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EX-31.2 - GRANDPARENTS.COM, INC. | v197316_ex31-2.htm |
EX-23.1 - GRANDPARENTS.COM, INC. | v197316_ex23-1.htm |
EX-31.1 - GRANDPARENTS.COM, INC. | v197316_ex31-1.htm |
EX-32.1 - GRANDPARENTS.COM, INC. | v197316_ex32-1.htm |
EX-10.3F - GRANDPARENTS.COM, INC. | v197316_ex10-3f.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended June 30, 2010
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from __________ to __________
Commission File Number 0-21537
Pacific
Biomarkers, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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93-1211114
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification
Number)
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220
West Harrison Street
Seattle,
Washington 98119
(Address
of principal executive offices)
(206)
298-0068
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Exchange
Act: None
Securities
registered pursuant to Section 12(g) of the Exchange
Act: Common Stock, $0.01 par value per
share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes¨ No x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yeso No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes x No o.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yeso Nox
The
aggregate market value of the registrant’s common stock held by non-affiliates
on December 31, 2009 (the last business day of the registrant’s most recently
completed second fiscal quarter) was $7,606,388 based on the average of the bid
and ask prices of such stock on that date of $0.51, as reported on the OTC
Bulletin Board.
On
September 21, 2010, there were 16,669,856 shares of the registrant’s common
stock issued and outstanding.
Documents Incorporated By
Reference: The registrant’s definitive proxy statement for the 2010
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 2010 fiscal year, is
incorporated by reference in Part III hereof.
PACIFIC
BIOMARKERS, INC.
Form 10-K
Annual Report
Table of
Contents
Page
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PART
I
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Item
1
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Business
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2
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Item
1A
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Risk
Factors
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8
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Item
1B
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Unresolved
Staff Comments
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17
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Item
2
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Properties
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17
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Item
3
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Legal
Proceedings
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17
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Item
4
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[Removed
and Reserved]
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17
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PART
II
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Item
5
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and
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Issuer
Purchases of Equity Securities
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17
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Item
6
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Selected
Financial Data
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18
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Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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26
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Item
8
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Financial
Statements and Supplementary Data
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26
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Item
9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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26
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Item
9A
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Controls
and Procedures
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26
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Item
9B
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Other
Information
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27
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PART
III
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Item
10**
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Directors,
Executive Officers and Corporate Governance
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27
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Item
11**
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Executive
Compensation
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28
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Item
12**
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Security
Ownership of Certain Beneficial Owners and Management and
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Related
Stockholder Matters
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28
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Item
13**
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Certain
Relationships and Related Transactions, and Director
Independence
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28
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Item
14**
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Principal
Accountant Fees and Services
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29
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PART
IV
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Item
15
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Exhibits
and Financial Statement Schedules
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29
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SIGNATURES
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32
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**
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Information
contained in Items 10, 11, 12, 13 and 14 of Part III is incorporated by
reference from the definitive proxy statement for our 2010 annual meeting
of stockholders, which will be filed with the Securities and Exchange
Commission on or before October 28, 2010 (within 120 days after the close
of the 2010 fiscal year).
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i
EXPLANATORY
NOTE
Unless
otherwise indicated or the context otherwise requires, all references in this
Report to “we,” “us,” “our,” and the “Company” are to Pacific Biomarkers, Inc.
and our wholly-owned subsidiaries.
CAUTIONARY
NOTICE REGARDING FORWARD LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking statements,
including statements about
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our
working capital and cash flows and our estimates as to how long these
funds will be sufficient to fund our
operations,
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our
business development efforts and our expectations for future work orders
for services and revenue
generation,
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our
plans for growing demand for our services and products, including our
expectations for our novel biomarker
services,
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our
goals for implementing aspects of our business plan and strategies,
and
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our
financing goals and plans
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The
forward-looking statements in this Report reflect management’s current views and
expectations with respect to our business, strategies, services, future results
and financial performance. All statements other than statements of historical
fact, including statements addressing projected results of operations or our
future financial position, made in this Annual Report on Form 10-K are
forward looking. In particular, the words “expect,” “anticipate,” “estimate”,
“desire”, “goal”, “ believe”, “may”, “will”, “should”, “could”, “intend”,
“objective”, “seek”, “plan”, “strive”, variations of such words, or similar
expressions, or the negatives of these words, are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements. The absence of these words does not mean that any
particular statement is not a forward-looking statement.
These
forward-looking statements are subject to risks and uncertainties. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated or implied by these
forward-looking statements. We expressly disclaim any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statements
contained in this Report to reflect any change in management’s expectations with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based.
For a
discussion of some of the factors that may affect our business, results and
prospects, see “ITEM 1A – RISK FACTORS” beginning on page 8. Readers are urged
to carefully review and consider the various disclosures made by us in this
Report and in our other reports previously filed with the Securities and
Exchange Commission, including our periodic reports on Forms 10-K, 10-Q and 8-K,
and those described from time to time in our press releases and other
communications, which attempt to advise interested parties of the risks and
factors that may affect our business, prospects and results of
operations.
1
PART
I
ITEM
1 BUSINESS
General
We
provide specialty laboratory services to support pharmaceutical, biotechnology
and laboratory diagnostic manufacturers in the conduct of human clinical
research, for use in their drug and diagnostic product development efforts. Our
clients include a number of the world’s largest multi-national pharmaceutical,
biotechnology and diagnostic companies. Our well-recognized specialty areas
include
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Diabetes
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Obesity
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Cardiovascular
diseases (dyslipidemia, atherosclerosis, and coronary heart
disease),
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Rheumatology
and Bone diseases, (including osteoporosis, osteoarthritis and rheumatoid
arthritis.
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Coupled
with our specialty testing, we also have central laboratory capability and
provide full-service central laboratory support for multi-center clinical
trials, including routine safety lab tests. We participate in all in-human
clinical trials, phases I – IV.
We also
perform clinical biomarker services for novel biomarkers, as well as custom
assay services for our pharmaceutical and biotechnology clients. Through our
biomarker services, we provide assay development services for novel biomarkers,
as well as custom assay services for immunogenicity testing and multiplex
testing. We anticipate that our clinical biomarker services will help diversify
our client base because these services apply to therapeutic areas beyond our
traditional specialty areas. We believe that the growing number of biological
and biosimilar drugs under development will drive increasing demand for highly
specialized and technical consultative services. We expect that these biomarker
services will also complement and extend our strong reputation in this specialty
testing sector.
Our
company is a Delaware corporation, incorporated in May 1996, and we conduct our
operations primarily through our wholly-owned subsidiary, Pacific Biomarkers,
Inc., a Washington corporation.
Business
Strategy
Our
primary business strategy is to increase our revenues and market share by
providing high quality specialty reference laboratory services in our core
areas, and growing our novel biomarker services, a dynamic sector of laboratory
services for clinical drug development.
A key
component of our strategy is to meet the outsourcing needs of pharmaceutical,
biotechnology, diagnostic companies and other central laboratories. Specialty
reference and central laboratory service companies like ours typically derive
substantially all of their revenue from the research and development
expenditures of the pharmaceutical, biotechnology, and diagnostic industries.
Participants in these industries typically outsource a significant quantity of
these services both to central laboratories and to specialty reference
laboratories. We believe that such outsourcing will continue and may increase in
the future because of many factors, including continuing pressures on the
pharmaceutical and biotechnology industries to contain costs, limitations on
pharmaceutical companies’ internal capacity, difficulty in developing expertise
in specialty testing areas internally within pharmaceutical companies or central
labs, a need for faster development time for new drugs, research in multiple
countries simultaneously and stringent government regulation. In addition,
central laboratories outsource to specialty reference laboratories some of the
testing that requires specialized expertise. Referrals from large clinical
laboratories depend on whether the central laboratory has internal expertise and
their internal work capacity, and ongoing consolidation in the industry has
affected the level of referrals.
Another
component of our strategy is to assist in enhancing the drug and diagnostic
development processes by developing and delivering innovative services that
apply science and technology in the provision of high quality service within our
areas of specialty. The development of new drugs and diagnostic products require
a significant investment of time and money by pharmaceutical, biotechnology, and
diagnostic companies. We believe that these factors create opportunities for
companies like ours to provide our expertise and services to help reduce the
time in the drug development and laboratory diagnostic product development
processes and make the processes more efficient.
2
Described
below are other efforts we are pursuing, or may pursue in the future, to further
our business strategies.
Increase
Specialty Areas
Our goal
is to expand our specialty laboratory expertise, beyond our core specialties of
cardiovascular diseases and rheumatology and bone diseases, within related areas
where we have a competitive advantage of existing in-depth expertise. This
includes novel biomarkers, immunogenicity, central nervous system disorders and
multiplexing platforms.
As part
of this strategy, in fiscal 2008, we expanded our service offerings into new
areas, both in terms of therapeutic areas and assay methodologies. Through our
biomarker services, we offer custom biomarker assay development, immunogenicity
assay development, and multiplex testing. We expect these activities to lead to
significant growth in our customer base and increases in our future
revenues.
In fiscal
year 2010 we began working on a biomarker initiative with the aim of identifying
a set of biomarkers that current literature and experimental evidence indicate
have the greatest possibility of being used in the early identification and
treatment of (drug)-induced Acute Kidney Injury (AKI). Drug-induced organ injury
is a serious condition accounting for as much as $75 billion for every 250
compounds tested. We believe that the pharmaceutical companies have a major
business incentive for early detection of flawed drugs. Development costs for
each approved drug cost approximately $1 billion or more to develop over an
average timeframe of 10 years. Assuming an average of 250 compounds tested
yearly and 30% found toxic, 75 compounds would be spared full development
resulting in savings of up to $7.5 billion per year. This ongoing initiative is
designed to help the pharmaceutical companies by reliably measuring biomarkers
that prevent compounds from entering the next stage of development unless they
are free of drug-induced toxicity. We have already validated a majority of
biomarkers associated with kidney organ injury specified by the Predictive
Safety Testing Consortium (PSTC). During fiscal year 2011 we plan to validate
other organ injury biomarkers utilizing the standards established by the
PSTC.
Diversify Client
Base
We have a
goal to continue to diversify our client base, both in terms of the number of
clients and the number of contracts within any particular client.
As a
result of ongoing business development and client diversification efforts, we
added 12 new clients to our client base during the fiscal year ended June 30,
2010, and 9 new clients in fiscal 2009, and we continue to diversify the total
number and types of study contracts. At June 30, 2010, we held a total of 159
active contracts, compared to 137 active contracts at June 30, 2009, a 16%
increase. Management believes that as a result of these continuing business
development activities, we will incrementally diversify our client base and
spread our revenues across a larger number of clients and a larger number of
individual study contracts.
We
anticipate that our clinical biomarker services will help diversify our client
base. These biomarker services apply to therapeutic areas beyond our traditional
specialty areas, and there is also an emphasis on the rapidly growing segment of
biologic drugs. As a result, we hope to develop client relationships with new
divisions within existing clients, as well as with other companies in the
pharmaceutical and biotechnology industries with whom we previously have not
contracted. We believe that these biomarker services will complement and extend
our strong reputation in specialty testing services.
Acquisitions
and Strategic Relationships
Our
clients and our competitors have experienced significant consolidation over the
last several years and we expect that trend to continue. The uncertainty caused
by the consolidation trend may result in other companies in the industry seeking
to form strategic relationships or joint ventures or to be acquired in order to
stay competitive. This may make it possible for us to make strategic
acquisitions that are complementary to our existing services and that expand our
ability to serve our clients. We are also exploring other strategic alternatives
for our business and operations, which may include joint ventures, co-marketing
relationships or other strategic relationships. Additionally, we will evaluate,
as appropriate, any potential business combinations involving our company as a
whole, or involving a portion of our assets.
3
Services
We
provide specialty reference laboratory services and clinical biomarker services,
as well as central laboratory services.
Specialty
Reference Laboratory Services
Our
specialty reference laboratory in Seattle, Washington has established itself as
a technical leader due to our strong expertise in certain core areas. Our three
well-recognized specialty areas include:
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cardiovascular
diseases (dyslipidemia, atherosclerosis, and coronary heart
disease),
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diabetes,
metabolic syndrome, and obesity,
and
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rheumatology
and bone diseases (osteoporosis as well as osteoarthritis and rheumatoid
arthritis).
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Management
believes that among prospective new drugs, these areas of expertise represent
three of the top ten areas of focus by the pharmaceutical industry.
With
respect to cardiovascular diseases, we are one of the leaders in lipid services
for clinical drug development and diagnostic product development in the U.S. and
internationally. Our expertise is concentrated on the measurement of
cardiovascular disease markers, especially cholesterol and lipoproteins,
including HDL, LDL and subfractions thereof, remnant cholesterol,
apolipoproteins, Lp(a), and protein and lipid composition of
lipoproteins.
We are
enhancing our activities in the area of diabetes and related disorders, notably
obesity and metabolic syndrome. Moreover, we are expanding our test menu in
areas related to diabetes and metabolic syndrome, notably in testing for markers
of inflammation and gut hormones. In prior fiscal years, we noticed a
significant increase in interest in assays for hormones such as GLP-1, GIP, PYY,
and ghrelin, which are produced in the gut and are dysregulated in conditions
such as diabetes and obesity. In the fiscal year of 2010 we have added
additional novel gut hormones to our test menu as well as improved our current
panel of gut hormones. The American Diabetes Association reports in 2010 that
diabetes is the fastest growing disease in the history of the United States.
Diabetes kills more people than breast cancer and AIDS combined and if current
trends continue, one in three children born since 2000 will develop diabetes in
their lifetime. Every 19 seconds a new case of diabetes is diagnosed. Diabetes
costs the U.S. approximately $218 billion each year. Because of our established
strengths in testing for lipids, cardiovascular risk and diabetes, we believe we
are well positioned to take advantage of this emerging area of pharmaceutical
drug development. We believe our strength in performing these difficult assays
will be attractive to our clients and be a significant source of future
revenues.
In fiscal
year 2010 we developed a novel method for the measurement of bile acids using
our LC-MS/MS platform acquired earlier the same year. Bile acids are well
recognized as essential for regulating cholesterol homeostasis and the digestion
and absorption of fat through the intestine, but in recent years, bile acids
have emerged as signaling molecules with endocrine functions, acting as ligands
for the G-protein coupled receptor TGR5 and the nuclear receptor farnesoid X
receptor (FXR). This has elevated the importance of bile acids beyond fat
digestion and into triglyceride, cholesterol, and glucose homeostasis. We
believe this assay will support our already ongoing programs in the diabetes and
cardiovascular areas because of the growing interest in bile acids as
therapeutic targets for the treatment of obesity, type 2 diabetes, and
hyperlipidemia.
In the
areas of bone metabolism and women’s health, we also specialize in the
measurement of hormones, and our menu of biochemical markers includes
pyridinolines, various C- and N- terminal telopeptides, procollagens,
osteocalcin and bone-specific alkaline phosphatase. Moreover, in recent years we
have actively expanded our test menu to include biochemical markers of cartilage
turnover as relating to drug development for arthritis, and we have performed
specialty testing to support clinical drug development of drugs for rheumatoid
arthritis and osteoarthritis. Further, we expect to see renewed increases in
demand for our testing services in drug development for rheumatoid arthritis,
and we expect this to be a significant source of future revenues.
4
In
connection with these stated areas of expertise, we offer a variety of services
through our specialty reference laboratory, including
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clinical
study testing services,
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development
of laboratory reference methods,
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development
of clinical trial protocols, and
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contract
research and development.
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Our
involvement with clients frequently begins at the protocol design stage.
Clinical trial support includes coordinating the collection and receipt of
specimens from investigative sites, processing the samples, generating test
databases and reporting the consolidated data to study sites and sponsors. The
extensive knowledge we have in test development and our close collaboration with
diagnostic manufacturers, frequently allow us to offer novel tests to our
clinical research clients before such tests are commercially
available.
We have
developed certain computer software and proprietary processes and procedures
intended to enhance the quality and effectiveness of our services. These
proprietary processes derive from the technical expertise, knowledge, ability
and experience of our laboratory professionals, and provide significant benefits
to our clients.
Novel
Biomarker Services
In fiscal
2008, we began offering new testing services that relate to the use of
biomarkers in clinical drug development. “Biomarkers” are any biological
parameters that can be measured in patient samples (e.g., blood or urine) and
that provide specific information about the effects (both safety and efficacy)
of a particular drug. There is a rapidly growing trend in the pharmaceutical and
biotechnology industries to use biomarkers to help guide drug development. We
have noticed recently more companies that offer various types of biomarker
services. We believe that this investment by others in this area validates our
conclusion that this is not only a significant growth area, but that we also
have an appropriate strategy to win more business in this area.
Leveraging
our extensive experience and expertise in performing demanding assays as well as
our long history of supporting diagnostic product development, we created our
biomarkers division to focus on this new market segment and to aggressively
expand and market our services for:
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biomarker
assay development
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immunogenicity
testing
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multiplex
testing
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We
anticipate that our clinical biomarker services will help diversify our client
base because these services apply to therapeutic areas beyond our traditional
specialty areas, and there is also an emphasis on biologic drugs. We also expect
that these biomarker services will complement and extend our strong reputation
in specialty testing services.
Clients
/ Marketing
We
provide specialty reference, novel biomarker and central laboratory services to
the pharmaceutical, biotechnology, and laboratory diagnostic industries. The
majority of our clients are pharmaceutical companies, many of which are on the
list of Fortune 500 companies, and 37% of our revenue was derived from these
Fortune 500 clients in fiscal 2010. Our clients generally range from the world’s
largest pharmaceutical companies and biotechnology companies to small and
start-up organizations. Our clients also include large central laboratories for
whom we provide subcontractor services for our specialty reference laboratory
testing.
Our
revenue has been concentrated in a small number of clients. For revenue
calculations we aggregate as a single client all revenues we receive from
several operating divisions within one pharmaceutical or biotechnology company.
We routinely have two or more large clients who individually account for more
than 10% of our revenue. Our two largest clients in fiscal 2010 represented 46%
of our revenue (27% and 19%, respectively), as compared to 40% from our two
largest clients in fiscal 2009 (27% and 13%, respectively). One of these clients
was the same and one was different in each fiscal period. Revenue from our five
largest clients represented approximately 65% and 70% of total revenue in fiscal
2010 and 2009. The loss of any of our largest clients could have a material
adverse impact on our revenues and results of operations.
