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EX-31.2 - GRANDPARENTS.COM, INC. | v210706_ex31-2.htm |
EX-32.1 - GRANDPARENTS.COM, INC. | v210706_ex32-1.htm |
EX-31.1 - GRANDPARENTS.COM, INC. | v210706_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x Quarterly Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended December 31, 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 No. 0-21537
Pacific
Biomarkers, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
93-1211114
|
(State
or other jurisdiction of incorporation
or
organization)
|
(I.R.S.
Employer Identification No.)
|
220
West Harrison Street
Seattle,
Washington
(Address
of principal executive offices)
|
98119
(Zip
Code)
|
(206)
298-0068
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
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 ¨
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 or 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 ¨
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 ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
As of
February 9, 2011, there were
16,909,501 shares of the registrant’s common stock, $0.01 par value per share,
outstanding.
PACIFIC
BIOMARKERS, INC.
INDEX TO
FORM 10-Q
Page
|
|
PART
I - FINANCIAL INFORMATION
|
|
ITEM
1 - FINANCIAL STATEMENTS
|
|
Condensed
Consolidated Balance Sheets as of December 31, 2010 (unaudited) and June
30, 2010
|
4
|
Condensed
Consolidated Statements of Operations for the three- and six-month periods
ended December 31, 2010 and 2009 (unaudited)
|
5
|
Condensed
Consolidated Statements of Cash Flows for the six-month periods ended
December 31, 2010 and 2009 (unaudited)
|
6
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
13
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ITEM
4 - CONTROLS AND PROCEDURES
|
21
|
PART
II - OTHER INFORMATION
|
|
ITEM
6 - EXHIBITS
|
21
|
2
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
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains certain forward-looking statements,
including statements about:
|
·
|
our
working capital and cash flows and our estimates as to how long these
funds will be sufficient to fund our
operations,
|
|
·
|
our
business development efforts and our expectations for future work orders
for services and revenue
generation,
|
|
·
|
our
plans for growing demand for our services and products, including our
expectations for our novel biomarker
services,
|
|
·
|
anticipated
cost savings from the reduction in force and other company-wide expense
reductions we implemented in December
2010,
|
|
·
|
our
goals for implementing aspects of our business plan and strategies,
and
|
|
·
|
our
financing goals and plans
|
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 Quarterly Report on Form 10-Q 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 the Risk Factors discussed in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2010. 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.
3
PACIFIC
BIOMARKERS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,113,143 | $ | 1,861,155 | ||||
Short-term
bank deposits
|
455,029 | 468,619 | ||||||
Accounts
receivable, net
|
1,513,115 | 1,852,987 | ||||||
Other
receivable, net
|
6,500 | 6,500 | ||||||
Inventory
|
232,105 | 239,863 | ||||||
Prepaid
expenses and other assets
|
302,359 | 229,802 | ||||||
Total
current assets
|
3,622,251 | 4,658,926 | ||||||
Property
and equipment, net
|
1,249,634 | 1,309,764 | ||||||
Total
assets
|
$ | 4,871,885 | $ | 5,968,690 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 551,991 | $ | 605,944 | ||||
Accrued
liabilities
|
399,620 | 632,429 | ||||||
Advances
from customers
|
470,333 | 408,455 | ||||||
Capital
lease obligation - current portion
|
204,822 | 200,806 | ||||||
Secured
note - current portion, net of discount
|
860,068 | 1,015,603 | ||||||
Total
current liabilities
|
2,486,834 | 2,863,237 | ||||||
Capital
lease obligations - long - term portion
|
288,153 | 389,820 | ||||||
Secured
note - long - term portion, net of discount
|
2,491,353 | 2,676,969 | ||||||
Total
liabilities
|
5,266,340 | 5,930,026 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Stockholders'
equity:
|
||||||||
Common
stock, $0.01 par value, 30,000,000 shares authorized, 16,909,501 shares
issued and outstanding at December 31, 2010, 16,669,856 shares
issued and outstanding at June 30, 2010
|
166,981 | 166,699 | ||||||
Additional
paid-in-capital
|
27,841,204 | 27,723,024 | ||||||
Accumulated
deficit
|
(28,402,640 | ) | (27,851,059 | ) | ||||
Total
stockholders' equity (deficit)
|
(394,455 | ) | 38,664 | |||||
Total
liabilities and stockholders' equity
|
$ | 4,871,885 | $ | 5,968,690 |
See
accompanying notes to these condensed consolidated financial
statements.
4
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | 2,532,069 | $ | 2,113,795 | $ | 5,385,602 | $ | 4,415,170 | ||||||||
Laboratory
expenses and cost of sales
|
1,515,574 | 1,380,457 | 3,194,383 | 2,774,157 | ||||||||||||
Gross
profit
|
1,016,495 | 733,338 | 2,191,219 | 1,641,013 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general and administrative
|
1,219,223 | 1,040,375 | 2,441,471 | 2,161,758 | ||||||||||||
Operating
loss
|
(202,728 | ) | (307,037 | ) | (250,252 | ) | (520,745 | ) | ||||||||
Other
expense:
|
||||||||||||||||
Interest
expense
|
(134,261 | ) | (138,851 | ) | (274,222 | ) | (191,951 | ) | ||||||||
Amortization
of discount on debt
|
(13,754 | ) | (12,132 | ) | (32,565 | ) | (18,090 | ) | ||||||||
Other
income
|
1,525 | 391 | 5,458 | 7 | ||||||||||||
Total
other expense
|
(146,490 | ) | (150,592 | ) | (301,329 | ) | (210,034 | ) | ||||||||
Net
loss before tax expense
|
(349,218 | ) | (457,629 | ) | (551,581 | ) | (730,779 | ) | ||||||||
Tax
expense
|
- | - | - | - | ||||||||||||
Net
loss
|
$ | (349,218 | ) | $ | (457,629 | ) | $ | (551,581 | ) | $ | (730,779 | ) | ||||
Net
loss per share
|
$ | (0.02 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.04 | ) | ||||
Weighted
average common shares outstanding, basic and diluted:
|
16,909,501 | 16,711,096 | 16,909,501 | 18,141,744 |
See
accompanying notes to these condensed consolidated financial
statements.
