Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains certain statements that are
"forward-looking" within the meaning of the Private Securities Litigation Reform
Act of 1995 (the "Litigation Reform Act"). These forward looking statements and
other information are based on our beliefs as well as assumptions made by us
using information currently available.
The words "anticipate," "believe," "estimate," "expect," "intend," "will,"
"should" and similar expressions, as they relate to us, are intended to identify
forward-looking statements. Such statements reflect our current views with
respect to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected, intended or using other similar expressions.
In accordance with the provisions of the Litigation Reform Act, we are making
investors aware that such forward-looking statements, because they relate to
future events, are by their very nature subject to many important factors that
could cause actual results to differ materially from those contemplated by the
forward-looking statements contained in this quarterly report on Form 10-Q. For
example, we may encounter competitive, technological, financial and business
challenges making it more difficult than expected to continue to develop and
market our products; the market may not accept our existing and future products;
we may not be able to retain our customers; we may be unable to retain existing
key management personnel; and there may be other material adverse changes in our
operations or business. Certain important factors affecting the forward-looking
statements made herein also include, but are not limited to (i) continued
downward pricing pressures in our targeted markets, (ii) the continued
acquisition of our customers by certain of our competitors, and (iii) continued
periods of net losses, which could require us to find additional sources of
financing to fund operations, implement our financial and business strategies,
meet anticipated capital expenditures and fund research and development costs.
In addition, assumptions relating to budgeting, marketing, product development
and other management decisions are subjective in many respects and thus
susceptible to interpretations and periodic revisions based on actual experience
and business developments, the impact of which may cause us to alter our
marketing, capital expenditure or other budgets, which may in turn affect our
financial position and results of operations. For all of these reasons, the
reader is cautioned not to place undue reliance on forward-looking statements
contained herein, which speak only as of the date hereof. We assume no
responsibility to update any forward-looking statements as a result of new
information, future events, or otherwise except as required by law. For further
information, you are encouraged to review our filings with the Securities and
Exchange Commission, including our Annual Report on Form 10-K for the fiscal
year ended March 31, 2019 and the risk factors discussed therein under Part I.
Item 1A.
Business
On January 31, 2020 (the "Closing Date"), we completed the sale of substantially
all of our assets (the "Asset Sale") for a total purchase price of $7,250,000
pursuant to an Asset Purchase Agreement entered into between us and Mitsubishi
Chemical Performance Polymers, Inc., a Delaware corporation ("MCPP"). Prior to
the Closing Date, we developed and manufactured advanced polymer materials which
provide critical characteristics in the design and development of medical
devices. Our biomaterials were marketed and sold to medical device manufacturers
who used our advanced polymers in devices designed for treating a broad range of
anatomical sites and disease states.
As a result of the Asset Sale, we ceased operating as a developer, manufacturer,
marketer and seller of advanced polymers. Subsequent to the Closing Date, we
became engaged in efforts to identify an operating company to acquire or merge
with through an equity-based exchange transaction that would likely result in a
change in control. As our efforts in engaging with an operating company
subsequent to the Closing Date has not yet commenced, our activities are subject
to significant risks and uncertainties, including the need to raise additional
capital if we are unable to identify an operating company desiring to acquire or
merge with us.
Management is seeking to identify an operating company and engage in a merger or
business combination of some kind, or acquire assets or shares of an entity
actively engaged in a business that generates sustained revenues. Although we
have investigated certain opportunities to determine whether they would have the
potential to add value to us for the benefit of our stockholders, we have not
yet entered into any binding arrangements.
We do not intend to restrict our consideration to any particular business or
industry segment. Because we have limited resources, the scope and number of
suitable candidates to merge with is relatively limited. Because we may
participate in a business opportunity with a newly formed firm, a firm that is
in the development stage, or a firm that is entering a new phase of growth, we
may incur further risk due to the inability of the target's management to have
proven its abilities or effectiveness, or the lack of an established market for
the target's products or services, or the inability to reach profitability in
the next few years.
17
Any business combination or transaction will likely result in a significant
issuance of shares and substantial dilution to our present stockholders. As it
is expected that the closing of such a transaction will result in a change in
control, such transaction is expected to be accounted for as a reverse merger,
with the operating company being considered the legal acquiree and accounting
acquirer, and we would be considered the legal acquirer and the accounting
acquiree. As a result, at and subsequent to closing of any such transaction, the
financial statements of the operating company would become our financial
statements for all periods presented.
