10-K 1 rpbif20151231_10k.htm FORM 10-K rpbif20151231_10k.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 FORM 10-K

(Mark One)

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

 

For the fiscal year ended December 31, 2015

 

Or

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

 

For the transition period from _________________ to _______________________

Commission file number: 000-50571

 

RESPONSE BIOMEDICAL CORP.

(Exact name of registrant as specified in its charter)

 

Vancouver, British Columbia, Canada

98 -1042523

 

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

 
     

1781 - 75th Avenue W.

Vancouver, British Columbia, Canada

V6P 6P2

 

(Address of principal executive offices)

(Zip Code))

 

 

Registrant's telephone number, including area code: (604) 456-6010

 

Securities registered pursuant to Section 12(b) of the Act: NONE

 

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

 

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 ☒   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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐
(Do not check if a smaller
reporting company)

Smaller reporting company ☒

 

Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

The aggregate market value of the voting common stock held by non-affiliates of the Registrant (assuming officers, directors and 10% stockholders are affiliates), based on the last sale price for such stock on June 30, 2015: $2,728,083. The Registrant has no non-voting common stock.

 

As of February 28, 2016, there were 9,925,256 shares of the Registrant's common stock outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant's Proxy Statement for the 2015 Annual Meeting of Stockholders of the Registrant to be held on May XX, 2016 will be incorporated by reference into Part III of this Form 10-K.

 

The Registrant makes available free of charge on or through its website (http://www.responsebio.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The material is made available through the Registrant's website as soon as reasonably practicable after the material is electronically filed with or furnished to the U.S. Securities and Exchange Commission, or SEC. All of the Registrant's filings may be read or copied at the SEC's Public Reference Room at 100 F Street, N.E., Room 1580, Washington D.C. 20549. Information on the hours of operation of the SEC's Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains reports and proxy and information statements of issuers that file electronically.



 
 

 

 

RESPONSE BIOMEDICAL CORP.

 

Form 10-K – ANNUAL REPORT

 

For the Fiscal Year Ended December 31, 2015

 

Table of Contents

 

    Page
PART II
 

ITEM 1.

BUSINESS 3

ITEM 1A.

RISK FACTORS   19

ITEM 2.

PROPERTIES   32

ITEM 3.

LEGAL PROCEEDINGS   32

ITEM 4.

MINE SAFETY DISCLOSURES   32
     

PART II

 

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   33

ITEM 6.

Selected Financial Data

  33

ITEM 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

  35

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

  45

ITEM 8.

Financial Statements and Supplementary Data

  46

ITEM 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

  74

ITEM 9A.

Controls and Procedures

  74

ITEM 9B.

OTHER INFORMATION

  74
     

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 

  75

ITEM 11.

EXECUTIVE COMPENSATION   75

ITEM 12.

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

  75

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

  75

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES 

  75
     

PART IV

 

ITEM 15.

Exhibits and Financial Statement Schedules

  76

 

 
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PART I

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terms such as "may", "will", "should", "could", "would", "hope", "expects", "plans", "intends", "anticipates", "believes", "estimates", "projects", "predicts", "potential" and similar expressions intended to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to future events, future results, and future economic conditions in general and statements about:

 

 

Our future strategy, structure, and business prospects and our ability to retain distributors and increase product sales in existing and new markets;

 

 

The development of new products, regulatory approvals of new and existing products and the expansion of the market for our current products;

 

 

Implementing aspects of our business plan and strategies, including our strategy to increase our sales and distribution in China;

 

 

Our ability to attain and maintain profitability;

 

 

Our financing goals and plans;

 

 

Our ability to conserve cash and reduce costs; and

 

 

Whether and how long our existing working capital and cash flows will be sufficient to fund our operations;

 

These statements involve known and unknown risks, uncertainties and other factors, including the risks described in Part I, Item 1A. of this Annual Report on Form 10-K, which may cause our actual results, performance or achievements to be materially different from any future results, performances, time frames or achievements expressed or implied by the forward-looking statements. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Information regarding market and industry statistics contained in this Annual Report on Form 10-K is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources and cannot assure you of the accuracy of the market and industry data we have included.

 

 
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CORPORATE INFORMATION

 

ITEM 1. BUSINESS

 

GENERAL

 

Response Biomedical Corp. (“Response,” “Company,” “us,” “we” or “our”) is engaged in the research, development, commercialization and distribution of diagnostic technologies for the medical central-lab testing, point of care (“POC”) testing and on-site environmental testing markets. POC, on-site diagnostic tests (or assays) are simple, non-laboratory based tests performed using portable hand-held devices, compact desktop analyzers, single-use test cartridges and/or dipsticks. RAMP® represents a paradigm in diagnostics that provides sensitive and reliable information in minutes. Response was incorporated in British Columbia in August 1980. Our principal offices are located at 1781 – 75th Avenue West, Vancouver, British Columbia, Canada and we have a representative office based in Shanghai, China. The Company’s wholly-owned US subsidiary, Response Point of Care Inc., was incorporated on November 9, 2012 in the State of Delaware. Our common stock is traded on the Toronto Stock Exchange (“TSX”) under the trading symbol “RBM” and quoted on the OTC market under the symbol “RPBIF”.

 

OUR TECHNOLOGY – THE RAMP® SYSTEM

 

Our RAMP® system is a proprietary platform technology that combines a sensitive fluorescence detection system with simple lateral flow immunoassays. Although lateral flow immunoassay technology has been available for over 25 years, the market for early generation rapid immunoassays has been limited by their inability to provide the accurate, quantitative results required by the majority of test situations.

 

RAMP® maintains the key positive attributes of lateral flow immunoassays - simplicity, specificity, reliability and rapid results, while adding a unique, patented feature that can improve test performance versus other companies’ traditional lateral flow systems. Specifically, in addition to analyzing a traditional “detection zone” in its tests, the RAMP® system also has a second “control zone”. By introducing a second population of known antibodies into the “control zone” that are impacted by the same conditions as the test antibodies in the typical lateral flow technology’s “detection zone”, the ratio of a measurement of the signal from the two sets of antibodies effectively factors out uncontrolled variability, thereby providing an accurate result. The algorithm for this ratio is unique to our test system. Furthermore, the use of a fluorescent label in the cartridge combined with a custom optical scanner in the RAMP® Reader or RAMP® 200 Reader (“Reader”), results in a reliable and sensitive detection system. While the RAMP® 200 Reader is currently limited to central-lab use in the U.S. for use with the cardiovascular tests, our RAMP® System has demonstrated its capability to detect and quantify a wide variety of analytes with sensitivity and accuracy comparable to centralized lab systems, including testing multiple analytes simultaneously.

 

A large menu of tests can be run on our proprietary RAMP® system, namely:

 

Cardiovascular Tests

 

-

Troponin-I

 

-

Myoglobin

 

-

CK-MB

 

-

NT-proBNP

 

-

D-dimer (not available in the U.S.)

 

Vector Environmental Tests

 

-

West Nile virus

 

-

Dengue virus

 

Biodefense Tests

 

-

Anthrax

 

-

Small pox

 

-

Ricin

 

-

Botulinum toxin

 

 
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Infectious Disease Tests

 

-

Influenza A + B

 

 

-

Respiratory syncytial virus (RSV)

 

 

-

Procalcitonin (PCT)

 

Minimal training is required to use our RAMP® System. A test is performed by adding a sample (e.g., blood, nasal or sinus mucus, saliva, water or unknown powders) containing the analyte of interest (e.g., Myoglobin, anthrax spores, etc.) mixed with a proprietary buffer and labeled antibodies to the sample well of a test cartridge. The cartridge is then inserted into the Reader, which scans the test strip and provides the result in 20 minutes or less, depending on the assay. In the absence of rapid on-site and point of care (“POC”) test results like our RAMP® test, health care providers and first responders may be forced to wait up to two (2) or more hours for a confirmatory result from a government- or hospital-run central lab.

 

Our RAMP® system consists of a Reader and single-use disposable test cartridges, and has the potential to be adapted to any other medical and non-medical immunoassay based test currently performed in laboratories.

 

OUR PRODUCTS

 

MEDICAL LABORATORY AND POINT-OF-CARE (POC) CLINICAL DIAGNOSTICS

 

CARDIOVASCULAR TESTING

 

A major focus of our development programs in cardiovascular testing has been clinical tests for the quantification of cardiovascular markers. Cardiovascular markers are biochemical substances that are released by the body after it has been damaged or stressed. We have tests for elevated levels of the markers associated with three important health conditions: acute myocardial infarction (heart attack), congestive heart failure or thrombotic disease.

 

 

1.

Acute myocardial infarction (i.e. heart attack) markers

Response sells tests that detect three of the primary markers for the detection of an acute myocardial infarction: Troponin I, Myoglobin and CK-MB.

 

2.

Congestive Heart Failure (“CHF”) markers

Response sells tests to detect the two primary markers for congestive heart failure, NT-proBNP and B-type natriuretic peptide (“BNP”). Response’s NT-proBNP test is marketed in various countries both directly and by our international distributor network with the exception of Japan, where BNP is sold solely.

 

3.

Thrombotic disease markers

Response sells tests to detect D-dimer, one of the most prescribed markers for deep venous thrombosis (“DVT”), pulmonary embolism (“PE”) or disseminated intravascular coagulation (“DIC”).

 

Acute Myocardial Infarction (Heart Attack) Testing

 

Serial measurement of biochemical markers is now universally accepted as an important determinant in the diagnosis of an acute myocardial infarction (“AMI”). The ideal AMI marker is one that has high clinical sensitivity and specificity, appears soon after the onset of a heart attack; remains elevated for several days following a heart attack and can be assayed with a rapid turnaround time.1 Today, there is no single marker that meets all of these criteria, thus necessitating the need to test for multiple cardiac markers. The biochemical markers that are commonly used by physicians to aid in the diagnosis of a heart attack are Myoglobin, CK-MB, Troponin I and Troponin T. We sell tests to detect three of these markers (Myoglobin, CK-MB, and Troponin I). As seen in the figure below, cardiac markers follow a specific, predictable pattern of release kinetics following an acute coronary event. The differences in the time for each marker to reach its peak concentration has made it common practice for clinicians to make use of at least two different markers in tandem, an early marker such as Myoglobin and a later one such as Troponin I. International guidelines recommend the use of serial Troponin tests in order to identify a rising and falling pattern in Troponin I level and comparison to test-specific reference values for definitive diagnosis of heart attacks.

 


1 Adams JE, III, Clin Chem Acta, 1999.

 

 
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Release of Cardiac Markers into the Bloodstream Following a Heart Attack2

 

 

 

The turn-around times (“TAT”) for results from a hospital lab can vary from as little as thirty minutes to more than two hours due to the necessity of test ordering and specimen collection, specimen transport, sample preparation, test completion and reporting. In rural settings and physicians’ offices, the TAT can be many hours or even days. Evidence-based clinical practice guidelines recommend that the results from cardiac marker testing be available within 60 minutes of patient presentation and ideally within thirty minutes. POC testing with products such as our RAMP® system could provide doctors with the information they need to diagnose and treat heart attack patients in a much shorter timeframe (e.g. less than 20 minutes from blood draw to result). In most cases, this is more likely to be within the critical window of time to minimize irreversible heart damage or death. Our RAMP® System is expected to aid in the diagnosis of heart attack by enabling physicians to easily and frequently monitor changes in the levels of a patient’s AMI cardiac markers. Early access to this information enables physicians to use accelerated care protocols, which are intended to drive earlier and better treatment decisions. According to statistics published by the U.S. Centers for Disease Control and Prevention (“CDC”), approximately 7 million people visit U.S. hospital emergency departments each year with complaints of chest pain, a primary symptom of heart attack.3

 

Congestive Heart Failure (“CHF”) testing

 

Congestive heart failure is a chronic, progressive disease in which the heart muscle weakens overall and the left ventricle becomes distended, thus impeding the heart's ability to pump enough blood to support the body's metabolic demands. CHF is the only cardiovascular disorder to show a marked increase in incidence in the past 40 years and it is expected to continue rising due in part to the aging population and better survival prospects of patients with other cardiovascular diseases.4Many patients hospitalized with CHF will need to be repeatedly hospitalized due to their hearts’ continued functional degradation over time.

 

Previous methods for the diagnosis and assessment of CHF, which include physical examinations and chest x-rays, are not usually conclusive, making accurate diagnoses difficult. We sell tests to detect the two primary markers for congestive heart failure, BNP and NT-proBNP. The introduction of testing for the BNP and NT-proBNP markers of the disease dramatically changed the ability of physicians to make qualified diagnoses and to more effectively monitor the success of their treatment plans because the levels of the BNP and NT-proBNP markers are elevated in the blood whenever the heart is forced to work harder. BNP and NT-proBNP tests have proven to be more accurate than any other single physical or laboratory gauge of heart failure.5 Both BNP and NT-proBNP are fragments of proBNP, a neurohormone that is released by the heart in response to increased blood pressure and volume overload causing stretching of the ventricular muscle of the heart during heart failure. Both of these markers are elevated in the blood during heart failure and are sensitive and specific indicators of congestive heart failure.

 

 

2 Wu AHB, Introduction to Coronary Artery Disease (CAD) and Biochemical Markers, 1998.

3 National Hospital Ambulatory Medical Care Survey: 2009 Emergency Department Summary Tables

4 McCullough, PA, Nowak, RM, McCord J, et al. B-type natriuretic peptide and clinical judgment in emergency diagnosis of heart failure. Clin Inv Rep. 2002;106:416-422.

5 http://www.stjohnsmercy.org/healthinfo/newsletters/heart/Aug02.asp

 

 
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Thrombotic Disease testing

 

D-dimer is considered to be a marker of blood clotting and therefore D-dimer is present in the circulation as part of the normal wound healing process, but it is also valuable as a diagnostic marker for a spectrum of diseases where a clot has formed in blood vessels in other areas of the body such as Disseminated Intravascular Coagulation (“DIC”), Venous Thromboembolism (“VTE”), Deep Vein Thrombosis (“DVT”) and Pulmonary Embolism (“PE”). We sell a test to detect this marker.

 

Blood D-dimer levels are elevated in a number of additional disease states including malignant neoplasm, myocardial infarction, trauma, recent surgery, and hepatic insufficiency.6 This limits the test’s specificity for any one given disease, preventing it from becoming a screening test for the presence of PE and DVT. A negative test, however, has been found to have a high negative predictive value and is clinically useful as a predictor of the absence of both DVT and PE. Also, in situations when the patient presents at a time when the full range of diagnostic tests is not available, a negative D-dimer test may allow the patient to be discharged until further tests can be completed, avoiding hospital admission.

 

More than 2 million people in the US develop DVT each year. D-dimer testing can reduce length of stay and the rate of admission and discharge to the Emergency Room. D-dimer may improve medical outcome.7

 

Infectious Disease Testing

 

Influenza A + B

 

Influenza (“Flu”) viruses cause seasonal epidemics associated with high morbidity and mortality, especially affecting those with underlying medical conditions and the elderly.8 Influenza is characterized by a rapid start of high fever, chills, myalgia, headache, sore throat and cough. However, even during periods of a large outbreak, clinical diagnosis can be difficult due to the possibility of other respiratory viruses.http://www.cdc.gov/flu/about/qa/disease.htm9 The rapid and accurate diagnosis of Influenza is important for determining appropriate treatment strategies and to minimize the unnecessary use of antibiotics.10 The laboratory diagnosis of Influenza infections is based on detection of the Influenza virus directly, isolation of the virus in a cell culture or the detection of nucleic acid by a polymerase chain reaction, each of which can take several hours to days before results become available.

 

Seasonal influenza is a highly variable, contagious and potentially life-threatening viral respiratory infection. Flu can lead to severe complications and results in approximately 3,000 - 49,000 seasonal influenza-related deaths in the United States each year11. With the recent development of different treatments for Influenza A and B and the need to begin therapy within the first 48 hours of infection12, the demand for rapid and accurate Influenza tests has grown. Being able to rapidly identify patients with Influenza in the clinic or hospital allows sites to reduce infections occurring in hospitals and reduces the amount of unnecessary or incorrect treatment and administration. We sell a test to detect Influenza A and B.

 

Respiratory Syncytial Virus (RSV)

 

Respiratory syncytial virus (“RSV”) is a respiratory virus that infects the lungs and breathing passages. Most otherwise healthy people recover from an RSV infection in 1- 2 weeks. RSV in the United States is responsible for thousands of hospitalizations annually among children younger than one year. It is believed to be the most common viral cause of death in children younger than five years and, in particular, children younger than one year. In the first two years of life, virtually all children are infected with the virus at some point.13 In fact, RSV is the most common cause of bronchiolitis (inflammation of the small airways in the lung) and pneumonia in children under one year of age in the United States. In addition, RSV is more often being recognized as an important cause of respiratory illness in older adults.14 We sell a test to detect RSV.

 

 

 


6 Arch Pathol Lab Med. 1993. 117(10): 977-80

7 Point of Care Diagnostic Testing World Market, Trimark Publications April 2013.

8 Nicholson KG, Wood JM, Zambon M (2003) Influenza. Lancet 362:1733– 1745.

9 http://www.cdc.gov/flu/about/qa/disease.htm.

10 http://www.cdc.gov/flu/professionals/treatment/0506antiviralguide.htm.

11 CDC. http:www.cdc.gov/flu/about/disease/us_flu-related_deaths.htm (MMWR 2010; 52(33): 1057-1062)

12 http://www.cdc.gov/flu/keyfacts.htm.

13 CDC. http:www.cdc.gov/RSV

14 http://www.cdc.gov/RSV/

  

 
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Procalcitonin (PCT)

 

Procalcitonin (“PCT”) is a biomarker elevated in the blood of patients suffering from sepsis, also known as blood poisoning. Physicians today use PCT to distinguish bacterial sepsis from other causes of similar symptoms15,16 .Sepsis is a global problem, afflicting nearly 30 million people annually17 . The incidence of sepsis continues to increase by 2% - 9% per year18,19. Despite advances in critical care medicine, sepsis is the leading cause of death in intensive care units in the US and is listed as one of the most expensive conditions treated in US hospitals, with costs exceeding $20 billion annually20,21. Early detection and treatment of sepsis has been proven to improve patient outcomes and reduce healthcare costs22,23. The traditional methods of sepsis diagnosis can take 24 hours or more, lack sensitivity and specificity and frequently do not correlate to the level of severity of the illness24.