5
PACIFIC
BIOMARKERS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (551,581 | ) | $ | (730,779 | ) | ||
Reconciliation
of net loss to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
193,982 | 151,114 | ||||||
Amortization
of discount on debt
|
32,565 | 18,090 | ||||||
Income
on deposits
|
13,590 | 4,473 | ||||||
Compensation
expense from restricted shares and options
|
118,462 | 49,590 | ||||||
Changes in assets and
liabilities:
|
||||||||
Accounts
receivable
|
339,872 | 1,063,480 | ||||||
Other
receivable
|
- | 5,500 | ||||||
Inventory
|
7,758 | (1,019 | ) | |||||
Prepaid
expenses and other assets
|
(72,557 | ) | 71,140 | |||||
Advances
from customers
|
61,878 | 47,537 | ||||||
Accounts
payable
|
(53,953 | ) | (128,601 | ) | ||||
Accrued
liabilities
|
(232,809 | ) | (282,844 | ) | ||||
Net
cash provided by (used in) operating activities
|
(142,793 | ) | 267,681 | |||||
Cash
flows from investing activities:
|
||||||||
Purchases
of capital equipment
|
(133,853 | ) | (92,122 | ) | ||||
Purchases
of investments
|
- | (506,710 | ) | |||||
Net
cash used in investing activities
|
(133,853 | ) | (598,832 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
on notes payable
|
(373,715 | ) | - | |||||
Proceeds
from loan
|
- | 4,000,000 | ||||||
Repurchases
of common stock
|
- | (1,674,334 | ) | |||||
Restricted
stock transferred for employee withholding tax liability
|
- | (65,614 | ) | |||||
Payments
on capital lease obligations
|
(97,651 | ) | (30,283 | ) | ||||
Net
cash provided by (used in) financing activities
|
(471,366 | ) | 2,229,769 | |||||
Net
increase (decrease) in cash and cash equivalents
|
(748,012 | ) | 1,898,618 | |||||
Cash
and cash equivalents, beginning of period
|
1,861,155 | 1,365,406 | ||||||
Cash
and cash equivalents, end of period
|
$ | 1,113,143 | $ | 3,264,024 | ||||
Supplemental
Information:
|
||||||||
Cash
paid during the period for interest
|
$ | 210,967 | $ | 136,606 | ||||
Cash
paid during the period for income tax
|
$ | - | $ | - |
See
accompanying notes to these condensed consolidated financial
statements.
6
PACIFIC
BIOMARKERS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
|
Organization
and Basis of Presentation
|
We
provide specialty reference laboratory services to the pharmaceutical,
biotechnology, and diagnostics industries. Our company was incorporated in
Delaware in May 1996. We conduct our business primarily through our wholly-owned
subsidiary, Pacific Biomarkers, Inc., a Washington corporation. Our 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 unaudited
interim financial statements.
Unaudited
interim financial statements include all adjustments such as normal recurring
accruals that are, in the opinion of management, necessary for a fair statement
of results of interim periods. Operating results for the three- and six-month
periods ended December 31, 2010 are not necessarily indicative of the results
that may be expected for any future period. The accompanying unaudited financial
statements and related condensed notes should be read in conjunction with the
audited financial statements and notes thereto, for our fiscal year ended June
30, 2010, as previously reported in our annual report on Form 10-K.
2.
|
Summary
of Significant Accounting Policies
|
There
have been no significant changes in our significant accounting policies during
the six-month period ended December 31, 2010 compared to what was previously
disclosed in the our Annual Report on Form 10-K for the fiscal year ended June
30, 2010.
Principles
of Consolidation
These
consolidated financial statements include our consolidated financial position,
results of operations, 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 Deposits
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.
Income
Taxes
We
recognize deferred tax assets and liabilities based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax laws and rates that are expected to be in effect when the differences are
expected to be recovered. We provide a valuation allowance for deferred tax
assets due to the uncertainty of realization.
7
Revenue
Recognition
We
recognize revenue in the period when 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
Loss per Share
Basic
loss per share is based upon the weighted average number of our outstanding
common shares. Diluted 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, which excludes treasury
shares. There were no treasury shares at December 31, 2010.
The net
loss per common share for the three- and six-month periods ended December 31,
2010 and 2009 is based on the weighted average number of shares of common stock
outstanding during the periods. Potentially dilutive securities include
1,827,175 options and 2,416,677 warrants; however, such securities have not been
included in the calculation of the net loss per common share as their effect
would be antidilutive.
The
following table is a reconciliation of the numerator (net loss) and the
denominator (number of shares) used in the basic and diluted EPS calculations
and sets forth potential shares of common stock that are not included in the
diluted net loss per share calculation as the effect is
antidilutive:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Numerator-basic
and diluted net loss
|
$ | (349,218 | ) | $ | (457,629 | ) | $ | (551,581 | ) | $ | (730,779 | ) | ||||
Denominator-basic
or diluted weighted average number of common shares
outstanding
|
16,909,501 | 16,711,096 | 16,909,501 | 18,141,744 | ||||||||||||
Net
loss per share-basic and diluted
|
$ | (0.02 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
The
reduction in shares outstanding for the six-month period ended December 31,
2010, compared to the six-month period ended December 31, 2009, primarily
reflects the repurchase of 2,391,906 shares related to our debt financing during
September, 2009.
Comprehensive
Income
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 three- and six-month periods ended December 31, 2010, our
comprehensive loss equaled our net loss. Accordingly, a statement of
comprehensive 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.
8
Fair
Value of Financial Instruments
We have
certain financial instruments which consist of cash and cash equivalents,
marketable securities, accounts receivable and accounts payable. Our
short-term investments primarily consist of certificates of deposits having a
maturity of less than 12 months and the cost basis value approximated fair
value. These investments all mature within one year. The fair values
of our other financial instruments approximate their carrying values, due to the
short-term nature of those instruments.
Concentrations of
Credit Risk, Suppliers, and Revenues - Our financial instruments that
potentially subject us to concentrations of credit risk are cash and cash
equivalents and short-term investments. The Company invests cash that is not
currently being used in operations in accordance with its investment policy. The
policy allows for the purchase of low-risk, investment grade debt securities
issued by the United States government and very highly-rated banks and
corporations, subject to certain concentration limits. The policy allows for
maturities that are not longer than 12 months for individual
securities.
