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EXCEL - IDEA: XBRL DOCUMENT - WESTBRIDGE RESEARCH GROUPFinancial_Report.xls
EX-32.2 - CERTIFICATION - WESTBRIDGE RESEARCH GROUPwestbridge_10k-ex3202.htm
EX-32.1 - CERTIFICATION - WESTBRIDGE RESEARCH GROUPwestbridge_10k-ex3201.htm
EX-31.2 - CERTIFICATION - WESTBRIDGE RESEARCH GROUPwestbridge_10k-ex3102.htm
EX-31.1 - CERTIFICATION - WESTBRIDGE RESEARCH GROUPwestbridge_10k-ex3101.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended November 30, 2012

 

OR

 

£ 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: 2-92261

 

WESTBRIDGE RESEARCH GROUP

(Exact Name of registrant as specified in its charter)

 

California 95-3769474
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

1260 Avenida Chelsea, Vista, California 92081

(Address of Principal Executive Offices and Zip Code)

 

(760) 599-8855

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act: None

   

 

Securities Registered Pursuant to Section 12(g) of the Act:

 

Title of Each Class Name of Each Exchange on Which Registered
Common Stock None

  

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yes £ No S

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes £ No S

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 of 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 S No £

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every International Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 amendments to this Form 10-K. £

 

Indicate by checkmark 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. (Check one):

 

Large accelerated filer £ Accelerated filer £
Non-Accelerated filer £ Smaller reporting company S
(Do not check if a smaller reporting company)  

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $2,072,447.

 

At March 6, 2013, there were outstanding 2,228,438 shares of the registrant’s common stock.

 

Documents Incorporated by Reference: None

 

 

 
 

  

TABLE OF CONTENTS

 

  Page
PART I  
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 5
ITEM 1B. UNRESOLVED STAFF COMMENTS 8
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. MINE SAFETY DISCLOSURE 8
PART II 9
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 9
ITEM 6. SELECTED FINANCIAL DATA 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 13
ITEM 9A. CONTROLS AND PROCEDURES 13
ITEM 9B. OTHER INFORMATION 15
PART III 15
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 15
ITEM 11. EXECUTIVE COMPENSATION 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 22
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 22
PART IV 23
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 23

 

 
 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

Certain statements contained in this report that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933) that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. When we use the words “anticipates”, “plans”, “expects”, “believes”, “should”, “could”, “may”, and similar expressions, we are identifying forward-looking statements. These risks and uncertainties include, but are not limited to, a slow-down in the domestic or international markets for the Company’s products; greater competition for customers from businesses who are larger and better capitalized; local, state, federal or international regulatory changes which adversely impact the Company’s ability to manufacture or sell its products, particularly its organic products; the reliance of the Company on limited sources of raw materials; an increase in the Company’s costs of raw materials.

 

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward looking statements contained in this Annual Report on Form 10-K as a result of new information or future events or developments. You should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.

 

 

PART I

 

ITEM 1. BUSINESS

 

OVERVIEW

 

Westbridge Research Group was incorporated in California in 1982. From inception, Westbridge Research Group and its wholly-owned subsidiary, Westbridge Agricultural Products (hereinafter referred to collectively as “Westbridge,” the “Company,” “we,” “our,” “us,” and “our company”) have engaged in the development, manufacture and marketing of environmentally compatible products for the agriculture industry. Those products are divided between conventional (non-organic) and organic. The Company has established a line of “sustainable” products which, while not organic, are more environmentally friendly. While still conventional, these sustainable products are offered to growers who are practitioners of developing biological systems which do not need high levels of toxic inputs. The Company also produces a line of products that are used in industrial bioremediation. During the past several years, the Company has placed an emphasis on the sale of agricultural inputs that meet the organic requirements as defined under the United States Department of Agriculture (“USDA”) National Organic Program (“NOP”). The Company’s products are sold principally in the western region of the United States, but it has international sales as well. The Company sells its products through its own sales organization and through dealers and distributors. Depending on the product, the Company’s products are effective on vines and tree crops, berries and vegetables.

 

The Company’s executive offices are located at 1260 Avenida Chelsea, Vista, California 92081, and its telephone number is (760) 599-8855.

 

PRINCIPAL PRODUCTS AND THEIR MARKETS

 

The Company's environmentally sensitive products include proprietary formulations based primarily on the use of microbial fermentations and plant extracts, micronutrient blends containing primary and complex secondary nutrients, as well as additional natural humates and natural substances with growth promoting activity. Those products are generally divided between organic products and products that are not organic, often referred to as conventional products. Organic products are considered those that are made in accordance with government approved standards for organics. Those standards are defined under the USDA NOP.

 

1
 

 

Conventional Product Line

 

The Company’s conventional products are marketed under the trademarked brand names TRIGGRR®, SunBurst® and EarthTrend®. Earthtrend is the Company’s line of sustainable products.

 

Two of the Company’s important conventional products are Soil TRIGGRR® and Foliar TRIGGRR®. These formulations are registered with the United States Environmental Protection Agency (“USEPA”) as plant growth regulators. The active components of these two formulas are "cytokinins" that affect rates of cell division and growth.

 

•     Soil TRIGGRR®, a liquid product that is applied to the soil at the time of planting or as a side dress or through drip irrigation to stimulate early seedling vigor, improve root development, and improve stand. Soil TRIGGRR® is commonly used on a wide variety of fruits and vegetables.

 

•     Foliar TRIGGRR®, which is applied as a liquid directly to plant foliage. The product has its primary use in stimulating root growth, promoting earlier and fuller flowering, and increasing seed set. Plants that Foliar TRIGGRR® is commonly used on include fruiting vegetables, tree fruit and row crops.

 

Soil TRIGGRR® and Foliar TRIGGRR® may be used with conventional farming practices and in combination with other agricultural chemicals, rendering them easy to apply and facilitating distribution. These products are inexpensive to use and in many crops produce yield increases sufficient to provide substantial increases in profits to the user.

 

Another group of important conventional products is sold under the trademark SunBurst®. These are specialty fertilizers which are micronutrient blends containing primary and complex secondary nutrients, as well as additional natural humates and natural substances with growth promoting activity. The SunBurst® products are often used in conventional crop production such as table grapes, and in growing turf.

 

Sustainable Product Line

 

The Company introduced its EarthTrend® line of products in 2010. The EarthTrend® line is conventional (non-organic), however its products are based on the concepts of sustainable agriculture. While the EarthTrend® products are not organic, the Company uses non-toxic or less toxic ingredients in these products.

 

Organic Product Line

 

The Company’s organic products are marketed under the trademarked brand names TRIGGRR® and BioLink®. Organic TRIGGRR® is a liquid auxiliary soil and plant substance containing natural plant extracts. The product line includes Organic BioLink® NPK (nitrogen-phosphorus-potassium) blends and micro and macronutrient blends that can be used on most plants including fruits and vegetables, trees, vines, shrubs, flowering ornamentals and containerized plants. These NPK blends are designed to correct nitrogen, phosphorus, and potassium deficiencies. All of the liquid products can be delivered to plants by either soil or foliar applications. Organic products are formulated to be in compliance with the USDA NOP.

 

Biocontrols

 

The Company is the exclusive distributor in the United States of Blossom ProtectTM and Botector®. These products are described under “Other Manufacturer’s Products”.

 

Bioremediation Products

 

Although these products do not constitute a large portion of the Company’s sales, Westbridge also manufactures and sells environmental products, H4-502 and Sewage Treatment (ST-12), which are organic products formulated to control ammonia, alcohol and hydrogen sulfide odors. Bioremediation Nutrient Blends (the BNB product line) are bionutrient products that enhance compost maturity as well as accelerate the remediation of petroleum hydrocarbon contaminated sites. TRIGGRR® Digester is designed to accelerate breakdown of stubble in low- or no-till farming operations. Customers who would be interested in this product line include composters and waste-water treatment facilities.

 

2
 

 

Adjuvants

 

The Company sells non-ionic type spreaders, referred to as adjuvants, which provides quick wetting, more uniform water distribution, and increased retention of pesticide sprays by reducing surface tension of the spray droplets. The Company markets its adjuvants line as synergists with other competing biological pesticide products to achieve better efficacy.

 

Insect Repellant

 

The Company’s product line also includes a liquid garlic-based insect repellant for use on most plants.

 

Programs

 

The Company markets its products through recommended programs it has developed over the years to assist with plant success. These programs are based on the type of key crop. For example, it has established programs for crops such as table and wine grapes, strawberries and high value nut and fruit tree orchards. Each program consists of one and usually more of the Company’s products. The programs include instructional information concerning the optimum type of application and the frequency and the time of applications. The Company believes that this type of comprehensive approach is of significant value to the grower.

 

DISTRIBUTION METHODS

 

In addition to an in-house sales force, the Company uses key regional and national distributors and dealers for reaching the U.S. market. Internationally, the Company has executed distribution agreements with in-place ag-chemical distributors to represent the Company's products in specified regions or countries. The Company has two large customers whose combined purchases amounted to 25% of the Company’s agricultural product sales in 2012. Sales to these customers amounted to 16% in 2011.

 

OTHER MANUFACTURER’S PRODUCTS

 

The Company is the exclusive distributor in the United States of the products Blossom ProtectTM and Botector®. Blossom ProtectTM is a biological product to combat fire blight, a bacterial disease that attacks apple and pear trees and other pome fruit. Botector® is a product for use in controlling the fungal disease botrytis and similar diseases in grapes, strawberries and other crops. Both products were approved by the USEPA in January 2012 and Blossom ProtectTM was introduced to the American market in 2012. State regulatory requirements may delay the introduction of Botector® in some states. The products are also approved for use in organic production in accordance with the USDA NOP and are appropriate for an Integrated Pest Management (IPM) regime.

 

Additionally, the Company is actively engaged in research and development activity for new products and is also investigating opportunities to either purchase or seek distribution rights of new products from third parties.

 

PRODUCT DEVELOPMENT AND RESEARCH AND DEVELOPMENT

 

The Company uses an internal program and contracts with universities and private government laboratories to conduct the majority of its research and development work in environmentally safe agriculture products and products that can be used with IPM programs. These programs and contracts generate the field trials and data necessary to obtain the requisite government approvals and establish efficacy under commercial conditions.

 

Research and development expenses for fiscal years 2012 and 2011, respectively, were $480,551 and $305,125.

 

COMPETITION

 

Competition in the agricultural products market is significant, and there are a number of large and mid-size businesses in direct competition with the Company. The Company's agricultural products compete with chemical products of major specialty suppliers to the agricultural industry. Some of the advantages these major specialty companies have in supplying chemical products to the agricultural industry include well-established distribution networks, well-known products, experience in satisfying the needs of farmers and extensive capital resources. These competitors are able to conduct large advertising campaigns and conduct direct mail efforts targeting growers who may use their product.

 

3
 

 

A number of other existing companies are engaged in research in the area of biotechnology relating to agriculture. The Company expects the biotechnology industry in agriculture to be very competitive in the future. Unlike chemical products, biotechnology products do not cause soil erosion, do not adversely affect the environment, are not dependent on petroleum products and do not present safety hazards to humans. Most of the Company's existing and potential competitors in agro-chemicals and biotechnology have more experience in operations, more extensive facilities and greater financial and other resources.

 

MATERIALS AND SUPPLIERS

 

The Company purchases the raw materials for its products from a number of suppliers. A number of the Company’s employees devote substantial time to dealing with the purchase of materials and evaluating potential new suppliers. The Company has endeavored to diversify suppliers for many years; however, there are a limited number of suppliers for certain raw materials used by the Company in its products.

 

MAJOR CUSTOMERS

 

Over the past three years, a majority of the Company’s sales, based on dollars sold, are to 15 companies. Most of these same companies have remained key customers for the past several years.

 

GOVERNMENT AND OTHER REGULATIONS

 

The Company's activities are subject to regulation under various federal laws and regulations including, among others, the USDA’s National Organic Program, the Occupational Safety and Health Act, the Toxic Substances Control Act, the National Environmental Policy Act, other water, air and environmental quality statutes, and export control legislation. The Company believes it has met its current obligations under the aforementioned regulations.