 

ON-SITE ENVIRONMENTAL TESTING

 

Environmental tests are generally considered to be products and services used to detect and quantify substances and microbes in the environment that may have potentially harmful effects in humans. We participate in two distinct areas of the environmental market. The first is biodefense, where our RAMP® products are used for the detection and identification of threatening biological agents. The second is the vector environmental testing market, where RAMP® products are used to test samples from mosquito pools for West Nile Virus and Dengue Virus to monitor the threat to humans.

 

BIODEFENSE TESTING

 

We have developed and are selling RAMP® tests for the rapid detection and identification of anthrax, ricin, botulinum toxin and orthopox viruses (including smallpox). The target market for our RAMP® Biodefense tests is primarily public safety institutions, or first responders, such as fire and police departments, military installations, emergency response teams and hazardous materials (HAZMAT) units. Government agencies and corporations that handle mail are also candidates for on-site anthrax tests. The rapid detection and identification of biological agents is an important capability affecting the management of a bioterrorism event, forming the basis of emergency response, medical treatment and consequence management. In addition, the rapid identification of biological agents facilitates the quick dismissal of hoaxes and panic-based reports, thereby reducing the logistical burden on first responders who have to maintain a higher level of ongoing preparedness when facing a likely real biodefense threat. In the aftermath of the terrorist attacks on September 11, 2001, there was an increased desire to be prepared for potential terrorist attacks, particularly on the part of the U.S. government, as evidenced by numerous initiatives, including the creation of the U.S. Department of Homeland Security (“DHS”). The first priority of the DHS is to protect the United States against further terrorist attacks. Component agencies analyze threats and intelligence, guard borders and airports, protect critical infrastructure and coordinate the response of the U.S. to future emergencies.

 

 

15 Uzzan et al. Procalcitonin as a diagnostic test for sepsis in critically ill adults and after surgery or trauma: a systematic review and meta-analysis. Crit Care Med 2006. 34:1996-2003.

16 Schuetz et al. Procalcitonin for diagnosis of infection and guide to antibiotic decisions: past, present and future. BMC Medicine 2011. 9:107-15

17 Fleischmann et al. Global burden of sepsis: a systematic review. Critical Care 2015, 19(Suppl 1): P21.

18 Angus et al. Epidemiology of severe sepsis in the United States: Analysis of incidence, outcome, and associated costs of care. Crit Care Med 2001. 29(7): 1303-1310.

19 Martin G. Sepsis, severe sepsis and septic shock: changes in incidence, pathogens and outcome. Expert Rev Anti Infect Ther 2012. 10(6):701-706.

20 Müller et al. Calcitonin precursors are reliable markers of sepsis in a medical intensive care unit. Crit Care Med 2000. 28(4): 977-983.

21 Torio et al. National Inpatient Hospital Costs: The Most Expensive Conditions by Payer, 2011. HCUP Statistical Brief #160. August 2013. Agency for Healthcare Research and Quality, Rockville, MD.

22 Kumar et al. Duration of hypotension before initiation of effective antimicrobial therapy is the critical determinant of survival in human septic shock. Crit Care Med 2006. 34:1589-1596.

23 Shorr et al. Economic implications of an evidence-based sepsis protocol: can we improve outcomes and lower costs? Crit Care Med 2007. 35(5):1257-1262.

24 McGee et al. Procalcitonin: clinical utility in diagnosing sepsis. Clin Lab News 2009. 35(7).

 

 
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Following the use of anthrax as a weapon for terrorist attacks in the United States in October 2001, we saw an opportunity to adapt our RAMP® technology for the rapid detection and identification of agents used in acts of bioterrorism and initiated development of a test for the rapid, on-site detection of Bacillus anthracis, the causative agent for anthrax, referred to as the Anthrax Test. Development of the Anthrax Test was substantially completed in April 2002 following successful initial validation by the Maryland State Department of Health where testing confirmed that our RAMP® Anthrax Test could reliably detect anthrax spores at levels lower than an infectious dose of 10,000 spores. These results were supported by further independent testing conducted by Defense Research and Development Canada in Suffield. Response’s Anthrax Test was launched commercially in May 2002. In September 2006, our RAMP® Anthrax Test was the first biodetection technology approved for field use by first responders in the United States for the detection of anthrax in an independent testing program conducted by the Association of Analytical Communities (AOAC) and sponsored by the U.S. Department of Homeland Security. Since the commercial launch of Response’s Anthrax Test in May 2002, we have commercialized tests for ricin, botulinum toxin and orthopox (including smallpox), three other priority, bio-threat agents. Commercial sales of the ricin test and the botulinum toxin test commenced in November 2002 and the orthopox test was launched in May 2003.

 

VECTOR ENVIRONMENTAL TESTING

 

West Nile Virus (“WNV”) is an arbovirus that can cause a fatal neurological disease in humans and is commonly found in North America, Europe, Africa, the Middle East, and West Asia. In the first ten years of prevalence in the United States, the Center for Disease Control (“CDC”) reported an average mortality rate of 5-10% and over 1,100 WNV deaths.  The virus is mainly transmitted to people through the bites of infected mosquitoes, thus mosquito surveillance programs for WNV have been successfully implemented in the US to monitor and mitigate the spread of the virus.

 

Dengue virus is a Flavivirus that is transmitted from mosquitoes to humans and leads to Dengue Fever, a potentially life-threatening illness. Dengue virus is a global concern, infecting an estimated 400 million people each year in over 100 countries, resulting in approximately 100 million cases of Dengue fever, a severe flu-like illness that can be fatal. The RAMP® Dengue test is the first protein based quantitative test for the detection of Dengue Virus in mosquitoes. In an independent evaluation of the technology, the CDC showed that the RAMP® Dengue test could detect a single positive infected mosquito for each of the four (4) serotypes of the Dengue virus, gave no false positives and did not cross-react with other Flaviviruses.

 

The RAMP® Vector Environmental tests are used by state health labs, vector control groups and local government agencies to monitor for these viruses in their local mosquito populations and to determine the need for vector control efforts as well as public health notifications. 

 

OUR MARKETS

 

We develop, manufacture and sell our RAMP® system for the global medical point of care market including cardiovascular testing, infectious disease testing market and the on-site environmental testing market including biodefense and vector environmental testing. In the U.S., our RAMP® 200 Reader is limited to central-lab use with the cardiovascular tests.

 

CARDIOVASCULAR TESTING MARKETS

 

Our RAMP® cardiovascular tests are intended for use primarily in hospital emergency rooms, laboratories and walk-in clinics around the world. We have obtained clearance to market these tests in the U.S., Canada, the European Union, China and other regulated jurisdictions around the world. RAMP® Cardiovascular testing products represent approximately 90% of our sales around the world.

 

In China, we sell our RAMP® and RAMP® 200 readers, as well as our Myoglobin, CK-MB, Troponin I, D-dimer and NT-proBNP tests to Shanghai Elite Biotech Co., Ltd. (“Shanghai Elite”) under the RAMP® brand. Effective March 3, 2016 Shanghai Elite no longer has exclusive rights to sell our products in China. In Japan, our distributor, Shionogi & Co., Ltd. (“Shionogi”), sells a rapid quantitative test for BNP under its own brand name. Effective January 5, 2016, the marketing of BNP in Japan has been restructured to Alere Medical Co., Ltd. (“Alere Japan”). Alere Japan is now the exclusive national distributor in Japan for the marketing and sales of Response manufactured BNP tests and readers.

 

We have agreements with regional distributors that sell our RAMP® cardiovascular products in the United States and various countries in Asia, Latin and South America, Europe and the Middle East.

 

 
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INFECTIOUS DISEASE TESTING MARKETS

 

INFLUENZA A + B AND RSV

 

In the United States, we sell our RAMP® 200 reader as well as our Influenza A + B and RSV tests primarily to Fisher HealthCare, which then distributes these RAMP®-branded readers and tests directly to end-users, nationwide. These tests provide hospitals with reliable and objective electronic results in approximately 15 minutes.

 

For our Flu tests, we were granted a Special 510(k) clearance by the U.S. Food and Drug Administration (“FDA”) for an update to our RAMP® Influenza A + B Assay Package Insert to include analytical reactivity information for a strain of the 2009 H1N1 virus cultured from positive respiratory specimens. Although our RAMP® Influenza A + B Assay has been shown to detect the 2009 influenza A (H1N1) virus in cultured isolates, the performance characteristics of this device with clinical specimens that are positive for the 2009 influenza A (H1N1) virus have not been established. Our RAMP® Influenza A + B Assay can distinguish between influenza A and B viruses, but it cannot differentiate influenza subtypes.

 

PCT

 

Our RAMP® Procalcitonin test has received Health Canada approval and CE Mark in early 2016 and therefore, is cleared to be marketed in Canada and select countries in the European Union.

 

ON-SITE ENVIRONMENTAL TESTING MARKETS

 

Environmental tests are generally considered to be products and services used to detect and quantify substances and microbes in the environment that have potentially harmful effects to humans. We participate in two distinct areas of the environmental market. The first is biodefense, where our RAMP® tests are used for the detection and identification of threatening biological agents. The second is the vector environmental testing market, where our RAMP® tests are used to test samples from mosquito pools for West Nile Virus and Dengue Virus to monitor the threat of the disease to humans.

 

BIODEFENSE TESTING MARKETS

 

We market and sell our biodefense products directly and through a network of regional and national distributors. The majority of our sales of biodefense products are to the United States and Canada with some sales to countries such as China, Ireland, and Australia. Our systems are sold primarily to first responder units, such as police and fire departments, and to governmental agencies.

 

VECTOR ENVIRONMENTAL TESTING MARKETS

 

The market for our WNV and Dengue tests is comprised of the following end users: state public health/veterinary labs, mosquito control districts and universities. We estimate that approximately 300,000 tests are performed throughout North America each year to screen for WNV. We have a sole distribution agreement with ADAPCO Inc., the largest distributor of mosquito control products in the United States.

 

KEY SALES AND DISTRIBUTION AGREEMENTS

 

SHANGHAI ELITE BIOTECH CO., LTD. (SHANGHAI ELITE)

 

In 2013, we signed a distribution agreement with Shanghai Elite authorizing them to exclusively market our Cardiovascular POC readers and tests, which were approved by the China Food and Drug Administration (CFDA) in November 2013, in the East, Central, South, and Southwestern provinces of China. In 2015, this agreement was amended to expand the territory for Shanghai Elite to all of China excluding Taiwan, Hong Kong and Macao Special Administration Region. Effective March 3, 2016 Shanghai Elite no longer has exclusive rights to sell our products in China.

 

HANGZHOU JOINSTAR BIOMEDICAL TECHNOLOGY CO. LTD. (JOINSTAR)

 

On October 15, 2014, we announced that we had entered into a funded Technology Development Agreement with Hangzhou Joinstar Biomedical Technology Co. Ltd. (“Joinstar”) to support the co-development of components and multiple assays that will run on a high throughput rapid immunoassay analyzer developed by Joinstar. Joinstar related entities purchased 1,800,000 of our common shares of at a price of $1.21 per share for net proceeds of $2.0 million on December 12, 2014. Under the terms of the Technology Development Agreement, Joinstar paid US$560,000 upon the signing of the Technology Development Agreement on October 15, 2014 and US$720,000 upon the signing of the Collaborative Agreement, which was signed on February 16, 2015. We received three additional milestones in 2015 totaling a further US$1.73 million. We are eligible to receive a further US$792,000 in development milestones over the development period. In conjunction with the signing of the Collaborative Agreement, we entered into a definitive Supply Agreement with Joinstar whereby we will provide certain materials required for Joinstar to manufacture and sell the developed assays specifically to run on their analyzer. Under the terms of the Supply Agreement, we are eligible to receive a guaranteed US$1.78 million in revenue-based payments over the first five years of commercialization of the co-developed assays.

 

 
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ANALYTICA LTD. (ANALYTICA)

 

In 2012, we signed a distribution agreement with Analytica, amended in 2012 and 2013, authorizing them to exclusively market our Cardiovascular readers and tests in the Russian Federation.

 

SHIONOGI & CO., LTD. (SHIONOGI) / ALERE MEDICAL CO., LTD (ALERE)

 

In May 2006, we signed an agreement with Shionogi, amended August 2012 and 2013, to market and sell our BNP tests in Japan. Under the terms of the agreement, we agreed to become the exclusive manufacturer of BNP tests on an OEM basis. The agreement may be terminated by either party with twelve months notice, should either party be in breach under the terms of the agreement, or under certain other conditions.

 

As mentioned above, effective January 5, 2016, Alere Japan became the exclusive national distributor in Japan for the marketing and sales of Response manufactured BNP tests and readers. Shionogi will continue to supply biological reagents to Response under separate license and supply agreements.

 

THERMO FISHER SCIENTIFIC L.L.C. (FISHER)

 

In January 2013, we announced that we entered into a nonexclusive distribution agreement with Fisher HealthCare, a subsidiary of Fisher, to distribute our Infectious Disease portfolio of our RAMP® products in the United States.

 

Fisher will market our Infectious Disease Point of Care (POC) test panel, which currently includes the RAMP® Influenza A + B test and the RAMP® RSV test, on the RAMP® 200.

 

ADAPCO, INC. (ADAPCO)

 

In April 2008, we entered into a distribution agreement with ADAPCO, which replaced an earlier agreement signed in March 2006. The initial term of the agreement was for one year, and is automatically renewed on an annual basis. This agreement appoints ADAPCO as the exclusive distributor of our tests and readers for detection of West Nile Virus in the United States; however, the agreement also gives us the right to sell these products directly.

 

 
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COMPETITION

 

MEDICAL POINT-OF-CARE (POC) MARKET

 

The medical POC test market is comprised of five basic segments: clinical chemistry, hematology, immunoassay, blood glucose and urinalysis, plus miscellaneous other tests. Dozens of companies sell qualitative POC tests in these segments, and several have substantially greater financial resources and larger, more established marketing, sales and service organizations than we do. Few companies, however, participate in the quantitative POC immunoassay market. The following table summarizes our key known competitors in the POC testing market:

  

 

Test Market Segment

Company

Cardiac Markers

CHF Marker

Drugs of Abuse

Sepsis

Flu and Infectious Disease

Pregnancy / Ovulation

Blood Gases/ Electrolytes

Coagulation

Response Biomedical Corp.

 

   

Abbott Point of Care Inc.

(1)

     

Alere Inc.

 

Becton Dickinson Corporation

       

     

Radiometer

 

 

 

Mitsubishi Chemical Medience Corporation (2)

 

 

   

Quidel Corporation

       

   

Roche Diagnostics (3)

     

(1)

Only Troponin I, CK-MB and BNP cardiac tests at this time.

(2)

Mitsubishi Pathfast weighs 33kg, which for some would not be considered a POC system but rather a small laboratory analyzer.

(3)

The Cardiac Reader measures Troponin T rather than TnI and does not measure CK-MB. This platform uses semi-quantitative technology. This limits the upper end of their NT-proBNP assay to only 20% of the entire clinical range.

 

Certain of the competitors listed in the table above have stated their intention to broaden their category offerings. In addition to the key competitors listed above, we believe that each of the major diagnostics companies has an active interest in POC testing and, as well as being potential competitors, are also potential business partners.

 

Alere Inc. (formerly Inverness Medical Innovations Inc.), or Alere, has sold a three-in-one quantitative immunoassay and reader system for cardiac markers (CK-MB, Troponin I and Myoglobin) on the market since 1999 and is currently one of the leading participants in quantitative POC cardiovascular testing on the basis of market share, revenues and technology. They also sell a “shortness of breath” panel cartridge, which includes Myoglobin, CK-MB, Troponin I, BNP and D-dimer. In 2007, Biosite Incorporated (Biosite) was acquired by Inverness Medical Innovations in a transaction valued at $1.68 billion. Based on published list prices for the Biosite products and data from the completed multi-site clinical study entitled “Evaluation of a point-of-care assay for cardiac markers for patients suspected of acute myocardial infarction,25 we believe that RAMP® has several advantages over the competing Biosite products including product performance and menu flexibility.

 

Since 2003, Abbott Point of Care Inc., formerly i-STAT Corporation, has sold a 10-minute Troponin I test for use on the i-STAT Portable Clinical Analyzer, a biosensor-based technology. In 2005, Abbott Point of Care launched a CK-MB test and, in 2006, launched a POC BNP test. In addition, Abbott Point of Care offers several tests for other markers in whole blood, predominantly electrolytes and blood gases. We believe that the requirement for different sample types for the i-STAT markers for heart attack (TnI and CK-MB) and congestive heart failure (BNP) is a significant disadvantage as compared to our RAMP® system.

 

Quidel Corporation has sold rapid, qualitative tests for the detection of RSV and Influenza A and B since 2001 as the QuickVue® Influenza A+B test and the QuickVue® RSV test. Based on data published in March 2011, we believe that our RAMP® RSV test offers superior performance versus the QuickVue® RSV test. Binax, Inc., a division of Alere, has been selling Influenza A, Influenza B and RSV tests under the BinaxNOW® brand since 2002 and a combined Influenza A+B test since 2004. Both of these tests have received Clinical Laboratory Improvement Amendments of 1988, or CLIA-waived status, which has allowed for their use in physician office laboratories. Quidel has developed a reader-based detection instrument, the Sofia, available in the US since 2011 that can run tests for Influenza, RSV, Strep A and ®hCG. The Sofia Influenza A+B test received CLIA-waiver in 2012.

 

Becton-Dickenson developed the Veritor System Digital Reader in 2011 with the Influenza A+B, RSV and Strep tests. The BD Veritor along with the Influenza A+B and Strep tests is CLIA-waived.

 

25 Munjal I, Gialanella P, Goss C, McKitrick JC, Avner JR, Quiulu Pan, Litman C, Levi ML, J Clin Micro 2011Mar 49(3):1151-3. 

 

 
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Other technologies that may compete against RAMP® in the future by delivering highly sensitive, quantitative results, for some POC tests include immunosensors or biosensors and nanotechnology-based approaches. Biosensor methods use specific binding molecules such as antibodies to generate a measurable signal as a direct result of binding to their target molecule (or analyte). These technologies are extremely complex and have been under development for many years with limited commercial success to date. Immunobiosensors, to date, have limited sensitivity and are not competitive with RAMP®. Although methods of testing using biosensors and nanotechnology can be fast, they generally suffer from a significant lack of accuracy, repeatability and reliability, and can be expensive to manufacture. Biosensors are now in limited use for selected diagnostic applications, most notably for blood glucose monitoring using non-immunoassay methods. Nanotechnology is a relatively new and growing field that deals with the use of inert micro-etched wafers, or chips, to provide templates for chemical, biochemical and biological processes.