Income
Taxes - We account for income taxes under the asset and liability method.
We provide deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between our financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates
expected to be in effect in the years in which the differences are expected to
reverse. A valuation allowance is provided to reduce the deferred tax assets to
the amount that is expected to be realized.
We use a
comprehensive model for how it recognizes, measures, presents, and discloses in
our financial statements uncertain tax positions that we have taken or expects
to take on a tax return (including a decision whether to file or not to file a
return in a particular jurisdiction). Under this comprehensive model, the
financial statements reflect expected future tax consequences of such positions
presuming the taxing authorities’ full knowledge of the position and all
relevant facts.
The
amount of unrecognized tax benefits is primarily due to net operating loss
carryforwards, and all of which would favorably impact our effective tax rate if
recognized. Since the unrecognized tax benefit has not been utilized on the
Company’s tax returns, there is no liability recorded on the balance sheets. We
do not have any interest or penalties accrued related to tax positions. In the
event we determine that accrual of interest or penalties are necessary in the
future, the amount will be presented as a component of income
taxes.
Accounting
Changes and Recent Accounting Pronouncements
Initial Application of
Accounting Standards
In the
first quarter of fiscal 2011, the adoption of accounting standards had no
material impact on our financial position, results of operations or cash
flows.
Accounting Standards Issued
But Not Yet Adopted
In
December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805):
Disclosure of Supplementary Pro Forma Information for Business
Combinations. ASU 2010-29 specifies that, for material business
combinations when comparative financial statements are presented, revenue and
earnings of the combined entity should be disclosed as though the business
combination had occurred as of the beginning of the comparable prior annual
reporting period. ASU 2010-09 also expands the supplemental pro forma
disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and earnings. ASU 2010-09
is effective prospectively for business combinations with an acquisition date on
or after the beginning of the first annual reporting period after
December 15, 2010. We will adopt this standard for acquisitions beginning
in fiscal year 2012.
9
3.
|
Concentration
of Credit Risk
|
Our
largest client in the quarter ended December 31, 2010 accounted for
approximately 17% of our total revenues, while our largest client in the quarter
ended December 31, 2009 accounted for approximately 22% of our total revenues.
As of December 31, 2010 and 2009, approximately 22% and 31% of our accounts
receivable balance was from the two largest clients as of these respective
dates. Component clients included in the largest client calculation may vary
from period to period.
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 a pharmaceutical company
client as one single client. For the quarter ended December 31, 2010, 24%
of our revenue was derived from Fortune 500 clients compared to 41% for the
quarter ended December 31, 2009. While the number of our Fortune 500 clients
remained the same, we received less revenue from these clients in the quarter
ended December 31, 2010. This is mainly due to a large contract with a large
international, non-Fortune 500 client during this period. 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 $897,187 at December 31, 2010 and by $2,764,024 at December 31, 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.
4.
|
Stock
Based Compensation
|
We
granted 630,000 stock options under our stock incentive plan during the
three-month period ended December 31, 2010, including 30,000 stock options to
non-employees, and 100,000 restricted shares and 200,000 stock options were
granted during the three-month period ended December 31, 2009. For the
comparable six-month periods, we granted 1,469,900 stock options in the six
months ended December 31, 2010, including 30,000 stock options to non-employees,
compared to 205,500 restricted shares and 351,700 stock options in the six
months ended December 31, 2009.
Stock
Options
We use
the Black-Scholes option pricing model to estimate the calculated fair value of
our share-based payments. Option exercise prices are based on the closing market
price of our common stock on the date of grant. Stock options granted
to employees are valued as of the date of grant. Stock options granted
to non-employees are valued when services are performed, based on the
market price of our common stock at that time. The volatility assumption used in
the Black-Scholes formula is based on the volatility of our common stock. We
used the following assumptions to compute the fair value of option grants the
six-month periods ended December 31:
2010
|
2009
|
|||||||
Expected
volatility
|
117-148 | % | 132-148 | % | ||||
Expected
dividend yield
|
0.00 | % | 0.00 | % | ||||
Risk-free
interest rate
|
2.54-2.96 | % | 3.2-3.85 | % | ||||
Expected
life
|
10
years
|
10
years
|
On
October 1, 2010 we granted 600,000 stock options to our CEO per his employment
agreement with the weighted average fair value on the date of the option grant
of $228,000. On December 13, 2010 we granted 30,000 stock options to the members
of our Scientific Advisory Board (SAB) with the fair value to be determined upon
the performance of services.
The total
unrecognized share-based compensation costs related to non-vested stock options
outstanding at December 31, 2010 was $582,132 and is expected to be recognized
over a weighted average period of approximately 1.9 years.
10
A summary
of option activity from July 1, 2010 through December 31, 2010 is presented
below:
Number of
Options
|
Weighted
Average Exercise
Price per share
|
|||||||
Options
outstanding at July 1, 2010
|
1,881,656 | $ | 0.76 | |||||
Granted
|
1,469,900 | 0.36 | ||||||
Forfeited
|
(12,022 | ) | 0.70 | |||||
Exercised
|
- | - | ||||||
Options
outstanding at December 31, 2010
|
3,339,534 | 0.59 | ||||||
Exercisable
outstanding at December 31, 2010
|
1,827,175 | $ | 0.73 |
Restricted
Stock
From time
to time we grant shares of Restricted Stock, which we refer to as RS, to certain
officers, directors and employees under our stock incentive plan. All RSs vest
on the three- or five-year anniversary of the date of grant. Our Board of
Directors approved RS agreement amendment extending certain existing and new RS
grants from three-year to five-year vesting effective March 29, 2010. The fair
value of our RS is based on the grant-date fair market value of the common
stock, which equals the grant date market price. We did not grant any RS during
the first two quarters of fiscal 2011. As of December 31, 2010, we had $133,004
of unrecognized compensation cost related to nonvested RS awards, which we
expect to recognize over a weighted average period of approximately 3.8
years.
