Attached files
file | filename |
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EX-31.2 - SERACARE LIFE SCIENCES INC | v210552_ex31-2.htm |
EX-31.1 - SERACARE LIFE SCIENCES INC | v210552_ex31-1.htm |
EX-10.2 - SERACARE LIFE SCIENCES INC | v210552_ex10-2.htm |
EX-10.1 - SERACARE LIFE SCIENCES INC | v210552_ex10-1.htm |
EX-10.3 - SERACARE LIFE SCIENCES INC | v210552_ex10-3.htm |
EX-32.1 - SERACARE LIFE SCIENCES INC | v210552_ex32-1.htm |
EX-10.4 - SERACARE LIFE SCIENCES INC | v210552_ex10-4.htm |
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
|
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2010
|
|
OR
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period
from to
|
Commission
file number: 1-34105
SeraCare
Life Sciences, Inc.
(Exact
name of registrant as specified in its charter)
DE
|
33-0056054
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
|
37
Birch Street
Milford,
MA
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01757
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (508) 244-6400
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 R No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 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 £ No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filer £
(Do
not check if a smaller
reporting
company)
|
Smaller
reporting company R
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes R No £
The
number of shares of common stock outstanding as of January 31, 2011 was
19,246,239.
TABLE
OF CONTENTS
Page
|
|
PART
I: FINANCIAL INFORMATION
|
|
Item
1. Financial Statements
|
3
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
12
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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16
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Item
4. Controls and Procedures
|
16
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PART
II: OTHER INFORMATION
|
|
Item
1. Legal Proceedings
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18
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Item
1A. Risk Factors
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18
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Item
5. Other Information
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19
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Item
6. Exhibits
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19
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1
PART
I: FINANCIAL INFORMATION
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
We caution you that this document
contains disclosures that are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 about
SeraCare Life Sciences, Inc. (“SeraCare” or the “Company”). All statements
regarding our expected future financial position, results of operations, cash
flows, dividends, financing plans, business strategy, budget, projected
costs or cost savings, capital expenditures, competitive positions,
growth opportunities for existing products or products under development, plans
and objectives of management for future operations and markets for stock are
forward-looking statements. In addition, forward-looking statements include
statements in which we use words such as “expect,” “believe,” “anticipate,”
“intend,” or similar expressions. Although we believe the expectations reflected
in such forward-looking statements are based on reasonable assumptions, we
cannot assure you that these expectations will prove to have been correct, and
actual results may differ materially from those reflected in the
forward-looking statements. Factors that could cause our actual results to differ from the
expectations reflected in the forward-looking statements in this document include,
without limitation, those risks and uncertainties set forth in Part I, Item 1A,
“Risk Factors,” of our Annual Report on Form 10-K, as amended, for the year
ended September 30, 2010 and other risk factors identified herein or from time
to time in our periodic filings with the Securities and Exchange Commission.
Many of these factors are beyond our ability to control or predict. We do not undertake any
obligation to update any forward-looking statements.
2
Item
1. Financial Statements
SERACARE
LIFE SCIENCES, INC.
BALANCE
SHEETS — UNAUDITED
As of
December 31,
2010
|
As of
September 30,
2010
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 16,209,391 | $ | 16,074,915 | ||||
Accounts
receivable, less allowance for doubtful accounts of $40,000 as of both
December 31, 2010 and September 30, 2010
|
6,640,505 | 7,288,133 | ||||||
Taxes
receivable
|
118,486 | 118,486 | ||||||
Inventory
|
9,485,977 | 9,028,809 | ||||||
Prepaid
expenses and other current assets
|
176,359 | 333,191 | ||||||
Total
current assets
|
32,630,718 | 32,843,534 | ||||||
Property
and equipment, net
|
6,167,280 | 5,970,179 | ||||||
Goodwill
|
4,284,979 | 4,284,979 | ||||||
Other
assets
|
498,358 | 526,810 | ||||||
Total
assets
|
$ | 43,581,335 | $ | 43,625,502 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 1,958,207 | $ | 2,787,855 | ||||
Accrued
expenses and other liabilities
|
2,978,025 | 4,041,172 | ||||||
Current
portion of long-term debt
|
49,811 | 55,994 | ||||||
Total
current liabilities
|
4,986,043 | 6,885,021 | ||||||
Long-term
debt
|
14,406 | 21,970 | ||||||
Other
liabilities
|
2,187,307 | 2,216,916 | ||||||
Total
liabilities
|
7,187,756 | 9,123,907 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity
|
||||||||
Preferred
stock, $.001 par value, 5,000,000 shares authorized; no shares issued or
outstanding
|
— | — | ||||||
Common
stock, $.001 par value, 35,000,000 shares authorized; 18,901,366 and
18,853,584 shares issued and outstanding as of December 31, 2010 and
September 30, 2010, respectively
|
18,901 | 18,853 | ||||||
Additional
paid-in capital
|
104,662,489 | 104,351,093 | ||||||
Retained
deficit
|
(68,287,811 | ) | (69,868,351 | ) | ||||
Total
stockholders’ equity
|
36,393,579 | 34,501,595 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 43,581,335 | $ | 43,625,502 |
See
accompanying notes to financial statements.
3
SERACARE
LIFE SCIENCES, INC.
STATEMENTS
OF OPERATIONS — UNAUDITED
For the three months ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
Revenue
|
$ | 10,462,497 | $ | 11,257,105 | ||||
Cost
of revenue
|
6,494,610 | 6,340,331 | ||||||
Gross
profit
|
3,967,887 | 4,916,774 | ||||||
Research
and development expense
|
309,247 | 163,273 | ||||||
Selling,
general and administrative expenses
|
2,946,928 | 3,260,406 | ||||||
Reorganization
items
|
(846,094 | ) | — | |||||
Operating
income
|
1,557,806 | 1,493,095 | ||||||
Interest
income (expense), net
|
22,282 | (204,725 | ) | |||||
Other
income, net
|
452 | 2,465 | ||||||
Income
before income taxes
|
1,580,540 | 1,290,835 | ||||||
Income
tax expense
|
— | 8,300 | ||||||
Net
income
|
$ | 1,580,540 | $ | 1,282,535 | ||||
Earnings
per common share
|
||||||||
Basic
|
$ | 0.08 | $ | 0.07 | ||||
Diluted
|
$ | 0.08 | $ | 0.07 | ||||
Weighted
average shares outstanding
|
||||||||
Basic
|
18,861,196 | 18,740,261 | ||||||
Diluted
|
19,270,477 | 18,875,980 |
See
accompanying notes to financial statements.
4
SERACARE
LIFE SCIENCES, INC.
