ADVANSOURCE BIOMATERIALS CORPORATION

FORM 10-K

FOR THE YEAR ENDED MARCH 31, 2013

INDEX

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PART I

Item 1.

Business

Cautionary Note Regarding Forward Looking Statements

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

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

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Report on Form 10-K.  For example, we may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market our products; the market may not accept our existing and future products; we may not be able to retain our customers; we may be unable to retain existing key management personnel; and there may be other material adverse changes in our operations or business.  Certain important factors affecting the forward-looking statements made herein also include, but are not limited to (i) continued downward pricing pressures in our targeted markets, (ii) the continued acquisition of our customers by certain of our competitors, and (iii) continued periods of net losses, which could require us to find additional sources of financing to fund operations, implement our financial and business strategies, meet anticipated capital expenditures and fund research and development costs.  In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our financial position and results of operations.  For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof.  In addition, you should read and carefully consider the Risk Factors discussed in Part I, Item 1A of this Form 10K.  We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law.

General

Overview

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

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

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History

We were founded in 1993 as a subsidiary of PolyMedica Corporation (“PolyMedica”).  In June 1996, PolyMedica distributed all of the shares of CardioTech International, Inc.’s (“CardioTech”) common stock, par value $0.01 per share, which PolyMedica owned, to PolyMedica stockholders of record.  Our materials science technology is principally based upon the ChronoFlex^TM proprietary polymers which represent our core technology.

In July 1999, we acquired the assets of Tyndale-Plains-Hunter (“TPH”), a manufacturer of specialty hydrophilic polyurethanes.

In July 1999, Dermaphylyx International, Inc. (“Dermaphylyx”) was formed by certain of our affiliates to develop advanced wound healing products.  Dermaphylyx was merged with and into us, effective March 2004, as a wholly-owned subsidiary.  In June 2006, our Board of Directors decided to cease the operations of Dermaphylyx.  We considered the net assets of Dermaphylyx to be immaterial.

In April 2001, we acquired Catheter and Disposables Technology, Inc. (“CDT”).  CDT, which was located in Minnesota, was an original equipment manufacturer and supplier of private-label advanced disposable medical devices from concept to finished packaged and sterilized products, providing engineering services and contract manufacturing.  In the development of our business model, we reviewed the strategic fit of our various business operations and determined that CDT did not fit our strategic direction.  CDT was sold in March 2008.

In April 2003, we acquired Gish Biomedical, Inc. (“Gish”).  Gish was located in southern California and manufactured single use cardiopulmonary bypass products having a disposable component.  In the development of our business model, we reviewed the strategic fit of our various business operations and determined that Gish did not fit our strategic direction.  Gish was sold in July 2007.

In March 2004, we joined with Implant Sciences Corporation (“Implant”) to participate in the funding of CorNova.  CorNova was initially formed to develop a novel coronary drug eluting stent using the combined capabilities and technology of CorNova, Implant Sciences and CardioTech.  We currently have a less than 1.5% equity interest in the issued and outstanding common stock of CorNova, based on the assumed conversion of all outstanding CorNova preferred stock into common stock.  Although CorNova is expected to incur future operating losses, we have no obligation to fund CorNova.

At our 2007 Annual Meeting, our stockholders approved our reincorporation from Massachusetts to Delaware.  Our Articles of Charter Surrender in Massachusetts and Certificate of Incorporation and Certificate of Conversion in Delaware were effective as of October 26, 2007.  We changed our name from CardioTech International, Inc. to AdvanSource Biomaterials Corporation, effective October 15, 2008, and filed our Certificate of Amendment to our Certificate of Incorporation filed with the Secretary of State of the State of Delaware.

Business Strategy

Our vision is to be a world-class, technology company focused on customer-driven solutions in the medical device industry.  Our unique materials science strengths are marketed to our existing customer base and to a broader range of medical device developers.  We believe there exists a major void in the marketplace that could be filled with our strong materials science capabilities to maximize the early development phase of devices that utilize polymers.

In fiscal 2008, we expanded our development laboratory at our Massachusetts facility and launched a concept center.  The expansion of our development laboratory is one element of our plan to combine our core polymer technology with new product applications and expand customer access to our capabilities.

Technology

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

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

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

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

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

Intellectual Property

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

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

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

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

Manufacturing and Service Operations

We manufacture polymers at our leased facility in Wilmington, Massachusetts.

Product and Services

Materials Science Technology

We manufacture polymeric materials with a wide-range of physical and biological properties.  Our polymers are available with a variety of hardness and mechanical strengths and possess unique characteristics such as biodurability, biocompatibility, lubricity and antimicrobial properties.  These polymeric materials may be used as structural engineering polymers or as coatings for metallic and polymeric surfaces and have a history of use in both short and long-term implant applications.

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We have been provided exclusive and non-exclusive perpetual, world-wide, royalty-free license and sublicense rights for the use of polyurethane patents and related technology for the development, manufacture and sale of implantable medical devices and biodurable polymer material.  As a result, we are able to enter into license and royalty arrangements for the exclusive use of our customized polymers.  During the years ended March 31, 2013 and 2012, we generated revenues from license, royalty and development fees of $775,000 and $941,000, respectively.

Marketing and Sales

We sell our polymers directly to our customers from our Massachusetts facility.  Our Senior Vice President of Commercial Operations has primary responsibilities in our sales, marketing and business development efforts.  Our domestic sales distribution includes two independent sales engineers responsible for our regional sales efforts in the Eastern and Western U.S.  Our international sales distribution includes an independent distributor based in China.

We have not experienced, and do not expect to experience, in any material respect, seasonality in sales of our products.

We perform ongoing credit evaluations and maintain allowances for potential credit losses.  As of March 31, 2013, the Company had accounts receivable-trade of $95,000, or 65%, due from three customers.  As of March 31, 2012, the Company had accounts receivable-trade of $145,000, or 97%, due from three customers.

As of March 31, 2013, we had $208,000 due from two customers related to receivables on license fees and royalties.  As of March 31, 2012, we had $142,000 due from four customer related to receivables on license fees and royalties.  These amounts are classified as accounts receivable-other in the Company’s consolidated balance sheets.

We do not have any facilities, property or other assets located in any geographic area other than the United States of America.

Contracts and Material Relationships

In March 2004, we joined with Implant Sciences Corporation (“Implant”) to participate in the funding of CorNova.  CorNova was initially formed to develop a novel coronary drug eluting stent using the combined capabilities and technology of CorNova, Implant Sciences and CardioTech.  We currently have a less than 1.0% equity interest in the issued and outstanding common stock of CorNova, based on the assumed conversion of all outstanding CorNova preferred stock into common stock.  Although CorNova is expected to incur future operating losses, we have no obligation to fund CorNova.

Revenues

Our revenues were $2,195,000 and $1,866,000 for the years ended March 31, 2013 and 2012, respectively.

Competition

Competition in the medical device industry, in general, is intense and based primarily on scientific and technological factors, the availability of patent and other protection for technology and products, the ability to commercialize technological developments and the ability to obtain governmental approval for testing, manufacturing and marketing products.

Competition among products is based, among other things, on product efficacy, safety, reliability, availability, price and patent position.  An important factor is the timing of the market introduction of our products or the products of competitors.  Accordingly, the relative speed with which we can develop products and supply commercial quantities of the products to the market is expected to be an important competitive factor.  Our competitive position depends upon our ability to attract and retain qualified personnel, to obtain patent protection or otherwise develop proprietary products or processes, and to secure sufficient capital resources for the often substantial period between technological conception and commercial sales.

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Research and Development, Regulatory and Engineering

Our development decisions are based on: (i) development costs, (ii) product need, (iii) third-party interest, (iv) funding availability, and (v) regulatory considerations.  Research, development and regulatory expenditures for the years ended March 31, 2013 and 2012 were $444,000 and $605,000, respectively, and consisted primarily of salaries and related costs (70% and 74% of research and development expenses in fiscal 2013 and 2012, respectively), and are expensed as incurred.

Government Regulation

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products and medical devices.

Backlog

Our backlog in the ordinary course of business for biomaterial products is approximately $8,000 at March 31, 2013.

Environmental Compliance

Our direct expenditures for environmental compliance were not material in the two most recent fiscal years.  However, certain costs of manufacturing have increased due to environmental regulations placed upon suppliers of components and services.

Employees

As of March 31, 2013, we had 13 full-time employees at our leased facility in Wilmington, Massachusetts in the following positions: (i) five in production, (ii) two in research and development, (iii) three in sales and marketing, and (iv) three in administration.

None of these employees are covered by a collective bargaining agreement, and management considers its relations with its employees to be good.

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Item 1A.

Risk Factors

You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock.  If any of these risks or uncertainties occurs, our business, financial condition or operating results could be materially harmed.  In that case the trading price of our common stock could decline and you could lose all or part of your investment.  The risks and uncertainties described below are not the only ones we may face.  We believe that this filing contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements are subject to regulatory risks and clinical uncertainties.  Such statements are based on management’s current expectations and are subject to facts that could cause results to differ materially from the forward-looking statements.  See Item 1. Description of Business – “Cautionary Note Regarding Forward Looking Statements.”

Risks Related to Liquidity

We have reported net losses in the last 10 fiscal years and may continue to report net losses in the future.  There can be no assurance that our revenue will be maintained at the current level or increase in the future.