Critical Accounting Policies
Our critical accounting policies are summarized in Note 3 to our consolidated
financial statements included in Item 8 of our annual report on Form 10-K for
the fiscal year ended March 31, 2019. However, certain of our accounting
policies require the application of significant judgment by our management, and
such judgments are reflected in the amounts reported in our financial
statements. In applying these policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of
estimates. Those estimates are based on our historical experience, terms of
existing contracts, our observance of market trends, information provided by our
strategic partners and information available from other outside sources, as
appropriate. Actual results may differ significantly from the estimates
contained in our unaudited condensed financial statements. There have been no
changes to our critical accounting policies during the fiscal quarter ended
December 31, 2019.
Results of Operations
As a result of the Asset Sale described above, which closed on January 31, 2020,
our sole business operations of developing, manufacturing, marketing and selling
of advanced polymers ceased. Accordingly, we have recorded all operations for
the three- and nine-month period ended December 31, 2019 as discontinued
operations. The following separately presents our results of continuing
operations, which are composed of costs necessary to operate as a public
company; and results of our discontinued operations, composed revenue and costs
of operating the advanced polymer business.
Results of Continuing Operations
Our loss from continuing operations represents those costs necessary to operate
a public company. During the three months ended December 31, 2019 and 2018,
these costs were approximately $65,000 and $54,000, respectively, an increase of
$11,000 or 20.3%. During the nine months ended December 31, 2019 and 2018, these
costs were approximately $185,000 and $152,000, respectively, an increase of
$33,000 or 21.7%. These costs were composed of accounting fees, professional
fees, regulatory fees, board of directors fees, and director and officer
liability insurance premiums.
Results of Discontinued Operations
For the Three Months Ended December 31, 2019 vs December 31, 2018
Revenues
Total revenues from discontinued operations for the three months ended December
31, 2019 were approximately $808,000 as compared with approximately $889,000 for
the prior year period, a decrease of approximately $81,000, or 9.1%.
Product sales from discontinued operations for the three months ended December
31, 2019 were approximately $457,000 as compared with approximately $608,000 for
the prior year period, a decrease of approximately $151,000, or 24.8%. The
decrease is due to reductions in product shipments to certain key customers.
License and royalty fees from discontinued operations for the three months ended
December 31, 2019 were approximately $351,000 as compared with approximately
$281,000 for the prior year period, an increase of approximately $70,000 or
24.9%. License and royalty fees increased primarily as a result of minimum
royalties earned at calendar year-end pursuant to an arrangement with one of two
customers with whom we have royalty arrangements.
Gross Profit
Gross profit on total revenues from discontinued operations for the three months
ended December 31, 2019 was approximately $614,000, or 76.0% of total revenues,
compared with approximately $630,000, or 70.9% of total revenues, for the prior
year period. Gross profit dollars for the three months ended December 31, 2019
decreased as compared to the prior year period as a result of decreased product
sales. Gross profit as a percentage of total revenues for the three months ended
December 31, 2019 as compared to the prior year period increased primarily due
to increased fees from royalties.
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Gross profit on product sales from discontinued operations for the three months
ended December 31, 2019 was approximately $263,000, or 57.6% of product sales,
compared with approximately $349,000, or 57.4% of product sales, for the prior
year period. Although gross profit as a percentage of product sales remained
fairly stable for the three months ended December 31, 2019, gross profit dollars
decreased primarily due to decreased product sales in the three months ended
December 31, 2019 as compared to the comparable prior year period.
Research, Development and Regulatory Expenses
Research and development expenses of discontinued operations for the three
months ended December 31, 2019 were approximately $103,000 as compared with
approximately $77,000 for the prior year period, an increase of approximately
$26,000, or 33.8%. Research and development expense increased primarily as a
result of increases in payroll costs and outside services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of discontinued operations for the
three months ended December 31, 2019 were approximately $495,000 as compared
with approximately $271,000 for the prior year period, an increase of
approximately $224,000, or 82.7%. Selling, general and administrative expenses
primarily increased as a result of increases in payroll costs in the sales and
marketing department, executive management bonus, and outside consulting
services.
Gain on Disposition of Sale-Leaseback Assets
Gain on disposition of sale-leaseback assets for the three months ended December
31, 2019 was approximately $34,000 as compared to approximately $348,000 for the
comparable prior year period, a decrease of approximately $314,000. The decrease
is primarily a result of recording the affect of the gain on the disposition of
sale-leaseback assets in the prior year period.
Interest Expense
Interest expense of continuing operations for the three months ended December
31, 2019 was approximately $136,000 as compared to approximately $94,000 for the
comparable prior year period, an increase of $42,000 or 44.7%. Interest expense
is composed primarily of (i) interest accrued in connection with the financing
obligation of approximately $87,000 and $88,000 for the three months ended
December 31, 2019 and 2018, respectively; and (ii) accrual of interest of
approximately $32,000 on facility lease obligations for the three months ended
December 31, 2019.