STATEMENTS
OF CASH FLOWS — UNAUDITED
For the three months ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 1,580,540 | $ | 1,282,535 | ||||
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
292,837 | 260,705 | ||||||
Amortization
of deferred financing expenses
|
— | 123,944 | ||||||
Bad
debt expense
|
3,536 | — | ||||||
Write-down
of inventory
|
103,969 | — | ||||||
Loss
on disposal of property and equipment
|
9,599 | — | ||||||
Gain
on disposition of certain assets of Genomics Collaborative
division
|
(7,500 | ) | — | |||||
Stock-based
compensation
|
235,614 | 688,392 | ||||||
(Increase)
decrease from changes:
|
||||||||
Accounts
receivable
|
644,092 | 1,262,941 | ||||||
Inventory
|
(561,137 | ) | (715,913 | ) | ||||
Prepaid
expenses and other current assets
|
156,832 | 48,054 | ||||||
Other
assets
|
215,354 | — | ||||||
Increase
(decrease) from changes:
|
||||||||
Accounts
payable
|
(149,750 | ) | 148,254 | |||||
Accrued
expenses and other liabilities
|
(1,092,756 | ) | (809,399 | ) | ||||
Net
cash provided by operating activities
|
1,431,230 | 2,289,513 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(1,179,435 | ) | (23,102 | ) | ||||
Proceeds
from the disposition of certain assets of Genomics Collaborative
division
|
7,500 | — | ||||||
Net
cash used in investing activities
|
(1,171,935 | ) | (23,102 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Repayments
of long-term debt
|
(13,747 | ) | (239,980 | ) | ||||
Deferred
financing expenses
|
(186,902 | ) | — | |||||
Proceeds
from exercise of options
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75,830 | 3,332 | ||||||
Net
cash used in financing activities
|
(124,819 | ) | (236,648 | ) | ||||
Net
increase in cash and cash equivalents
|
134,476 | 2,029,763 | ||||||
Cash and cash equivalents,
beginning of period
|
16,074,915 | 6,169,396 | ||||||
Cash and cash equivalents,
end of period
|
$ | 16,209,391 | $ | 8,199,159 |
See
accompanying notes to financial statements.
5
SERACARE
LIFE SCIENCES, INC.
NOTES
TO FINANCIAL STATEMENTS
1.
Basis of Presentation
The
unaudited condensed financial statements of SeraCare Life Sciences, Inc.
(“SeraCare” or the “Company”) for the three months ended December 31, 2010 and
2009 presented herein have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission for quarterly reports
on Form 10-Q. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with United States generally
accepted accounting principles (“GAAP”) have been condensed or omitted pursuant
to such rules and regulations. In addition, the September 30, 2010 unaudited
condensed Balance Sheet was derived from the audited financial statements, but
does not include all disclosures required by GAAP. These financial statements
should be read in conjunction with the audited financial statements for the year
ended September 30, 2010 and the notes thereto included in the Company’s Annual
Report on Form 10-K, as amended. The accounting policies used in preparing these
unaudited condensed financial statements are materially consistent with those
described in the audited September 30, 2010 financial statements.
The
financial information in this report reflects, in the opinion of management, all
adjustments of a normal recurring nature necessary to present fairly the results
for the interim period. Quarterly operating results are not necessarily
indicative of the results that may be expected for other interim periods or the
year ending September 30, 2011.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, as of the date
of the financial statements, and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. In particular, SeraCare provides estimates regarding the
collectability of accounts receivable, the net realizable value of the Company’s
inventory, the recoverability of long-lived assets, as well as the Company’s
deferred tax asset and valuation allowance. On an ongoing basis, the Company
evaluates its estimates based on historical experience and various other
assumptions that SeraCare believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Future financial results could differ materially from
current financial results.
2.
Recent Accounting Pronouncements
In April
2010, The Financial Accounting Standards Board ( the “FASB”) issued Accounting
Standards Update (“ASU”) No. 2010-17, Milestone Method of Revenue
Recognition (Topic
605): Milestone Method of Revenue Recognition which provides guidance on
defining a milestone and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development
transactions. The guidance is effective on a prospective basis for milestones
achieved in fiscal years, and interim periods within those years, beginning on
or after June 15, 2010. The Company adopted this guidance on October 1, 2010.
The guidance did not have an effect on the financial position, results of
operations or cash flows of the Company.
In
December 2010, the FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other
(Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts. The
guidance is effective for fiscal years beginning after December 15, 2010 and
amends the criteria for performing Step 2 of the goodwill impairment test for
reporting units with zero or negative carrying amounts and requires performing
Step 2 if qualitative factors indicate that it is more likely than not that a
goodwill impairment exists. We do not believe that this will have a
material impact on the financial position, results of operations or cash flows
of the Company.
In
December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805):
Disclosure of Supplementary Pro forma Information for Business
Combinations. The guidance is effective for fiscal periods
beginning after December 15, 2010 and clarifies the periods for which pro forma
financial information is presented. The disclosures include pro forma
revenue and earnings of the combined entity for the current reporting period as
though the acquisition date for all business combinations that occurred during
the year had been as of the beginning of the annual reporting period. If
comparative financial statements are presented, the pro forma revenue and
earnings of the combined entity for the comparable prior reporting period should
be reported as though the acquisition date for all business combinations that
occurred during the current year had been as of the beginning of the comparable
prior annual reporting period. We do not believe that this will have
a material impact on the financial position, results of operations or cash flows
of the Company.
6
3.
Inventory
Inventory
consists primarily of human blood plasma and products derived from human blood
plasma. Inventory is carried at specifically identified cost and assessed
periodically to ensure it is valued at the lower of cost or market. The Company
reviews inventory periodically for impairment based upon factors related to age,
historical scrap rates, usability and fair market value and provides a reserve
where necessary to ensure the inventory is appropriately valued. A provision has
been made to reduce excess and not readily marketable inventories to their
estimated net realizable value.
Inventory
consists of the following:
December 31, 2010
|
September 30, 2010
|
|||||||
Raw
materials and supplies
|
$ | 1,327,655 | $ | 1,251,965 | ||||
Work-in
process
|
962,563 | 879,686 | ||||||
Finished
goods
|
8,833,566 | 8,614,977 | ||||||
Gross
inventory
|
11,123,784 | 10,746,628 | ||||||
Reserve
for obsolete inventory
|
(1,637,807 | ) | (1,717,819 | ) | ||||
Net
inventory
|
$ | 9,485,977 | $ | 9,028,809 |
4.
Commitments and Contingencies
The
Company is involved from time to time in litigation incidental to the conduct of
the Company’s business, but the Company is not currently a party to any material
lawsuit or proceeding.
5.
Leases
On
October 1, 2007, the Company entered into a lease agreement pursuant to which
the Company is leasing approximately 60,000 rentable square feet in three
buildings in a business park in Milford, Massachusetts. During fiscal 2008, the
landlord reimbursed the Company $1.2 million for leasehold improvements. The
Company has recorded the $1.2 million as a deferred lease liability which is
recognized over the term of the lease using the straight-line method. The
Company is also accounting for the lease expense using the straight-line method
which results in a deferred lease liability. As of both December 31, 2010 and
September 30, 2010, the total deferred lease liability for this facility was
$1.4 million.