5
Our
scientific expertise is an integral and interrelated part of our business
development, marketing and sales process. Our success in business development
depends in part on our reputation in the industry and client perceptions
(particularly as to our scientific expertise, but also our laboratory capacity
and financial health), and also to a degree on personal relationships between us
and the client. Accordingly, our Chief Scientific Officer and science and
technology team are directly involved in sales and marketing through company
capability and scientific presentations as well as consultation with
pharmaceutical clinical teams beginning at the protocol design
stage.
We
continually focus on our business development efforts, and we added two
employees to our business development group during fiscal 2010, in addition to
the work of our science and technology team. The primary component of our
business development efforts has been directed towards pharmaceutical and
biotechnology companies, which includes our novel biomarkers business, and we
expect this to continue. We also constantly seek to build relationships with
other large clinical laboratories for referral work for our specialty laboratory
testing.
Contractual
Arrangements
We enter
into contracts with all of our clients for our laboratory services. Contracts
may range from a few months to several years depending on the nature of the work
performed and the duration of the client’s study. For some contracts, a portion
of the contract fee is paid at the time the study or trial is started with the
balance of the contract fee payable in installments upon the progress of the
work completed or achievement of milestones over the study or trial duration. We
recognize revenue in the period that we perform the related
services.
We often
enter into master service agreements with clients under which we perform
services based on work orders submitted to us from time to time by the client.
As of the end of our 2010 fiscal year, we had master service agreements with 20
of our clients as compared to 16 agreements we had as of June 30, 2009. There is
no guaranteed minimum number of work orders or revenue to us under these master
service agreements. Each work order is separately negotiated with the client and
is usually limited to a specific project with limited duration.
Our
contracts with clients are primarily fixed price, where our fees are based on
the number of samples we test at an agreed-upon price per sample. In such cases,
we benefit if our costs are lower than we anticipated but we bear the cost of
overruns. Occasionally, we may enter into contracts priced as a fee-for-service
(with or without a cap). In such cases, the contracts contain an overall budget
for the trial based on time and cost estimates. If our costs are lower than
anticipated, the client generally benefits from the savings. If our costs are
higher than estimated, we bear the responsibility for the overrun unless the
increased cost is a result of a change requested by the client, such as an
increase in the number of patients to be enrolled or the type or amount of data
to be collected. For the 2010 and 2009 fiscal years, fixed price contracts
amounted to 100% of our revenue.
Most of
our contracts or work orders may be terminated or modified at any time by the
client. Clients may terminate, delay, or change the scope of a project for a
variety of reasons including unexpected or undesirable clinical results, a
decision to forego a particular study, regulatory issues and other factors
outside of our control. Our contracts typically entitle us to receive payment
for services performed by us up to the time of termination and reimbursement for
out-of-pocket costs incurred prior to termination. In certain limited instances,
if a study is terminated early our contracts may also entitle us to a
termination fee or payment for the costs of winding down the terminated
project.
Recently,
we have observed that our pharmaceutical and biotechnology clients have been
shifting to “adaptive clinical trials”. These adaptive clinical trial protocols
are designed to replace large, multi-year, multi-million dollar contracts. After
each adaptive clinical trial phase, the pharmaceutical or biotechnology company
reviews the results and decides whether to continue or discontinue the work,
after which we may be awarded another small contract for another discrete
clinical phase. Compared to our traditional contract business, these adaptive
clinical trials are shorter in duration and with fewer test samples sent to us,
resulting in a smaller dollar value contract.
6
Competition
The
clinical laboratory services industries, including specialty reference, novel
biomarker and central laboratory services, have many participants ranging from
small, limited-service providers to a limited number of full-service
laboratories with global capabilities.
For
specialty reference laboratory services in our areas of expertise, we primarily
compete against other full-service and limited-service specialty and central
laboratory services organizations and, to a lesser extent, laboratories in
academic centers. Many of these organizations have significantly greater
resources than we do, with somewhat different focus and business targets. In
addition, with the increased focus on biomarkers in drug development, we are
noticing more companies that offer various types of biomarker services. Our
significant competitors in specialty reference and biomarker laboratory services
include Covance, PPD, LINCO (Millipore), Quintiles, ICON, Synarc, Medpace,
Esoterix (Labcorp), IBT Laboratories, ALTA Immunochemistry, Charles River
Laboratories, Tandem Labs, Eurofins, Clearstone Central Laboratories, CRL,
Cetero, and Cedra.
There is
significant competition for clients on the basis of many factors for both
specialty reference and full-service central laboratory services and biomarker
services, including
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technological
expertise and efficient drug development
processes,
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financial
stability,
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reputation
for on-time quality performance,
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strengths
in various geographic markets and global
reach,
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ability
to manage large-scale clinical trials both domestically and
internationally,
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expertise
and experience in specific areas,
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scope
of service offerings,
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price,
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ability
to acquire, process, analyze and report accurate data in a timely
manner,
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size,
and
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expertise
and experience in health economics and outcomes
services.
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While
size and global reach are more important competitive factors in the central
laboratory services business, we believe that technological expertise is more
important for specialty reference laboratory services. Except as to size and
international capacity, where we know certain other competitors have an
advantage, we believe we compete very favorably in a majority of these areas,
particularly with respect to our technical expertise in our three specialty
areas.
Government
Regulation
Our
laboratory services are subject to various regulatory requirements designed to
ensure the quality and integrity of our laboratory testing in support of
clinical trials. The industry standards for conducting clinical laboratory
testing are embodied in the Clinical Laboratory Improvement Amendments of 1988
(“CLIA”). As a medical test site in the State of Washington and with a clinical
laboratory permit in the State of New York, we have established quality
assurance programs at our laboratory facilities that monitor ongoing compliance
with CLIA. In addition, we are a College of American Pathologists
(“CAP”)-certified test site. This certification provides monitoring for CAP and
CLIA compliance by CAP on a continual basis.
The
industry standards for conducting preclinical laboratory testing are embodied in
the Good Laboratory Practices (“GLP”) regulations as defined by the FDA. For the
majority of our testing, which is not related to preclinical research, we do
comply with specific sections of the GLP regulations, at our discretion, when it
is either important to our clients or is determined by management as
advantageous to our quality assurance program. Additionally, PBI is now offering
fully GLP compliant services as requested by our clients.
Our
clinical laboratory services are subject to industry standards for the conduct
of clinical research and development of studies that are embodied in the
regulations for Good Clinical Practice (“GCP”). The FDA requires that test
results submitted to such authorities be based on studies conducted in
accordance with GCP. Noncompliance with GCP can result in the disqualification
of some or all of the data collected during the clinical trial, as well as
precipitate a full investigation of all previous and current regulatory
submissions.
7
We are
subject to licensing and regulation under federal, state and local laws relating
to workplace hazard communications and employee right-to-know regulations, the
handling and disposal of medical specimens and hazardous waste and radioactive
materials, as well as the safety and health of laboratory employees. Our
laboratory is subject to applicable federal, state and local laws and
regulations relating to the storage and disposal of all laboratory specimens
including regulations of the Environmental Protection Agency, the Nuclear
Regulatory Commission, the Department of Transportation, the National Fire
Protection Agency and the Resource Conservation and Recovery Act. Although we
believe that we are currently in compliance in all material respects with such
federal, state and local laws, failure to comply could subject us to denial of
the right to conduct business, fines, criminal penalties and other enforcement
actions.
In
addition to its comprehensive regulation of safety in the workplace, the
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers whose
workers may be exposed to blood borne pathogens such as HIV and the hepatitis B
virus, as well as radiation. Our employees receive initial and periodic training
focusing on compliance with applicable hazardous materials regulations and
health and safety guidelines.
In the
past few years, the United States and foreign governments have become more
concerned about the disclosure of confidential personal data. In the U.S., the
Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) governs
the disclosure of confidential medical information. We do not process IIHI
(Individually Identifiable Health Information) during any phase of our business
practices related to clinical testing. We therefore are currently exempt from
HIPAA regulations.
The
regulations of the U.S. Department of Transportation, the U.S. Public Health
Service and the U.S. Postal Service apply to the surface and air transportation
of laboratory specimens. We also comply with the International Air Transport
Association (IATA) regulations, which govern international shipments of
laboratory specimens. Furthermore, when materials are sent to a foreign country,
the transportation of such materials becomes subject to the laws, rules and
regulations of such foreign country.
Employees
At
September 21, 2010, we had 69 full-time employees and 2 temporary or contract
employees, for a total of 71 employees, 47 of whom were employed in laboratory
operations, laboratory administration and client services, 6 were employed in
sales, marketing and business development, and 18 were employed in
administrative capacities. Six of our employees hold doctorate level degrees and
two others hold master’s degrees or other postgraduate degrees. None of our
employees are represented by labor unions. We believe that our relationships
with our employees are good.
Available
Information
We make
available free of charge through links on our website at www.pacbio.com, our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after such reports are electronically filed with, or furnished to,
the SEC.
ITEM
1A RISK
FACTORS
The
following discussion in this Annual Report on Form 10-K contains forward-looking
statements regarding our company, our business, prospects and results of
operations that involve risks and uncertainties. Our actual results could differ
materially from the results that may be anticipated by such forward-looking
statements and discussed elsewhere in this Report. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below, as well as those discussed under the captions “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” as well as those discussed elsewhere in this Report. In evaluating
our business, prospects and results of operations, readers should carefully
consider the following factors in addition to other information presented in
this Report and in our other reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors
that may affect our business, prospects and results of operations. See
“Cautionary Notice Regarding Forward Looking Statements.”
8
Risks
Relating to Our Company and Our Business
We
may bear financial losses because our contracts may be delayed, terminated or
reduced in scope for reasons beyond our control.
Our
contracts may be terminated, delayed or reduced in scope by our clients at any
time, either immediately or upon notice. See “BUSINESS – Contractual
Arrangements” above. Contract termination, delay or reduction in scope may occur
for a variety of reasons, most of which are beyond our control,
including:
· unexpected
or undesired clinical results;
· insufficient
patient enrollment by the client;
· insufficient
investigator recruitment by the client;
·
client budgetary constraints;
· the
client’s decision to terminate the development of a product or to end a
particular study.
Because
we primarily receive revenue on the basis of the number of clinical samples we
test and process, the loss, reduction in scope or delay of a large contract or
the loss or delay of multiple contracts could materially adversely affect our
business, results of operations, financial condition and cash flows. Our
contracts typically entitle us to receive payment for fees earned by us up to
the time of termination and reimbursement for out-of-pocket costs incurred prior
to termination. However, most of our contracts do not entitle us to a
termination fee or payment for the costs of winding down the terminated
projects.
We
depend on small number of clients for a significant portion of our revenue. Any
decrease in revenue from these clients could materially adversely affect
us.
Our
revenue has been concentrated in a small number of clients. We can be materially
adversely impacted by decreases in work generated from these clients, including
delays in undertaking clinical studies or submitting samples for testing
services, early termination or reductions in work orders or clinical studies, or
decreases in the volume or timing of new work orders. See “MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and
see “BUSINESS – Clients/Marketing” above.
We have
expanded our business development efforts and have continued to submit bids and
proposals to these and other companies for our services, to increase our revenue
and to diversify our client base. Although we believe that we have good
relations with all of our large clients and other companies in the industry, and
we expect to receive additional work orders in the future, we cannot predict the
timing or amount of any such additional work or whether we will be successful in
further diversifying our client base. If we are unsuccessful in our sales and
business development efforts with our existing clients and potential clients,
our backlog and our revenue will be adversely affected. In addition, unless we
are able to attract additional clients for medium to large studies, we will
continue to be dependent on a small number of clients for a substantial majority
of our revenue.
If
we do not gain new clients and new projects from our business development
efforts, our growth may be limited, sales of our services may decrease and our
operating results may suffer.
We
generally do not have long-term contracts with clients for our services. The
client may terminate projects that we undertake at any time. As a result, it is
difficult for us to forecast future sales, and our future revenue depends on our
ability to generate new clients and new projects. Our business development
efforts are substantially dependent on our ability to effectively manage our
time, personnel and resources. In particular, our Chief Scientific Officer and
other scientists are often heavily involved in the marketing and business
development process, and time that they spend in this area detracts from their
available time for laboratory and development work. Our success in business
development depends in part on our reputation in the industry and client
perceptions (including as to our laboratory capacity and financial health), and
also to a degree on personal relationships between the client and us. With the
significant consolidation in the pharmaceutical industry, it is often a long and
complex process in finding and meeting with the right person within the client
company. We also understand that some companies in the pharmaceutical industry
have “preferred vendor lists, such that a vendor cannot participate in requests
for proposal or contract with the company unless the vendor is pre-approved on
the list. We are hopeful that with the expansion of our existing service
offerings and novel biomarker services, we will be able to attract new clients.
If our business development efforts are not successful, our revenue and cash
flow may decrease and our operating results may suffer.
9
We
may bear financial risk if we under price our contracts or overrun cost
estimates.
Since our
contracts are primarily often structured as fixed price (or to a lesser extent
as fee-for-service with a cap), we bear the financial risk if we initially under
price our contracts or otherwise overrun our cost estimates. Such under pricing
or significant cost overruns could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
Our
contract backlog may not result in future revenue.
For
internal management purposes, we maintain a contract backlog to track our signed
contracts and the anticipated revenues that may be earned in the future for work
that has not yet been performed under those signed contracts. Management uses
backlog as a financial metric to internally track our business development
efforts and anticipated revenues. The scope of the projects and studies we
perform under our signed contracts varies significantly, from a few months to
over several years; however, those studies or contracts can be terminated,
revised, or delayed at any time. As a result, although backlog can provide
helpful information to our management, we believe that our aggregate backlog as
of any date is not necessarily a reliable indicator of our future results. Our
backlog is also affected by the size and duration of our contracts, and as we
see more clients moving towards adaptive clinical trials, resulting in smaller
contracts with shorter duration, this will impact our backlog and reduce our
visibility of forward revenues. A reduction in backlog during any particular
period or the failure of our backlog to result in future revenues could
adversely affect our results of operations.
Our
revenue is unpredictable and varies significantly from quarter to quarter and
year to year.
We
typically experience significant quarterly fluctuations in revenue in any fiscal
year. Our revenue depends in large part on receiving new clinical or diagnostic
studies and biomarker development projects from our clients. We cannot predict
the timing or amount of revenue we may recognize from quarter to quarter. With
these dramatic quarterly fluctuations, it makes it difficult for management to
plan for cash flow and capital expenditures, and difficult for investors to
evaluate our results of operations. During fiscal 2011, we are planning to make
additional investments in our technology infrastructure, operations and other
areas of our business in an effort to become more competitive and to increase
our revenue. These efforts will use significant amounts of time, effort and
funding. These efforts may not be successful in generating additional
revenue.
We
have historically had working capital deficits. If our revenue does not
increase, our losses may increase; cash and working capital position may
decline.
We have
had cash flow shortages and deficiencies in working capital in previous fiscal
years. Although we
ended fiscal 2010 with approximately $1,861,000 in cash and $469,000 in
short-term investments and a
positive working capital position of approximately $1,796,000, we had
a net loss for the
fiscal year and used approximately $654,000 in cash to fund operations.
Unless revenue increases, we may experience losses and our cash and
working capital positions may be adversely impacted through fiscal 2011. To
improve our cash position, we are actively seeking to increase revenue and
improve operating income. However, our continuing efforts to improve our cash
position, reduce expenses and generate revenue may not be
successful.
Our
future capital requirements depend upon many factors, including, but not limited
to:
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the
timing and number of clinical trials by clients, the number of samples
submitted to us for testing, and the amount of revenue generated from
these tests;
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our
ability to enter into and build relationships with new clients, and obtain
additional projects from existing
clients;
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capital
expenditure requirements, including for research and development efforts,
upgrading or replacing laboratory equipment and making investments in
information technology;
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delays
or early terminations of clinical testing agreements with
clients;
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our
plans to pursue additional business
strategies;
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our
ability to manage our cash flow, including reducing our expenses;
and
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other
business and economic factors that may occur from time to
time.
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None of
these factors can be predicted with certainty. Additionally, if we desire to
invest in our laboratory technology or research and development, we may require
additional financing.
We
depend on cash flows from operations to fund our debt obligations, and any
shortfall in working capital could have a material adverse effect on our
business and operations.
In fiscal
2010 we entered into a $4 million term loan (see “ITEM 7 - MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”). The
loan is due and payable over 48 months, requiring current monthly payments of
principal and interest of $121,822 for the remaining term of the loan. We will
need to generate sufficient working capital and cash flows from operations to
pay our debt. Any inability to make our loan payments as they become due could
result in an event of default under the loan documents, which could have a
material adverse effect on our business. Upon an event of default, the holder of
the secured debt could seek to foreclose on our assets or exercise any other
remedies available to it, subject to the terms of the loan
documents.
The
loss of our key personnel could adversely affect our business.
Our
success depends to a significant extent upon the efforts of our senior
management team and other key personnel. The loss of the services of any such
personnel could adversely affect our business. Also, because of the scientific
and technical nature of our business, our success is dependent upon our ability
to attract and retain technologically qualified personnel. There is substantial
competition for qualified personnel, and an inability to recruit or retain
qualified personnel may impact our ability to grow our business and compete
effectively in our industry.
Business
disruptions could impact our personnel; clients and suppliers; and could
adversely affect our business.
Our
well-trained staff and scientific professionals are instrumental to our business
productivity and success. The loss of the services of any such personnel, due to
short-term illness or pandemic could cause significant disruptions to our
employee base and could adversely impact our ability to provide our services.
Also, because of the scientific and technical nature of our business, our
success is also dependent upon our clients and supplier’s ability to deliver
study samples, chemical reagents and other supplies necessary to produce test
results and data.
The
majority of our services are performed at our main laboratory and, if our
facility is affected by man-made or natural disasters, our business could be
materially adversely affected.
We
currently perform all of our clinical and biomarker development services in our
laboratories located in Seattle, Washington. Any natural or man-made disaster,
such as a fire or earthquake, could damage or destroy our equipment, cause
substantial delays in our operations, and create significant expenses. Any
temporary or extended shutdown of our laboratories would harm our ability to
perform services for our clients and to operate our business. There is no
assurance as to when or whether we could recover from a serious natural or
man-made disaster. If we were to need to establish a new laboratory for our
services, we would have to spend considerable time and money securing adequate
space and building out the laboratory and necessary infrastructure, and we would
also have to obtain new CLIA and CAP certifications, which would take a
significant amount of time and could result in delays in our ability to begin
operations. All of this could have a material adverse effect on our business,
financial condition, and results of operations. Even though we carry business
interruption insurance, this insurance may not compensate us fully from any loss
we may incur relating to these interruptions.
