Attached files
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EX-32.1 - EXHIBIT 32.1 - RESEARCH PHARMACEUTICAL SERVICES, INC. | c92451exv32w1.htm |
EX-10.1 - EXHIBIT 10.1 - RESEARCH PHARMACEUTICAL SERVICES, INC. | c92451exv10w1.htm |
EX-31.1 - EXHIBIT 31.1 - RESEARCH PHARMACEUTICAL SERVICES, INC. | c92451exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - RESEARCH PHARMACEUTICAL SERVICES, INC. | c92451exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - RESEARCH PHARMACEUTICAL SERVICES, INC. | c92451exv31w2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-52981
RESEARCH PHARMACEUTICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-4322769 | |
(State or other jurisdiction of incorporation | (IRS Employer Identification Number) | |
or organization) | ||
520 Virginia Drive | ||
Fort Washington, PA | 19034 | |
(Address of principal executive offices) | (Zip code) |
(215) 5400700
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of each of the issuer classes of common stock as of the latest
practicable date,
Class | Outstanding at November 13, 2009 | |
Common Stock, par value $0.0001 per share | 37,277,808 |
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2
Part I. Financial Information
Item 1. | Financial Statements |
ReSearch Pharmaceutical Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,193,010 | $ | 6,565,003 | ||||
Restricted cash |
4,911,223 | 7,247,532 | ||||||
Accounts receivable, less allowance for
doubtful accounts of $806,000 at September
30, 2009 and $654,000 at December 31, 2008,
respectively |
50,774,249 | 43,225,016 | ||||||
Current deferred tax asset |
989,433 | 970,797 | ||||||
Prepaid expenses and other current assets |
1,893,342 | 2,377,838 | ||||||
Total current assets |
$ | 64,761,257 | $ | 60,386,186 | ||||
Property and equipment, net |
6,043,407 | 5,993,386 | ||||||
Other assets |
1,351,173 | 1,179,018 | ||||||
Intangible assets subject to amortization, net |
3,145,737 | 3,880,000 | ||||||
Goodwill |
17,323,504 | 15,145,585 | ||||||
Deferred tax asset |
504,366 | 504,366 | ||||||
Total assets |
$ | 93,129,444 | $ | 87,088,542 | ||||
Liabilities and stockholders equity (deficit) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,995,639 | $ | 3,496,309 | ||||
Accrued expenses |
12,654,901 | 12,069,957 | ||||||
Customer deposits |
9,411,043 | 7,247,532 | ||||||
Deferred revenue |
6,605,575 | 4,781,935 | ||||||
Line of credit |
12,003,517 | 7,500,000 | ||||||
Current portion of capital lease obligations |
421,984 | 682,695 | ||||||
Total current liabilities |
$ | 44,092,659 | $ | 35,778,428 | ||||
Customer deposits |
| 4,500,000 | ||||||
Deferred tax liability |
1,005,222 | 1,331,955 | ||||||
Other liabilities |
2,009,897 | 2,323,794 | ||||||
Capital lease obligations, less current portion |
548,573 | 871,963 | ||||||
Total liabilities |
$ | 47,656,351 | $ | 44,806,140 | ||||
Stockholders equity: |
||||||||
Common stock, $.0001 par value: |
||||||||
Authorized shares 150,000,000 issued and
outstanding shares 37,277,808 and
36,746,291 at September 30, 2009 and
December 31, 2008, respectively |
3,728 | 3,675 | ||||||
Additional paid-in capital |
45,457,670 | 44,083,184 | ||||||
Accumulated other comprehensive (loss) income |
(11,075 | ) | 155,535 | |||||
Retained earnings (accumulated deficit) |
22,770 | (1,959,992 | ) | |||||
Total stockholders equity |
$ | 45,473,093 | $ | 42,282,402 | ||||
Total liabilities and stockholders equity |
$ | 93,129,444 | $ | 87,088,542 | ||||
Please see accompanying notes.
3
ReSearch Pharmaceutical Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Service revenue |
$ | 51,669,235 | $ | 39,113,267 | $ | 145,374,471 | $ | 117,447,462 | ||||||||
Reimbursement revenue |
5,588,148 | 4,900,378 | 16,528,476 | 13,249,875 | ||||||||||||
Total revenue |
57,257,383 | 44,013,645 | 161,902,947 | 130,697,337 | ||||||||||||
Direct costs |
37,167,441 | 29,555,433 | 105,327,137 | 87,948,270 | ||||||||||||
Reimbursable out-of-pocket costs |
5,588,148 | 4,900,378 | 16,528,476 | 13,249,875 | ||||||||||||
Selling, general, and administrative expenses |
11,279,779 | 7,845,537 | 32,370,791 | 22,725,789 | ||||||||||||
Depreciation and amortization |
884,177 | 449,187 | 2,554,806 | 1,233,451 | ||||||||||||
Income from operations |
2,337,838 | 1,263,110 | 5,121,737 | 5,539,952 | ||||||||||||
Interest expense |
286,802 | 91,089 | 757,670 | 231,020 | ||||||||||||
Interest income |
105,164 | 94,189 | 272,993 | 256,190 | ||||||||||||
Net income before provision for income taxes |
2,156,200 | 1,266,210 | 4,637,060 | 5,565,122 | ||||||||||||
Provision for income taxes |
1,162,167 | 517,971 | 2,654,298 | 2,340,750 | ||||||||||||
Net income |
$ | 994,033 | $ | 748,239 | $ | 1,982,762 | $ | 3,224,372 | ||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | 0.03 | $ | 0.02 | $ | 0.05 | $ | 0.10 | ||||||||
Diluted |
$ | 0.03 | $ | 0.02 | $ | 0.05 | $ | 0.09 | ||||||||
Weighted average number of common shares
outstanding: |
||||||||||||||||
Basic |
37,231,635 | 32,547,406 | 36,910,087 | 32,507,708 | ||||||||||||
Diluted |
38,141,116 | 34,049,551 | 37,955,539 | 34,069,060 |
Please see accompanying notes.
4
ReSearch Pharmaceutical Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ending September 30, | ||||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Net income |
$ | 1,982,762 | $ | 3,224,372 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation and amortization |
2,554,806 | 1,233,451 | ||||||
Stock-based compensation |
453,630 | 413,771 | ||||||
Deferred tax benefit |
(317,115 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(7,298,979 | ) | (1,897,447 | ) | ||||
Prepaid expenses and other assets |
383,865 | (968,379 | ) | |||||
Accounts payable |
(582,190 | ) | 17,973 | |||||
Accrued expenses and other liabilities |
1,849,424 | (518,930 | ) | |||||
Customer deposits |
(2,559,107 | ) | (307,155 | ) | ||||
Deferred revenue |
1,761,991 | (1,640,451 | ) | |||||
Net cash used in operating activities |
(1,770,913 | ) | (442,795 | ) | ||||
Investing activities |
||||||||
Change in restricted cash |
2,558,927 | 307,155 | ||||||
Business combinations, net of cash acquired |
(3,092,758 | ) | | |||||
Purchase of property and equipment |
(1,574,894 | ) | (1,128,412 | ) | ||||
Net cash used in investing activities |
(2,108,725 | ) | (821,257 | ) | ||||
Financing activities |
||||||||
Net borrowings on line of credit |
4,503,517 | | ||||||
Principal payments on capital lease obligations |
(584,101 | ) | (496,172 | ) | ||||
Proceeds from exercise of options |
254 | 8,951 | ||||||
Cross Shore merger consideration, net of fees paid |
| (17,880 | ) | |||||
Net cash provided by (used in) financing activities |
3,919,670 | (505,101 | ) | |||||
Effect of exchange rates on cash and cash equivalents |
(412,025 | ) | 26,915 | |||||
Net change in cash and cash equivalents |
(371,993 | ) | (1,742,238 | ) | ||||
Cash and cash equivalents, beginning of period |
6,565,003 | 11,060,255 | ||||||
Cash and cash equivalents, end of period |
$ | 6,193,010 | $ | 9,318,017 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 757,670 | $ | 231,020 | ||||
Income taxes |
$ | 4,531,026 | $ | 2,924,777 | ||||
Supplemental disclosures of noncash financing activities |
||||||||
Issuance of shares in connection with business combinations |
$ | 918,583 | $ | | ||||
Acquisition of fixed assets under capital leases |
$ | | $ | 1,211,158 | ||||
Please see accompanying notes.
5
ReSearch Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2009 (unaudited)
1. Business
ReSearch Pharmaceutical Services, Inc. and Subsidiaries (the Company or RPS) is a next
generation CRO (clinical research organization) serving biotechnology and pharmaceutical companies,
which the Company refers to collectively as the bio-pharmaceutical industry. The RPS business model
combines the expertise of a traditional CRO with the ability to provide flexible outsourcing
solutions that are fully integrated within the Companys clients clinical infrastructure. The
Company is able to leverage its high degree of clinical expertise, industry knowledge and
specialization to reduce the expense and time frame of clinical development that meets the varied
needs of small, medium and large bio-pharmaceutical companies.
On August 30, 2007, our predecessor company (Former RPS) merged with and into a wholly-owned
subsidiary of Cross Shore Acquisition Corporation (Cross Shore), a blank check company
incorporate in Delaware in 2006 as a vehicle to acquire one or more operating companies in the
United States. Prior to the merger, Cross Shore completed an initial public offering on the
Alternative Investment Market (AIM) of the London Stock Exchange to raise proceeds to fund such
an acquisition. As a result of the merger, Cross Shore changed its name to RPS, and RPS is now a
holding company for, and conducts substantially all of its operations through its wholly-owned
subsidiary, ReSearch Pharmaceutical Services, LLC.
On September 4, 2009 RPS delisted its common stock from AIM following approval of the delisting by
the requisite number of shareholders. Trading in RPS warrants to purchase common stock, also
listed on AIM, was suspended following delisting of the common sotck, and the warrants were
delisted on October 5, 2009. RPS common stock and warrants are no longer traded on AIM, but remain
transferable as described in the proxy statement which was mailed to shareholders and warrant
holders on July 24, 2009 and filed with the SEC on July 23,
2009, in each case subject to applicable securities laws.
The Company has wholly owned subsidiaries in over 40 countries around the world with its core
operations located in North America, Latin America, Europe and Asia.
2. Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed
consolidated balance sheet as of September 30, 2009 and the condensed consolidated statements of
operations and cash flows for the three months and nine months ended September 30, 2009 and 2008
are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which
we consider necessary for a fair presentation of the financial position, operating results and cash
flows for the periods presented. The condensed consolidated balance sheet at December 31, 2008 has
been derived from audited financial statements.