 

Much of the research effort for recent diagnostic testing has been directed toward the development of DNA hybridization probe tests. These tests identify specific gene sequences that can be associated with certain genetically based disorders, infectious diseases and the prediction of predisposition to certain medical conditions, such as cancer. Several companies, such as Cepheid, Luminex, Bio-Fire (Biomerieux), Becton-Dickinson and Gen-Probe Inc., are now marketing specific probe tests for various infectious diseases. DNA probe technology is useful for gene markers that have been shown to be associated with specific disease states or clinical conditions. Although more useful gene sequences are being discovered all the time, we believe they will not displace the need for high-sensitivity immunoassays; while there is limited evidence of changes in gene expression for patients with obstructive coronary artery disease, there is no evidence of a genetic change when a person has a heart attack. In addition, our RAMP® format may be applicable to hybridization probe methods if a need is found for these tests to be quantitative and for use at the point-of-care.

 

BIODEFENSE MARKET

 

The following table summarizes our known competitors in the rapid on-site environmental biodefense testing market (note that this table may not include all biological agents for which these companies may have tests):

 

Company

Biological Agent

 

Anthrax

Ricin

Botulinum Toxin

Orthopox

Brucella

Plague

Tularemia

SEB

Response Biomedical Corp.

       

Alexeter Technologies LLC (1)

New Horizons Diagnostics

   

ADVNT Inc.

   

 

Idaho Technology Inc. (2)

 

Tetracore, Inc.

Smiths Detection BioSeeq Plus (3)

   

 

 

QTL/MSA

         

 

(1)

Product includes a portable reader based on reflectance technology.

(2)

Product includes a portable reader based on polymerase chain reaction technology.

(3)

Product includes a portable reader based on polymerase chain reaction technology.

 

A number of independent studies have been conducted on biodefense tests. Our RAMP® Anthrax Test has been evaluated at four sites in the United States and Canada: DRDC Suffield,26 a division of the Canadian Department of National Defense; the Maryland State Department of Health;27 Intertox Inc.,28 a Seattle-based public and occupational health firm, and, Edgewood Chemical Biological Center, part of the U.S. Army's Aberdeen proving ground, and AOAC testing.29 Data from these four evaluations show that our RAMP® Anthrax Test meets or exceeds its product claims of reliably detecting less than 4,000 live spores, with 99 percent confidence in specificity. The CDC defines a lethal dose of anthrax as 10,000 spores.

 

26 Defense Research and Development Canada, July, 2002.

27 Maryland State Department of Health, March 2002.

28 Intertox Inc., July 2002.

29 The U.S. Army Aberdeen Proving Ground, November 2004. 

 

 
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In November 2004, our RAMP® System was the only commercially available rapid on-site anthrax detection system of those tested that met the new performance standards introduced by AOAC for rapid immunoassay-based anthrax detection systems and to receive the AOAC Official Methods Certificate 070403 stating that our RAMP® Anthrax Test performed as we claimed and that we are authorized to display the AOAC Performance Tested certification mark. All other commercially available rapid on-site anthrax detection systems tested failed to meet the AOAC’s performance standard. A further intensive, independent field testing program conducted by AOAC and sponsored by the DHS, culminated in the announcement in September 2006 that our RAMP® Anthrax Test was the first biodetection technology approved for field use by first responders in the United States for the detection of anthrax in an independent testing program conducted by AOAC.

 

Since our initial RAMP® product launch, many competitors have launched competitive products into the market place, including Alexeter Biotechnologies and ADVNT Inc., both of which also market rapid detection tests in the United States for Anthrax, Ricin and Botulinum, in addition to SEB, Y. pestis (plague) and others.  Internationally, Smith Detection maintains a strong market share. We also believe that a number of diagnostics companies have an active interest in rapid on-site biodefense testing and have the potential to become either competitors or business affiliates.

 

We currently have over 350 RAMP® biodefense systems in field use by our customers.

 

VECTOR ENVIRONMENTAL MARKET

 

Our main competitor in the rapid on-site vector environmental testing market is VecTor Test Systems Inc. who sells qualitative tests for the detection of viruses such as WNV, Chikungunya, Malaria, Dengue, SLE, EEE and WEE among others.

 

Emerging competition in the detection of West Nile Virus in the United States market is from RT-PCR systems, as more labs are investing in PCR technology in lieu of rapid detection. 

 

OPERATIONS AND MANUFACTURING

 

Our RAMP® System consists of a Reader and test kits (“Kits”) of applicable RAMP® tests. Until the end of 2013, manufacturing of the Readers was outsourced to an electronics manufacturer located in British Columbia, Canada. Starting in January 2014, we now manufacture and repair both our Readers in-house at our manufacturing facility. We also manufacture all Kits in-house in order to maximize return on investment, protect proprietary technology, and ensure compliance with government and internal quality standards. Kit manufacturing includes reagent and component production, cartridge assembly and final packaging.

 

In advance of the expected growth of our products, we invested significantly, starting in 2007, to increase the automation, quality and capacity of our manufacturing operations. In March 2008, we moved into our current corporate headquarters, a leased, multi-use, 46,000 square foot facility in Vancouver, British Columbia, Canada where we coordinate all support operations including customer support, technical and instrument service, production planning, shipping and receiving. The facility houses all of our administrative and manufacturing operations and will allow us to achieve our projected manufacturing capacity targets for the next five or more years. Our manufacturing scale-up is ongoing, and our test production capacity has increased from approximately 500,000 tests per shift per year to approximately 2 million tests per shift per year. The initial term of the lease agreement is 15 years with two 5-year renewal options.

 

Where possible, we require distribution and marketing partners to provide a twelve-month rolling forecast in order to ensure timely and adequate product supply and to allow efficient production, materials, shipping and inventory planning. We plan to meet cost and quality targets through strict scale-up validation procedures and by negotiating supplier agreements for key materials that emphasize both reasonable costs and the highest possible quality. Final packaging, inventory storage and product distribution to marketing partners are managed in accordance with individual partner agreements.

 

The primary raw materials required to manufacture a test cartridge consist of: antibody reagents, nitrocellulose membrane and injection molded plastic parts to act as housing for the cartridge assembly. There are several different components required to perform the test that are included with the Kit. These are a sample transfer device, a solution for diluting the test sample and reagent-containing tips (for placing the sample being tested into the cartridge). For Readers, the primary raw materials are electronics and mechanical components, optical components, display screens and an injection molded plastic housing. We purchase these primary raw materials from unaffiliated domestic and international suppliers, some of which are sole suppliers. If any single-source supplier were no longer able to supply a component, we may experience a delay while we identify and enter into a purchase arrangement with an alternate supplier. Interruptions in the delivery of these materials or services could adversely impact the Company.

  

 
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PATENTS AND PROPRIETARY RIGHTS

 

We rely on a combination of patents, trademarks, confidential procedures, contractual provisions and similar measures to protect our proprietary information. To develop and maintain our competitive position, we also rely upon continuing invention, trade secrets, technology in-licensing and technical know-how.

 

It has been our practice to periodically file for patent and trademark protection in the United States and other countries with significant markets, such as Canada, Western European countries, Japan and China. No assurance can be given that patents or trademarks will be issued to us pursuant to our applications or that our patent portfolio will provide us with a meaningful level of commercial protection. We file patent applications on our own behalf as assignee and, when appropriate, have filed and expect to continue to file, applications jointly with our collaborators. Our ability to obtain and enforce patents is uncertain and we cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us, see “Risk Factors”.

 

In the United States, we own a total of eight utility patents with expiration dates ranging from 2020 to 2028 and two design patents having expiration dates in 2024. We have many foreign counterparts (patents/applications) in other jurisdictions. In addition, patent applications related to our key technologies are pending or granted in China and Hong Kong. We also have multiple registered trademarks in the United States and counterparts in other jurisdictions.

 

We seek to protect our trade secrets and technology by entering into confidentiality agreements with employees and third parties (such as potential licensees, customers, strategic partners and consultants). In addition, we have implemented certain security measures in our laboratories and offices. Despite such efforts, no assurance can be given that the confidentiality of our proprietary information can be maintained. Also, to the extent that consultants or contracting parties apply technical or scientific information independently developed by them to our projects, disputes may arise as to the proprietary rights to such data.

 

We have technology in-licensing agreements including the license of NTpro-BNP from Roche Diagnostics GmbH that expires in November 2024. In addition, we have a non-exclusive license of certain intellectual property required to manufacture our lateral flow immunoassay products that expires in December 2019.

 

GOVERNMENT REGULATION

 

REGULATORY APPROVAL

 

CLINICAL DIAGNOSTICS

 

The Food and Drug Administration, Health Canada and comparable agencies in foreign countries impose substantial requirements upon the development, manufacturing and marketing of drugs and medical devices through the regulation of laboratory and clinical testing procedures, manufacturing, marketing and distribution by requiring labeling, registration, notification, clearance or approval, record keeping and reporting, among other things. See “Risk Factors.”

 

In China, clearance to market drugs and medical devices must be granted by the China Food & Drug Administration (“CFDA”). Our previous distributors in China obtained their own regulatory clearances however, in November 2013, we received clearance from the CFDA to market our RAMP® Myoglobin, CK-MB, Troponin I and NT-proBNP tests. In January 2014, we received clearance for our Readers under the names of Response Reader System and Response Reader System Advanced. In August 2014, we received clearance to market our RAMP® D-dimer test.

 

As of December 7, 2003, all medical devices sold in the countries of the European Union (“EU”) are required to be compliant with the EU In-Vitro Diagnostic Directive. All new in-vitro diagnostic devices must bear a mark, called the CE Mark, to be registered and legally marketed in the EU after that date. The regulatory requirements for marketing are based on the classification of the individual products and EU member countries are not allowed to impose any additional requirements on medical device manufacturers other than the language used in product labeling. In April 2003, we fulfilled the requirements of the EU In-Vitro Diagnostic Directive Essential Requirements for our three RAMP® cardiac tests and RAMP® Reader; in December 2006, we registered our NT-proBNP test as well as our RAMP® liquid cardiac marker controls used by laboratories to verify Kit performance and user technique; in May 2009, we registered our RAMP® 200 Reader, in December 2009, we registered our Influenza A+B Test and in September, 2010 our RSV Test. In November 2012, we received the CE mark for D-dimer, capable of the quantification of D-dimer in the blood important for detecting a variety of thrombotic disorders. In May 2013, we received CE Mark for our second generation RAMP® Cardiac Controls used by laboratories to verify Kit performance and user technique. These controls are manufactured for us by a European company who holds the 510(k) clearance with the FDA. Through the EC Declaration of Conformity, we are entitled to apply the CE Mark to these products. In January 2016, we received CE Mark for our Procalcitonin test. As with the FDA, future RAMP® tests may have different classifications, which would require ISO 13485 registration as well as a technical file review by a registration organization, known as a Notified Body, prior to authorization to apply the CE Mark.

 

 
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Prior to sale in the United States, RAMP® clinical products will typically require pre-marketing clearance through a filing with the FDA called a 510(k) submission. A 510(k) submission claims substantial equivalence to a similar, previously cleared product known as a “predicate device” and minimally takes about ninety (90) days for clearance approval once a submission is made. Some RAMP® tests may detect analytes or have applications or intended uses for which there are no equivalent products on the market. In such cases, the test will require pre-market approval, a process that requires clinical trials to demonstrate clinical utility, as well as the safety and efficacy of the product. Including clinical trials, the pre-market approval process can take approximately two years.

 

Marketing clearance for our RAMP® Myoglobin Assay and RAMP® Reader was received in 2001. Marketing clearances for the RAMP® CK-MB Assay and the RAMP® Troponin I Assay on our RAMP® Reader were received in May 2004. The marketing clearance for our RAMP® Influenza A+B Assay and our RAMP® 200 Reader was received in April 2008. The marketing clearance for our RAMP® NT-proBNP Assay on our RAMP® Reader was received in July 2008. The marketing clearance for our RAMP® RSV Assay on our RAMP® 200 was received in July 2009.

 

As of March 23, 2012, we have received FDA premarket clearance for Myoglobin, CK-MB, Troponin I and NT-proBNP on our RAMP® Reader for POC and central-lab use and Influenza A+B and RSV on our RAMP® 200 reader for POC and central-lab use. In January 2013, documentation of extensive internal validation testing was completed as required by the FDA guidance “Replacement Reagent and Instrument Family Policy”, to allow for the addition of the 510(k) cleared RAMP® 200 as a central laboratory analyzer for use with the 510(k) cleared RAMP® Troponin I, NT-proBNP, CK-MB and Myoglobin cardiovascular tests. This testing demonstrated that the RAMP® Reader and the RAMP® 200 give equivalent results when the cardiac products are used in a laboratory setting. We concluded that additional 510(k) clearance of the RAMP® 200 use with the cardiovascular products was not required under the FDA’s regulations. Our D-dimer and PCT assays are not cleared by the FDA in the U.S.

 

We are currently developing additional tests that we will have to clear with the FDA through the 510(k) notification procedures. These new test products are crucial for our continued success in the human medical market. If we do not receive 510(k) clearance for a particular product, we will not be able to market that product in the United States until we provide additional information to the FDA and gain premarket clearance. The inability to market a new product during this time could harm our future sales in the United States.

 

In order to fully penetrate the physician’s office lab market in the United States, we will need to obtain waiver status under the CLIA. A CLIA-waived test is a test that employs methodologies that are so simple and accurate as to render the likelihood of erroneous results negligible and/or pose no reasonable risk of harm to the patient if the test is performed incorrectly. CLIA-waived tests are designed to be performed by less experienced and untrained personnel. The current CLIA regulations divide laboratory tests into three categories: “waived,” “moderately complex” and “highly complex.” Many of the tests performed using our RAMP® platform are in the “moderately complex” category. Moderately complex tests can only be performed in laboratories fulfilling certain criteria, which are fulfilled by a minority of physician office laboratories in the United States.

 

In Canada, in vitro diagnostics are regulated by the Therapeutic Products Directorate of Health Canada (“TPD”) and are licensed for sale through submission to the TPD. The timeline for approval is similar to that of the FDA’s 510(k) process. As of January 2003, all new and existing class II, III and IV Medical Device Licenses (“MDL”) in Canada also require a valid International Organization for Standardization (“ISO”), 13485 or ISO 13488 Quality System Certificate from a registrar recognized by the Canadian Medical Devices Conformity Assessment System (“CMDCAS”). We achieved registration to the ISO 13485:2003 standard in April 2004. An MDL was issued for our Myoglobin Assay and Reader in 2002. MDLs were received for our RAMP® CK-MB Assay and RAMP® Troponin I Assay in August 2004; for our RAMP® NT-proBNP Assay in June 2007, and for our RAMP® liquid cardiac marker controls used by laboratories to verify Kit performance and user technique. These controls are manufactured for us by a U.S. company who holds the 510(k) clearance with the FDA. An MDL was received for our RAMP® Influenza A+B Assay and RAMP® 200 reader in May 2009. An MDL was received for our RAMP® RSV Assay in May 2010. In October 2012, we received an MDL from Health Canada for our RAMP® D-dimer Assay. In May 2013, we received an MDL from Health Canada as a private labeler for our second generation RAMP® Cardiac Controls. In January 2016, we received an MDL from Health Canada for our RAMP® PCT Assay.

 

In other parts of the world, the regulatory process varies greatly and is subject to rapid change. Many developing countries only require an import permit from their own government agency or proof of approval from the regulatory agency in the manufacturer’s country of origin. We require our marketing and distribution partners to ensure that all regulatory requirements are met in order to sell our RAMP® tests in their respective territories.

 

Clinical consultants are used to support in-house resources where necessary to develop protocols and prepare regulatory submissions for government agencies such as the FDA and the TPD. We completed multi-center clinical trials for our RAMP® Myoglobin Assay and our RAMP® Reader in 2001, for our RAMP® CK-MB Assay and our RAMP® Troponin I Assay in November 2003, for our RAMP® NT-proBNP Assay in November 2006 and for our Influenza A+B Assay and our RAMP® 200 reader in May 2007, and for our RAMP® RSV Assay in November 2008. We completed a single site clinical study to determine the reference range for our RAMP® D-dimer Assay in August 2012. We completed a single site clinical study to determine the reference range for our RAMP® PCT Assay in October 2015.

 

 
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ON-SITE ENVIRONMENTAL TESTING

 

Biodefense Testing

 

There are currently no regulatory approvals or clearances required to market on-site environmental biodefense tests in North America. There appears to be some support from the market for regulatory oversight of such testing, and regulatory agencies such as the Department of Homeland Security may in the future impose substantial requirements upon the development, manufacturing and marketing of devices through the regulation of laboratory and clinical testing procedures, manufacturing, marketing and distribution by requiring labeling, registration, pre-market notification, clearance or approval, record keeping and reporting. While additional regulatory requirements will make it more difficult for poorly performing products to participate in the market, they could also significantly increase the time and cost for companies to bring new tests to market, creating a barrier to entry.

 

The lack of regulatory oversight in the biodefense industry means there is virtually no independent data available for a customer to verify a manufacturer’s product claims. Since launching our Anthrax Test, we have received third party validation of the product’s performance. See “On-Site Environmental Testing Market, Competition.” Currently, however, companies are not required to have any form of regulatory clearance to market handheld assays for the detection of biodefense threats such as anthrax. See “Risk Factors.”

 

The performance and field-testing programs conducted by the AOAC in 2004 through 2006 were developed in collaboration with and funded by the DHS. One of the goals of the testing programs was to develop industry performance standards. The final form and substance of these possible standards and the impact on our industry is currently unclear.

 

Vector Environmental Testing

 

There is no regulatory clearance required for our RAMP® West Nile Virus or RAMP® Dengue tests because it is only used for testing mosquitoes.

 

MANUFACTURING REGULATIONS AND VARIOUS FEDERAL, STATE, LOCAL AND INTERNATIONAL REGULATIONS

 

The 1976 Medical Device Amendment also requires us to manufacture our RAMP® products in accordance with Good Manufacturing Practice regulations. Current Good Manufacturing Practices (“CGMPs”) requirements are set forth in the 21CFR 820 Quality System Regulation. These requirements regulate the methods used in, and the facilities and controls used for the design, manufacture, packaging, storage, installation and servicing of our medical devices intended for human use. Our manufacturing facility is subject to periodic inspections. In addition, various state regulatory agencies may regulate the manufacture of our products.

 

Federal, state, local and international regulations regarding the manufacture and sale of health care products and diagnostic devices may change. In addition, as we continue to sell in foreign markets, we may have to obtain additional governmental clearances in those markets.