A summary
of RS activity from July 1, 2010 through December 31, 2010 is presented
below:
Number of RS
awards
|
Weighted
Average Grant
Date Fair Value
per share
|
|||||||
RS
nonvested at July 1, 2010
|
239,645 | $ | 0.63 | |||||
Granted
|
- | - | ||||||
Vested
|
(28,168 | ) | 0.63 | |||||
Forfeited
|
- | - | ||||||
RS
nonvested at December 31, 2010
|
211,477 | $ | 0.63 |
Compensation
expense for share-based awards was $118,462 and $49,590 for the six months ended
December 31, 2010 and 2009, respectively. Amounts were included in our
consolidated statements of operations as follows:
Three months ended
|
Six months ended
|
|||||||||||||||
December 31,
2010
|
December 31,
2009
|
December 31,
2010
|
December 31,
2009
|
|||||||||||||
Cost
of sales
|
$ | 3,961 | $ | (2,087 | ) | $ | 7,922 | $ | 3,527 | |||||||
Selling
and administrative expenses
|
49,550 | (21,097 | ) | 110,540 | 46,063 | |||||||||||
Total
compensation expense
|
$ | 53,511 | $ | (23,184 | ) | $ | 118,462 | $ | 49,590 |
The
credit amounts in the three months ended December 31, 2009 column are due to an
adjustment of the RS amortization for the July 01, 2009 grant.
11
5.
Modification of Debt in a Nontroubled Situation
As
previously disclosed, on September 1, 2009, we issued a secured Note in
connection with our $4 million debt financing, bearing interest at 12% per annum
and with a maturity date of August 31, 2013. We recorded $205,725 on our balance
sheet as a discount on the Note (as the difference between the fair value of the
common stock that we repurchased with the proceeds from the debt financing and
the repurchase price) and we amortized this discount as interest expense using
the effective interest method over the original 48-month term of the Note. With
this discount, the effective interest rate on the Note was 12.727%.
Effective
October 1, 2010, we agreed to a modification of terms on the Note, to extend the
maturity date on a portion of the Note to March 31, 2015 (resulting in a lower
payment and interest amount each period from $121,822 to $104,645) and to add a
balloon payment of $600,000 due at the end of the extended term of 55 months.
The effective interest rate on the modified portion of the debt increased from
12.727% to 12.735%.
Effective
December 1, 2010, we agreed to a second modification to the Note, to reduce the
interest rate on the non-extended portion of the Note from 12.0% to 11.5%
(resulting in a reduced monthly payment from $104,645 to $104,011). The
effective interest rate on the modified portion of the debt decreased from
12.725% to 12.126%.
Because
neither the first nor the second modification was a troubled debt restructuring,
we applied the 10% significance test in ASC 470-50-40-10 (EITF 96-19) in each
case to determine whether the original debt should be accounted for as an
extinguishment. The results of these tests are -.31% and .03%,
respectively, less than the 10% significance and therefore the original debt has
not been accounted for as an extinguishment in either modification.
Modification I
|
Modification II
|
|||||||
Original
effective rate
|
12.727 | % | 12.725 | % | ||||
Present
value of revised cash flows discounted at original rate
|
$ | 3,629,694 | $ | 3,485,839 | ||||
Carrying
amount of debt (modified)
|
$ | 3,618,412 | $ | 3,486,820 | ||||
Difference
|
(0.31 | )% | 0.03 | % |
6.
Income Taxes
There was
no income tax expense during the three months ended December 31, 2010 and
2009. Our effective tax rate for the three months ended December 31, 2010
and 2009 was 0% due to uncertainties related to the realizability of the
deferred tax assets as a result of our history of operating losses. The net
deferred tax asset as of December 31, 2010 remains fully offset by a
valuation allowance since it is more likely than not that such tax benefits will
not be realized.
7.
Subsequent Events
In
January 2011, we received funding of approximately $294,000 from an equipment
financing lease on certain of our laboratory equipment. We entered into the
equipment lease on October 20, 2010 for two laboratory instruments valued at
approximately $193,000, and we added two additional instruments to the lease on
December 21, 2010, bringing the total to approximately $294,000. The lease
requires quarterly payments of $37,804 over a term of 24 months from the funding
date. The lease also requires a 50% security deposit in the form of a
letter of credit with our bank.
12
ITEM
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Investors
should read the following discussion and analysis in conjunction with our
consolidated financial statements and related notes in this Form 10-Q and our
audited financial statements and related notes for the year ended June 30, 2010,
included in our Annual Report on Form 10-K.
Overview
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 cardiovascular disease (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.
Management
continues to monitor developments in the drug development market. These changes
include continued consolidation, cost reductions and the use of adaptive
clinical trial approaches. These changes have impacted past and current
revenues, and have the potential to significantly impact future revenues. We
believe that these changes drive continued uncertainty in our market. In fact,
reduction in revenue is a trend reported by most of the major Contract Research
Organizations (CRO’s) since the economic downturn began in 2008. While our
revenues for the quarter are up substantially over last year, we continued to
observe a number of studies being postponed, suspended or terminated during this
past quarter, which we believe is due to resource constraints within
pharmaceutical companies. Despite these market challenges, we believe that there
are new compounds coming into the drug development pipeline and outsourcing
opportunities, and that we are well positioned, particularly in the biomarker
testing services and novel biomarker development service market, to take
advantage of this.
In
December 2010, we implemented a company-wide reduction in force, which resulted
in a work-force reduction of 8 employees. This reduction in force represented
12% of our staff, both in headcount and in compensation expense. As part
of the reduction in force, we paid severance benefits to affected
employees. We expensed a substantial portion of the costs associated with
the reduction in force in the second quarter of fiscal 2011, and we expect to
see cost savings in the next two quarters of fiscal 2011. Also in December, we
started implementing additional company–wide expense reductions with a goal of
approximately $500,000 in expense savings for the second half of the current
fiscal year.
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.
Critical
Accounting Policies and Estimates
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 U.S. GAAP. 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. 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.
There
have been no material changes to our critical accounting policies and estimates
since the end of our 2010 fiscal year. In our Annual Report on Form
10-K, for the fiscal year ended June 30, 2010, we identified four of our
accounting policies that we consider critical to our business operations and an
understanding of our results of operations:
13
● revenue
recognition;
● fair
value measurements - debt financing;
● stock-based
compensation; and
● useful
lives of tangible assets.