For the Nine Months Ended December 31, 2019 vs December 31, 2018
Revenues
Total revenues from discontinued operations for the nine months ended December
31, 2019 were approximately $2,435,000 as compared with approximately $2,272,000
for the prior year period, an increase of approximately $163,000, or 7.2%.
Product sales from discontinued operations for the nine months ended December
31, 2019 were approximately $1,632,000 as compared with approximately $1,564,000
for the prior year period, an increase of approximately $68,000, or 4.4%. The
slight increase is due to greater product shipments to certain key customers
during the two fiscal quarters ended September 30, 2019 which offset the reduced
product shipments during the fiscal quarter ended December 31, 2019.
License and royalty fees from discontinued operations for the nine months ended
December 31, 2019 were approximately $803,000 as compared with approximately
$708,000 for the prior year period, an increase of approximately $95,000 or
13.4%. License and royalty fees increased primarily as a result of minimum
royalties earned at calendar year-end pursuant to an arrangement with one of two
customers with whom we have royalty arrangements.
Gross Profit
Gross profit on total revenues from discontinued operations for the nine months
ended December 31, 2019 was approximately $1,794,000, or 73.7% of total
revenues, compared with approximately $1,602,000, or 70.5% of total revenues,
for the prior year period. Gross profit dollars and gross profit as a percentage
of total revenues for the nine months ended December 31, 2019 increased as
compared to the prior year period as a result of slight increases in both
product sales and royalties.
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Gross profit on product sales from discontinued operations for the nine months
ended December 31, 2019 was approximately $991,000, or 60.7% of product sales,
compared with approximately $894,000, or 57.2% of product sales, for the prior
year period. Gross profit dollars and gross profit as a percentage of total
revenues for the nine months ended December 31, 2019 increased as compared to
the prior year period as a result of the increase in product sales.
Research, Development and Regulatory Expenses
Research and development expenses of discontinued operations for the nine months
ended December 31, 2019 were approximately $280,000 as compared with
approximately $253,000 for the prior year period, an increase of approximately
$27,000, or 10.7%. Research and development expense increased primarily as a
result of increases in payroll costs and outside services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of discontinued operations for the
nine months ended December 31, 2019 were approximately $1,049,000 as compared
with approximately $847,000 for the prior year period, an increase of
approximately $202,000, or 23.9%. Selling, general and administrative expenses
primarily increased as a result of increases in payroll costs in the sales and
marketing department, executive management bonus, and outside consulting
services.
Gain on Disposition of Sale-Leaseback Assets
Gain on disposition of sale-leaseback assets for the three months ended December
31, 2019 was approximately $34,000 as compared to approximately $382,000 for the
comparable prior year period, a decrease of approximately $314,000. The decrease
is primarily a result of recording the affect of the gain on the disposition of
sale-leaseback assets in the prior year period.
Interest Expense
Interest expense of continuing operations for the nine months ended December 31,
2019 was approximately $370,000 as compared to approximately $282,000 for the
comparable prior year period, an increase of $88,000 or 31.2%. Interest expense
is composed primarily of (i) interest accrued in connection with the financing
obligation of approximately $262,000 and $263,000 for the nine months ended
December 31, 2019 and 2018, respectively; (ii) accrual of interest of
approximately $32,000 on facility lease obligations for the nine months ended
December 31, 2019; and (iii) accrual of interest of approximately $46,000 on
local regulatory obligations for the nine months ended December 31, 2019.
Liquidity and Capital Resources
As of December 31, 2019, we had cash of approximately $447,000 as compared to a
cash balance of approximately $172,000 as of March 31, 2019.
During the nine months ended December 31, 2019, we had net cash of approximately
$225,000 provided by operating activities as compared with net cash of
approximately $22,000 used in operating activities for the prior year period.
Our cash flows provided by operating activities of continuing operations in the
approximate amount of $118,000 for the nine months ended December 31, 2019
consisted primarily of (i) collections of accounts receivable-trade of
approximately $270,000; (ii) increases in aggregate accounts payable and accrued
expenses of approximately $134,000; and (iii) increase in customer advances of
approximately $167,000 of which approximately $191,000 represented and advance
from one customer for future shipments. These cash flows provided by operating
activities of continuing operations were primarily offset by (i) our loss from
continuing operations of $185,000; (ii) increases of accounts receivables on
royalty arrangements of approximately $100,000; and (iii) increases of prepaid
expenses for professional fees related to the sale of asset transaction. Our
cash flows used in operating activities of continuing operations in the
approximate amount of $317,000 for the nine months ended December 31, 2018
consisted primarily of (i) our loss from continuing operations of approximately
$152,000; (ii) increases in accounts receivable-trade of approximately $234,000;
and (iii) decreases in aggregate accounts payable, accrued expenses and customer
advances of approximately $77,000. These cash flows used in operating activities
of continuing operations were primarily offset by increases of collections on
accounts receivables on royalty arrangements of approximately $127,000.