Although we believe that the disclosures in these financial statements are adequate to make the
information presented not misleading, certain information and footnote information normally
included in financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results for any future interim
period or for the entire year. The accompanying financial statements should be read in conjunction
with the financial
statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2008.
6
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to credit risk, consist principally of
cash and accounts receivable. The Company performs periodic evaluations of the financial
institutions in which its cash is invested. The majority of the Companys revenues and accounts
receivable are derived from pharmaceutical companies located in the United States. The Companys
two largest customers accounted for approximately 17% and 12% of service revenues during the nine
months ended September 30, 2009 and the three largest customers represented approximately 20%, 12%
and 12% of service revenues during the nine months ended September 30, 2008. The Companys two
largest customers accounted for approximately 16% and 10% of service revenues during the three
months ended September 30, 2009 and the three largest customers
represented approximately 20%, 12%
and 12% of service revenues during the three months ended September 30, 2008.
The two largest customers represented approximately 14% and 11% of the accounts receivable balance
at September 30, 2009, and approximately 14% and 13% of the accounts receivable balance at December
31, 2008. No other customers represented more than 10% of net service revenues or accounts
receivable during those periods or at those times. The Company provides an allowance for doubtful
accounts based on experience and specifically identified risks. Accounts receivable are carried at
fair value and charged off against the allowance for doubtful accounts when management determines
that recovery is unlikely and the Company ceases collection efforts.
Revenue and Cost Recognition
The majority of the Companys service revenues are derived from fee-for-service contracts, some of
which are fixed-price contracts. Revenues and the related costs of fee-for-service contracts are
recognized in the period in which services are performed. Fixed-price contract revenue is
recognized as services are performed, on a proportional performance basis, based generally on the
ratio that costs incurred to date bear to estimated total costs at completion. Revenue related to
contract modifications is recognized when realization is assured and the amounts are reasonably
determinable. Adjustments to contract estimates are made in the periods in which the facts that
require the revisions become known. When the revised estimate indicates a loss, such loss is
provided for in the financial statements during that period. No such losses were recognized in the
three or nine months ended September 30, 2009 or 2008. Deferred revenue represents amounts billed
to customers in excess of revenue recognized. Accounts receivable from customers, which represent
deposits to be applied to customer invoices in future years or returned to the customer upon
expiration of the contract are recorded in long term customer deposits.
FASB guidance requires reimbursable out-of-pocket expenses to be characterized as revenue in the
statements of operations. Reimbursements for out-of-pocket expenses included in total revenue in
the Companys consolidated statements of operations were $5,588,148 and $4,900,378 for the three
months ended September 30, 2009 and 2008, respectively, and were $16,528,476 and $13,249,875 for
the nine months ended September 30, 2009 and 2008, respectively.
The Company excludes investigator fees from its out-of-pocket expenses because these fees are
funded from the customers restricted cash and are recorded on a pass-through basis without risk
or reward to the Company. Investigator fees paid on behalf of clients were approximately $1,157,000
and $1,681,000 for the three months ended September 30, 2009 and 2008 respectively and
approximately $2,412,000 and $4,320,000 for the nine months ended September 30, 2009 and 2008
respectively.
7
Income Taxes
The Company accounts for income taxes using an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and
amounts reportable for income tax purposes. On January 1, 2007 the Company adopted the FASB
guidance related to accounting for uncertainty in income taxes. This guidance creates a single
model to address uncertainty in tax positions and clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet before it is
recognized in the financial statements.
The effective tax rate for the three and nine months ended September 30, 2009 is higher than
the federal statutory rate, as the Company is not recording a tax benefit for net operating losses
generated in certain of its foreign subsidiaries as it may not realize the tax benefit of these net
operating losses.
Foreign Currency Translation
The financial statements of the Companys foreign subsidiaries have been translated into U.S.
dollars in accordance with the FASB guidance on foreign currency translation. All balance sheet
accounts have been translated using the exchange rates in effect at the balance sheet dates. Income
statement amounts have been translated using average exchange rates in effect for the relevant
periods. The gains and losses resulting from the changes in exchange rates during the year have
been reported separately in other comprehensive income in the consolidated financial statements.
Stock-Based Compensation
The per-share weighted average fair value of the options granted during the three months ended
September 30, 2009 and 2008 were estimated at $0.88 and $1.89, respectively while the per-share
weighted average fair value of the options granted during the nine months ended September 30, 2009
and 2008 were estimated at $0.87 and $1.98, respectively using the Black-Scholes option-pricing
model with the following weighted average assumptions which are based upon Company history or
industry comparative information:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Expected volatility |
50 | % | 50 | % | 50 | % | 50 | % | ||||||||
Risk-free interest rate |
2.73 | % | 3.21 | % | 2.19 | % | 3.02 | % | ||||||||
Expected life |
6 years | 6 years | 6 years | 6 years |
Prior to August 30, 2007, the Companys common stock was not publicly traded, and the expected
volatility was calculated for each date of grant based on an alternative method (defined as
calculated value). Subsequent to August 30, 2007, as a public company on the AIM, the Company
continued to utilize the calculated value for expected volatility as a sufficient level of history
was not available as a publicly traded company. In September and October 2009, the Company delisted
its common stock and warrants from AIM, respectively, and its common stock and warrants are no
longer publicly traded. As such, the Company will continue to use the calculated value. The Company
identified similar public entities for which share price information is available and has
considered the historical volatility of these entities share prices in determining its estimated
expected volatility. The Company used the average volatility of these guideline companies over a
six-year period, consistent with the expected term calculated pursuant to FASB guidance. From
August 30, 2007 through the September 2009 AIM delisting date, the Company utilized the quoted
stock price on the AIM as a determinant of fair value of the Companys common stock. Subsequent to
the AIM delisting date, the Company estimates the fair value of its common stock using the market
and income valuation approaches, with the assistance of a valuation consultant. Stock based
compensation expense for the three months ended September 30, 2009 and 2008 related to share based
service awards was $144,955 and $146,518, respectively, and was $453,630 and $413,771 for the nine
months ended September 30, 2009 and 2008 respectively and is included in selling, general, and
administrative expenses in the accompanying consolidated statements of operations. The Company
recognizes the compensation expense of such share-based service awards on a straight-line basis.
Total compensation cost of options granted but not yet vested as of September 30, 2009 was $0.6
million net of estimated forfeitures, which is expected to be recognized over the weighted average
period of 1.3 years.
8
Segment Information
Operating segments are identified as components of an enterprise about which separate financial
information is available for evaluation by the chief operating decision-maker, or decision-making
group, in making decisions on how to allocate resources and assess performance. The Company views
its operations and manages its business as one operating segment.
The Companys foreign operations accounted for approximately 16% and 5% of service revenues during
the nine months ended September 30, 2009 and 2008, respectively.
In addition, approximately 37% and
34% of the Companys consolidated tangible assets are located in foreign locations at September 30, 2009 and
December 31, 2008, respectively.
Recent Accounting Pronouncements
The Company adopted new accounting guidance on fair value measurements effective January 1, 2008,
for financial assets and liabilities. In addition, effective January 1, 2009, the Company adopted
this guidance as it relates to nonfinancial assets and liabilities that are not recognized or
disclosed at fair value in the financial statements on at least an annual basis. This guidance
defines fair value as the price that would be received to sell an asset or paid to transfer a
liability, referred to as the exit price, in an orderly transaction between market participants at
the measurement date. The standard outlines a valuation framework and creates a fair value
hierarchy in order to increase the consistency and comparability of fair value measurements and the
related disclosures. In determining fair value of financial assets, the Company primarily uses
prices and other relevant information generated by market transactions involving identical or
comparable assets, called the market approach. As of September 30, 2009 and December 31, 2008, the
fair value of all of the Companys financial assets are based on level one observable inputs. The
implementation of this guidance for nonfinancial assets and liabilities did not have an impact on
the Companys consolidated financial statements as of September 30, 2009. The provisions of this
guidance will be applied at such time a fair value measurement of a nonfinancial asset or liability
is required, which may result in a fair value that is materially different than would have been
calculated prior to the adoption of this guidance.
In December 2007, the FASB issued new guidance related to business combinations. This guidance
retains the fundamental requirements of existing guidance that the acquisition method of accounting
be used for all business combinations and for an acquirer to be identified for each business
combination. This guidance defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as the date the
acquirer achieves control. This guidance was effective for the Company beginning January 1, 2009
and the impact of the adoption of this guidance depends upon the nature and terms of business
combinations that the Company consummates on or after January 1, 2009.
In June 2008, the FASB issued new guidance related to assessing whether an equity-linked financial
instrument (or embedded feature) is indexed to an entitys own stock for the purposes of
determining whether such equity-linked financial instrument (or embedded feature) is subject to
derivative accounting The Company adopted this new guidance effective January 1, 2009. The
adoption of this guidance did not have a material impact on our results of operations or financial
condition.
In May 2009, the FASB issued new guidance on subsequent events. The standard provides guidance on
managements assessment of subsequent events and incorporates this guidance into accounting
literature. The standard is effective prospectively for interim and annual periods ending after
June 15, 2009 and the Company adopted this guidance commencing with our June 30, 2009 consolidated
financial statements. The implementation of this standard did not have a material impact on our
consolidated financial position
and results of operations. We have evaluated subsequent events through November 13, 2009, the date
of issuance of our consolidated balance sheet and results of operations.
9
In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as
well as annual financial statements in order to provide more timely information about the effects
of current market conditions on financial instruments. The guidance is effective for interim and
annual periods ending after June 15, 2009, and the Company adopted this guidance commencing with
our June 30, 2009 consolidated financial statements. The implementation of this standard did not
have a material impact on our consolidated balance sheet and results of operations.
In June 2009, FASB Accounting Standards Codification (Codification) was issued, effective for
financials statements issued for interim and annual periods ending after September 15, 2009. The
Codification supersedes literature of the FASB, Emerging Issues Task Force and other sources. The
Codification did not change U.S. generally accepted accounting principles. The implementation of
this standard did not have a material impact on our consolidated balance sheet and results of
operations.
Net Income Attributable to Common Shares
Basic net income per share is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the periods presented. Diluted net income per share is
computed by dividing net income by the weighted average number of shares of common stock
outstanding during the periods plus the dilution that would occur upon the exercise or conversion
of stock options or common stock warrants.