Our future growth may depend on our ability to raise capital for acquisitions, to support research and development activities for modification of existing biomaterials and development of new biomaterials, including advanced applications for our biomaterials, and to market and sell our advanced biomaterials.  Our capital requirements depend on numerous factors, including but not limited to, our results of operations; the progress of our research and development programs; the cost of filing, prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in our development of commercialization activities and arrangements; and the purchase of additional facilities and capital equipment.

Risks Related to Our Growth Strategy

If we cannot obtain the additional capital required to fund our operations on favorable terms or at all, we may have to delay or reconsider our growth strategy.

Our growth strategy may require additional capital for, among other purposes, completing acquisitions of companies and customers’ product lines and manufacturing assets, integrating acquired companies and assets, acquiring new equipment and maintaining the condition of existing equipment.  If cash generated internally is insufficient to fund capital requirements, or if we desire to make additional acquisitions, we will require additional debt or equity financing.  Adequate financing may not be available or, if available, may not be available on terms satisfactory to us.  If we raise additional capital by issuing equity or convertible debt securities, the issuance may dilute the share ownership of the existing investors.  In addition, we may grant future investors rights that are superior to those of our existing investors.  If we fail to obtain sufficient additional capital in the future, we could be forced to curtail our growth strategy by reducing or delaying capital expenditures and acquisitions, selling assets or restructuring or refinancing our indebtedness, or delaying plans for clinical trials.

Adverse economic and geopolitical conditions could have a material adverse effect on our ability to raise capital to fund future growth and product development.

Our business may be affected by the ongoing volatility and illiquidity in the financial and credit markets, the general global economic recession, and other market or economic challenges experienced by the U.S. economy.  If economic conditions persist or deteriorate and our licensing and product revenue is insufficient to support our product development and growth strategies, then reduced liquidity in the capital markets may impair our ability to access capital on terms and conditions that we find acceptable, or at all.  In addition, the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits.

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Risks Related to Our Business

We have incurred substantial operating losses and we may never be profitable.

Our revenues were $2,195,000 and $1,866,000 for the years ended March 31, 2013 and 2012, respectively.  We had net losses of $1,011,000 and $1,812,000 for the years ended March 31, 2013 and 2012, respectively.  There is a risk that we will never be profitable.  Our ability to generate enough revenues to achieve profits will depend on a variety of factors, many of which are outside our control, including:

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size of market;

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competition and other solutions;

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extent of patent and intellectual property protection afforded to our products;

·

demand for our advanced biomaterials by existing and potential developers of medical devices and both the time for development of devices by medical device developers and their success in obtaining regulatory approvals and commercialization of medical devices which incorporate our advanced biomaterials;

·

cost and availability of raw material and intermediate component supplies;

·

changes in governmental (including foreign governmental) initiatives and requirements;

·

changes in domestic and foreign regulatory requirements;

·

costs associated with equipment development, repair and maintenance; and

·

our ability to manufacture and deliver products at prices that exceed our costs.

Our operating results fluctuate significantly from period-to-period and may not be indicative of future results.

Our operating results have fluctuated in the past from quarter to quarter and are likely to fluctuate significantly in the future due to a variety of factors, many of which are beyond our control, including:

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changing demand for our products and services;

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the timing of actual customer orders and requests for product shipment and the accuracy of our customers’ forecasts of future production requirements;

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the reduction, rescheduling or cancellation of product orders and development and design services requested by customers;

·

difficulties in forecasting demand for our products and the planning and managing of inventory levels;

·

the introduction and market acceptance of our customers’ new products and changes in demand for our customers’ existing products;

·

changes in the relative portion of our revenue represented by our various products, services and customers, including the relative mix of our business across our target markets;

·

changes in competitive or economic conditions generally or in our customers’ markets;

·

competitive pressures on selling prices;

·

the amount and timing of costs associated with product warranties and returns;

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changes in availability or costs of raw materials or supplies;

·

fluctuations in manufacturing yields and yield losses and availability of production capacity;

·

changes in our product distribution channels and the timeliness of receipt of distributor resale information;

·

the amount and timing of investments in research and development;

·

difficulties in integrating acquired assets and businesses into our operations;

·

charges to earnings resulting from the application of the purchase method of accounting following acquisitions; and

·

pressure on our selling prices as a result of healthcare industry cost containment measures.

As a result of these factors, many of which are difficult to control or predict, as well as the other risk factors discussed in this report, we may experience material adverse fluctuations in our future operating results on a quarterly or annual basis.

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The medical device industry is cyclical, and an industry downturn could adversely affect our operating results.

Business conditions in the medical device industry have rapidly changed between periods of strong and weak demand.  The industry is characterized by:

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periods of overcapacity and production shortages;

·

cyclical demand for products;

·

changes in product mix in response to changes in demand of products;

·

variations in manufacturing costs and yields;

·

rapid technological change and the introduction of new products by customers;

·

price erosion; and

·

expenditures for product development.

These factors could harm our business and cause our operating results to suffer.

The failure of our customers and potential customers, who utilize our advanced biomaterials in their medical devices, to complete development of their medical technology, obtain government approvals, including required FDA approvals, or to comply with ongoing governmental regulations could delay or limit introduction of their proposed products, thereby negatively impacting our ability to generate future revenues from product sales and royalty and development fees.

Research, development and production activities undertaken by our customers and potential customers engaged in the development of medical devices which utilize our advanced biomaterials, are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and abroad.

Before receiving FDA approval to market their medical devices utilizing our advanced biomaterials, our customers and potential customers will have to demonstrate that their medical devices are safe and effective on the patient population.  Clinical trials, manufacturing and marketing of medical devices are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities.  The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statutes and regulations govern and influence the testing, manufacture, labeling, advertising, distribution and promotion of drugs and medical devices.  As a result, clinical trials and regulatory approval of medical devices can take a number of years or longer to accomplish and require the expenditure of substantial financial, managerial and other resources.

In order to be commercially viable, our customers and potential customers must successfully research, develop, obtain regulatory approval, manufacture, market and distribute their medical devices.  For each medical device incorporating our advanced biomaterials, our customers and potential customers must successfully meet a number of critical developmental milestones, including:

·

demonstrate benefit from the use of their medical devices in various contexts;

·

demonstrate through pre-clinical and clinical trials that their medical devices are safe and effective; and

·

establish a viable good manufacturing practice capable of potential scale up.

The time frame necessary to achieve these developmental milestones may be long and uncertain, and our customers and potential customers may not successfully complete these milestones for any of their intended products in development.

In order to conduct clinical trials that are necessary to obtain approval by the FDA to market a product, it is necessary to receive clearance from the FDA to conduct such clinical trials.  The FDA can halt clinical trials at any time for safety reasons or because clinical investigators do not follow the FDA’s requirements for conducting clinical trials.  If our customers or potential customers are unable to receive clearance to conduct clinical trials or the trials are halted by the FDA, we would not be able to achieve any revenue from the sale of biomaterials or royalty and development fees from our customers’ or potential customers’ products as it is illegal to sell any medical device for human consumption without FDA approval.

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More generally, the manufacture and sale of medical devices, including products currently sold by our customers or potential customers and their other potential products, are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state human services agencies.  In order for them to market their products for clinical use in the United States, they must obtain clearance from the FDA of a 510(k) pre-market notification or premarket approval application.  In addition, certain material changes to medical devices also are subject to FDA review and clearance or approval.  The process of obtaining FDA and other required regulatory clearances and approvals is lengthy, expensive and uncertain, frequently requiring from one to several years from the date of FDA submission if pre-market clearance or approval is obtained at all.  Securing FDA clearances and approvals may require the submission of extensive clinical data and supporting information to the FDA.

Sales of medical devices outside of the United States are subject to international regulatory requirements that vary from country to country.  The time required to obtain approval for sales internationally may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ.  There can be no assurance that our customers or potential customers will be able to obtain approval in a particular country for any of their future products.

Regulatory clearances or approvals, if granted, may include significant limitations on the indicated uses for which the product may be marketed.  In addition, to obtain such clearances or approvals, the FDA and certain foreign regulatory authorities impose numerous other requirements with which medical device manufacturers must comply.

FDA enforcement policy strictly prohibits the marketing of cleared or approved medical devices for uncleared or unapproved uses.  In addition, product clearances or approvals could be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.  Our customers and potential customers will be required to adhere to applicable FDA good manufacturing practice (“GMP”) regulations and similar regulations in other countries, which include testing, control, and documentation requirements.  Ongoing compliance with GMP and other applicable regulatory requirements, including marketing products for unapproved uses, could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of clearances or approvals and criminal prosecution.  Changes in existing regulations or adoption of new governmental regulations or policies could prevent or delay regulatory approval of their products.

There can be no assurance that our customers or potential customers will be able to obtain FDA 510(k) clearance or premarket approval for their products under development or other necessary regulatory approvals or clearances on a timely basis or at all.  Delays in receipt of or failure to receive U.S. or foreign clearances or approvals, the loss of previously obtained clearance or approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business with respect of our ability to generate revenues from product sales to and royalty and development fees from our customers and potential customers utilizing our advanced biomaterials in their medical devices.

Our markets are subject to technological change and our success depends on our ability to modify existing advanced biomaterials and develop and introduce new advanced biomaterials for use by customers and potential customers in their medical devices.

The medical device market for our products is characterized by:

·

changing technologies;

·

changing customer needs;

·

frequent new product introductions and enhancements;

·

increased integration with other functions; and

·

product obsolescence.