Our cash flows provided by operating activities of discontinued operations in
the approximate amount of $107,000 for the nine months ended December 31, 2019
consisted primarily of income from discontinued operations of approximately
$129,000 offset by the additional net gain on disposition of sale-leaseback
asset and extinguishment of long-term financing obligation of approximately
$34,000. Our cash flows provided by operating activities of discontinued
operations in the approximate amount of $295,000 for the nine months ended
December 31, 2018 consisted primarily of income from discontinued operations of
approximately $602,000 offset by the net gain on disposition of sale-leaseback
asset and extinguishment of long-term financing obligation of approximately
$382,000.
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During the nine months ended December 31, 2019, we provided cash of $50,000 for
financing activities. We issued 830,500 shares and 656,250 shares of our common
stock pursuant to the exercise of common stock purchase warrants and incentive
stock options, respectively, which were purchased for cash in the approximate
aggregate amount of $65,000. We also repaid two notes payable to an affiliate of
our chief executive officer, in the aggregate principal amount of $125,000. In
lieu of a cash payment for the repayment of these notes, the affiliate allowed
our chief executive officer to exercise a portion of his non-qualified stock
options to purchase 2,083,333 shares of our common stock. We issued an
additional 3,201,667 shares of our common stock pursuant to the cashless
exercise of non-qualified stock options granted to our directors, employees and
a consultant.
On January 31, 2020 (the "Closing Date"), we completed the sale of substantially
all of our assets (the "Asset Sale") for a total purchase price of $7,250,000
pursuant to an Asset Purchase Agreement entered into between us and Mitsubishi
Chemical Performance Polymers, Inc., a Delaware corporation ("MCPP"). Prior to
the Closing Date, we developed and manufactured advanced polymer materials which
provide critical characteristics in the design and development of medical
devices. Our biomaterials were marketed and sold to medical device manufacturers
who used our advanced polymers in devices designed for treating a broad range of
anatomical sites and disease states.
As a result of the Asset Sale, we ceased operating as a developer, manufacturer,
marketer and seller of advanced polymers. Subsequent to the Closing Date, we
became engaged in efforts to identify an operating company to acquire or merge
with through an equity-based exchange transaction that would likely result in a
change in control. As our efforts in engaging with an operating company
subsequent to the Closing Date has not yet commenced, our activities are subject
to significant risks and uncertainties, including the need to raise additional
capital if we are unable to identify an operating company desiring to acquire or
merge with us.
Our financial statements have been presented on the basis that we are a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. At December 31, 2019, we recorded
our normal business operations as discontinued operations as a result of the
previously described Asset Sale. On the Closing Date we received net proceeds
from the Asset Sale of approximately $6,100,000. Within ninety (90) days of the
Closing Date, the Board of Directors is expected to declare a distribution of
the net proceeds from the Asset Sale, after making adjustments for (i)
collection of accounts receivable retained as of January 31, 2020, (ii) payment
of accounts payable assumed as of January 31, 2020; and (iii) retention of a
reasonable amount of cash for anticipated future obligations. As a result, we
expect our funds will not be sufficient to meet our needs for more than twelve
months from the date of issuance of these financial statements. Accordingly,
management believes there is substantial doubt about our ability to continue as
a going concern.
Management is seeking to identify an operating company for the purpose of
effecting a merger or business combination, or to acquire assets or shares of an
entity actively engaged in a business that generates sustained revenues.
Although we have investigated certain opportunities to determine whether they
would have the potential to add value to us for the benefit of our stockholders,
we have not yet entered into any binding arrangements.
We do not intend to restrict our consideration to any particular business or
industry segment. Because we have limited resources, the scope and number of
suitable candidates to merge with is relatively limited. Because we may
participate in a business opportunity with a newly formed firm, a firm that is
in the development stage, or a firm that is entering a new phase of growth, we
may incur further risk due to the inability of the target's management to have
proven its abilities or effectiveness, or the lack of an established market for
the target's products or services, or the inability to reach profitability in
the next few years.
Any business combination or transaction will likely result in a significant
issuance of shares and substantial dilution to our present stockholders. As it
is expected that the closing of such a transaction will result in a change in
control, such transaction is expected to be accounted for as a reverse merger,
with the operating company being considered the legal acquiree and accounting
acquirer, and we would be considered the legal acquirer and the accounting
acquiree. As a result, at and subsequent to closing of any such transaction, the
financial statements of the operating company would become our financial
statements for all periods presented.
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Commitments
We do not have any long-term commitments at December 31, 2019.
Off-Balance Sheet Arrangements
As of December 31, 2019, 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.
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