The following table is a reconciliation of the numerator and denominator of the computation of
basic and diluted net income per share.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income |
$ | 994,033 | $ | 748,239 | $ | 1,982,762 | $ | 3,224,372 | ||||||||
Weighted average
common shares
outstanding basic |
37,231,635 | 32,547,406 | 36,910,087 | 32,507,708 | ||||||||||||
Dilutive effect of
stock options and
warrants |
909,481 | 1,502,145 | 1,045,452 | 1,561,352 | ||||||||||||
Weighted average
common shares
outstanding
diluted |
38,141,116 | 34,049,551 | 37,955,539 | 34,069,060 | ||||||||||||
Warrants outstanding totaling 1.4 million shares of the Companys common stock, along with options
to purchase 975,853 shares of the Companys common stock were excluded from the computation of
diluted weighted average shares outstanding for the three and nine months ended September 30, 2009 because
their effect would have been anti-dilutive. Warrants outstanding
totaling $1.4 million shares of the Companys common stock,
along with options to purchase 962,447 shares of the Companys
common stock were excluded from the computation of diluted weighted
average shares outstanding for the three and nine months ended
September 30, 2008 because their effect would have been
anti-dilutive. Outstanding stock options and warrants could
potentially dilute earnings per share in the future.
Comprehensive Income
The Companys comprehensive income was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income as reported |
$ | 994,033 | $ | 748,239 | $ | 1,982,762 | $ | 3,224,372 | ||||||||
Other comprehensive
income (loss): |
||||||||||||||||
Foreign currency
translation
adjustment |
217,565 | 85,255 | (166,610 | ) | 26,915 | |||||||||||
Comprehensive income |
$ | 1,211,598 | $ | 833,494 | $ | 1,816,152 | $ | 3,251,287 | ||||||||
10
3. Acquisitions
2009 Acquisition
Paramax International Inc. (Paramax)
On July 7, 2009, RPS acquired the outstanding shares of Paramax for consideration of $1.0 million
in cash and 530,973 shares of common stock (the Paramax Shares) issued to Paramaxs sole
shareholder (the Paramax Acquisition). Paramax, which is active in the same fields as RPS,
provides the Company with opportunities in the Asia-Pacific market and complements its current
operations in the Americas and Europe. In addition, the acquisition will provide RPS with greater
scale to meet the growing needs of its customers in the rapidly expanding market for globally
integrated clinical research services. The Paramax Shares were valued by management utilizing the
assistance of a valuation specialist at $1.73 per share, which resulted in total acquisition
consideration of approximately $1.9 million. The shareholder of Paramax has entered into a share
escrow agreement whereby all of the Paramax Shares are held in escrow, to be released in equal
portions on October 7, 2009, July 7, 2010 and January 31, 2011, subject to there being no indemnity
claims outstanding (as defined within the acquisition agreement).
Accordingly, 176,991 of the Paramax Shares were released from escrow
on October 7, 2009. In addition, the shareholder of
Paramax has agreed to a 24 month lock-up on all Paramax Shares,
commencing on the date of closing of the Paramax Acquisition. Paramax, founded in 2007, is
located in Beijing, China. Paramax operates throughout China and the AsiaPacific market,
providing clinical research services to the bio-pharmaceutical industry.
The acquisition has been accounted for as a purchase. Accordingly, the results of operations of
Paramax have been included in the consolidated financial statements commencing July 7, 2009. A
preliminary allocation of the purchase price is outlined below:
Purchase Price: |
||||
Cash paid |
$ | 1,000,000 | ||
Value of RPS Shares |
918,583 | |||
Total purchase price |
$ | 1,918,583 | ||
Allocation of Purchase Price:
Cash |
$ | 163,692 | ||
Accounts receivable |
87,367 | |||
Fixed assets |
31,780 | |||
Other assets |
9,130 | |||
Goodwill |
1,504,355 | |||
Customer lists |
18,000 | |||
Non compete agreements |
117,000 | |||
Current liabilities |
(12,742 | ) | ||
$ | 1,918,583 | |||
The allocation of the purchase price to the estimated fair values of the assets acquired and
liabilities assumed as reflected in the consolidated financial statements is preliminary and
subject to change based on finalization of the Companys valuation of the assets acquired and
liabilities assumed. The Company is currently assessing the fair value of the identifiable tangible
and intangible assets acquired and liabilities assumed. It is expected that the current assets and
liabilities assumed will approximate the values assigned as of the date of the acquisition. A
valuation study is presently being conducted to establish the fair market value of the identifiable
intangibles acquired. The intangible assets acquired consist primarily of customer lists and a
non-compete agreement. The final purchase price allocation to reflect the fair values of the assets
acquired and liabilities assumed will be based on the outcome of the Companys valuation study. The
final valuation is expected to be completed in 2009.
11
2008 Acquisitions
In December 2008, the Company completed the acquisitions of three European companies located in
Spain, France and Germany (the European Acquisitions). The European Acquisitions, which are
active in the same fields as RPS, will provide the Company with opportunities in the European
market and complement its current operations in the Americas. In addition, the European
Acquisitions will provide RPS with greater scale to meet the growing needs of its customers in the
rapidly expanding market for globally integrated clinical research services.
IMEREM
Institute for Medical Research Management and Biometrics Institut für medizinisches
Forschungsmanagement und Biometrie Ein unabhaengiges Forschungsunternehmen GmbH (Imerem)
On December 22, 2008, RPS acquired the outstanding shares of Imerem for a consideration of 2.7
million ($3.9 million) in cash and issuance of 1,296,165 shares of common stock (the Imerem
Shares) issued to Imerems sole shareholder. The Imerem Shares were valued at $1.68 per share,
which, along with transaction costs of approximately $1.0 million that were paid by the Company,
resulted in total acquisition consideration of approximately $7.1 million. The sole shareholder of
Imerem has entered into a share escrow agreement whereby 50 percent of the Imerem Shares are held
in escrow, to be released in equal portions on the first, second and third anniversaries of the
acquisition date, subject to there being no indemnity claims outstanding (as defined within the
acquisition agreement). In addition, the shareholder of Imerem has agreed to a 12 month lock-up on
all Imerem Shares, commencing on the date of closing of the
acquisition. Imerem, founded in 1990, is located in Nürnberg, Germany. Imerem operates
throughout Eastern and Western Europe and Scandinavia, providing clinical research services to the
bio-pharmaceutical industry and academic institutions.
The acquisition has been accounted for as a purchase. Accordingly, the results of operations of
Imerem have been included in the consolidated financial statements commencing December 22, 2008. A
preliminary allocation of the purchase price is outlined below:
Purchase Price: |
||||
Cash paid |
$ | 3,924,089 | ||
Value of RPS Shares |
2,182,742 | |||
Transaction costs |
954,858 | |||
Total purchase price |
$ | 7,061,689 | ||
Allocation of Purchase Price:
Cash |
$ | 1,499,696 | ||
Restricted cash |
1,079,203 | |||
Accounts receivable |
886,369 | |||
Prepaid expense and other current assets |
68,708 | |||
Fixed assets |
101,179 | |||
Goodwill |
4,432,541 | |||
Customer lists |
800,000 | |||
Brand name |
330,000 | |||
Non compete agreements |
350,000 | |||
Accrued Expenses |
(378,583 | ) | ||
Customer deposits |
(1,079,203 | ) | ||
Accounts Payable |
(562,465 | ) | ||
Deferred tax liability |
(465,756 | ) | ||
$ | 7,061,689 | |||
12
The allocation of the purchase price to the estimated fair values of the assets acquired and
liabilities assumed as reflected in the consolidated financial statements is preliminary and
subject to change based on finalization of the Companys valuation of the assets acquired and
liabilities assumed. The Company is currently assessing the fair value of the identifiable tangible
and intangible assets acquired and liabilities assumed. It is expected that the current assets and
liabilities assumed will approximate the values assigned as of the date of the acquisition. A
valuation study is presently being conducted to establish the fair market value of the identifiable
intangibles acquired. The intangible assets acquired consist primarily of customer lists, brand
name and a non-compete agreement. The final purchase price allocation to reflect the fair values of
the assets acquired and liabilities assumed will be based on the final results of a working capital
adjustment and the outcome of the Companys valuation study. The final valuation is expected to be
completed in 2009.
Infociencia, S.L. and Infociencia Clinical Research S.L. (Infociencia)
On December 22, 2008, RPS acquired the outstanding shares of Infociencia for consideration of 2.5
million ($3.6 million) in cash and issuance of 1,404,856 shares of common stock (the Infociencia
Shares) to Infociencias shareholders. The Infociencia Shares were valued at $1.68 which, along
with transaction costs of approximately $1.0 million that were paid by the Company, resulted in
total acquisition consideration of $7.0 million. The shareholders of Infociencia entered into share
escrow agreements whereby 50 percent of the Infociencia Shares are held in escrow, to be released
in equal portions on the first, second and third anniversaries of the acquisition date, subject to
there being no indemnity claims outstanding (as defined within the acquisition agreement). In
addition, the shareholders of Infociencia have agreed to a 12 month lock-up on all of the
Infociencia Shares, commencing on the date of closing of the
acquisition. Infociencia founded in 1998, has offices in Barcelona and Madrid, Spain and
operates throughout Western Europe providing clinical research services to the bio-pharmaceutical
industry, academic and government institutions.
The acquisition has been accounted for as a purchase. Accordingly, the results of operations of
Infociencia have been included in the consolidated financial statements commencing December 22,
2008. A preliminary allocation of the purchase price is outlined below:
Purchase Price: |
||||
Cash paid |
$ | 3,563,536 | ||
Value of RPS Shares |
2,365,778 | |||
Transaction costs |
1,034,929 | |||
Total purchase price |
$ | 6,964,243 | ||
Allocation of Purchase Price:
Cash |
$ | 446,939 | ||
Restricted cash |
4,702,100 | |||
Accounts receivable |
3,612,585 | |||
Prepaid expense and other current assets |
493,413 | |||
Fixed assets |
1,146,736 | |||
Goodwill |
4,872,958 | |||
Customer lists |
280,000 | |||
Brand name |
640,000 | |||
Software |
350,000 | |||
Non compete agreements |
550,000 | |||
Long term debt |
(1,141,933 | ) | ||
Customer deposits |
(4,702,100 | ) | ||
Accounts payable |
(876,983 | ) | ||
Accrued expenses |
(2,863,472 | ) | ||
Deferred tax liability |
(546,000 | ) | ||
$ | 6,964,243 | |||
13
The allocation of the purchase price to the estimated fair values of the assets acquired and
liabilities assumed as reflected in the consolidated financial statements is preliminary and
subject to change based on finalization of the Companys valuation of the assets acquired and
liabilities assumed. The Company is currently assessing the fair value of the identifiable tangible
and intangible assets acquired and liabilities assumed. It is expected that the current assets and
liabilities assumed will approximate the values assigned as of the date of the acquisition. A
valuation study is presently being conducted to establish the fair market value of the software and
the identifiable intangibles acquired. The intangible assets acquired consist primarily of customer
lists, brand name, and non-compete agreements. The final purchase price allocation to reflect the
fair values of the assets acquired and liabilities assumed will be based on the final results of a
working capital adjustment and the outcome of the Companys valuation study. The final valuation is
expected to be completed in 2009.