 

To date, we have complied with the following federal, state, local and international regulatory requirements:

 

 

In December 2012, the United States FDA conducted its second routine Quality Systems Inspection at Response since August of 2007. The four-day FDA visit covered FDA’s Quality System/CGMPs Regulations for Medical Devices. The inspection was successful and there were no Form 483 observations issued to Response. Health Canada Therapeutic Products Directorate: In 2004, the TPD granted our manufacturing facility Medical Device Licenses, based on the Medical Device Regulations (SOR/98-282), Section 36, for the manufacture of our medical devices.

 

 

International Organization for Standardization: In July 2004, we received our ISO 9001 certification, expanding our compliance with international quality standards. In April 2004, we received ISO 13485 Quality System certification as required by the 2003 European In Vitro Device Directive. This certified our quality system specifically to medical devices. In April 2004, we received the Canadian Medical Device Conformity Assessment System stamp on our ISO 13485 certificate to signify compliance with Health Canada regulations. In June 2010, we received our recertification to the ISO 13485:2003 Quality System Standard for medical devices.

 

RESEARCH AND DEVELOPMENT EXPENDITURES

 

Research and development activities relate to development of new tests and test methods, clinical trials, product improvements and optimization, activities required under our research collaborations and enhancement of existing products. Our research and development expenses, which consist of personnel costs, facilities, materials and supplies, regulatory and clinical trial activities and other related expenses were $2.9 million, $3.5 million, and $2.4 million for the years ended December 31, 2015, 2014, and 2013, respectively.

 

 
-16-

 

 

SEASONAL VARIATIONS IN BUSINESS

 

Our operating results may fluctuate from quarter to quarter due to many seasonal factors. Many of our end-users are government related organizations at a federal, state/provincial or municipal level. Consequently, our sales may be tied to government budget and purchasing cycles. Sales may also be slower in the traditional vacation months, could be accelerated in the first or fourth calendar quarters by customers whose annual budgets are about to expire (especially affecting purchases of our fluorescent Readers), may be distorted by unusually large Reader shipments from time to time, or may be affected by the timing of customer cartridge ordering patterns. Sales of our Influenza A+B Tests are typically slower in the non-traditional influenza months of April through September.

 

BACKLOG

 

Because we ship our products shortly after we receive the orders from our customers, we generally operate with a limited order backlog. As a result, our product sales in any quarter are generally dependent on orders that we receive and ship in that quarter. As a result, any such revenue shortfall would immediately materially and adversely impact our operating results and financial condition. The sales cycle for our products can fluctuate, which may cause revenue and operating results to vary significantly from period to period. We believe this fluctuation is primarily due (i) to seasonal patterns in the decision-making processes by our independent distributors and direct customers, (ii) to inventory or timing considerations by our distributors and (iii) to the purchasing requirements by various international governments to acquire our products.

 

RISKS ATTENDANT TO FOREIGN OPERATIONS AND DEPENDENCE

 

63% of our sales in 2015 were generated from China primarily through Shanghai Elite whose territory was expanded to encompass all of China in early 2015, thus resulting in a greater dependence on Shanghai Elite’s performance. Shanghai Elite met its contractual minimums for purchases of products from us in the first half of the year. In August 2015, Shanghai Elite advised us that they had built up inventory at a higher rate than their end user sales at the time. As a result, they made lower purchases than their contractual minimums during the second half of the year. Effective March 3, 2016 Shanghai Elite no longer has exclusive rights to sell our products in China.

 

FINANCIAL INFORMATION AND INDUSTRY SEGMENTS

 

The Company operates primarily in one business segment, the research, development, commercialization and distribution of diagnostic technologies, with primarily all of its assets and operations located in Canada. The Company’s revenues are generated from product sales primarily in China, the United States, Europe, Asia and Canada. Expenses are primarily incurred from purchases made from suppliers in Canada and the United States.

 

The geographical distribution of our product sales is as follows (in thousands):

 

 

Years ended December 31,

 

2015

   

2014

   

2013

 
      $        $       $  

China

    7,516       6,906       7,153  

United States

    1,379       1,246       1,670  

Russia

    991       1,031       918  

Japan

    521       378       625  

Canada

    42       73       35  

Other

    1,524       1,194       1,130  

Total

    11,973       10,828       11,531  

 

 
-17-

 

 

Product sales by type of product were as follows (in thousands):

 

Years ended December 31,

 

2015

   

2014

   

2013

 
   

$

   

$

   

$

 

Cardiovascular

    10,826       9,785       10,056  

Infectious Diseases

    122       163       450  

Biodefense products

    312       360       403  

Vector Environmental

    713       520       622  

Total

    11,973       10,828       11,531  

 

For further information, please see Item 6 (“Selected Financial Data”).

 

WORKING CAPITAL

 

Please see Item 6 (“Selected Financial Data”) and Item 7 (“Management's Discussion and Analysis of Financial Condition and Results of Operations").

 

EMPLOYEES

 

On December 31, 2015, we had 56 full-time employees.

 

AVAILABLE INFORMATION

 

Our corporate internet address is http://responsebio.com. At the "Investors" section of this website, we make available free of charge our Annual Report on Form 10-K, our Annual Proxy statement, our quarterly reports on Form 10-Q, our press releases, and any amendments to these reports, as soon as reasonably practicable after we electronically file them with, or furnish them to, the Securities and Exchange Commission, or the SEC. The information found on our website is not part of this Annual Report on Form 10-K. In addition to our website, the Securities and Exchange Commission, or the SEC, maintains an Internet site at www.sec.gov/edgar that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.

 

 
-18-

 

 

ITEM 1A.     RISK FACTORS

 

We operate in a rapidly changing environment that involves numerous uncertainties and risks. If any of the following risks actually occur, our business could be harmed and the trading price of our common stock could decline. This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. In evaluating our business, you should carefully consider the following risks in addition to the other information in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.

 

RISKS RELATED TO OUR COMPANY

 

We may need to raise additional capital to fund operations. If we are unsuccessful in attracting capital to our Company, we will not be able to continue operations or will be forced to sell assets to do so. Alternatively, capital may not be available to our Company on favorable terms, or at all. If available, financing terms may lead to significant dilution to the shareholders' equity in our Company.

 

We are not profitable and although we have positive cash flows from operations in 2015, we historically have had negative cash flow from operations. We believe that with a combination of some or all of various cost reduction, cash conservation, sales and marketing, and financing initiatives, and with the targeted execution under the Joinstar Agreements, and strengthening of our China sales/distribution, based on the projected level of operations, our cash and cash equivalent balances, including cash generated from operations, will be sufficient to meet our anticipated cash requirements through the next twelve months. If we are unable to sustain cash flow positive operations and we are unable to obtain additional financing, we will be required to reduce or restructure operations or we may be required to cease operations. We have historically relied primarily on debt and equity financings to fund our operations and commercialize our products. Additional capital may not be available, at such times or in amounts as needed by us. Even if capital is available, it might be on adverse terms. Any additional equity financing will be dilutive to our shareholders. If access to sufficient capital is not available as and when needed, our business will be materially impaired and we may be required to cease operations, curtail one or more product development, manufacturing improvement, or sales generation programs, attempt to obtain funds through collaborative partners or others that may require us to relinquish rights to certain technologies or product candidates, or we may be required to significantly reduce expenses, sell assets, seek a merger or joint venture partner, file for protection from creditors or liquidate all our assets.

 

In February 2014, we secured a US$2.5 million term loan from SVB of which an initial US$1.5 million was drawn. This term loan contains covenants that may limit our flexibility in planning for or reacting to changes in our business and our industry, including limitations on incurring additional indebtedness, making investments, granting liens and merging or consolidating with other companies. Complying with these covenants may impair our ability to finance our future operations or capital needs or to engage in other favorable business activities.

 

If a future event of default under the term loan were to occur and it is not cured, waived, or forbeared, SVB could cause all amounts outstanding with respect to the term loan to be due and payable immediately. We cannot assure that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments, either upon maturity or if accelerated upon the event of default, or that we would be able to refinance or restructure the payments on those debt instruments.

 

Our inability to generate sufficient cash flows may result in our Company not being able to continue as a going concern.

 

We have incurred significant losses to date and we expect these losses to continue for the near future. As at December 31, 2015, we had an accumulated deficit of $120.4 million and until the last three quarters, have only generated positive cash flow from operations in one other period, in the first quarter of 2013. Our existing cash resources, along with cash generated from operations, may not be sufficient to fund operations for at least the next twelve months. In addition, we may not be able to successfully achieve the last development milestone in our collaboration agreement with Joinstar on a timely basis, or at all. Accordingly, there is substantial doubt about our ability to continue as a going concern. We may need to seek additional financing to support our continued operations and there are no assurances that any such financing can be obtained on favorable terms, if at all. In view of these conditions, our ability to continue as a going concern is dependent upon our ability to obtain such financing and, ultimately, on sustaining profitable operations. The outcome of these matters cannot be predicted at this time. The consolidated financial statements for the year ended December 31, 2015 do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should we be unable to continue in business. Such adjustments could be material. If we are unable to generate sufficient revenue, positive cash flow or earnings, or raise sufficient capital to maintain operations, we may not be able to continue operating our business and be forced to sell our Company or liquidate our assets.

 

 
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We have evolved from a pure development company to a commercial enterprise but to date have realized minimal operating profits from product sales. For the years ended December 31, 2015, 2014 and 2013, we have a net loss of $0.2 million, $2.1 million, and $6.0 million, respectively; however, excluding the non-cash unrealized loss or gain on revaluation of our warrant liability we have incurred adjusted losses of $1.1 million, $6.1 million, and $3.9 million. This fiscal year is the first time we have generated income from operations but there is uncertainty if this will continue. Generating revenues and profits will depend significantly on our ability to obtain sufficient financing and to successfully develop, commercialize, manufacture and market our products. The time necessary to achieve market success for any individual product is uncertain. No assurance can be given that product development efforts will be successful, that required regulatory approvals can be obtained on a timely basis, if at all, or that approved products can be successfully manufactured or marketed. Consequently, we cannot assure that we will ever generate significant revenue or achieve or sustain profitability. As well, there can be no assurance that the costs and time required to complete commercialization will not exceed current estimates. We may also encounter difficulties or problems relating to research, development, manufacturing, distribution and marketing of our products. In the event that we are unable to generate adequate revenues, cash flow or earnings, to support our operations, or we are unable to raise sufficient capital to do so, we may be forced to cease operations and either sell our business or liquidate our assets.

 

We must increase sales of our products and/or decrease our expenses, or we may not be able to become profitable or sustain profitability.

 

Our ability to become profitable and to increase profitability will depend, in part, on our ability to increase our sales volumes. Increasing the sales volume of our products will depend upon, among other things, our ability to:

 

 

continue to improve our existing products and develop new and innovative products;

 

increase our sales and marketing activities;

 

effectively manage our manufacturing activities; and

 

effectively compete against current and future competitors.

 

We cannot provide assurance that we will be able to successfully increase our sales volumes of our products and/or decrease our expenses to become profitable or sustain profitability.

 

Current and future conditions in the global economy and in key country markets we serve may have a material adverse effect on our business prospects, financial condition and results of operations.

 

Economic performance in markets we serve has been mixed, with some countries experiencing slow growth or recessions. In addition, country specific crises such as the impact of low oil prices on certain oil producing countries and economic sanctions on countries such as Russia may impact our sales in those specific countries. Although we cannot predict the extent, timing, or ramifications of future financial crisis, world political events, and the economic outlook in different economies, we believe that a downturn in the world's major economies and the related constraints in the credit markets will heighten a number of material risks to our business, results of operations, cash flows and financial condition, as well as our future prospects, including the following:

 

 

Credit availability and access to equity markets — Issues involving liquidity and capital adequacy affecting lenders could affect our ability to fully obtain credit facilities or additional debt and could affect the ability of any lenders to meet their funding requirements when we need to borrow. Further, the high level of volatility in the equity markets and the decline in our stock price may make it difficult for us to access the equity markets for additional capital at attractive prices, if at all. If we are unable to obtain credit, or access the capital markets, where required, our business could be negatively impacted.

 

Credit availability to our customers — We believe that many of our customers are reliant on liquidity from global credit markets and, in some cases, require external financing to fund their operations. As a consequence, if our customers lack liquidity, it would likely negatively impact their ability to pay amounts due to us.

 

Currency and import controls – Our customers may be impacted by various governmental controls on currency and restrictions on imports. These controls may impact our customers’ ability to order and pay for our product.

 

Commitments from our customers — There is a greater risk that customers may be slower to make purchase commitments during times of economic uncertainty or significant currency fluctuations, which may negatively impact the sales of our new and existing products.

 

Supplier difficulties — If one or more of our suppliers experiences difficulties that result in a reduction or interruption in supplies or services to us, or they fail to meet any of our manufacturing requirements, our business could be adversely impacted until we are able to secure alternative sources, if any.

 

Many of these and other factors affecting the diagnostic technology industry are inherently unpredictable and beyond our control.

 

 
-20-

 

 

We rely significantly on third party distributors and alliance partners to market and sell our products. If we are unable to successfully negotiate or maintain acceptable agreements with potential distributors, our ability to access various markets with our products may be significantly restricted. Further, we may not be able to negotiate agreements that would permit us to sell our products at a profit.

 

Our marketing strategy in both the environmental and the medical diagnostics markets depends significantly on our ability to establish and maintain arrangements with third party distributors for marketing and distribution. We have recently added new distributors in a number of markets, including China, and we plan to add additional new distributors in existing and new markets. There can be no assurance that we will be able to negotiate or maintain acceptable arrangements with new and/or existing distributors enabling us to sell our products in new and existing markets or be able to sell our products at acceptable prices or volumes. Consequently, we may not be able to generate sufficient revenue or gross margins to achieve and maintain profitability.

 

We rely on a limited number of third party distributors to market and sell our products in China.

 

In the first quarter of 2015, we granted Shanghai Elite exclusive distribution rights to all of China excluding Taiwan, Hong Kong and Macao Special Administration Region effective April 23, 2015. We cannot predict whether our new national distributor will fully replace the sales previously provided by our former distributors or that Shanghai Elite will be able to accurately determine end-user buying patterns, which would have an adverse impact on our business performance in future years, as was the case in the second and third quarters of 2013 and the first quarter of 2014. Additionally, our national distributor in China made fewer purchases from us during the third and fourth quarters of 2015 as they are still trying to determine end-user buying patterns. Effective March 3, 2016 Shanghai Elite no longer has exclusive rights to sell our products in China.

 

A substantial portion of our business is in China where we have limited direct presence to closely monitor and understand the rapidly expanding market.

 

Approximately 62% of our product revenue during the year ended December 31, 2015 came from sales of our products through our distribution channel partner in China. China is a dynamic and rapidly evolving market for medical technology including the POC diagnostic testing market in which we compete. While we have established a direct presence in China via a Representative Office to allow us to better monitor and understand this market, there is no assurance that these activities will be effective and will enable us to anticipate changes in this market or may impact the relationships that we have with existing Chinese distributors which could materially and adversely impact our product sales in China.

 

As we generate a large part of our revenues from international product sales and services for international customers, we are subject to risks inherent in international business, including currency exchange risk, difficulty in collecting accounts receivable, and possible marketing restrictions. Consequently, we may be restricted from selling our products in certain jurisdictions or our products may not be able to be sold at a profit.

 

There are various operational and financial risks associated with international activity. We may face difficulties and risks in our international business, including changing economic or political conditions, export restrictions, currency risks, export controls relating to technology, compliance with existing and changing regulatory requirements, tariffs and other trade barriers, longer payment cycles, problems in collecting accounts receivable, reimbursement levels, government mandated price reductions, reduced protection for intellectual property, potentially adverse tax consequences, limits on repatriation of earnings, the burdens of complying with a wide variety of foreign laws, nationalization, war, insurrection, terrorism and other political risks and factors beyond our control. In addition, sales to countries such as Russia may be disrupted by short and long-term international sanctions, which may involve the requirement to obtain export licenses, the cessation of business activities in those countries, implementations of compliance programs, and prohibitions on the conduct of our business. As a consequence, these potential international risks may prevent us from selling our products in certain jurisdictions, lead to competitive products similar to ours developed and sold without properly licensing our IP, may make it very difficult or even impossible to collect on accounts receivable or may impose a variety of additional expenses on our business such that we cannot sell our products at a profit. For international sales, we price and invoice our products primarily in U.S. dollars and consequently incur a U.S./Canadian foreign exchange risk. Similarly, our customers in countries that do not have the U.S. dollar as their home currency, such as China and Russia, may face additional pricing pressure if the U.S. dollar moves unfavorably against their home currency. We also expect that there may be a greater requirement in the future for sales to European customers to be priced and invoiced in Euros. Any significant adverse change in currency exchange rates may negatively impact our profit margins such that we may not be able to generate positive cash flow or earnings from our operations. To date, we have not made any provision for a currency-hedging program. We periodically evaluate options to mitigate our exposure to currency fluctuations, but there can be no assurance that we will be able to do so.

 

 
-21-

 

 

We are not able to predict sales in future quarters and a number of factors affect our periodic results, which makes our quarterly operating results less predictable.

 

We are not able to accurately predict our sales in future quarters. A significant portion of our product sales is made through distributors, both domestically and internationally. Many of our distributors or sales agencies in our biggest markets are new. We do not have adequate experience working with them to accurately predict their future performance. As a result, our financial results, quarterly product sales, trends and comparisons are affected by as-yet-untried new distributors, seasonal factors and fluctuations in the buying patterns of end-user customers, our distributors, and by the changes in inventory levels of our products held by these distributors. For example, higher utilization rates of our NT-proBNP test may be due to a higher number of emergency department visits by patients exhibiting shortness of breath, a symptom of both heart failure and of influenza. However, higher utilization may also result from greater awareness, education and acceptance of the uses of our tests, as well as from additional users within the hospitals. Accordingly, our sales in any one quarter or period are not indicative of our sales in any future period.

 

We generally operate with a limited order backlog, because we ship our products shortly after we receive the orders from our customers. As a result, our product sales in any quarter are generally dependent on orders that we receive and ship in that quarter. As a result, any such revenue shortfall would immediately materially and adversely impact our operating results and financial condition. The sales cycle for our products can fluctuate, which may cause revenue and operating results to vary significantly from period to period. We believe this fluctuation is primarily due to (i) seasonal patterns in the decision-making processes by our independent distributors and direct customers, (ii) inventory or timing considerations by our distributors (iii) the purchasing requirements by various international governments to acquire our products and (iv) the ordering frequency of our distributors and direct customers. In addition, distributors may fail to make their contractually required minimum purchases, may change their own business priorities and interests without notifying us in advance, may otherwise violate distribution agreements or may not renew upon the expiration of current distribution agreements.

