Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ASNB > SEC Filings for ASNB > Form 10-K on 15-Jul-2013All Recent SEC Filings

Show all filings for ADVANSOURCE BIOMATERIALS CORP

Form 10-K for ADVANSOURCE BIOMATERIALS CORP


15-Jul-2013

Annual Report


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 2013" or our "2013 fiscal year" refer to the fiscal year ended March 31, 2013.

- 21 -


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, pursuant to agreements with its customers, for the use of its proprietary polymer biomaterials. The terms of the various license, royalty and development agreements may contain multiple deliverables which may include (i) licenses to use our polymer biomaterials in the customer's end-product medical device, (ii) research and development activities, (iii) services and/or (iv) the manufacturing of polymer biomaterials. Payments to us under these agreements may include non-refundable license fees, payments for research and development activities, payments for the manufacture of polymer materials, payments based upon the achievement of certain milestones, payments for the use of our polymer biomaterials in the customer's end-product, and/or royalties earned on the sale of the customer's end-product.

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 includes 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, 2013 and 2012 and determined that during the fiscal year ended March 31, 2012 there existed an impairment of a single group of production equipment, accordingly, we recorded an impairment charge of $16,000 for the fiscal year ended March 31, 2012. We determined that during the fiscal year ended March 31, 2013, there existed no additional impairment of our long-lived assets.

- 22 -


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 date 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, 2013, there was approximately $8,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted-average period of .39 years.

- 23 -


Results of Operations

Fiscal Year Ended March 31, 2013 vs. March 31, 2012

Revenues

Total revenues for the fiscal year ended March 31, 2013 were $2,195,000 as compared with $1,866,000 for the comparable prior year period, an increase of $329,000, or 17.6%.

Product sales of our biomaterials for the fiscal year ended March 31, 2013 were $1,420,000 as compared with $925,000 for the comparable prior year period, an increase of $495,000, or 53.5%. The increase is due to the growth in product sales from existing and new customers.

License, royalty and development fees for the fiscal year ended March 31, 2013 were $775,000 as compared with $941,000 for the comparable prior year period, a decrease of $166,000 or 17.6%. 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 is primarily due to the recognition of revenue related to a long-term license and consulting agreement (the "Agreements") with a major international developer and manufacturer of medical devices, which was entered into in June 2011. In June 2011, we received an initial payment of $150,000 (the "Initial Payment") upon the execution of the Agreements. In July 2011, we received a subsequent payment of $250,000 (the "Subsequent Payment") upon the transfer of certain technology and know-how. As a result, during the fiscal year ended March 31, 2012, we recognized revenue of $400,000 in connection with the Agreements. During the fiscal year ended March 31, 2013, we achieved an additional milestone and recognized $20,000 of revenue in connection with the Agreements. Since inception of the Agreements, we have recognized revenue of $420,000, in the aggregate, through December 31, 2012.
The decrease in license, royalty and development fees was offset by the recognition of approximately $293,000 in royalty and product minimums during the fiscal year ended March 31, 2013. The royalty and product minimums were earned in connection with a supply agreement with one domestic customer which provided for calendar year-based product and royalty minimums. Accordingly, we reviewed all royalties earned from and product sold to this customer during the calendar year ended December 31, 2012 and, in the event actual royalties earned and product sold was less than the contractual minimums, the remaining balance was recognized during our fiscal year ended March 31, 2013.

For the year ended March 31, 2013, three customers represented 33%, 17% and 13% of our total revenues, respectively. For the year ended March 31, 2012, two customer represented 30% and 24%, respectively, 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, 2013 was $1,382,000, or 63.0% of total revenues, compared with $969,000, or 51.9% of total revenues, for the comparable prior year period. The increase in gross profit dollars and gross profit as a percentage of total revenues is primarily due to the effect of the royalty and product minimums recognized during the fiscal year ended March 31, 2013, as previously described, and the increase in product sales.

Gross profit on product sales for the fiscal year ended March 31, 2013 was $607,000, or 42.8% of product sales, compared with $28,000, or 3.0% of product sales, for the comparable prior year period. The improvement in gross profit dollars and gross profit as a percentage of product sales is primarily due to continued improvement in our manufacturing cost structure and efficiencies in our manufacturing processes combined with the increase in product sales. We believe our efforts to improve manufacturing overhead costs and processes have stabilized, and future growth in product sales, which future growth cannot be assured, should benefit gross profit on product sales.

- 24 -


Research, Development and Regulatory Expenses

Research and development expenses for the fiscal year ended March 31, 2013 were $444,000 as compared with $605,000 for the comparable prior year period, a decrease of $161,000 or 26.6%. 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. The decrease in research and development expenses is primarily a result of the elimination of non-essential departmental resources. Management believes its current research and development resources meet the needs of our customers and internal development needs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the fiscal year ended March 31, 2013 were $1,609,000 as compared with $1,844,000 for the comparable prior year period, a decrease of $235,000 or 12.7%. The decrease is primarily due to reductions in legal, accounting and regulatory fees and insurance costs.

Impairment of Long-Lived Assets

As a result of our evaluation of the recoverability of our property and equipment, we determined an impairment for a single group of production equipment existed as of March 31, 2011, accordingly, we recorded an impairment charge of $16,000 for the fiscal year ended March 31, 2012. We determined that during the fiscal year ended March 31, 2013, there existed no additional impairment of our long-lived assets.