In
addition, the Company is currently leasing properties in Frederick, Maryland and
Gaithersburg, Maryland. These operating leases expire July 2015 and October
2017, respectively, and currently consist of approximately 65,000 square feet
and 36,000 square feet, respectively. These properties include laboratories,
refrigerated storage facilities and administrative offices. These leases are
accounted for as operating leases using the straight-line method. During fiscal
2009, our landlord reimbursed the Company $0.4 million for leasehold
improvements at our Gaithersburg facility. The Company has recorded the $0.4
million as a deferred lease liability which is recognized over the term of the
lease using the straight-line method. As of both December 31, 2010 and September
30, 2010, the total deferred lease liability for both facilities was $1.0
million. The Company also leases various equipment under capital
leases.
6.
Debt
Debt
consists of the following:
December 31, 2010
|
September 30, 2010
|
|||||||
Total
debt - Consisting of capital leases
|
$ | 64,217 | $ | 77,964 | ||||
Less
current portion
|
(49,811 | ) | (55,994 | ) | ||||
Total
long-term debt
|
$ | 14,406 | $ | 21,970 |
Middlesex
Savings Bank and Commerce Bank and Trust Company Loan Agreement
On
December 30, 2010, the Company entered into a secured Loan Agreement
with Middlesex Savings Bank and Commerce Bank and Trust Company. The Loan
Agreement provides the Company with senior secured credit facilities in the
aggregate amount of $20.0 million. The credit facilities consist
of: a $5.0 million revolving credit facility, which provides both for
the making of revolving loans and the issuance of letters of credit, subject to
certain conditions as set forth in the Loan Agreement; and a $15.0 million term
loan facility, which allows the Company to borrow up to four separate term loans
prior to February 29, 2012, subject to certain conditions and limits as set
forth in the Loan Agreement.
7
The
proceeds of the revolving credit facility may be used by the Company for working
capital and general corporate purposes (excluding the financing of
acquisitions). Availability under the revolving credit facility is governed by a
borrowing base, which at any time is equal to the sum of the applicable
percentages of the Company’s eligible accounts receivable and eligible
inventory. As of December 31, 2010, $5.0 million was available for borrowing
under the revolving credit facility. Amounts repaid under the revolving credit
facility may be reborrowed, subject to continued compliance with the Loan
Agreement. The revolving credit facility will terminate on, and the
Company must repay all outstanding revolving credit loans no later than,
February 29, 2012.
All
revolving loans bear interest at a rate per annum equal to the prime rate as set
by Middlesex Savings Bank plus 0.50% per annum, with a floor of 3.49% per annum.
Interest on the revolving loans is payable monthly in arrears. The effective
interest rate for revolving loans as of December 31, 2010 was 3.75% per annum.
As of December 31, 2010, no revolving loans were outstanding and only a letter
of credit of less than $0.1 million was outstanding under the revolving credit
facility.
The
proceeds of the term loan facility may be used to finance permitted
acquisitions, permitted repurchases of the Company’s stock and other general
corporate purposes, subject to various conditions and restrictions as set forth
in the Loan Agreement. No amount of any term loan that is repaid may be
reborrowed. The term loans will be consolidated into a single term loan on
February 29, 2012, and such consolidated term loan must be repaid by the Company
in eighty-four consecutive monthly installments, commencing on April 1, 2012 and
ending on the final maturity date of February 28, 2019.
All term
loans bear interest prior to February 29, 2012 at a rate per annum equal to the
prime rate as set by Middlesex Savings Bank plus 0.50% per annum, with a floor
of 3.49% per annum. During the five-year period from and after February 29,
2012, all term loans bear interest at a rate per annum (determined once on such
date and applicable for the duration of such period) equal to the five-year
Treasury rate plus 3.00% per annum, with a floor of 5.49% per
annum. All term loans bear interest during the period from and after
such five-year period until the final term loan maturity date at a rate per
annum equal to the two-year Treasury rate plus 3.50% per annum, with a floor of
5.49% per annum. Interest on the term loans is payable monthly in arrears. The
effective interest rate for term loans as of December 31, 2010 was 3.75% per
annum. There were no amounts outstanding as of December 31, 2010 under the term
loan facility.
The
Company is permitted to make voluntary prepayments of outstanding revolving
loans and term loans, in whole or in part (subject to certain minimum prepayment
amount requirements), at any time. The Company is also required to make certain
mandatory prepayments of the loans upon certain asset sales, upon certain
casualty events, upon certain equity issuances, upon certain change of control
events and in the event it has excess cash flow if it makes certain
acquisitions. The Company is required to pay an early termination fee
in certain agreed amounts if it prepays the term loans in full by refinancing
the term loans with any lenders other than Middlesex Savings Bank or Commerce
Bank and Trust Company prior to the third anniversary of the date of the Loan
Agreement.
The Loan
Agreement contains various customary representations, financial and
non-financial covenants, and events of defaults. The covenants include, among
others: restrictions on the existence or incurrence of indebtedness;
restrictions on the existence or incurrence of liens; restrictions on mergers,
acquisitions and dispositions of assets; restrictions on the payment of
dividends and distributions on Company stock, on repurchases of Company stock,
and on other restricted payments; restrictions on the making of investments; and
a maximum consolidated senior leverage ratio and a minimum consolidated debt
service coverage ratio. As of December 31, 2010, the Company is in
compliance with its covenants. Upon the occurrence of an event of
default (subject in some cases to certain grace periods and cure rights of the
Company), the lenders may accelerate the payment of the loans and/or terminate
their commitments to lend, in addition to exercising other legal remedies,
including foreclosing on the collateral for the loans.
Borrowings
under the Loan Agreement are secured by substantially all of the Company’s
assets.
During
the three months ended December 31, 2010, the Company capitalized $0.2 million
of costs directly related to the Loan Agreement. These costs are being amortized
to interest expense over the term of the agreement using the straight-line
method which approximates the effective interest method.
Real
Property Mortgage Note
The
Company had a promissory note with Commerce Bank & Trust Company which was
secured by a mortgage on the real property located at 375 West Street, West
Bridgewater, Massachusetts. On July 31, 2009, the Company amended the note.
Under the note amendment, the Company paid monthly principal and interest
payments through October 2009 to reduce the principal balance of the loan to
$1.2 million and thereafter made monthly principal and interest payments based
on a ten-year amortization schedule. The note amendment also extended the final
maturity to February 28, 2011 from August 31, 2009. Under the note amendment,
the Company paid interest at the bank’s base rate plus 3%, with a floor of
6.25%.
8
The
Company sold the West Bridgewater property for $1.4 million and repaid the note
in its entirety during January 2010.
GE
Capital Credit and Security Agreement
On June
7, 2007, the Company entered into a three-year Credit and Security Agreement,
dated as of June 4, 2007, with Merrill Lynch Capital (now GE Capital) pursuant
to which a $10.0 million revolving credit facility was made available to the
Company. During the three months ended December 31, 2009, the Company terminated
the Credit and Security Agreement and paid a $0.1 million termination fee to GE
Capital which was charged to interest expense. In addition, the Company had $0.1
million of unamortized deferred financing expenses related to the Credit and
Security Agreement that were charged to interest expense during the three months
ended December 31, 2009.