 

Accordingly, we believe that period to period comparisons of our results of operations are not necessarily meaningful. In the future, our periodic operating results may vary significantly depending on, but not limited to, a number of factors, including:

 

 

new product announcements made by us or our competitors;

 

changes in our pricing structures or the pricing structures of our competitors;

 

our ability to develop, introduce and market new products on a timely basis, or at all;

 

the timing and size of orders from our distributors;

 

country specific issues or restrictions affecting the ability of our distributors to purchase our products;

 

the seasonality of sales of our Influenza A+B products and the impact on demand based on the severity of the Influenza season;

 

our ability to maintain existing distributors and grow our Cardiovascular and Influenza A+B and RSV testing revenues;

 

our manufacturing capacities and our ability to increase the scale of these capacities;

 

the mix of product sales between our instruments and our consumable products;

 

our ability to take advantage of supply constraints by our competitors due to regulatory and other issues;

 

the amount we spend on research and development; and

 

changes in our strategy.

 

Although we are a Canadian company, a small number of our products are subject to U.S. export control and economic sanctions laws.

 

We have determined that some of our products are subject to U.S. export controls and may require a license from the U.S. Government prior to export to countries subject to economic sanctions. Although these products are manufactured in Canada, they incorporate U.S. origin components, and for that reason, they may be subject to U.S. controls.

 

As a result, we must monitor, on an on-going basis, our compliance with economic sanctions, if any, and the level of U.S. origin components contained in our products that may lead to more of our products being subject to U.S. controls. If we inadvertently violate U.S. export control and economic sanction laws, significant penalties that could include fines, termination of our ability to export our products, and/or referral for criminal prosecution may be imposed against us, our management, or other employees. These penalties may have a material adverse effect on our business, operating results, and financial condition.

 

We may not be able to compete effectively with larger, more established entities or their products, or with future organizations or future products, which could cause our sales to decline.

 

In-vitro diagnostics is a well-established field in which several competitors have substantially greater financial resources and larger, more established marketing, sales and service organizations than we do.

 

 
-22-

 

 

Our principal competitors in the human diagnostic market are Alere Inc. (Alere), Abbott Point of Care Inc. (Abbott), Mitsubishi Chemical Corporation (Mitsubishi), Roche Diagnostics (Roche), Siemens AG (Siemens), Becton Dickinson Corporation, and Quidel Corporation. Alere, Abbott and Roche have quantitative POC systems, and Mitsubishi and Siemens produce a small quantitative bench-top system, for the detection of some cardiac markers.

 

In addition, in various emerging markets such as China, there may be local competitors who sell only in that specific country. Some of these local competitors may be very strong competitors in their local markets due to factors which may include lower cost of production, stronger sales, marketing and distribution capabilities, less stringent quality standards and customer quality expectations, customer familiarity and preference for local suppliers and local government environments which may favor local companies and their products and/or may preferentially, or by statute, favor POC testing device manufacturers offering the lowest price.

 

In the biodefense testing market, our primary competitors are Alexeter Technologies LLC (Alexeter), Idaho Technology Inc., Cepheid Inc. (Cepheid) and Biofire Defense. Alexeter sells rapid on-site immunoassay tests that are read by an instrument and Cepheid and Biofire Defense have a polymerase chain reaction test system being sold in this marketplace.

 

In the Vector environmental testing market, our primary competitor is VecTor Test Systems Inc. VecTor Test Systems Inc markets and sells a product for the rapid detection of WNV, Chikungunya, Malaria, Dengue, SLE, EEE and WEE among other tests..

 

We believe the primary competitors in the POC Influenza A+B and RSV testing market are Binax, Inc., a division of Alere, Becton Dickinson Corporation and Quidel Corporation. Each of these companies has qualitative POC tests for the detection of Influenza A+B and RSV.

 

Many of our competitors have significantly larger product lines to offer and greater financial and other resources to acquire or develop new or competing technologies than we do. In addition, many of these competitors have large sales forces and well-established distribution channels and well-known brand names. In the event that we are not able to compete successfully in the marketplace, we may face limited adoption of our products by potential customers or erosion of current market share, which would seriously impede our ability to generate revenue.

 

Our business may be impacted by political events, war, terrorism, public health issues, natural disasters and other circumstances.

 

War, terrorism, geopolitical uncertainties, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on our Company, our suppliers, logistics providers, manufacturing vendors, and customers, including our channel partners. Our operations are subject to interruption by events beyond our control, which could decrease demand for our products, make it difficult or impossible to make and deliver products to our customers, including channel partners, or to receive components from our suppliers, and create delays and inefficiencies in our supply chain. Should any of these events occur, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to re-obtain market share or resume operations.

 

A larger-than-required and high cost facility lease and associated cash used to repay additional financial obligations associated with the facility will negatively impact our operating results and financial position.

 

In May 2007, we entered into an agreement to lease a multi-use, 46,000 square foot facility in Vancouver, British Columbia, Canada. Although we have recently brought our Reader manufacturing in-house, this facility, which we have occupied as our main operation center since 2008, is significantly larger than required for our near term production requirements. The excess space is difficult to sublease due to the current layout of the company’s manufacturing operations and the significant availability of space in other buildings in the local real estate market. In addition to rental payments for the facility, we are obligated to repay with interest over the next 7 years the $5.2 million balance due as of December 31, 2015 on the repayable leasehold improvement allowance.

 

We believe that the financial obligation associated with this facility lease and associated liabilities represent a total facilities cost significantly above the current real estate market prevailing lease rates. This factor, together with the excessive size of the facility, may adversely affect the company’s financial performance.

 

Should there be a downturn in our business or the markets in which we compete, we may not achieve maximum utilization of our facility. As a result, we may then seek an alternative use for all or a portion of the property or seek to sub-lease some or all of our property. We may experience unanticipated decreases in productivity and other losses due to inefficiencies relating to any such transition, or delays in obtaining any required approvals or clearances from regulatory agencies related to the validation of any new manufacturing facilities. For instance, the scale-up of manufacturing at our planned facility could result in lower than expected manufacturing output and higher than expected product costs.

 

 
-23-

 

 

Sole-source suppliers provide some of our raw materials. In the event a sole-sourced raw material became unavailable, there may be a delay in obtaining an alternate source, and the alternate source may require significant development to meet product specifications. It is also possible that we may not be able to locate an acceptable alternate source on a timely basis, or at all. Consequently, we may face difficulty in manufacturing, or be entirely unable to manufacture, some of our products.

 

Single-source suppliers provide some key components, in particular antibodies, used in the manufacture of our products. We do not have supply agreements with all of our single-sourced suppliers. We are currently negotiating supply agreements for some of the key reagents that we use. Although we maintain inventories of some key components, including antibodies, any loss or interruption in the supply of a sole-sourced component or raw material would have a material adverse effect on our ability to manufacture these products until a new source of supply is qualified and, as a result, may temporarily or even permanently prevent us from being able to sell our products. Given the nature of variations in biological raw materials, a new supply source of antibodies may require considerable time and resources to develop manufacturing procedures to meet the required product performance levels for commercial sale. Additionally, it may require us to enter into supply agreements on commercially reasonable terms with the new suppliers to ensure supply or there could be a material adverse effect on our ability to manufacture product for commercial sale.

 

Interruption in the supply of any sole-sourced component or raw material would likely have a material adverse effect on our profit margins, our ability to develop and manufacture products on a timely and competitive basis, and the timing of market introductions and subsequent sales of products.

 

We rely significantly on third party manufacturers for some components of our products and rely on third party manufacturers of certain equipment necessary for us to scale-up our internal capacity to manufacture products. If these third party manufacturers experience difficulties, our ability to serve various markets with our products may be significantly restricted.

 

All of our test kits, or Kits, and our portable fluorescence readers, or Readers, are currently produced in-house. Some of the components of our Readers are assembled by third party manufacturers. To meet the projected demand for our products, we will require additional equipment to scale up our manufacturing processes. Some of this equipment will require customization that may increase the lead-time from the supplier. If demand for our products significantly exceeds forecasts, or manufacturing equipment is unable to be delivered to us on schedule, we may not be able to meet customer requirements.

 

Some components of our instruments face obsolescence pressure. If we are not able to secure enough of these components or design and receive any required regulatory approvals for replacement components to meet our future demands, our ability to serve various markets may be significantly restricted or eliminated.

 

As component manufacturers manage their product lifecycles, some critical components used in the manufacturing of our Readers may become unavailable resulting in delays in production or lead to the inability to manufacture our instrument as currently designed. In some cases, we are able to secure sufficient quantities of the components prior to their obsolescence to continue manufacturing until replacement components can be sourced or designed and the required regulatory approvals are received. Should these safety stocks of older components or product design updates for replacement components prove insufficient, we may experience significant delays in production or the potential inability to manufacture our instrument as currently designed may occur. As a result, we may not be able to meet customer requirements, and that could have a material adverse effect on future sales.

 

To the extent we are able to enter into collaborative arrangements or strategic partnerships, we will be exposed to risks related to those collaborations and partnerships.

 

We are currently party to a collaboration agreement and related supply agreement with Joinstar. The success of the collaboration agreement and the timing of our receipt of the development milestones is dependent on our and Joinstar’s success in the co-development of components and assays to be run on a new immunoassay analyzer developed by Joinstar. In addition, since marketing and distribution of the co-developed assays will be the responsibility of Joinstar, we are dependent on the success of their marketing efforts under the supply agreement. Additionally, the collaboration and related supply agreements contain limited non-compete clauses that prevent us from developing an instrument that has the same specific attributes of the Joinstar instrument as well as prevents us from developing similar assays that would run on such an instrument during the terms of the agreements.

 

The collaboration with Joinstar could subject us to a number of risks, including the risk that:

 

 

We may not be able to control the amount and timing of resources that Joinstar will devote to the co-development and marketing of the assays;

 

Joinstar may experience financial difficulties or technical difficulties in the development of their new immunoassay analyzer; and

 

Significant changes in a Joinstar’s business strategy may adversely affect their willingness or ability to complete their obligations under our agreements.

  The limited non-compete clauses may inhibit our ability to enter into a strategic partnership with a Company with an instrument that has the same specific attributes of the Joinstar instrument during the terms of the agreements.

 

 
-24-

 

 

We may not be able to adequately protect our technology and proprietary rights, and third parties may claim that we infringe on their proprietary rights. If we cannot protect our technology, companies with greater resources than us may be able to use our technology to make products that directly compete with ours. Additionally, third parties claiming that we infringe on their proprietary rights may be able to prevent us from marketing our products or force us to enter into license agreements to do so. Both situations may negatively impact our ability to generate revenues, cash flows and earnings.

 

The success of our technology and products is highly dependent on our intellectual property portfolio, for which we have sought protection through a variety of means, including patents (both issued and pending) and trade secrets, see "Intellectual Property". There can be no assurance that any additional patents will be issued on existing or future patent applications or on patent applications licensed from third parties. Even when such patents have been issued, there can be no assurance that the claims allowed will be sufficiently broad to protect our technologies or that the patents will provide protection against competitive products or otherwise be commercially valuable. No assurance can be given that any patents issued to or licensed to us will not be challenged, invalidated, infringed, circumvented or held unenforceable. In addition, enforcement of our patents in foreign countries will depend on the attitudes, laws and procedures in those foreign jurisdictions. Monitoring and identifying unauthorized use of our technologies or licensed technologies may prove difficult, and the cost of litigation to enforce our IP may impair our ability to guard adequately against such infringement. If we are unable to successfully defend our intellectual property, third parties may be able to use our technology to commercialize products that compete with ours. Further, defending intellectual property can be a very costly and time-consuming process. The costs and delays associated with such a defense, even if successful, may negatively impact our financial position.

 

There are many patent claims in the area of lateral flow immunoassays and some patent infringement lawsuits have occurred amongst parties, other than ourselves, with respect to patents in this area. Our commercial success may depend upon our products not infringing on any intellectual property rights of others and upon no such claims of infringement being made. In the event that a third party was able to substantiate a claim against us, it could result in us not being able to sell our products in certain markets or at all. Further, as a result we may be required to enter into license agreements with said third parties on terms that would negatively impact our ability to conduct our business. Even if such claims were found to be invalid, the dispute process would likely have a materially adverse effect on our business, results of operations and prospects. To date, to the best of our knowledge, there have been no threats of litigation, legal actions or other claims made against any of our intellectual property. Although we attempted to identify patents that pose a risk of infringement, there is no assurance that we have identified all U.S. and foreign patents that present such a risk.

 

In addition to patent protection, we also rely on trade secrets, proprietary know-how and technological advances which we seek to protect, in part, through confidentiality agreements with our collaborative partners, employees and consultants. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that the trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others, which could negatively impact our ability to compete in the marketplace.

 

To continue developing new products or enhance existing ones, we may need to obtain licenses to certain technologies and rights from third parties, and such licenses may not be available on acceptable terms, or at all. If our product development efforts are hindered, we may face considerable challenges competing in the market place with our existing products or be unable to introduce new products.

 

Although we believe we are able to conduct our business based on our current intellectual property portfolio, there is a risk that additional non-core technology licenses may be required in the development of new products or to enhance the performance characteristics of our existing products. We believe that such licenses would generally be available on a non-exclusive basis; however, there is no guarantee that they will be available on acceptable terms, or at all. If we are unable to license any required non-core technology, it may impede our product development capabilities, which may put us at a competitive disadvantage in the market place and negatively affect our ability to generate revenue or profits.

 

We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries, including China, do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product candidates and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

 

 
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We depend on our key personnel, the loss of whose services could adversely affect our business.

 

We are highly dependent upon the members of our management and scientific staff, who could leave Response at any time. The loss of these key individuals could impede our ability to achieve our business goals. Our Chief Executive Officer and Senior Vice President of Worldwide Sales and Marketing resigned during the third quarter of 2014 and our General Manager in China resigned during the first quarter of 2015. The Board consequently promoted a senior executive to Chief Operating Officer and then to Chief Executive Officer during the second quarter of 2015. In addition, we have hired additional staff for our China office during the third and fourth quarters of 2015. The Board continues to work closely and support the remaining management team and believes this team has the potential to effectively lead the company’s recovery and future growth. There can be no assurance however that the current management team can continue to improve operations and achieve strong targeted future growth due to the substantial workload facing the small leadership team.

 

We face competition for qualified employees from numerous industry and academic sources, and there can be no assurance that we will be able to retain our key managers and other qualified personnel on acceptable terms. We currently do not have key person insurance in place on any of our key employees. In the event that we are unable to retain key personnel, and recruit qualified key personnel on favorable terms, we may not be able to successfully manage our business operations, including sales and marketing activities, product research and development and manufacturing. As a consequence, we may not be able to effectively develop and manufacture new products, negotiate strategic alliances or generate sufficient revenue growth from existing products.

 

Compliance with changing regulations and standards for accounting, corporate governance and public disclosure may result in additional expenses.

 

To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving regulations and standards for accounting. These investments may result in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities. If we fail to maintain effective internal controls and procedures for financial reporting, or the SEC requirements applicable to these, we could be unable to provide timely and accurate financial information and therefore be subject to investigation by the SEC, and civil or criminal sanctions. Additionally, ineffective internal control over financial reporting would place us at increased risk of fraud or misuse of corporate assets and could cause our stockholders, lenders, suppliers and others to lose confidence in the accuracy or completeness of our financial reports.

 

Management is required to determine if material weaknesses exist in our internal control over financial reporting.

 

We are required to maintain internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes. If we fail to maintain effective internal controls over financial reporting and disclosure controls and procedures, our business and results of operations could be harmed, we may be unable to report properly or timely the results of our operations and investors may lose faith in the reliability of our financial statements. Ineffective internal control over financial reporting may also increase the risk of, or result in, fraud or misuse of our corporate assets. As a consequence, the market price of our securities may be harmed. In addition, our current or former officers, directors and employees, may be subject to investigation by the SEC or Canadian securities regulators, and civil or criminal sanctions, or shareholder lawsuits, any of which could result in a significant expense whether directly or indirectly through the Company’s statutory or contractual obligations to indemnify such persons, and require significant investments of management time, which may prevent management from focusing its efforts on our business operations.

 

We may be subject to breaches of our information technology systems, which could cause substantial harm to our business.

 

We maintain significant proprietary information and manage personal data and confidential information about our employees and customers. Although cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access are a high priority for us, this may not successfully protect our systems against all vulnerabilities, including technologies developed to bypass our security measures. In addition, outside parties may attempt to fraudulently induce employees or customers to disclose sensitive information in order to gain access to our secure systems and networks.

 

As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Further, because the techniques used to gain access to, or sabotage, systems often are not recognized until launched against a target, we may be unable to anticipate the correct methods necessary to defend against these types of attacks. Any actual breach, the perceived threat of a breach or a perceived breach, could cause our customers to cease doing business with us, subject us to lawsuits, regulatory fines or other action or liability, which would harm our business, financial condition and results of operations.

 

 
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We may be subject to product liability claims, which may adversely affect our operations.

 

We may be held liable or incur costs to settle liability claims if any of the products we sell cause injury or are found unsuitable. Although we currently maintain product liability insurance, we cannot be assured that this insurance is adequate, and, at any time, it is possible that such insurance coverage may cease to be available on commercially reasonable terms, if at all. A product liability claim could result in liability to us greater than our total assets or insurance coverage. Moreover, product liability claims could have an adverse impact on our business even if we have adequate insurance coverage.

 

Manufacturing risks and inefficiencies may adversely affect our ability to produce products and could reduce our gross margins and increase our research and development expenses.

 

We are subject to manufacturing risks, including our manufacturing experience with newer products and processes, which may hinder our ability to scale-up manufacturing. Additionally, unanticipated acceleration or deceleration of customer demand may lead to manufacturing inefficiencies. We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining acceptable product quality and manufacturing costs. Significant additional resources, implementation of additional automated and semi-automated manufacturing equipment and changes in our manufacturing processes and organization have been, and are expected to continue to be, required for scale-up to meet increasing customer demand , and this work may not be affordable and/or successfully or efficiently completed.

 

In addition, although we expect some of our newer products and products under development to share production attributes with our existing products, production of these products may require the development of new manufacturing technologies and expertise. It may not be possible for us, or any other party, to manufacture these products at a cost or in quantities to make these products commercially viable.

