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-Q on 14-Feb-2014All Recent SEC Filings

Show all filings for ADVANSOURCE BIOMATERIALS CORP

Form 10-Q for ADVANSOURCE BIOMATERIALS CORP


14-Feb-2014

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains certain statements that are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). These forward looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

The words "anticipate," "believe," "estimate," "expect," "intend," "will," "should" and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions.

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this quarterly report on Form 10-Q. For example, we may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market our products; the market may not accept our existing and future products; we may not be able to retain our customers; we may be unable to retain existing key management personnel; and there may be other material adverse changes in our operations or business. Certain 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. We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law. For further information, you are encouraged to review our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 and the risk factors discussed therein under Part I. Item 1A.

Overview

We develop advanced polymer materials which provide critical characteristics in the design and development of medical devices. Our biomaterials are used in devices that are designed for treating a broad range of anatomical sites and disease states. Our business model leverages our proprietary materials science technology and manufacturing expertise in order to expand our product sales and royalty and license fee income.

Our leading edge technology, notably products such as ChronoFlex®, HydroMed™, and HydroThane™, has been developed to overcome a wide range of design and functional challenges, from the need for dimensional stability, ease of manufacturability and demanding physical properties to overcoming environmental stress cracking and providing heightened lubricity for ease of insertion. Our polymer product lines are compliant with measures applying to the processing of certain animal waste to protect against transmissible spongiform encephalopathies as set forth in European Council Decision 1999/534/EC. Our new product extensions allow us to customize our proprietary polymers for specific customer applications in a wide range of device categories.

- 12 -


Technology and Intellectual Property

Our unique materials science strengths are embodied in our family of proprietary polymers. We manufacture and sell our custom polymers under the trade names ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, ChronoSil, HydroThane, and PolyBlend. The ChronoFlex family of polymers has the potential to be marketed beyond our existing customer base. Our goal is to fulfill the market's need for advanced materials science capabilities, thereby enabling customers to improve devices that utilize polymers. Our chemists continue to develop the ChronoFlex family of medical-grade polymers. Conventional polymers are susceptible to degradation resulting in catastrophic failure of long-term implantable devices such as pacemaker leads. ChronoFlex and ChronoThane polymers are designed to overcome such degradation and reduce the incidents of infections associated with invasive devices.

Key characteristics of our polymers are i) optional use as lubricious coatings for smooth insertion of a device into the body, ii) antimicrobial properties that are part of the polymer itself, and iii) mechanical properties, such as hardness and elasticity sufficient to meet engineering requirements. We believe our technology has wide application in increasing biocompatibility, drug delivery, infection control and expanding the utility of complex devices in the hospital and clinical environment.

We manufacture and sell our proprietary HydroThane polymers to medical device manufacturers that are evaluating HydroThane for use in their products. HydroThane is a thermoplastic, water-absorbing, polyurethane elastomer possessing properties which we believe make it well suited for the complex requirements of a variety of catheters. In addition to its physical properties, we believe HydroThane exhibits an inherent degree of bacterial resistance, clot resistance and biocompatibility. When hydrated, HydroThane has elastic properties similar to living tissue.

We also manufacture specialty hydrophilic polyurethanes that are primarily sold to customers as part of exclusive arrangements. Specifically, one customer is supplied tailored, patented hydrophilic polyurethanes in exchange for a multi-year, royalty-bearing exclusive supply contract which generates royalty income for the Company.

ChronoFilm is a registered trademark of PolyMedica. ChronoFlex is our registered trademark. ChronoThane, ChronoPrene, ChronoSil, HydroThane, and PolyBlend are our tradenames. CardioPass is our trademark.

We own or license four patents relating to our vascular graft manufacturing and polymer technology and products. While we believe our patents secure our exclusivity with respect to certain of our technologies, there can be no assurance that any patents issued would not afford us adequate protection against competitors which sell similar inventions or devices, nor can there be any assurance that our patents will not be infringed upon or designed around by others. However, we intend to vigorously enforce all patents issued to us.

In October 2009, we filed for a U.S. patent on ChronoSil, our silicone-urethane copolymer product, and methods for making ChronoSil. ChronoSil can have many physical properties which are usually associated with polyurethanes, but also the feel and characteristics of silicones.

In August 2010, the U.S. Patent and Trademark Office issued us a U.S. patent on our proprietary antimicrobial formulation for ChronoFlex. Current technology in the marketplace uses antibiotic drugs. The antimicrobial component of our polymers has been designed to be non-leaching as a result of the polymerization process.