11
Our
ability to protect our intellectual property is essential to the growth and
development of our products and services.
We rely,
in part, on trade secrets and know-how to develop and maintain our competitive
position and technological advantage on our existing intellectual property and
any future intellectual property we develop. We protect our intellectual
property through a combination of trademark, service mark, copyright, trade
secret laws and other methods of restricting disclosure and transferring title.
We have and intend to continue entering into confidentiality agreements with our
employees, consultants and vendors; and generally seeking to control access to
and distribution of our intellectual property. These methods may not be adequate
to protect our intellectual property.
We
are dependent on single-source suppliers.
We
purchase certain chemical reagents used in our laboratory testing
from many single source suppliers. If any of our suppliers were to
become unwilling or unable to provide these materials in required quantities or
on our required timelines, we would need to identify acceptable replacement
sources. The disruption of such supply relationships could impair our ability to
perform laboratory testing, result in contract delays or cause us to incur costs
associated with the finding of alternative sources of supplies. We may not be
able to identify and contract with acceptable replacement sources on a timely
basis or on acceptable terms or at all. Any delays or difficulties with our
suppliers could have a material adverse effect on our business and results of
operations.
If
our revenue or cash flow from operations does not increase, we may need to raise
capital to fund operations in the future.
We used
cash of approximately $654,000 in our operations during fiscal 2010. Although we
anticipate that our cash, current assets and projected cash flows from
operations will be sufficient to fund our business through fiscal 2011, this may
prove inaccurate. Our business can change unpredictably due to a variety of
factors, including competition, regulation, legal proceedings or other events,
which could impact our funding needs or our cash flow from operations or
increase our required capital expenditures. If our revenue or cash flow does not
increase, or if unforeseen events arise, we may need to raise capital through
equity or debt financing or through the establishment of other funding
facilities in order to maintain operations. In the current market condition,
raising capital has been, and may continue to be difficult, and we may not
receive sufficient funding. Any future financing that we seek may not be
available in amounts or at times when needed, or, even if it is available, may
not be on favorable terms. Also, if we raise additional funds by selling equity
or equity-based securities, the ownership of our existing stockholders will be
diluted.
Any
inability to obtain sufficient capital to fund operations when needed would have
a material adverse effect on our financial position, results of operations and
ability to continue in existence, and we could be forced to seek protection from
creditors under the bankruptcy laws or cease operations. During fiscal 2011, we
plan to make additional investments in our technology infrastructure, operations
and other areas of our business in an effort to become more competitive and to
increase our revenue. These efforts will use significant amounts of time, effort
and funding.
We
may consider strategic alternatives and acquisition or divestiture
opportunities.
From time
to time, we may consider strategic alternatives or other acquisition or
divestiture opportunities, which could include merger, asset sale, joint venture
or similar transaction. There are significant risks and uncertainties associated
with acquisition or sales transactions. If we were to seek to grow by
acquisition, factors which could affect the success of such a transaction
include
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difficulties
and expenses in connection with integrating the acquired companies and
achieving the expected benefits,
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diversion
of management’s attention from current
operations,
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the
possibility that we may be adversely affected by risk factors facing the
acquired companies, and
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acquisitions
could be dilutive to earnings, or in the event of acquisitions made
through the issuance of our common stock to the stockholders of the
acquired company, dilutive to the percentage of ownership of our existing
stockholders.
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12
Risks
Relating to Our Industry
A
decrease in research and development expenditures or outsourcing by
pharmaceutical and biotechnology companies would adversely affect
us.
Our
revenue depends greatly on the expenditures made by the pharmaceutical and
biotechnology industries in research and development, and particularly on the
ability and willingness of these companies to outsource the services we provide.
We are therefore subject to risks, uncertainties and trends that affect
companies in these industries, including economic factors, availability of
funding, and changes in research and development budgets. Research and
development budgets fluctuate due to many factors, including changes in
available resources, spending priorities, mergers of pharmaceutical and
biotechnology companies, and institutional policies. A decrease in R&D
expenditures or a decrease in outsourcing by pharmaceutical and biotechnology
companies could materially adversely affect our business and results of
operations.
The
pharmaceutical and biotechnology industries movement to “adaptive clinical
trials” may adversely affect our results of operations.
Recently,
we have observed that our pharmaceutical and biotechnology clients have been
shifting to “adaptive clinical trials”. These adaptive clinical trial protocols
are designed to replace large, multi-year, multi-million dollar contracts. After
each adaptive clinical trial phase, the pharmaceutical or biotechnology company
reviews the results and decides whether to continue or discontinue the work,
after which we may be awarded another small contract for another discrete
clinical phase. Compared to our traditional contract business, these adaptive
clinical trials are shorter in duration and with fewer test samples sent to us,
resulting in a smaller dollar value contract. The major industry risk for us is
cancellation of contracts for drug research and development studies outsourced
to our company, and with adaptive clinical trial contracts, there are many more
potential stopping points for the testing work. In addition, the
complexity and additional work created by several start and stop and restart
phases within the adaptive clinical trial model challenges profit margins
through its requirement to use greater internal resources to complete the work.
We anticipate that these adaptive clinical trials will require more project
management time and efforts on our behalf, and will require us to increase our
business development in order to bring in more, albeit smaller, contracts. If we
are not able to effectively manage these shorter trials, or increase our
business development, our business may be harmed. In addition, other risks
and issues with these smaller trials is that patient recruiting is multiplied as
well as sample collection, handling, and testing. While companies in these
industries may actually increase the number of research and development projects
they outsource via the use of adaptive clinical trials, our business could be
materially adversely affected by nature of these many smaller increments of
contract work outsourced to us.
We may be affected by changes in and
trends affecting the pharmaceutical and biotechnology
industries.
Our
clients in the pharmaceutical and biotechnology industries have experienced
significant consolidation over the last several years and we expect that trend
to continue. The uncertainty caused by consolidation, before, during and after a
business combination can result in product delays, changes in strategy, and
consolidation and/or elimination of research and development efforts. Any of
these effects can have a materially adverse affect on us.
In
addition, management continues to review developments in the dyslipidemia drug
development market that had previously provided the majority of our
revenues. Over the last several fiscal years, we have observed a modest
resurgence in the dyslipidemia pipeline and we are cautiously optimistic that
this trend will continue, despite a downturn in the current fiscal year.
Moreover, we have also observed a shift in emphasis in Pharma from pure
“cholesterol drugs” towards drugs that treat type 2 diabetes and obesity, both
of which are therapeutic areas in which we have considerable expertise. We will
continue to be impacted by changes affecting the pharmaceutical and
biotechnology industries.
13
Failure
to keep pace with changes in the marketplace may cause us to lose market share
and our revenue may decrease.
Clinical
testing and biomarker services are subject to rapid technological change and
innovation. In particular, laboratories are regularly developing new assays to
incorporate into clinical testing and have to maintain up-to-date laboratory
equipment to stay competitive. In developing and enhancing our services, we have
made, and will continue to make, assumptions about which features; standards and
performance criteria will be attractive to, or demanded by, our clients. We have
noticed recently more companies that offer various types of biomarker services.
If we implement criteria that are different from those required by our clients
or if our competitors introduce products and systems that better address these
needs, market acceptance of our offerings may suffer or may become obsolete. In
that event, our market share and revenue would likely decrease. In addition,
clients are requiring that laboratories maintain secure and sophisticated
information technology systems, as a means for storing data and facilitating
communication between the laboratory and the client. Although we continue to
expend efforts and resources in these areas, we may not be successful in keeping
up with client needs or expectations. In addition, if a client or prospective
client has negative perceptions about our abilities, whether based on our
financial strength or other factors, this may affect our ability to attract new
clients or projects. Many of our competitors have greater resources than we
do.
To
be competitive in our industry, we need to successfully develop and market new
services.
We
continually seek to develop and market new services that complement or expand
our existing business to increase our competitive position, diversify our client
base, and increase the scope and number of our contracts. If the market
for these services does not develop as we anticipate, we may not be successful
in attracting new clients and generating revenue. In addition, these new
services require management time and efforts, which may detract from our core
business. If we are unable to develop new services and or create demand
for those newly developed services, our future business, results of operations,
financial condition and cash flows could be adversely affected.
We
operate in a highly competitive industry, and we may lose or fail to attract
clients for our services to our competitors.
Our
competitors range from small, limited-service providers to full service global
contract research organizations. Our main competition consists of in-house
departments of pharmaceutical companies, full-service contract research
organizations, and, to a
lesser degree, universities. See “BUSINESS – Competition” above. We compete on a
variety of factors, including
· technological
expertise and efficient drug development processes,
· reputation
for on-time quality performance,
· price,
·
expertise
and experience in specific therapeutic areas,
·
strengths
in various geographic markets and global reach,
· scope
of service offerings,
· ability
to acquire, process, analyze and report accurate data in a time-saving manner,
and
· expertise
and experience in health economics and outcomes services.
Many of
our competitors have greater resources than we do, have global operations and
greater name recognition. If we experience significant competition which
is based on factors which we do not have in our business, such as global
management of projects or size, our business could be materially adversely
affected.
Changes
in government regulations could decrease the need for our services.
Governmental
agencies throughout the world, but particularly in the United States, highly
regulate the drug development and approval process. See “BUSINESS –
Government Regulation” above. Our business involves performing safety and
efficacy laboratory testing during clinical trials of new pharmaceutical
drugs. Clinical trial laboratory data is used by pharmaceutical and
biotechnology companies in the submission process to the FDA for the marketing
approval of a new drug. Changes in regulations, such as a relaxation in
regulatory requirements or the introduction of simplified drug approval
procedures or an increase in regulatory requirements that we have difficulty
satisfying, could eliminate or substantially reduce the need for our
services. Also, government efforts to contain drug costs and
pharmaceutical and biotechnology company profits from new drugs may have an
impact on the drug development and approval process, and our clients may spend
less, or reduce their growth in spending, on research and development or
outsourcing.
14
Healthcare
reform could adversely affect our clients and could decrease the need for the
services we provide and our revenues.
In recent
years, governments of the United States, Europe and Asia have considered various
types of health care reform in order to control growing health care costs.
In addition, there are a number of initiatives on the federal and state levels
for comprehensive reforms affecting the payment for, the availability of, and
the reimbursement for healthcare services in the United States. The
effects of these health care reforms will likely pose changes to the
pharmaceutical and biotechnology industries. It is possible that they could
limit the profits that can be made from the development of new drugs, or have
the effect of putting downward pressure on the prices that pharmaceutical and
biotechnology companies can charge for prescription drugs. This could
result in pharmaceutical and biotechnology companies spending less on research
and development or outsourcing, which could in turn decrease the business
opportunities available to us. Alternatively, this could result in an increase
in generic drugs which could provide increased opportunities for us. In
addition, new laws such as the Affordable Health Care Act which became law in
the United States on July 1, 2010 or other regulations may create a risk of
liability, increase our costs or limit our service offerings. We cannot
predict the impact of these healthcare reforms on our pharmaceutical and
biotechnology clients and their drug development efforts, or the resulting
impact on the number and size of clinical services we perform.
Failure
to comply with existing government regulations or our CLIA and CAP
certifications could result in a loss of revenue.
The
clinical laboratory testing industry is subject to extensive regulation. Any
failure on our part to comply with applicable government regulations could
result in the termination of on-going research or sales and marketing projects
or the disqualification of data for submission to regulatory authorities. Our
laboratory is currently CLIA and CAP-certified. If we fail to comply with CLIA
or CAP requirements, our license could be suspended or revoked, or our
operations could be limited and we could become subject to significant fines
and/or criminal penalties. In addition, if we fail to validate analytical
test methods performed on samples collected during and in support of a trial or
if we fail to comply with GCP (Good Clinical Practice) or GLP (Good Laboratory
Practice) regulations, the generated test data could be disqualified. If
this were to happen, we could be contractually required to repeat the trial at
no further cost to our client, but at substantial cost to us. Any of this
would harm our business and financial condition.
We
must maintain certifications from our clients in order to be eligible to bid on
projects.
Many of
our clients require our laboratories to be audited from time to time for
certification that we comply with their internal requirements. If we fail to
comply or make adjustments in a timely fashion, we will probably be terminated
from existing contracts and we will not be eligible to bid on that client’s
future projects. While generally we have been very successful in maintaining
certifications and in gaining new certifications, if we fail certification
tests, especially for our major clients, our business would be materially
adversely affected.
Specialty
reference laboratory services create a risk of liability.
In
contracting to work on drug development trials, we face a range of potential
liabilities, including
|
·
|
errors
or omissions in laboratory data being generated relating to the safety and
efficacy of the drug, that could affect the regulatory approval of the
drug, and
|
|
·
|
errors
and omissions during a trial that may undermine the usefulness of a trial
or data from the trial.
|
While we
maintain what we believe is adequate insurance coverage and obtain contractual
indemnifications protecting us against liability arising from our own actions
(other than negligence or intentional misconduct), we could be materially and
adversely affected if we were required to pay damages or bear the costs of
defending any claim which is not covered by a contractual indemnification
provision or which is beyond the level of our insurance coverage. Due to the
rising costs of insurance, we may not be able to maintain such insurance
coverage at levels or on terms acceptable to us.
15
Risks
Related to Our Common Stock
Our
common stock is traded on the OTC Bulletin Board and is considered a “penny
stock”. Our stockholders’ ability to sell shares in the secondary trading
market may be limited.
Our
common stock is currently quoted for trading on the OTC Bulletin Board. As a
result, the liquidity of our common stock is limited, not only in the number of
shares that are bought and sold, but also through delays in the timing of
transactions, and the lack of coverage by security analysts and the news media
of our company.
In
addition, because our stock is quoted on the OTC Bulletin Board, our common
stock is subject to certain rules and regulations relating to “penny stock.” A
“penny stock” is generally defined as any equity security that has a price less
than $5.00 per share and that is not quoted on the NASDAQ Stock Market or a
national securities exchange. Being a penny stock generally means that any
broker who wants to trade in our shares (other than with established clients and
certain institutional investors) must comply with certain “sales practice
requirements,” including delivery to the prospective purchaser of the penny
stock a risk disclosure document describing the penny stock market and the risks
associated therewith. In addition, broker-dealers must take certain steps prior
to selling a “penny stock,” which steps include:
|
·
|
obtaining
financial and investment information from the
investor;
|
|
·
|
obtaining
a written suitability questionnaire and purchase agreement signed by the
investor; and
|
|
·
|
providing
the investor a written identification of the shares being offered and the
quantity of the shares.
|
If these
penny stock rules are not followed by the broker-dealer, the investor has no
obligation to purchase the shares. The application of these comprehensive rules
will make it more difficult for broker-dealers to sell our common stock, and as
a practical matter, these requirements may mean that brokers are less likely to
make recommendations on our shares to its general clients.
As a
result, for as long as our common stock is quoted on the OTC Bulletin Board and
subject to these penny stock rules, our stockholders may have difficulty in
selling their shares in the secondary trading market. In addition, prices for
shares of our common stock may be lower than might otherwise prevail if our
common stock were quoted on the NASDAQ Stock Market or traded on a national
securities exchange, like The New York Stock Exchange or American Stock
Exchange. This lack of liquidity may also make it more difficult for us to raise
capital in the future through the sale of equity securities.
Risks
related to our common stock include, but are not limited to the
following:
· our quarterly
operating results may vary, and these fluctuations could affect the market price
of our stock;
· our stock price
is volatile and a stockholder’s investment in our common stock could suffer a
decline in value; and
· the market for
our stock has not been liquid.
If
we issue additional equity securities in the future, the ownership of our
existing stockholders will be diluted.
If we
issue stock or convertible securities in the future, including for any future
equity financing or upon exercise of any of the outstanding stock purchase
warrants and stock options, those issuances would also dilute our stockholders.
If any of these additional shares are issued and are sold into the market, it
could decrease the market price of our common stock and could also encourage
short sales. Short sales and other hedging transactions could place
further downward pressure on the price of our common stock.
16
We
do not intend to pay cash dividends, so any return on investment must come from
appreciation.
We have
not declared dividends on our common stock in the past, and do not intend to
declare dividends on our common stock in the foreseeable future. As a result,
any investment return in our common stock must come from increases in the fair
market value and trading price of our common stock.
ITEM
1B UNRESOLVED
STAFF COMMENTS
Not
Applicable.
ITEM
2 PROPERTIES
We lease
approximately 15,000 square feet of office and primary laboratory space in
Seattle, Washington for our executive offices and laboratory. The current
monthly rent under the lease is $21,639, and the monthly rental rate increases
approximately three percent on each November 1 for the remainder of the term.
The lease term expires October 31, 2012.
We also
lease approximately 1,030 square feet of office and laboratory space in a
separate Seattle, Washington location for our biomarker services laboratory.
Previously, our lease covered only 500 square feet, but on August 1, 2009, we
entered into a new lease that increased the size of the leased space to
approximately 1,030 square feet. The current monthly rent under the lease is
$5,595. The lease term is 24 months and expires August 31, 2011.
In the
opinion of management, the leased premises are adequately covered by insurance.
We do not own any real property.
We have
experienced space and power constraints with our existing premises. In
addition, we would also like to consolidate our two laboratories under one
location. Accordingly, we have engaged the services of a commercial real
estate broker to assist us in locating suitable new office and laboratory space
in the greater Seattle, Washington area. We do not currently have an
agreement or negotiations underway for a new location. We anticipate that
any such relocation will not occur until the fourth quarter of fiscal 2011 or
the first quarter of fiscal 2012.
ITEM
3
|
LEGAL
PROCEEDINGS
|
We are
not a party to any material pending material legal proceedings.
ITEM
4
|
[REMOVED
AND RESERVED]
|
PART
II
ITEM
5
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Common
Stock
Our
common stock is currently quoted for trading on the OTC Bulletin Board under the
symbol “PBMC.”
The
following table shows, for each quarter of fiscal 2010 and 2009, the high bid
and ask sales prices as reported by the OTC Bulletin Board. The quotations from
the OTC Bulletin Board reflect inter-dealer prices without retail mark-up,
mark-down, or commissions and may not represent actual
transactions.