7. Reorganization
Items
On March
22, 2006, the Company filed voluntary petitions for relief under Chapter 11 of
the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of California. The Company emerged from bankruptcy protection under the
Joint Plan of Reorganization which was confirmed by the Bankruptcy Court on
February 21, 2007 and after each of the conditions precedent to the consummation
was satisfied or waived, became effective May 17, 2007. As part of the Joint
Plan of Reorganization, on September 4, 2007, the United States District Court
for the Southern District of California approved the motion for final settlement
of the federal class actions and entered an order of settlement and final
judgment dismissing with prejudice the claims. There were no objections to the
final settlement. Shareholders owning a nonmaterial number of shares opted out
of the final settlement. Pursuant to the settlement, $4.4 million was paid into
an escrow for the purpose of covering settlement payments and legal expenses for
certain directors and officers who served at the Company in fiscal 2005. During
the three months ended December 31, 2010, the Company was informed that the
escrow funds were not entirely used and the Company was refunded $0.9 million,
which included interest.
8. Stockholders’
Equity
The
Company is authorized to issue 35,000,000 shares of common stock and 5,000,000
shares of preferred stock at $0.001 par value. The Board of Directors may,
without further action by the Company’s shareholders, issue preferred stock in
one or more series. These terms may include voting rights, preferences as to
dividends and liquidation, and conversion and redemption rights.
During
the three months ended December 31, 2010, the non-employee directors were issued
a total of 3,450 shares of the Company’s common stock. Employees exercised
44,332 stock options during the three months ended December 31,
2010.
As of
December 31, 2010, the total number of shares outstanding was
18,901,366.
The Loan
Agreement contains certain restrictions on the payment of dividends on the
Company’s stock.
9. Stock-Based Compensation
Plans
SeraCare
has granted various stock-based awards under its Amended and Restated 2001 Stock
Incentive Plan, as amended, and its 2009 Equity Incentive Plan (collectively,
the “Plans”), which are described in further detail in SeraCare’s Annual Report
on Form 10-K, as amended, for the year ended September 30, 2010. Unless
the Compensation Committee otherwise provides, stock options vest ratably over
three years. The maximum term of a stock option is ten years. Options that are
granted to Board members generally vest either immediately or over one
year.
A summary
of the Company’s options as of December 31, 2010 and changes during the three
months then ended is presented below:
9
Weighted-
|
||||||||
Average
|
||||||||
Number
|
Exercise
|
|||||||
of
|
Price
Per
|
|||||||
Options
|
Options
|
Share
|
||||||
Outstanding
September 30, 2010
|
2,497,294 | $ | 4.16 | |||||
Granted
|
85,000 | $ | 3.86 | |||||
Exercised
|
(44,332 | ) | $ | 1.71 | ||||
Expired
|
- | - | ||||||
Forfeited
|
(56,336 | ) | $ | 2.29 | ||||
Outstanding
December 31, 2010
|
2,481,626 | $ | 4.24 | |||||
Exercisable
at December 31, 2010
|
1,968,743 | $ | 4.65 |
As of
December 31, 2010, options to purchase 622,529 shares of common stock remain
available for future grants under the Plans.
As
of December 31, 2010, options to purchase 700,000 shares of common stock were
issued outside the Plans, all of which were exercisable. These options vested in
equal annual installments over a period of three years and have a maximum term
of ten years. During the three months ended December 31, 2010, there was no
activity outside of the Plans.
During
the three months ended December 31, 2010, the Company granted 340,935 shares of
restricted stock to employees. The grant date fair value of the restricted stock
was $4.79. In addition, the Company granted 3,450 shares of common stock to its
non-employee directors. Restricted stock awards represent shares of common stock
issued to employees subject to forfeiture if vesting conditions are not
satisfied. Restricted stock vests over four years and is subject to forfeiture
should employment terminate during the restriction period. Restricted stock
cannot be sold, assigned, transferred or pledged during the restriction period.
During the three months ended December 31, 2009, the Company granted 145,933 and
8,787 shares of common stock to the senior management team and non-employee
directors, respectively. Of the 145,933 shares of common stock that were issued
to the senior management team, 128,094 shares of common stock valued at $0.4
million were issued as part of the fiscal 2009 bonus plan and are included in
the table below as part of selling, general and administrative expenses. The
Company did not grant any stock options with an exercise price that was less
than the market price of the underlying stock on the date of the grant in the
current period.
The
following table presents stock-based compensation included in our statements of
operations:
Three Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Cost
of revenue
|
$ | 69,549 | $ | 61,723 | ||||
Research
and development expense
|
(5,289 | ) | 14,011 | |||||
Selling,
general and administrative expenses
|
171,354 | 612,658 | ||||||
Total
stock-based compensation
|
$ | 235,614 | $ | 688,392 | ||||
Incremental
charge to earnings per share
|
||||||||
Basic
|
$ | 0.01 | $ | 0.04 | ||||
Diluted
|
$ | 0.01 | $ | 0.04 |
10.
Earnings Per Share
Basic
earnings per common share is computed based on the weighted average number of
common shares outstanding during the period. Diluted earnings per common share
is calculated by considering the dilutive impact of common stock equivalents
(e.g., outstanding stock options and unvested restricted shares) under the
treasury stock method as if they were converted into common stock as of the
beginning of the period or as of the date of grant, if later.
The
following table sets out the computations of basic and diluted earnings per
common share:
10
Three Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Numerator:
|
||||||||
Net
income
|
$ | 1,580,540 | $ | 1,282,535 | ||||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
18,861,196 | 18,740,261 | ||||||
Effect
of dilutive securities:
|
||||||||
Stock
options
|
409,281 | 135,719 | ||||||
Diluted
weighted average common shares outstanding
|
19,270,477 | 18,875,980 | ||||||
Earnings
per common share
|
||||||||
Basic
|
$ | 0.08 | $ | 0.07 | ||||
Diluted
|
$ | 0.08 | $ | 0.07 |
Excluded
from the calculation of diluted earnings per common share for the three months
ended December 31, 2010 and 2009 were 1.4 million and 1.6 million shares,
respectively, related to stock options because their exercise prices would
render them anti-dilutive. For the three months ended December 31, 2010, 0.3
million shares of unvested restricted stock were excluded from the calculation
of diluted earnings per common share as the assumed proceeds were in excess of
the average fair market value of our common stock which would make them
anti-dilutive.
11.
Segment Information
The
Company’s business is divided into two segments: Diagnostic &
Biopharmaceutical Products and BioServices. SeraCare’s Diagnostic &
Biopharmaceutical Products segment includes two types of products: controls and
panels, which include the manufacture of products used for the evaluation and
quality control of infectious disease testing in hospital and clinical testing
labs and blood banks, and by in vitro diagnostic
manufacturers; and reagents and bioprocessing products, which include the
manufacture and supply of biological materials used in the research, development
and manufacturing of human and animal diagnostics, therapeutics and vaccines.
The BioServices segment includes biobanking, sample processing and testing
services for research and clinical trials, and contract research services in
molecular biology, virology, immunology and biochemistry. These reportable
segments are strategic business lines that offer different products and services
and require different marketing strategies.