 

Manufacturing and quality problems have arisen and may arise in the future as we attempt to scale-up our manufacturing capacity to meet potentially higher future sales growth and implement automated and semi-automated manufacturing methods. We rely on third parties for the manufacture of much of our automated and semi-automated manufacturing equipment. Consequently, implementation of automated and semi-automated manufacturing methods may not be achieved in a timely manner or at a commercially reasonable cost, or at all. In addition, we continue to make investments to improve our manufacturing processes and to design, develop and purchase manufacturing equipment that may not yield the improvements that we expect. Unanticipated acceleration and deceleration of customer demand for our products has resulted, and may continue to result, in inefficiencies or constraints related to our manufacturing, which has harmed, and may in the future harm, our gross margins and overall financial results. Such inefficiencies or constraints may also result in delays, lost potential product sales or loss of current or potential customers due to their dissatisfaction.

 

We may not be able to effectively and efficiently manage the planned growth of our operations and, as a result, we may find ourselves unable to effectively compete in the marketplace with our products resulting in lost revenue, poor operational performance, and sustained losses.

 

We anticipate growth in the scope of the operating and financial systems and the geographic area of operations as new products are developed and commercialized. This growth will result in increases in responsibilities for both existing and new management personnel. Managing growth effectively will require us to continue to implement and improve operational, financial and management information systems, and to successfully attract, hire on favorable terms, develop, motivate and manage employees. This growth may require additional locations and new capital equipment. If we are unable to successfully manage and finance our expansion, we may experience an inability to take advantage of new sales opportunities, poor employee morale, an inability to attract new employees and management, an inability to generate adequate financial and other relevant reports, poor quality control and customer service and difficulty managing our operating expenses and working capital. As a consequence, we may find ourselves unable to compete effectively in the market place with our products leading to loss of revenue and poor operational performance, including sustained losses.

 

 
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The research and development of our products carries substantial technical risk. We may not be able to successfully commercialize future products. As a consequence, our ability to expand our product portfolio to generate new revenue opportunities may be severely limited.

 

Our future growth will depend upon, among other factors, our ability to afford and to successfully develop new products and to make product improvements to meet evolving market needs. Although we believe that we have the scientific and technical resources available, future products will nevertheless be subject to the risks of failure inherent in the development of products based on innovative technologies and our ability to fund the timely development of new products. Any specific new product in research and development may face technical challenges that may significantly increase the costs to develop that product, cause delays to commercialization or prevent us from commercializing that product at all. Additionally, our currently constrained financial resources may limit our ability to develop new products and technologies. Although we expect to continue to expend resources on research and development efforts, to enhance existing products and develop future ones, we are unable to predict whether research and development activities will result in any commercially viable products. There can be no assurance that we will be able to successfully develop future products and tests. This would prevent us from introducing new or improved products in the marketplace, could allow for competing products to capture additional market shares and would negatively impact our ability to grow our revenues and become profitable.

 

Our Company is organized under the laws of British Columbia, Canada, and certain of our directors and officers and substantially all of our assets are located outside of the United States, which may make enforcement of United States judgments against us difficult.

 

We are organized under the laws of British Columbia, Canada, substantially all of our assets are located outside of the United States and certain members of our directors and officers are residents outside of the United States. As a result, it may be difficult for U.S. investors to affect service of process, or enforce within the United States any judgments obtained against us or those officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. In addition there is uncertainty as to whether the courts of Canada would recognize, or enforce, judgments of United States courts obtained against us, or our directors and officers, predicated upon the civil liability provisions of the securities laws of the United States, or any state thereof; or be competent to hear original actions brought in Canada against us, or our directors and officers, predicated upon the securities laws of the United States, or any state thereof.

 

Valuation of stock-based payments, which we are required to perform for purposes of recording compensation expense under FASB – ASC 718 "Compensation - Stock Compensation", involves significant assumptions that are subject to change and difficult to predict.

 

On January 1, 2006, we adopted FAS 123(R), which is now codified as FASB ASC 718 Compensation – Stock Compensation, which requires that we record compensation expense in the statement of income for stock-based payments, such as stock options, using the fair value method. As long as stock-based awards are utilized as part of our compensation strategy, the requirements of ASC 718 have had, and will continue to have, a material effect on our future financial results reported under Generally Accepted Accounting Principles, and make it difficult for us to accurately predict our future financial results.

 

For instance, estimating the fair value of stock-based payments is highly dependent on assumptions regarding the future exercise behavior of our employees and changes in our stock price. Our stock-based payments have characteristics significantly different from those of freely traded options, and changes to the subjective input assumptions of our stock-based payment valuation models can materially change our estimates of the fair values of our stock-based payments. In addition, the actual values realized upon the exercise, expiration, early termination, or forfeiture of stock-based payments might be significantly different than our estimates of the fair values of those awards as determined at the date of grant.

 

ASC 718 could also adversely impact our ability to provide accurate guidance on our future financial results as assumptions that are used to estimate the fair value of stock-based payments are based on estimates and judgments that may differ from period to period. For instance, we may be unable to accurately predict the timing, amount, and form of future stock-based payments to employees or directors. We may also be unable to accurately predict the amount and timing of the recognition of tax benefits associated with stock-based payments, as they are highly dependent on the exercise behavior of our employees, and the price of our stock relative to the exercise and fair value of each outstanding stock option.

 

For those reasons, among others, ASC 718 may create variability and uncertainty in the compensation expense we will record in future periods, potentially negatively impacting our ability to provide accurate financial guidance. This variability and uncertainty could further adversely impact our stock price, and increase our expected stock price volatility as compared to prior periods.

 

 
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RISKS RELATED TO OUR INDUSTRY

 

Products in the biomedical industry, including ours, may be subject to government regulation. Obtaining government approvals can be costly and time consuming. Any failure to obtain necessary regulatory clearances will restrict our ability to sell those products and impede our ability to generate revenue.

 

As we operate in the biomedical industry, some of our products are subject to a wide variety of government regulation (federal, state, and municipal) within the United States, China and in other international jurisdictions. For example, Health Canada, the FDA, the CFDA and comparable regulatory agencies in other countries impose substantial pre-market approval requirements on the introduction of medical products, through lengthy and detailed clinical testing programs and other costly and time consuming procedures. Satisfaction of these requirements is expensive and can take a long period of time depending upon the type, complexity, and novelty of the product. All medical devices manufactured for sale in the United States and Canada, regardless of country of origin, must be manufactured in accordance with Good Manufacturing Practices specified in regulations under the Federal Food, Drug, and Cosmetic Act. These practices control the product design process as well as every phase of production from incoming receipt of raw materials, components, and subassemblies to product labeling, tracing of consignees after distribution, and follow-up and reporting of complaint information. Both before and after a product is commercialized, we have ongoing responsibilities under the regulations of Health Canada, the FDA, the CFDA and other agencies. Noncompliance with applicable laws and the requirements of Health Canada, the FDA, the CFDA and other agencies can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution. Health Canada, the FDA, the CFDA and other agencies have the authority to request recall, repair, replacement, or refund of the cost of any device manufactured or distributed by us. The FDA and CFDA also administer certain controls over the import and export of medical devices to and from the United States and China respectively. The U.S. Clinical Laboratory Improvement Acts of 1988 also affects our medical products. This law is intended to assure the quality and reliability of all medical testing in the United States regardless of where tests are performed. The regulations require laboratories performing clinical tests to meet specified standards in the areas of personnel qualification, administration, and participation in proficiency testing, patient test management, quality control, quality assurance, and inspections.

 

Sales and pricing of medical products, including ours, are affected by third-party reimbursement. Depending on our manufacturing costs, we may not be able to profitably sell our products at prices that would be acceptable to customers affected by third party reimbursement programs. Consequently, we may have difficulty generating revenue from these customers, resulting in reduced profit margins and potential operating losses.

 

Third party payers can indirectly affect the pricing and, therefore, the relative attractiveness of our products by regulating the maximum amount of reimbursement provided for testing services. These third party payers increasingly challenge prices paid for medical products, and the cost effectiveness of such products due to global pressure on healthcare costs. If the reimbursement amounts for testing services are decreased in the future, it may decrease the amount that physicians and hospitals are able to charge patients for such services and therefore the prices that we, or our distributors, can charge for our products. Consequently, our ability to generate revenue and/or profits may be negatively impacted for both existing and new products.

 

Significant uncertainty exists as to the reimbursement potential of newly cleared health care products, if any. The reimbursement amounts paid by third-party payers on existing medical products can be reduced at any time. There can be no assurance that products will be considered cost effective, or that reimbursement from third party payers will be available, or, if available, that reimbursement will not be limited, thereby adversely affecting our ability to sell products or sell our products at a profit.

 

Our business is substantially dependent on market acceptance of our products. As well, our environmental and biodefense business is affected by industry, governmental and public perceptions of these products in general. Failure to obtain or retain market acceptance for some or all of our products would have a negative impact on our revenue and ability to operate profitably.

 

The commercial success of our clinical tests is highly dependent upon the acceptance and adoption of the tests by the medical community. The medical community tends to be very conservative with regards to adopting new technologies and products. Often substantial data and evidence supporting product performance is required to generate market acceptance. If we are unsuccessful in generating market acceptance, our ability to generate revenue and hence profits would be severely limited.

 

The commercial success of our environmental and biodefense tests is dependent upon their acceptance by the public safety community and government funding agencies as being useful and cost effective. In addition, the purchase of our biodefense products in the United States (our largest potential market) by the public safety community is highly dependent on the availability of federal and state government funds dedicated to "homeland security". In the event that homeland security funds became unavailable for use (to purchase our products or otherwise) or the release of such funds was significantly delayed, it would have a negative effect on our ability to generate revenue or profits.

 

Federal, state and foreign regulations regarding the manufacture and sale of medical devices continue to evolve and are constantly subject to change. We cannot predict what regulations may come into effect in the future and what impact, if any; such regulatory changes may have on our business.

 

A majority of our sales are through distributors in foreign markets who sell our products or modifications of our products in their local country markets. Sales through these distributors in these markets are usually subject to the regulators in those markets. Frequently our distributors are responsible for obtaining and maintaining regulatory approval in their territories and are thus subject to all of those requirements. In the future, should we elect to build our own sales and marketing operations in certain countries outside the US, we would be subject to extensive regulations in each of those countries. We may not be successful in such new initiatives.

 

 
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If products in the biodefense testing industry and other environmental testing segments, including ours, become subject to government legislation in the future, obtaining necessary government approvals may be very costly and time consuming. Failure to obtain government approvals will restrict our ability to sell our products and impede our ability to generate revenue.

 

In the biodefense and Vector Environmental testing markets, there is currently an absence of regulatory checks and balances and there is significant market uncertainty and misinformation. While we believe it is likely that future regulatory requirements in these markets will come into effect, the form and substance of these regulations remain highly uncertain. The effect of government regulations may be to prevent or to delay marketing and pricing of any new products for a considerable or indefinite period or to require additional studies prior to approval. Federal, state and foreign regulations, or lack thereof, regarding the sale of environmental testing devices are subject to change. We cannot predict the impact, if any, such changes may have on our business.

 

We operate primarily selling through distributors in highly competitive markets, with continual developments in new technologies and products. Some of our competitors have significantly greater resources than we do. Others, while having fewer resources than we do, may nevertheless have a very strong market or other leadership position in a specific local market where we or our distributors compete. We or our distributors may not be able to compete successfully based on many factors, including product price or performance characteristics, sales and marketing effort or customer support capabilities. An inability to successfully compete could lead to us having limited prospects for establishing market share or generating revenues.

 

The diagnostic industry is characterized by extensive research efforts, ongoing technological progress and intense competition. There are many public and private companies, including well-known diagnostic companies, engaged in marketing and developing products for the markets we have targeted. Many of these companies have substantially greater financial, technical and human resources than we do, including direct sales in countries in which we are selling our products. While we are in the process of establishing our distribution networks in the United States and China, our competitors may be more successful in convincing potential customers to adopt their products over ours and hence gain greater market share. Competitors with greater financial resources may also have an advantage when dealing with suppliers, particularly sole source suppliers providing antibodies or unique reagents. Additionally, they may develop technologies and products that are more effective than any products developed by us, or that would render our technologies and products obsolete or non-competitive.

 

In addition, in various emerging markets such as China, there may be local competitors who sell only in that specific country. Some of these local competitors may be very strong competitors in their local markets due to factors, which may include lower cost production, stronger sales, marketing and distribution capabilities, customer familiarity and preference for local suppliers and local government environments, which may favor local companies and their products.

 

In addition to the specific competitive risks from rapid diagnostic manufacturers that we face in the market for our tests, we face intense competition in the general market for diagnostic testing including companies making laboratory-based tests and analyzers, and clinical reference laboratories. Currently, the majority of diagnostic tests prescribed by physicians and other healthcare providers are performed by independent clinical reference laboratories and hospital-based laboratories using automated testing systems. Therefore, in order to achieve market acceptance for our products, we will be required to demonstrate that our products provide clinical benefit and are cost-effective and time saving alternatives to automated tests traditionally used by clinical reference laboratories or hospital-based laboratories.

 

Companies operating in our industry may be impacted by potential healthcare reform, including decreased reimbursement for our product’s use. Such healthcare reform may include pricing restrictions on medical products, including ours, that may restrict our ability to sell our products at a profit.

 

Healthcare reform bills that have been before the United States Congress and government officials in other countries contemplate changes in the structure, financing, and delivery of healthcare services. These and any future healthcare reforms may have a substantial impact on the operations of companies in the healthcare industry worldwide, including us. Such reforms could include product pricing restrictions, excise taxes, or additional regulations governing the usage of medical products. No assurances can be given that any such proposals, or other current, or future, legislation in the United States, or other countries, will not adversely affect our product development and commercialization efforts, results of operations, or financial condition. At this time, we are unaware of any recent legislation or pending legislative proposals that will materially negatively affect our business.

 

The impact of consolidation of several major competitors in the market for immunoassay testing is difficult to predict and may harm our business.

 

The market for immunoassay-based diagnostic testing is rapidly changing as a result of consolidation in the industry. There have been many acquisitions in the medical diagnostics market including several by Alere, which helped the company expand its presence in the market for rapid diagnostic tests used in hospitals and doctors' offices. Siemens and Alere both have significant existing businesses in diagnostics and/or related markets for healthcare equipment and services. It is unclear how these completed, or future, acquisitions will impact the competitive landscape for our products, or for hospital-based diagnostic testing in general. However, because these competitors sell a broad range of product offerings to our prospective hospital customers, and because of the substantially greater financial resources and more established marketing, sales, and service organizations that they each have, we believe there is greater risk that these new consolidated competitors may offer discounts as a competitive tactic, or may hold other competitive advantages as a result of their ability to sell to a broader menu of important hospital infrastructures, for equipment and information systems, on a combined, or bundled basis.

 

 
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Our business and industry is affected by seasonality, including governmental budget cycles. We may not be able to successfully scale up operations to meet demand during peak seasonal periods or scale down operations during periods of low demand, which could result in lost revenue and/or reduced manufacturing efficiencies, negative cash flows and losses.

 

Our operating results may fluctuate from quarter to quarter due to many seasonal factors. Many of our prospective customers are government related organizations at a federal, state/provincial or municipal level. Consequently, our sales may be tied to government budget and purchasing cycles. Sales may also be slower in the traditional vacation months, could be accelerated in the first or fourth calendar quarters by customers whose annual budgets are about to expire (especially affecting purchases of our test Readers), may be distorted by unusually large Reader shipments from time to time, or may be affected by the timing of customer cartridge ordering patterns. Seasonality may require us to invest significantly in additional resources including equipment, labor, and inventory to meet demand during peak seasonal periods. There can be no assurance that we will be successful in putting in place the resources to meet anticipated demand, which could lead to lost revenue opportunities. If we cannot scale down our operations and expenses sufficiently during periods of low demand for our products, we may experience significantly negative cash flow and operating losses. If we are unable to adequately forecast seasonal activity, we may experience periods of inventory shortages or excesses that would negatively impact our working capital position.

 

RISKS RELATED TO OUR COMMON STOCK

 

As we have a large number of warrants and stock options outstanding, our shareholders will experience dilution from these options and warrants in the event that they are exercised.

 

As of December 31, 2015, we had outstanding stock options to purchase an aggregate of 1,533,022 shares, at exercise prices between $0.60 and $6.80, warrants to purchase an aggregate of 5,049,445 shares at exercise prices between $1.00 and $3.58, and 112,489 restricted share units, which in total represents 34% of our fully diluted outstanding share capitalization at that date. To the extent that these outstanding options and warrants are exercised, considerable dilution to the interests of our shareholders will occur.

 

The price of our common stock may be volatile, and a shareholder's investment in our common stock could suffer a decline in value.

 

There has been significant volatility in the volume and market price of our common stock, and this volatility may continue in the future. This volatility may be caused by a variety of factors, including the lack of readily available quotations, the absence of consistent administrative supervision of "bid" and "ask" quotations, and generally lower trading volume. In addition, factors such as quarterly variations in our operating results, changes in financial estimates by securities analysts or our failure to meet our or their projected financial and operating results, litigation involving us, general trends relating to the medical device industry, actions by governmental agencies, national economic and stock market considerations, as well as other events and circumstances beyond our control, could have a significant impact on the future market price of our common stock and the relative volatility of such market price.

 

Because our common stock is considered a "penny stock," a shareholder may have difficulty selling shares in the secondary trading market.

 

Our common stock is subject to certain rules and regulations relating to "penny stock" (generally defined as any equity security that is not quoted on the Nasdaq Stock Market and that has a price less than US$5.00 per share, subject to certain exemptions). Broker-dealers who sell penny stocks are subject to certain "sales practice requirements" for sales in certain nonexempt transactions (e.g., sales to persons other than established customers and institutional "accredited investors"), including requiring delivery of a risk disclosure document relating to the penny stock market and monthly statements disclosing recent price information for the penny stock held in the account, and certain other restrictions. For as long as our common stock is subject to the rules on penny stocks, the market liquidity for such securities could be significantly limited. This lack of liquidity may also make it more difficult for us to raise capital in the future through sales of equity in the public or private markets.

 

 
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Because our common stock is not traded on a national securities exchange in the U.S., a U.S. shareholder's ability to sell shares in the secondary trading market may be limited.