 

In addition to the foregoing requirements, the Company's agricultural products must often be approved by state authorities before distribution in a state. In some cases, this necessitates having to conduct field tests in the particular state to accumulate the necessary efficacy for registration. Soil TRIGGRR® and Foliar TRIGGRR® have been federally registered with the USEPA. Blossom ProtectTM and Botector® have been registered by their manufacturer with the USEPA. In addition, the Company has registered its products with certain appropriate state agencies and is pursuing registration in other states. In 2011, the State of California, where the Company is located, developed its own regulatory compliance regime.

 

The Company has its organic products reviewed and approved for use on organically grown crops by either state certifiers accredited under the USDA NOP, or by the Organic Materials Review Institute (OMRI). The State of California recently adopted an approval process for certification of products as organic for sale within the state. The Company is obtaining certificates in compliance with the new California regulations.

 

The NOP under the direction of the Agricultural Marketing Service (AMS), is an arm of the USDA. This national program facilitates domestic and international marketing of fresh and processed food that is organically produced and assures consumers that such products meet consistent, uniform standards.

 

OMRI is a national nonprofit organization that determines which input products are allowed for use in organic production and processing. OMRI Listed—or approved—products may be used on operations that are certified organic under the USDA NOP.

 

The NOP announced a set of regulations effective 2009 meant to more strictly control those manufacturers of organic farm inputs which also produce conventional farm inputs. The new rules require dual manufacturers of liquid fertilizers (dual means both conventional and organic fertilizers), which manufacture organic liquid fertilizers of more than 3 percent nitrogen, to have a USDA NOP accredited third-party expert certify that (i) there is no fraud in the formulation of the organic fertilizer, (ii) the manufacturer has the appropriate infrastructure to produce the organic farm inputs, and (iii) a successful audit was conducted comparing incoming materials with outgoing finished product. The Company supports the implementation of these regulations. Although the Company does not currently manufacture an organic fertilizer that would mandate this certification, the Company has undergone annual inspections and has been certified.

 

4
 

 

Additionally, the California Department of Food and Agriculture (CDFA) has promulgated a number of proposed regulations related to the inspection of facilities producing organic fertilizers under the California Organic Products Act of 2003. The Company’s facilities and records underwent an inspection by CDFA in October 2011 and passed that inspection.

 

MANUFACTURING

 

All of the Company's proprietary formulations and finished products are manufactured at its Vista, California facility.

 

THIRD PARTY DISTRIBUTION CENTER

 

In response to customer requests, in 2013, the Company has started to use a third party warehouse and distribution center for the convenience of customers located in California’s central valley. The Company has no recent history working with such facilities and does not know if this facility will be useful to its customers and there is no assurance that use of this facility will result in increased sales.

 

SEASONALITY

 

Agricultural product sales are typically seasonal in nature with heavier sales in the spring months. The Company is seeking to temper the seasonality of its agronomic sales by marketing its products in Latin American countries which typically produces sales in January, February and March of each year.

 

ENVIRONMENTAL LAWS

 

In addition to certain regulations governing the manufacturing process for organic products, the Company is subject to environmental laws regarding its manufacturing process, air regulation and disposal requirements. The Company has worked diligently to comply with all such laws and is subject to inspections from time to time and other requirements of compliance.

 

EMPLOYEES

 

At November 30, 2012, the Company had 23 employees, of which 21 are full-time and 2 are part time. None of these employees are covered by a collective bargaining agreement. The Company believes that its employee relations are satisfactory.

 

ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Any potential investor should carefully consider the risks and uncertainties described below before purchasing any shares of our common stock. The risks described below are those we currently believe may materially affect us. If any of them occur, our business, financial condition, operating results or cash flow could be materially harmed.

 

Risks Related to our Business

 

We are in a heavily regulated industry.

 

The production of pesticides is regulated by the USEPA and by state governments. Those regulations require the registration of many of our products. Should the registration of one or more of our products be lost because of a change in the laws or for any other reason, it will have an adverse effect on the Company and its profitability. That consequence could be minor to severe depending on the product. Similarly, the Company could be required to make changes to its product formulations to comply with any newly enacted regulations, which changes could be costly both in terms of raw material changes but also changes in the manufacturing process and the willingness of the Company’s raw material suppliers to disclose their manufacturing processes.

 

5
 

 

The production of organic fertilizers is regulated by the federal government and often by state governments. California is particularly becoming involved in the regulation of organic fertilizers. USDA NOP regulations require the Company to adopt a material evaluation program. This is evidence of the Company belief that the organics industry as a whole is coming under increasing scrutiny and growing regulation. New regulations and changes to existing regulations may have a number of adverse consequences to the Company and its profitability. The Company may find its cost of goods or manufacturing processes more expensive. Or, the Company may determine that under some circumstances it is unable to produce its organic fertilizers because of restrictive measures taken by the government or industry groups.

 

The Company’s sales are impacted by weather conditions and the availability of water.

 

The Company sells most of its products through distributors and dealers both nationally and internationally. A large number of end-users are located in the Pacific Northwest of the United States and California. The Pacific Northwest is a prime growing region in the United States for many of the crops that benefit from the Company’s products. However, that region is well-known for unpredictability in its weather. The Pacific Northwest is frequently subject to severe winter conditions that postpone or shorten the growing season or damage perennial tree crops. As a result, the Company’s sales of products into that region may from time to time be less than historically typical. The unpredictability of weather makes it difficult for the Company to forecast sales with any significant degree of certainty.

 

California recently experienced a multi-year drought. During that time the state government limited water availability to growers in certain parts of California. Growers were advised to use water wisely and conserve as much as possible through good on-farm water management practices. Additionally, water restrictions may occur as a result of court decisions on endangered species as was the case recently with the Delta smelt. If water distribution is curtailed for these or any other reasons, the Company anticipates its sales in California will decrease, perhaps substantially.

 

A majority of the Company’s sales are concentrated on a few customers.

 

A small number of customers have historically accounted for a majority of the Company’s sales. Sales for the top two customers accounted for 25% and 16% of sales revenues in 2012 and 2011, respectively. There is no assurance that the Company’s current customers will continue to place orders with the Company, that the orders by existing customers will continue at the levels of previous periods, or that the Company will be able to obtain orders from new customers. The loss of one of more of the largest customers will have an adverse impact on the Company’s sales and operating results. A bankruptcy filing by one or more of the Company’s major customers could materially adversely affect the Company’s business, financial condition and results of operations.

 

The Company may not be able to obtain all raw materials necessary for its products.

 

The Company is reliant on suppliers of raw materials in order to manufacturer its products. Those raw materials are bought from both domestic and international suppliers. In years of a strong economy, there is significant competition for those materials making availability uncertain. Additionally, with greater competition the price of some raw materials will increase and not all of that additional expense will be passed onto customers. While starting in 2008 the world economy weakened and the demand for raw materials lessened, the Company has seen recent trends that raw materials are becoming once again more difficult to obtain and more expensive. Related to this, the value of the United States dollar compared to some currencies has decreased from time to time. This decrease in value made the cost of foreign raw materials more expensive than in previous periods. Such currency fluctuations may occur again in the future. Finally, some countries have adopted policies which restrict the export of minerals if these items can be used or reserved for domestic production. In other cases, countries may suffer from domestic disturbances or worker actions that disrupt the flow of materials to the Company.

 

6
 

 

We may not be successful in acquiring or developing new products.

 

The Company is attempting to expand its product offerings through licensing and distributing arrangements and by developing products in-house. There is no assurance that these attempts will be successful. Licensing of products requires identification of new products or determination of new applications for existing products and a willingness on the product owner to license the product. Additionally, all products need to be proven efficacious, which requires costly testing and a favorable result is not assured. Because many of the products that may be sold by the Company must be registered with one or more government agencies, the registration process can be time consuming and expensive, and there is no guarantee that the product will obtain all needed registrations. The Company has obtained registration in some jurisdictions and not in others. In the Company’s view, the State of California has one of the most stringent regulatory environments and occasionally the Company may have federal registration of a product but will be unable to sell that product in California. This is the case with Botector® which has been approved by the USEPA, but has not yet been approved by the California Department of Pesticide Regulation.

 

We can expect fluctuations in revenue from quarter to quarter and the seasonal nature makes the Company’s business more difficult to manage.

 

The Company’s revenues vary from period to period for a number of factors. We sell products during growing seasons. Although the Company has had some success in selling into the southern hemisphere to capture another growing season, the large majority of its sales are in the United States, and most crops that benefit from our products are grown in spring and summer. Therefore, most of the Company’s revenues are realized in a six month period beginning in April. This requires us to build up inventories in the first and second quarters when our cash flow is weakest. Historically speaking, our cash flow is strongest in the third and fourth quarters.

 

We have no patents on our product formulations or manufacturing process.

 

The Company’s product formulations are carefully protected trade secrets, but we have no patents on our formulations. The Company believes that its formulations are still valuable proprietary information, but there is no assurance that they will not be copied. The manufacturing process for many of its products is also confidential and maintained as a trade secret, but there is no assurance that a competitor cannot duplicate our processes. The Company has not decided if it will patent future products or processes.

 

We are reliant upon key senior management and any discontinuation of employment will cause disruptions in the Company’s prospects.

 

We are highly dependent on our management and scientific team and the loss of our President, Christine Koenemann or our chief scientist, Dr. Lawrence Parker, could adversely impact sales and significantly impede the efforts of the Company to acquire additional products or develop new products internally. Ms. Koenemann and Dr. Parker have entered into employment agreements with the Company, but there is no assurance they will not breach such agreements.

 

Risks Related to Owning our Common Stock

 

Our stock is not traded.

 

There is no existing market for our stock. It is not currently traded, and therefore it is difficult to liquidate our stock. The price for our common stock, if it were traded, would be affected by a number of factors, including: product availability, weather and regulatory affairs.

 

Our principal shareholders have significant voting power.

 

Our officers, directors and principal shareholders own approximately 11.8% of the voting stock on a fully diluted basis (if all options are exercised). Although there is no voting agreement among them, this concentration of ownership may have an impact on the management and direction of the Company.

 

7
 

 

We incur substantial costs as a result of being a public company.

 

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, has required changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

  

ITEM 2. PROPERTIES

 

The Company's principal executive office is located at 1260 Avenida Chelsea, Vista, California 92081. This facility consists of 19,504 square feet and is used for offices, a laboratory and the production and storage of agricultural products and materials. The Company leases these facilities under a lease that was originally set to expire in January, 2015. The lease commenced on February 1, 2007 with early possession on January 1, 2007, and a term of eight (8) years. The Company had an option under the original lease to extend the term for an additional three (3) years at the fair market rate at the time of extension. The rent under the lease for the initial year is approximately $13,650 per month, with increases by three percent (3%) each year. The Company was required to pay certain other customary expenses under the lease. The Company installed improvements to the facility totaling approximately $350,000 and new equipment totaling approximately $230,000. In August, 2010, the Company negotiated an extension of the term for an additional four years to January 31, 2019 with the option of an additional three year extension through January 31, 2021. The new lease agreement gave the Company a $1,000 per month rent decrease beginning September 1, 2010 through the end of the initial lease term, January 31, 2015. The monthly rent for the option period will be established at fair market value by November 1, 2014. Rent is being expensed on a straight-line basis over the term of the lease.

 

The Company entered into a lease on April 8, 2011 of a free-standing industrial building located at 1251 Avenida Chelsea, Vista, California 92081. It occupies approximately 11,300 square feet of that building for use primarily as a storage space. The lease commenced on May 1, 2011, with early occupancy on April 8, 2011. The lease has a term of four years with an option to extend the term for an additional forty-five months at the fair market rate at the time of extension. The rent under this lease was $2,750 per month through December 31, 2011, and is $6,215 per month for the period January 1, 2012 through December 31, 2012, and will be $6,441 per month for the period January 1, 2013 through April 30, 2015.