The
Company utilizes multiple forms of analysis and control to evaluate the
performance of the segments and to evaluate investment decisions. Gross profit
is deemed to be the most significant measurement of performance, and
administrative expenses are not allocated or reviewed by management at the
segment level. Segments are expected to manage only assets completely under
their control. Accordingly, segment assets include primarily accounts
receivable, inventory, property and equipment and goodwill and do not include
assets identified as general corporate assets. The following segment financial
information has been prepared on the same basis as the Company’s financial
statements, utilizing the accounting policies described in the Summary of
Significant Accounting Policies in note 2 of the notes to the Company’s audited
financial statements included in the Company’s Annual Report on Form 10-K, as
amended.
The
Company’s segment information for the three months ended December 31, 2010 and
2009 is as follows:
Three Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Revenue:
|
||||||||
Diagnostic
& Biopharmaceutical Products
|
$ | 7,271,318 | $ | 7,715,112 | ||||
BioServices
|
3,191,179 | 3,541,993 | ||||||
Total
revenue
|
$ | 10,462,497 | $ | 11,257,105 | ||||
Gross
Profit:
|
||||||||
Diagnostic
& Biopharmaceutical Products
|
$ | 3,381,657 | $ | 4,055,256 | ||||
BioServices
|
586,230 | 861,518 | ||||||
Total
gross profit
|
$ | 3,967,887 | $ | 4,916,774 |
12. Fair
Value Measurements
The FASB
Accounting Standards Codification defines fair value and establishes a hierarchy
for reporting the reliability of input measurements used to assess fair value
for all assets and liabilities. Fair value is defined as the selling price that
would be received for an asset, or paid to transfer a liability, in the
principal or most advantageous market on the measurement date. The hierarchy
prioritizes fair value measurements based on the types of inputs used in
the valuation technique. The inputs are categorized into the following
levels:
Level 1 –
Observable inputs such as quoted prices in active markets for identical assets
or liabilities
11
Level 2 –
Directly or indirectly observable inputs for quoted and other than quoted prices
for identical or similar assets and liabilities in active or non-active
markets
Level 3 –
Unobservable inputs not corroborated by market data, therefore requiring the
entity to use the best available information available in the circumstances,
including the entity’s own data
The
following table represents the assets and liabilities measured at fair value on
a recurring basis in the financial statements of the Company and the valuation
approach applied to each.
Level 1
|
Level 2
|
Level 3
|
Balance
|
|||||||||||||
Assets
|
||||||||||||||||
Cash
equivalents
|
$ | 16,209,391 | $ | — | $ | — | $ | 16,209,391 |
At
December 31, 2010, the fair value of the assets measured and classified
within Level 1 was based on quoted prices.
Assets
and liabilities measured at fair value on a nonrecurring basis are recognized at
fair value subsequent to initial recognition when they are deemed to be
impaired. As of December 31, 2010, the Company’s assets and liabilities subject
to measurement at fair value on a nonrecurring basis are property and equipment
and goodwill. Neither was deemed to be impaired and measured at fair value
on a nonrecurring basis for the three months ended December 31,
2010.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
This Management’s Discussion and
Analysis of Financial Condition and Results of Operations should be read
in conjunction with our Financial Statements and related notes thereto
and other financial information included elsewhere in this Quarterly Report
on Form 10-Q and our Annual Report on Form 10-K, as amended, for the
year ended September
30, 2010.
Business
Overview
SeraCare
serves the global life sciences industry by providing vital products and
services to facilitate the discovery, development and production of human and
animal diagnostics and therapeutics. Our innovative portfolio includes
diagnostic controls, plasma-derived reagents and molecular biomarkers,
biobanking and contract research services. Our quality systems, scientific
expertise and state-of-the-art facilities support our customers in meeting the
stringent requirements of the highly regulated life sciences
industry.
Our
business is divided into two segments: Diagnostic & Biopharmaceutical
Products and BioServices. Our Diagnostic & Biopharmaceutical Products
segment includes two types of products: controls and panels, which include the
manufacture of products used for the evaluation and quality control of
infectious disease testing in hospital and clinical testing labs and blood
banks, and by in vitro
diagnostic manufacturers; and reagents and bioprocessing products, which
include the manufacture and supply of biological materials used in the research,
development and manufacturing of human and animal diagnostics, therapeutics and
vaccines. The BioServices segment includes biobanking, sample processing and
testing services for research and clinical trials, and contract research
services in molecular biology, virology, immunology and
biochemistry.
Critical
Accounting Policies and Estimates
As
previously disclosed in our Annual Report on Form 10-K, as amended, for the year
ended September 30, 2010, we have identified revenue recognition, returns,
inventory valuation, valuation of long-lived assets, contingencies and
litigation reserves, accounting for goodwill and other intangible assets,
accounting for income taxes and stock-based compensation as the accounting
policies critical to the operations of SeraCare. We have reviewed our accounting
policies and determined that these remain our critical accounting policies for
the quarter ended December 31, 2010. For a full discussion of these
policies, please refer to our Annual Report on Form 10-K for the year ended
September 30, 2010.
Results
of Operations
The
following table presents our statement of operations data as a percentage of
revenue:
12
Three Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
%
|
%
|
|||||||
STATEMENT
OF OPERATIONS DATA:
|
||||||||
Revenue
|
100.0 | 100.0 | ||||||
Cost
of revenue
|
62.1 | 56.3 | ||||||
Gross
profit
|
37.9 | 43.7 | ||||||
Research
and development expense
|
3.0 | 1.4 | ||||||
Selling,
general and administrative expenses
|
28.1 | 29.0 | ||||||
Reorganization
items
|
(8.1 | ) | — | |||||
Operating
income
|
14.9 | 13.3 | ||||||
Interest
income (expense), net
|
0.2 | (1.8 | ) | |||||
Other
income, net
|
— | — | ||||||
Income
before income taxes
|
15.1 | 11.5 | ||||||
Income
tax expense
|
— | (0.1 | ) | |||||
Net
income
|
15.1 | 11.4 |
Comparison
of three months ended December 31, 2010 and December 31, 2009
Revenue
The
following table sets forth segment revenue in millions of dollars for the three
months ended December 31, 2010 and 2009, respectively:
December 31,
2010
|
December 31,
2009
|
Percent
change
|
||||||||||
Diagnostic
& Biopharmaceutical Products
|
$ | 7.3 | $ | 7.7 | (6 | )% | ||||||
BioServices
|
3.2 | 3.6 | (10 | )% | ||||||||
Total
revenue
|
$ | 10.5 | $ | 11.3 | (7 | )% |
Revenue
for the three months ended December 31, 2010 decreased by 7%, or $0.8 million,
to $10.5 million from $11.3 million in the three months ended December 31, 2009.
Diagnostic & Biopharmaceutical Products revenue during the same period
decreased by $0.4 million, a 6% decrease. The decrease is due to lower sales
volume due to the timing of purchases by our large customers. One of our large
customers has been reducing their inventory on hand as they prepare to
transition to one of our new products. In addition, during the three months
ended December 31, 2010, we terminated our Vice President, Sales and Marketing.