We
included in our Annual Report on Form 10-K a brief discussion of some of the
judgments, estimates and uncertainties that can impact the application of these
policies and the specific dollar amounts reported on our financial statements.
This is neither a complete list of all of our accounting policies, nor does it
include all the details surrounding the accounting policies we have identified,
and there are other accounting policies that are significant to us. For detailed
information and discussion on our critical accounting policies and estimates,
see our financial statements and notes thereto included in this Report and our
Annual Report on Form 10-K. 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 and in our Annual Report. We do not
undertake any obligation to update or revise this discussion to reflect any
future events or circumstances.
Results
of Operations for Three- and Six-Month Periods Ended December 31, 2010 and
2009
Revenue:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||||||||||
Dollars in thousands, rounded
|
December 31,
|
$
|
%
|
December 31,
|
$
|
%
|
||||||||||||||||||||||||||
to nearest thousand
|
2010
|
2009
|
Change
|
Change
|
2010
|
2009
|
Change
|
Change
|
||||||||||||||||||||||||
Revenue
|
$ | 2,532 | $ | 2,114 | 418 | 20 | $ | 5,386 | $ | 4,415 | 971 | 22 |
We
generate revenue from clinical pharmaceutical trials testing (“traditional
biomarker services”) and novel biomarker development services.
Our
revenue increased approximately 20% to $2,532,000 from $2,114,000 between the
comparable quarters ended December 31, 2010 and 2009. We see quarterly revenue
fluctuations (both in our direct trials testing and our biomarker business) due
to the variability in the volume of testing services we perform, and by the
timing between our work on testing and open work orders, and prior work orders
having been completed or terminated. For the quarter ended December 31, 2010, we
benefited from a large contract for direct trials
testing covering the first and second fiscal quarters, completed in
the second quarter, with one of our clients in
the cardio-vascular therapeutic area. We had no comparable large
contract for the prior period. We also saw improved levels of testing
revenue in osteoporosis, dyslipidimia and rheumatoid arthritis therapeutic
areas, as well as a decrease in clinical biomarker services.
Our
revenue increased approximately 22% to $5,386,000 from $4,415,000 between the
comparable six-month periods ended December 31, 2010 and 2009. The reasons for
this increase and therapeutic areas driving it are noted above.
The
primary component of our business development efforts has been directed towards
pharmaceutical and biotech companies, which includes both direct trials testing
and our biomarker business. Biomarker services are a primary focus of
our business and we believe it addresses a rapidly growing sector of laboratory
services for clinical drug development. For the comparable quarters and six
months ended December 31, we had a 15% decrease and 4% increase in revenue from
our biomarker services, reflecting fluctuations in the volume of services we
perform. For the balance of fiscal 2011, we expect to see our biomarker services
grow and represent a larger portion of our revenue compared to fiscal 2010,
despite slower growth in this line during the first half of the fiscal
year.
14
During
the second quarter of fiscal 2011, the proportion of our revenue from biomarker
services and referral laboratory work decreased as we saw a 16 percentage point
increase in the proportion of revenue from direct trials testing in our mix of
services provided. The primary reason for this shift to direct trials
testing was a large contract in this service area that we
benefited from in the first two fiscal quarters of 2011. This resulted in
decreases in the proportion of revenue for our biomarker business (5% decrease)
and referral laboratory work (11% decrease).
The
following table provides a breakdown of the percentage of our total revenue
generated from these service areas for the comparable quarters and six- month
periods ended December 31, 2010 and 2009:
Services Revenue Mix
|
||||||||||||
Direct Clinical Services
|
|
|||||||||||
Direct Trials
Testing
|
Biomarkers
|
Referral
Laboratories
|
||||||||||
Three
months Ended
|
||||||||||||
December
31, 2010
|
67 | % | 10 | % | 23 | % | ||||||
December
31, 2009
|
51 | % | 15 | % | 34 | % | ||||||
Six
months Ended
|
||||||||||||
December
31, 2010
|
65 | % | 12 | % | 23 | % | ||||||
December
31, 2009
|
49 | % | 14 | % | 37 | % |
We
believe that the overall increase in revenue for the quarter ended December 31,
2010 reflects our investments in business development initiatives over several
fiscal years, particularly directed towards Direct Clinical Services, as shown
in the table above.
We also
continue to experience reductions in revenue sourced from other large clinical
laboratories that refer specialty laboratory testing to us (“Referral Laboratory
Partners”). We had an 11% decrease in the proportion of revenue from our
Referral Laboratory Partners between the comparable quarters. Similar results
are seen in the six-month periods. We believe this decrease is
directly attributable to decreases with our Referral Laboratory Partners in
their revenues from central lab services, which affects the amount they refer to
us.
As
discussed in our Annual Report on Form 10-K for the 2010 fiscal year, we are
monitoring and evaluating the shift in the industry to “adaptive clinical
trials” and how this continues to impact us. The primary impact of these
“adaptive clinical trials” is that our projects from clients for clinical
testing services are smaller in size and duration, and can be more easily
revised or cancelled by the client. Our revenues tend to fluctuate from quarter
to quarter, and sometimes these fluctuations are significant. These fluctuations
are typically explained by the timing of entering into new contracts for
clinical studies and our work on testing and open work orders, and the
completion of prior work orders or early cancellation of studies by our
clients. The studies that we bid on are uncertain until we have a
signed contract. 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 pharmaceutical
market.
15
Laboratory
Expense and Cost of Goods Sold:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||||||||||
Dollars in thousands, rounded
|
December 31,
|
$
|
%
|
December 31,
|
$
|
%
|
||||||||||||||||||||||||||
to nearest thousand
|
2010
|
2009
|
Change
|
Change
|
2010
|
2009
|
Change
|
Change
|
||||||||||||||||||||||||
Laboratory Expenses and Cost of Goods Sold | $ | 1,516 | $ | 1,380 | 136 | 10 | $ | 3,194 | $ | 2,774 | 420 | 15 | ||||||||||||||||||||
Percentage
of Revenue
|
60 | % | 65 | % | 59 | % | 63 | % |
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 testing and analysis of clinical trial
samples, and the cost of chemical reagents and supplies for analysis of clinical trial samples. Also,
laboratory expenses and cost of goods sold include 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.