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Our success is dependent in part on the modification of existing advanced biomaterials and the design and development of new advanced biomaterials for use in the medical device industry.  To modify existing advanced biomaterials and develop new advanced biomaterials and designs for the medical device market, we must develop, gain access to and use leading technologies in a cost effective and timely manner and continue to expand our technical and design expertise.  The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance.  Our failure to modify existing advanced biomaterials, develop new advanced biomaterials, or successfully market existing and potential new advanced biomaterials; and the failure of our customers and potential customers in obtaining necessary regulatory clearances or approvals for medical devices using our advanced biomaterials, could have a material adverse effect on our business, financial condition and results of operations.

We depend on outside suppliers and subcontractors, and our production and reputation could be harmed if they are unable to meet our volume and quality requirements and alternative sources are not available.

We have various “sole source” suppliers who supply key components for our products.  Our outside suppliers may fail to develop and supply us with products and components on a timely basis, or may supply us with products and components that do not meet our quality, quantity or cost requirements.  If any of these problems occur, we may be unable to obtain substitute sources of these products and components on a timely basis or on terms acceptable to us, which could harm our ability to:  i) manufacture our own products and components profitably or on time, and ii) ship products to customers on time and generate revenues.  In addition, if the processes that our suppliers use to manufacture products and components are proprietary, we may be unable to obtain comparable components from alternative suppliers.

A significant portion of our product sales and royalty, license and development fees come from two large customers, and any loss, cancellation or delay in sales to these customers could harm our operating results.

Our ability to grow and sustain growth levels may be adversely affected by slowdowns in the U.S. economy.

Due to the recent decrease in corporate profits, capital spending and consumer confidence, we have experienced weakness in certain of our end markets.  We are primarily susceptible when customers stop placing orders for us to supply advanced biomaterials or when customers experience reduced sales of their medical devices for which we receive royalties on product sales.  The medical commercial markets, including bio-medical research and development and medical device manufacturing, could be affected by the past and present slowdown in the U.S. economy.  If the economic slowdown persists and capital spending for research and development from our customers decreases, our business, financial condition and results of operations may be adversely affected.

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We could be harmed by litigation involving patents and other intellectual property rights.

None of our patents or other intellectual property rights has been successfully challenged to date.  However, in the future, we could be accused of infringing the intellectual property rights of other third parties.  We also have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our products.  No assurance can be provided that any future infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted or that assertions of infringement, if proven to be true, will not harm our business.

In the event of any adverse ruling in any intellectual property litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations by us.

Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, is costly and may divert the efforts and attention of our management and technical personnel.

We may not be able to protect our intellectual property rights adequately.

Our ability to compete is affected by our ability to protect our intellectual property rights.  We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights.  Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is substantially similar or superior to our technology.  More specifically, we cannot assure you that any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties.  Nor can we assure you that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business.  Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design their products around any patents that may be issued to us.

Our future success depends on the continued service of management, engineering and sales personnel and our ability to identify, hire and retain additional personnel.

Our success depends, to a significant extent, upon the efforts and abilities of members of senior management.  The loss of the services of one or more of our senior management or other key employees could adversely affect our business.  We do not maintain key person life insurance on any of our officers, employees or consultants.

There is intense competition for qualified employees in the medical industry, particularly for highly skilled design, applications, engineering and sales people.  We may not be able to continue to attract and retain technologists, managers, or other qualified personnel necessary for the development of our business or to replace qualified individuals who could leave us at any time in the future.  Our anticipated growth is expected to place increased demands on our resources, and will likely require the addition of new management and engineering staff as well as the development of additional expertise by existing management employees.  If we lose the services of or fail to recruit engineers or other technical and management personnel, our business could be harmed.

Periods of rapid growth and expansion could place a significant strain on our resources, including our employee base.

To manage our possible future growth effectively, we will be required to continue to improve our operational, financial and management systems.  In doing so, we will periodically implement new software and other systems that will affect our internal operations regionally or globally.  

Future growth will also require us to successfully hire, train, motivate and manage our employees.  In addition, our continued growth and the evolution of our business plan will require significant additional management, technical and administrative resources.  We may not be able to effectively manage the growth and evolution of our current business.

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We are exposed to product liability and clinical and pre-clinical liability risks which could place a substantial financial burden on us, if we are sued.  Although we have $5 million in product liability insurance coverage, that amount may not be sufficient to cover all potential claims made against us.  Additionally, we face the risk of financial exposure to product liability claims alleging that the use of devices that incorporate our products resulted in adverse effects.

While we are not aware of any claim at this time, our business exposes us to potential product liability, recalls and other liability risks that are inherent in the testing, manufacturing and marketing of medical products.  We cannot assure you that such potential claims will not be asserted against us.  In addition, the use in our clinical trials of medical products that our potential collaborators may develop and the subsequent sale of these products by us or our potential collaborators may cause us to bear a portion of or all product liability risks.  A successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.

We cannot assure you that we will be able to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against our potential liabilities.  Furthermore, our current and potential partners with whom we have collaborative agreements or our future licensees may not be willing to indemnify us against these types of liabilities and may not themselves be sufficiently insured or have a net worth sufficient to satisfy any product liability claims.  Claims or losses in excess of any product liability insurance coverage that may be obtained by us could have a material adverse effect on our business, financial condition and results of operations.  We do not currently carry recall insurance and we may be subject to significant recall costs in the event of a recall.

We may be affected by environmental laws and regulations.

We are subject to a variety of laws, rules and regulations in the United States related to the use, storage, handling, discharge and disposal of certain chemical materials such as isocyanates, alcohols, dimethylacetamide, and glycols used in our research and manufacturing process.  Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them.  If we incur substantial additional expenses, product costs could significantly increase.  Our failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations.

If we fail to implement new or improved internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to comply with the requirements of Section 404 in a timely manner.  This could result in investors losing confidence in the reliability of our consolidated financial statements, which could result in a decrease in the value of our common stock.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K.  This report is required to contain an assessment by management of the effectiveness of such company’s internal controls over financial reporting.  Although management has concluded that our internal control over financial reporting was effective as of March 31, 2013, there is a risk that that we may identify previously unknown deficiencies or weaknesses in our internal controls.  If we fail to implement required new or improved controls, we may be unable to comply with the requirements of Section 404.  This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations.

Under current rules, we are required to report on the effectiveness of our internal controls for the year ended March 31, 2013.

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Compliance With Regulations Governing Public Company Corporate Governance and Reporting is Complex and Expensive.

Many laws and regulations impose obligations on public companies, which have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices.  Examples include the Sarbanes-Oxley Act of 2002, The Dodd-Frank Wall Street Reform and Consumer Protection Act, and the SEC’'s requirements for public companies to provide financial statements in interactive data format using the eXtensible Business Reporting Language, or XBRL.  Our implementation of certain aspects of these laws and regulations has required and will continue to require substantial management time and oversight and may require us to incur significant additional accounting and legal costs.  We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the ultimate amount of additional costs we may incur or the timing of such costs.  These laws and regulations are also subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies.  This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.  Although we are committed to maintaining high standards of corporate governance and public disclosure, if we fail to comply with any of these requirements, legal proceedings may be initiated against us and we may be harmed.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we may collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers and vendors, including personally identifiable information of our customers and employees, in our data centers and on our networks.  Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.  Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen.  Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation, which could adversely affect our business.

Risks Related to Competition

The medical device industry, in general, is intensely competitive and characterized by rapid innovation and technological advances.  Product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the medical device industry.  We expect the current high levels of competition and technological change in the medical device industry in general.  Most of our competitors have longer operating histories and significantly greater financial, technical, research, marketing, sales, distribution and other resources.  In addition, our competitors may have greater name recognition than us and frequently offer discounts as a competitive tactic.  There can be no assurance that our current competitors or potential future competitors will not succeed in developing or marketing technologies and products that are more effective or commercially attractive than those that have been and are being developed by us or that would render our technologies and products obsolete or noncompetitive, or that such companies will not succeed in obtaining regulatory approval for, introducing or commercializing any such products prior to us.  Any of the above competitive developments could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Pricing Pressure

We face aggressive cost-containment pressures from governmental agencies and third party payors.  There can be no assurances that we will be able to maintain current prices in the face of continuing pricing pressures.  Over time, the average price for our products may decline as the markets for these products become more competitive.  Any material reduction in product prices could negatively affect our gross margin, necessitating a corresponding increase in unit sales to maintain net sales.

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Risks Related to Our Securities

Our stock price is volatile.

The market price of our common stock has fluctuated significantly to date.  In the past fiscal year, our stock price ranged from $0.015 to $0.132.  The future market price of our common stock may also fluctuate significantly due to:

·

variations in our actual or expected quarterly operating results;

·

announcements or introductions of new products;

·

technological innovations by our competitors or development setbacks by us;

·

the commencement or adverse outcome of litigation;

·

changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers;

·

announcements of acquisition or acquisition transactions; or

·

general economic and market conditions.

In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many medical and biotechnology companies.  These fluctuations have often been unrelated or disproportionate to the operating performance of companies in our industry, and could harm the market price of our common stock.

Additional authorized shares of our common stock and preferred stock available for issuance may adversely affect the market.