We believe this organizational change negatively affected sales during the
quarter. We believe this organizational change will negatively affect sales
during the second quarter as well, but will have a positive long term effect as
we hire a successor who will be charged with realigning the sales and marketing
organization to drive increased sales in the future.
During
the three months ended December 31, 2010, revenue for our BioServices segment
decreased by $0.4 million, a 10% decrease, to $3.2 million from $3.6 million in
the three months ended December 31, 2009. As previously disclosed, the decrease
is due to the expiration of certain government contracts and projects that
were funded by the American Recovery and Relief Act.
Gross
Profit
Gross
profit margin decreased to 38% in the three months ended December 31, 2010 from
44% in the three months ended December 31, 2009. Our Diagnostic &
Biopharmaceutical Products gross profit margin decreased to 47% in the three
months ended December 31, 2010 from 53% in the three months ended December 31,
2009. The decrease is due to higher fixed manufacturing expenses compared to
revenue, increased inventory write-downs and product mix as we sold less of our
higher margin products during the three months ended December 31, 2010 as
compared to the prior year.
Our
BioServices gross profit margin decreased to 18% in the three months ended
December 31, 2010 from 24% in the three months ended December 31, 2009. The
decrease is due to the lower revenue base over which our costs are spread as
well as severance costs as we terminated select employees in order to realign
our costs with our revenue.
Research
and Development Expense
Research
and development expense totaled $0.3 million, or 3% of revenue, in the three
months ended December 31, 2010 as compared to $0.2 million, or 1% of revenue, in
the three months ended December 31, 2009. The increase in expense is due to a
renewed focus on research and development as well as severance costs associated
with organizational changes. Going forward, we expect to increase research and
development expense over prior year spending levels.
13
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased to $2.9 million, or 28% of revenue
in the three months ended December 31, 2010, from $3.3 million, or 29% of
revenue in the three months ended December 31, 2009. During the three months
ended December 31, 2010, we switched our legal and accounting firms and saved
$0.3 million, primarily legal costs, as compared to the three months ended
December 31, 2009. These savings were partially offset by severance costs of
$0.1 million for the termination of our Vice President, Sales and
Marketing.
Reorganization
Items
In
connection with our 2007 plan of reorganization, an aggregate of $4.4 million
was paid into an escrow for the purpose of covering settlement payments and
legal expenses for certain directors and officers who served at the Company in
fiscal 2005. During the three months ended December 31, 2010, we were
informed that the escrow funds were not entirely used and we were refunded $0.9
million, including interest. For more details regarding these
reorganization items, see note 7 of the notes to our unaudited financial
statements included in Item 1 of this report.
Operating
Income
Operating
income resulted from the factors above and included non cash expenses of
stock-based compensation expense and depreciation and amortization. Operating
income was $1.6 million for the three months ended December 31, 2010, which
included stock-based compensation and depreciation and amortization totaling
$0.2 million and $0.3 million, respectively, as compared to operating income of
$1.5 million for the three months ended December 31, 2009, which included
stock-based compensation and depreciation and amortization totaling $0.7 million
and $0.3 million, respectively.
Interest
Expense and Other Income
Interest
expense was nominal during the three months ended December 31, 2010 as compared
to $0.2 million during the three months ended December 31, 2009. During the
three months ended December 31, 2009, interest expense included $0.2 million for
the write-off of unamortized deferred financing expenses and a termination fee
related to the Credit and Security Agreement with GE Capital which we terminated
in October 2009. Other income was nominal in each period.
Income
Tax Expense
Income
tax expense for both three month periods ended December 31, 2010 and 2009 was
negligible as the Company’s taxable income was offset by its net operating loss
carryforwards.
Net
Income and Earnings Per Share
As a
result of the above, net income was $1.6 million in the three months ended
December 31, 2010 compared to net income of $1.3 million in the three months
ended December 31, 2009. Earnings per share on a basic and diluted basis was
$0.08 in the three months ended December 31, 2010 compared to earnings per share
of $0.07 in the three months ended December 31, 2009.
Liquidity
and Capital Resources
Cash
Flows
The
following table summarizes our sources and uses of cash over the three month
periods indicated (in millions):
December 31,
2010
|
December 31,
2009
|
|||||||
Net
cash provided by operating activities
|
$ | 1.4 | $ | 2.3 | ||||
Net
cash used in investing activities
|
(1.2 | ) | (0.1 | ) | ||||
Net
cash used in financing activities
|
(0.1 | ) | (0.2 | ) | ||||
Net
increase in cash and cash equivalents
|
$ | 0.1 | $ | 2.0 |
14
As of
December 31, 2010, our cash balance was $16.2 million, an increase of $0.1
million from our cash balance as of September 30, 2010. We had a current ratio,
current assets to current liabilities, of 6.5 to 1 as of December 31, 2010
compared to 4.8 to 1 as of September 30, 2010. Total liabilities as of December
31, 2010 were $7.2 million compared to $9.1 million as of September 30, 2010.
The total debt to equity ratio was 0.2 to 1 as of December 31, 2010 as compared
to 0.3 to 1 as of September 30, 2010.
We
believe our current cash on hand combined with expected future operating cash
flows will be sufficient to meet our future operating cash needs through at
least the next twelve months.
Operating
Cash Flows
Cash
provided by operating activities was $1.4 million for the three months ended
December 31, 2010, as compared to cash provided by operating activities of $2.3
million for the three months ended December 31, 2009. During the three months
ended December 31, 2010, we had net income of $1.6 million, which included
non-cash charges of approximately $0.6 million, primarily related to
depreciation and amortization of $0.3 million and stock-based compensation of
$0.2 million. Our accounts receivable decreased $0.6 million while our inventory
increased $0.6 million. The decrease in accounts receivable is due to lower
revenue during the three months ended December 31, 2010 as compared to the three
months ended September 30, 2010. Inventory has grown in anticipation of
increased sales during the second half of fiscal 2011. Accounts payable and
accrued expenses decreased $1.2 million due to the payment of year end
accruals.
Cash
provided by operating activities was $2.3 million for the three months ended
December 31, 2009. During the three months ended December 31, 2009, we had net
income of $1.3 million, which included non-cash charges of approximately $1.1
million, primarily related to stock-based compensation of $0.7 million and
depreciation and amortization of $0.4 million. Our accounts receivable decreased
$1.3 million while our inventory increased $0.7 million. The decrease in
accounts receivable is due to both increased collection activity as well as
lower revenue during the three months ended December 31, 2009 as compared to the
three months ended September 30, 2009. In the three months ended December 31,
2009, we grew inventory in conjunction with forecasted demand for the remainder
of fiscal 2010. Accounts payable and accrued expenses decreased $0.7 million due
to the payment of year end accruals.
Investing
Cash Flows
Cash used
in investing activities was $1.2 million in the three months ended December 31,
2010 and was negligible in the three months ended December 31, 2009. During the
three months ended December 31, 2010, we invested in equipment and are in the
process of building out additional laboratory space at our Milford facility. Of
the $1.2 million of equipment purchases, $0.7 million was purchased during
fiscal 2010, but paid for during the three months ended December 31,
2010.