Generally,
laboratory expense and cost of goods sold include expense items that are highly
variable due to the mix of services we provide in any given period, the overall
volume of tests performed, the use of new and highly complex assays and the
volume of subcontracted laboratory services. The following table illustrates
changes in laboratory expense and cost of goods sold in fixed and variable
expense categories:
Three
Months Ended
|
||||||||||||||||||||||||
December 31,
|
$
|
%
|
||||||||||||||||||||||
Dollars in thousands, rounded
to nearest thousand
|
2010
|
% of
revenue
|
2009
|
% of
revenue
|
Change
|
Change
|
||||||||||||||||||
Fixed
Cost Detail
|
||||||||||||||||||||||||
Rent,
Utilities, Certain Taxes
|
$ | 177 | 7 | % | $ | 172 | 8 | % | $ | 5 | 3 | % | ||||||||||||
Variable
Cost Detail
|
||||||||||||||||||||||||
Wages,
Taxes, Benefits
|
662 | 26 | % | 655 | 31 | % | 7 | 1 | % | |||||||||||||||
Reagent
Chemicals
|
535 | 21 | % | 399 | 19 | % | 136 | 34 | % | |||||||||||||||
Other
Variable Costs
|
142 | 6 | % | 154 | 7 | % | (12 | ) | (8 | )% | ||||||||||||||
Total
|
1,339 | 53 | % | 1,208 | 57 | % | 131 | 11 | % | |||||||||||||||
Total
Cost of Goods Sold
|
$ | 1,516 | 60 | % | $ | 1,380 | 65 | % | $ | 136 | 10 | % |
Six
Months Ended
|
||||||||||||||||||||||||
December 31,
|
$
|
%
|
||||||||||||||||||||||
Dollars
in thousands, rounded
to nearest thousand
|
2010
|
% of
revenue
|
2009
|
% of
revenue
|
Change
|
Change
|
||||||||||||||||||
Fixed
Cost Detail
|
||||||||||||||||||||||||
Rent,
Utilities, Certain Taxes
|
$ | 353 | 7 | % | $ | 336 | 8 | % | $ | 17 | 5 | % | ||||||||||||
Variable
Cost Detail
|
||||||||||||||||||||||||
Wages,
Taxes, Benefits
|
1,356 | 25 | % | 1,282 | 29 | % | 74 | 6 | % | |||||||||||||||
Reagent
Chemicals
|
1,157 | 21 | % | 861 | 20 | % | 296 | 34 | % | |||||||||||||||
Other
Variable Costs
|
328 | 6 | % | 295 | 6 | % | 33 | 11 | % | |||||||||||||||
Total
|
2,841 | 52 | % | 2,438 | 55 | % | 403 | 17 | % | |||||||||||||||
Total
Cost of Goods Sold
|
$ | 3,194 | 59 | % | $ | 2,774 | 63 | % | $ | 420 | 15 | % |
16
For the comparable quarters ended December 31, 2010, laboratory expense and cost of goods sold increased by approximately $136,000, or 10%, to $1,516,000 from $1,380,000. Laboratory expense and cost of goods sold as a percentage of revenue decreased to approximately 60% from 65% for the comparable quarters. The increase in laboratory expense and cost of goods sold was mainly due to increases in variable costs of salaries and related benefits and laboratory reagents used to support the increase in revenues. The percentage decrease was due to the increase in revenues between comparable periods.
The
largest component of laboratory expense for the quarter ended December 31, 2010
was salaries and related benefits. Laboratory salaries and related benefits
increased 1% to approximately $662,000 from $655,000 for the quarters ended
December 31, 2010 and 2009 as a result of addition of new laboratory staff in
the first quarter of fiscal 2011 to accommodate increases in the complexity and
volume of tests performed. Laboratory salaries and related benefits represented
approximately 26% and 31%, respectively, as a percentage of revenue for the
comparable periods.
In
December 2010, we implemented a company-wide reduction in force (RIF) which
eliminated 7 staff positions in our laboratory and client
services. We expensed a substantial portion of the costs
associated with this RIF in the second quarter of fiscal 2011, which added
approximately $26,000 in cost to our laboratory expense and cost of goods
sold. We expect to see cost savings in this expense category in the
remainder of fiscal 2011.
The other
major component of laboratory expense for the quarter ended December 31, 2010
was the cost of laboratory reagents and supplies for analysis of clinical trial
samples. 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 and mix of lab testing
we are asked to perform, and constitute a significant expense item for our
business. For the comparable quarters ended December 31, 2010 and 2009, the cost
of laboratory reagents and supplies as a percentage of revenue was approximately
21% and 19%. Over the last two fiscal years we have seen increases in
both the cost of reagents and shipping costs. During the comparable quarters
ended December 31, 2010 and 2009, laboratory reagents and supplies increased by
34% to approximately $535,000 from $399,000 as a result of an increase in the
number of tests performed.
Other
variable costs decreased 8% for the comparable quarters, to $142,000 from
$154,000. The major reason for this decrease was a reduction in laboratory
repair and maintenance expenses, and travel and recruiting
expenses.
Fixed
costs for the quarter ended December 31, 2010 were essentially unchanged with an
increase of 3% compared to the quarter ended December 31, 2009, to approximately
$177,000 from $172,000. This increase was mainly due to increases in laboratory
depreciation.
For the
comparable six-month periods ended December 31, 2010 and 2009, laboratory
expense and cost of goods sold increased approximately 15% to $3,194,000 from
$2,774,000, and as a percentage of revenue, decreased to approximately 59% from
approximately 63%. The dollar increase in laboratory expense and cost of goods
sold was due to increases in variable costs of salaries and related benefits,
laboratory reagents and other variable costs.
Laboratory
salaries and related benefits increased 6% to approximately $1,356,000 from
$1,282,000 for the six-month periods ended December 31, 2010 and 2009 as a
result of an increase in staff to accommodate increases in the complexity and
volume of tests performed. Salaries and related benefits accounted for
approximately 25% and 29% of total laboratory expense and cost of goods sold for
the six-month periods ended December 31, 2010 and 2009.