We are authorized to issue 50,000,000 shares of our common stock.  As of March 31, 2013, there were 21,567,313 shares of common stock issued and 21,490,621 shares of common stock outstanding.  As of March 31, 2013, there were 76,692 shares of treasury stock which were acquired prior to the fiscal year ended March 31, 2010.  The total number of shares of our common stock issued and outstanding does not include shares reserved in anticipation of the exercise of options and warrants.  As of March 31, 2013, we had outstanding stock options and warrants to purchase 2,063,798 shares of our common stock, the exercise price of which range between $0.26 per share to $5.40 per share, and we have reserved shares of our common stock for issuance in connection with the potential exercise thereof.  To the extent such options, warrants or additional investment rights are exercised; the holders of our common stock will experience further dilution.  Stockholders will also experience dilution upon the exercise of options granted under our stock option plans.  In addition, in the event that any future financing or consideration for a future acquisition should be in the form of, be convertible into or exchangeable for, equity securities investors will experience additional dilution.  No stock options or warrants were exercised during the fiscal year ended March 31, 2013.

The exercise of the outstanding stock options and warrants will reduce the percentage of common stock held by our current stockholders.  Further, the terms on which we could obtain additional capital during the life of the stock options and warrants may be adversely affected, and it should be expected that the holders of the stock options and warrants would exercise them at a time when we would be able to obtain equity capital on terms more favorable than those provided for by such stock options and warrants.  As a result, any issuance of additional shares of common stock may cause our current stockholders to suffer significant dilution which may adversely affect the market.  In addition to the above referenced shares of common stock which may be issued without stockholder approval, we have 5,000,000 shares of authorized preferred stock, the terms of which may be fixed by our Board, of which 500,000 preferred shares were previously issued, but none are currently outstanding.  While we have no present plans to issue any additional shares of preferred stock, our Board has the authority, without stockholder approval, to create and issue one or more series of such preferred stock and to determine the voting, dividend and other rights of holders of such preferred stock.  The issuance of any of such series of preferred stock may have an adverse effect on the holders of common stock.

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Shares eligible for future sale may adversely affect the market.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations.  In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one year holding period may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale.  Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by our stockholders that are non-affiliates that have satisfied a two year holding period.  Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have material adverse effect on the market price of our securities.

There is a limitation on director and officer liability.

As permitted by Delaware law, our Restated Articles of Organization limit the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances.  As a result of our charter provision and Delaware law, stockholders may have limited rights to recover against directors for breach of fiduciary duty.  In addition, our bylaws provide that we shall indemnify our directors, officers, employees and agents if such persons acted in good faith and reasoned that their conduct was in our best interest.

The anti-takeover provisions of our Restated Articles of Organization, the Delaware General Corporation Law and our Stockholder Rights Plan may delay, defer or prevent a change of control.

Our Board of Directors has the authority to issue up to 4,500,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders.  The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future.  The issuance of preferred stock may delay, defer or prevent a change in control because the terms of any issued preferred stock could potentially prohibit our consummation of any acquisition, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction, without the approval of the holders of the outstanding shares of preferred stock.  In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.

Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting.  These notice requirements could inhibit a takeover by delaying stockholder action.  In addition, our bylaws and Delaware law provide for staggered board members with each member elected for three years.  In addition, directors may be removed by stockholders only for cause and by a vote of 80% of the stock.

In addition, we have adopted a stockholder rights plan that may discourage any potential acquirer from acquiring more than 15% of our outstanding common stock since, upon this type of acquisition without approval of our Board of Directors, all other common stockholders will have the right to purchase a specified amount of common stock at a substantial discount from market price.

Risk of Market Withdrawal or Product Recall

There can be no assurance that we will be able to successfully take corrective actions if required, nor can there be any assurance that any such corrective actions will not force us to incur significant costs.  In addition, there can be no assurance any future recalls will not cause us to face increasing scrutiny from our customers, which could cause us to lose market share or incur substantial costs in order to maintain existing market share.  We do not currently carry recall insurance and we may be subject to significant recall costs in the event of a recall.

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Risks Associated with Healthcare Reform Proposals

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our corporate headquarters, polymer development and manufacturing operations, are located in an approximate 25,966 square foot building, which we lease at 229 Andover Street, Wilmington, MA.

Item 3.

Legal Proceedings

We are not a party to any legal proceedings other than ordinary routine litigation incidental to our business which we believe will not have a material affect on our financial position or results of operations.

Item 4.

Mine Safety Disclosures

Not applicable.

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PART II

Item 5.

Market Information for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is quoted on the OTCQB tier of The OTC Markets under the ticker symbol “ASNB.”  The following table sets forth the high and low sales prices of the common stock for each of the last two fiscal years, as reported on the OTCQB tier of The OTC Markets:

As of June 19, 2013, there were approximately 357 stockholders of record.  The last sale price as quoted by the OTCQB tier of The OTC Markets on June 19, 2013, was $0.095 per share.  We have never paid a cash dividend on our common stock and do not anticipate the payment of cash dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans as of the End of Fiscal 2013 Equity Compensation Plan Information

_______________

(1)

This total includes shares to be issued upon exercise of outstanding options under the equity compensation plans that have been approved by our stockholders (i.e., the 2003 Plan).  We did not have any equity compensation plans that were not approved by stockholders.

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Recent Sales of Unregistered Securities

None.

Stock Repurchase Plan

In June 2001, the Board of Directors adopted a share repurchase program authorizing the repurchase by the Company of up to 250,000 of its shares of common stock.  In June 2004, the Board of Directors authorized the purchase of an additional 500,000 shares of common stock.  Since June 2001, a total of 251,379 shares have been repurchased by the Company under the share repurchase program, leaving 498,621 shares remaining to purchase under the share repurchase program.  No repurchases were made during the fiscal years ended March 31, 2013 and 2012.  The share repurchase program authorizes repurchases from time to time in open market transactions, through privately negotiated transactions, block transactions or otherwise, at times and prices deemed appropriate by management, is not subject to an expiration date.

Stockholder Rights Plan

Dividend Policy

We have never declared or paid any cash dividends on our common stock and do not expect to pay any dividends for the foreseeable future.  We currently intend to retain any future earnings to fund the operation, development and expansion of our business.  Any future determination to pay dividends will be at the sole discretion of our Board of Directors and will depend upon a number of factors, including our results of operations, capital requirements, financial condition, future prospects, contractual arrangements, restrictions imposed by applicable law, any limitations on payments of dividends present in our current and future debt arrangements, and other factors our Board of Directors may deem relevant.

Item 6.

Selected Financial Data

Not Applicable.

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Item 7.

Management’s Discussion and Analysis or Plan of Operation

Forward-Looking Statements

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

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

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Report on Form 10-K.  For example, we may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market our products; the market may not accept our existing and future products; we may not be able to retain our customers; we may be unable to retain existing key management personnel; and there may be other material adverse changes in our operations or business.  Certain important factors affecting the forward-looking statements made herein also include, but are not limited to (i) continued downward pricing pressures in our targeted markets, (ii) the continued acquisition of our customers by certain of our competitors, and (iii) continued periods of net losses, which could require us to find additional sources of financing to fund operations, implement our financial and business strategies, meet anticipated capital expenditures and fund research and development costs.  In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our financial position and results of operations.  For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof.  In addition, you should read and carefully consider the Risk Factors discussed in Part I, Item 1A of this Form 10-K.  We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law.

Overview

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

Fiscal Year

Our fiscal year ends on March 31.  Reference in this annual report on Form 10-K to a fiscal year is reference to the fiscal year ended March 31.  For example, references to “fiscal 2013” or our “2013 fiscal year” refer to the fiscal year ended March 31, 2013.

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Critical Accounting Policies

Our significant accounting policies are summarized in Note B to our consolidated financial statements.  However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our consolidated financial statements.  In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates.  Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate.  Actual results may differ significantly from the estimates contained in our consolidated financial statements.  Our critical accounting policies are as follows:

·

Revenue Recognition.  We recognize revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed reasonably assured.  If uncertainties regarding customer acceptance exist, we recognize revenue when those uncertainties are resolved and title has been transferred to the customer.  Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.  We also receive license, royalty and development fees, pursuant to agreements with its customers, for the use of its proprietary polymer biomaterials.  The terms of the various license, royalty and development agreements may contain multiple deliverables which may include (i) licenses to use our polymer biomaterials in the customer’s end-product medical device, (ii) research and development activities, (iii) services and/or (iv) the manufacturing of polymer biomaterials.  Payments to us under these agreements may include non-refundable license fees, payments for research and development activities, payments for the manufacture of polymer materials, payments based upon the achievement of certain milestones, payments for the use of our polymer biomaterials in the customer’s end-product, and/or royalties earned on the sale of the customer’s end-product.

·

Accounts Receivable Valuation.  We perform various analyses to evaluate accounts receivable balances and record an allowance for bad debts based on the estimated collectability of the accounts such that the amounts reflect estimated net realizable value.  Account balances are charged off against the allowance after significant collection efforts have been made and potential for recovery is not considered probable.

·

Inventory Valuation.  We value our inventory at the lower of our actual cost or the current estimated market value.  We regularly review inventory quantities on hand and inventory commitments with suppliers and record a provision for excess and obsolete inventory based primarily on our historical usage for the prior twelve-month period.  Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

·

Long-Lived Assets.  We evaluate our long-lived assets, which includes property and equipment, for impairment as events and circumstances indicate that the carrying amount may not be recoverable.  We evaluated the realizability of our long-lived assets based primarily on reviews of results of sales of similar assets and independent appraisals.  As a result of the indicators of impairment described above, we evaluated the recoverability of our property and equipment as of March 31, 2013 and 2012 and determined that during the fiscal year ended March 31, 2012 there existed an impairment of a single group of production equipment, accordingly, we recorded an impairment charge of $16,000 for the fiscal year ended March 31, 2012.  We determined that during the fiscal year ended March 31, 2013, there existed no additional impairment of our long-lived assets.