Therapharm Recherches Th.R. (Therapharm)
On December 23, 2008, RPS acquired the outstanding shares of Therapharm for consideration of 2.6
million ($3.8 million) in cash and issuance of 1,497,864 shares of common stock (the Therapharm
Shares, and along with the Imerem Shares and the Infociencia Shares, the Shares) to Therapharms
shareholder. The Therapharm Shares were valued at $1.68 which, along with transaction costs of
approximately $1.1 million that were paid by the Company, resulted in total acquisition
consideration of $7.4 million. The shareholder of Therapharm entered into a share escrow agreement
whereby 50 percent of the Therapharm Shares are held in escrow, to be released in equal portions on
the first, second and third anniversaries of the acquisition date, subject to there being no
indemnity claims outstanding (as defined within the acquisition agreement). In addition, the
shareholder of Therapharm has agreed to a 12 month lock-up on
all of the Therapharm Shares, commencing on the date of closing of
the acquisition.
Therapharm, founded in 1980, is located in Boulogne Billancourt, France. Therapharm provides
clinical research services to the bio-pharmaceutical industry and operates throughout Western
Europe focusing its efforts on France, Belgium and Switzerland.
The acquisition has been accounted for as a purchase. Accordingly, the results of operations of
Therapharm have been included in the consolidated financial statements commencing December 23,
2008. A preliminary allocation of the purchase price is outlined below:
Purchase Price: |
||||
Cash paid |
$ | 3,799,459 | ||
Value of RPS Shares |
2,522,403 | |||
Transaction costs |
1,103,445 | |||
Total purchase price |
$ | 7,425,307 | ||
Allocation of Purchase Price:
Cash |
$ | 2,356,206 | ||
Restricted cash |
563,896 | |||
Accounts receivable |
3,430,837 | |||
Prepaid expense and other current assets |
632,878 | |||
Fixed assets |
144,265 | |||
Goodwill |
5,943,786 | |||
Customer lists |
280,000 | |||
Brand name |
440,000 | |||
Non compete agreements |
210,000 | |||
Customer deposits |
(563,896 | ) | ||
Accounts payable |
(884,066 | ) | ||
Accrued expenses |
(3,097,466 | ) | ||
Deferred revenue |
(1,710,934 | ) | ||
Deferred tax liability |
(320,199 | ) | ||
$ | 7,425,307 | |||
14
The allocation of the purchase price to the estimated fair values of the assets acquired and
liabilities assumed as reflected in the consolidated financial statements is preliminary and
subject to change based on finalization of the Companys valuation of the assets acquired and
liabilities assumed. The Company is currently assessing the fair value of the identifiable tangible
and intangible assets acquired and liabilities assumed. It is expected that the current assets and
liabilities assumed will approximate the values assigned as of the date of the acquisition. A
valuation study is presently being conducted to establish the fair market value of the identifiable
intangibles acquired. The intangible assets acquired consist primarily of customer lists, brand
names, and a non-compete agreement. The final purchase price allocation to reflect the fair values
of the assets acquired and liabilities assumed will be based on the final results of a working
capital adjustment and the outcome of the Companys valuation study. The final valuation is
expected to be completed in 2009.
The unaudited pro forma information below presents combined results of operations as if the Paramax
Acquisition and the European Acquisitions had occurred as of the beginning of the applicable
reporting periods instead of in July 2009 and December 2008, respectively. The pro forma
information is based on historical results and is not necessarily indicative of the results of
operations of the combined entity had the acquisition occurred at the beginning of the periods
presented, nor is it necessarily indicative of future results.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Service revenue |
$ | 51,669,235 | $ | 45,183,419 | $ | 145,899,447 | $ | 129,717,017 | ||||||||
Reimbursement revenue |
$ | 5,588,148 | $ | 6,843,092 | $ | 16,528,476 | $ | 17,135,303 | ||||||||
Total revenue |
$ | 57,257,383 | $ | 52,724,913 | $ | 162,427,923 | $ | 146,852,320 | ||||||||
Net income |
$ | 994,033 | $ | 1,492,340 | $ | 1,835,222 | $ | 4,689,074 | ||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | 0.03 | $ | 0.04 | $ | 0.05 | $ | 0.13 | ||||||||
Diluted |
$ | 0.03 | $ | 0.04 | $ | 0.05 | $ | 0.12 | ||||||||
Weighted average number of
common shares outstanding: |
||||||||||||||||
Basic |
37,277,808 | 37,277,264 | 37,277,684 | 37,237,566 | ||||||||||||
Diluted |
38,187,289 | 38,779,409 | 38,323,136 | 38,798,918 |
The Shares issued in connection with the consummation of the European Acquisitions were valued by
management utilizing the assistance of a valuation specialist, which resulted in a fair value of
$1.68 per share. This value is also consistent with the trading price of the Companys common
stock on AIM at the time of the European Acquisitions, discounted to reflect the escrow and lock up
arrangements underlying certain of the Shares issued as discussed above.
15
4. Intangible Assets
The following table summarizes the changes in the carrying amount of the Companys goodwill for the
nine months ended September 30, 2009:
Balance as of December 31, 2008 |
$ | 15,145,585 | ||
Purchase accounting adjustments |
412,237 | |||
Goodwill acquired (Paramax) |
1,504,355 | |||
Currency exchange |
261,327 | |||
Balance as of September 30, 2009 |
$ | 17,323,504 | ||
The following tables summarize intangible assets and their amortization as of:
September 30, 2009 | ||||||||||||
Intangible assets subject to amortization | Gross | Accumulated Amortization | Net | |||||||||
Customer contracts and lists |
$ | 3,315,888 | $ | (2,177,425 | ) | $ | 1,138,463 | |||||
Brand name |
1,428,412 | (517,330 | ) | 911,082 | ||||||||
Non-compete agreements |
1,591,495 | (495,303 | ) | 1,096,192 | ||||||||
Total |
6,335,795 | (3,190,058 | ) | 3,145,737 | ||||||||
December 31, 2008 | ||||||||||||
Intangible assets subject to amortization | Gross | Accumulated Amortization | Net | |||||||||
Customer contracts and lists |
$ | 3,280,128 | $ | (1,920,128 | ) | $ | 1,360,000 | |||||
Brand name |
1,410,000 | | 1,410,000 | |||||||||
Non-compete agreements |
1,460,000 | (350,000 | ) | 1,110,000 | ||||||||
Total |
$ | 6,150,128 | $ | (2,270,128 | ) | $ | 3,880,000 | |||||
The estimated amortization expense for each of the five years ending December 31, 2013 is as
follows:
Three Months Ending | ||||||||||
December 31, 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | |||||
$306,000
|
$1,207,000 | $508,000 | $485,000 | $457,000 | $183,000 |
5. Property and Equipment
Property and equipment consist of the following:
September 30, | December 31, | |||||||||
Useful life | 2009 | 2008 | ||||||||
Computers, software and other equipment |
2 to 3 years | $ | 4,990,395 | $ | 5,301,507 | |||||
Automobiles |
1 to 3 years | 1,717,969 | 2,163,123 | |||||||
Leasehold improvements |
7 years | 500,503 | 314,882 | |||||||
Furniture and fixtures |
5 years | 2,178,933 | 2,000,211 | |||||||
9,387,800 | 9,779,723 | |||||||||
Less accumulated depreciation |
(3,344,393 | ) | (3,786,337 | ) | ||||||
$ | 6,043,407 | $ | 5,993,386 | |||||||
Automobiles, computers, software and other equipment include assets acquired under capital lease
obligations (Note 10).
16
6. Accrued Expenses
Accrued expenses consist of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Accrued compensation |
$ | 5,410,181 | $ | 4,280,576 | ||||
Accrued professional fees |
1,640,950 | 1,755,192 | ||||||
Volume rebate accrual |
1,198,184 | 1,049,534 | ||||||
Accrued taxes |
1,667,280 | 1,583,950 | ||||||
Accrued transaction costs |
| 1,573,752 | ||||||
Other |
2,738,306 | 1,826,953 | ||||||
$ | 12,654,901 | $ | 12,069,957 | |||||
7. Lines of Credit
In November 2006, the Company entered into a bank line of credit agreement (the Credit
Agreement), expiring October 31, 2009. The Credit Agreement provided for $15,000,000 of available
borrowings, and was subject to certain borrowing base restrictions. Borrowings under the Credit
Agreement required interest at the Federal Funds open rate, as defined, plus 1%. The Credit
Agreement is secured by all corporate assets and also contains financial and nonfinancial covenants
including restrictions on the payment of dividends, restrictions on acquisitions and restrictions
on the repurchase, redemption, or retirement of outstanding equity. At December 31, 2008, there
were $7.5 million in outstanding borrowings under this line of credit.
In July 2009, the Credit Agreement was amended (the Amended Credit Agreement) to extend the
termination date to October 31, 2012. The Amended Credit Agreement also provides for $30,000,000 of
available borrowings, and is subject to certain borrowing base restrictions. Borrowings under the
Amended Credit Agreement require interest at the Federal Funds open rate, as defined, plus 2%
(4.75% at September 30, 2009). The Amended Credit Agreement remains secured by all corporate assets
and continues the financial and nonfinancial covenants including restrictions on the payment of
dividends, restrictions on acquisitions and restrictions on the repurchase, redemption, or
retirement of outstanding equity present under the Credit Agreement. At September 30, 2009 there
were $12.0 million in outstanding borrowings under this line of credit.
8. Stockholders equity
The Company is authorized to issue up to 1,000,000 shares of Preferred Stock and 150,000,000 shares
of common stock, $.0001 par value. Of the shares authorized, 6,792,271 shares of common stock have
been reserved for issuance pursuant to the Companys equity incentive plans (Note 9).
A total of 1,500,000 shares issued to RPS stockholders were placed in escrow
pursuant to the merger agreement with Cross Shore in August 2007. 60% of the escrow shares
(900,000 shares) were released on August 30, 2008 and the remaining shares were released on August
30, 2009.