Laboratory
reagents and supplies expense increased 34% to approximately $1,157,000 from
$861,000 for the six-month periods ended December 31, 2010 and 2009 due to an
increase in the number of tests performed. During the comparable six-month
periods ended December 31, 2010 and 2009, the cost of laboratory reagents and
supplies accounted for approximately 21% and 20% as a percentage of
revenue.
Other
variable costs showed an increase of 11% for the six-month period ended December
31, 2010 compared to the six-month period ended December 31, 2009. The major
reason for an increase in other variable costs was an increase in our expenses
for outside services that consist mainly of contracted laboratory
services. These outside service costs were directly related to the large
contract in process during the first and second fiscal
quarters.
17
Fixed
costs increased 5% for the comparable six month periods, to approximately
$353,000 from $336,000. This increase was mainly due to increases in laboratory
depreciation.
Selling,
General and Administrative Expense:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||||||||||
Dollars in thousands, rounded
|
December 31,
|
$
|
%
|
December 31,
|
$
|
%
|
||||||||||||||||||||||||||
to nearest thousand
|
2010
|
2009
|
Change
|
Change
|
2010
|
2009
|
Change
|
Change
|
||||||||||||||||||||||||
Selling,
General and Administrative Expense
|
$ | 1,219 | $ | 1,040 | 179 | 17 | $ | 2,441 | $ | 2,162 | 279 | 13 | ||||||||||||||||||||
Percentage
of Revenue
|
48 | % | 49 | % | 45 | % | 49 | % |
We
categorize under “selling, general and administrative expenses” operating costs
associated 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 quarters ended December 31, 2010 and 2009, our selling, general and
administrative expense increased 17% to approximately $1,219,000 from
$1,040,000. As a percentage of revenue, selling, general and administrative
expense was 48% and 49% for the quarters ended December 31, 2010 and 2009. The
decrease in selling, general and administrative expense as a percentage of
revenue was the result of the significant increase in our revenues between the
comparable periods.
For the
comparable six-month periods ended December 31, 2010 and 2009, our selling,
general and administrative expense increased 13% to approximately $2,441,000
from $2,162,000. As a percentage of revenue, selling, general and administrative
expense was 45% and 49% for the quarters ended December 31, 2010 and 2009. The
percentage decrease in selling, general and administrative expense as a
percentage of revenue was the result of the significant increase in our revenues
between the comparable periods.
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, public company expense and share-based compensation. Our salary
and benefit expenses increased due to one new addition in our Business
Development team and other promotional salary increases. These increases
were offset somewhat by decreases in advertising and marketing expenses and
travel expense.
In
December 2010, we implemented a company-wide reduction in force (RIF) which
eliminated 1 staff position in SG&A. We expensed the substantial
portion of the costs associated with this RIF in the second quarter of fiscal
2011, which added approximately $10,000 in cost to our SG&A. We
expect to see cost savings in this expense category in the remainder of fiscal
2011.
Other
Expense:
Three Months Ended
|
Six Months Ended
|
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Dollars in thousands, rounded
|
December 31,
|
$
|
%
|
December 31,
|
$
|
%
|
||||||||||||||||||||||||||
to nearest thousand
|
2010
|
2009
|
Change
|
Change
|
2010
|
2009
|
Change
|
Change
|
||||||||||||||||||||||||
Other
Expense
|
$ | (146 | ) | $ | (151 | ) | 5 | 3 | $ | (301 | ) | $ | (210 | ) | (91 | ) | (43 | ) | ||||||||||||||
Percentage
of Revenue
|
(6 | )% | (7 | )% | (6 | )% | (5 | )% |
18
We had
other expense of approximately $146,000 for the quarter ended December 31, 2010,
compared to other expense of approximately $151,000 for the quarter ended
December 31, 2009. The main component of other expense for the quarter ended
December 31, 2010 was interest expense of approximately $134,000 compared to
approximately $139,000 interest expense in the comparable fiscal period last
year. For the quarters ended December 31, 2010 and 2009, interest expense
included approximately $108,000 and $120,000 of interest related to our debt
financing. We also recorded approximately $14,000 of expense related to the
amortization of the discount on the debt, compared to approximately $12,000
amortization for the comparable fiscal period last year. This decrease in
interest related to our debt financing was due to a modification of terms,
effective October 1, 2010, to extend a portion of the long term note, resulting
in lower monthly payments of principal and interest, from $121,822 to $104,645
for the remainder of the original 48-month term of the loan. A second
modification was made to the note, effective December 9, 2010, to decrease the
interest rate on the non-extended portion of the note from 12.0% to 11.5%. This
will reduce our future quarterly interest expense accordingly.
Total
other expense for the six-month period ended December 31, 2010 was approximately
$301,000, compared to other expense of approximately $210,000 for the six-month
period ended December 31, 2009. The main component of other expense for the
six-month period ended December 31, 2010 was interest expense of approximately
$274,000 compared to approximately $192,000 interest expense in the comparable
fiscal period last year. For the six-month periods ended December 31, 2010 and
2009, interest expense included approximately $247,000 and $160,000 of interest
related to our debt financing. We also recorded approximately $33,000 of expense
related to the amortization of the discount on the debt, compared to
approximately $18,000 amortization for the comparable fiscal period last year.
For the six-month period ended December 31, 2010, interest and amortization
related to our debt financing were higher due to six months’ interest and
amortization incurred versus four month’s interest and amortization incurred for
the six-month period ended December 31, 2009 due to the start of our secured
loan in September 2009.
Net
Loss:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||||||||||
Dollars in thousands, rounded
|
December 31,
|
$
|
%
|
December 31,
|
$
|
%
|
||||||||||||||||||||||||||
to nearest thousand
|
2010
|
2009
|
Change
|
Change
|
2010
|
2009
|
Change
|
Change
|
||||||||||||||||||||||||
Net
Loss
|
$ | (349 | ) | $ | (458 | ) | 109 | 24 | $ | (552 | ) | $ | (731 | ) | 179 | 25 | ||||||||||||||||
Percentage
of Revenue
|
(14 | )% | (22 | )% | (10 | )% | (17 | )% |
We had
24% reduction in our net loss, to approximately $(349,000) for the quarter ended
December 31, 2010 from approximately $(458,000) for the quarter ended December
31, 2009. Our gross profit increased 39% to $1,016,000 from $733,000 due to
our substantial revenue increase for the quarter, which also contributed
to the 34% decrease in our operating loss to approximately $(203,000)
from $(307,000) compared to the quarter ended December 31, 2009.