17
OTC
Bulletin Board
|
||||||||
Bid
|
Ask
|
|||||||
Fiscal
2010:
|
||||||||
Fourth
quarter, ended June 30, 2010
|
$ | 0.46 | $ | 0.55 | ||||
Third
quarter, ended March 31, 2010
|
0.60 | 0.66 | ||||||
Second
quarter, ended December 31, 2009
|
0.87 | 0.96 | ||||||
First
quarter, ended September 30, 2009
|
1.03 | 1.05 | ||||||
Fiscal
2009:
|
||||||||
Fourth
quarter, ended June 30, 2009
|
$ | 0.78 | $ | 0.81 | ||||
Third
quarter, ended March 31, 2009
|
0.63 | 0.68 | ||||||
Second
quarter, ended December 31, 2008
|
0.49 | 0.51 | ||||||
First
quarter, ended September 30, 2008
|
0.63 | 0.69 |
Holders
As of
September 21, 2010, there were 16,669,856 shares of common stock issued and
outstanding, held by approximately 136 holders of record.
Dividends
We have
never declared or paid any cash dividends with respect to our common stock, and
do not plan to do so in the foreseeable future. We anticipate that we will
retain future earnings for use in the operation and expansion of our business.
Any future determination with regard to the payment of dividends will be at the
discretion of our board of directors and will be dependent upon our future
earnings, financial condition, applicable dividend restrictions and capital
requirements and other factors deemed relevant by the board.
Sales
of Unregistered Securities
The
following provides information regarding sales of equity securities by us during
the fiscal year ended June 30, 2010, which were not registered under the
Securities Act: None
ITEM
6
|
SELECTED
FINANCIAL DATA
|
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and
in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure
reporting obligations and therefore are not required to provide the information
requested by this Item.
ITEM
7
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You
should read the following discussion and analysis in conjunction with our
consolidated audited financial statements and related notes for the fiscal year
ended June 30, 2010, included elsewhere in this Report. Except for
historical information, the following discussion contains forward-looking
statements. See “Cautionary Notice Regarding Forward Looking Statements”
and “Risk Factors.”
Overview
We
provide specialty reference laboratory services to support pharmaceutical and
laboratory diagnostic manufacturers in the conduct of human clinical research,
for use in their drug and diagnostic product development efforts. Our clients
include a number of the world’s largest multi-national pharmaceutical,
biotechnology and diagnostic companies Our well-recognized specialty areas
include cardiovascular diseases (dyslipidemia, atherosclerosis, and coronary
heart disease), diabetes, obesity, and rheumatology and bone diseases including
osteoporosis as well as osteoarthirits and rheumatoid arthritis. We also provide
clinical biomarker services for novel biomarkers, as well as custom assay
services, to our pharmaceutical and biotech clients. Our company is a Delaware
corporation, incorporated in May 1996, and we conduct our operations primarily
through our wholly-owned subsidiary, Pacific Biomarkers, Inc., a Washington
corporation.
18
Critical
Accounting Estimates and Policies
The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates including, among
others, those affecting revenue, the allowance for doubtful accounts, and the
useful lives of tangible and intangible assets. The discussion below is intended
as a brief discussion of some of the judgments and uncertainties that can impact
the application of these policies and the specific dollar amounts reported on
our financial statements. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form our basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions, or if management made different judgments or utilized
different estimates. Many of our estimates or judgments are based on anticipated
future events or performance, and as such are forward-looking in nature, and are
subject to many risks and uncertainties, including those discussed below and
elsewhere in this Report. We do not undertake any obligation to update or revise
this discussion to reflect any future events or circumstances.
We have
identified below some of our accounting policies that we consider critical to
our business operations and the understanding of our results of operations. This
is not a complete list of all of our accounting policies, and there may be other
accounting policies that are significant to our company. For a detailed
discussion on the application of these and our other accounting policies, see
Note 2 to the Consolidated Financial Statements included in this
Report.
Revenue
Recognition
Under
fixed-price contracts, we recognize revenue as services are performed, with
performance generally assessed using output measures, such as units-of-work
performed to date compared to the total units-of-work contracted. Our
client contracts may be delayed or cancelled at anytime. Uncertainty surrounding
continuation of existing revenues during any period is high. We believe that
recognizing revenue as services are performed is the most appropriate method for
our business as it directly reflects services performed in the laboratory. We
would expect material differences in reporting of our revenues to occur if we
changed our assumptions for revenue recognition from services performed to other
methods such as percent complete or completed contract methods. While both other
methods are allowed under Generally Accepted Accounting Principals, they would
introduce more variables and estimates into our revenue recognition
process. The percent complete method introduces estimated costs early in
the process that may drive revenues higher in early periods and should the
study be terminated early, previously recognized revenue would
be reversed, net of a cancellation fee, if applicable. The completed
contract method may recognize revenues in future contract periods, such as the
first quarter after a fiscal year close and subsequent to completion of the
services rendered.
Fair
Value Measurements - Debt Financing
We follow
ASC Topic 820 and 825, (SFAS 157, Fair Value Measurements) in determining the
fair value in our recent repurchase of shares of common stock. SFAS 157
clarifies a number of considerations with respect to fair value measurement
objectives for financial reporting and expands disclosures about the use of fair
value measurements. The degree of judgment utilized in measuring the fair value
of financial instruments is largely dependent on the level to which pricing is
based on observable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our view of market
assumptions in the absence of observable market information. See Note 8 to our
Consolidated Financial Statements. In valuing the repurchased shares from our $4
million debt financing in September 2009, we chose a bid-ask regression model as
the most appropriate method to determine the fair value of these shares. We
would expect material differences in reporting of the fair value of these
shares, had we chosen other methods in determining the fair value. The discount
to the Note derived from the fair value of the shares and interest expense
derived from the discount may have been a higher or lower amount. For example, a
regression model based on restricted share regression analysis would produce a
higher discount amount. Alternatively, had we chosen the market closing price
for fair value, the discount would have been zero. However, due to the thin
trading characteristics of our stock within the OTCBB market, the number of
shares repurchased, other observable and unobservable inputs, it was our
judgment that the method utilized in estimating the fair value of these shares
was appropriate for this transaction.
19
Stock-Based
Compensation
We report
stock-based compensation expense applying ASC Topic 718 (SFAS No. 123(R),
Share-Based Payment),
using the modified prospective transition method. This requires us to
estimate the fair value of our equity-based awards on the date of grant using an
option-priced model. This also requires us to estimate the number of equity
awards that will ultimately vest and those that will be forfeited. We record on
our consolidated income statements the fair value of the portion of the award
that is expected to vest, which we expense over the requisite service periods.
Determining the fair value of equity-based awards at the grant date requires
judgment, particularly in applying the volatility assumptions used in the
Black-Scholes pricing model. With the recent volatility in the stock market, our
volatility assumptions changed significantly for fiscal 2010 (148-151%) from
fiscal 2009 (108.8%). See Note 2 to Consolidated Financial
Statements. In addition, judgment is also required in estimating the
amount of equity-based awards that are expected to be forfeited, which we base
on actual historical data, typically over the past three years. Our
current estimates are that only 2-4% of the awards will be forfeited. If
we were to estimate a higher percentage of forfeitures, we would recognize a
lower amount of stock based compensation expense as of the date of the grant. If
actual forfeitures are significantly fewer less than our estimate, we would have
to record additional equity-based compensation expense; conversely, if there are
more forfeitures than we estimated, we would have to reverse previously
recognized expense.
Useful
Lives of Tangible Assets
The
assets we acquire are subject to our best estimates of useful lives of the asset
for depreciation and amortization purposes. We depreciate equipment and
computers over three to five years, and we depreciate leasehold improvements
over the lesser of the remaining life of the lease or ten years. In management’s
judgment, these useful life periods reflect a reasonable estimate of the life
over which we will use the equipment, computers and leasehold improvements. We
capitalize software costs incurred in connection with obtaining and developing
internal use software (“software costs”) in accordance with ASC Topic 350-40
(formerly Statement of Position (SOP) No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use). We amortize software costs
over a period not to exceed three years. Under GAAP, we could have used other
useful life periods for depreciation and amortization. A longer period,
such as seven years for equipment and software costs, would result in smaller
depreciation and amortization expense and higher property and equipment values
on our balance sheet. We believe the useful life periods that we use are
reasonable.
The
amount of depreciation and amortization expense we record in any given period
will change if our useful life estimates were to increase or decrease. In
addition, from time to time we may determine that we no longer have use for a
certain tangible or intangible asset. This may be because an asset was
used exclusively for a study that has been cancelled, or because of changes in
scientific methods for our testing. We use the discounted cash flow method
according to ASC Topic 360 (formerly SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets) to test our assets for impairment. If we were
to determine that any of our assets were impaired or have a reduced useful life,
we would have to take a charge against current earnings.
20
Results
of Operations for the Fiscal Years Ended June 30, 2010 and 2009
Revenue:
Years
Ended
|
||||||||||||||||
Dollars
in thousands, rounded to nearest
|
June
30,
|
$
|
%
|
|||||||||||||
thousand
|
2010
|
2009
|
Change
|
Change
|
||||||||||||
Revenue
|
$ | 9,665 | $ | 10,881 | (1,216 | ) | (11 | ) |
We
generate the majority of our revenue from clinical pharmaceutical trials testing
(“traditional biomarker services”) and novel biomarker development
services. We also provide diagnostic services, which historically have
represented less than 1% of our total revenue.
Our
revenue decreased approximately 11% to $9,665,000 from $10,881,000 for the
comparable fiscal years ended June 30, 2010 and 2009. In fiscal 2010 our revenue
was negatively impacted by delays and cancellations of testing in the diabetes
and rheumatoid arthritis therapeutic areas. Our revenue fluctuates due to
the variability in the volume of testing services we perform, by the timing
between actual receipt of test samples and scheduled testing, pace of the
clinical trial itself, open work orders and prior work orders having been
completed or terminated. We also experienced a large reduction in revenue
sourced from other large clinical laboratories that refer specialty laboratory
testing to us (“Referral Laboratory Partners”). In contrast, during fiscal 2009
we benefited from strong levels of testing revenue in the same therapeutic areas
and from our Referral Laboratory Partners.
We
believe that the overall decrease in revenue for the year ended June 30, 2010
reflects ongoing uncertainty in the drug development marketplace, including
cancellations and delays. We are continuing to monitor and evaluate the shift in
the industry to “adaptive clinical trials” and how this change is impacting us
now as well as going forward. In fiscal 2010 we experienced a 25% decrease in
revenues from our work with Referral Laboratory Partners. Several of our
Referral Laboratory Partners have reported decreases in their revenue from
central lab services during our fiscal year that directly affect our
revenue. We believe this is responsible for the significant 7% downward
shift in this revenue category as a percentage of total revenue, as noted in the
chart below.
While we
added staff in our business development area during fiscal 2010, approximately
half of our study contracts signed during the fiscal year did not result in
recognized revenue in the fiscal year but added to our contract backlog. The
primary component of our business development efforts has been directed towards
pharmaceutical and biotech companies, which includes our biomarkers business
(“Direct Clinical Services”) which showed an 8% increase over fiscal 2009 as a
percentage of total revenue, but due to a decrease in total revenue represents
no increase in revenue dollars. Biomarker services showed a 2% increase as
a percentage of total revenue, but an 11% increase in dollars. Although the
growth of our biomarker services has been slower than we originally expected,
this area is a primary focus of our business and we believe it addresses a
rapidly growing sector of laboratory services for clinical drug development. As
a result, we expect to see our biomarker services to continue to grow and to
represent a larger portion of our revenue during fiscal 2011.
The
following table provides a breakdown of the percentage of our total revenue
generated from each of our service areas for the past two fiscal
years:
Direct Clinical Services
|
|
|
||||||||||||||
Direct Trials
Testing
|
Biomarkers
|
Referral
Laboratories
|
Diagnostic
Services
|
|||||||||||||
Fiscal
2010
|
52 | % | 10 | % | 38 | % | 0 | % | ||||||||
Fiscal
2009
|
46 | % | 8 | % | 45 | % | 1 | % |
21
Our
revenues tend to fluctuate from quarter to quarter, and at times these
fluctuations are significant. These fluctuations are clearly observed in the
first, second and third fiscal quarters of 2010 compared to the comparable
quarters in fiscal 2009, where revenue increased 27% in the first quarter,
decreased 35% in the second quarter and decreased 22% in the third
quarter. In contrast, for the first, second and third quarters of fiscal
2009 revenue increased 96%, 24% and 34% compared to the comparable quarters in
fiscal 2008. The following table shows the significant swings in our
quarterly revenue for each quarter in the past three fiscal years:
(Dollars in
thousands,
|
Fiscal
year
|
|||||||||||
rounded
to nearest thousand)
|
2010
|
2009
|
2008
|
|||||||||
Q1,
ended September 30
|
$ | 2,301 | $ | 1,805 | $ | 2,082 | ||||||
Q2,
ended December 31
|
2,114 | 3,231 | 1,648 | |||||||||
Q3,
ended March 31
|
2,234 | 2,853 | 2,296 | |||||||||
Q4,
ended June 30
|
3,016 | 2,992 | 2,239 | |||||||||
Total
|
$ | 9,665 | $ | 10,881 | $ | 8,265 |
Once our
work on a study commences, the client may cancel the study at any time during
the testing phase. Clients may terminate, delay, or change the scope of a
project for a variety of reasons including unexpected or undesirable clinical
results or a decision to forego a particular study. Accordingly, our
revenues may be significantly affected by the success or failure of the testing
phase and other factors outside of our control, including a large number of
pharmaceutical companies’ cost reduction announcements and continuing
consolidation in the biopharmaceutical market.
Operating
Expenses
Historically,
we have segregated our recurring operating expenses between two categories:
laboratory and cost of goods sold and selling, general and administrative
expenses, which includes research and development. Laboratory expenses and cost
of goods sold consist of amounts necessary to complete the revenue and earnings
process, and includes direct labor and related benefits, other direct costs, and
an allocation of facility charges and information technology costs, and
depreciation and amortization. Also, laboratory expenses and cost of goods sold
include shipping and handling fees and reimbursable out-of-pocket costs.
Laboratory expenses and cost of goods sold, as a percentage of net revenue,
tends, and is expected, to fluctuate from one period to another, as a result of
changes in labor utilization and the mix of service offerings involving studies
conducted during any period of time. Selling, general and administrative
expenses include business development activities, sales and marketing expenses,
laboratory administration expenses and research and development activities
through our science and technology department. Selling, general and
administrative expenses consist primarily of administrative payroll and related
benefit charges, legal and accounting fees, advertising and promotional
expenses, administrative travel and an allocation of facility charges,
information technology costs, and depreciation and amortization.
Laboratory
Expense and Cost of Goods Sold:
Years
Ended
|
||||||||||||||||
Dollars
in thousands, rounded to nearest
|
June
30,
|
$
|
%
|
|||||||||||||
thousand
|
2010
|
2009
|
Change
|
Change
|
||||||||||||
Laboratory
Expenses and Cost of Goods Sold
|
$ | 5,858 | $ | 5,920 | (62 | ) | (1 | ) | ||||||||
Percentage
of Revenue
|
61 | % | 55 | % |
We
categorize under “laboratory expense and cost of goods sold” certain operating
expenses that are necessary to complete the revenue and earnings process.
These expenses consist primarily of direct labor costs and related benefits of
employees performing analysis of clinical trial samples, and the cost of
chemical reagents and supplies for analysis of clinical trial samples, and
secondarily, of payments to subcontractors for laboratory services, an
allocation of facility charges and information technology costs, insurance,
business and occupation taxes, shipping and handling fees and reimbursable
out-of-pocket costs. For the comparable fiscal years ended June 30, 2010 and
2009, laboratory expense and cost of goods sold decreased approximately 1% to
$5,858,000 from $5,920,000.
22
As a
percentage of revenue, laboratory expense and cost of goods sold fluctuate from
period to period as a result of changes in labor utilization and the mix of
service offerings. For the comparable fiscal years 2010 and 2009,
laboratory expense and cost of goods was approximately 61% and 55% as a
percentage of revenue, which reflects our decrease in
revenue.
In 2010,
we had expense increases primarily related to biomarker services in salaries and
related benefits and fixed costs; including an increase in rent from our
expanded laboratory for biomarker development (total occupied square footage in
fiscal 2010 increased 97% compared to fiscal 2009). These increases were offset
by decreases in bonus expense, reagent costs and expenses for outside
services. Our bonus expense decreased because the performance targets were
not fully achieved in fiscal 2010. The following table illustrates changes in
Laboratory Expenses and Cost of Goods Sold in fixed and variable expense
categories:
Years Ended
|
||||||||||||||||||||||||
|
June 30,
|
|
|
|||||||||||||||||||||
Dollars in thousands, rounded to
nearest
thousand
|
2010
|
% of
revenue
|
2009
|
% of
revenue
|
$
Change
|
%
Change
|
||||||||||||||||||
Fixed
Cost Detail
|
||||||||||||||||||||||||
Rent,
Utilities, Certain Taxes
|
$ | 694 | 7 | % | $ | 511 | 5 | % | $ | 183 | 36 | % | ||||||||||||
Variable
Cost Detail
|
||||||||||||||||||||||||
Wages,
Taxes, Benefits
|
2,630 | 28 | % | 2,391 | 22 | % | 239 | 10 | % | |||||||||||||||
Reagent
Chemicals
|
1,972 | 20 | % | 2,402 | 22 | % | (430 | ) | (18 | )% | ||||||||||||||
Other
Variable Costs
|
562 | 6 | % | 616 | 6 | % | (54 | ) | (9 | )% | ||||||||||||||
Total
|
5,164 | 54 | % | 5,409 | 50 | % | (245 | ) | (5 | )% | ||||||||||||||
Total
Cost of Goods Sold
|
$ | 5,858 | 61 | % | $ | 5,920 | 55 | % | $ | (62 | ) | (1 | )% |
The
largest component of laboratory expense during fiscal 2010 was salaries and
related benefits. During the fiscal years ended June 30, 2010 and 2009, salaries
and related benefits increased by 10% to approximately $2,630,000 from
$2,391,000 as a result of an increase in staff from 44 FTE to 46 FTE and one
transfer from our science and technology department to the biomarker services
laboratory to accommodate the increasing complexity of the tests performed and
development of new capabilities in the biomarker services area. During the
fiscal years ended June 30, 2010 and 2009 salaries and related benefits were 28%
and 22% of our revenue and accounted for approximately 45% and 40% of total
laboratory expense and cost of goods sold.