In addition, PolyMedica has granted us an exclusive, perpetual, worldwide, royalty-free license for the use of one polyurethane patent and related technology in the field consisting of the development, manufacture and sale of implantable medical devices and biodurable polymer material to third parties for the use in medical applications (the "Implantable Device and Materials Field"). PolyMedica also owns, jointly with Thermedics, Inc., an unrelated company that manufactures medical grade polyurethane, the ChronoFlex polyurethane patents relating to the ChronoFlex technology. PolyMedica has granted us a non-exclusive, perpetual, worldwide, royalty-free sublicense of these patents for use in the Implantable Devices and Materials Field.

- 13 -


Critical Accounting Policies

Our critical accounting policies are summarized in Note B to our consolidated financial statements included in Item 8 of our annual report on Form 10-K for the fiscal year ended March 31, 2013. However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our financial statements. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our unaudited condensed financial statements. There have been no changes to our critical accounting policies during the fiscal quarter ended December 31, 2013.

Results of Operations

Three Months Ended December 31, 2013 vs. December 31, 2012

Revenues

Total revenues for the three months ended December 31, 2013 were $685,000 as compared with $869,000 for the prior year period, a decrease of $184,000, or 21.2%.

Product sales of our biomaterials for the three months ended December 31, 2013 were $425,000 as compared with $440,000 for the prior year period, a decrease of $15,000, or 3.4%. The slight decrease is due to one order from one customer resulting in product sales of approximately $165,000 during the three months ended December 31, 2012 which did not recur in the three months ended December 31, 2013. We anticipate future orders from this one customer, although there can be no assurance as to the timing or amount of future orders from this one customer. The decrease in product sales resulting from the absence of orders from this one recurring customer during the three months ended December 31, 2013 was offset by approximately $116,000 in additional sales to our two most significant product sales customers as well as an approximate $84,000 increase in sales from six of recurring customers. As of December 31, 2013 our product sales backorder was approximately $602,000.

License, royalty and development fees for the three months ended December 31, 2013 were $260,000 as compared with $429,000 for the prior year period, a decrease of $169,000 or 39.4%. 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 net decrease of approximately $288,000 of fees from one domestic customer as a result of the i) termination of exclusivity fees and ii) reduction in royalty and product minimums pursuant to an amendment to a continuing royalty and product supply agreement. This decrease was offset, in part, by increased quarterly fees of approximately $120,000 from a major international developer and manufacturer of medical devices pursuant to the amendment of a non-exclusive license agreement and consulting services agreement.

Gross Profit

Gross profit on total revenues for the three months ended December 31, 2013 was $517,000, or 75.5% of total revenues, compared with $673,000, or 77.5% of total revenues, for the prior year period. The decrease in gross profit dollars and gross profit as a percentage of product sales is primarily due to the effect of decreased license, royalty and development fees. The decrease was positively affected by improved margins on product sales.

Gross profit on product sales for the three months ended December 31, 2013 was $257,000, or 60.1% of product sales, compared with $244,000, or 55.5% of product sales, for the prior year period. The increase in gross profit dollars and gross profit as a percentage of product sales is primarily due to the improved absorption of fixed overhead costs resulting from the increase in production activities to build inventories for anticipated future product sales.

- 14 -


Research, Development and Regulatory Expenses

Research and development expenses for the three months ended December 31, 2013 were $90,000 as compared with $99,000 for the prior year period, a decrease of $9,000 or 9.1%. Our research and development efforts are focused on developing new applications for our biomaterials. Research and development expenditures consist primarily of the salaries of full time employees and related expenses, and are expensed as incurred. Research and development expenses have remained stable from quarter to quarter. 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 three months ended December 31, 2013 were $342,000 as compared with $376,000 for the prior year period, a decrease of $34,000, or 9.0%. The decrease is primarily due to reduction in administrative consulting costs and board of director fees.

Other Expense, Net

Other expense, net for the three months ended December 31, 2013 were $44,000 as compared to $85,000 for the comparable prior year period, a decrease in net expense of $41,000 or 48.2%. Interest expense is composed primarily of interest accrued in connection with the financing obligation. Other income is primarily a result of i) a gain on sale of equipment of approximately $36,000 and ii) other income of approximately $8,000 realized from the favorable settlement of an obligation to one vendor.

Nine Months Ended December 31, 2013 vs. December 31, 2012

Revenues

Total revenues for the nine months ended December 31, 2013 were $1,748,000 as compared with $1,786,000 for the prior year period, a decrease of $38,000, or 2.1%.