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·

Stock-Based Compensation.  We make certain assumptions in order to value our stock-based compensation.  The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options.  Accordingly, an option pricing model is utilized to derive an estimated fair value.  In calculating the estimated fair value of our stock options we use the Black-Scholes pricing model, which requires the consideration of the following six variables for purposes of estimating fair value:

·

the stock option exercise price;

·

the expected term of the option;

·

the grant date price of our common stock, which is issuable upon exercise of the option;

·

the expected volatility of our common stock;

·

the expected dividends on our common stock (we do not anticipate paying dividends in the foreseeable future); and

·

the risk free interest rate for the expected option term.

We are also required to estimate the level of pre-vesting award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest.  This requirement applies to all awards that are not yet vested.  Due to the limited number of unvested options outstanding, the majority of which are held by executives and members of the Company’s Board of Directors, the Company has estimated a zero forfeiture rate.  The Company will revisit this assumption periodically and as changes in the composition of our option pool dictate.

Changes in the inputs and assumptions, as described above, can materially affect the estimated fair value of our share-based awards.  The Company anticipates the amount of stock-based compensation to increase in the future as additional options are granted.  As of March 31, 2013, there was approximately $8,000 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted-average period of .39 years.

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Results of Operations

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

Revenues

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

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

License, royalty and development fees for the fiscal year ended March 31, 2013 were $775,000 as compared with $941,000 for the comparable prior year period, a decrease of $166,000 or 17.6%.  We have agreements to license our proprietary biomaterial technology to medical device manufacturers and develop biomaterials for incorporation into medical devices under development by our customers.  Royalties are earned when these manufacturers sell medical devices which use our biomaterials.

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

For the year ended March 31, 2013, three customers represented 33%, 17% and 13% of our total revenues, respectively.  For the year ended March 31, 2012, two customer represented 30% and 24%, respectively, of our total revenues.  We expect that this concentration of our customer base will continue for the foreseeable future.

Gross Profit

Gross profit on total revenues for the fiscal year ended March 31, 2013 was $1,382,000, or 63.0% of total revenues, compared with $969,000, or 51.9% of total revenues, for the comparable prior year period.  The increase in gross profit dollars and gross profit as a percentage of total revenues is primarily due to the effect of the royalty and product minimums recognized during the fiscal year ended March 31, 2013, as previously described, and the increase in product sales.

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

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Research, Development and Regulatory Expenses

Research and development expenses for the fiscal year ended March 31, 2013 were $444,000 as compared with $605,000 for the comparable prior year period, a decrease of $161,000 or 26.6%.  Our research and development efforts are focused on developing new applications for our biomaterials.  Research and development expenditures consisted primarily of the salaries of full time employees and related expenses, and are expensed as incurred.  The decrease in research and development expenses is primarily a result of the elimination of non-essential departmental resources.  Management believes its current research and development resources meet the needs of our customers and internal development needs.

Selling, General and Administrative Expenses

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

Impairment of Long-Lived Assets

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

Interest and Other Expenses

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

Income Taxes

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

As of March 31, 2013, we had federal and state net operating loss carry forwards available to offset future taxable income of approximately $26,094,000, expiring between 2014 and 2033, and $10,313,000, expiring between 2014 and 2018, respectively.  As of March 31, 2013, we had a capital loss carry forward available to offset future taxable income of approximately $9,065,000, expiring between 2015 and 2016.  As of March 31, 2013, we had federal and state investment and research tax credit carry forwards available to offset future taxable income of approximately $123,000, expiring between 2014 and 2033, and $223,000, expiring between 2014 and 2018, respectively.  The Company evaluates the realizability of our deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.

The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions.  The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position.  The Company evaluates this tax position on a quarterly basis.  The Company also accrues for potential interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense.

- 25 -

Liquidity and Capital Resources

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

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

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

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

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

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

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

- 26 -

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

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

With respect to the Exchange and Venture Agreement with CorNova, we have no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur.

Off-Balance Sheet Arrangements

As of March 31, 2013, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

- 27 -

Item 8.

Financial Statements and Supplementary Data

The following documents are filed as part of this report on Form 10-K

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

On January 11, 2013, AdvanSource Biomaterials Corporation (the “Company”), based on the decision of the Audit Committee of its Board of Directors, dismissed Moody, Famiglietti & Andronico, LLP (“MFA”) as the Company’s independent registered public accounting firm and recommended, and approved, the engagement of Liggett, Vogt & Webb P.A. (“LVW”) to serve as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2013.

MFA’s report on the Company’s consolidated financial statements for the fiscal year ended March 31, 2012 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal year ended March 31, 2012 and through the date of dismissal, there were no disagreements with MFA on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to MFA’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company’s consolidated financial statements for such fiscal year; and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K.

The Company provided MFA with a copy of the disclosures in the preceding two paragraphs and requested in writing that MFA furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether or not they agree with such disclosures.  MFA provided a letter, dated January 15, 2013 stating its agreement with such statements, which was included as an exhibit in the Company’s Form 8-K dated January 15, 2013.

- 28 -

Item 9A.

Controls and Procedures

The certificates of our Chief Executive Officer and Chief Financial Officer attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures, and internal control over financial reporting.  Such certifications should be read in conjunction with the information contained in this Item 9A for a more complete understanding of the matters covered by such certifications.

Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2013.  The term “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”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions to be made regarding required disclosure.  It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of March 31, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the interim or annual financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, 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.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2013 based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, our management concluded that, as of March 31, 2013, our internal control over financial reporting was effective.

This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by our registered public accounting firm pursuant to Securities and Exchange Commission rules that permit us to provide only management's report in this annual report.

- 29 -

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting during the fourth quarter ended March 31, 2013 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

Other Information

None.

- 30 -

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this Item 10 will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.

Item 11.

Executive Compensation

The information required by this Item 11 will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item 12 will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.

Item 14.

Principal Accounting Fees and Services

The information required by this Item 14 will be filed as an amendment to our Form 10-K within 120 days of our fiscal year end.

- 31 -

PART IV

Item 15.

Exhibits, Financial Statement Schedules

The following are filed as part of this Form 10-K:

(1)

Consolidated Financial Statements: For a list of consolidated financial statements which are filed as part of this Form 10-K, See Item 8, page 28.

(2)

Exhibits

- 32 -

- 33 -

- 34 -

________________

**

Filed herewith

- 35 -

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of AdvanSource Biomaterials Corporation

Wilmington, Massachusetts

We have audited the accompanying consolidated balance sheet of AdvanSource Biomaterials Corporation (the “Company”) as of March 31, 2013, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 the Company’s 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AdvanSource Biomaterials Corporation as of March 31, 2013 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of AdvanSource Biomaterials Corporation

Wilmington, Massachusetts

We have audited the accompanying consolidated balance sheet of AdvanSource Biomaterials Corporation and Subsidiary (the “Company”) as of March 31, 2012, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 the Company’s 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AdvanSource Biomaterials Corporation and Subsidiary as of March 31, 2012 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

F-2

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

F-3

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

F-4

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

F-5

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

F-6

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.

Nature of Business

AdvanSource Biomaterials Corporation (“AdvanSource” or the “Company”) develops advanced polymer materials which provide critical characteristics in the design and development of medical devices.  The Company’s biomaterials are used in devices that are designed for treating a broad range of anatomical sites and disease states.  The Company’s business model leverages its proprietary materials science technology and manufacturing expertise in order to expand product sales and royalty and license fee income.

The Company’s technology, notably products such as ChronoFlex®, HydroMed™, and HydroThane™, which have been developed to overcome a wide range of design and functional challenges such as the need for dimensional stability, ease of manufacture and demanding physical properties to overcoming environmental stress cracking and providing heightened lubricity for ease of insertion.  The Company’s new product extensions customize proprietary polymers for specific customer applications in a wide range of device categories.

The Company’s corporate, development and manufacturing operations are located in Wilmington, Massachusetts.

Fiscal Year

The Company’s fiscal year ends on March 31.  References herein to fiscal 2013 and/or fiscal 2012 refer to the fiscal years ended March 31, 2013 and/or 2012, respectively.

B.

Summary of Significant Accounting Policies

Accounting Principles

The consolidated financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, CardioTech Realty, LLC.  CardioTech Realty, LLC, which has no operating activities and was formed for purposes of holding title to the Company’s property located in Wilmington, Massachusetts, was involuntarily dissolved by the Commonwealth of Massachusetts on April 30, 2009.  On June 24, 2011, CardioTech Realty, LLC was reinstated as a corporation in good standing by the Commonwealth of Massachusetts.  On December 22, 2011, the Company sold its land and building (Notes F and I).

Use of Accounting Estimates

Cash

Cash includes cash on hand, is deposited at one area bank and may exceed federally insured limits at times.

F-7

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

The Company generates revenue primarily from (i) the sale of polymer products and (ii) license, royalty and development agreements.

Product Sales

Revenues generated from the sale of polymer products is recognized upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed reasonably assured.  If uncertainties regarding customer acceptance exist, the Company recognizes revenues when those uncertainties are resolved and title has been transferred to the customer.  Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.