The other
major component of laboratory expense during fiscal 2010 was the cost of
laboratory reagents and supplies for analysis of clinical trial samples. During
the fiscal years ended June 30, 2010 and 2009, laboratory reagents and supplies
decreased by 18% to approximately $1,972,000 from $2,402,000 as a result of a
decrease in the number of tests performed. These expenses are also affected by
our novel biomarker business as it requires significantly less laboratory
reagents and supplies to operate. Over the last three fiscal years, reagent
chemicals used in our laboratory testing have averaged approximately 20% in cost
as a percentage of revenue, but may vary considerably depending on the type of
specific testing we perform, and constitute a significant expense item for our
business. In contrast, reagent and laboratory supply expenses for our
biomarker services are approximately 3-5%, as a percentage of revenue.
During the fiscal years ended June 30, 2010 and 2009 laboratory supplies were
approximately 20% and 22% of our revenue and accounted for approximately 34% and
41% of total laboratory expense and cost of goods sold.
Another
component of laboratory expense during fiscal 2010 was other variable costs.
Other variable costs decreased 9% to approximately $562,000 from $616,000 during
the fiscal years ended June 30, 2010 and 2009. The major reason for this
decrease was a decrease in our expenses for outside services that consists
mainly of contracted laboratory services.
Fixed
costs for the fiscal year ended June 30, 2010 increased 36% compared to the
fiscal year ended June 30, 2010, to approximately $694,000 from $511,000. This
overall increase was mainly due to increases in depreciation expense from our
purchasing several new instruments for the laboratory during the fiscal year,
rent due to our expansion of our biomarker facility and liability insurance
expense.
23
Selling,
General and Administrative Expense:
Years
Ended
|
||||||||||||||||
Dollars
in thousands, rounded to nearest
|
June
30,
|
$
|
%
|
|||||||||||||
Thousand
|
2010
|
2009
|
Change
|
Change
|
||||||||||||
Selling,
General and Administrative Expense
|
$ | 4,643 | $ | 4,347 | $ | 296 | 7 | |||||||||
Percentage
of Revenue
|
48 | % | 40 | % |
We
categorize under “selling, general and administrative expenses” operating costs
associates with our business development activities, sales and marketing,
laboratory administration and research and development activities through our
science and technology department. Our selling, general and administrative
expense consists primarily of administrative payroll and related benefits
(including compensation for our executive officers, board members and
administrative personnel in business development, laboratory administration, and
our science and technology department), and secondarily of share-based
compensation, business development expenses, legal, accounting and public
company expenses.
For the
comparable years ended June 30, 2010 and 2009 selling, general and
administrative expense increased approximately 7% to approximately $4,643,000
from $4,347,000. As a percentage of revenue, selling, general and administrative
expenses were approximately 48% and 40%, respectively, for the comparable fiscal
years ended June 30, 2010 and 2009, which reflects our decrease in
revenue.
The
dollar increase in our selling, general and administrative expenses for the
comparable periods is due in large part to increases in salaries and related
benefits, due to the addition of two FTEs in business development and one FTE in
administration. Other
SG&A increases occurred in legal expenses, public company expenses and
expenses for outside consultants. These increases were offset somewhat by
decreases in accounting expense, bad debt expense and bonus expense. Our bonus
expense decreased because the performance targets were not fully achieved in
fiscal 2010.
Other
Income/(Expense):
Years
Ended
|
||||||||||||||||
Dollars
in thousands, rounded to nearest
|
June
30,
|
$
|
%
|
|||||||||||||
Thousand
|
2010
|
2009
|
Change
|
Change
|
||||||||||||
Other
Income/(Expense)
|
$ | (547 | ) | $ | 623 | $ | (1,170 | ) | (188 | ) | ||||||
Percentage
of Revenue
|
(6 | )% | 6 | % |
We had
other expense of approximately $547,000 for the fiscal year ended June 30, 2010,
compared to other income of approximately $623,000 for the fiscal year ended
June 30, 2009. For the fiscal year ended June 30, 2010, we had interest expense
of approximately $399,000 related to our $4 million debt financing from
September 2009 and approximately $63,000 of amortization expense for the
discount on the debt, plus approximately $84,000 of other interest
expense.
In
contrast, for fiscal 2009, we had only $158,000 in interest expense and,
significantly, we incurred a one-time non-cash gain of approximately $676,000
due to the accounting treatment on the Laurus convertible notes, which were paid
in full as of December 31, 2008. We had no comparable gain in fiscal
2010.
24
Net
Income (Loss):
Years
Ended
|
||||||||||||||||
Dollars
in thousands, rounded to nearest
|
June
30,
|
$
|
%
|
|||||||||||||
Thousand
|
2010
|
2009
|
Change
|
Change
|
||||||||||||
Net
Income (Loss)
|
$ | (1,383 | ) | $ | 1,236 | $ | (2,619 | ) | (212 | ) | ||||||
Percentage
of Revenue
|
(14 | )% | 11 | % |
We had a
net loss of approximately $1,383,000 for the fiscal year ended June 30, 2010,
compared to net income of approximately $1,236,000 for the fiscal year ended
June 30, 2009. The decrease to net loss, from net income, is attributable to our
reduced operating income and the gain derived from the Laurus convertible notes
(as described above in “Other Income (Expense)”), whereas we had no similar
non-cash gain in fiscal 2010. Other changes, such as increases in expense,
affecting our net loss, are described above under “Laboratory Expense and Cost
of Goods Sold” and “Selling, General and Administrative Expense.”
Liquidity
and Capital Resources:
At June
30, 2010 our cash and cash equivalents were approximately $1,861,000, compared
to approximately $1,365,000 at June 30, 2009. We also had approximately $469,000
invested in short-term marketable securities at June 30, 2010 and we had no
short-term marketable securities at June 30, 2009. At June 30, 2010, we had
approximately $1,853,000 in accounts receivable, compared to approximately
$2,239,000 as of June 30, 2009, reflecting timing of revenues billed and
collected. Our accounts receivable generally reflect our billings, and may
include one or several individually large customer receivables from time to
time. We generally have a high collectability rate on our accounts receivable,
and our allowance for doubtful trade accounts is approximately $34,000, which we
believe is reasonable based on our past experience.
Total
liabilities recorded on our balance sheet as of June 30, 2010 were approximately
$5,930,000 compared to approximately $1,986,000 as of June 30, 2009. This
significant increase in liabilities was the result of our $4 million debt
financing in September 2009. The loan is due and payable over 48 months, with
the first 8 months being interest only ($40,000 per month) beginning September
30, 2009, and thereafter (beginning May 31, 2010) 40 monthly payments of
principal and interest ($121,822 per month). During the first 12 months of the
term of the loan, we had the right, in our sole discretion, to obtain an
additional $500,000 loan from the lender on the same terms. We chose not to
exercise this additional loan right. We do not have a bank line of credit or
other general borrowing facility.
At June
30, 2010, we had working capital of approximately $1,796,000, compared to
approximately $2,459,000 at June 30, 2009. Although we had a significant
increase (approximately $496,000) in our cash and cash equivalents, this
positive impact on our working capital was offset by the current portion
(approximately $1,016,000) of our $4 million debt financing, by a decrease (by
approximately $386,000) in our accounts receivable and an increase (by
approximately $253,000) in short-term client advance primarily due to
reclassified client advance funds that may be refunded to the client during
fiscal 2011. Other changes providing a positive impact in working capital
included increases in inventory and decreases in accounts payable and accrued
liabilities. Other changes providing a negative impact included increases in
capital lease obligations.
Net cash
used by operating activities was approximately $654,000 for the fiscal year
ended June 30, 2010 and included the effect of approximately $344,000 in
depreciation and amortization, $112,000 in expense from share-based compensation
and $63,000 in amortization of fair value assigned to repurchased shares of
common stock, related to the debt financing. Our investing activities used cash
of approximately $786,000 for the fiscal year ended June
30, 2010 for investments and the purchase of capital equipment. Cash flow
provided by or used in financing activities included $4,000,000 provided by
gross loan proceeds; and approximately $1,674,000 of those funds were used in a
common stock repurchase. Additional cash flow used in financing activities
included $164,000 for payments on debt, $160,000 for payments on capital lease
obligations and $66,000 in payment of employee withholding taxes from
transferred restricted stock.
25
We
believe that our cash, current assets and cash flows from operations will be
sufficient to fund current operations through the 2011 calendar
year.
During fiscal 2011,
we will continue to actively pursue business development and marketing
activities to broaden our client and revenue base. In particular, we anticipate
making additional capital investments for our clinical biomarker services. We
may also invest from time to time in our technology infrastructure, operations
and other areas of our business. These efforts will use significant amounts of
time, effort and funding. We also anticipate that we will incur relocation and
build-out costs in late fiscal 2011 or early fiscal 2012, assuming we are
successful in finding and negotiating a lease for new office and laboratory
space. In addition, our overall lease expenses may increase.
We will
also continue to explore other strategic alternatives, which may include a
merger, acquisition, asset sale, joint venture or other similar transaction with
one or more strategic partners to provide additional capital resources to fund
operations and growth opportunities.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
ITEM 7A
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
Applicable.
ITEM
8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
information required by this Item is set forth in our Consolidated Financial
Statements and Notes thereto beginning at page F-1 of this Annual Report on Form
10-K.
ITEM
9
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A
|
CONTROLS
AND PROCEDURES
|
Disclosure
Control and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934 is (a) recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms and (b) accumulated and communicated to management, including our
Chief Executive Officer and Vice President and Controller, as appropriate, to
allow timely decisions regarding required disclosure.
As
required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this Annual Report on Form 10-K, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Vice
President and Controller. Based upon that evaluation, management and our Chief
Executive Officer and Vice President and Controller concluded that our
disclosure controls and procedures are effective at June 30, 2010.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected.
26
There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
fourth quarter of fiscal 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
In
response to the Sarbanes-Oxley Act of 2002, we are continuing a comprehensive
review of our disclosure procedures and internal controls and expect to make
minor modifications and enhancements to these controls and procedures.
Management continually reviews, modifies and improves its systems of accounting
and controls in response to changes in business conditions and operations and in
response to recommendations in reports prepared by the independent registered
public accounting firm and outside consultants.
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 Exchange Act Rule
13a-15(f)).Under the supervision and with the participation of our management,
including our Chief Executive Officer and Vice President and Controller, we
conducted an evaluation of our internal control over financial reporting as of
June 30, 2010, based on the framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations (COSO) of the Treadway
Commission. Based on our evaluation under the framework in Internal Control –
Integrated Framework, management concluded that our internal control over
financial reporting was effective as of June 30, 2010.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
This
Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to recent federal
legislation (the Dodd-Frank Wall Street
Reform and Consumer Protection Act) that exempts nonaccelerated filers
from this obligation.
/S/ Ronald R.
Helm
|
/S/ John P.
Jensen
|
|
Ronald
R. Helm
Chief
Executive Officer
|
John
P. Jensen
Vice
President and Controller
|
THE
FOREGOING MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING SHALL
NOT BE DEEMED TO BE “FILED” WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES
ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT WE SPECIFICALLY INCORPORATE IT BY
REFERENCE INTO SUCH FILING.
ITEM
9B
|
OTHER
INFORMATION
|
On
September 13 2010, we entered into an amendment of our employment agreement with
Ronald R. Helm, our Chief Executive Officer. Under this amendment, to be
effective October 1, 2010, we (a) extended his employment agreement through
September 30, 2012 and (b) agreed to grant to him stock options for 600,000
shares of common stock on October 1, 2010. The stock options vest monthly over a
period of three years from the grant date, and will have an exercise price equal
to the closing market price on the grant date.
PART
III
ITEM
10
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
information called for by Part III, Item 10, is included in our proxy
statement relating to our 2010 annual meeting of stockholders, and is
incorporated herein by reference to the sections captioned “Directors and
Executive Officers,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Board Meetings and Committees,” “Audit Committee,” “Policy on
Stockholder Nomination of Directors” and “Code of Ethics”. The proxy
statement will be filed on or before October 28, 2010 (within 120 days of June
30, 2010, our fiscal year end).
27
ITEM
11
|
EXECUTIVE
COMPENSATION
|
Information
called for by Part III, Item 11, is included in our proxy statement
relating to our 2010 annual meeting of stockholders, and is incorporated herein
by reference to the section captioned “Executive Compensation.” The proxy
statement will be filed on or before October 28, 2010 (within 120 days of June
30, 2010, our fiscal year end).
ITEM
12
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Certain
information called for by Part III, Item 12, is included in our proxy
statement relating to our 2009 annual meeting of stockholders, and is
incorporated herein by reference to the section captioned “Principal
Stockholders.” The proxy statement will be filed on or before October
28, 2010 (within 120 days of June 30, 2010, our fiscal year end).
Equity
Compensation Plan Information
The
following table gives information as of June 30, 2010, regarding our common
stock that may be issued upon the exercise of options, warrants and other rights
under our equity compensation plans. See also “Note 10 to Consolidated
Financial Statements” to our Consolidated Financial Statements for the fiscal
year ended June 30, 2010 included in this report.
(a)
|
(b)
|
(c)
|
||||||||||
Plan Category
|
No. of Shares
to be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights
|
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
No. of Shares Available
for Future Issuance,
excluding securities
reflected in Column (a)
|
|||||||||
Equity
Compensation Plans Approved by Stockholders (1)
|
1,242,567 | $ | 0.94 | - | ||||||||
Equity
Compensation Plans Approved by Stockholders (2)
|
639,089 | $ | 0.72 | 1,145,285 | ||||||||
Equity
Compensation Plans Not Approved by Stockholders
|
117,625 | $ | 0.51 | - | ||||||||
TOTAL
|
1,999,281 | $ | 0.85 | 1,145,285 |
|
(1)
|
Consists
solely of our 1996 Stock Incentive Plan. The Plan has been
terminated and no additional shares or options may be awarded, but
outstanding options and awards previously granted under the 1996 Plan
continue in accordance with their
terms.
|
|
(2)
|
Consists
solely of our 2005 Stock Incentive
Plan.
|
ITEM
13
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
called for by Part III, Item 13, is included in our proxy statement
relating to our 2010 annual meeting of stockholders, and is incorporated herein
by reference to the section captioned “Related-Party Transactions.” The proxy
statement will be filed on or before October 28, 2010 (within 120 days of June
30, 2010, our fiscal year end).
28
ITEM
14
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information
called for by Part III, Item 14, is included in our proxy statement
relating to our 2010 annual meeting of stockholders, and is incorporated herein
by reference to the sections captioned “Policy for Approval of Audit and
Permitted Non-Audit Services” and “Audit and Related Fees.” The proxy
statement will be filed on or before October 28, 2010 (within 120 days of June
30, 2010, our fiscal year end).
PART
IV
ITEM
15
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
Documents
filed as part of this Report are as follows:
1.
Financial Statements:
The following consolidated financial statements, related notes and report of
independent registered public accounting firm are incorporated by reference into
Item 8 of Part II of this Annual Report on Form 10-K for the fiscal year
ended June 30, 2010:
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of June 30, 2010 and 2009
|
F-3
|
Consolidated
Statements of Operations for the Years Ended June 30, 2010 and
2009
|
F-4
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2010 and
2009
|
F-5
|
Consolidated
Statement of Stockholders’ Equity for the Years Ended June 30, 2010 and
2009
|
F-6
|
Notes
to the Consolidated Financial Statements
|
F-7
|
2.
Financial Statement
Schedules: All schedules have been omitted because they are not
applicable or not required, or the required information is included in the
financial statements or notes thereto.
3. Exhibits.
Exhibit
No.
|
Description
|
|
3.1
|
(1)
|
Second
Amended and Restated Certificate of Incorporation of the Company, dated
December 15, 2009
|
3.2
|
(2)
|
Amended
and Restated By-Laws of the Company
|
4.1
|
(2)
|
Specimen
Stock Certificate
|
10.1A
|
(3)
|
1996
Stock Incentive Plan, as amended
|
10.1B
|
(4)
|
Form
of stock option agreement (for employees and officers) under 1996 Stock
Incentive Plan
|
10.1C
|
(4)
|
Form
of stock option agreement (for directors) under 1996 Stock Incentive
Plan
|
10.2A
|
(5)
|
2005
Stock Incentive Plan
|
10.2B
|
(6)
|
Form
of stock option agreement under 2005 Stock Incentive
Plan
|
10.2C
|
(7)
|
Form
of restricted stock award agreement under 2005 Stock Incentive
Plan
|
10.3A
|
(8)
|
Executive
Employment Agreement, dated June 1, 2006, between the Company and Ronald
R. Helm
|
10.3B
|
(9)
|
First
Amendment to Executive Employment Agreement, between the Company and
Ronald R. Helm, dated August 30, 2006
|
10.3C
|
(10)
|
Second
Amendment to Executive Employment Agreement, between the Company and
Ronald R. Helm, dated October 19, 2007
|
10.3D
|
(11)
|
Third
Amendment to Executive Employment Agreement, between the Company and
Ronald R. Helm, dated September 24, 2008
|
10.3E
|
(22)
|
Fourth
Amendment to Executive Employment Agreement, between the Company and
Ronald R. Helm, dated September 14,
2009
|
29
10.3F
|
**
|
Fifth
Amendment to Executive Employment Agreement, between the Company and
Ronald R. Helm, dated September 13, 2010
|
10.4
++
|
(12)
|
Employment
Agreement, dated October 1, 2004, by and between the Company and Dr.
Elizabeth Leary
|
10.5A
|
(13)
|
Office
Lease, dated April 23, 1997, between Tom Kane and Elsa Kane and the
Company
|
10.5B
|
(14)
|
First
Amendment to Office Lease, dated January 20, 1998
|
10.5C
|
(14)
|
Second
Amendment to Office Lease, dated April 20, 2007
|
10.6
|
(22)
|
Lease
Agreement dated August 14, 2009, between Pacific Northwest Research
Institute and the Company
|
10.7
|
(15)
|
Loan
and Security Agreement, dated September 1, 2009, between the Company and
Terry M. Giles
|
10.8
|
(15)
|
Term
Note, dated September 1, 2009 by the Company in favor of Terry M.