 

Rent expense on the 1260 Avenida Chelsea facility for the years ending November 30, 2012 and 2011 was $182,076 and $182,076, respectively. The rent expense for the 1251 Avenida Chelsea storage facility for the years ending November 30, 2012 and 2011 was $74,580 and $19,250. Rent expense on the old storage facility rented by the Company on a month-to-month basis for the years ending November 30, 2012 and 2011 was $0 and $8,000.

 

In January 2013, the Company entered into a month to month agreement with a third party warehouse and distribution center. The monthly rent is dependent upon activity but no less than $250 per month. The Company expects to keep rent to a minimum and not to exceed $500 per month.

 

ITEM 3. LEGAL PROCEEDINGS

 

(a) The Company is not a party to, and its property is not the subject of, any pending legal proceeding.

 

(b) No proceeding was terminated during the fourth quarter of the fiscal year.

  

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

8
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

(a)     Principal Market. There is no established public trading market for the Company’s single class of common stock.

 

(b)     Approximate Number of Holders for Common Stock. Many holders of the common stock hold their shares in “street name” accounts and are not individually shareholders of record. The approximate number of record holders of Company’s Common Stock as of November 30, 2012, was 604. The transfer agent for our shares is Continental Stock Transfer and Trust Company, 17 Battery Place 8th Floor, New York, New York 10004, tel: 212-509-4000, www.continentalstock.com.

 

(c)     Repurchases; Dividends. The Company has not repurchased any of its stock for the fiscal year ending November 30, 2012. The Company has paid no dividends during that same period. There are no contractual restrictions that materially limit the Company's present or future ability to pay dividends. The Company does not expect to pay dividends in the foreseeable future.

 

ITEM 6. SELECTED FINANCIAL DATA

 

As a smaller reporting company we are not required to provide information typically disclosed under this section.

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

The following discussion and analysis of the Company’s financial condition and the results of operations should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

 

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes. This discussion and analysis contains forward-looking statements relating to future events and our future financial performance. The statements involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those results expressed or implied by these forward-looking statements, including those set forth in this Annual Report.

 

General

 

We maintain a strategy for growth through stressing expansion of sales of our organic products and the continued development of our product offerings. The Company is also seeking to acquire biological products for the control of damaging insects or plant pathogens, which can be organically certified for use in organic fruit and crop production or utilized in IPM. These potential biological products may be acquired through either purchase or distribution agreement arrangements. The Company is beginning the distribution of the products, Blossom ProtectTM and Botector®. It is highly likely that any new technology will be required to be registered with the United States Environmental Protection Agency.

 

We believe that the key drivers of growth for 2013 and beyond will be sales of our organic and environmentally friendly products. We sell our organic products for use on a number of high value crops, including grapes, tree fruits, berries and row crops. The recent reformulation of one of the Company’s top selling fertilizer products in California for use by organic growers will have an adverse impact on the Company as it is unknown how the reformulation will be accepted in the market place. However, this product may continue to be used by conventional growers and therefore the magnitude of the loss cannot be determined.

 

9
 

 

As stated elsewhere, our business is seasonal. Our products are used mostly in the growing period, accordingly, a majority of our products are sold in the six months following February. We are selling into South America where the growing season is counter to the North American season and we are attempting to expand that market reducing our exposure to the North American growing season.

 

While the demand for organic farm inputs increases, there remains a limited supply of allowed organic raw materials for the formulation of the Company’s finished products due to increased competition for those materials. The Company is also facing an increase in freight and packaging material costs.

 

Fiscal Year 2012 Compared to Fiscal Year 2011

 

Total product sales were $6,557,989 in fiscal 2012 compared with $4,826,434 in fiscal 2011, an increase of approximately 36% or $1,731,555. The increase in sales is primarily due to increased sales in parts of the Midwest, along with the introduction of its new biological control product in the Pacific Northwestern region of the United States. In addition, this increase is due to the Company’s sales and educational efforts over a number of years resulting in its products gaining acceptance with growers and distributors. Prices for the Company's existing products remained stable during fiscal 2012. Production by gallons was 356,496 in 2012 and 304,281 in 2011. Our production gallons increased approximately 17% in fiscal 2012 compared with fiscal 2011. The Company’s total product sales increased by approximately 36% in fiscal 2012 while the production in gallons increased by approximately 17% for the same period. This is due to approximately 24% of the Company’s sales increase being derived from product that is not produced by the Company and approximately 38% of the sales increase is in the Company’s higher priced products in fiscal 2012 when compared with fiscal 2011.

 

Cost of sales as a percentage of total product sales decreased to approximately 44% (or $2,894,134) in fiscal 2012 as compared with 45% (or $2,164,823) in fiscal 2011. The percentage remained relatively constant as the cost of raw materials used in production of our products generally remained the same from 2012 to 2011.

 

Research and development expenses increased approximately 57% or $175,426, from $305,125 to $480,551. This increase is primarily due to the addition of research and development staff and increased trials of potential new products.

 

Selling expenses increased by $404,544, from $1,304,156 in fiscal 2011 to $1,708,700 in fiscal 2012, however selling expenses decreased to approximately 26% of product sales in fiscal 2012 from approximately 27% of product sales in fiscal 2011. This increase in selling expenses is primarily due to increased commission related to increased sales, an increase in salaries related to the addition of sales and marketing staff, and increased advertising and trade show expenses.

 

General and administrative expenses increased from 2011 to 2012 by 4% or $31,788, from $895,724 to $927,512. This increase is primarily due to increased salaries and related benefits.

 

Interest expense decreased by 71%, or $5,912, from $8,298 to $2,386. This decrease is primarily due to the pay off a capital lease in fiscal 2012.

 

Net income for fiscal 2012 was $499,288 compared with net income of $313,418 in fiscal 2011. The increase in net income is primarily due to increased sales of the Company’s products.

 

Fiscal Year 2011 Compared to Fiscal Year 2010

 

Total product sales were $4,826,434 in fiscal 2011 compared with $4,238,308 in fiscal 2010, an increase of approximately 14% or $588,126. Prices for the Company's existing products remained stable during fiscal 2011. Production by gallons was 304,281 in 2011 and 241,968 in 2010. Our production gallons increased approximately 26% in fiscal 2011 compared with fiscal 2010. While the Company’s production in gallons increased by approximately 26% in 2011, its total product sales increased by approximately 14% for the same period. This is due to an increase in production and sale of lower priced products in fiscal 2011 when compared with fiscal 2010.

 

Cost of sales as a percentage of total product sales increased to approximately 45% (or $2,164,823) in fiscal 2011 as compared with 44% (or $1,844,924) in fiscal 2010. The percentage remained relatively constant as the cost of raw materials used in production of our products generally remained the same from 2010 to 2011.

 

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Research and development expenses increased approximately 8% or $23,801, from $281,324 to $305,125. This increase is primarily due to increased testing of potential new products.

 

Selling expenses increased by $60,031, from $1,244,125 in fiscal 2010 to $1,304,156 in fiscal 2011, however selling expenses decreased to approximately 27% of product sales from approximately 29% of product sales. This increase in selling expenses is primarily due to an increase in salaries related to the addition of sales and marketing staff.

 

General and administrative expenses increased from 2010 to 2011 by 15% or $119,753, from $775,971 to $895,724. This increase is primarily related to the costs of a business consultant and the hiring of a Chief Financial Officer.

 

Interest expense decreased by 28%, or $3,240, from $11,538 to $8,298. This decrease is primarily due to the pay off a note payable and reduced interest at the end of the capital lease.

 

Net income for fiscal 2011 was $313,418 compared with net income of $246,645 in fiscal 2010. The increase in net income is due to increased sales of the Company’s products and the receipt of payments related to the sale of the Mexico property which are being recognized as other income.

 

Liquidity and Capital Resources

 

Net working capital increased to $2,994,328 in fiscal year 2012 compared to $2,301,541 in fiscal year 2011. At November 30, 2012, the Company had approximately $1,532,000 in cash and cash equivalents.

 

Operating Activities

The Company generated cash flows from operations of $384,806 and used cash flows from operations of $36,402 for the years ended November 30, 2012 and 2011, respectively. The increase in cash flows was primarily attributable to the increase in sales of the Company’s products during fiscal 2012.  

 

The Company used cash flows in operations of $36,402 and generated cash flows from operations of $454,300 for the years ended November 30, 2011 and 2010, respectively. The decrease in cash flows was primarily attributable to a substantial investment in raw materials inventory. 

 

Investing Activities

The Company's cash used in investing activities was $178,894 in 2012 and $124,554 in 2011. Investing activities in 2012 are driven primarily by capital expenditures. The increase in cash used in investing activities in 2012 as compared to 2011 was primarily the result of the addition of production equipment. 

 

The Company's cash used in investing activities was $124,554 in 2011 and $81,311 in 2010. Investing activities in 2011 are driven primarily by capital expenditures. The increase in cash used in investing activities in 2011 as compared to 2010 was primarily the result of the addition of production equipment. 

 

Financing Activities

The Company generated cash from financing activities of $6,126 in 2012 and used cash in financing activities of $12,538 in 2011. The increase in cash generated from financing activities was primarily the result of proceeds from the exercise of stock options during fiscal 2012 and financing of a new truck for production.

 

The Company used cash in financing activities of $12,538 in 2011 and $147,101 in 2010. The decrease in cash used in financing activities was primarily the result of the Company paying down its line of credit in 2010. Other financing outlays include the pay downs of debt and capital leases.

 

Credit Facility

The Company has a $500,000 line of credit available to be drawn upon, of which $0 has been utilized as of November 30, 2012. The line of credit expires on August 5, 2013 and is expected to be renewed. The Company anticipates that cash flows from operations and borrowings available under our line of credit will be sufficient to meet the ongoing needs of our business.

 

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Mexico Property

During fiscal year 2012, the Company received proceeds of $120,597 net of commissions paid from the final installments in the sale of rights to land in Baja Sur, Mexico. These amounts constituted the final payments from the buyer and the Company will receive no further payments.

 

Off-balance Sheet Arrangements

 

None.

 

Critical Accounting Policies and Estimates

 

The financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Management believes the disclosures made are adequate to make the information not misleading. The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles. Preparing financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. These estimates and assumptions are affected by Management's application of accounting policies.

 

Revenue Recognition

 

Revenues are recorded on the accrual basis of accounting when title transfers to the customer, which is typically at the shipping point. We record estimated reductions to revenue for return allowances and product performance, based upon a percentage of sales. We also allow for returns based upon pre-approval or in the case of damaged goods. Such returns are estimated based on historical experience and an allowance is provided at the time of sale.

 

Accounts Receivable and Allowances for Doubtful Accounts

 

We evaluate our ability to collect on accounts receivable and charge-backs (disputes from the customer) based upon a combination of factors. Whether a receivable is past due is based on how recently payments have been received and in certain circumstances where we are aware of a specific customer's inability to meet its financial obligations (e.g., bankruptcy filings, substantial downgrading of credit sources). A specific reserve for bad debts is taken against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. Amounts are charged off against the reserve once it is established that amounts are not likely to be collected. We recognize reserves for charge-backs based on our historical collection experience. Our historical experience has shown that very little of customer receivables go uncollected.

 

Inventory

 

We continually evaluate the composition of our inventories, assessing slow-turning, ongoing product as well as product from prior seasons. Market value of distressed inventory is valued based on historical sales trends on our individual product lines, the impact of market trends and economic conditions, and the value of current orders relating to the future sales of this type of inventory. Significant changes in market values could cause us to record additional inventory markdowns.