The Companys stockholders are granted certain rights to register their shares under the securities
laws of the United States pursuant to two separate registration rights agreements. The
Registration Rights Agreement (as defined below) pertains to those holding shares in RPS prior to
the merger with Cross Shore. The Investor Rights Agreement (as defined below) pertains to those
acquiring shares and warrants in Cross Shores initial public offering in April of 2006.
17
Under the Investor Rights Agreement dated April 24, 2006 (the Investor Rights Agreement), the
Company is required to file a shelf registration statement on Form S-3 within 90 days after
becoming eligible to do so. In addition the holders of the Companys stock and warrants are
entitled to no more than three demand registrations (covering in each case a minimum of 15% of the
shares then outstanding) and piggyback registration rights. If the Company files a shelf
registration for resale of shares, demand and piggyback registration rights will be suspended
except for underwritten offerings. Registration rights are generally available only for stock that
is subject to restrictions or transfer under the U.S. securities laws.
Under the terms of the Registration Rights Agreement dated August 30, 2007 (the Registration
Rights Agreement), the Company will grant the existing stockholders the rights to include shares
on any registration statement filed by the Company pursuant to the Securities Act of 1933, as
amended (the Securities Act) in connection with a public offering of stock, whether such offering
is being made for the Companys own account or for the account of stockholders other than the
existing stockholders. These registration rights are applicable to any registration of stock that
is made pursuant to a demand from the existing stockholders pursuant to the Investor Rights
Agreement. The number of shares that the existing stockholders may include in an underwritten
public offering by exercising their registration rights under the Registration Rights Agreement is
subject to reduction in the event the managing underwriters of such offering advise the Company
that the number of shares to be included in such offering exceeds the amount of stock that can be
sold without adversely affecting the offering. The Registration Rights Agreement also provides the
historic RPS stockholders similar shelf registration rights as those in the Investor Rights
Agreement. If the Company fails to make filings under the Securities Act or the Securities Exchange
Act of 1934, as amended (the Exchange Act) that are required to be made pursuant to its
contractual arrangements with the existing stockholders, the Registration Rights Agreement entitles
the holders of shares to receive liquidated damages in the form of additional shares in an amount
per month equal to 1% of all or a portion of such holders registrable securities for up to two
months, or up to four months under the Investor Rights Agreement.
The Company also has a total of 1,357,179 common stock warrants (the IPO Warrants) outstanding.
The IPO Warrants are exercisable at any time through April 28, 2010 at $5.00 per share. The IPO
Warrants were issued to investors in connection with the initial public offering of Cross Shore in
April 2006 and were delisted from AIM on October 5, 2009.
The IPO Warrants are redeemable at the Companys option at a price of $.0001 per IPO Warrant only
in the event that the last sale price of the Companys common stock is at least $8.50 per share for
any 20 trading days within a 30 trading day period ending on the third day prior to the date on
which notice of redemption is given and the weekly trading volume of
the common stock has been at
least 550,000 shares for each of the two calendar weeks before the Company sends the notice of
redemption.
In addition, a total of 186,667 options remain outstanding from the date of the Cross Shore initial
public offering in April 2006. These options (the Underwriter Purchase Options) were issued to
representatives of the underwriters of the Cross Shore initial public offering. The options
entitle the holder to one share of common stock and two common stock warrants in exchange for an
exercise price of $6.60 per share. Should the options be exercised, the warrants received will be
fully vested with exercise prices of $5.00 per share at any time through April 28, 2010. Such
warrants are subject to the same provisions as the IPO Warrants discussed above.
In January 2008, the Company issued 336,000 shares of common stock to certain investors pursuant to
the provisions of certain Underwriter Purchase Options that were tendered by such investors in
connection with the merger with Cross Shore.
18
In December 2008, the Company issued a total of 4,198,885 Shares in connection with
the European Acquisitions. The shareholders of Therapharm, Infociencia and Imerem have entered
into share escrow agreements whereby 50 percent of the Shares are held in escrow, with such Shares
held in escrow to be released in equal portions on the first, second and third anniversaries of the
acquisition date, subject to there being no indemnity claims outstanding against each of the
acquired corporations (as
defined within the respective acquisition agreements). In addition, the shareholders of
Therapharm, Infociencia and Imerem have agreed to a 12 month
lock-up on all of the Shares, commencing on the date of closing of
the respective European Acquisition.
In
July 2009, the Company issued a total of 530,973 Paramax Shares in connection with the
Paramax Acquisition. The shareholder of Paramax has entered into a share escrow agreement whereby
100 percent of the Paramax Shares shall be held in escrow, with such Paramax Shares held in escrow
to be released in equal portions on the six and twelve month anniversaries of the acquisition date
and on the last business day of the eighteen month anniversary of the acquisition date, subject to
there being no claims outstanding against Paramax (as defined within
the acquisition agreement). Accordingly, 176,991 Paramax Shares were
released from escrow in October 2009. In
addition, the shareholder of Paramax has agreed to a 24 month
lock-up on all of the Paramax Shares, commencing on the date of
closing of the Paramax Acquisition.
9. Stock Option Plan
In June 2002, the Company adopted the 2002 Equity Incentive Plan (the 2002 Plan) which permitted
the grant of incentive stock options, nonqualified stock options and restricted stock. The Company
authorized the issuance of up to 2,108,456 shares of common stock to satisfy grants under the 2002
Plan. Stock options issued under the 2002 Plan generally vested over a three-year period. The exercise period was
determined by the Companys Board of Directors, but could not exceed ten years from the date of
grant. Each option entitled the holder to purchase one share of common stock at the indicated
exercise price.
The Company adopted the 2007 Stock Incentive Plan (the 2007 Incentive Plan) on August 30, 2007
and terminated the 2002 Plan. The 2007 Incentive Plan permits awards of options and restricted
stock. At September 30, 2009, the total number of shares reserved under the 2007 Incentive Plan
was 6,792,271 shares. On an annual basis, this amount is automatically increased to an amount
equal to 15% of the number of shares outstanding (calculated on a fully diluted basis). Stock
options issued under the 2007 Incentive Plan generally vest over a three year period. The exercise
period is determined by the Board of Directors, but may not exceed 10 years from the date of grant.
The following table summarizes activity under the 2002 Plan and 2007 Incentive Plan:
Options | Number of | Weighted | ||||||||||
Available For | Options | Average | ||||||||||
Grant | Outstanding | Exercise Price | ||||||||||
Balance, December 31, 2008 |
3,777,484 | 2,920,449 | $ | 2.09 | ||||||||
Authorized |
| | $ | | ||||||||
Granted |
(27,859 | ) | 27,859 | $ | 1.75 | |||||||
Exercised |
| (544 | ) | $ | 0.37 | |||||||
Forfeited/cancelled |
39,648 | (39,648 | ) | $ | 2.99 | |||||||
Balance, September 30, 2009 |
3,789,273 | 2,908,116 | $ | 2.07 | ||||||||
The weighted average grant date fair value of options granted was $0.88 and $0.87 during the three
and nine months ended September 30, 2009, respectively.
At September 30, 2009, 348,289 options were exercisable at $0.37 per share, 1,583,992 options were
exercisable at $0.83 per share, 13,035 options were exercisable at $1.66 per share, 29,381 options
were exercisable at $3.85 per share, 25,180 options were exercisable at $4.20 per share and 500,000
options were exercisable at $5.05 per share. The weighted average remaining contractual life of the
outstanding options at September 30, 2009 was 6.4 years. The weighted average remaining
contractual life of the fully vested options at September 30, 2009 was 6.2 years. The aggregate
intrinsic value of options outstanding, and fully vested at September 30, 2009 are $2.1 million and
$2.1 million, respectively.
19
10. Commitments and Contingencies
The Company occupies its corporate headquarters and other offices and uses certain equipment under
various operating leases. The Companys current lease for its corporate headquarters expires in
June 2017. Rent expense under such lease arrangements was approximately $860,000 and $477,500
during the three months ended September 30, 2009 and 2008, respectively and was approximately
$2,384,000 and $1,484,500 during the nine months ended September 30, 2009 and 2008, respectively.
The Company is the lessee of approximately $1,689,000 of automobiles and equipment under capital
leases expiring through 2012. The equipment is recorded at the present value of minimum lease
payments and is amortized over its estimated useful life. Amortization of the assets under capital
lease agreements of approximately $125,000 and $172,000 for the three months ended September 30,
2009 and 2008, respectively and approximately $414,000 and $476,000 for the nine months ended
September 30, 2009 and 2008, respectively, and is included in depreciation expense.
Future minimum lease payments subsequent to September 30, 2009 under capital and non-cancelable
operating leases are as follows:
Capital | Operating | |||||||
Leases | Leases | |||||||
2009 |
$ | 151,062 | $ | 829,524 | ||||
2010 |
637,936 | 2,506,203 | ||||||
2011 |
255,602 | 2,361,931 | ||||||
2012 |
4,590 | 2,257,340 | ||||||
2013 |
| 1,989,115 | ||||||
Thereafter |
| 5,399,531 | ||||||
Total minimum lease payments |
$ | 1,049,190 | $ | 15,343,644 | ||||
Less amount representing interest |
78,633 | |||||||
Present value of net minimum lease payments |
$ | 970,557 | ||||||
The Company is involved in various claims incidental to the conduct of its business. Management
does not believe that any such claims to which the Company is a party, both individually and in the
aggregate, will have a material adverse effect on the Companys financial position or results of
operations.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
RPS
has been providing services to the biopharmaceutical industry
since it was founded in 1994, and has expanded to build an outsourcing
organization that combines clinical drug development expertise and infrastructure with staffing and
recruiting capabilities.
The biopharmaceutical industry continues to increase its spending on clinical drug development as
it looks for the rapid introduction of new, innovative drugs. Further economic pressures including
the rising costs of developing a new drug as a result of the increasing complexity, size and
duration of trials and recruiting patients have made it more difficult for biopharmaceutical
companies to generate significant revenues to exceed the development costs of their drugs.
In light of the economic pressures seen by its biopharmaceutical clients, the Company believes
that its unique model of providing integrated outsourcing solutions is an attractive alternative to
traditional outsourcing to CROs as well as to research activities performed in-house.
20
Over the last six years, the Company has invested in building an infrastructure to support the
expected demand for its services. In late 2005 the Company began its
investment in global expansion with the opening of offices across Latin America.
Towards the end of 2005, and continuing into 2006, the Company experienced a significant shift in
the demand for its integrated outsourcing solutions. Accordingly, operating results for 2006, 2007
and 2008 have shown increases in revenues and performance metrics.
