company had a negative working capital balance of $1.5 million. Included in current liabilities is a warrant liability in the amount of $5.2 million that is required to be measured at fair value and is presented as a current liability in accordance with ASC 815. Each warrant may only be exercised on a net cashless exercise basis and no warrant may be exercised at a time when the exercise price equals or exceeds the current market price meaning the potential settlement of any warrant does not require any cash disbursement. Without taking into account the warrant liability mentioned above, the Company's working capital is $3.7 million. As at December 31, 2011, the Company's working capital, excluding the warrant liability, was $7.2 million. Therefore, the Company's working capital, excluding the warrant liability, has decreased by $3.4 million. This decrease is primarily due to a $4.6 million decrease in cash as a result of the reduction of the Company's accounts payable and accrued liabilities in addition to increased operating expenses.

Financial Condition

The Company has financed its operations primarily through equity financings. As of September 30, 2012, the Company has raised approximately $103.0 million from the sale and issuance of equity securities and debt, net of issue costs.

The Company has sustained continuing losses since its formation and at September 30, 2012, had a deficit of $112.9 million and for the nine month period ended September 30, 2012 incurred negative cash flows from operations of $4.1 million compared to $2.3 million in the same period in 2011. Also, as mentioned above, the Company had a $3.4 million decrease in working capital, net of the warrant liability. These conditions raise substantial doubt about the Company's ability to continue as a going concern.

Management has been able, thus far, to finance the operations through a series of equity financings. Management will continue, as appropriate, to seek other . . .

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