Product sales of our biomaterials for the nine months ended December 31, 2013 were $1,145,000 as compared with $1,114,000 for the prior year period, an increase of $31,000, or 2.8%. The increase is due to the growth in product sales from existing and new customers, including commencement of product deliveries to a significant customer who previously placed a large order during the first quarter of fiscal 2014. As of December 31, 2013 our product sales backorder was approximately $602,000.

License, royalty and development fees for the nine months ended December 31, 2013 were $603,000 as compared with $672,000 for the prior year period, a decrease of $69,000 or 10.3%. 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 net decrease of approximately $302,000 of fees from one domestic customer as a result of the i) termination of exclusivity fees and ii) reduction in royalty and product minimums pursuant to an amendment to a continuing royalty and product supply agreement. This decrease was offset, in part, by increased quarterly fees of approximately $240,000 from a major international developer and manufacturer of medical devices pursuant to i) the achievement of certain milestones pursuant to the original non-exclusive license and consulting services agreements and ii) quarterly fees pursuant to the amendment of the non-exclusive license and consulting services agreements.

Gross Profit

Gross profit on total revenues for the nine months ended December 31, 2013 was $1,197,000, or 68.5% of total revenues, compared with $1,224,000, or 68.5% of total revenues, for the prior year period. The decrease in gross profit dollars and flat gross profit as a percentage of total revenues is primarily due to the effect of decreased license, royalty and development fees. The decrease was positively affected by improved margins on product sales.

Gross profit on product sales for the nine months ended December 31, 2013 was $594,000, or 51.9% of product sales, compared with $552,000, or 49.6% of product sales, for the prior year period. The increase in gross profit dollars and gross profit as a percentage of product sales is primarily due to the improved absorption of fixed overhead costs resulting from the increase in product sales volume. Additionally, absorption of fixed overhead costs further improved as a result of increases in production activities to build inventories for anticipated future product sales.

- 15 -


Research, Development and Regulatory Expenses

Research and development expenses for the nine months ended December 31, 2013 were $298,000 as compared with $342,000 for the prior year period, a decrease of $44,000 or 12.9%. Our research and development efforts are focused on developing new applications for our biomaterials. Research and development expenditures consist 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 nine months ended December 31, 2013 were $1,080,000 as compared with $1,232,000 for the prior year period, a decrease of $152,000, or 12.3%. The decrease is primarily due to reductions in administrative consulting costs, trade show related costs, and board of director fees.

Other Expense, Net

Other expense, net for the nine months ended December 31, 2013 were $226,000 as compared to $254,000 for the comparable prior year period, a decrease in net expense of $28,000 or 11.0%. Interest expense is composed primarily of interest accrued in connection with the financing obligation. Additionally, the increase in interest expense is attributable to approximately $10,000 of stock-based compensation ascribed to the warrants issued in connection with the August 22, 2013 Note and Warrant financing transaction. Other income is primarily a result of i) a gain on sale of equipment of approximately $36,000 and ii) other income of approximately $8,000 realized from the favorable settlement of an obligation to one vendor.

Liquidity and Capital Resources

As of December 31, 2013, we had cash of $108,000. This represents an increase of $33,000, or a 44.0% improvement in our cash balance when compared to a balance of $75,000 as of March 31, 2013.

During the nine months ended December 31, 2013, we had net cash outflows of $146,000 from operating activities as compared with net cash outflows of $448,000 for the 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 improved by approximately $302,000, as compared to the prior year period, primarily due to (i) increased margins on product sales and timely collection of receivables; ii) extended payment terms with certain vendors; iii) elimination of administrative consultants and reduction of board of director fees; and iv) receipt of cash in connection with the amendment of certain license and consulting agreements with a major international developer and manufacturer of medical devices. These cash inflows were offset by our net loss for the period and the build-up of inventories for future product sales.

During the nine months ended December 31, 2013, we had net cash inflows from investing activities of $35,000 in connection with i) the sale of equipment and
ii) deposits on the building lease. We had no cash activity in connection with investing activities during the nine months ended December 31, 2012.

During the nine months ended December 31, 2013, we had net cash inflows from financing activity of $116,000. The cash inflows for the nine months ended December 31, 2013 were attributable to i) accrued interest on financing obligations of $46,000 as compared to $39,000 for the comparable prior year period; and ii) proceeds from the issuance of a $100,000 promissory note. The cash inflows were offset by the $30,000 repayment of a portion of the related party payable.

There were no options or warrants exercised during the nine months ended December 31, 2013 and 2012, respectively. 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 December 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.

- 16 -


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.

Off-Balance Sheet Arrangements

As of December 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 3.

  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.