Interest and Other Expenses

Interest and other expenses for the fiscal year ended March 31, 2013 were $340,000 as compared to $316,000 for the comparable prior year period. During the fiscal year ended March 31, 2013, interest expense is composed of i) $280,000 of cash paid in connection with the financing obligation, ii) $53,000 of interest accrued in connection with the financing obligation and iii) $7,000 of amortized deferred financing costs. During the fiscal year ended March 31, 2012, interest expense of $165,000 is primarily composed of i) interest incurred on the $800,000 promissory note issued in July 2011, ii) the amortization of related deferred financing costs, and iii) interest incurred on the long-term financing obligation. Loss on extinguishment of promissory note of $151,000 is composed of the write-off of remaining deferred financing costs and the prepayment penalties incurred as a result of the early extinguishment of the promissory note.

Income Taxes

We did not record a tax provision in either of the years ended March 31, 2013 and 2012.

As of March 31, 2013, we had federal and state net operating loss carry forwards available to offset future taxable income of approximately $26,094,000, expiring between 2014 and 2033, and $10,313,000, expiring between 2014 and 2018, respectively. As of March 31, 2013, we had a capital loss carry forward available to offset future taxable income of approximately $9,065,000, expiring between 2015 and 2016. As of March 31, 2013, we had federal and state investment and research tax credit carry forwards available to offset future taxable income of approximately $123,000, expiring between 2014 and 2033, and $223,000, expiring between 2014 and 2018, respectively. 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.

- 25 -


Liquidity and Capital Resources

As of March 31, 2013, we had cash of $103,000, a decrease of $381,000 when compared with a balance of $484,000 as of March 31, 2012.

During the fiscal year ended March 31, 2013, we had net cash outflows of $484,000 from operating activities as compared with net cash outflows of $1,752,000 for the comparable prior year period. Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees; facility and facility-related costs, material and overhead costs used in production, laboratory supplies and materials, and professional fees. The sources of our cash flow from operating activities have consisted primarily of payments received from customers on the sale of polymer products and fees earned on license, royalty and development agreements. Net cash flows used in operating activities decreased by approximately $1,328,000, as compared to the comparable prior year period, primarily due to (i) increased product sales and timely collection of receivables; and ii) improvements in gross profits from product sales due to the positive effect of our cost containment efforts and increased efficiencies with respect to production.

During the fiscal year ended March 31, 2013, we had net cash outflows from investing activities of $10,000 related to deposits on the building lease as compared to no net cash outflows for the comparable prior year period.

During the fiscal year ended March 31, 2013, we had net cash inflows of $113,000 from financing activities as compared to $1,759,000 for the comparable prior year period. The net cash flows from financing activities of $53,000 during the fiscal year ended March 31, 2013 represents accrued interest on financing obligations. The net cash flows from financing activities during the fiscal year ended March 31, 2012 is primarily due to the sale of our land and building for $2,000,000, less approximately $102,000 of transaction costs, and was accounted for as a financing transaction. During the three months ended September 30, 2011, we issued a Commercial Real Estate Promissory Note in the principal amount of $800,000, net of financing costs of $67,000 (the "Note").
The Note was secured by our land and building pursuant to the terms and conditions of the Note and a mortgage in favor of the lender. The principal amount of the Note was repaid in connection with the December 22, 2011 financing transaction, including a $99,000 prepayment penalty, and the mortgage was discharged.

There were no options or warrants exercised during the fiscal years ended March 31, 2013 and 2012. During the fiscal year ended March 31, 2012, we issued 140,566 shares of our common stock to employees pursuant to our Employee Stock Purchase Plan and received cash proceeds of approximately $7,000.

On December 22, 2011, we entered into an agreement with an independent third-party under which we sold and leased back our land and building generating gross proceeds of $2,000,000. The initial minimum lease term is 15 years. At the end of the initial minimum lease term, we have the option to renew the lease for three periods of five years each. Under the terms of the lease, we have provided, as collateral, a security interest in all furnishings, fixtures and equipment owned and used by us, having a net book value of approximately $146,000 as of March 31, 2012. For accounting purposes, the provision of such collateral constitutes continuing involvement with the associated property. Due to this continuing involvement, this sale-leaseback transaction is accounted for under the financing method, rather than as a completed sale. Under the financing method, we include the sales proceeds received as a financing obligation. The building, building improvements and land remain on the consolidated balance sheet and the building and building improvements will continue to be depreciated over their remaining useful lives. Payments made under the lease are applied as payments of imputed interest and deemed principal on the underlying financing obligation. The following table summarizes the financing transaction:

Gross proceeds from sale of land and building $2,000,000

Less:
Repayment of promissory note                   (800,000)
Prepayment penalty on promissory note           (99,000)
Transaction costs                              (102,000)
Net proceeds from sale of land and building     $999,000

In connection with the financing transaction, we were required to place $280,000 of the net proceeds in escrow as a prepayment of the calendar year 2012 lease payment. As of March 31, 2013 and 2012, the balance of the prepaid lease payment was $0 and $210,000, respectively, and is included in prepaid expenses and other current assets of the consolidated balance sheet.

- 26 -


The ability to attract additional capital investments in the future will depend on many factors, including the availability of credit, rate of revenue growth, the expansion of selling and marketing and research and development activities, and the timing of new product introductions and enhancements to existing products. We believe that as of March 31, 2013 our cash position and cash flows from our fiscal 2014 operations will be sufficient to fund our working capital and research and development activities for at least the next twelve months.

Any potential future sale of equity or debt securities may result in dilution to our stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, or at all.
If we are required to raise additional financing, but are unable to obtain such financing, we may be required to delay, reduce the scope of, or eliminate one or more aspects of our operations or business development activities.

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, 2013, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Item 7A.

  Add ASNB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ASNB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.