In December 2008, the Company completed the European Acquisitions, as discussed in Note 3 to the
financial statements included in this report. The Company believes that its European subsidiaries,
which are active in the same fields as RPS, will provide the Company with opportunities in the
European market and complement its current operations in the Americas. In addition, RPS believes
its European subsidiaries will provide it with greater scale to meet the growing needs of its
customers in the rapidly expanding market for globally integrated clinical research services.
In July 2009, the Company completed the Paramax Acquisition, as discussed in Note 3 to the
financial statements included in this report. The Company believes that the acquisition of Paramax,
which is active in the same fields as RPS, will provide the Company with opportunities in the Asian
market and complement its current operations in the Americas and Europe. In addition, RPS believes
that Paramax will also provide it with greater scale to meet the growing needs of its customers in
the rapidly expanding Asian market for globally integrated clinical research services.
Critical Accounting Policies
RPS consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles (GAAP), which require management to make estimates and assumptions about
future events that affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from these estimates. The following discussion highlights what
the Company believes to be the critical accounting policies and judgments made in the preparation
of these consolidated financial statements.
| Revenue and Cost Recognition |
The majority of the Companys service revenues are derived from fee-for-service contracts, some of
which are fixed price contracts. Revenues and the related costs of fee-for-service contracts are
recognized in the period in which services are performed. Fixed price contract revenue is generally
recognized as services are performed, on a proportional performance basis, based on the ratio that
costs incurred to date bear to estimated total costs at completion. Revenue related to contract
modifications is recognized when realization is assured and the amounts are reasonably
determinable. Adjustments to contract estimates are made in the periods in which the facts that
require the revisions become known. When the revised estimate indicates a loss, such loss is
provided for in the financial statements during that period. Deferred revenue represents amounts
billed to customers in excess of revenues recognized.
The Company accounts for expense reimbursement in accordance with FASB guidance, which requires
reimbursable out-of-pocket expenses to be characterized as revenue in the statements of operations.
The Company excludes investigator fees from its out-of-pocket expenses because these fees are
funded from the customers restricted cash and are recorded on a pass-through basis without risk
or reward to the Company.
21
| Income Taxes |
The Company accounts for income taxes using the asset and liability approach, which requires that
deferred tax assets and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax bases of recorded assets and liabilities. This
approach also requires that deferred tax assets be reduced by a valuation allowance if it is more
likely than not that some portion or the entire deferred tax asset will not be realized. The
Company evaluates if its deferred tax assets are realizable on an
ongoing basis by assessing the valuation allowance and by adjusting the amount of such allowance,
if necessary. The factors used to assess the likelihood of realization is the Companys forecast of
future taxable income and available tax planning strategies that could be implemented to realize
the net deferred tax assets. Failure to achieve forecasted taxable income might affect the ultimate
realization of the net deferred tax assets.
Effective January 1, 2007, the Company adopted the FASB guidance related to accounting for
uncertainty in income taxes. This authoritative interpretation clarified and standardized the
manner by which companies are required to account for uncertain income tax positions. Under this
guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is
more likely than not to be sustained upon examination based on the technical merits of the
position. The amount of the accrual for which an exposure exists is measured as the largest amount
of benefit determined on a cumulative probability basis that the Company believes is more likely
than not to be realized upon ultimate settlement of the position.
The Companys annual provision for income taxes and the determination of the resulting deferred tax
assets and liabilities involve a significant amount of management judgment. Managements judgments,
assumptions and estimates relative to the current provision for income tax take into account
current tax laws, our interpretation of current tax laws and possible outcomes of current and
future audits conducted by foreign and domestic tax authorities. The Company operates within
federal, state and international taxing jurisdictions and is subject to audit in these
jurisdictions. These audits can involve complex issues, which may require an extended period of
time to resolve.
| Stock Based Compensation |
FASB guidance requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values beginning with the
first annual period after December 15, 2005. This guidance requires that an entity measure the cost
of equity-based service awards based on the grant-date fair value of the award and recognize the
cost of such award over the period during which the employee is required to provide service in
exchange for the award (vesting period).
The pershare weighted average fair value of the options granted during the three months ended
September 30, 2009 and 2008 respectively were estimated at $0.88 and $1.89, and were $0.87 and
$1.98 for the nine months ended September 30, 2009 and 2008 respectively, on the date of grant,
using the Black-Scholes option-pricing model with the following weighted average assumptions which
are based upon the Companys history or industry comparative information:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Expected volatility |
50 | % | 50 | % | 50 | % | 50 | % | ||||||||
Risk-free interest rate |
2.73 | % | 3.21 | % | 2.19 | % | 3.02 | % | ||||||||
Expected life |
6 years | 6 years | 6 years | 6 years |
22
Prior to August 30, 2007, the Companys common stock was not publicly traded, and the expected
volatility was calculated for each date of grant based on an alternative method (defined as
calculated value). Subsequent to August 30, 2007, as a public company on the AIM, the Company
continued to utilize the calculated value for expected volatility as a sufficient level of history
was not available as a
publicly traded company. In September and October 2009, the Company delisted its common stock and
warrants from AIM, respectively, and its common stock and warrants are no longer publicly traded.
As such, the Company will continue to use the calculated value. The Company identified similar
public entities for which share price information is available and has considered the historical
volatility of these entities share prices in determining its estimated expected volatility. The
Company used the average volatility of these guideline companies over a six-year period, consistent
with the expected term calculated pursuant to FASB guidance. From August 30, 2007 through the
September 2009 AIM delisting date, the Company utilized the quoted stock price on the AIM as a
determinant of fair value of the Companys common stock. Subsequent to the AIM delisting date, the
Company estimates the fair value of its common stock using the market and income valuation
approaches, with the assistance of a valuation consultant. Stock based compensation expense for the
three months ended September 30, 2009 and 2008 related to share based service awards was $144,955
and $146,518, respectively, and was $453,630 and $413,771 for the nine months ended September 30,
2009 and 2008 respectively and is included in selling, general, and administrative expenses in the
accompanying consolidated statements of operations. The Company recognizes the compensation expense
of such share-based service awards on a straight-line basis. Total compensation cost of options
granted but not yet vested as of September 30, 2009 was $0.6 million net of estimated forfeitures,
which is expected to be recognized over the weighted average period of 1.3 years.
As of September 30, 2009, the aggregate amount of stockbased compensation expense associated with
all the options the Company granted since January 1, 2006 determined in accordance with SFAS 123(R)
was $2.1 million, net of estimated forfeitures. This amount will be recognized on a straightline
basis over the vesting period of the related options. Under the trueup provisions of SFAS 123(R),
the Company will record additional expense if the actual forfeiture rate is lower than it has
initially estimated, and the Company will record a recovery of prior expense if the actual
forfeiture rate is higher than it estimated.
| Valuation of Longlived Assets |
Intangible assets consist primarily of noncompete agreements, customer contracts and lists, brand
names, and goodwill. The majority of the intangible asset balances consist of intangible assets
acquired from the European Acquisitions and the acquisition of Paramax. Finite-lived intangible
assets are amortized on a straight line basis over the following periods: Customer lists five
years, brand names two years, software three years, and non-compete agreements six years.
Goodwill represents the excess of the cost over the fair value of net assets acquired in a business
combination. If the Company determines that the carrying value of definite lived longlived assets
may not be recoverable based upon the existence of one or more of the above indicators of
impairment, the Company performs an undiscounted cash flow analysis to determine if impairment
exists. If impairment exists, the Company measures the impairment based on the difference between
the assets carrying amount and its fair value. Goodwill is tested for impairment on an annual
basis (as of October 1 of each year) and more frequently if an event occurs or circumstances change
that would more likely than not reduce the fair value of the Company below its carrying value. If
the fair value of the Company is less than the carrying value, goodwill may be impaired, and will
be written down to its estimated fair market value, if necessary.
Results of Operations
Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30,
2008:
Revenues. Service revenues increased 32.1% to $51.7 million for the three months ended September
30, 2009 from $39.1 million for the three months ended September 30, 2008 as we generated
additional business from existing and new customers. The majority of the increase is related to the
continued build from existing contracts with several bio-pharmaceutical companies in our Clinical
Master Service Provider (CMSP) programs in addition to the revenue generated by the recently
acquired companies in Europe and China. CMSP revenue for the three months ended September 30, 2009
grew 33.8% over the comparable prior period, and accounted for 64.5% of our total service revenue
for the three months ended September 30, 2009.
23
Reimbursement revenues and offsetting reimbursable outofpocket costs fluctuate from period to
period due primarily to the level of passthrough expenses in a particular period. Reimbursement
revenues and reimbursable outofpocket costs increased 14.0% to $5.6 million during the three
months ended September 30, 2009 from $4.9 million during the three months ended September 30, 2008.
The increase is due primarily to an increase in the number of staff incurred expenses on client
programs and an increase related to the European and Paramax Acquisitions.
Direct Costs. Direct costs increased 25.8% to $37.2 million or 71.9% of service revenues for the
three months ended September 30, 2009 as compared to $29.6 million or 75.6% of service revenues for
the three months ended September 30, 2008. Although the increase in direct costs is directly
correlated with the increase in revenues as described above, the improvement in direct costs as a
percentage of service revenue is related to increased labor efficiencies that we have implemented.
The primary costs included in direct costs are operational staff payroll and related taxes and
benefits.
Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A)
increased 43.8% to $11.3 million for the three months ended September 30, 2009 from $7.8 million
for the three months ended September 30, 2008 to support the increase in revenues. The primary
reason for the increase in SG&A costs was the additional overhead costs of the European
Acquisitions which resulted in increases in employeerelated costs such as salaries, health
benefits and payroll taxes to $6.3 million for the three months ended September 30, 2009 as
compared to $4.9 million for the three months ended September 30, 2008. Additionally, due to our
increasing global footprint we saw an increase in rent and travel expense to $1.3 million for the
three months ended September 30, 2009 as compared to $0.8 million for the three months ended
September 30, 2008.
Depreciation and amortization expense. Depreciation and amortization expense increased 96.8% to
$0.9 million for the three months ended September 30, 2009 as compared to $0.4 million for the
three months ended September 30, 2008 due primarily to an increase in the depreciable asset base
and amortization of intangible assets related to the European Acquisitions.
Income from operations. Income from operations increased to $2.3 million for the three months ended
September 30, 2009 as compared to income from operations of $1.3 million for the three months ended
September 30, 2008. The increase is attributable to additional leveraging of fixed costs of a
larger revenue base.
Interest income and expense. There was $105,000 of interest income during the three months ended
September 30, 2009 as compared to interest income of $94,000 during the three months ended
September 30, 2008 due to the level of investable cash on hand during the third quarter of 2009.