 

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Stock Based Compensation

 

We account for stock-based compensation in accordance with the Financial Accounting Standards Board (“FASB”) standards. We elected the modified prospective method where prior periods are not revised for comparative purposes. Under the fair value recognition provisions, stock based compensation is measured at grant date based upon the fair value of the award and expense is recognized on a straight-line basis over the vesting period. We use the Black-Scholes option pricing model to determine the fair value of stock options, which requires management to use estimates and assumptions. The determination of the fair value of stock based option awards on the date of grant is based upon the exercise price as well as assumptions regarding subjective variables. These variables include our expected life of the option, expected stock price volatility over the term of the award, determination of a risk free interest rate and an estimated dividend yield. We estimate the expected life of the option by calculating the average term based upon historical experience. We estimate the expected stock price volatility by using implied volatility in market traded stock over the same period as the vesting period. We base the risk-free interest rate on zero coupon yields implied from U.S. Treasury issues with remaining terms similar to the term on the options. We do not expect to pay dividends in the foreseeable future and therefore use an expected dividend yield of zero. If factors change or we employ different assumptions for estimating fair value of the stock option, our estimates may be different than future estimates or actual values realized upon the exercise, expiration, early termination or forfeiture of those awards in the future. At this time, we believe that our current method for accounting for stock based compensation is reasonable. Furthermore, an entity may elect either an accelerated recognition method or a straight-line recognition method for awards subject to graded vesting based on a service condition, regardless of how the fair value of the award is measured. For all stock based compensation awards that contain graded vesting based on service conditions, we have elected to apply a straight-line recognition method to account for these awards. However, guidance is relatively new and the application of these principles over time may be subject to further interpretation or refinement. See "Notes to Consolidated Financial Statements—Note 1 - Summary of Significant Accounting Policies" and "Note 6 - Stock Options" for additional discussion.

 

Recent Accounting Pronouncements

 

There are no other recently issued accounting standards with pending adoptions that the Company’s management currently anticipates will have any material impact upon its financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company we are not required to provide the information typically required in this item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Response to this item is submitted as a separate section of this annual Report following Item 15.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There were no changes in or disagreements with accountants on accounting and financial disclosure for the fiscal year ended November 30, 2012.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s principal executive officer and principal financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the President and Chief Financial Officer concluded that, as of the end of the period covered by the Annual Report on Form 10-K, our disclosure controls and procedures were effective.

 

13
 

 

Management Annual Report on Internal Control over Financial Reporting

 

The financial statements, financial analyses and all other information included in this Annual Report on Form 10-K was prepared by the Company’s management, which is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles accepted in the United States of America and includes those policies and procedures that:

 

(i)     Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company;

 

(ii)    Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

(iii)   Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition and use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

 

Because of its inherent limitations, internal control over financial reporting, may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of the end of the Company’s most recent fiscal year based on the framework in Internal Control - Integrated Framework (1992) and Internal Control Over Financial Reporting - Guidance for Small Public Companies (2006), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that the Company’s internal controls over financial reporting were effective as of November 30, 2012.

 

This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

 

Changes in Internal Control over Financial Reporting

 

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and up to the filing date of this Annual Report.

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

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ITEM 9B. OTHER INFORMATION

 

At November 30, 1989, the Company had an account receivable totaling $451,270 due from a foreign distributor. The account was collateralized by a perfected security interest in unimproved real property in Baja California, Mexico. The Company was unsuccessful in its efforts to collect the amounts due on this account and, accordingly, during fiscal 1993, retained Mexican legal counsel to initiate foreclosure proceedings on the property. On February 8, 2007, the real property was to be sold through a public auction. As there were no bids placed, the Company obtained the right to take title to the land. The Company was subject to certain ownership restrictions based on Mexican law and therefore, formed a Mexican legal entity in order to take title to the property.

 

On August 15, 2008, the Company entered into an agreement to sell its rights to the property for a purchase price of $1,250,000 with a $300,000 deposit, and the balance of payment in installments.

 

As of November 30, 2012, the Company has received payment in full from the buyer totaling $1,250,000 plus interest totaling $14,000. The Company has released all rights and claims to the property to the buyer. As part of the arrangement with its Mexican legal counsel and American broker, the Company is obligated to pay them a portion of any collection received on its long term receivable. As of November 30, 2012, the Company has paid $384,508 and has paid in full its obligation under the arrangements from the payments collected.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

Executive Officers and Directors

 

The following table sets forth certain information regarding the current executive officers and directors of the Company as of November 30, 2012:

 

        Expiration of
Name Age Position Director Since Term
         
Christine Koenemann 59 Director and President 1995 2013
         
Richard Forsyth 61 Chief Financial Officer and Secretary Not a Director  
         
William Fruehling (1)(2) 72 Director and Chairman 1997 2013
         
Mark Cole (1)(2) 49 Director 2005 2013

  

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

  

Background and Experience of Directors and Officers

 

Christine Koenemann was elected President and appointed as a Director of the Company on March 2, 1995. She has worked for the Company for the past 29 years in varying positions including Operations Manager, Shareholder Relations Liaison, Director of Administration, and Assistant Treasurer. She attended Indiana University School of Business and worked in retail management prior to joining the Company.

 

William Fruehling was appointed to the Board of Directors in April 1997. Mr. Fruehling is the founder and President of Fruehling Communications, a San Diego based advertising and public relations company which focuses on Western and Sunbelt agriculture. Prior to starting Fruehling Communications, Mr. Fruehling worked extensively in the Advertising industry with regard to agribusiness. He managed The Elanco Products Crop Protection Chemical account in the Southern and Western United States, as well as the Monsanto Account with regard to Hybrid Seed Corn, for Creswell, Munsell, Fultz & Zirbel in Cedar Rapids, Iowa.

 

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Mark Cole received his Bachelors Degree in Business Administration (Accounting) from San Diego State University in 1990. After receiving his degree, Mr. Cole spent 8 years as an audit professional with Big 4 public accounting firms and later served as Managing Director for the CPA firm of Cole and Company. He served as the Corporate Controller for Crocs, Inc., a designer and manufacturer of footwear and as a consultant until 2009. He has served in similar financial capacities for Salient Networks and Ashworth, Inc. From March 2010 to October 2011, Mr. Cole was an accounting officer of Kidrobot, Inc. He was appointed as a Director of the Company April 7, 2005.

 

Richard Forsyth was hired as the Chief Financial Officer and Secretary of the Company as of September 1, 2011. He also serves as General Counsel to the Company and acted as outside counsel to the Company from time-to-time since 1988. Mr. Forsyth was most recently a shareholder and President of the San Diego based law firm of Wertz McDade and prior to that was affiliated with other national law firms. He received his BA degree from San Jose State University and his law degree in 1977 from Santa Clara University. Mr. Forsyth received his training as a business and finance attorney with the Shiomi Yamamoto law firm in Osaka, Japan. He has sat on numerous civic, business, government and professional boards and committees. He has been an adjunct professor at the University of San Diego Law School.

 

Directors are elected to serve until the next annual meeting of shareholders and until their successors have been elected and have qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of shareholders and until their successors have been elected and qualified.

 

Family Relationships

 

There are no family relationships between or among the directors, executive officers or person’s nominated or chosen to become directors or executive officers.

 

Board Meetings and Committees

 

During the year ended November 30, 2012, the Board of Directors held 4 board meetings to conduct business.

 

Audit Committee

 

The Audit Committee of our Board of Directors is composed of two non-employee directors who meet the independence standards of the SEC. The members of the Audit Committee are Mark Cole, chair and William Fruehling. Our Board has determined that Mr. Cole qualifies as an audit committee financial expert under federal securities laws, by virtue of his education and relevant experience, and is independent under the applicable requirements of the Securities Exchange Act of 1934. During the year ended November 30, 2012, the Audit Committee held 2 meetings to conduct business.

 

Compensation Committee

 

The Compensation Committee of our Board of Directors is comprised of members of the Board of Directors. The members of the Compensation Committee are William Fruehling, who serves as its chair, and Mark Cole. The Committee consults from time to time with Ms. Koenemann on certain matters not related to Ms. Koenemann’s compensation. During the year ended November 30, 2012, the Compensation Committee held 1 meeting to conduct business. The Committee reviews and approves our compensation policy for management and has assumed responsibility for administration of our Stock Option Plan.

 

Board Compensation

 

Each non-employee director receives the amount of $1,500 per day for attending a Board meeting in person or by phone or video link, and $500 per day for attending each meeting of a meeting of the Company’s Committees. However, if a meeting of one or more of the Committees occurs on the same day as a meeting of the Board, a director will not be separately compensated for the attending that Committee meeting(s). As illustration, if a Board meeting, Audit Committee meeting and Compensation Committee meeting occur during the course of one day, a director will receive $1,500 as compensation for attending the Board meeting, but no other compensation. The Company reimburses directors’ reasonable out of pocket costs related to attending meetings. Finally, each non-employee director receives annually an option to purchase up to 7,500 shares of the Company’s common stock. There were no options issued during fiscal 2012, however the fiscal 2012 options are expected to be issued in fiscal 2013 along with the current year’s options.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Commission. Officers, directors and greater than ten percent beneficial owners are required by Commission regulations to furnish us with copies of all forms they file pursuant to Section 16(a). One officer purchased shares from two shareholders in 2012 and filed the necessary forms. This was a private transaction.

 

Code of Ethics

 

We have adopted a Code of Ethics that is designed to deter wrongdoing and to promote honest and ethical conduct, full, fair, accurate and timely and understandable disclosure in our SEC reports and other public communications. We will provide to any person without charge, upon request, a copy of our code of ethics. Persons wishing to make such a request should contact Westbridge Research Group, 1260 Avenida Chelsea, Vista, CA 92081 or may find a copy filed with our Form 10-Q for the quarter ended August 31, 2009.

 

Indemnification of Directors

 

The Company’s Bylaws provide for the indemnification of Directors to the fullest extent provided by applicable law when they are carrying out their duties in good faith.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The following table sets forth information relating to the annual and long-term compensation for the fiscal years ended November 30, 2012, 2011 and 2010 for the President, Chief Financial Officer and Vice President of the Company.

 

Summary Compensation Table

 

Name and Principal Position   Fiscal Year   Salary   Bonus   Stock Awards   Option Awards(1)   Non-Equity Incentive Plan Compensation   Non-qualified Incentive Plan Compensation   All Other Compensation(2)   Total 
                                              
Christine Koenemann   2012   $152,083   $50,000    0   $0    0    0   $554   $202,637 
President & Director   2011   $150,000   $35,000    0   $0    0    0   $0   $185,000 
    2010   $135,000   $25,000    0   $8,260    0    0   $2,596   $170,856 
                                              
Richard Forsyth   2012   $120,000   $20,000    0   $0    0    0   $0   $140,000 
Chief Financial Officer,   2011   $30,000   $0    0   $0    0    0   $0   $30,000 
Secretary & General Counsel(3)                                             
                                              
Larry Parker, PhD   2012   $100,000   $25,000    0   $0    0    0   $28,809   $153,809 
Vice President &   2011   $100,000   $20,000    0   $0    0    0   $22,382   $142,382 
Director of R&D   2010   $85,000   $15,000    0   $4,139    0    0   $24,236   $128,375 

  

(1)     Option Awards are issued pursuant to our 2001 Stock Option Plan and reflects the dollar amount of compensation expense recognized by us in our financial statements for reporting purposes in accordance with ASC 718. For a discussion on the assumptions made regarding the valuation of the option awards, please see Note 1 “Organization and Significant Accounting Policies” in our Notes to Consolidated Financial Statements.

 

(2)     All Other Compensation is comprised of unused vacation paid to Christine Koenemann and commissions and unused vacation paid to Larry Parker, PhD.

 

(3)     Mr. Forsyth’s employment began September 1, 2011.

 

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Bonuses

 

Historically the Compensation Committee recommends and the Board of Directors approves bonuses only for the President of the Company and establishes a pool of funds available for bonus grants to other employees at the discretion of the President. However, both the President’s bonus and the pool for the payment of bonuses to other employees is determined by the Compensation Committee based on a number of factors, in particular the profitability of the Company and on other factors which are subjective. In 2012 a bonus was paid to Ms. Koenemann, Mr. Forsyth and to Dr. Parker in recognition of their contributions in increasing sales, fostering the development and testing of new products and growing key personnel.

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information regarding outstanding equity awards held by our President, Chief Financial Officer and Vice-President during our fiscal year ended November 30, 2012.