 

Our common stock is currently listed for trading in Canada on the Toronto Stock Exchange (“TSX”). Our common stock is also quoted in the United States on the OTC. Shareholders may find it more difficult to dispose of or to obtain accurate quotations as to the price of our securities than if the securities were traded on a national securities exchange like The New York Stock Exchange, the NASDAQ Stock Market or the NYSE Amex LLC. The continued listing of our common stock on the TSX is currently under review. We have been granted 30 days from March 21, 2016 to demonstrate compliance with the continued listing requirements of the TSX. In the event we are unable to continue with the listing of our common stock on the TSX, other listing alternatives exist for reporting issuers in the U.S. and Canada, including the TSX Venture Exchange.

 

ITEM 2.     PROPERTIES.

 

Our business offices are located in Vancouver, British Columbia. In May 2007, we entered into an agreement to lease a multi-use, 46,000 square foot facility. The facility has housed all of our operations since March 31, 2008 and requires us to pay approximately $185,000 per month in rent and operating expenses. Initial capital modifications to the facility were paid by the landlord and managed by us. The agreement has an initial term of 15 years with two five-year renewal options. To secure the lease, we are required to maintain a security deposit with the landlord in the form of an irrevocable letter of credit in the amount of $870,000. As a result of our realizing an operating profit for calendar 2015, we are permitted to reduce the security deposit to 33% of the of the original amount . As part of the agreement, we received a repayable leasehold improvement allowance for an amount of $7.8 million, used for additional improvements to the facility. The allowance is being repaid over the term of the operating lease at approximately $89,000 per month including interest at an annual rate of 11%, compounded monthly.

 

We believe that the facilities we currently lease are sufficient for our anticipated near-term needs.

 

ITEM 3.     LEGAL PROCEEDINGS.

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position. There are no material proceedings to which any director, officer or any of our affiliates, any owner of record or beneficially of more than five percent of any class of our voting securities is a party adverse to us or has a material interest adverse thereto.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
-32-

 

 

PART II

 

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

 

MARKET FOR COMMON EQUITY

 

Our common stock is traded on the Toronto Stock Exchange (TSX) under the trading symbol “RBM” and quoted on the OTC under the symbol “RPBIF”. As of February 28, 2016, there were 9,925,256 shares of our common stock outstanding held by approximately 1,500 stockholders of record and 2 beneficial stockholders. The high and low sales prices of our common stock as reported on the TSX for the periods indicated are as follows:

   

HIGH

   

LOW

 
   

(in CDN $)

   

(in CDN $)

 
Response Biomedical Corp.            

YEAR ENDED DECEMBER 31, 2014

               

First quarter

  $ 1.94     $ 1.41  

Second quarter

    1.60       1.41  

Third quarter

    1.80       1.22  

Fourth quarter

    1.37       0.70  
                 

YEAR ENDED DECEMBER 31, 2015

               

First quarter

  $ 1.00     $ 0.66  

Second quarter

    0.92       0.68  

Third quarter

    0.99       0.38  

Fourth quarter

    0.80       0.34  

 

DIVIDEND POLICY

 

We have not declared or paid any dividends on the outstanding common shares since our inception and we do not anticipate that we will do so in the foreseeable future. The declaration of dividends on our common shares is within the discretion of the Board of Directors and will depend on the assessment of, among other factors, earnings, capital requirements and our operating and financial condition. At the present time, anticipated capital requirements are such that we intend to follow a policy of retaining earnings in order to finance the further development of the business.

 

SALES OF UNREGISTERED SECURITIES

 

On December 12, 2014, the Company closed a non-brokered private placement with Joinstar of 1,800,000 common shares at a price of $1.21 per common share for total gross proceeds of $2.2 million before share issuance costs of approximately $150,000. The offering was exempt under Rule 506 of Regulation D promulgated under Securities Exchange Act of 1934, as amended (Rule 506).

 

On November 7, 2013, the Company’s shareholders approved a brokered and non-brokered private placement of 1,273,117 subscription receipts at a price of $2.45 for aggregate gross proceeds of $3.1 million before share issuance costs of approximately $400,000. Each Subscription Receipt automatically entitled the holder to receive one unit. Each unit consists of one common share and one-half of one warrant to purchase one common share. Each whole warrant has a term of 36 months and an exercise price of $3.58. The offering was exempt under Rule 506.

 

REPURCHASES OF EQUITY SECURITIES

 

We did not repurchase any of our equity securities during the year ending December 31, 2015.

 

ITEM 6.     SELECTED FINANCIAL DATA

 

The selected historical financial information presented below for each of the five years ended December 31, 2011 through to 2015, has been derived from our consolidated financial statements prepared in accordance with U.S. GAAP.

 

 
-33-

 

 

The information below should be read in conjunction with our consolidated financial statements, the related notes thereto and the information contained in "Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations".

 

                               

Year ended December 31,

 

2015

   

2014

   

2013

   

2012

   

2011

 

Consolidated Statements of Income Data:

                                       

Product sales

  $ 11.973     $ 10,828     $ 11,531     $ 11,750     $ 9,024  

Collaborative revenue

    3,445       186       -       -       450  

Total revenue

  $ 15,418     $ 11,014     $ 11,531     $ 11,750     $ 9,474  

Cost of sales

    7,339       6,647       6,588       7,504       6,969  

Gross profit

    8,079       4,367       4,943       4,246       2,505  

Operating expenses

    7,794       9,400       8,147       8,449       7,392  

Income/(loss) from operations

    285       (5,033 )     (3,204 )     (4,203 )     (4,887 )

Other expense / (income)

    435       (2,943 )     2,794       1,078       484  

Net loss

  $ (150 )   $ (2,090 )   $ (5,998 )   $ (5,281 )   $ (5,371 )

Loss per common share - basic and diluted

  $ (0.02 )   $ (0.26 )   $ (0.89 )   $ (0.82 )   $ (2.72 )

Weighted average common shares outstanding - basic and diluted

    9,879,148       8,025,143       6,747,369       6,437,158       1,972,171  
                               

As of December 31,

 

2015

   

2014

   

2013

   

2012

   

2011

 

Consolidated Balance Sheets Data:

                                       

Total assets

  $ 11,806     $ 13,628     $ 14,204     $ 14,348     $ 20,893  

Long-term obligations

    6,082       7,411       7,063       7,633       8,236  

Total shareholders' equity/(deficit)

    (711 )     (894 )     (1,482 )     321       4,976  

 

 
-34-

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, included in Item 8 of this Report. Unless otherwise specified, all dollar amounts are Canadian dollars.

 

OVERVIEW

 

Response Biomedical Corp. develops manufactures and sells diagnostic tests for use with its proprietary RAMP® System, a portable fluorescence immunoassay-based diagnostic testing platform. Our RAMP® technology utilizes a unique method to account for sources of error inherent in conventional lateral flow immunoassay technologies, thereby providing the ability to quickly and accurately detect and quantify an analyte present in a liquid sample. Consequently, an end-user in a medical facility’s central-lab or in a point-of-care diagnostic testing setting can rapidly obtain important diagnostic information. We currently have sixteen tests available for clinical and environmental testing applications, and we have plans to commercialize additional tests.

 

Sales to the Company’s national distributor in China represented 62% of product sales during the year ended December 31, 2015. While this distributor met its contractual minimums for purchases of products from the Company in the first six months of the year, it advised the Company that it has built up inventory at a higher rate than its current sales to end-users. Consequently, this distributor made lower purchases from the Company during the last two quarters of the year compared to the first two quarters of 2015. This national distributor is still in the process of expanding into additional territories within China and determining end-user buying patterns. No returns of the products purchased by the national distributor are either expected or permitted under the terms of its distribution agreement.

 

To address the recent expected near term reductions in our shipments to this China distributor, we implemented several cash conservation and cost reduction initiatives during the third quarter in 2015 to extend our available cash resources. These actions included selected staff layoffs and work-sharing programs, reductions in discretionary spending, and additional efforts to sell inventory accumulated late in the second quarter. In parallel, our China office staff are now actively engaged in expanding our sales and marketing activities in China working with our distributor. As a further step to strengthen our financial position, the Company is also seeking additional financing alternatives. While the Company is pursuing these various initiatives, there is no assurance that these efforts will be sufficient to fund the Company’s operations or that quarter-over-quarter product sales will increase.

 

We have thus far financed our operations through a series of equity financings, debt financings, and collaborative arrangements. On October 15, 2014, we entered into a funded Technology Development Agreement and on February 16, 2015, a Collaboration Agreement with Hangzhou Joinstar Biomedical Technology Co. Ltd. (“Joinstar”) to support the co-development by Response and Joinstar of components and multiple assays that will run on a high throughput rapid immunoassay analyzer developed by Joinstar. Under the terms of the agreements, we have received milestones totaling US$3.0 million to date and are eligible to receive a further US$0.8 million for the last development milestone that is expected to be paid to Response during the remaining six month project period. In conjunction with the signing of the Collaborative Agreement, we entered into a definitive Supply Agreement with Joinstar whereby we will provide certain materials required for Joinstar to manufacture and sell the developed assays specifically to run on their analyzer. Under the terms of the Supply Agreement, we are eligible to receive a guaranteed US$1.78 million in revenue-based payments over the first five years of commercialization of the co-developed assays. To date, commercialization of the co-developed assays has not commenced.

 

In addition to the Joinstar agreements, the Company has a term loan from Silicon Valley Bank (“SVB”) with an outstanding principal balance of approximately US$0.9 million as of December 31, 2015, which is being repaid monthly over the next seventeen months. We believe that with a combination of some or all of the various cost reduction, cash conservation, sales and marketing, and, if necessary, financing initiatives and with the targeted execution under the Joinstar Agreements and strengthening of our China sales/distribution, based on the projected level of operations, our cash and cash equivalent balances, including cash generated from operations, will be sufficient to meet our anticipated cash requirements through the next twelve months. However, due to our history of losses, the challenges of our sales activities in our China market and uncertain success of our various cost, cash, and financing efforts, there is substantial doubt over our ability to continue as a going concern as we are dependent on expanding distribution in China and meeting the development milestones required to earn the additional US$0.8 million in development fees under the Collaboration Agreement with Joinstar, achieving profitable operations, and/or additional financings, the outcomes of which cannot be predicted at this time. In the event that we are unable to generate adequate revenues, cash flow or earnings, to support our operations, or we are unable to raise sufficient capital to do so, we may be forced to cease operations and either sell our business or liquidate our assets.

 

 
-35-

 

  

RECENT DEVELOPMENTS

 

 

On February 6, 2015, we announced that we had expanded the scope of our agreement with Shanghai Elite to distribute our Cardiovascular portfolio of RAMP® products effective April 23, 2015. Under the agreement, Shanghai Elite became our exclusive national distributor in China. Effective March 3, 2016 Shanghai Elite no longer has exclusive rights to sell our products in China.

 

 

On February 16, 2015, we announced that we had earned the second milestone of US$720,000 in the funded Technology Development Agreement with Joinstar. We received the milestone payment upon the signing of the definitive Collaboration Agreement.

 

 

On April 14, 2015, we earned the third milestone of US$360,000 in the Collaboration Agreement with Joinstar. We earned the milestone upon the delivery of certain components for the high throughput rapid immunoassay analyzer developed by Joinstar.

 

 

On May 19, 2015, we announced that Dr. Barbara Kinnaird, Ph.D. was promoted to our Chief Executive Officer.

 

 

On August 6, 2015, following a successful search process, we hired Julius Wu as our new General Manager for China..

 

 

On September 9, 2015, we received the fourth milestone of US$648,000 in the funded Collaboration Agreement with Joinstar. We earned this milestone during the quarter ended September 30, 2015 upon the delivery of certain components for the high throughput rapid immunoassay analyzer developed by Joinstar.

 

 

On November 19, 2015, we announced that we received notice that the Toronto Stock Exchange (“TSX”) has initiated a review of the continued listing of our common shares. The TSX initiated its review because the price of our shares traded below $0.68 for 30 consecutive trading days, and as a result, the market value of the publicly held common shares (as defined by the TSX) did not meet the minimum threshold of $2 million required under the TSX rules. TSX rules exclude shares held by certain of our significant shareholders and directors and officers, which total approximately 70% of our outstanding shares, from their calculation. As of March 21, 2016, the TSX has granted a thirty (30) day extension of their review.

 

 

On December 8, 2015, we announced that, effective January 5, 2016, Alere Medical Co., Ltd. (“Alere Japan”) became the exclusive national distributor in Japan for the marketing and sales of Response manufactured BNP tests and readers. Shionogi & Co. Ltd will continue to supply biological reagents to us under separate license and supply agreements.

 

 

On December 30, 2015, we announced that we earned the fifth milestone of US$720,000 in the Collaboration Agreement with Joinstar. We earned this milestone upon the receipt of certain reports for the high throughput rapid immunoassay analyzer developed by Joinstar.

 

 

On January 11, 2016, we announced that we received Health Canada approval and CE Mark for our new RAMP® diagnostic test that measures levels of Procalcitonin (“PCT”). PCT is a biomarker elevated in the blood of patients suffering from sepsis.

 

 

On February 18, 2016, we announced that we launched the RAMP® Dengue Environmental test at the American Mosquito Control Association annual general meeting. The RAMP® Dengue Environmental test is a rapid, quantitative test for detection of Dengue antigen in mosquitoes that transmit Dengue virus.

 

 
-36-

 

 

RESULTS OF OPERATIONS

 

REVENUES, COST OF GOODS SOLD AND GROSS MARGIN (IN THOUSANDS EXCEPT PERCENTAGES)

 

   

Year ended December 31,

   

Change 2014 to 2015

   

Change 2013 to 2014

 
   

2015

   

2014

   

2013

   

Increase / (Decrease)

   

Percent Change

   

Increase / (Decrease)

   

Percent Change

 

Product sales

    11,973       10,828       11,531       1,145       11 %     (703 )     (6% )

Collaborative revenue

    3,445       186       -       3,259       1,752 %     186       100 %

Total revenue

    15,418       11,014       11,531       4,404       40 %     (517 )     (4% )

Cost of Sales

    7,339       6,647       6,588       692       10 %     59       1 %

Gross profit

    8,079       4,367       4,943       3,712       85 %     (576 )     12 %

Gross margin on product sales

    38.7 %     38.6 %     42.9 %                                

 

FISCAL 2015 VERSUS FISCAL 2014

 

Product Sales

 

Product sales increased 11%, or $1.1 million, in fiscal 2015 as compared to fiscal 2014. The change is due primarily to an increase in worldwide instrument and cardiovascular test sales worldwide with the largest increase coming from China. As mentioned above, our national distributor in China met its contractual minimums in each of the first two quarters of 2015 but as a new national distributor still in the process of expanding into additional territories within China and determining end-user buying patterns, they built up inventory at a higher rate than their current sales to end-users. Consequently, the distributor made fewer purchases from us during the second half of 2015.

 

Collaborative Revenue

 

Collaborative revenue increased by $3.3 million in fiscal 2015 due to recognition of revenue associated with the collaboration with Joinstar signed in the fourth quarter of 2014. We earned three of the four substantive milestones under the collaboration agreement during the year ended December 31, 2015.

 

Gross Profit

 

Gross profit increased 85%, or $3.7 million, in fiscal 2015 as compared to fiscal 2014. Excluding the collaborative revenue, gross profit increased 11%, or $0.5 million. Gross margin on product sales stayed relatively the same due to the following factors:

 

 

A 4% decrease in manufacturing overhead costs leading to a lower cost per unit; and

 

Inflation and foreign exchange fluctuations from an appreciated US dollar relative to the Canadian dollar during the year.

 

Offsetting the above was:

 

 

A significant increase in subsidized promotional reader placement programs intended to increase our customer base and stimulate future test sales growth;

 

An increase in our estimated product warranties; and

 

An increase in the volume rebate earned by our largest distributor.

 

FISCAL 2014 VERSUS FISCAL 2013 

 

Product Sales

 

Product sales decreased 6%, or $0.7 million, in fiscal 2014 as compared to fiscal 2013. The change in total revenue is due to the following:

 

 

Cardiovascular sales decreased 2.7%, or $0.3 million, primarily due to reduced sales in China as a result of the transition to new distribution partners in the fourth quarter of 2013; and

 

 

Infectious disease, Biodefense and West Nile Virus sales decreased 29%, or $0.4 million, primarily due to lower sales of Influenza tests during the first quarter of 2014 compared with the first quarter of 2013, because the flu season was more severe during the first quarter of 2013;

 

 
 -37-

 

 

Collaborative Revenue

 

Collaborative revenue was $0.2 million in fiscal 2014 due to recognition of revenue associated with the collaboration with Joinstar signed in the fourth quarter of 2014. We did not record any collaborative revenue in 2013.

 

Gross Profit

 

Gross profit decreased 12%, or $0.6 million, in fiscal 2014 as compared to fiscal 2013. The change in total gross profit is primarily due to the decrease in product sales of 6% and a decrease in gross margin on product sales to 38.6% from 42.9% in fiscal 2013. This decrease in gross margin is primarily due to the following:

 

 

A decrease in the sale of our higher margin products (Infectious disease, Biodefense, and West Nile Virus ) described under Product Sales above;

 

An increase in promotional reader placement programs implemented during the year intended to stimulate future test sale growth;

 

A $0.3 million increase in the amount of inventory provided for or written off related to scrapped, expired, obsolete or damaged inventory; and

 

A 2%, increase in unit manufacturing costs as inflationary cost factors outweighed productivity gains during the year.

 

OPERATING EXPENSES (IN THOUSANDS EXCEPT PERCENTAGES)

   

Year ended December 31,

   

Change 2014 to 2015

   

Change 2013 to 2014

 
   

2015

   

2014

   

2013

   

Increase / (Decrease)

   

Percent Change

   

Increase / (Decrease)

   

Percent Change

 

Research and development

    2,901       3,525       2,402       (624 )     (18% )     1,123       47 %

General and administrative

    2,564       3,297       3,574       (733 )     (22% )     (277 )     (8% )

Sales and marketing

    2,329       2,578       2,171       (249 )     (10% )     407       19 %

Total operating expenses

    7,794       9,400       8,147       (1,606 )     (17% )     1,253       15 %

 

FISCAL 2015 VERSUS 2014

 

Research and Development Expenses

 

Research and development expenses decreased by 18%, or $0.6 million. This was the result of lower legal and professional costs associated with the timing of clinical and regulatory work being done in 2015, which were partially offset by higher development costs related to the Joinstar collaboration and development of our new PCT and Dengue tests.

 

General and Administrative Expenses

 

General and administrative expenses decreased by 22%, or $0.7 million. The decrease is primarily due to decreased stock based compensation and salaries and wages as a result of the resignation of our former CEO in the third quarter of 2014 and an associated severance accrual in 2014.