Giles
|
10.9
|
(15)
|
Subsidiary
Guarantee, dated September 1, 2009, by the Company, Pacific Biomarkers,
Inc., PBI Technology, Inc., and BioQuant, Inc. for the benefit of Terry M.
Giles
|
10.10
|
(15)
|
Stock
Redemption Agreement, dated September 1, 2009, between the Company and
Terry M. Giles
|
10.11
|
(16)
|
Common
Stock Purchase Warrant, dated May 28, 2004, issued by the Company in favor
of Laurus Master Fund, Ltd. for 681,818 shares of common
stock.
|
10.15
|
(21)
|
Form
of Common Stock Purchase Warrant for March 2006 private
placement
|
14.1
|
(4)
|
Code
of Ethics for Financial Officers
|
21.1
|
(1)
|
Subsidiaries
of the Company
|
23.1
|
**
|
Consent
of PMB Helin Donovan, LLP
|
31.1
|
**
|
Certification
by Ronald R. Helm, Chief Executive Officer
|
31.2
|
**
|
Certification
by John P. Jensen, Vice President and Controller
|
32.1
|
**
|
Certification
by Ronald R. Helm, Chief Executive Officer and John P. Jensen, Vice
President and Controller, of Pacific Biomarkers, Inc., pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
**
|
Filed
herewith
|
++
|
Portions
of the marked exhibit have been omitted pursuant to a request for
confidential treatment filed with the
SEC.
|
(1)
|
Incorporated
by reference to Exhibits of Registrant’s Quarterly Report on Form 10-Q for
the quarter ended December 31, 2009, filed on February 11,
2010.
|
(2)
|
Incorporated
by reference to Exhibits of Registrant’s Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2, Registration No. 333-11551, filed on
October 11, 1996.
|
(3)
|
Incorporated
by reference to Exhibits of Registrant’s Annual Report on Form 10-KSB for
the fiscal year ended June 30, 2003, filed on September 29,
2003.
|
(4)
|
Incorporated
by reference to Exhibits of Registrant’s Annual Report on Form 10-KSB for
the fiscal year ended June 30, 2004, filed on September 23,
2004.
|
(5)
|
Incorporated
by reference to Appendix A of Registrant’s Definitive Proxy Statement on
Schedule 14A filed on October 25,
2005.
|
(6)
|
Incorporated
by reference to Exhibits of Registrant’s Annual Report on Form 10-KSB for
the fiscal year ended June 30, 2006, filed on October 3,
2006.
|
(7)
|
Incorporated
by reference to Exhibits of Registrant’s Quarterly Report on Form 10-QSB
for the quarter ended December 31, 2007, filed on February 13,
2008.
|
(8)
|
Incorporated
by reference to Exhibit of Registrant’s Current Report on Form 8-K filed
on June 7, 2005.
|
(9)
|
Incorporated
by reference to Exhibit of Registrant’s Current Report on Form 8-K filed
on September 5, 2006.
|
(10)
|
Incorporated
by reference to Exhibits of Registrant’s Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2007, filed on November 14,
2007.
|
(11)
|
Incorporated
by reference to Exhibit of Registrant’s Annual Report on Form 10-K filed
on September 26, 2008.
|
(12)
|
Incorporated
by reference to Exhibits of Registrant’s Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2004, filed on November 15,
2004.
|
(13)
|
Incorporated
by reference to Exhibits of Registrant’s Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1997, filed on September 29,
1997.
|
30
(14)
|
Incorporated
by reference to Exhibits of Registrant’s Annual Report on Form 10-KSB for
the fiscal year ended June 30, 2007, filed on October 5,
2007.
|
(15)
|
Incorporated
by reference to Exhibit of Registrant’s Current Report on Form 8-K filed
on September 2, 2009.
|
(16)
|
Incorporated
by reference to Exhibits of Registrant’s Current Report on Form 8-K filed
on June 7, 2004.
|
(17)
|
Incorporated
by reference to Exhibits of Registrant’s Current Report on Form 8-K filed
on February 1, 2006.
|
(18)
|
Incorporated
by reference to Exhibit of Registrant’s Current Report on Form 8-K filed
on May 10, 2005.
|
(19)
|
Incorporated
by reference to Exhibits of Registrant’s Registration Statement on Form
SB-2, Registration No. 333-116968, filed on June 29,
2004.
|
(20)
|
Incorporated
by reference to Exhibit of Registrant’s Current Report on Form 8-K filed
on November 7, 2005.
|
(21)
|
Incorporated
by reference to Exhibit of Registrant’s Current Report on Form 8-K filed
on March 13, 2006.
|
(22)
|
Incorporated
by reference to Exhibit of Registrant’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2009, filed on September 25,
2009.
|
31
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on September 23, 2010.
PACIFIC
BIOMARKERS, INC.
|
||
By:
|
/s/ Ronald R. Helm
|
|
Ronald
R. Helm
|
||
President
and Chief Executive Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature
|
Capacities
|
Date
|
||
/s/ Ronald R. Helm
|
Chief
Executive Officer, President, and Director
|
September
23, 2010
|
||
Ronald
R. Helm
|
(Principal Executive
Officer)
|
|||
/s/ John P. Jensen
|
Vice
President and Controller
|
September
23, 2010
|
||
John
P. Jensen
|
(Principal Financial Officer
and
Principal Accounting
Officer)
|
|||
/s/ Mario R. Ehlers
|
Director
|
September
23, 2010
|
||
Mario
R. Ehlers
|
||||
/s/ Paul G. Kanan
|
Director
|
September
23, 2010
|
||
Paul
G. Kanan
|
||||
/s/ Richard W. Palfreyman
|
Director
|
September
23, 2010
|
||
Richard
W. Palfreyman
|
||||
/s/ Curtis J. Scheel
|
Director
|
September
23, 2010
|
||
Curtis
J. Scheel
|
||||
/s/ Kenneth R. Waters
|
Director
|
September
23, 2010
|
||
Kenneth
R. Waters
|
||||
/s/ Stanley L. Schloz
|
Director
|
September
23, 2010
|
||
Stanley L.
Schloz
|
|
|
32
PACIFIC
BIOMARKERS, INC.
Form 10-K
Annual Report
Index to
Consolidated Financial Statements
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Financial Statements:
|
||
Consolidated
Balance Sheets as of June 30, 2010 and 2009
|
F-3
|
|
Consolidated
Statements of Operations for the years ended June 30, 2010 and
2009
|
F-4
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2010 and
2009
|
F-5
|
|
Consolidated
Statement of Stockholders’ Equity for the years ended June 30, 2010 and
2009
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Pacific Biomarkers, Inc.
We have
audited the accompanying balance sheets of Pacific Biomarkers, Inc. as of June
30, 2010 and 2009, and the related statements of operations, stockholders’
equity, and cash flows for each of the years in the two-year period ended June
30, 2010. Pacific Biomarkers, Inc.’s management is responsible for these
financial statements. 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 audit 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 its internal control over
financial reporting. Our audit 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, as well as 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 financial position of Pacific Biomarkers, Inc. as of June
30, 2010 and 2009, and the results of its operations and its cash flows for each
of the years in the two-year period ended June 30, 2010, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ PMB
Helin Donovan, LLP
PMB Helin
Donovan, LLP
Spokane,
WA
September
23, 2010
F-2
PACIFIC
BIOMARKERS, INC.
CONSOLIDATED
BALANCE SHEETS
As
of June 30,
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,861,155 | $ | 1,365,406 | ||||
Short-term
investments
|
468,619 | - | ||||||
Accounts
receivable, net
|
1,852,987 | 2,238,912 | ||||||
Other
receivable, net
|
6,500 | 9,000 | ||||||
Inventory
|
239,863 | 171,885 | ||||||
Prepaid
expenses and other assets
|
229,802 | 230,974 | ||||||
Total
current assets
|
4,658,926 | 4,016,177 | ||||||
Property
and equipment, net
|
1,309,764 | 813,258 | ||||||
Total
assets
|
$ | 5,968,690 | $ | 4,829,435 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 605,944 | $ | 678,818 | ||||
Accrued
liabilities
|
632,429 | 660,284 | ||||||
Advances
from customers - current portion
|
408,455 | 155,471 | ||||||
Capital
lease obligation - current portion
|
200,806 | 62,709 | ||||||
Secured
note - current portion, net of discount
|
1,015,603 | - | ||||||
Total
current liabilities
|
2,863,237 | 1,557,282 | ||||||
Advances
from customers - long - term portion
|
- | 272,032 | ||||||
Capital
lease obligations - long - term portion
|
389,820 | 156,309 | ||||||
Secured
note - long - term portion, net of discount
|
2,676,969 | - | ||||||
Total
liabilities
|
5,930,026 | 1,985,623 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Stockholders'
equity:
|
||||||||
Common
stock, $0.01 par value, 30,000,000 shares authorized, 16,669,856 shares
issued and outstanding at June 30, 2010, 19,099,539 shares
issued and outstanding at June 30, 2009
|
166,699 | 190,995 | ||||||
Additional
paid-in capital
|
27,723,024 | 29,121,334 | ||||||
Accumulated
deficit
|
(27,851,059 | ) | (26,468,517 | ) | ||||
Total
stockholders' equity
|
38,664 | 2,843,812 | ||||||
Total
liabilities and stockholders' equity
|
$ | 5,968,690 | $ | 4,829,435 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended June 30,
2010
|
2009
|
|||||||
Revenues
|
$ | 9,664,861 | $ | 10,881,107 | ||||
Laboratory
expenses and cost of sales
|
5,857,971 | 5,920,195 | ||||||
Gross
profit
|
3,806,890 | 4,960,912 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative
|
4,642,925 | 4,347,482 | ||||||
Operating
income (loss)
|
(836,035 | ) | 613,430 | |||||
Other
income (expense):
|
||||||||
Interest
expense
|
(482,746 | ) | (158,324 | ) | ||||
Gain
on adjustment of embedded and freestanding derivatives to fair
value
|
- | 675,691 | ||||||
Amortization
of deferred financing costs - secured convertible debt
|
- | (18,447 | ) | |||||
Amortization
of discount on debt
|
(62,758 | ) | - | |||||
Other
expense
|
(1,003 | ) | 123,597 | |||||
Total
other income (expense)
|
(546,507 | ) | 622,517 | |||||
Net
income (loss) before tax expense
|
(1,382,542 | ) | 1,235,947 | |||||
Tax
expense
|
- | - | ||||||
Net
income (loss)
|
$ | (1,382,542 | ) | $ | 1,235,947 | |||
Net
income (loss) per share:
|
||||||||
Basic
income (loss) per share
|
$ | (0.08 | ) | $ | 0.07 | |||
Diluted
income (loss) per share
|
$ | (0.08 | ) | $ | 0.06 | |||
Weighted
average common shares outstanding:
|
||||||||
Basic
|
17,528,746 | 19,012,769 | ||||||
Diluted
|
17,528,746 | 19,640,041 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
PACIFIC
BIOMARKERS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended June 30,
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | (1,382,542 | ) | $ | 1,235,947 | |||
Reconciliation
of net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
343,716 | 263,756 | ||||||
Accretion
of fair value assigned to conversion feature and warrants
|
- | 88,134 | ||||||
Amortization
of deferred financing costs on secured convertible
note
|
- | 18,447 | ||||||
Bad
debt expense
|
- | 20,431 | ||||||
Gain
from embedded and freestanding derivative liabilities relating to
secured convertible note
|
- | (675,691 | ) | |||||
Amortization
of discount on debt
|
62,758 | - | ||||||
Income
on deposits
|
8,975 | - | ||||||
Warrant
expense for equipment lease and financing
|
- | 3,940 | ||||||
Compensation
expense from restricted shares and options
|
111,618 | 101,585 | ||||||
Changes in assets and
liabilities:
|
||||||||
Accounts
receivable
|
385,925 | (113,262 | ) | |||||
Other
receivable
|
2,500 | 442,291 | ||||||
Inventory
|
(67,978 | ) | 25,571 | |||||
Prepaid
expenses and other assets
|
1,172 | (130,105 | ) | |||||
Advances
from customers
|
(19,048 | ) | (215,788 | ) | ||||
Accounts
payable
|
(72,874 | ) | (139,406 | ) | ||||
Accrued
liabilities
|
(27,855 | ) | 209,496 | |||||
Net
cash provided by (used in) operating activities
|
(653,633 | ) | 1,135,346 | |||||
Cash
flows from investing activities:
|
||||||||
Purchases
of capital equipment
|
(308,738 | ) | (45,387 | ) | ||||
Purchases
of investments
|
(977,594 | ) | - | |||||
Maturities
of investments
|
500,000 | - | ||||||
Net
cash used in investing activities
|
(786,332 | ) | (45,387 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
on notes payable
|
(164,462 | ) | (869,136 | ) | ||||
Proceeds
from loan
|
4,000,000 | - | ||||||
Repurchases
of common stock
|
(1,674,336 | ) | - | |||||
Restricted
stock transferred for employee withholding tax liability
|
(65,615 | ) | - | |||||
Payments
on capital lease obligations
|
(159,873 | ) | (51,727 | ) | ||||
Net
cash provided by (used in) financing activities
|
1,935,714 | (920,863 | ) | |||||
Net
increase in cash and cash equivalents
|
495,749 | 169,096 | ||||||
Cash
and cash equivalents, beginning of period
|
1,365,406 | 1,196,310 | ||||||
Cash
and cash equivalents, end of period
|
$ | 1,861,155 | $ | 1,365,406 | ||||
Supplemental
Information:
|
||||||||
Cash
paid during the period for interest
|
$ | 398,641 | $ | 72,173 | ||||
Cash
paid during the period for income tax
|
$ | - | $ | - | ||||
Non-cash
investing and financing activities:
|
||||||||
Capital
expenditures funded by capital lease borrowings
|
$ | 531,484 | $ | 147,106 | ||||
Capital
expenditures funded by accounts payable
|
$ | 193,463 | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
PACIFIC
BIOMARKERS, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
Additional
|
Total
|
|||||||||||||||||||||||
Common Stock
|
Treasury
|
Paid-in
|
Accumulated
|
Stockholders’
|
||||||||||||||||||||
Shares
|
Amount
|
Stock
|
Capital
|
Deficit
|
Equity
|
|||||||||||||||||||
Balance
June 30, 2008
|
18,920,147 | $ | 362,803 | - | $ | 28,465,676 | $ | (27,704,464 | ) | $ | 1,124,015 | |||||||||||||
Warrants
reclassified from debt to APIC
|
- | - | - | 378,324 | - | 378,324 | ||||||||||||||||||
Warrants
issued for equipment financing
|
- | - | - | 3,940 | - | 3,940 | ||||||||||||||||||
Restricted
shares issued - compensation
|
179,392 | 1,794 | - | 71,757 | - | 73,551 | ||||||||||||||||||
Stock
options issued - compensation
|
- | - | - | 28,035 | - | 28,035 | ||||||||||||||||||
Common
stock adjusted to par value
|
- | (173,602 | ) | - | 173,602 | - | - | |||||||||||||||||
Net
income for year ended June 30, 2009
|
- | - | - | - | 1,235,947 | 1,235,947 | ||||||||||||||||||
Balance
June 30, 2009
|
19,099,539 | $ | 190,995 | - | $ | 29,121,334 | $ | (26,468,517 | ) | $ | 2,843,812 | |||||||||||||
Restricted
shares issued - compensation
|
53,355 | 534 | - | 34,909 | - | 35,443 | ||||||||||||||||||
Stock
options issued - compensation
|
- | - | - | 76,175 | - | 76,175 | ||||||||||||||||||
Common
stock repurchased
|
(2,483,038 | ) | - | (1,534,224 | ) | - | - | (1,534,224 | ) | |||||||||||||||
Retired
treasury stock
|
- | (24,830 | ) | 1,534,224 | (1,509,394 | ) | - | - | ||||||||||||||||
Net
loss for year ended June 30, 2010
|
- | - | - | - | (1,382,542 | ) | (1,382,542 | ) | ||||||||||||||||
Balance
June 30, 2010
|
16,669,856 | $ | 166,699 | - | $ | 27,723,024 | $ | (27,851,059 | ) | $ | 38,664 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
PACIFIC
BIOMARKERS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Basis of Presentation
Pacific
Biomarkers, Inc., a Delaware corporation (“PBI” or the “Company”), provides
specialty reference laboratory services to the pharmaceutical and diagnostics
industries. The Company was incorporated in Delaware in May 1996. The Company
conducts its business primarily through its wholly-owned subsidiary, Pacific
Biomarkers, Inc., a Washington corporation. The Company’s two other wholly-owned
subsidiaries are PBI Technology, Inc., a Washington corporation, and BioQuant,
Inc., a Michigan corporation. All material intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements. All references in this report to “we,” “our,” “us” or similar
expressions are to the Company and its wholly-owned subsidiaries.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
These
consolidated financial statements include our consolidated financial position,
results of operations, and statements of stockholders’ equity and cash flows.
All material intercompany balances and transactions have been eliminated in the
accompanying consolidated financial statements.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased.
Short-term
bank deposit
Bank
deposits with original maturities of more than three months but less than one
year are presented as part of short-term investments. Deposits are presented at
their cost including accrued interest. Interest on deposits is recorded as
financial income.
Accounts
Receivable
Trade
accounts receivable are stated at amounts billed to and due from clients, net of
an allowance for doubtful accounts. Credit is extended based on evaluation of a
client’s financial condition, and collateral is not required. In determining the
adequacy of the allowance, management identifies specific receivables for which
collection is not certain and estimates the potentially uncollectible amount
based on the most recently available information. We write off accounts
receivable when they are determined to be uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. At June 30, 2010, we deemed no accounts receivable
uncollectible.
Other
accounts receivable consist of non-trade receivables such as state business and
occupation tax refunds, notes receivable and employee advances. These
receivables are stated at amounts per invoice or agreement and due from other
parties, net of an allowance for doubtful accounts. They are evaluated with the
same methods as utilized for trade accounts receivable. At June 30, 2010 and
2009, we had $6,500 and $9,000 in other receivables, respectively.
The
balance of the bad debt allowance was approximately $34,000 for the fiscal years
ended June 30, 2010 and June 30, 2009.
Inventory
Inventory
is stated the lower of cost or market. Cost is determined on a first in, first
out (FIFO) basis. Our inventory consists of chemical reagents used in our
laboratory testing.