 

OPTION AWARDS   STOCK AWARDS  
Name   Number of Securities Underlying Unexercised Options (#) Exercisable     Number of Securities Underlying Unexercised Options (#) Unexercisable     Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)     Option Exercise Price ($)   Option Expiration Date   Number of Shares or Units of Stock That Have Not Vested (#)     Market Value of Shares or Units of Stock That Have Not Vested ($)     Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)     Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#)  
Christine Koenemann     50,000                 $ 1.53   04/15/2018                        
      20,000             6,666     $ 0.81   03/08/2020                        
                                                                   
Larry Parker, PhD     40,000                 $ 1.53   04/15/2018                        
      10,000             3,333     $ 0.81   03/08/2020                        

  

Richard Forsyth, Chief Financial Officer, began employment on September 1, 2011. He received no equity awards and had no stock awards as of November 30, 2012. In 2012, Mr. Forsyth purchased shares from other shareholders.

 

Option Grants in Last Fiscal Year (Individual Grants)

 

During fiscal 2012, there were no options granted.

 

During fiscal 2011, the Company granted non-qualified stock options to acquire 7,500 shares each to two members of the Board of Directors at $0.85 per share. The 15,000 options vested immediately and expire in March 2021. All of these options remain outstanding and exercisable at November 30, 2012.

 

During fiscal 2010, the Company granted stock options to acquire 30,000 shares at $0.81 per share to the Company’s President and Vice-President. These options have fully vested and remain outstanding and exercisable at November 30, 2012.

 

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value

 

In fiscal 2012, Christine Koenemann exercised stock options to purchase stock. Christine Koenemann exercised the right to purchase 75,000 shares of common stock at $0.25 per share for a total of $18,750.

 

18
 

 

In fiscal 2011, the Company established the 2011 Stock Option and Stock Compensation Plan (“2011 Plan”). The Plan allows for the grant of options and other awards representing up to 92,688 shares of the Company’s common stock. Such options and awards may be granted to directors, officers, employees and others who render services to the Company. The options may be granted as either incentive stock options or non-qualified stock options. Under the 2011 Plan, incentive stock options may be granted at an exercise price greater than or equal to the market value at the date of the grant, for owners of 10% or more of the voting shares, at an exercise price of not less than 110% of the market value at the date of grant and non-qualified options may be granted at an exercise price greater than or equal to 85% of the market value at the date of the grant. The other awards that may be granted under the Plan include stock units and stock appreciation rights. There are 15,000 shares granted as non-qualified stock options under the 2011 Plan, and no other options or awards were made. Those options are fully vested as of November 30, 2012.

 

During fiscal 2011, under the 2011 Plan, the Company granted non-qualified stock options to acquire 7,500 shares each to two members of the Board of Directors at $0.85 per share. These options are fully vested and expire on November 30, 2021. All of these options remain outstanding and exercisable at November 30, 2012.

 

At November 30, 2012, the 2011 Plan has a total of 77,688 shares that remain reserved and available for future stock option grants or other award grants.

 

During fiscal 2001, the Company established an employee stock option plan (“the 2001 Plan”) under which options to purchase an aggregate of 400,000 shares of the Company’s common stock may be granted to directors, officers, employees and certain persons rendering service to the Company as either incentive options or non-qualified options. Options vest over varying terms designated by the 2001 Plan’s administrative committee and expire at the earlier of ten years from the date of grant or 90 days after termination of employment. There are options to 262,000 shares granted under the 2001 plan of which 262,000 shares are fully vested as of November 30, 2012. The 2001 Plan has expired and no further stock options are being granted under the 2001 Plan.

 

Employment Agreements

 

The Company entered into a new employment agreement with Ms. Koenemann commencing May 1, 2011 which will end on November 30, 2014. Under the new agreement Ms. Koenemann is to continue to serve as the President, Secretary and Chief Financial Officer. On September 1, 2011, Ms. Koenemann relinquished her positions as Secretary and Chief Financial Officer with the hiring of Richard Forsyth. Ms. Koenemann’s base salary is $150,000 per year with annual reviews which may result in an increase or decrease of the base salary, but any decrease cannot be for more than ten percent of the prior year’s base salary without the written agreement of Ms. Koenemann.  As of November 1, 2012, Ms. Koenemann’s base salary was increased to $175,000. Ms. Koenemann is also entitled to a bonus paid out annually based on the financial performance of the Company and other factors to be determined by the Board of Directors, or a committee thereof, at its sole discretion.  Ms. Koenemann was not granted stock options in connection with this employment agreement, but may receive options from time to time as determined by the Board of Directors. Ms. Koenemann may terminate the employment agreement at any time by giving the Company 120 day’s written notice.  The employment agreement will also terminate upon the death or complete disability of Ms. Koenemann, although her salary would continue for six months thereafter.  The Company may terminate Ms. Koenemann’s employment agreement “for cause” as defined in the employment agreement, in which case there will be no severance or continuation pay. The employment agreement also provides that Ms. Koenemann will receive such insurance coverage, pension plans and vacation time as is available under the Company’s policies.  In the event of termination of the employment agreement, Ms. Koenemann has the right to assume the key-person insurance policy that the Company has in place covering her life.

 

19
 

 

The Company entered into a new employment agreement with Dr. Parker commencing May 1, 2011 and will end on November 30, 2014. Under the new agreement Dr. Parker is to continue to serve as the Vice President and Director of Research and Development. Dr. Parker’s base salary will be $100,000 per year with annual reviews which may result in an increase or decrease of the base salary, but any decrease cannot be for more than ten percent of the prior year’s base salary without the written agreement of Dr. Parker.  Dr. Parker will also be entitled to a bonus paid out annually based on the financial performance of the Company and other factors determined by the Company’s President at the President’s sole discretion. Dr. Parker was not granted stock options in connection with this employment agreement, but may receive options from time to time as determined by the Board of Directors. Dr. Parker will receive commissions on sales he supervises with rates and terms to be reviewed and approved annually by the Company’s President.  Dr. Parker may terminate the employment agreement at any time by giving the Company 120 day’s written notice.  The employment agreement will also terminate upon the death or complete disability of Dr. Parker, although his salary would continue for six months thereafter.  The Company may terminate Dr. Parker’s employment agreement “for cause” as defined in the employment agreement, in which case there will be no severance or continuation pay. The employment agreement also provides that Dr. Parker will receive such insurance coverage, pension plans and vacation time as is available under the Company’s policies.  In the event of termination of the employment agreement, Dr. Parker has the right to assume the key-person insurance policy that the Company has in place covering his life.

 

On August 15, 2011, the Company entered into an employment agreement with Richard Forsyth.  The employment agreement provides that Mr. Forsyth is to serve as the General Counsel, Secretary and Chief Financial Officer of the Company for a term commencing September 1, 2011 and ending November 30, 2014. Mr. Forsyth’s base salary will be $120,000 per year with annual reviews which may result in an increase or decrease of the base salary, but any decrease cannot be for more than ten percent of the prior year’s base salary without the written agreement of Mr. Forsyth. Mr. Forsyth will also be entitled to a bonus paid out annually based on the financial performance of the Company and other factors determined by the Company’s President at the President’s sole discretion.  Mr. Forsyth was not granted stock options in connection with this employment agreement. Mr. Forsyth may terminate the employment agreement at any time by giving the Company 120 day’s written notice.  The employment agreement will also terminate upon Mr. Forsyth’s death or complete disability, although his salary would continue for six months thereafter.  The Company may terminate Mr. Forsyth’s employment agreement “for cause” as defined in the employment agreement, in which case there will be no severance or continuation pay. The employment agreement also provides that Mr. Forsyth will receive such insurance coverage, pension plans and vacation time as is available under the Company’s policies, provided however that Mr. Forsyth is entitled to receive three weeks of vacation each year although the Company’s policies only make available two weeks.

 

Director Compensation

 

The following Director Compensation Table summarizes the compensation of our non-employee directors for services rendered during the year ended November 30, 2012:

 

Name   Fees Earned or Paid In Cash     Stock Award     Options Award (1)     Non-Qualified Non-Equity Incentive Plan Compensation     Deferred Compensation Earnings     All Other Compensation     Total  
                                           
Bill Fruehling   $ 5,000       0     0       0       0       0     $ 5,000  
                                                         
Mark Cole   $ 5,000       0     0       0       0       0     $ 5,000  

 

(1)     The Company, in 2013, will grant to each of Mr. Fruehling and Mr. Cole an option for 7,500 shares for their service in 2012 and in addition an option for 7,500 shares for their services in 2013.

 

In addition to the compensation mentioned above, we reimburse the directors for their travel expenses incurred in attending meetings of the Board and its Committees.

 

 

20
 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information as of March 6, 2013, with respect to the beneficial ownership of the Company's Common Stock (a) by each person who is known to the Company to own beneficially or of record more than 5% of the outstanding shares of Common Stock, (b) each present director and nominee for election as a director of the Company, and (c) all officers and directors of the Company as a group.

 

Unless indicated below, to our knowledge, the persons and entities named in the table below have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Pursuant to the rules of the rules of the SEC, certain shares of our common stock that a beneficial owner set forth in this table has a right to acquire within 60 days of the date hereof (pursuant to the exercise of options or warrants for the purchase of shares of common stock) are deemed to be outstanding for the purpose of computing the percentage ownership of that owner, but are not deemed outstanding for the purpose of computing percentage ownership of any other beneficial owner shown in the table. Percentages are calculated based on 2,228,438 shares.

 

Name of Beneficial Owner   Amount and Nature of Beneficial Ownership     W/O Exercise Percent of Class (5)     Percent of Class (6)  
                   

Christine Koenemann

1260 Avenida Chelsea

Vista, CA 92081

    170,675 (1)     4.5       7.4  
                         

Lawrence Parker

1260 Avenida Chelsea

Vista, CA 92081

    70,675 (2)     *       3.1  
                         

Richard Forsyth

1260 Avenida Chelsea

Vista, CA 92081

    2,787       *       *  
                         

Albert L. Good

14550 Castle Rock Road

Salinas, CA 93908

    182,300       8.2       8.2  
                         

Kenneth P. Miles

8 Avenida Andra

Palm Desert, CA 92260

    119,867       5.4       5.4  
                         

William Fruehling

5416 Renaissance Avenue

San Diego, CA 92122

    69,500 (3)     *       3.0  
                         

Mark Cole

P.O. Box 685

Lyons, CO 80540

    42,500 (4)     *       1.9  
                         
All Directors & Officers as a Group (4 persons)     285,462       4.9       11.9  

  

* less than 1%

 

21
 

  

(1)Consists in part of exercisable options to purchase 50,000 shares at $1.53 per share, and 20,000 shares at $0.81 per share.

 

(2)Consists in part of exercisable options to purchase 40,000 shares at $1.53 per share, and 10,000 shares at $0.81 per share.

 

(3)Consists of exercisable options to purchase 32,000 shares at $0.25 per share, 5,000 shares at $1.53 per share, 12,500 shares at $0.47 per share, 7,500 shares at $0.81 per share and 7,500 shares at $0.85 per share.

 

(4)Consists of exercisable options to purchase 10,000 shares at $0.25 per share, 5,000 shares at $1.53 per share, 12,500 shares at $0.47 per share, 7,500 shares at $0.81 per share and 7,500 shares at $0.85 per share.

 

(5)Calculated as if no options were exercised and 2,228,438 shares outstanding.

 

(6)Calculated as if only that (those) shareholder's(s') options/warrants exercisable within 60 days were exercised and no other options/warrants were exercised.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The Company has entered into indemnification agreements with each of its executive officers and directors. The Company has agreed to indemnify each such person for all expenses and liabilities, including criminal monetary judgments, penalties and fines, incurred by such person in connection with any criminal or civil action brought or threatened against such person by reason of such person being or having been a Company officer, director or employee. In order to be entitled to indemnification, such person must have acted in good faith and in a manner such person believed to be in the Company’s best interests. With respect to criminal actions, such person must have had no reasonable cause to believe his or her conduct was unlawful. Insofar as there is a claim by an officer or director for indemnification for liabilities arising under the Securities Act of 1933, the claim may be unenforceable under the regulations of the Securities and Exchange Commission.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The following are the fees billed us by our auditors, PKF, for services rendered thereby during 2012 and 2011:

 

    2011     2010  
Audit Fees   $ 44,080     $ 45,143
Audit Related Fees           428  
Tax Fees     5,204       5,350  
All Other Fees           234  

 

Audit Fees consist of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial information included in our Forms 10-K and for any other services that are normally provided by PKF in connection with our statutory and regulatory filings or engagements.