License, Royalty and Development Fees

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

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, “Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”).”  The Company adopted the provisions of the new multiple-element arrangement guidance summarized in ASU 2009-13 on April 1, 2011 on a prospective basis.  Therefore, this guidance is applicable to any contract entered into or modified on or subsequent to the date of adoption.  This guidance establishes a new hierarchy for determining the amount of arrangement consideration to allocate to each separable deliverable in an arrangement.  For those deliverables that qualify as separate units of accounting, the Company must assign value based on each deliverable’s  vendor-specific objective evidence (“VSOE”) of fair value if available, third-party evidence (“TPE”) of its value if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE or TPE is available.  Arrangement consideration is then allocated to all deliverables using the relative selling price method.  The residual method of allocation is not permissible under the new guidance.

In determining the separate units of accounting, management evaluates whether the delivered element has standalone value to the customer based on the consideration of the relevant facts and circumstances for each arrangement.  Factors considered in this determination include the customer’s research, development, production and product commercialization capabilities and the availability of these capabilities, as well as polymer development and manufacture expertise in the general marketplace.  In addition, the Company considers whether the customer can use the license for its intended purpose without the receipt of the remaining deliverables, whether the value of the license is dependent on the undelivered items and whether there are other vendors that can provide the undelivered item.

F-8

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management performs extensive analysis to determine the value, or selling price, of each unit of accounting.  The Company has been unable to establish VSOE due to the fact that it does not typically enter into arrangements where technology is licensed separately, rather, its arrangements are commingled with fees from royalties, usage of polymers within customer end-products, minimum purchases of polymer products manufactured and sold to customers by the Company, or a combination of the aforementioned.  Additionally, the Company has been unable to obtain TPE for any of its deliverables, without undue cost and effort.  Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a significant level of customization and differentiation such that the Company’s services are not interchangeable with those of its competitors.  Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a standalone basis.

Management’s ESP is used for the Company’s licensing, royalty and development arrangements.  The Company determines that ESP for the elements of these arrangements is based on several factors, including, but not limited to, the terms of the arrangements, market conditions, historical analysis of contracts having similar elements, and the Company’s internal costs and gross margin objectives.  The determination of ESP is made through consultation with and formal approval by the Company’s management.  ESP for certain consultative services is determined based on consideration of time incurred by the Company to perform these services, consulting fees charged on a per-hour basis by the Company and by its vendors, and the Company’s pricing methodologies.

The Company’s arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.

In June 2011, the Company entered into a non-exclusive license agreement and a consulting services agreement (collectively, the “Agreements”) with a major international developer and manufacturer of medical devices (“Customer”), which generally provides the Customer the right to use and know-how to produce a specific proprietary polymer biomaterial for a specific field of use (the “Licensed Polymer”) within the Customer’s suite of medical device products.  In accordance with the applicable accounting guidance, the Company determined the Agreements included the following units of accounting:  (i) transfer of technology and know-how related to the Licensed Polymer, (ii) consulting services related to the establishment of a facility to manufacture the Licensed Polymer by the Customer, (iii) assisting the Customer in validating the Licensed Polymer produced by the Customer, and (iv) consulting with the Customer in connection with the Customer’s efforts to obtain various regulatory approvals for medical devices incorporating the Licensed Polymer.

Upon the execution of the Agreements, the Company received an up-front payment of $150,000, and in July 2011, the Company received an additional $250,000 upon the transfer of technology and know-how related to the Licensed Polymer.  The Agreements also provide for additional payments upon the achievement of certain milestones, as previously described, each of which the Company considers substantive, and could total up to an additional $1,100,000.  The Agreements do not provide for any royalties or other fees upon the achievement of any or all of the milestones.  The Company determined that the transfer of technology and know-how of the Licensed Polymer represented a separate unit of accounting, and upon delivery, in accordance with the applicable accounting guidance, the Company recognized $400,000 of revenue during the fiscal year ended March 31, 2012.  During fiscal 2013, the Company achieved an additional milestone in connection with the functional installation of certain production equipment and recognized $20,000 of revenue during the fiscal year ended March 31, 2013.

The adoption of this guidance resulted in an increase to revenue during the fiscal years ended March 31, 2013 and 2012 of $20,000 and $400,000, respectively, over the amount which would have been recognized under the principles used during the fiscal year ended March 31, 2011.  Prior to the adoption of this guidance, the Company would have been required to defer revenue for license, royalty or development agreements until completion of the contracts or until recognized utilizing a proportional performance method of revenue recognition, based on the terms of the various agreements.

F-9

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Research, Development and Regulatory Expense

Research, development and regulatory expenditures for the years ended March 31, 2013 and 2012 were $444,000 and $605,000, respectively, and consisted primarily of salaries and related costs and are expensed as incurred.  The Company has two full time research and development employees that work on a variety of projects, including production support.

Advertising Costs

Advertising costs are expensed as incurred or at the first time the advertising takes place.  Advertising costs for the years ended March 31, 2013 and 2012 were $15,000 and $4,000, respectively.

Reporting Comprehensive Loss

Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity including such items as unrealized holding gains (losses) on securities classified as available-for-sale and foreign currency translation adjustments.  For the years ended March 31, 2013 and 2012, comprehensive loss is equal to net loss.

Basic and Diluted Earnings(Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.  Diluted earnings (loss) per share are based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period.  Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method.  In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversion of potential shares.  At March 31, 2013 and 2012, potentially dilutive shares of 2,063,798 and 2,349,417, respectively, were excluded from the loss per share calculations because their effect would be antidilutive.  Shares deemed to be antidilutive include stock options and warrants.

Accounts Receivable

The Company performs various analyses to evaluate accounts receivable balances and record an allowance for bad debts based on the estimated collectability of the accounts such that the amounts reflect estimated net realizable value.  Account balances are charged off against the allowance after significant collection efforts have been made and potential for recovery is not considered probable.  As of March 31, 2013 and 2012, the Company’s allowance for doubtful accounts was $5,000.

Inventories

The Company values its inventory at the lower of our actual cost or the current estimated market value.  The Company regularly reviews inventory quantities on hand and inventory commitments with suppliers and records a provision for excess and obsolete inventory based primarily on our historical usage for the prior twelve-month period.  Although the Company makes every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant impact on the value of the Company’s inventory and its reported operating results.  As of March 31, 2013 and 2012, the Company’s allowance for obsolete and excess inventory was $166,000 and $133,000, respectively.

F-10

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment

Property and equipment are stated at cost.  Equipment is depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years.  Building improvements are amortized using the straight-line method over the remaining estimated life of the building at the time the improvement is put into service.  The Company’s building is depreciated using the straight-line method over 40 years.  Land is not depreciated.  Expenditures for repairs and maintenance are charged to expense as incurred.  The Company records construction in process in the appropriate asset category and commences depreciation upon completion and commencement of use of the asset.

Deferred Financing Costs

The Company has capitalized certain costs related to the issuance of debt.  These costs are amortized to interest expense on a straight-line basis over the term of the debt. During the fiscal years ended March 31, 2103 and 2012, amortization expense related to deferred financing costs were $7,000 and $18,000, respectively.

Income Taxes

The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled.  The Company evaluates the realizability of its deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized.

The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions.  The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position.  The Company evaluates this tax position on a quarterly basis.  The Company also accrues for potential interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense.  (See Note G).

Investment in CorNova

The Company’s investment in CorNova is accounted for using the cost method of accounting.  (See Note P).

Impairment of Long-Lived Assets

F-11

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the estimated fair value of the award and is recognized as an expense over the requisite service period.  The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options.  Accordingly, the Black-Scholes option pricing model is utilized to derive an estimated fair value.  The Black-Scholes pricing model requires the consideration of the following six variables for purposes of estimating fair value:

·

the stock option exercise price;

·

the expected term of the option;

·

the grant date price of the Company’s common stock, which is issuable upon exercise of the option;

·

the expected volatility of the Company’s common stock;

·

the expected dividends on the Company’s common stock (the Company does not anticipate paying dividends in the foreseeable future); and

·

the risk free interest rate for the expected option term.

There were no options granted during the fiscal years ended March 31, 2013 and 2012.

Expected Dividends.  The Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future.  Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.

Expected Volatility.  The expected volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate during the expected term of options granted.  The Company determines the expected volatility solely based upon the historical volatility of its common stock over a period commensurate with the option’s expected term.  The Company does not believe that the future volatility of its common stock over an option’s expected term is likely to differ significantly from the past.

Risk-Free Interest Rate.  The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the option’s expected term on the grant date.

Expected Term.  For option grants subsequent to the adoption of the fair value recognition provisions of the accounting standards, the expected life of stock options granted is based on the actual vesting date and the end of the contractual term.

Stock Option Exercise Price and Grant Date Price of Common Stock.  The closing market price of the Company’s common stock on the date of grant.

The Company is required to estimate the level of award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest.  This requirement applies to all awards that are not yet vested.  Due to the limited number of unvested options outstanding, the majority of which are held by executives and members of the Company’s Board of Directors, the Company has estimated a zero forfeiture rate.  The Company will revisit this assumption periodically and as changes in the composition of the option pool dictate.

F-12

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

The Company follows Accounting Standards Codification 820-10 (“ASC 820-10”), “Fair Value Measurements and Disclosures,” for fair value measurements.  ASC 820-10 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The standard provides a consistent definition of fair value, which focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurement based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.