Financing
Cash Flows
Cash used
in financing activities was $0.1 million in the three months ended December 31,
2010 compared to cash used in financing activities of $0.2 million in the three
months ended December 31, 2009. During the three months ended December 31, 2010,
we spent $0.2 million to obtain a loan agreement. This was partially offset by
$0.1 million of proceeds from the exercise of stock options by employees. During
the three months ended December 31, 2009, we made payments of $0.2 million for
our mortgage note and various capital leases.
Off-Balance
Sheet Arrangements
During
the three months ended December 31, 2010, we were not party to any off-balance
sheet arrangements.
Debt
On
December 30, 2010, we entered into a secured Loan Agreement with Middlesex
Savings Bank and Commerce Bank and Trust Company. The Loan Agreement provides us
with senior secured credit facilities in the aggregate amount of $20.0 million.
The credit facilities consist of: a $5.0 million revolving credit
facility, which provides both for the making of revolving loans and the issuance
of letters of credit, subject to certain conditions as set forth in the Loan
Agreement; and a $15.0 million term loan facility, which allows us to borrow up
to four separate term loans prior to February 29, 2012, subject to certain
conditions and limits as set forth in the Loan Agreement.
15
The
proceeds of the revolving credit facility may be used by us for working capital
and general corporate purposes (excluding the financing of acquisitions).
Availability under the revolving credit facility is governed by a borrowing
base, which at any time is equal to the sum of the applicable percentages of our
eligible accounts receivable and eligible inventory. As of December 31, 2010,
$5.0 million was available for borrowing under the revolving credit facility.
Amounts repaid under the revolving credit facility may be reborrowed, subject to
continued compliance with the Loan Agreement. The revolving credit
facility will terminate on, and we must repay all outstanding revolving credit
loans no later than, February 29, 2012.
All
revolving loans bear interest at a rate per annum equal to the prime rate as set
by Middlesex Savings Bank plus 0.50% per annum, with a floor of 3.49% per annum.
Interest on the revolving loans is payable monthly in arrears. The effective
interest rate for revolving loans as of December 31, 2010 was 3.75% per annum.
As of December 31, 2010, no revolving loans were outstanding and only a letter
of credit of less than $0.1 million was outstanding under the revolving credit
facility.
The
proceeds of the term loan facility may be used to finance permitted
acquisitions, permitted repurchases of our stock and other general corporate
purposes, subject to various conditions and restrictions as set forth in the
Loan Agreement. No amount of any term loan that is repaid may be reborrowed. The
term loans will be consolidated into a single term loan on February 29, 2012,
and we must repay the consolidated term loan in eighty-four consecutive monthly
installments, commencing on April 1, 2012 and ending on the final maturity date
of February 28, 2019.
All term
loans bear interest prior to February 29, 2012 at a rate per annum equal to the
prime rate as set by Middlesex Savings Bank plus 0.50% per annum, with a floor
of 3.49% per annum. During the five-year period from and after February 29,
2012, all term loans bear interest at a rate per annum (determined once on such
date and applicable for the duration of such period) equal to the five-year
Treasury rate plus 3.00% per annum, with a floor of 5.49% per
annum. All term loans bear interest during the period from and after
such five-year period until the final term loan maturity date at a rate per
annum equal to the two-year Treasury rate plus 3.50% per annum, with a floor of
5.49% per annum. Interest on the term loans is payable monthly in arrears. The
effective interest rate for term loans as of December 31, 2010 was 3.75% per
annum. There were no amounts outstanding as of December 31, 2010 under the term
loan facility.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Market Risk.
As of December 31, 2010, we had no assets or liabilities subject to
material risks from interest rate changes. Our cash was held in non-interest
bearing deposit accounts. Since interest rates are low, this strategy generates
savings in bank fees greater than the interest income that would have been
earned in an interest-bearing account.
Foreign Currency Exchange Risk.
We do not believe that we currently have material exposure to foreign
currency exchange risk because all international sales are denominated in U.S.
dollars.
We were
not a party to any derivative financial instruments at December 31,
2010.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
Rule
13a-15(b) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act, and Item 307 of Regulation S-K require management to evaluate the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of each fiscal quarter. Disclosure controls and
procedures are controls and other procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls are also designed
with the objective of ensuring that such information is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
Our
management, with the participation of our principal executive officer and
principal financial officer, conducted an evaluation as of the end of the period
covered by this Quarterly Report on Form 10-Q of the effectiveness of the design
and operation of our disclosure controls and procedures. Based on that
evaluation, our management, including our principal executive officer and
principal financial officer, concluded that our disclosure controls and
procedures were effective at the reasonable assurance level as of December 31,
2010.
16
Changes
in Internal Control over Financial Reporting
As
required by Rule 13a-15(d) of the Exchange Act, our management, including our
principal executive officer and principal financial officer, conducted an
evaluation of our internal control over financial reporting to determine whether
any changes occurred during the period covered by this Quarterly Report on Form
10-Q that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Based on that evaluation,
our management, including our principal executive officer and principal
financial officer, concluded no such changes during the quarter ended December
31, 2010 materially affected, or were reasonably likely to materially affect,
our internal control over financial reporting.
17
PART
II: OTHER INFORMATION
Item
1. Legal Proceedings
With
respect to the fiscal quarter ended December 31, 2010, the information required
in response to this Item is set forth in note 4 of the notes to our financial
statements included in this report, and such information is hereby incorporated
herein by reference.
Item 1A. Risk
Factors
There
have been no material changes to the risk factors previously disclosed in Part
I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K, as amended, for
the fiscal year ended September 30, 2010, except for the following:
Our
secured credit facilities impose certain restrictions on our ability to take
certain actions which may have an impact on our business, operating results and
financial conditions.
Our
secured credit facilities impose certain operating and financial restrictions on
us and require us to meet certain financial tests, including a maximum
consolidated senior leverage ratio and a minimum consolidated debt service
coverage ratio. These restrictions may significantly limit or prohibit us from
engaging in certain transactions, including the following:
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•
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incurring
additional indebtedness or raising other
capital;
|
|
•
|
incurring
liens on our assets;
|
|
•
|
engaging
in mergers, consolidations, acquisitions of other businesses, or
disposition of assets;
|
|
•
|
paying
dividends or other distributions to our stockholders, or redeeming,
repurchasing or retiring our capital stock in excess of specific limits;
and
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|
•
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making
investments, loans and advances.
|
These
restrictions may limit or restrict our cash flow and our ability to pursue
business opportunities or strategies that we would otherwise consider to be in
our best interests. The failure to comply with any of these restrictive
covenants would cause a default under our secured credit facilities. A default
includes a “change of control,” as defined in the loan agreement governing our
secured credit facilities. If a default occurs, we may not be able to
obtain a waiver or otherwise renegotiate the terms of our secured credit
facilities on terms acceptable to us. A default, if not waived, could prevent us
from borrowing under the secured credit facilities, could result in the
termination of the secured credit facilities, could cause any outstanding debt
thereunder to become immediately due and payable, and could result in our
lenders thereunder proceeding against the collateral securing the debt. If any
outstanding debt became immediately due and payable, we may not be able to repay
the debt or borrow sufficient funds to refinance it, and even if new financing
is available, it may not be available on terms acceptable to us.