Interest expense increased to $287,000 for the three months ended September 30, 2009 from $91,000
during the three months ended September 30, 2008. The increase is due to the interest expense
calculated on the outstanding balance on our line of credit.
Provision for income taxes. The provision for income taxes for the three months ended September 30,
2009 increased to $1.2 million as compared to a provision of $0.5 million for the three months
ended September 30, 2008. The increase in the provision is due to both an increase in taxable
income in the United States during the period, as well as an increase in the overall effective tax
rate. The effective tax rate increased as we are not recording a tax benefit for net operating
losses generated in certain foreign subsidiaries as we may not realize the tax benefit of these
operating losses.
Net income. As a result of the factors discussed above, net income for the three months ended
September 30, 2009 increased to $1.0 million or $0.03 per share, basic and diluted, from net income
for the three months ended September 30, 2008 of $0.7 million or $0.02 per share, basic and
diluted.
24
Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008:
Revenues. Service revenues increased 23.8% to $145.4 million for the nine months ended September
30, 2009 from $117.5 million for the nine months ended September 30, 2008 as we generated
additional
business from existing and new customers. The majority of the increase is related to the continued
build from existing contracts with several bio-pharmaceutical companies in our CMSP programs in
addition to the revenue generated by recently acquired companies in Europe and China. CMSP revenue
for the nine months ended September 30, 2009 grew 24.7% over the comparable prior period, and
accounted for 62.5% of our total service revenue for the nine months ended September 30, 2009.
Reimbursement revenues and offsetting reimbursable outofpocket costs fluctuate from period to
period due primarily to the level of passthrough expenses in a particular period. Reimbursement
revenues and reimbursable outofpocket costs increased 24.7% to $16.5 million during the nine
months ended September 30, 2009 from $13.2 million during the nine months ended September 30, 2008.
The increase is due primarily to an increase in the number of staff incurred expenses on client
programs and an increase related to the European Acquisitions.
Direct Costs. Direct costs increased 19.8% to $105.3 million or 72.5% of service revenues for the
nine months ended September 30, 2009 as compared to $87.9 million or 74.9% of service revenues for
the nine months ended September 30, 2008. Although the increase in direct costs is directly
correlated with the increase in revenues as described above, the improvement in direct costs as a
percentage of service revenues is related to increased labor efficiencies that we have implemented.
The primary costs included in direct costs are operational staff payroll and related taxes and
benefits.
Selling, general and administrative expenses. SG&A increased 42.4% to $32.4 million for the nine
months ended September 30, 2009 from $22.7 million for the nine months ended September 30, 2008 to
support the increase in revenues. The primary reason for the increase in SG&A costs was the
additional overhead costs of the European Acquisitions which resulted in increases in
employeerelated costs such as salaries, health benefits and payroll taxes to $18.6 million for the
nine months ended September 30, 2009 as compared to $14.0 million for the nine months ended
September 30, 2008. Additionally, due to our increasing global footprint we saw an increase in rent
and travel expense to $4.0 million for the nine months ended September 30, 2009 as compared to $2.6
million for the nine months ended September 30, 2008.
Depreciation and amortization expense. Depreciation and amortization expense increased 107.1% to
$2.6 million for the nine months ended September 30, 2009 as compared to $1.2 million for the nine
months ended September 30, 2008 due primarily to an increase in the depreciable asset base and
amortization of the intangible assets related to the European Acquisitions.
Income from operations. Income from operations decreased to $5.1 million for the nine months ended
September 30, 2009 as compared to income from operations of $5.5 million for the nine months ended
September 30, 2008. The decrease is attributable an increase in our SG&A costs as described above
related to our integration of the European Acquisitions.
Interest income and expense. Interest income was $0.3 million during the nine months ended
September 30, 2009 and September 30, 2008 due to the level of investable cash on hand. Interest
expense increased to $0.8 million for the nine months ended September 30, 2009 from $0.2 million
during the three months ended September 30, 2008. The increase is due primarily to the interest
expense related to the borrowings on our line of credit.
Provision for income taxes. The provision for income taxes for the nine months ended September 30,
2009 increased to $2.7 million versus a provision of $2.3 million for the nine months ended
September 30, 2008. The increase in the provision is due to both an increase in taxable income in
the United States during the period, as well as an increase in the overall effective tax rate. The
effective tax rate increased as we are not recording a tax benefit for net operating losses
generated in certain foreign subsidiaries as we may not realize the tax benefit of these operating
losses.
25
Net income. As a result of the factors discussed above, net income for the nine months ended
September 30, 2009 decreased to $2.0 million or $0.05 per basic and diluted share, for the nine
months ended
September 30, 2009 from net income of $3.2 million for the nine months ended September 30, 2008 or
$0.10 per basic share and $0.09 per diluted share.
Liquidity and Capital Resources
In the United States, the Company manages its cash function using collection and cash management
accounts. Daily collections are swept into its operating account with excess funds invested in high
quality money market funds of short duration. Disbursements presented for payment are funded daily
out of the money market accounts. Outside of the United States, cash balances are maintained at
levels necessary to support operating activities. As in the United States, cash balances for
foreign subsidiaries are generally maintained in the functional currency of the applicable
subsidiary.
The Companys expected primary cash needs on both a short and longterm basis are for capital
expenditures, expansion of services, possible future acquisitions, global expansion, working
capital and other general corporate purposes.
At September 30, 2009 the Company maintained a working capital line of credit with a bank, with a
maximum potential borrowing capacity of $30.0 million. At September 30, 2009, there were $12.0
million in outstanding borrowings under this facility. Interest on outstanding borrowings under
this facility is at the Federal Funds open rate, plus 2% (4.75% at September 30, 2009). The credit
facility contains various financial and other covenants, including a prohibition on paying
dividends or distributions (other than dividends or distributions payable in our stock). At
September 30, 2009, the Company was in compliance with these covenants. The facility is secured by
all of the assets of the Company. At September 30, 2009, the Company had available cash and cash
equivalent balances of $6.2 million and working capital of $20.7 million, which the Company
believes will provide sufficient liquidity for the next twelve months.
During the nine months ended September 30, 2009, the Companys operating activities used cash of
$1.8 million, a further use of $1.4 million from the corresponding amount for the nine months ended
September 30, 2008. The operating activities use of cash during the nine month period can be
attributed to an increase in both the amount of revenue to be collected and the time it takes to
collect that revenue, as reflected in the accounts receivable.
Accounts receivable, net of allowance for doubtful accounts, increased $7.3 million,
or 16.8%, to $50.8 million at September 30, 2009 from $43.2 million at December 31, 2008.
In addition, during the nine months ended September 30, 2009, the Company used cash in other
operating assets and liabilities of $3.1 million consisting primarily of $0.6 million in accounts
payable and $2.6 million in customer deposits, as well as noncash charges of $0.3 million of
deferred taxes. These uses of cash were offset by net income for the nine months ended September
30, 2009 of $2.0 million, a $1.8 million increase in deferred revenue, a $1.8 million increase in
accrued expenses and other liabilities, along with noncash charges of $0.5 million related to stock
based compensation and $2.6 million related to depreciation and amortization.
Cash used in investing activities for the nine months ended September 30, 2009 totaled $2.1
million, consisting primarily of $3.1 million paid during the year relating to the European
Acquisitions and the Paramax Acquisition, and $1.6 million for the purchase of property and
equipment, which was offset by the increase in restricted cash of $2.6 million.
Cash provided by financing activities for the nine months ended September 30, 2009 totaled $3.9
million, consisting primarily of $4.5 million in net borrowings on the Companys line of credit
which was offset by $0.6 million in principal payments on capital lease obligations.
26
Contractual Obligations
Set forth below is information concerning our known contractual obligations as of September 30,
2009.
Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 13 Years | 35 Years | 5 years | ||||||||||||||||
Contractual Obligations |
||||||||||||||||||||
Capital leases |
$ | 1,049,190 | $ | 151,062 | $ | 893,538 | $ | 4,590 | | |||||||||||
Operating leases |
$ | 15,343,644 | 829,524 | 4,868,134 | 4,246,455 | 5,399,531 | ||||||||||||||
Total |
$ | 16,392,834 | $ | 980,586 | $ | 5,761,672 | $ | 4,251,045 | $ | 5,399,531 | ||||||||||
OffBalance Sheet Arrangements
At December 31, 2008, RPS was not a party to any offbalance sheet arrangements as defined by
Regulation SK Item 303(a)(4)(i), promulgated under the Exchange Act.
Inflation
Certain of RPS revenues are earned under longterm contracts (having terms in excess of one year)
and generally include an inflation or cost of living adjustment for the portion of services to be
performed one year from the contract date. As a result, RPS believes that the effects of inflation
generally do not have a material effect on its operations or financial condition.
Recently Issued Accounting Standards
The Company adopted new accounting guidance on fair value measurements effective January 1, 2008,
for financial assets and liabilities. In addition, effective January 1, 2009, the Company adopted
this guidance as it relates to nonfinancial assets and liabilities that are not recognized or
disclosed at fair value in the financial statements on at least an annual basis. This guidance
defines fair value as the price that would be received to sell an asset or paid to transfer a
liability, referred to as the exit price, in an orderly transaction between market participants at
the measurement date. The standard outlines a valuation framework and creates a fair value
hierarchy in order to increase the consistency and comparability of fair value measurements and the
related disclosures. In determining fair value of financial assets, the Company primarily uses
prices and other relevant information generated by market transactions involving identical or
comparable assets, called the market approach. As of September 30, 2009 and December 31, 2008, the
fair value of all of the Companys financial assets are based on level one observable inputs. The
implementation of this guidance for nonfinancial assets and liabilities did not have an impact on
the Companys consolidated financial statements as of September 30, 2009. The provisions of this
guidance will be applied at such time a fair value measurement of a nonfinancial asset or liability
is required, which may result in a fair value that is materially different than would have been
calculated prior to the adoption of this guidance.
In December 2007, the FASB issued new guidance related to business combinations. This guidance
retains the fundamental requirements of existing guidance that the acquisition method of accounting
be used for all business combinations and for an acquirer to be identified for each business
combination. This guidance defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as the date the
acquirer achieves control. This guidance was effective for the Company beginning January 1, 2009
and the impact of the adoption of this guidance depends upon the nature and terms of business
combinations that the Company consummates on or after January 1, 2009.
In June 2008, the FASB issued new guidance related to assessing whether an equity-linked financial
instrument (or embedded feature) is indexed to an entitys own stock for the purposes of
determining whether such equity-linked financial instrument (or embedded feature) is subject to
derivative accounting The Company adopted this new guidance effective January 1, 2009. The
adoption of this guidance did not have a material impact on our results of operations or financial
condition.