The hierarchy established under ASC 820-10 gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  The three levels of the fair value hierarchy under ASC 820-10 are described below:

Level 1 – Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date.  As required by ASC 820-10, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Level 2 – Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data.  Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

Level 3 – Pricing inputs are unobservable for the investment, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.  Level 3 includes investments that are supported by little or no market activity.

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update 2010-06 (“ASU 2010-06”), “Improving Disclosures About Fair Value Measurements,” which requires interim disclosures regarding significant transfers in and out of Level 1 and Level 2 fair value measurements.  Additionally, ASU 2010-06 requires disclosure for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements.  These disclosures are required for fair value measurements that fall in either Level 2 or Level 3.  Further, ASU 2010-06 requires separate presentation of Level 3 activity for the fair value measurements.  The Company adopted the provisions of this standard on April 1, 2010.

The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis in the Company’s balance sheet at March 31, 2012:

Certain equipment, included in property, plant and equipment on the balance sheet, with a carrying amount of approximately $32,000, was written down to its fair value of approximately $16,000, resulting in an impairment charge of $16,000 for the fiscal year ended March 31, 2012.  The equipment was valued using a market approach.  The values were determined using market prices of similar pieces of equipment.  The Company determined that during the fiscal year ended March 31, 2013, there existed no additional impairment of our long-lived assets.

F-13

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

The Company has evaluated all issued but not yet effective accounting pronouncements and determined that they are either immaterial or not relevant to the Company.

C.

Related Party Transactions

On January 16, 2013, Michael Adams, the Company’s President and Chief Executive Officer, advanced the Company $60,000 for working capital purposes.  The advance was payable on demand and did not bear interest.

D.

License Agreements

PolyMedica Corporation (“PolyMedica”) granted to AdvanSource an exclusive, perpetual, worldwide, royalty-free license for AdvanSource to use all of the necessary patent and other intellectual property owned by PolyMedica in the implantable devices and materials field (collectively, “Licensed Technology”).  AdvanSource, at its own expense, will file patents or other applications for the protection of all new inventions formulated, made, or conceived by AdvanSource during the term of the license that related to Licensed Technology and all such inventions shall be exclusively licensed to PolyMedica for use by PolyMedica in fields other than the implantable devices and materials field.  There are no financial commitments of AdvanSource related to this license.

E.

Inventories

Inventories, net are stated at the lower of cost (first in, first out) or market and consist of the following:

F.

Property, Plant and Equipment

Property, plant and equipment consist of the following:

Depreciation expense for the fiscal years ended March 31, 2013 and 2012 was approximately $188,000 and $197,000, respectively.

As a result of the Company’s evaluation of the recoverability of its property, plant and equipment, the Company recorded impairment of a single group of production equipment that existed during the fiscal year ended March 31, 2012, accordingly, the Company recorded an impairment charge of $16,000.  The Company determined that during the fiscal year ended March 31, 2013, there existed no additional impairment of its long-lived assets.

F-14

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On December 22, 2011, we entered into an agreement with an independent third-party under which we sold and leased back our land and building generating gross proceeds of $2,000,000.  The initial minimum lease term is 15 years.  At the end of the initial minimum lease term, we have the option to renew the lease for three periods of five years each.  Under the terms of the lease, we have provided, as collateral, a security interest in all furnishings, fixtures and equipment owned and used by us, having a net book value of approximately $95,000 as of March 31, 2013.  For accounting purposes, the provision of such collateral constitutes continuing involvement with the associated property.  Due to this continuing involvement, this sale-leaseback transaction is accounted for under the financing method, rather than as a completed sale.  Under the financing method, we include the sales proceeds received as a financing obligation.  The building, building improvements and land remain on the consolidated balance sheet and the building and building improvements will continue to be depreciated over their remaining useful lives.  Payments made under the lease are applied as payments of imputed interest and deemed principal on the underlying financing obligation.

G.

Income Taxes

As of March 31, 2013 and 2012, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.

The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions.  The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  No interest and penalties have been recognized by the Company to date.

Tax years 2009 through 2013 are subject to examination by the federal and state taxing authorities.  There are no income tax examinations currently in process.

Reconciliation between the Company’s effective tax rate and the United States statutory rate is as follows:

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of the assets and liabilities using the enacted tax rate in effect in the years in which the differences are expected to reverse.  A valuation allowance has been recorded against the deferred tax asset as it is more likely than not, based upon the analysis by the Company of all available evidence, that the tax benefit of the deferred tax asset will not be realized.

F-15

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the significant components of the Company’s deferred tax assets as of March 31, 2013 and 2012:

A valuation allowance has been recorded to offset all deferred tax assets due to uncertainty of realizing the tax benefits of the underlying operating loss and tax credit carry forwards over their carry forward periods.  The Company had no significant deferred tax liabilities as of March 31, 2013 and 2012.

As of March 31, 2013, the Company has the following unused net operating loss and tax credit carryforwards available to offset future federal and state taxable income, both of which expire at various times as noted below:

The Company’s net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities.

Approximately $1,400,000 of the above Federal net operating loss carryforwards relate to stock compensation.  The related tax benefit of approximately $553,000 will be credited to additional paid-in capital upon realization.

F-16

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

H.

Promissory Note

On July 7, 2011, the Company entered into a Commercial Real Estate Promissory Note in the principal amount of $800,000 (the “Note”) with Axiom Partners, LP as the lender (the “Lender”).  The Note had a two-year term and interest at the rate of 15% per annum.  The Note provided for monthly interest payments to be paid on the last calendar day of each month commencing on August 31, 2011.  A balloon payment of the principal balance of $800,000, plus any accrued and unpaid interest, was due upon the maturity of the Note on July 8, 2013.  The Note was secured by the Company’s land and building pursuant to the terms and conditions of the Note and a mortgage in favor of the Lender (the “Mortgage”).  The Note contained a penalty provision equal to $166,000, less the amount of interest actually paid to the Lender, in the event of an early prepayment.  During the fiscal year ended March 31, 2012, the Company paid approximately $56,000 of interest incurred on the Note.

In connection with this transaction, the Company also incurred approximately $68,000 in fees, primarily for legal and placement activities, which were recorded as deferred financing costs in the consolidated balance sheet.  Deferred financing costs were to be amortized over the 24-month term of the Note using the effective interest rate method.  During the fiscal year ended March 31, 2012, the Company amortized approximately $16,000 of these costs, which are reported as additional interest expense in the consolidated statement of operations.

On December 22, 2011, in connection with the sale of the Company’s land and building, the Note was paid in full, including a prepayment penalty of approximately $99,000, as provided for in the Note and amended by the Lender at the time of the sale of the Company’s land and building, and the mortgage was discharged (See Note I).  The prepayment penalty and the write-off of the remaining unamortized deferred financing costs of $52,000 are included in the loss on the extinguishment of promissory note for the fiscal year ended March 31, 2012 in the consolidated statement of operations.

I.

Long-Term Financing Obligation

On December 22, 2011, the Company entered into an agreement with an independent third-party under which we sold and leased back our land and building generating gross proceeds of $2,000,000.  Pursuant to a lease agreement, the initial minimum lease term is 15 years.  At the end of the initial minimum lease term, we have the option to renew the lease for three periods of five years each.  Under the terms of the lease, we were required to place $280,000 of the net proceeds in escrow as a prepayment of the calendar year 2012 lease payments.  As of March 31, 2012, the balance of the prepaid lease payment was $210,000 and is included in prepaid expenses and other current assets of the consolidated balance sheets.  In addition, we provided, as collateral, a security interest in all furnishings, fixtures and equipment owned and used by us, having a net book value of approximately $146,000 as of March 31, 2012.  For accounting purposes, the provision of such collateral constitutes continuing involvement with the associated property.  Due to this continuing involvement, this sale-leaseback transaction is accounted for under the financing method, rather than as a completed sale.  Under the financing method, we include the sales proceeds received as a financing obligation.  As of March 31, 2013 and 2012, the total financing obligation was $1,986,000, respectively.  The building, building improvements and land remain on the consolidated balance sheet and the building and building improvements will continue to be depreciated over their remaining useful lives.  Payments made under the lease are applied as payments of imputed interest and deemed principal on the underlying financing obligation.

F-17

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the financing transaction:

The future minimum lease payments as of March 31, 2013 are as follows:

J.

Contingencies

The Company is not a party to any legal proceedings, other than ordinary routine litigation incidental to its business, which the Company believes will not have a material affect on its financial position or results of operations.

K.

Concentration of Credit Risk and Major Customers

For the year ended March 31, 2013, three customers represented 33%, 17% and 13% of revenues, respectively.  For the year ended March 31, 2012, two customers represented 30% and 24%, respectively, of our revenues.

As of March 31, 2013, the Company had accounts receivable-trade of $95,000, or 65%, due from three customers.  As of March 31, 2012, the Company had accounts receivable-trade of $145,000, or 97%, due from three customers.

As of March 31, 2013, the Company had $208,000 due from two customers related to receivables on license fees and royalties.  As of March 31, 2012, the Company had $142,000 due from four customers related to receivables on license fees and royalties.  These amounts are classified as accounts receivable-other in the Company’s consolidated balance sheets.

During the year ended March 31, 2013, four vendors represented, in the aggregate, $93,000, or 81%, of material purchases used in the production process.  During the year ended March 31, 2012, four vendors represented, in the aggregate, $101,000, or 76%, of material purchases used in the production process.

F-18

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

L.