F-7
Long
–Lived Assets
Property
and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the useful lives of the related assets, which range
from three to five years. Leasehold improvements are amortized over the shorter
of the estimated useful life of the improvements or the remaining term of the
lease. The cost and related accumulated depreciation of property or equipment
sold or otherwise disposed of are removed from the accounts and the resulting
gains or losses are included in the statement of operations.
In
accordance with the US GAAP, all of our long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount may not be recovered. If the sum of the expected future cash flows is
less than the carrying amount of the asset, a loss is recognized. As of June 30,
2010 and 2009, no impairment was deemed necessary.
Client
Advances
We
receive advances from certain clients to perform consulting, laboratory
services, and clinical studies. We apply these advances as payments to invoices
as work is completed until the amounts advanced are exhausted. Advances are also
applied to invoices for setup and administrative fees, billed upon contract
approval. These setup and administrative fees are deferred as unearned income
when billed and amortized over the life of the project. As of June 30, 2010,
approximately $272,000 was reclassified to short-term client advance for a study
that was determined
inactive in the U.S., though still active in European trials. Should
testing not resume with us during fiscal 2011, these monies will be
refunded to the client.
Treasury
Stock
Shares of
common stock repurchased by us are recorded at cost and are included as a
separate component of stockholders’ equity. We repurchased 2,391,906 shares of
our common stock having a fair value of $1,468,609 for the fiscal year ended
June 30, 2010. In addition, 91,132 employee-owned shares were surrendered
to satisfy the withholding taxes due upon vesting of restricted stock. The value
of the surrendered stock was $65,615. In December 2009 we retired all our
treasury stock and this stock is no longer considered treasury stock, but
returned to authorized and unissued stock. At June 30, 2010 and June 30, 2009,
the total value of our treasury stock was zero.
Income
Taxes
We
account for income taxes under an asset and liability approach. This process
involves calculating the temporary and permanent differences between the
carrying amounts of the assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The temporary differences result
in deferred tax assets and liabilities, which would be recorded on our
Consolidated Balance Sheet in accordance with ASC Topic 740, (SFAS No. 109,
Accounting for Income Taxes), which established financial accounting and
reporting standards for the effect of income taxes. We must assess the
likelihood that its deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, we must
establish a valuation allowance. Changes in our valuation allowance in a period
are recorded through the income tax provision on the consolidated statement of
operations.
We have
adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes—An interpretation of FASB Statement No. 109 (“FIN 48”). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance ASC Topic 740, (SFAS No. 109,
Accounting for Income Taxes) and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. Under FIN 48, the impact of an
uncertain income tax position on the income tax return must be recognized at the
largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Additionally, FIN 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. As a result of the implementation of FIN 48, we recognized no
material adjustment in the liability for unrecognized income tax benefits. At
the adoption date of January 1, 2007, we had $176,639 of unrecognized tax
benefits, none of which would affect its effective tax rate if
recognized.
F-8
Fair
Value Measurements
We follow
ASC Topic 820 and 825, (SFAS 157, Fair Value Measurements) which clarify a
number of considerations with respect to fair value measurement objectives for
financial reporting and expand disclosures about the use of fair value
measurements. The guidance regarding fair value measurements is intended to
increase consistency and comparability among fair value estimates used in
financial reporting. The disclosure requirements are intended to provide users
of financial statements with the ability to assess the reliability of an
entity's fair value measurements.
Definition of Fair
Value
Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date and, therefore, represents an exit price, not an entry price.
We hold or have held fixed maturities, equity securities, derivatives, and
embedded derivatives, which are carried at fair value.
The
degree of judgment utilized in measuring the fair value of financial instruments
is largely dependent on the level to which pricing is based on observable
inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect our view of market assumptions in the absence
of observable market information. The fair value hierarchy is broken down into
three levels based on the reliability of inputs as follows and applies to the
secured note effective September 1, 2009:
|
•
|
Level 1—Valuations
based on quoted prices in active markets for identical assets. Since
valuations are based on quoted prices that are readily and regularly
available in an active market, valuation of these products does not entail
a significant degree of judgment.
|
|
•
|
Level 2—Valuations
based on quoted prices in markets that are not active or for which all
significant inputs are observable, directly or indirectly. Quoted prices
for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
•
|
Level 3—Valuations
based on inputs that are unobservable and significant to the overall fair
value measurement.
|
Debt Financing – Fair Value
of Repurchased Shares
We
applied ASC Topics 820 and 825 (SFAS 157, Fair Value Measurements) to assess the
fair value of 2,391,906 shares of common stock that we repurchased during the
first quarter of fiscal 2010. On September 1, 2009, we obtained $4,000,000 in
debt financing, and pursuant to the terms of the loan agreement, we were
required to use a portion of the loan proceeds to repurchase 2,391,906 shares of
common stock at an aggregate price of $1,674,336 ($0.70 per share). At the time
we negotiated the term sheet with Mr. Giles, the closing trading price for our
common stock ranged from $0.60 to $0.79 per share, and on September 1, 2009 (the
closing date of the loan transaction), the closing trading price of our common
stock was $0.95.
We
recorded the repurchased shares on our balance sheet as treasury stock having a
fair value of $1,468,609 ($0.614 per share). We determined fair value using a
bid-ask regression model which uses Level 2 inputs for the determination of fair
value, which take into account the quoted market price of the common stock and
historic trading volumes. We recorded $205,725 on our balance sheet as a
discount on the secured note, representing the difference between the fair value
of the common stock repurchased ($1,468,609) and the repurchase price
($1,674,336). The discount on the Note is being amortized as interest expense
using the effective interest method over the 48-month term of the Note. At June
30, 2010, the unamortized discount on the Note was approximately
$143,000.
F-9
Stock-Based
Compensation
We use
the Black-Scholes option-pricing model to estimate the calculated value of our
share-based payments. Stock options are valued as of the date of grant. The
volatility assumption used in the Black-Scholes formula is based on the
volatility of our common stock. The following assumptions were used to compute
the fair value of option grants for the fiscal years ended June 30:
2010
|
2009
|
|||||||
Expected
volatility
|
148-151 | % | 108.8 | % | ||||
Expected
dividend yield
|
0 | % | 0 | % | ||||
Risk-free
interest rate
|
3.21-3.53 | % | 3.9 | % | ||||
Expected
life
|
10
years
|
10
years
|
We
granted 351,700 equity-based payment awards under our incentive compensation
plan for the fiscal year ended June 30, 2010, compared to 192,000 equity-based
payment awards for the fiscal year ended June 30, 2009. We issued 293,000
incentive-based restricted shares for the fiscal year ended June 30, 2010,
compared to 179,392 incentive-based restricted shares for the fiscal year ended
June 30, 2009. The Board of Directors approved the extension of the restriction
period for restricted shares from three years to five years at the March 29,
2010 meeting, subject to approval by each restricted stockholder.
Revenue
Recognition
We
recognize revenue in the period that the related services are performed and
collectability is reasonably assured. Currently, we derive substantially all of
our revenues from laboratory services. Service contracts generally take the form
of fixed-price contracts. Under fixed-price contracts, revenue is recognized as
services are performed, with performance generally assessed using output
measures, such as units-of-work performed to date as compared to the total
units-of-work contracted. Changes in the scope of work generally result in a
renegotiation of contract pricing terms and/or a contract amendment.
Renegotiated amounts are not included in net revenues until earned, and
realization is assured. Advance payments on service contracts are treated as a
deposit and applied to periodic billing during the contract period. Setup and
administrative fees are billed upon contract approval. Revenues from setup and
administrative fees are amortized over the life of the contract. Historically,
costs are not deferred in anticipation of work on contracts after they are
awarded, but instead are expensed as incurred. All out-of-pocket costs are
included in expenses.
Net
Income (Loss) Per Share
Basic
income (loss) per share is based upon the weighted average number of our
outstanding common shares. Diluted income (loss) per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options and warrants using the “treasury stock”
method. All per share calculations exclude treasury shares.
For the
year ended June 30, 2010, we did not include common stock equivalents related to
our (i) in-the-money, vested options and (ii) in-the-money warrants in the
computation of diluted (loss) per share because we had net losses in this period
and the effect would be anti-dilutive. In contrast, because we had net income
for the year ended June 30, 2009, we did include common stock equivalents
related to our (i) in-the-money, vested options and (ii) in-the-money warrants
in our computation of diluted earnings per share. As of June 30, 2009, our
common stock equivalents included: (i) in-the-money, vested options
to purchase 233,167 shares of common stock and (ii) in-the-money warrants to
purchase 394,105 shares of common stock.
Components
of basic and diluted income (loss) per share were as follows for the years ended
June 30, 2010 and 2009:
F-10
Years ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
Net
income
(loss) (A)
|
$ | (1,382,542 | ) | $ | 1,235,947 | |||
Net
income (loss) applicable to common
stockholders (B)
|
$ | (1,382,542 | ) | $ | 1,235,947 | |||
Weighted
average number of outstanding
|
||||||||
shares
of common
stock (C)
|
17,528,746 | 19,012,769 | ||||||
Weighted
average number of outstanding
|
||||||||
shares
of common stock and common stock
equivalents (D)
|
17,528,746 | 19,640,041 | ||||||
Income
(loss) per share:
|
||||||||
Basic (B/C)
|
$ | (0.08 | ) | $ | 0.07 | |||
Diluted (A/D)
|
$ | (0.08 | ) | $ | 0.06 |
Comprehensive
Income
We have
adopted US GAAP standards for reporting comprehensive income and its components
in the financial statements. Comprehensive income consists of net income and
other gains and losses affecting stockholders’ equity that, under generally
accepted accounting principles are excluded from net income. For the year ended
June 30, 2010 and 2009, our comprehensive income (loss) equaled our net income
(loss). Accordingly, a statement of comprehensive income (loss) is not
presented.
Use
of Estimates
In
preparing financial statements in conformity with U.S. GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
New
Accounting Pronouncements
In
December 2009, the Financial Accounting Standards Board (“FASB”) issued an
accounting standard update, Transfers and Servicing (Topic 860) Accounting for
Transfers of Financial Assets. The amendments in this update to the Accounting
Standards Codification are the result of FASB Statement No. 166, Accounting for
Transfers of Financial Assets. We believe adoption of this new guidance will not
have a material impact on our financial statements.
In
December 2009, the Financial Accounting Standards Board (“FASB”) issued an
accounting standard update for improvements to financial reporting by
enterprises involved with Variable Interest Entities. The new guidance includes
revised evaluations of whether entities represent variable interest entities and
additional disclosures for variable interests. We believe adoption of this new
guidance will not have a material impact on our financial
statements.
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued an
accounting standard update, Fair Value Measurements and Disclosures (Topic 820),
Improving Disclosures about Fair Value Measurements. The Update would affect all
entities that are required to make disclosures about recurring and nonrecurring
fair value measurements. The Board concluded that users will benefit from
improved disclosures in this Update and that the benefits of the increased
transparency in financial reporting will outweigh the costs of complying with
the new requirements. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 31, 2010, and for interim periods within those fiscal years. We are
currently evaluating the impact this update will have on our consolidated
financial statements.
F-11
In
January 2010, the Financial Accounting Standards Board (“FASB”)
issued an accounting standard update to address implementation issues related to
the changes in ownership provisions in the Consolidation—Overall Subtopic
(Subtopic 810-10) of the FASB
Accounting Standards Codification™, originally issued as FASB Statement
No. 160, Noncontrolling
Interests in Consolidated Financial Statements. Subtopic 810-10
establishes the accounting and reporting guidance for noncontrolling interests
and changes in ownership interests of a subsidiary. The
amendments in this update are effective beginning in the period that an entity
adopts Statement 160 (now included in Subtopic 810-10). If an entity has
previously adopted Statement 160 as of the date of the amendments in this update
are included in the Accounting Standards Codification, the amendments in this
update are effective beginning in the interim or annual reporting period ending
on or after December 31, 2009. The amendments in this update should be applied
retrospectively to the first period that an entity adopted 160. We are currently
evaluating the impact this update will have on our consolidated financial
statements.
In April
2010, the Financial Accounting Standards Board (“FASB”) issued an accounting
standard update, Receivables (Topic 310): Effect of a Loan Modification When the
Loan Is Part of a Pool That Is Accounted for as a Single Asset—a consensus of
the FASB Emerging Issues Task Force. The amendments in this Update affect any
entity that acquires loans subject to Subtopic 310-30, that accounts for some or
all of those loans within pools, and that
subsequently modifies one or more of those loans after acquisition. We believe
adoption of this new guidance will not have a material impact on our financial
statements.
In July
2010, the Financial Accounting Standards Board (“FASB”) issued an accounting
standard update, Receivables (Topic 310): Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses. This Update is
intended to provide additional information to assist financial statement users
in assessing an entity’s credit risk exposures and evaluating the adequacy of
its allowance for credit losses. The disclosures as of the end of a reporting
period are effective for interim and annual reporting periods ending on or after
December 15, 2010. We are currently evaluating the impact this update will have
on our consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants ("AICPA"), and the SEC did not or are not believed
by management to have a material impact on our present condensed consolidated
financial statements.
3.
Concentration of Credit
Risk
Our
largest client in fiscal 2010 and 2009 individually accounted for approximately
27% of our total revenues. This was the same client in each fiscal period.
Component clients included in the largest client calculation may vary from
period to period. As of June 30, 2010 and 2009, respectively, approximately 38%
and 41% of our accounts receivable balance were from the two largest clients at
that time. One of these clients was different.
The
majority of our clients are pharmaceutical companies, many of which are on the
list of Fortune 500 companies. For our revenue calculations, we aggregate
revenues we receive from several divisions within one pharmaceutical company
client as a single client. For the year ended June 30, 2010, 37% of our revenue
was derived from Fortune 500 clients compared to 33% for the year ended June 30,
2009. We believe that our exposure to concentration of credit risk is very low
considering the financial strength of our clients.
We
maintain cash in three insured commercial accounts and one uninsured investment
account at major financial institutions. Although the financial institutions are
considered creditworthy and have not experienced any losses on client deposits,
our cash balance exceeded Federal Deposit Insurance Corporation (FDIC) limits by
$1,361,155 at June 30, 2010 and by $865,406 at June 30, 2009. FDIC limits were
increased from $100,000 per insured account to $250,000 per insured account
effective October 10, 2008. The new FDIC limits expire on December 31, 2013.
Our
accounts are non-interest bearing and would have been covered under FDIC’s
Transaction Account Guarantee Program which provided unlimited coverage.
However, both of our banks opted out of this program effective January 1,
2010.
F-12
4.
Prepaid Expenses and Other
Assets
Prepaid
expenses consisted of the following at June 30:
2010
|
2009
|
|||||||
Insurance
|
$ | 141,236 | $ | 95,837 | ||||
Service
Contracts
|
26,676 | 22,308 | ||||||
Trade
Show and Conference Fees
|
12,083 | 14,335 | ||||||
Security
and Lease Deposits
|
9,759 | 9,759 | ||||||
Other
|
40,048 | 88,735 | ||||||
$ | 229,802 | $ | 230,974 |
5.
Property and
Equipment
Property
and equipment consisted of the following at June 30:
2010
|
2009
|
|||||||
Laboratory
equipment
|
$ | 2,307,641 | $ | 1,497,275 | ||||
Computer
equipment
|
419,328 | 394,020 | ||||||
Internal
use software
|
233,477 | 233,477 | ||||||
Office
furniture and equipment
|
217,645 | 213,097 | ||||||
Leasehold
improvements
|
238,262 | 238,262 | ||||||
Total
property and equipment
|
3,416,353 | 2,576,131 | ||||||
Less:
accumulated depreciation and amortization
|
2,106,589 | 1,762,873 | ||||||
Net
property and equipment
|
$ | 1,309,764 | $ | 813,258 |
At June
30, 2010 and 2009, respectively, these amounts included assets under capital
leases of $1,309,311 and $553,621, and related accumulated amortization of
$473,783 and $380,716. Depreciation expense for the fiscal years ended June 30,
2010 and 2009 was $343,716 and $263,756, respectively.
6.
Accrued Liabilities
Accrued
liabilities consisted of the following at June 30:
2010
|
2009
|
|||||||
Accrued
bonuses
|
$ | 110,462 | $ | 204,738 | ||||
Accrued
payroll and related payroll taxes
|
195,539 | 178,684 | ||||||
Accrued
insurance
|
77,680 | 54,601 | ||||||
Accrued
vacation
|
96,745 | 88,384 | ||||||
Accrued
audit fees
|
73,000 | 65,000 | ||||||
Accrued
board of directors fees
|
27,500 | 25,000 | ||||||
Accrued
interest expense
|
5,433 | 2,493 | ||||||
Other
|
46,070 | 41,384 | ||||||
$ | 632,429 | $ | 660,284 |
F-13
7.
Capital Lease Obligations
We lease
laboratory and other equipment under capital lease arrangements. The obligations
under capital leases have interest rates ranging from approximately 6.5% to
19.35% and mature at various dates through 2015. Annual future minimum lease
payments for fiscal years subsequent to June 30, 2010 are as
follows:
2011
|
$ | 257,464 | ||
2012
|
230,848 | |||
2013
|
153,925 | |||
2014
|
40,596 | |||
2015
|
21,815 | |||
Total
minimum payments
|
704,648 | |||
Less:
amount representing interest
|
(114,022 | ) | ||
Obligations
under capital leases
|
$ | 590,626 | ||
Total
minimum payments
|
$ | 590,626 | ||
Less:
current portion
|
200,806 | |||
Long-term
portion
|
$ | 389,820 |
8.
Notes Payable
Secured
Note
Effective
September 1, 2009, we obtained $4,000,000 in debt financing from a member of our
Board of Directors, Mr. Terry Giles. Pursuant to the terms of the loan
agreement, we were required to use a portion of the loan proceeds to repurchase
2,391,906 shares of common stock from Mr. Giles and certain other parties
designated by Mr. Giles at a price of $0.70 per share or an aggregate price of
$1,674,336. At the time we negotiated the term sheet with Mr. Giles, the closing
trading price for our common stock ranged from $0.60 to $0.79 per share, and on
September 1, 2009 (the closing date of the loan transaction), the closing
trading price of our common stock was $0.95. Concurrent with the financing
transaction, Mr. Giles resigned from the Board of Directors. We issued a secured
note payable bearing interest at 12% per annum, due on August 31, 2013. We
received net loan proceeds of $2,325,664, after payment for stock repurchase for
$1,674,336.