 

Audit Related Fees consist of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.

 

Tax Fees consist of the aggregate fees billed for professional fees rendered for tax compliance, tax advice, and tax planning. Included in such Tax Fees were the fees for preparation of our tax returns, consultancy and advice on domestic tax structures.

 

All Other Fees consists of the aggregate fees billed for products and services provided by PKF and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.

 

Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining PKF’s independence and determined that such services are appropriate.

 

Before the auditors are engaged to provide us audit services, such engagement is approved by the Audit Committee of our Board of Directors.

 

22
 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE

 

(a)     1.     The following financial statements of the Company are included in Item 7:

 

Consolidated Balance Sheets at November 30, 2012 and 2011 F-4
   
Consolidated Statements of Operations for each of the two years ended November 30, 2012 F-6
   
Consolidated Statements of Shareholders' Equity for each of the two years ended November 30, 2012 F-7
   
Consolidated Statements of Cash Flows for each of the two years ended November 30, 2012 F-8
   
Notes to Consolidated Financial Statements F-9

 

(b)     Form 8-K was filed on October 10, 2008 disclosing the employment agreement between Company and Dr. Lawrence Parker, Vice-President and Director of Research and Development.

 

Form 8-K was filed on January 22, 2009 disclosing the employment agreement between Company and Christine Koenemann, President.

 

Form 8-K was filed on April 29, 2011 disclosing the new employment agreement between Company and Christine Koenemann, President, Secretary and Chief Financial Officer.

 

Form 8-K was filed on April 29, 2011 disclosing the new employment agreement between Company and Larry Parker, Ph.D. and Director of Research and Development.

 

Form 8-K was filed on August 25, 2011, disclosing the employment agreement between Company and Richard Forsyth, Chief Financial Officer, Secretary, Chief Financial Officer and General Counsel.

 

(c)     Exhibit filed herewith:

 

3(a)   Articles of Incorporation and amendments thereto, incorporated by reference to Exhibit 3(a) to Registration Statement number 2-92261 on Form S-18 filed July 18, 1984.

 

3(b)   Amendment to Articles of Incorporation as filed with the California Secretary of State on September 24, 1997.

 

3(c)   Bylaws, incorporated by reference to Exhibit 3(b) to Registration Statement number 2-92261 on Form S-18 filed July 18, 1984.

 

10(a) Biosystems R & D Agreement, incorporated by reference to Exhibit 10(a) to Registration Statement number 2-92261 on Form S-18 filed July 18, 1984.

 

10(b) Biosystems Technology Transfer Agreement, incorporated by reference to Exhibit 10(b) to Registration Statement number 2-92261 on Form S-18 filed July 18, 1984.

 

10(c) Biolink Acquisition Agreement, incorporated by reference to Exhibit 10(c) to Registration Statement number 2-92261 on Form S-18 filed July 18, 1984.

 

23
 

 

10(d) Employee Incentive Stock Option Plan, incorporated by reference to Exhibit 10(d) to Registration Statement number 2-92261 on Form S-18 filed July 18, 1984.

 

10(e) Employee Stock Purchase Plan, incorporated by reference to Exhibit 10(e) to Registration Statement number 2-92261 on Form S-18 filed July 18, 1984.

 

10(f) Nonqualified Stock Option of Dr. Jonas Salk, incorporated by reference to Exhibit 10(f) filed with Form 8-K dated November 10, 1987.

 

10(g) Nonqualified Stock Option of Stephen C. Hall, incorporated by reference to Exhibit 10(g) filed with Form 8-K dated November 10, 1987.

 

10(h) Nonqualified Stock Option of Michael A. Spivak, incorporated by reference to Exhibit 10(h) filed with Form 8-K dated November 10, 1987.

 

10(i) Nonqualified Stock Option of Dr. Peter L. Salk, incorporated by reference to Exhibit 10(i) filed with Form 8-K dated November 10, 1987.

 

10(j) Nonqualified Stock Option of Gerald R. Haddock, incorporated by reference to Exhibit 10(j) filed with Form 8-K dated November 10, 1987.

 

10(k) Nonqualified Stock Option of Peter Dine, incorporated by reference to Exhibit 10(m) filed with the Annual Report on Form 10-K for the fiscal year ended November 30, 1988.

 

10(l) Nonqualified Stock Option of Stanley L. Woodward, incorporated by reference to Exhibit 10(n) filed with the Annual Report on Form 10-K for the fiscal year ended November 30, 1988.

 

10(m) Westbridge Agrosystems Limited Exchange Agreement, incorporated by reference to Exhibit 10(o) filed with Post Effective Amendment Number 1 to the Registration Statement number 2-92261 on Form S 18 filed December 26, 1989.

 

10(n) Nonqualified Stock Option of Noel R. Schaefer incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1989.

 

10(o) Biosystems License Agreement incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1989.

 

10(p) Warrant Agency Agreement, incorporated by reference to Exhibit 4(b) to Registration Statement number 2-92261 on Form S-18 filed July 18, 1984.

 

10(q) Agriculture Products Marketing, Sales, License and Distribution Agreement by and between Haddock & Schaefer and the Company, dated November 15, 1991, incorporated by reference to Exhibit 10(q) filed with The Annual Report on Form 10-KSB for the fiscal year ended November 30, 1992.

 

10(r) Oil Products Marketing, Sales, License and Distribution Agreement by and between Haddock & Schaefer and the Company, dated November 15, 1991, incorporated by reference to Exhibit 10(r) filed with The Annual Report on Form 10-KSB for the fiscal year ended November 30, 1992.

 

10(s) Employment Agreement by and between Company and Warren Currier III, dated December 1, 1991, by reference to Exhibit 10(s) filed with 10-KSB for the fiscal year ended November 30, 1992.

 

10(t) Property lease by and between Mitsui Fudosan (USA), Inc. and the Company, dated December 1, 1995, filed with the Annual Report on Form 10-KSB for the fiscal year ended November 30, 1995.

 

10(u) Agreement dated as of October 1, 1996, by and between Westbridge Research Group and Westbridge Biosystems Limited filed with the Annual Report on Form 10-KSB for the fiscal year ended November 30, 1996.

 

24
 

 

10(v) Westbridge Research Group 1994 Incentive Stock Option Plan filed with the Annual Report on Form 10-KSB for the fiscal year ended November 30, 1996.

 

10(w) Nonqualified Stock Option of Christine Koenemann, incorporated by reference to Exhibit 10(w) filed with the Annual Report on Form 10-KSB for the fiscal year ended November 30, 1996.

 

10(x) Westbridge Research Group 2001 Stock Option Plan filed herewith.

 

10(y) Form 8-K, filed on November 5, 2004, disclosing the resignation of two members of the Board of Directors.

 

10(z) Form 8-K, filed on March 15, 2006, disclosing the Employment Agreement by and between Company and Christine Koenemann.

 

10(aa) Form 8-K, filed on December 7, 2006, disclosing the new building facilities lease agreement.

 

10(bb) Amendment to Employment Agreement between Company and Christine Koenemann dated December 1, 2007.

 

10(cc) Assignment Agreement between Company and buyer of Mexico property dated August 15, 2008, and Amendment No. 1 dated December 15, 2008.

 

10(dd) Amendment No. 2 dated March 2, 2009 between Company and buyer of Mexico property.

 

10(ee) Amendment No. 3 dated November 23, 2010 between Company and buyer of Mexico property.

 

10(ff) Form 8-K filed on April 29, 2011 disclosing the Employment Agreement between the Company and Christine Koenemann, President, Secretary and Chief Financial Officer.

 

10(gg) Form 8-K filed on April 29, 2011 disclosing the Employment Agreement between the Company and Larry Parker, Ph.D., Director of Research and Development.

 

10(hh) Form 8-K filed on August 25, 2011 disclosing the Employment Agreement between the Company and Richard Forsyth, Chief Financial Officer and Secretary.

 

31.1     Certification of Principal Executive Officer

 

31.2     Certification of Principal Financial Officer

 

32.1     Certification of Principal Executive Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2     Certification of Principal Executive Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

25
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 and 15(d) 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 on March 6, 2013.

 

  Westbridge Research Group
   
By:  /s/ Christine Koenemann
    Christine Koenemann, President
Principal Executive Officer

 

   
  By:  /s/ Richard Forsyth
    Richard Forsyth, Chief Financial Officer and Secretary
Principal Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, 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   Title   Date
         
         
/s/ Christine Koenemann   Director   March 6, 2013
Christine Koenemann        
         
/s/ William Fruehling   Director   March 6, 2013
William Fruehling        
         
/s/ Mark Cole   Director   March 6, 2013
Mark Cole        

 

 

 

 

 

26
 

 

 

 

 

Westbridge Research Group

AND SUBSIDIARY

 

CONSOLIDATED FINANCIAL STATEMENTS AND

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

For The Years Ended November 30, 2012 and 2011

 

 

 

 

 

 

 

F-1
 

 

Westbridge Research Group

AND SUBSIDIARY

 

 

 

 

TABLE OF CONTENTS

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F- 3
   
FINANCIAL STATEMENTS  
   
Consolidated Balance Sheets F-4
   
Consolidated Statements of Operations F-6
   
Consolidated Statements of Shareholders’ Equity F-7
   
Consolidated Statements of Cash Flows F-8
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9

 

 

F-2
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Board of Directors and Shareholders

Westbridge Research Group and Subsidiary

Vista, California

 

 

We have audited the accompanying consolidated balance sheets of Westbridge Research Group and Subsidiary (the “Company”) as of November 30, 2012 and 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended November 30, 2012. The Company’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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Westbridge Research Group and Subsidiary as of November 30, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended November 30, 2012 in conformity with accounting principles generally accepted in the United States of America.

 

 

 

 

  /s/ PKF
San Diego, California PKF
March 6, 2013 Certified Public Accountants
  A Professional Corporation

 

 

F-3
 

 

Westbridge Research Group and Subsidiary

Consolidated Balance Sheets

November 30, 2012 and 2011

 

ASSETS
         
   2012   2011 
Current assets:          
Cash and cash equivalents  $1,531,686   $1,319,648 
Investments   1,000    1,000 
Accounts receivable, less allowance of $3,600 at November 30, 2012 and 2011   155,693    194,785 
Inventories   1,211,170    970,085 
Deferred taxes   172,000    76,000 
Prepaid inventory   161,500    116,704 
Other current assets   160,783    115,557 
           
Total current assets   3,393,832    2,793,779 
           
Property and equipment, at cost:          
Machinery and equipment   923,929    779,304 
Office furniture and fixtures   186,787    173,779 
Leasehold improvements   383,401    372,488 
Vehicles   71,080    55,442 
           
    1,565,197    1,381,013 
           
Less: accumulated depreciation and amortization   (1,019,758)   (896,510)
           
Net property and equipment   545,439    484,503 
           
Deferred tax asset, net of current portion       75,000 
Intangible assets   151,600    151,600 
           
Total assets  $4,090,871   $3,504,882 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4
 

 

Westbridge Research Group and Subsidiary

Consolidated Balance Sheets

November 30, 2012 and 2011

 

LIABILITIES AND SHAREHOLDERS' EQUITY
         
   2012   2011 
Current Liabilities:          
Accounts payable  $58,079   $59,364 
Accrued expenses   336,802    420,975 
Current portion of long-term debt   4,623     
Current portion of capital leases       11,899 
           
Total current liabilities   399,504    492,238 
           
Note payable, net of current portion   19,152     
Deferred taxes   137,400     
           
Total liabilities   556,056    492,238 
           
Commitments and contingencies (Note 7)          
           
Shareholders' equity:          
Preferred stock, 5,000,000 shares authorized, no shares issued and outstanding        
Common stock, no par value, 37,500,000 shares authorized, 2,223,438 and 2,148,438 shares issued and outstanding at November 30, 2012 and 2011   8,509,854    8,491,104 
Paid-in capital   247,902    243,769 
Accumulated deficit   (5,222,941)   (5,722,229)
           
Total shareholders' equity   3,534,815    3,012,644 
           
Total liabilities and shareholders' equity  $4,090,871   $3,504,882 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5
 