We
may need additional capital.
In order
to conduct operations and remain competitive, we must make investments in
research and development to fund new product initiatives, continue to upgrade
our process technology and manufacturing capabilities, and actively seek out
potential acquisition candidates. Although we believe that internal cash flows
from operations will be sufficient to satisfy our working capital and normal
operating requirements for at least the next fiscal year, we cannot assure you
that cash generated from operations will be sufficient and, even if sufficient,
we may not be able to fund our planned research and development, capital
investment programs, and potential acquisitions without seeking additional
capital.
18
Our
ability to raise additional capital depends on a variety of factors, some of
which may not be within our control, including investor perceptions of our
management, our business, and the industries in which we operate. In December
2010, we established secured credit facilities in the aggregate amount of $20.0
million, consisting of a $5.0 million revolving credit facility, which is
governed by a borrowing base, and a $15.0 million term loan facility. Our
ability to finance organic growth as well as future acquisitions under our
secured credit facilities will be subject to certain conditions as set forth in
the loan agreement governing our secured credit facilities, including our
borrowing capacity thereunder. Even if we are able to access our secured credit
facilities, we cannot assure you that our borrowing capacity thereunder,
combined with cash generated from operations, will be sufficient to conduct
operations and achieve our goals. In that event, we may need to raise additional
capital. Recent conditions in the banking system and financial markets have
resulted in a tightening in the credit markets, lower levels of liquidity in
many financial markets, and volatility in fixed income, credit, currency and
equity markets. If we raise money through additional borrowings, we may become
subject to new restrictive covenants and high interest rates, which would
increase the total cost of conducting operations. However, there can be no
assurance that additional borrowing resources will be available promptly, on
favorable terms or at all. If we raise money through the issuance of equity
securities, your stock ownership will be diluted. Our stock price has been
volatile as a result of overall conditions in the financial markets and other
factors. A decline in the price of our common stock may adversely impact our
ability to fund our operations through the issuance of equity securities. The
issuance of additional equity securities by us following a decline in our stock
price may result in a significant dilution of your stock ownership. Any
inability to successfully raise needed capital on a timely or cost-effective
basis could adversely affect our short-term liquidity and our ability to make
investments in research and development to fund new product initiatives,
continue to upgrade our process technology and manufacturing capabilities, and
actively seek out potential acquisition candidates, and could have a material
adverse effect on our business, financial condition, and operating
results.
Item
5. Other Information
Our board
of directors has not yet established a record date or meeting date for our 2011
annual meeting of stockholders. We will disclose the record date and
meeting date after they are determined by our board.
Grants
of Restricted Stock
On
December 8, 2010, the Compensation Committee of our Board of Directors approved
the issuance of restricted stock awards to certain of our employees, including
certain of our named executive officers. Susan L.N. Vogt, Gregory A. Gould,
Ronald R. Dilling and Katheryn E. Shea received grants of 80,000, 50,000, 24,600
and 21,000 shares of restricted stock, respectively, under our Amended and
Restated 2001 Stock Incentive Plan, as amended, or the 2001 Plan. The
recipients of restricted stock awards generally may not sell, assign, transfer,
pledge, hypothecate or otherwise dispose of any unvested shares. The
shares vest over four years, as follows: 25% of the shares subject to
the grant vests on the first anniversary of the date of grant, and 6.25% of the
shares subject to the grant vests at the end of each three-month period
thereafter. For restricted stock issued to employees pursuant to the
2001 Plan, upon a change of control, as defined in the 2001 Plan, unvested
shares may be subject to acceleration under certain circumstances set forth in
the 2001 Plan. Vesting of the shares of restricted stock granted to
Ms. Vogt and Mr. Gould are also subject to acceleration in accordance with the
terms of their employment agreements.
The forms
of restricted stock agreements adopted by the Compensation Committee for grants
of restricted stock to our executive officers under the 2001 Plan and our 2009
Equity Incentive Plan are filed as exhibits to this report. In addition, the
restricted stock agreements for Ms. Vogt and Mr. Gould, which are substantially
the same as the form of restricted stock agreement under the 2001 Plan except
for the acceleration of vesting provision, are filed as exhibits to this
report.
Item
6. Exhibits
The
Exhibits listed in the Exhibit Index immediately preceding the Exhibits are
filed or furnished as a part of this Quarterly Report on Form
10-Q.
19
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.
SERACARE
LIFE SCIENCES, INC.
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||
By:
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/s/ Gregory A. Gould
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Gregory A. Gould
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||
Title:
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Chief Financial Officer, Treasurer and Secretary (Principal
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financial officer, chief accounting officer and duly authorized
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||
officer)
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Date:
February 11, 2011
20
INDEX
TO EXHIBITS
Exhibit
|
Incorporated by Reference
|
Filed
|
||||||||
Number
|
Exhibit Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
3.1
|
Certificate
of Incorporation.
|
8-A
|
5/17/07
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3.1
|
|
|||||
3.2
|
Amended
and Restated Bylaws.
|
8-K
|
9/3/08
|
3.1
|
|
|||||
10.1
|
Form
of Restricted Stock Agreement under the Amended and Restated 2001 Stock
Incentive Plan, as amended *
|
X
|
||||||||
10.2
|
Form
of Restricted Stock Agreement under the 2009 Equity Incentive Plan
*
|
X
|
||||||||
10.3
|
Restricted
Stock Agreement dated as of December 8, 2010 by and between SeraCare Life
Sciences, Inc. and Susan L.N. Vogt *
|
X
|
||||||||
10.4
|
Restricted
Stock Agreement dated as of December 8, 2010 by and between SeraCare Life
Sciences, Inc. and Gregory A. Gould *
|
X
|
||||||||
10.5
|
Loan
Agreement dated as of December 30, 2010 by and among SeraCare Life
Sciences, Inc., as borrower, the guarantors from time to time party
thereto, the lenders from time to time party thereto, and Middlesex
Savings Bank, as letter of credit issuer and administrative
agent.
|
8-K
|
1/6/11
|
10.1
|
||||||
10.6
|
Security
Agreement dated as of December 30, 2010 by and among SeraCare Life
Sciences, Inc., as borrower, the guarantors from time to time party
thereto, and Middlesex Savings Bank, as administrative
agent.
|
8-K
|
1/6/11
|
10.2
|
||||||
10.7
|
Severance
Agreement dated as of December 31, 2010 by and between SeraCare Life
Sciences, Inc. and William J. Smutny. *
|
8-K
|
1/13/11
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10.1
|
||||||
31.1
|
Sarbanes-Oxley
Act Section 302 Certification of Susan L.N. Vogt.
|
X
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||||||||
31.2
|
Sarbanes-Oxley
Act Section 302 Certification of Gregory A. Gould.
|
X
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||||||||
32.1
|
Sarbanes-Oxley
Act Section 906 Certification of Susan L.N. Vogt and Gregory A.
Gould.
|
X
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||||||||
*
Indicates management contract or compensatory plan or
arrangement
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21