In
connection with the Note, the terms were:
|
·
|
Interest: The
Note bears interest at 12% per
annum.
|
|
·
|
Monthly
payments: The loan is due and payable over 48 months, with the first 8
months being interest only ($40,000 per month) beginning September 30,
2009, and thereafter (beginning May 31, 2010) 40 monthly payments of
principal and interest ($121,822 per
month).
|
|
·
|
Additional
Loan Rights: During the first 12 months of the term of the loan, we have
the right, in our sole discretion, to obtain an additional $500,000 loan
from the lender on the same terms.
|
|
·
|
Security:
The loan is secured by a security interest in all of our assets. In
addition, each of our subsidiaries guaranteed our obligations under the
loan and granted a security interest in all of its
assets.
|
We
recorded $205,727 on our balance sheet as a discount on the secured note,
representing the difference between the fair value of the common stock
repurchased ($1,468,609) and the repurchase price ($1,674,336). The discount on
the Note is being amortized as interest expense using the effective interest
method over the 48-month term of the Note. At June 30, 2010, the unamortized
discount on the Note was approximately $143,000.
F-14
Summary
of Secured Note and Laurus Notes Payable
We had
the following other notes payable as of June 30:
2010
|
2009
|
|||||||
Secured Note:
|
||||||||
Secured
Note to Mr. Giles, secured by all assets, interest at 12%, monthly
payments of $40,000 interest only for 8 months, monthly payments of
$121,822 principal and interest for 40 months
|
$ | 4,000,000 | $ | - | ||||
Less:
Principle Payments
|
(164,462 | ) | - | |||||
Less:
Fair value assigned to repurchased shares of common stock (Note
Discount)
|
(142,966 | ) | ||||||
Note
Balance
|
$ | 3,692,572 | $ | - | ||||
Less:
Current Portion
|
(1,015,603 | ) | - | |||||
Long-Term
Portion
|
$ | 2,676,969 | $ | - |
May 2004 Secured
Convertible Note Payable:
|
||||||||
Secured
convertible note to Laurus, secured by all assets, interest at prime plus
2% (subject to reduction upon specified conditions), monthly payments of
$83,333 plus interest beginning May 1, 2006, due May 1,
2008
|
$ | - | $ | 2,500,000 | ||||
Less:
Principal amount converted into common stock
|
- | (710,200 | ) | |||||
Less:
Principal payments
|
- | (1,756,851 | ) | |||||
Less:
Fair value of conversion feature and warrants
|
- | (32,949 | ) | |||||
Note
Balance
|
- | - | ||||||
Less:
Current Portion
|
- | - | ||||||
Long-Term
Portion
|
$ | - | $ | - | ||||
January 2005 Secured
Convertible Note Payable:
|
||||||||
Secured
convertible note to Laurus, secured by all assets, interest at prime plus
2% (subject to reduction upon specified conditions), monthly payments of
$50,000 plus interest beginning August 1, 2006, due February 1,
2009
|
$ | - | $ | 1,500,000 | ||||
Less:
Principal payments
|
- | (1,444,815 | ) | |||||
Less:
Fair value of conversion feature and warrants
|
- | (55,185 | ) | |||||
Note
Balance
|
- | - | ||||||
Less:
Current Portion
|
- | - | ||||||
Long-Term
Portion
|
$ | - | $ | - |
The
Laurus Notes were paid in full during December 2008. The gain from adjustment of
embedded and freestanding derivatives to fair value was approximately $676,000
for the fiscal year ended June 30, 2009. A component of other expense for the
year ended June 30, 2009 was approximately $18,000 of amortization of deferred
financing costs on the Laurus debt.
F-15
Future
maturities on long-term debt as of June30, 2010 are as follows:
Fiscal
year 2011
|
$ | 1,058,566 | ||
Fiscal
year 2012
|
1,192,818 | |||
Fiscal
year 2013
|
1,344,098 | |||
Fiscal
year 2014
|
240,056 | |||
Total | $ | 3,835,538 |
As of
June 30, 2010, the amount of the long-term note payable is stated at contract
amount which approximates fair value based on current interest
rates.
9.
Income Taxes
The
income tax expense reconciled to the tax expense computed at the statutory rate
was approximately as follows during the years ended June 30:
2010
|
2009
|
|||||||
Income
Tax/(Benefit) computed at federal statutory rate
|
$ | (470,000 | ) | $ | 421,000 | |||
Permanent
differences
|
28,000 | (186,000 | ) | |||||
Other
|
(125,000 | ) | - | |||||
Increase/(Decrease)
in Valuation allowance
|
$ | 567,000 | $ | (235,000 | ) |
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of our net
deferred tax assets are approximately as follows at June 30:
2010
|
2009
|
|||||||
Net
deferred tax asset:
|
||||||||
Net
operating loss carryforward
|
$ | 5,678,000 | $ | 5,019,000 | ||||
Research
and experimentation credit
|
326,000 | 326,000 | ||||||
Stock
based compensation
|
234,000 | 331,000 | ||||||
Accrued
liabilities
|
21,000 | 19,000 | ||||||
Allowance
for bad debts
|
12,000 | 12,000 | ||||||
Depreciation
and amortization
|
(4,000 | ) | (7,000 | ) | ||||
6,267,000 | 5,700,000 | |||||||
Less
valuation allowance
|
(6,267,000 | ) | (5,700,000 | ) | ||||
$ | - | $ | - |
Utilization
of the net operating losses and credits may be subject to a substantial annual
limitation due to the “change in ownership” provision of the Internal Revenue
Code of 1986, as amended, and similar state provisions. The annual limitation
may result in the expiration of net operating losses and credits before
utilization. Reconciliation of the statutory federal income tax to our effective
tax rate is as follows:
June 30, 2010
|
June 30, 2009
|
|||||||
Statutory
regular federal income benefit rate
|
34.0 | % | 34.0 | % | ||||
Other
|
(7.0 | )% | (11.0 | )% | ||||
Change
in valuation allowance
|
(27.0 | )% | (23.0 | )% | ||||
Total
|
00.0 | % | 00.0 | % |
F-16
At June
30, 2010, operating loss carryforwards of approximately $17 million expiring
through 2029 are available to offset future taxable income. For financial
reporting purposes, a valuation allowance of approximately $6,267,000 has been
recognized to offset the deferred tax asset due to the uncertainty of future
utilization of net operating loss carryforwards and realization of other
deferred tax assets. For the fiscal year ended June 30, 2010, the valuation
allowance was increased by approximately $567,000. For the fiscal year ended
June 30, 2009, the valuation allowance was decreased by approximately $235,000,
respectively.
Internal
Revenue Code Section 382 places a limitation on the amount of taxable income
that can be offset by carryforwards after a change in control (generally greater
than 50% change in ownership). As a result of these provisions, utilization of
the NOL and credit carryforwards may be limited.
10.
Stock Incentive Plans and Stock Based Compensation
1996
Stock Incentive Plan
Our 1996
Stock Incentive Plan (the “1996 Plan”) provided for the issuance of up to
1,800,000 shares of common stock under this Plan. Options granted under the 1996
Plan may have been either incentive stock options within the meaning of Section
422(b) of the Internal Revenue Code, or nonqualified options. Our 1996 Stock
Incentive Plan expired by its terms on July 9, 2006, but outstanding options and
awards previously granted under the 1996 Plan continue in accordance with their
terms.
2005
Stock Incentive Plan
We have a
Stock Incentive Plan (the “2005 Plan”) with 3,000,000 shares of common stock
reserved for issuance under this Plan. Options granted under the Plan may be
either incentive stock options within the meaning of Section 422(b) of the
Internal Revenue Code, or nonqualified options. We may also grant restricted
stock awards. The option price of each incentive stock option granted shall not
be less than the fair market value of the underlying common stock on the grant
date, and will expire no later than ten years following the date of grant. With
respect to nonqualified options, the exercise price and term shall be determined
at the discretion of the Board. However, the exercise price shall not be less
than the fair market value of the underlying common stock on the grant date, and
the term will not exceed a period of ten years. The options generally vest over
a range of immediately to three years. As of June 30, 2010, 1,145,285 shares of
common stock remained available for future grant under the 2005
Plan.
The
following is a summary of the activity in the 1996 and 2005 Plans for the year
ended June 30, 2010:
Number of
Shares
|
Weighted Average
Exercise Price per
share
|
Weighted Average
Grant Date Fair
Value per share
|
||||||||||
1996
Plan Options at June 30, 2008
|
1,351,907 | |||||||||||
2005
Plan Options at June 30, 2008
|
864,397 | |||||||||||
Options
and Restricted Shares Outstanding at June 30, 2008
|
2,216,304 | $ | 0.76 | |||||||||
1996 and 2005 Plan Options
|
||||||||||||
Granted
|
192,000 | 0.41 | ||||||||||
Exercised
|
- | - | ||||||||||
Terminated
(1996 Plan)
|
(228,018 | ) | 0.81 | |||||||||
Terminated
(2005 Plan)
|
(6,667 | ) | 0.99 | |||||||||
Total
Options outstanding at June 30, 2009
|
1,430,385 | 0.76 | ||||||||||
2005 Plan Restricted Shares
|
||||||||||||
Granted
|
179,392 | 0.41 | 0.41 | |||||||||
Options
and Restricted Shares Outstanding at June 30, 2009
|
2,353,011 | $ | 0.59 | |||||||||
1996 and 2005 Plan Options
|
||||||||||||
Granted
(2005 Plan)
|
351,700 | 0.77 | ||||||||||
Exercised
|
- | - | ||||||||||
Terminated
(1996 Plan)
|
(2,500 | ) | 0.81 | |||||||||
Terminated
(2005 Plan)
|
(19,107 | ) | 0.66 | |||||||||
Reinstated
(2005 Plan)
|
121,178 | 0.81 | ||||||||||
Total
Options outstanding at June 30, 2010
|
1,881,656 | 0.76 | ||||||||||
2005 Plan Restricted Shares
|
||||||||||||
Granted
|
293,000 | 0.64 | 0.64 | |||||||||
Options
and Restricted Shares Outstanding at June 30, 2010
|
3,097,282 | $ | 0.77 | |||||||||
Options
Exercisable at June 30, 2010
|
||||||||||||
1,557,814 | $ | 0.78 |
F-17
As of
June 30, 2010, outstanding options had exercise periods which expire over the
following time periods:
Weighted Average
|
||||||||||||||
Remaining Life
|
||||||||||||||
Exercise Price
|
Number Outstanding
|
(in years)
|
Number Exercisable
|
|||||||||||
$ | 0.41 | 185,700 | 8.3 | 108,325 | ||||||||||
$ | 0.51 | 175,167 | 2.2 | 175,167 | ||||||||||
$ | 0.60 | 144,700 | 9.0 | 48,233 | ||||||||||
$ | 0.70 | 1,000 | 4.2 | 1,000 | ||||||||||
$ | 0.81 | 40,761 | 3.4 | 40,761 | ||||||||||
$ | 0.81 | 780,639 | 3.6 | 780,639 | ||||||||||
$ | 0.86 | 125,000 | 5.2 | 125,000 | ||||||||||
$ | 0.88 | 200,000 | 9.3 | 50,000 | ||||||||||
$ | 0.90 | 1,000 | 3.5 | 1,000 | ||||||||||
$ | 0.90 | 1,000 | 3.7 | 1,000 | ||||||||||
$ | 0.96 | 90,000 | 4.5 | 90,000 | ||||||||||
$ | 0.99 | 108,689 | 6.2 | 108,689 | ||||||||||
$ | 1.01 | 1,000 | 4.0 | 1,000 | ||||||||||
$ | 1.15 | 25,000 | 5.5 | 25,000 | ||||||||||
$ | 1.75 | 2,000 | 3.4 | 2,000 | ||||||||||
1,881,656 | 5.0 | 1,557,814 |
The
weighted average contractual life remaining of options outstanding at June 30,
2010 is approximately 5 years.
The 1996
Plan expired by its terms on July 9, 2006, but outstanding options and awards
previously granted under the 1996 Plan continue in accordance with their
terms.
F-18
Stock
Based Compensation
We
granted 151,700 equity-based payment awards with an exercise price of $0.60 and
200,000 equity-based payment awards with an exercise price of $0.88 under our
incentive compensation plan for the fiscal year ended June 30, 2010, compared to
192,000 equity-based payment awards with an exercise price of $0.41 for the
fiscal year ended June 30, 2009. The fair value of options granted during fiscal
2010 was $248,788. The fair value of options granted during fiscal 2009 was
$54,374. We issued 293,000 incentive-based restricted shares for the fiscal year
ended June 30, 2010 at fair value of $186,300, compared to 179,392
incentive-based restricted shares for the fiscal year ended June 30, 2009 at
fair value of $73,551. The Board of Directors approved the extension of the
restriction period for incentive-based restricted shares from three years to
five years at the March 29, 2010 meeting, subject to approval by each restricted
share holder.
Compensation
expense for share-based awards for the fiscal years ended June 30, 2010 and 2009
was included in our consolidated statements of operations as
follows:
Fiscal year ended
|
||||||||
June 30, 2010
|
June 30, 2009
|
|||||||
Cost of sales
|
$ | 6,743 | $ | 7,775 | ||||
Selling
and administrative expenses
|
104,875 | 93,810 | ||||||
Total
compensation expense
|
$ | 111,618 | $ | 101,585 |
As of
June 30, 2010, the total compensation of $199,971 for unvested shares is to be
recognized over the next 1.84 years on a weighted average basis.
We did
not have any "in the money" options or warrants as of June 30, 2010; therefore
the intrinsic value is zero.
11.
Stock Purchase Warrants
The
following is a summary of the activity in stock warrants for the year ended June
30, 2010:
Number of Shares
|
Weighted Average
Exercise Price per
share
|
|||||||
Outstanding
at June 30, 2009
|
3,898,027 | $ | 1.13 | |||||
Issued
|
- | - | ||||||
Exercised
|
1,331,350 | 1.15 | ||||||
Expired
|
- | - | ||||||
Outstanding
at June 30, 2010
|
2,566,677 | $ | 0.72 | |||||
Exercisable
at June 30, 2010
|
2,566,677 | $ | 0.72 |
As of
June 30, 2010, outstanding stock warrants had exercise periods which expire over
the following time periods:
Weighted Average
|
||||||||||||||
Remaining Life
|
||||||||||||||
Exercise Price
|
Number Outstanding
|
(in years)
|
Number Exercisable
|
|||||||||||
$ | 0.50 | 100,000 | 3.18 | 100,000 | ||||||||||
$ | 0.51 | 117,625 | 2.16 | 117,625 | ||||||||||
$ | 0.60 | 276,480 | 0.63 | 276,480 | ||||||||||
$ | 0.85 | 5,000 | 3.38 | 5,000 | ||||||||||
$ | 0.95 | 5,000 | 3.14 | 5,000 | ||||||||||
$ | 0.95 | 5,000 | 3.34 | 5,000 | ||||||||||
$ | 0.99 | 150,000 | 0.13 | 150,000 | ||||||||||
$ | 1.00 | 5,000 | 3.18 | 5,000 | ||||||||||
$ | 1.10 | 5,000 | 3.12 | 5,000 | ||||||||||
$ | 1.17 | 20,000 | 5.36 | 20,000 | ||||||||||
$ | 1.17 | 5,000 | 5.44 | 5,000 | ||||||||||
$ | 1.17 | 10,000 | 5.53 | 10,000 | ||||||||||
$ | 1.25 | 681,818 | 0.91 | 681,818 | ||||||||||
$ | 1.60 | 1,180,754 | 1.19 | 1,180,754 | ||||||||||
2,566,677 | 2.91 | 2,566,677 |
F-19
12.
Commitments and Contingencies
Operating
Leases
On
January 20, 1998, we entered into a non-cancelable operating lease for office
facilities and laboratory space. Under the current lease we are responsible for
our proportionate share of real estate taxes, insurance and common area
maintenance costs. The office lease has been renewed per agreement with the
lessor on April 1, 2007, effective November 1, 2007. The current monthly rent
under the lease is $21,639, and the monthly rental rate increases approximately
three percent on each November 1 for the remainder of the term. The lease term
expires October 31, 2012.
On August
1, 2009, we entered into a non-cancelable operating lease for our biomarker
services laboratory. Under the current lease we are responsible for our
proportionate share of real estate taxes, insurance and common area maintenance
costs. The current monthly rent under the lease is $5,595. The lease term is 24
months and expires August 31, 2011.
Rent
expense was $324,296 and $306,947 for the years ended June 30, 2010 and 2009,
respectively.
Future
minimum lease payments are as follows:
Year Ended June 30,
|
||||
2011
|
327,720 | |||
2012
|
282,938 | |||
2013
|
91,668 | |||
$ | 702,326 |
Security
Interest
In
connection with our secured note agreement, we granted to Mr. Giles a security
interest in all of our assets. In addition, each of our subsidiaries guaranteed
our obligations under the loan and granted a security interest in all of its
assets. The loan agreement provides a waiver of security interest in
purchases of equipment that may be financed by other means such
as leasing.
13.
Retirement Plan
We have a
401(k) Plan that was reopened to employees in May 2005. The 401(k) Plan covers
all employees over the age of 21 with 1,000 hours of service in a 12-month
eligibility computation. We make a contribution equal to one-half of the
employee’s contribution up to the maximum of 6%. We can make discretionary
contributions as determined by its board of directors, not to exceed the amount
permissible under the Internal Revenue Code. We have not made any discretionary
contributions since the plan was reopened. For the fiscal year ended June 30,
2010, our matching expense was $96,124 and 401(k) payable balance as of June 30,
2010 was $0.
F-20
14.
Subsequent Events
On July
1, 2010, we granted 1,439,900 equity-based payment awards under our incentive
compensation plan. The fair value of these awards at the grant date was
$460,768.
On
September 13, 2010, we entered into an amendment of our employment agreement
with Ronald R. Helm, our Chief Executive Officer. Under this amendment, to be
effective October 1, 2010, we (a) extended his employment agreement for an
additional two years, to September 30, 2012, (b) his annual base salary
remains at $300,000, and (c) agreed to grant to him stock options for
600,000 shares of common stock on October 1, 2010. The stock options
vest monthly over a period of three years from the grant date, and will have an
exercise price equal to the closing market price on the grant
date.
F-21