 

Westbridge Research Group and Subsidiary

Consolidated STATEMENTS OF OPERATIONS

For the Years Ended November 30, 2012 and 2011

 

   2012   2011 
           
Agricultural product sales  $6,557,989   $4,826,434 
           
Cost of sales   2,894,134    2,164,823 
           
Gross profit   3,663,855    2,661,611 
           
Operating expenses:          
Research and development   480,551    305,125 
Selling   1,708,700    1,304,156 
General and administrative   927,512    895,724 
           
Total operating expenses   3,116,763    2,505,005 
           
Income from operations   547,092    156,606 
           
Other income (expense):          
Interest expense   (2,386)   (8,298)
Interest income   1,488    1,231 
Gain on sale of asset   500     
Other income   131,619    159,339 
           
Total other income   131,221    152,272 
           
Income before income taxes   678,313    308,878 
           
Income tax provision (benefit)   179,025    (4,540)
           
Net income  $499,288   $313,418 
           
Basic earnings per common share  $0.23   $0.15 
           
Weighted average shares outstanding   2,183,855    2,144,688 
           
Diluted earnings per common share  $0.22   $0.14 
           
Weighted average shares and options outstanding   2,241,017    2,247,042 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6
 

 

Westbridge Research Group and Subsidiary

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Years Ended November 30, 2012 and 2011

 

 

    Common Stock                    
    Shares     Amount    

Paid-in

Capital

   

Accumulated

Deficit

    Total  
                               
Balance, November 30, 2010     2,103,438     $ 8,479,854     $ 224,172     $ (6,035,647 )   $ 2,668,379  
                                         
Exercise of stock options     45,000       11,250                   11,250  
                                         
Stock compensation expense                 19,597             19,597  
                                         
Net income                       313,418       313,418  
                                         
Balance, November 30, 2011     2,148,438       8,491,104       243,769       (5,722,229 )     3,012,644  
                                         
Exercise of stock options     75,000       18,750                   18,750  
                                         
Stock compensation expense                 4,133             4,133  
                                       
Net income                       499,288       499,288  
                                         
Balance, November 30, 2012     2,223,438     $ 8,509,854     $ 247,902     $ (5,222,941 )   $ 3,534,815  

  

The accompanying notes are an integral part of the consolidated financial statements.

 

F-7
 

 

Westbridge Research Group and Subsidiary

Consolidated STATEMENTS OF cash flows

For the Years Ended November 30, 2012 and 2011

 

   2012   2011 
Cash flows from operating activities:          
Net income  $499,288   $313,418 
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:          
Depreciation and amortization   142,958    142,960 
Stock compensation expense   4,133    19,597 
Gain on sale of property and equipment   (500)    
Increase in bad debt allowance       600 
Deferred income taxes   116,400    (9,000)
           
Changes in operating assets and liabilities:          
Decrease (increase) in accounts receivable   39,092    (2,689)
Increase in inventories   (241,085)   (392,635)
(Increase) decrease in prepaid inventory   (44,796)   2,296 
Increase in other assets   (45,226)   (24,546)
Decrease in accounts payable   (1,285)   (4,942)
Decrease in accrued expenses   (84,173)   (81,461)
           
Net cash flows provided by (used in) operating activities   384,806    (36,402)
           
Cash flows from investing activities:          
Proceeds from sale of property and equipment   500     
Purchase of property and equipment   (179,394)   (124,554)
           
Net cash flows used in investing activities   (178,894)   (124,554)
           
Cash flows from financing activities:          
Proceeds from exercise of stock options   18,750    11,250 
Payments of long-term debt   (725)   (3,974)
Payments on capital lease obligations   (11,899)   (19,814)
           
Net cash flows provided by (used in) financing activities   6,126    (12,538)
           
Net increase (decrease) in cash and cash equivalents   212,038    (173,494)
           
Cash and cash equivalents at beginning of year   1,319,648    1,493,142 
           
Cash and cash equivalents at end of year  $1,531,686   $1,319,648 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
           
Cash paid during the year for:          
Interest  $2,386   $8,298 
Income taxes  $80,277   $4,150 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities for 2012:

·Issuance of note payable for acquisition of property and equipment during the year for $24,500.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-8
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

 

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Business

 

Westbridge Research Group and Subsidiary (the “Company”) was incorporated in California on April 12, 1982 for the acquisition, research, development, manufacturing, and marketing of biotechnological products in the agricultural and energy industries.

 

Disclosure Regarding Segments

 

The Company has determined that it operates in one segment.

 

Seasonality

 

Agricultural product sales are typically seasonal in nature with heavier sales in the spring months. The Company is seeking to temper the seasonality of its agronomic sales by marketing its products in Latin American countries which typically produces sales in December, January and February of each year.

 

Principles of Consolidation

 

The accompanying financial statements consolidate the accounts of the Company and its wholly-owned subsidiary Westbridge Agricultural Products. All significant inter-company transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

The Company maintains its bank accounts with three financial institutions located in California and one in Nevada. As of November 30, 2012, the cash balances with the banks exceeded the $250,000 FDIC limit, but is covered under the temporary unlimited deposit insurance coverage for non-interest bearing transaction accounts through December 31, 2012. The Company has not experienced any losses in such accounts and management believes it places its cash on deposit with financial institutions which are financially stable.

 

Accounts Receivable and Allowances for Uncollectible Accounts

 

The Company extends unsecured credit to most of its customers. Accounts receivable are stated at the historical carrying amount net of write-offs and allowances for uncollectible accounts. The Company establishes an allowance for uncollectible accounts based on historical experience and any specific customer collection issues that the Company has identified. Uncollectible accounts receivable are written off when a settlement is reached for an amount that is less than the outstanding balance or when the Company has determined that the balance will not be collected.

 

Inventories

 

Inventories, consisting of material, material overhead, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market. Any write-down of inventory to market is reflected in cost of goods sold.

 

F-9
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

 

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Intangible Assets

 

The Company does not amortize indefinite lived intangible assets, but tests these assets for impairment annually or whenever indicators of impairments arise.  Intangible assets that have finite lives are amortized over their estimated useful lives and tested for impairment as described above for long-lived assets.  The Company’s intangible assets with indefinite lives primarily consist of purchased formulas.  Management has determined that the formulas have indefinite useful lives due to the following:

 

·Formulas and trade secret applications are generally authorized by the United States Environmental Protection Agency subject to certain conditions, without substantial cost under a stable regulatory, legislative and legal environment; 
·Maintenance expenditures to obtain future cash flows are not significant;
·The Foliar TRIGGRR® and Soil TRIGGRR® formulations are not technologically dependent; and
·The Company intends to use these assets indefinitely.

 

The Company combines all its indefinite lived formulas which mainly consist of Foliar TRIGGRR® and Soil TRIGGRR®, into a single unit of accounting.  The analysis encompasses future cash flows from sales of the Foliar TRIGGRR® and Soil TRIGGRR® product line. In conducting the annual impairment test in 2011 and 2012, the Company determined that the estimated fair value of the formulas, calculated using a discounted cash flow analysis, exceeded their carrying amounts.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the depreciable assets, or related lease life, if shorter, which range from three to ten years. Machinery and equipment is depreciated over a five to ten year period, depending on the type of equipment. Office furniture and fixtures are depreciated over a five-year period and vehicles are depreciated over a three-year period. Leasehold improvements are amortized over the life of the lease and are included in depreciation expense. Capital leases are amortized using the straight-line method over the estimated useful life or the remaining term of the related lease, whichever is less. Depreciation and amortization totaled $142,958 and $142,960 for the years ended November 30, 2012 and 2011, respectively.

 

Impairment of Long-Lived Assets and Intangibles

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

F-10
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

 

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Products Warranty

 

The Company warrants its products against defects in workmanship. The warranty accrual at November 30, 2012 and 2011 was $32,000 and $20,000, respectively, and is included within accrued expenses. The accrual is based on an estimate of the cost to be incurred based on the claims received and historical experience. In addition, upon introduction of a new product, the Company reserves a minimum amount until historical experience can be substantiated. Returns offset against the warranty accrual for fiscal 2012 and 2011 were approximately $9,364 and $8,863, respectively.

 

Revenue Recognition

 

Revenues are recorded on the accrual basis of accounting when title transfers to the customer, which is typically at the shipping point. The Company records estimated reductions to revenue for return allowances and product performance, based upon a percentage of sales. The Company also allows for returns based upon pre-approval or for damaged goods. Such returns are estimated based on historical experience and an allowance is provided at the time of sale.

 

Shipping and Handling Costs

 

The Company incurs expenses for the shipment of goods to customers. These expenses are recognized in the period in which they occur and are classified as gross revenues if billed to the customer and cost of goods sold if incurred by the Company. Such costs amounted to approximately $146,000 and $113,000 for the years ended November 30, 2012 and 2011, respectively.

 

Research and Development

It is the Company’s policy to expense research and development costs when incurred. During the years ended November 30, 2012 and 2011, the Company expensed $480,551 and $305,125, respectively, of research and development costs.

 

Advertising

 

Advertising expense is comprised of media, agency and promotion costs. Advertising expenses are charged to operations as incurred. Advertising expenses totaled $115,545 and $86,167 during the years ended November 30, 2012 and 2011, respectively.

 

Sales to Major Customers

 

A majority of the Company’s domestic sales are concentrated in states west of the Mississippi. The majority of the Company’s foreign sales are concentrated in South America and Asia. For the year ended November 30, 2012 three customers represented 78% of accounts receivable. The Company has two large customers whose combined purchases amounted to 25% of the Company’s agricultural product sales in 2012. Sales to these customers amounted to 16% in 2011. For the year ended November 30, 2011 four customers represented 77% of accounts receivable. Total international sales represent 10% of total sales in 2012 and 15% of total sales in 2011. The Company has no assets located in foreign countries.

 

F-11
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

 

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Earnings Per Share

 

Basic earnings per common share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings per common share is based upon the weighted average number of common shares outstanding adjusted for the assumed conversion of dilutive stock options using the treasury stock method. The calculation of weighted-average diluted shares outstanding excludes all anti-dilutive shares. During 2012 and 2011, the Company excluded 140,000 and 147,500 stock options, respectively, from the calculation of diluted weighted-average shares outstanding as the stock options were considered anti-dilutive.

 

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented below:

 

   Year Ended November 30, 
   2012   2011 
         
Numerator for earnings per common share  $499,288   $313,418 
           
Denominator for basic earnings per common share   2,183,855    2,144,688 
           
Effect of dilutive securities   57,162    102,354 
           
Denominator for diluted earnings per common share   2,241,017    2,247,042 
           
Net income per common share:          
Basic  $0.23   $0.15 
           
Diluted  $0.22   $0.14 

 

Income Taxes

 

The Company follows ASC 740, Income Taxes (“ASC 740”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

 

F-12
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

 

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

 

The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of November 30, 2012 and 2011, the Company had no accrued interest or penalties related to uncertain tax positions.

 

The Company is subject to U.S. federal or state income tax examinations by tax authorities for years after 2008. During the periods open to examination, the Company has net operating loss and tax credit carry-forwards for U.S. federal and state tax purposes that have attributes from closed periods. Since these net operating losses and tax credit carry-forwards may be utilized in future periods, they remain subject to examination.

 

Stock Based Compensation

 

For stock options issued under the Company’s stock-based compensation plans, the fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model, and an estimated forfeiture rate is used when calculating stock-based compensation expense for the period. For restricted stock awards and units issued under the Company’s stock-based compensation plans, the fair value of each grant is calculated based on the Company’s stock price on the date of grant and an estimated forfeiture rate when calculating stock-based compensation expense for the period. The Company recognizes the compensation cost of stock-based awards on a straight-line basis over the vesting period of the award.

 

The benefits of tax deductions in excess of recognized stock-based compensation are reported as a financing activity rather than an operating activity in the statements of cash flows. This requirement reduces net operating cash flows and increases net financing cash flows in certain periods.  

 

The expected volatility of options granted has been determined using an average of the historical volatility measures of a peer group of companies as well as the historical volatility of the Company’s common stock. The expected life of options has been determined utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin No. 110, Share-Based Payment. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.