We also
had 25% reduction in our net loss for the six-month period ended December 31,
2010, to approximately $(552,000) from approximately $(731,000) for the
six-month period ended December 31, 2009. Our gross profit increased 34% to
$2,191,000 from $1,641,000 due to our substantial revenue increase for the
six-month period, which also contributed to the 52% decrease in our
operating loss to approximately $(250,000) from $(521,000) compared to the
six-month period ended December 31, 2009.
This
reduction in our net loss for the quarter and six-month period ended December
31, 2010 is attributable to higher revenues reported in these periods compared
to the same periods last fiscal year.
Liquidity
and Capital Resources:
At
December 31, 2010, our cash and cash equivalents were approximately $1,113,000,
compared to approximately $1,861,000 at June 30, 2010. We also had approximately
$455,000 invested in short-term investments at December 31, 2010, down from
$469,000 at June 30, 2009. At December 31, 2010, we had approximately $1,513,000
in accounts receivable, compared to approximately $1,853,000 as of June 30,
2010, 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.
19
Total
liabilities recorded on our balance sheet as of December 31, 2010 were
approximately $5,266,000 compared to approximately $5,930,000 as of June 30,
2010. This decrease in liabilities for the quarter ended December 31, 2010 is
primarily attributable to our continuing to pay down our long-term debt balance
and lease obligations. During the quarter ended December 31, 2010, we paid
approximately $206,000 of the principal amount due on our debt financing. The
liabilities recorded on the balance sheet for our debt financing are net of
approximately $110,000 and $143,000, respectively, as of December 31, 2010 and
June 30, 2010 as an unamortized discount on the secured note. This discount is
recorded solely for U.S. GAAP purposes, but it doesn’t actually reduce our total
payment obligations on the note. As of December 31, 2010, the principal balance
outstanding on the note was approximately $3,462,000.
During
the second quarter of fiscal 2011, we amended the payment terms of our $4
million secured note to extend the maturity date on a portion of the note and to
reduce the interest rate on the non-extended portion. See “Other
Expense” above and “Note 5. Modification of Debt in a Nontroubled Situation” in
our Notes to Condensed Consolidated Financial Statements. The
combined net effect of these amendments are (i) to reduce the monthly
payments of principal and interest from $121,822 to $104,011 thru August 31,
2013 (the remainder of the original 48-month term of the loan), (ii) to
provide for monthly payments of $20,000 of principal and interest from September
31, 2013 thru March 31, 2015 (the 19-month term extension), and (iii) to
provide for a final balloon payment in the amount of $600,000 on April 30, 2015.
Other than this secured note, we do not have available to us a bank line of
credit or other general borrowing facility.
At
December 31, 2010, we had working capital of approximately $1,135,000, compared
to approximately $1,796,000 at June 30, 2010. The decrease of approximately
$661,000 in our working capital is mainly attributable to our decreased cash and
cash equivalents due to loan payments and capital lease payments, and a decrease
in accounts receivable. Changes providing a positive impact included increases
in prepaid expenses, and decreases in accounts payable and accrued
liabilities.
Net cash
used in operating activities was approximately $143,000 for the quarter ended
December 31, 2010 and included the effect of approximately $194,000 in
depreciation and amortization and approximately $118,000 in expense from
share-based compensation. Our investing activities used cash of approximately
$134,000 for the quarter ended December 31, 2010 for the purchase of capital
equipment. Cash flow used in financing activities included approximately
$374,000 used in payments on our debt and $98,000 used in payments on capital
lease obligations. We believe that our cash, current assets and cash flows from
operations will be sufficient to fund current operations through March 31,
2012.
During
the second quarter of fiscal 2011, we entered into an equipment financing lease
on four of our laboratory instruments for approximately $294,000. The lease
funded via vendor payments for the instruments in January 2011. We
are required to make quarterly payments of $37,804 over the 24-month term of the
equipment lease. In the third quarter of fiscal 2011, we expect to receive a
refund of $125,500 for one lab instrument that we paid for prior to adding it to
the lease.
As
previously announced, in November 2010, the IRS approved a grant to us for up to
$244,479 for reimbursement of certain qualified investment expense (submitted
under section 48D of the Internal Revenue Code). We did not receive any grant
funds in the second quarter of fiscal 2011. Grant funds will be paid to us as
and when we provide qualified investment substantiation with the filing of our
federal tax returns. We expect to receive a portion of these grant
funds in the third quarter of fiscal 2011, with respect to qualified investment
expenses reflected in our tax return for fiscal year 2010.
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.
20
We will
also continue to explore other strategic alternatives, which may include a
merger, acquisition, asset sale, joint venture or other similar
transaction.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet financing arrangements.
ITEM
4. CONTROLS
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, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. 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.
As of the
end of the period covered by this Report on Form 10-Q, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. This evaluation
was carried out under the supervision and with the participation of management,
including our Chief Executive Officer and Vice President and Controller. Based
upon that evaluation, our Chief Executive Officer and Vice President and
Controller concluded that our disclosure controls and procedures are effective
at December 31, 2010.
During
the quarterly period covered by this report, there were no changes in our
internal controls or in other factors that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.
PART
II – OTHER INFORMATION
ITEM
6. EXHIBITS
|
31.1
|
Certification
of Ronald R. Helm, Chief Executive
Officer
|
|
31.2
|
Certification
of John P. Jensen, Vice President and
Controller
|
|
32.1
|
Certification
of 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.
|
21
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: February
11, 2011
/s/ Ronald R. Helm
|
|
Ronald
R. Helm
|
|
Chief
Executive Officer
|
|
(principal
executive officer)
|
|
/s/ John P. Jensen
|
|
John
P. Jensen
|
|
Vice
President and Controller
|
|
(principal
financial and accounting
officer)
|
22