27
In May 2009, the FASB issued new guidance on subsequent events. The standard provides guidance on
managements assessment of subsequent events and incorporates this guidance into accounting
literature. The standard is effective prospectively for interim and annual periods ending after
June 15, 2009 and the
Company adopted this guidance commencing with our June 30, 2009 consolidated financial statements.
The implementation of this standard did not have a material impact on our consolidated financial
position and results of operations. We have evaluated subsequent events through November 13, 2009,
the date of issuance of our consolidated balance sheet and results of operations.
In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as
well as annual financial statements in order to provide more timely information about the effects
of current market conditions on financial instruments. The guidance is effective for interim and
annual periods ending after June 15, 2009, and the Company adopted this guidance commencing with
our June 30, 2009 consolidated financial statements. The implementation of this standard did not
have a material impact on our consolidated balance sheet and results of operations.
In June 2009, FASB Accounting Standards Codification (Codification) was issued, effective for
financials statements issued for interim and annual periods ending after September 15, 2009. The
Codification supersedes literature of the FASB, Emerging Issues Task Force and other sources. The
Codification did not change U.S. generally accepted accounting principles. The implementation of
this standard did not have a material impact on our consolidated balance sheet and results of
operations.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Foreign currency risks. Since RPS operates in countries other than the United States, it is exposed
to various foreign currency risks. The majority of client services are contracted in U.S. dollars.
However, at times, a portion of the work performed under these contracts is performed by one of our
subsidiaries under which costs are incurred in the local denomination of that subsidiary. In these
instances, where expenses are incurred in a denomination that is other than U.S. dollars, our net
earnings can be affected by fluctuations in exchange rates. In addition, any fluctuation in the
exchange rates of the net assets of our foreign subsidiaries denominated in local currency would be
reflected in translation gains or losses, which are accounted for in other comprehensive income in
our statements of changes redeemable convertible preferred stock and stockholder equity. We do not
believe that a change of 10% in the foreign currency exchange rates would have a material impact on
our financial position or results of operations.
Approximately 16% and 16% of our net revenues for the three months and nine months ended September
30, 2009 respectively, were derived from our operations outside of the United States. We currently
do not engage in derivative or hedging activities related to our potential foreign exchange
exposures. However, as we contemplate future anticipated foreign currency working capital
requirements, capital asset acquisitions of our foreign operations, and our continued international
expansion, we will consider maintaining a portion of our cash and cash equivalents denominated in
foreign currencies sufficient to satisfy these possible future requirements. We will also evaluate
the need and cost of financial instruments to hedge currency exposures on an ongoing basis and may
hedge against exchange rate exposure in the future.
Interest rate risk. The primary objective of our investment activity is to preserve principal,
provide liquidity and maximize income without increasing risk. Our investments have limited
exposure to market risk. To minimize this risk, we maintain our portfolio of cash and cash
equivalents in a variety of investments, consisting primarily of bank deposits and money market
funds. The interest rates are variable and fluctuate with current market conditions. The risk
associated with fluctuating interest rates is limited to this investment portfolio, and we do not
believe that a 10% change in interest rates would have a material impact on our financial position
or results of operations.
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Item 4T. | Controls and Procedures |
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures
as of September 30, 2009. The term disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are 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 recorded, processed, summarized and
reported, within the time periods specified in the
SECs 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 companys
management, including its principal executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of the
Companys disclosure controls and procedures as of September 30, 2009, the Companys Chief
Executive Officer and Chief Financial Officer concluded that, as of such date, the Companys
disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the three and nine months ended September 30,
2009 that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
Part II. Other Information
Item 1A. | Risk Factors |
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, which to our knowledge have not materially changed other than
as set forth below.
Bio-pharmaceutical industry consolidation may adversely affect our business.
A number of large bio-pharmaceutical companies have recently completed mergers or other
acquisitions that will consolidate the research and development expenditures and outsourcing trends
of the bio-pharmaceutical industry into fewer companies. Our clients, Wyeth and Schering-Plough,
which represented 17% and 12% of our service revenues during the nine months ended September 30,
2009, respectively, and 16% and 10% of our service revenues during the three months ended September
30, 2009, respectively, have recently been acquired by other large bio-pharmaceutical companies. As
the integration of these acquisitions continues, the surviving bio-pharmaceutical companies may
decide to use other CROs, keep clinical research services in-house, or otherwise diminish the use
of our services. We cannot predict the potential impact of these acquisitions and subsequent
integration, but any resulting decisions related to outsourcing clinical trial services could have
an adverse effect on our business.
Our contracts may be delayed, terminated or reduced in scope with little or no notice, which could
adversely impact our profitability.
Many of our contracts with our clients may be terminated or reduced in scope with little or no
notice. Cancellations may occur for a variety of reasons, including the failure of the clients
product to satisfy safety and/or efficacy requirements, unexpected results of the clients product
or the clients decision to reduce its research and development activities. In addition, if we are
unable to provide the sufficient number of staff required for a project, the contract may be
delayed, terminated, or reduced in scope.
In addition, for the nine months ended September 30, 2009, our top five clients represented
approximately 48% of service revenues and our twenty top clients comprised approximately 78% of
service revenues. For the nine months ended September 30, 2009, our largest customer was
responsible for 17% of our service revenues. The loss of our single largest client or the loss or
reduction in scope of a single material contract or several smaller contracts of any of our top
five clients could materially adversely affect our results of operations, revenues or cash flow.
No assurance can be given that we will be able to realize the service revenues included in backlog
and accordingly our aggregate backlog is not a necessarily meaningful
indicator of future results. Our current total backlog as of September 30, 2009 was $156.8
million, of which approximately $105.3 million is not expected to be realized in 2009.
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Our stockholders have approved a proposal to effect a reverse stock split, which may impact our
ability to attract institutional investors and cause stockholders to own odd lots of shares.
At our 2008 Annual Meeting of Stockholders, our stockholders approved a proposal that gives our
Board of Directors the authority to effect a reverse stock split at a ratio of one-for-two to
one-for-four, to be determined by our Board of Directors. Our stock is not currently listed on any
national securities exchange or automated quotation system, so the market price of the stock would not be affected by such a reverse stock split.
However, the book value of our stock would be affected, and if the reverse stock split is
implemented, the resulting per-share price may not attract institutional investors or investment
funds and may not satisfy the investing guidelines of these investors.
The reverse stock split may also result in some stockholders owning odd lots of less than 100
shares of our common stock on a post-split basis. Odd lots may be more difficult to sell, or
require greater transaction costs per share to sell, than shares in round lots of even multiples
of 100 shares.
Further, the reverse stock split will result in an increase in the number of our authorized but
unissued shares. If a one-for-two reverse stock split is implemented, we will have at least
131,361,096 authorized but unissued shares, and will have even more unauthorized but unissued
shares if the reverse stock split is implemented at a ratio of one-for-three or one-for-four. We
may issue these shares without the approval of our stockholders, and any such issuance will have a
dilutive effect on the ownership interests of our current stockholders or any stockholders that own
our shares prior to effectiveness of the reverse stock split.
Item 4. | Submission of Matters to a Vote of Security Holders. |
We held a special meeting of our stockholders on August 26, 2009 at our corporate headquarters at
520 Virginia Drive, Fort Washington, Pennsylvania 19034. The following proposals were submitted to
our stockholders:
| Proposal One: approval of the cancellation of admission of our common stock from
trading on AIM on or about September 4, 2009; and |
| Proposal One-W: approval of the cancellation of admission of our warrants from trading
on AIM on or about September 4, 2009. |
The results of voting on Proposal One and Proposal One-W is as follows:
Proposal | Votes For | Votes Against | Votes Abstaining | |||||||||
Proposal
One: Cancellation of
admission of our
common stock from
trading on AIM |
29,268,826 | 5,453 | 0 | (1) | ||||||||
Proposal
One-W: Cancellation of
admission of our
warrants from trading
on AIM |
100,000 | 0 | 4,826 | (2) |
(1) | Represents the number of stockholder proxies marked and returned as abstaining from voting. The number of votes abstaining does not include the 8,003,529 stockholder proxies that were not returned and therefore did not cast a vote. | |
(2) | Represents the number of warrant holder proxies marked and returned as abstaining from voting. The number of votes abstaining does not include the 1,252,353 warrant holder proxies that were not returned and therefore did not cast a vote. |
All proposals put to the stockholders were approved. The warrant holders did not approve
cancellation of the admission of the warrants on AIM.
Item 5. | Other Information. |
On July 9, 2009, our wholly owned subsidiary, ReSearch Pharmaceutical Services, LLC, as the
successor by merger to our predecessor company, ReSearch Pharmaceutical Services, Inc., a
Pennsylvania corporation (Former RPS), entered into an amendment to the Credit Agreement by and
between Former RPS and PNC Bank, N.A. The Credit Agreement provided for $15,000,000 of available
borrowings, subject to certain borrowing base restrictions. Borrowings under the Credit Agreement
required interest at the Federal Funds open rate, as defined, plus 1%. The Credit Agreement was
secured by all corporate assets
and also contains financial and non-financial covenants including restrictions on the payment of
dividends, restrictions on acquisitions and restrictions on the repurchase, redemption, or
retirement of outstanding equity.
30
Under the Amended Credit Agreement, the available borrowings were increased to $30,000,000, the
termination date was extended to October 31, 2012, the interest rate on outstanding borrowings was
increased to the Federal Funds open rate, as defined, plus 2%, and the facility, collateral
evaluation, collateral monitoring, and related fees were increased. All other material terms of the
Credit Agreement, including a security interest in all corporate assets, remain unchanged.
We remain the guarantor of all of the obligations of ReSearch Pharmaceutical Services, LLC under
the Amended Credit Agreement.
The foregoing description of the Amended Credit Agreement is qualified in its entirety by reference
to the full text of the Amended Credit Agreement, attached hereto as Exhibit 10.1.
Item 6. | Exhibits. |
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed
as part of this quarterly report, which Exhibit Index is incorporated hereinby reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 13, 2009 | ReSearch Pharmaceutical Services, Inc. |
|||
By: | /s/ Steven Bell | |||
Steven Bell | ||||
Executive Vice President of Finance and Chief Financial Officer |
||||
Exhibit No. | Description | |||
10.1 | Third Amendment to Revolving Credit and Security Agreement |
|||
31.1 | Certification pursuant to Exchange Act Rules
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification pursuant to Exchange Act Rules
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
31