Stockholders’ Equity

Preferred Stock

The Company has authorized 5,000,000 shares, $0.001 par value, Preferred Stock (the Preferred Stock”) of which 500,000 shares have been issued and redeemed, therefore are not considered outstanding.  In addition, 500,000 shares of Preferred Stock have been designated as Series A Junior Participating Preferred Stock (the “Junior Preferred Stock”) with the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions specified in the Certificate of Designation of the Junior Preferred Stock filed with the Delaware Department of State on January 28, 2008.  Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Junior Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Junior Preferred Stock.  As of March 31, 2013, there was no Junior Preferred Stock issued or outstanding.

Common Stock Options and Warrants

On March 31, 2008, the Company issued warrants to the investment bankers, who assisted in the sale of a former subsidiary, to purchase 219,298 shares of common stock at an exercise price of $0.874 per share, which are exercisable until March 31, 2015.  The warrants were valued at $76,000 using the Black-Scholes model and treated as permanent equity.

There were no exercises of options or warrants by employees and consultants during the fiscal years ended March 31, 2013 and 2012.

Employee Stock Purchase Plan

During the fiscal year ended March 31, 2012, the Company issued 140,566 shares of its common stock to its employees pursuant to the terms of the Employee Stock Purchase Plan (the “ESP Plan”), as amended, and received cash proceeds of approximately $7,000.  During the fiscal year ended March 31, 2012, the Company also recorded stock compensation of $1,000 to reflect the effect of the benefit received by the employees for the issuance of common stock at a 15% discount to the fair market value of the Company’s common stock on the settlement date.  As of March 31, 2012, the Company issued all 500,000 shares authorized for issuance under the ESP Plan.  Accordingly, there were no shares of its common stock available for issuance or issued pursuant to the ESP Plan during the fiscal year ended March 31, 2013.

Treasury Stock and Other Transactions

In June 2001, the Board of Directors adopted a share repurchase program authorizing the repurchase by the Company of up to 250,000 of its shares of common stock.  In June 2004, the Board of Directors authorized the purchase of an additional 500,000 shares of common stock.  Since June 2001, a total of 251,379 shares have been repurchased by the Company under the share repurchase program, leaving 498,621 shares remaining to purchase under the share repurchase program.  No repurchases were made during the years ended March 31, 2013 and 2012.  The share repurchase program authorizes repurchases from time to time in open market transactions, through privately negotiated transactions, block transactions or otherwise, at times and prices deemed appropriate by management, and is not subject to an expiration date.

F-19

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stockholder Rights Plan

The Company’s Board of Directors approved the adoption of a stockholder rights plan (the “Rights Plan”) under which all stockholders of record as of February 8, 2008 will receive rights to purchase shares of the Junior Preferred Stock (the “Rights”).  The Rights will be distributed as a dividend.  Initially, the Rights will attach to, and trade with, the Company’s common stock.  Subject to the terms, conditions and limitations of the Rights Plan, the Rights will become exercisable if (among other things) a person or group acquires 15% or more of the Company’s common stock.  Upon such an event, and payment of the purchase price, each Right (except those held by the acquiring person or group) will entitle the holder to acquire shares of the Company’s common stock (or the economic equivalent thereof) having a value equal to twice the purchase price.  The Company’s Board of Directors may redeem the Rights prior to the time they are triggered.  In the event of an unsolicited attempt to acquire the Company, the Rights Plan is intended to facilitate the full realization of stockholder value in the Company and the fair and equal treatment of all Company stockholders.  The Rights Plan does not prevent a takeover attempt.

M.

Stock Based Compensation

AdvanSource’s 1996 Employee, Director and Consultants Stock Option Plan (the “1996 Plan”) was approved by AdvanSource’s Board of Directors and Stockholders in March 1996.  A total of 7,000,000 shares have been reserved for issuance under the Plan.  Under the terms of the Plan, the exercise price of Incentive Stock Options issued under the Plan must be equal to the fair market value of the common stock at the date of grant.  In the event that Non Qualified Options are granted under the Plan, the exercise price may be less than the fair market value of the common stock at the time of the grant (but not less than par value).  In October 2003, the Company’s shareholders approved the AdvanSource 2003 Stock Option Plan (the “2003 Plan”), which authorizes the issuance of 3,000,000 shares of common stock with terms similar to the 1996 Plan.  In January 2006, the Company filed Form S-8 with the Securities and Exchange Commission registering an additional 489,920 total shares of common stock in the 1996 Plan and 2003 Plan.  Total shares of common stock registered under the 1996 Plan and 2003 Plan (collectively, the “Plans”) are 10,489,920.  Substantially all of the stock options granted pursuant to the 1996 Plan provide for the acceleration of vesting of the shares of Common Stock subject to such options in connection with certain changes in control of the Company.  A similar provision is not included in the 2003 Plan.  In February 2008, the Company filed two Forms S-8 to register 360,000 shares of common stock in connection with previously granted stock options to two executives who received grants of unregistered shares under Rule 711 of NYSE Amex.  Normally, options granted expire ten years from the grant date.

Activity under the Plans for the year ended March 31, 2013 is as follows:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of the common stock on March 30, 2013 of $0.052 and the exercise price of each in-the-money option) that would have been received by the option holders had all option holders exercised their options on March 31, 2013.  There were no stock options exercised under the Plan for the fiscal years ended March 31, 2013 and 2012.  The total fair value of stock options that vested during the fiscal years ended March 31, 2013 and 2012 was $33,000 and $46,000, respectively.

F-20

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At March 31, 2013, there were no shares remaining to be granted under the 1996 Stock Option Plan and 771,250 shares were available for grant under the 2003 Stock Option Plan.

N.

Benefit Plans and Employment Agreements of Executive Officers

The Company has the AdvanSource 401(k) Retirement Savings Plan established under Section 401(k) of the Internal Revenue Code.  All full-time employees who are twenty-one years of age are eligible to participate on the beginning of the first month after 30 days of employment.  The Company’s contributions are discretionary.  The Company made matching contributions of approximately $9,000 and $8,000 during the fiscal years ended March 31, 2013 and 2012, respectively.

On August 7, 2006, the Company appointed Michael F. Adams as Chief Executive Officer and President of the Company.  Mr. Adams has been a director of the Company since May 1999 and joined the Company as its Vice President of Regulatory Affairs and Business Development on April 1, 2006.  The Company entered into an employment agreement with Mr. Adams (the “Adams Agreement”) on September 13, 2006.  Under the terms of the Adams Agreement, Mr. Adams will be employed by the Company for two years and receive an annual base salary of $290,000, as amended, which is subject to annual review by the Company’s Board of Directors.  During the Employment Period, as defined in the Adams Agreement, Mr. Adams may receive an annual bonus to be determined at the sole discretion of the Compensation Committee of the Board of Directors.  The Company did not renew the Adams Agreement at the end of the initial term, however, the Adams agreement provides that lacking any express agreement between the parties at the end of the Employment Period, the Adams Agreement shall be deemed to continue on a month-to-month basis.  As a result, the Adams Agreement currently continues on a month-to-month basis and is subject to all of the terms and conditions of the Adams Agreement.  Either party has the right to terminate the Adams Agreement upon 30 days written notice.  Mr. Adams is eligible for participation in all executive benefit programs, including health insurance, life insurance, and stock-based compensation.  If Mr. Adams’ employment is terminated without cause, the Company is obligated to (i) pay Mr. Adams an amount equal to two times his annual base salary upon such termination, (ii) provide Mr. Adams with health insurance benefits for a period of 18 months after such termination, of which the premiums for the first six months after such termination shall be paid by the Company, and (iii) provide Mr. Adams life insurance benefits for one year after such termination at the Company’s expense.  During the fiscal year ended March 31, 2010, the Compensation Committee of the Board of Directors approved an increase in Mr. Adams’ annual base salary to $320,000.  There was no bonus awarded to Mr. Adams during the fiscal years ended March 31, 2013 and 2012.

O.

Investment in CorNova, Inc.

The Company partnered with CorNova, Inc. (“CorNova”), a privately-held, development stage company, which is developing medical devices for cardiovascular applications.  In March 2004, the Company entered into an Exchange and Venture Agreement by and among the Company, Implant Sciences Corporation and CorNova.  During the fiscal years ended March 31, 2004 and 2005, the Company contributed, in the aggregate, 321,573 shares of its common stock, valued at approximately $825,000, which provided the Company a 30% ownership interest in the common stock of CorNova.  The Company initially used the equity method of accounting; accordingly, it recorded 30% of the net loss of CorNova in its financial statements through the fiscal year ended March 31, 2007.  During the fiscal year ended March 31, 2007, the Company recorded equity in the net loss of CorNova of $279,000, and equity in comprehensive income of CorNova of $40,000 (related to unrealized holding gains on securities classified as available-for-sale), which reduced the Company’s investment in CorNova to $0.  Therefore, no additional losses were recorded from the Company’s equity ownership in CorNova since the fiscal year ended March 31, 2007.

As a result of several dilutive financings by CorNova, the Company’s ownership interest decreased, accordingly, the Company began using the cost method of accounting during fiscal 2009.  As of March 31, 2013, the Company’s ownership interest in CorNova was less than 1.0%.

F-21

ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

P.

Subsequent Events

The Company evaluated all events or transactions that occurred after the consolidated balance sheet date through the date when the Company filed these consolidated financial statements and determined that it did not have any material recognizable subsequent events.

F-22

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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.