 

The Company did not issue any options during 2012. For 2011, the risk-free interest rate was 0.96% and the expected volatility was 56% at the time all options were granted. The dividend yield was assumed to be zero, and the expected life of the options was assumed to be between five and six years based on the average vesting period of options granted for 2011. For the years ended November 30, 2012 and 2011, the Company expensed approximately $4,000 and $20,000, respectively, of stock option expense.

 

F-13
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

  

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value of Financial Instruments

 

Certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these financial instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, the carrying value of the Company’s long-term debt and capital lease obligations approximate their fair values.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.

 

Recent Accounting Standards

 

There are no other recently issued accounting standards with pending adoptions that the Company’s management currently anticipates will have any material impact upon its financial statements.

 

Reclassifications

 

Certain financial statement amounts related to the prior year presentation have been reclassified in order to conform to the current year presentation.

 

NOTE 2 - INVENTORIES

 

Inventories consist of the following at November 30:

 

   2012   2011 
           
Raw materials  $559,421   $548,882 
Finished goods   651,749    421,203 
           
Total inventories  $1,211,170   $970,085 

  

There are a limited number of suppliers for certain raw materials used by the Company in its products.

 

F-14
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

  

NOTE 3 - MEXICO PROPERTY

 

At November 30, 1989, the Company had an account receivable totaling $451,270 due from a foreign distributor. The account was collateralized by a perfected security interest in unimproved real property in Baja California, Mexico. The Company was unsuccessful in its efforts to collect the amounts due on this account and, accordingly, during fiscal 1993, retained Mexican legal counsel to initiate foreclosure proceedings on the property. On February 8, 2007, the real property was to be sold through a public auction. As there were no bids placed, the Company obtained the right to take title to the land. The Company was subject to certain ownership restrictions based on Mexican law and therefore formed a Mexican legal entity in order to take title to the property.

 

On August 15, 2008, the Company entered into an agreement to sell its rights to the property for a purchase price of $1,250,000 with a $300,000 deposit, and the balance of payment in installments.

 

As of November 30, 2012, the Company has received payment in full from the buyer totaling $1,250,000 plus interest totaling $14,000. The Company has released all rights and claims to the property to the buyer. As part of the arrangement with its Mexican legal counsel and American broker, the Company was obligated to pay them a portion of any collections received on its long term receivable. As of November 30, 2012, the Company has paid $384,508 and has paid in full its obligation under the arrangements from the payments collected. For the years ended November 30, 2012 and 2011, the Company recognized gains from the transaction of $120,597 and $193,521, respectively, which are included in other income on the accompanying consolidated statements of operations.

 

NOTE 4 - LINE OF CREDIT

 

As of November 30, 2012 and 2011, the Company has a $500,000 line of credit with a bank, secured by all of the Company’s assets.  As of November 30, 2012 and 2011, there were no outstanding borrowings against the line. Borrowings under the line of credit bear interest at the bank’s prime rate plus 1.0% (with an interest rate floor of 5.0%) as of November 30, 2012 and 2011, respectively. Interest is payable monthly. The line of credit expires August 5, 2013.

  

NOTE 5 - ACCRUED EXPENSES

 

Accrued expenses consist of the following at November 30:

 

   2012   2011 
Accrued payroll  $   $37,500 
Accrued vacation   88,196    94,326 
Deferred rent   92,938    88,330 
Income taxes   3,488    20,900 
Warranty   32,000    20,000 
Sales commissions   48,721    111,972 
Other   71,459    47,947 
           
Total accrued expenses  $336,802   $420,975 

 

F-15
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

 

NOTE 6 - STOCK OPTIONS

 

During fiscal 2001, the Company established an employee stock option plan (“the 2001 Plan”) under which options to purchase an aggregate of 400,000 shares of the Company’s common stock may be granted to directors, officers, employees and certain persons rendering service to the Company as either incentive options or non-qualified options. Under the 2001 Plan, incentive stock options may be granted at an exercise price greater than or equal to the market value at the date of the grant, for owners of 10% or more of the voting shares, at an exercise price of not less than 110% of the market value at the date of grant and non-qualified options may be granted at an exercise price greater than or equal to 85% of the market value at the date of the grant. Options vest over varying terms designated by the 2001 Plan’s administration committee and expire at the earlier of ten years from the date of grant or 90 days after termination of employment. There are 262,000 options granted under the 2001 Plan of which 262,000 are fully vested as of November 30, 2012.

 

The 2001 Plan has expired and no further stock options are being granted under the 2001 Plan.

 

A summary of the stock option activity under the 2001 Plan is as follows:

  

           Weighted 
       Exercise   Average 
   Stock   Price Per   Price Per 
   Options   Share   Share 
                
Outstanding at November 30, 2010   389,500   $0.25 – 1.53   $0.81 
Exercised   (45,000)   0.25    0.25 
Granted            
Expired or canceled            
                
                
Outstanding at November 30, 2011   344,500    0.25 – 1.53    0.89 
Exercised   (75,000)   0.25    0.25 
Granted            
Expired or canceled   (7,500)        
                
Outstanding and exercisable at November 30, 2012   262,000   $0.25 – 1.53   $1.05 
                
Weighted average remaining contractual life   5.1 years           

 

The weighted average fair value of options vested during 2012 and 2011 was $0.81 and $1.20, respectively. The weighted average fair value of unvested options at November 30, 2012 and 2011 was $0 and $0.81, respectively. The aggregate intrinsic value of options outstanding at November 30, 2012 was approximately $53,461.

 

As of November 30, 2012, unrecognized stock-based compensation costs related to non-vested stock options was $0.

 

F-16
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

  

NOTE 6 - STOCK OPTIONS (Continued)

 

During the year ended November 30, 2012, 1 employee exercised the right to purchase a total of 75,000 shares of common stock at $0.25 per share for a total of $18,750. The aggregate intrinsic value of the options exercised was approximately $51,000.

 

In fiscal 2011, the Company adopted the 2011 Stock Option and Stock Compensation Plan (“2011 Plan”). The 2011 Plan allows for the grant of options and other awards representing up to 92,688 shares of the Company’s common stock. Such options and awards may be granted to directors, officers, employees and others who render services to the Company. The options may be granted as either incentive stock options or non-qualified stock options. Under the 2011 Plan, incentive stock options may be granted at an exercise price greater than or equal to the market value at the date of the grant, for owners of 10% or more of the voting shares, at an exercise price of not less than 110% of the market value at the date of grant and non-qualified options may be granted at an exercise price greater than or equal to 85% of the market value at the date of the grant. The other awards that may be granted under the 2011 Plan include stock units and stock appreciation rights.

 

During fiscal 2011, the Company granted non-qualified stock options to acquire 7,500 shares to each of its two members of the Board of Directors at $0.85 per share. All 15,000 of these options vested immediately upon grant and expire in November 2021. All of these options remain outstanding and exercisable at November 30, 2012.

 

A summary of the stock option activity under the 2011 Plan is as follows:

 

             Weighted 
        Exercise   Average 
   Stock   Price Per   Price Per  
   Options   Share   Share 
                
Outstanding at November 30, 2010     $   $ 
Granted   15,000    0.85    0.85 
Expired or canceled            
                
Outstanding at November 30, 2011   15,000   $0.85   $0.85 
Granted             
Expired or canceled            
                
Outstanding and exercisable at November 30, 2012   15,000   $0.85   $0.85 
                
Weighted average remaining contractual life   9.0 years           

  

The weighted average fair value of options vested during 2011 was $0.85. The weighted average fair value of unvested options at November 30, 2012 was $0. The aggregate intrinsic value of options outstanding at November 30, 2012 was $0.

 

As of November 30, 2012, total unrecognized stock-based compensation costs related to non-vested stock options was $0.

 

At November 30, 2012, the 2011 Plan has a total of 77,688 shares that remain reserved and available for future stock option grants or other award grants.

 

F-17
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

  

NOTE 7 - COMMITMENTS AND CONTINGENCIES

 

The Company entered into a lease of a freestanding industrial building with 19,504 square feet of office, storage and production space on December 5, 2006. The lease originally had an expiration date of January 31, 2015 and monthly base rent was $13,653 with annual increases. In August, 2010, the Company negotiated to extend the term for an additional four years to January 31, 2019 with the option of an additional three year extension through January 31, 2021, and in exchange received a $1,000 per month rent decrease beginning September 1, 2010 through the end of the initial lease term, January 31, 2015. The rent will be set at fair market value effective February 1, 2015 for the remaining term of the lease. The rent under the lease for the initial year is approximately $13,650 per month, with three percent increases each year. The Company must also pay certain other customary expenses under the lease. Rent is expensed on a straight-line basis over the term of the lease.

 

The Company entered into a lease of a freestanding industrial building with 11,300 square feet of primarily storage space on April 8, 2011. The lease commenced on May 1, 2011, with early occupancy on April 8, 2011. The lease has a term of four years with an option to extend the term for an additional forty-five months at the fair market rate at the time of extension. The rent under the new lease is $2,750 per month through December 31, 2011, $6,215 per month for the period January 1, 2012 through December 31, 2012, and $6,441 per month for the period January 1, 2013 through April 30, 2015.

 

In addition, the Company also leased certain of its property and equipment through capital leases, which have expired in 2012. Capitalized leases included in property and equipment amounted to approximately $139,000, before accumulated depreciation of $116,000 as of November 30, 2011. Minimum future obligations under the operating leases as of November 30, 2012 are as follows:

 

Year ending   Operating 
November 30,   Leases 
        
2013   $260,217 
2014    266,298 
2015    226,563 
2016    200,220 
2017    206,350 
Thereafter    230,497 
        
Total minimum lease payments   $1,390,145 

 

Rent expense was $256,656 and $209,326 for the years ended November 30, 2012 and 2011, respectively.

 

F-18
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

  

NOTE 8 - INCOME TAXES

 

The provision (benefit) for income taxes consisted of the following as of November 30:

 

   2012   2011 
Current provision:          
Federal  $10,000   $ 
State   52,625    4,460 
    62,625    4,460 
           
Deferred expense (benefit):          
Federal   116,400    (9,000)
State        
    116,400    (9,000)
           
Total income tax provision (benefit)  $179,025   $(4,540)

 

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. The tax effect of temporary differences consisted of the following as of November 30:

 

   2012   2011 
Deferred tax assets:          
Net operating loss carryforwards  $   $218,700 
Other   172,000    102,500 
Gross deferred tax assets   172,000    321,200 
Less valuation allowance       (170,200)
           
Net deferred tax assets   172,000    151,000 
           
Deferred tax liabilities:          
Depreciation   127,900     
Other   9,500     
           
Net deferred tax liabilities   137,400     
           
Net deferred taxes  $34,600   $151,000 

 

Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income. A valuation allowance is recorded when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At November 30, 2012, the Company has not recorded a valuation allowance as the Company has utilized all of its available net operating loss carrforwards in fiscal 2012. The valuation allowance decreased by $170,200 from 2011 and decreased by $322,000 from 2010.

 

At November 30, 2012, the Company has federal research and experimentation credit carryforwards of approximately $18,000. The federal research and experimentation credit carryforwards begin to expire in 2022. During the years ended November 30, 2012 and 2011, federal taxable income was reduced by the utilization of approximately $388,000 and $304,000, respectively, in net operating loss carryforwards.

 

F-19
 

 

Westbridge Research Group AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2012 and 2011

  

NOTE 8 - INCOME TAXES (Continued)

 

A reconciliation of the effective tax with the federal statutory rate is as follows as of November 30:

 

   2012   2011 
           
Expected income tax expense at 35% statutory rate  $237,400   $108,100 
Change in valuation allowance   (170,200)   (151,800)
Nondeductible expenses   7,300    10,000 
State income taxes   36,100    15,700 
Expiration of net operating loss   101,400     
Benefit of lower tax brackets   (8,500)    
R&D credits   (18,000)    
Other   (6,475)   13,460 
           
Total tax provision (benefit)  $179,025   $(4,540)

 

 

 

 

 

 

 

 

F-20