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased by 10%, or $0.2 million. This was primarily the result of lower salaries and wages due to a smaller staff and severance accrued for the resignation of our senior vice president of sales in 2014 offset by higher marketing costs incurred in China.

 

 
-38-

 

 

FISCAL 2014 VERSUS FISCAL 2013

 

Research and Development Expenses

 

Research and development expenses increased by 47%, or $1.1 million. The increase is primarily due to a $0.9 million increase in professional fees and development costs associated with increased product development, clinical and regulatory work and a $0.2 million increase in salaries and wages primarily the result of a reduction in government funding support that funds some of our research and development salaries and wages.

 

General and Administrative Expenses

 

General and administrative expenses decreased by 8%, or $0.3 million. The decrease is primarily due to a $0.3 million decrease in stock based compensation expense, a $0.2 million decrease in legal and professional fees and overhead costs due primarily to a decrease in the amount of legal work required in 2014. This was offset by a $0.1 million increase in salaries and wages as a result of higher severance costs that more than offset the savings from reduced headcount in 2014.

 

Sales and Marketing Expenses

 

Sales and marketing expenses increased by 19%, or $0.4 million. The increase is primarily due to a $0.3 million increase in salaries and wages and recruiting costs as a result of severance incurred in 2014 and an increase in the number of sales employees in the U.S. and China. The remaining increase is due to higher travel and marketing expenditures due to an increase tradeshow and conference presence.

 

OTHER EXPENSE/(INCOME), NET (IN THOUSANDS EXCEPT PERCENTAGES)

 

   

Year ended December 31,

   

Change 2014 to 2015

   

Change 2013 to 2014

 
   

2015

   

2014

   

2013

   

Increase / (Decrease)

   

Percent Change

   

Increase / (Decrease)

   

Percent Change

 

Interest expense and amortization of deferred financing costs and debt discount

    878       874       696       4       0 %     178       26 %

Interest income

    (10 )     (15 )     (15 )     5       (33% )     -       0 %

Other (income)/expense

    43       68       (17 )     (25 )     (37% )     85       (500% )

Foreign exchange loss

    472       132       16       340       258 %     116       725 %

Unrealized (gain) loss on revaluation of warrant liability

    (948 )     (4,002 )     2,114       3,054       (76% )     (6,116 )     (289% )

Total Other Expenses /(Income)

    435       (2,943 )     2,794       3,378       (115% )     (5,737 )     (205% )

 

FISCAL 2015 VERSUS 2014

 

Interest Expense and Amortization of Deferred Financing Costs and Debt Discount

 

Interest expenses and amortization of deferred financing costs and debt discount increased by $4,000. The increase is primarily due to the interest and amortization costs related to the SVB debt offset by a decrease in interest paid on the repayable leasehold improvement allowance as a result of a decrease in principal in 2015 versus 2014.

 

Other (Income)/Expense

 

Other expenses represent business taxes paid for the operations of our representative office in Shanghai, China. Tax is owed based on a percentage of operating expenses incurred. The expense decreased due to reduced costs in 2015 in our representative office.

 

Foreign exchange loss

 

Foreign exchange loss increased by 258%, or $0.3 million. Foreign exchange gains and losses are largely due to U.S. dollar balances of cash and cash equivalents, accounts receivable, accounts payable, and debt affected by the fluctuations in the value of the U.S. dollar as compared to the Canadian dollar. The increase in the loss is due to the appreciation of the U.S. dollar in 2015 versus 2014 on our net US dollar liabilities.

 

 
-39-

 

 

Unrealized (gain) loss on revaluation of warrant liability

 

The unrealized gain on revaluation of the warrant liability is solely due to the mark-to-market revaluation of the outstanding warrants each reporting period. The fair market value decreased from December 31, 2014 resulting in an unrealized gain of $0.9 million. The fair market value is calculated using a Black-Scholes model with inputs for volatility, risk free interest rate, and expected life of the warrants. The primary reason for the decrease in the value of the liability is the decrease in the fair market value of the shares of the Company in relation to December 31, 2014. A small change in the estimates used in the Black-Scholes pricing model may have a relatively large change in the estimated valuation of the common stock warrants.

 

FISCAL 2014 VERSUS 2013

 

Interest Expense and Amortization of Deferred Financing Costs and Debt Discount

 

Interest expenses and amortization of deferred financing costs and debt discount increased by 26%, or $0.2 million. The increase is primarily due to the interest and amortization costs related to the SVB debt offset by a decrease in interest paid on the repayable leasehold improvement allowance as a result of a decrease in principal in 2014 versus 2013.

 

Other (Income)/Expense

 

Other expenses represent business taxes paid for the operations of our representative office in Shanghai, China. Tax is owed based on a percentage of operating expenses incurred. The increase is due to tax paid on a full year’s of expenses in 2014 versus a partial year in 2013.

 

Foreign exchange loss

 

Foreign exchange loss increased by 725%, or $0.1 million. Foreign exchange gains and losses are largely due to U.S. dollar balances of cash and cash equivalents, accounts receivable, accounts payable, and debt affected by the fluctuations in the value of the U.S. dollar as compared to the Canadian dollar.

 

Unrealized (gain) loss on revaluation of warrant liability

 

The unrealized gain on revaluation of the warrant liability is solely due to the mark-to-market revaluation of the outstanding warrants each reporting period. The fair market value decreased from December 31, 2013 resulting in an unrealized gain of $4.0 million. The fair market value is calculated using a Black-Scholes model with inputs for volatility, risk free interest rate, and expected life of the warrants. The primary reason for the decrease in the value of the liability is the decrease in the fair market value of the shares of the Company in relation to December 31, 2013. A small change in the estimates used in the Black-Scholes pricing model may have a relatively large change in the estimated valuation of the common stock warrants.

 

LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS EXCEPT PERCENTAGES)

 

Total cash and cash equivalents and working capital at December 31, 2015 and 2014 were as follows:

             
   

2015

   

2014

 

Cash and cash equivalents

  $ 2,511     $ 3,221  

Percentage of total assets

    21 %     24 %

Working capital

    (1,315 )     (774 )

Warrant liability

    301       1,249  

Working capital, excluding Warrant liability

    (1,014 )     475  

 

As at December 31, 2015, the Company had a negative working capital balance. Included in current liabilities is a warrant liability that is required to be measured at fair value and is presented as a current liability in accordance with ASC 815. Each warrant may only be exercised on a net cashless exercise basis and no warrant may be exercised at a time when the exercise price equals or exceeds the current market price, which means that the potential settlement of any warrant does not require any cash disbursement. Without taking into account the warrant liability mentioned above, the Company’s working capital as at December 31, 2015 is negative $1.0 million (December 31, 2014 - $0.5 million). The decrease of $1.5 million during the year ended December 31, 2015 is primarily due to the cash used in investing and financing activities.

 

 
-40-

 

 

FINANCIAL CONDITION

 

We have financed our operations primarily through equity and debt financings. As of December 31, 2015, the Company has raised approximately $107.8 million from the sale and issuance of equity securities and debt, net of issue costs. On October 15, 2014, we entered into a funded Technology Development Agreement and on February 16, 2015, a Collaboration Agreement with Joinstar to support the co-development by Response and Joinstar of components and multiple assays that will run on a high throughput rapid immunoassay analyzer developed by Joinstar. Under the terms of the agreements, we have received milestones totaling US$3.0 million to date and are eligible to receive a further US$0.8 million in development milestones over the remaining six month project period. We expect these funds, in part, to be used to reduce working capital deficiencies, if any, at the time they are received. In conjunction with the signing of the Collaborative Agreement, we entered into a definitive Supply Agreement with Joinstar whereby we will provide certain materials required for Joinstar to manufacture and sell the developed assays specifically to run on their analyzer. Under the terms of the Supply Agreement, we are eligible to receive a guaranteed US$1.78 million in revenue-based payments over the first five years of commercialization of the co-developed assays. In addition to the Joinstar agreements, the Company has a term loan from SVB with an outstanding principal balance of approximately US$0.9 million as of December 31, 2015.

 

Sales to the Company’s national distributor in China represented 62% of product sales during the year ended December 31, 2015. While this distributor met its contractual minimums for purchases of products from the Company in the first six months of the year, it advised the Company that it has built up inventory at a higher rate than its current sales to end-users. Consequently, this distributor made lower purchases from the Company during the last two quarters of 2015 compared to the first two quarters of 2015. We are continuing to work with the national distributor we used in 2015 on a non-exclusive basis while it is in the process of expanding into additional territories within China and determining end-user buying patterns. No returns of the products purchased by the national distributor are either expected or permitted under the terms of its distribution agreement.

 

In order to address this recent and expected temporary decline in our shipments to this China distributor, we implemented several cash conservation and cost reduction initiatives to extend our available cash resources during the year. These actions included selected staff layoffs and work-sharing programs, reductions in discretionary spending, and additional efforts to sell inventory accumulated late in the second quarter in anticipation of Q3 sales in China. In parallel, our China office staff are now actively engaged in increasing our sales and marketing activities in China working with our distributor and expanding distribution. As a further step to strengthen our financial position, the Company is also seeking additional financing alternatives. While the Company is pursuing these various cost, sales, and financing initiatives, there is no assurance that these efforts will be sufficient to fund the Company’s operations.

 

Cash flows from operations are generally impacted by our level of quarterly sales and our ability to manage operating expenses. However, increased quarter over quarter growth also requires additional working capital in the form of higher accounts receivable and greater inventory balances to meet the increased demand. We expect that we will have net negative cash flow over the next several quarters until our growth initiatives and Joinstar milestone provide sufficient cash flow to cover internal operating expenses, capital purchases and provide the additional working capital required to support the growth. In addition, we continue to require cash for our contractual debt and other obligations outlined below.

 

We believe that with a combination of some or all of the various cost reduction, cash conservation, sales and marketing, and, if necessary, financing initiatives and with the targeted execution under the Joinstar Agreements and strengthening of our China sales/distribution, based on the projected level of operations, our cash and cash equivalent balances, including cash generated from operations, will be sufficient to meet our anticipated cash requirements through the next twelve months. However, due to our history of losses, the challenges of our sales activities in our China market and uncertain success of our various cost, cash, and financing efforts, there is substantial doubt over our ability to continue as a going concern as we are dependent on meeting the development milestones required to earn the additional US$0.8 million under the Collaboration Agreement with Joinstar, achieving profitable operations, and/or additional financings, the outcomes of which cannot be predicted at this time.

 

ONGOING SOURCES AND USES OF CASH

 

Changes in Cash Flows (in thousands):

 

Year ended December 31,

 

2015

   

2014

   

2013

 

Cash provided by (used in) operating activities

    813       (2,292 )     (1,272 )

Cash used in investing activities

    (449 )     (410 )     (196 )

Cash provided by (used in) financing activities

    (1,093 )     2,954       2,348  

Increase/(decrease) in cash during the period

  $ (710 )   $ 263     $ 878  

  

 
-41-

 

 

As at December 31, 2015, the Company had cash and cash equivalents balance of $2.5 million as a result of a $0.7 million decrease in cash during the year. The cash decrease was primarily the result of cash used in investing and financing activities offset by cash provided by operating activities described below:

 

Cash Provided by / (Used in) Operating Activities (in thousands):

 

During the year ended December 31, 2015, we generated $0.8 million in cash from operating activities, compared to using $2.3 million and $1.3 million during the years ended December 31, 2014 and 2013 respectively. The cash generated from operating activities was the result of a net loss of $0.1 million, adjusted for the total effects of non-cash adjustments of $0.9 million. In addition, changes in working capital excluding cash were as follows:

 

Year ended December 31,

 

2015

   

2014

   

2013

 

Trade receivables

    242       175       662  

Other receivables

    (11 )     23       25  

Inventories

    237       194       (459 )

Prepaid expenses and other

    50       (57 )     90  

Accounts payable and accrued liabilities

    (680 )     1,196       956  

Deferred revenue

    247       777       (181 )

Net change in working capital excluding cash

  $ 85     $ 2,308     $ 1,093  

 

The net changes in working capital during 2015 were primarily due to the following:

 

 

Accounts payable and accrued liabilities decreased from $3.9 million to $3.3 million due to the payment of severance costs accrued but not fully paid in 2014 and the timing of vendor payments during the year;

 

Deferred revenue increased from $873,000 to $1.3 million primarily the result of the increase in prepaid orders and volume rebates accrued for future sales;

 

Trade receivable balances decreased from $702,000 to $466,000 as a result of more product sales that were prepaid during the year; and

 

Inventory balances decreased from $2.1 million to $1.8 million primarily due to an effort to reduce raw material inventories in response to the reduction in Chinese product sales mentioned above and improved inventory management processes.

 

Cash Used in Investing Activities

 

Net cash used in investing activities for the years ended December 31, 2015, 2014, and 2013 was $449,000, $410,000, and $196,000. This cash was primarily used for the purchase of equipment used in manufacturing and research and development activities.

 

Cash Provided by (Used In) Financing Activities

 

Net cash used in financing activities during the year ended December 31, 2015 of $1.1 million was used to repay the SVB debt and repayable leasehold improvements allowance during the year.

 

The net cash provided by financing activities during the year ended December 31, 2014 of $3.0 million was primarily due to the private placement with Joinstar for gross proceeds of $2.2 million offset by $154,000 of financing costs. In addition, we received $1.7 million of debt proceeds from SVB during the year. These proceeds were offset by the repayment of the SVB debt and the leasehold improvements allowance.

 

The net cash provided by financing activities for the years ended December 31, 2013 were primarily the result of the private placements completed in 2013 for gross proceeds of $3.1 million less $388,000 of financing costs. This offset the repayment of the repayable leasehold improvement allowance of $371,000.

 

 
-42-

 

 

CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

 

The following table summarizes our contractual commitments as of December 31, 2015 and the effect those commitments are expected to have on liquidity and cash flow in future periods (in thousands):

   

Payments due by Period

 

Contractual Obligations

 

Total

   

Less than 1 Year

   

1-3 years

   

3 - 5 years

   

More than 5

years

 

Long-term debt obligations (1)

    6,561       1,426       1,657       1,511       1,967  

Operating lease obligations (2)

    7,984       1,040       2,163       2,278       2,502  

Purchase obligations (3)

    2,352       1,727       446       179       -  

Total

  $ 16,897     $ 4,193     $ 4,266     $ 3,968     $ 4,469  

 

(1) Long-term debt obligations consist of the principle and interest payments of our term loan with SVB and repayable leasehold improvement allowance. The term of the SVB debt ends on May 1, 2017. The term of the repayable leasehold improvement allowance coincides with the term of the lease mention in note (2).

(2) Operating lease obligations consist of leases of the facilities and property, plant, and equipment. These lease obligations expire on various dates between 2017 and 2023. The lease for the facility, which commenced in 2008, has a term of 15 years.

(3) Purchase obligations consist of obligations to purchase raw materials, manufacturing equipment, and other supplies from suppliers.

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

As of December 31, 2015, we have no material off-balance sheet arrangement as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

RELATED PARTY TRANSACTIONS

 

We received US$1.28 million from Joinstar, a significant shareholder, upon signing of the Technology Development Agreement and Collaboration Agreement. These upfront payments are being recognized into income over the expected development period of which $972,000 was recognized during the year ended December 31, 2015. These development fees are included under collaborative revenue in the consolidated statements of loss and comprehensive loss. The unrecognized portion of the development fees are included under deferred revenue on the consolidated balance sheet.

 

In addition, we received US $1.73 million upon achieving the third, fourth, and fifth milestones under the Collaboration Agreement with Joinstar in 2015. For the year ended December 31, 2015, $2.4 million was included under collaborative revenue in the consolidated statements of loss and comprehensive loss.

 

During the year, we paid Orbimed Advisors, LLC, a majority shareholder, $12,000 relating to financing costs that are included under general and administrative expenses in the consolidated statements of loss and comprehensive loss.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

A summary of the significant accounting policies is as follows:

 

USE OF ESTIMATES

 

Our consolidated financial statements are prepared in accordance with U.S. GAAP. In the application of U.S. GAAP, we are required to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities in our consolidated financial statements. Changes in the accounting estimates from period to period are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations may be affected.

 

On an ongoing basis, we evaluate our estimates, including those related to revenue recognition including the recognizing of revenue under the milestone method, valuation of stock based compensation, valuation of long-lived assets, tax related contingencies, recoverability of receivables, valuation of inventories, and warranty accruals. We base our estimates on historical experience and on various other assumptions, including expected trends that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

In addition to making critical accounting estimates, we must ensure that our financial statements are properly stated in accordance with U.S. GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require a high degree of management judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions.

 

 
-43-

 

 

Our significant accounting policies are discussed in Note 3, “Significant Accounting Policies,” to the consolidated financial statements included in Item 8 of this Annual Report. We believe that the following are our most critical accounting policies and estimates, each of which is critical to the portrayal of our financial condition and results of operations and requires our most difficult, subjective and complex judgments. Our management has reviewed our critical accounting policies and the related disclosures with the Audit Committee of our Board of Directors.

 

INVENTORIES

 

Raw material, finished goods, and work in progress inventories are carried at the lower of actual cost, determined on a first-in first-out basis, and market value. Cost of finished goods and work in progress inventories includes direct materials, direct labour and applicable overhead. We write down our inventory balances for estimates of excess and obsolete amounts. These write-downs are recorded as a component of cost of sales. At the point of the write-down, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

 

LONG LIVED ASSET IMPAIRMENT

 

Long-lived assets to be held and used are periodically reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, we base our evaluation on such impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. In the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss will be recognized for the difference between the carrying value and the fair value.

 

REVENUE RECOGNITION

 

Product sales are recognized when legal title passes to distributors or customers, the sales price is fixed and determinable, collection of the resulting receivables is reasonably assured and no uncertainties with regard to customer acceptance exist. Sales are recorded net of discounts and sales returns.

 

When arrangements include multiple elements, we use objective evidence of fair value to allocate revenue to the elements, and recognize revenue when the criteria for revenue recognition have been met for each element, in accordance with authoritative guidance on multiple-element arrangements.

 

Upfront fees from collaborative research arrangements that are non-refundable, require the ongoing involvement of the Company and are directly linked to specific milestones are deferred and amortized into income as services are rendered. Upfront fees from collaborative research arrangements that are non-refundable, require the ongoing involvement of the Company and are not directly linked to specific milestones are deferred and amortized into income on a straight-line basis over the term of ongoing development. Upfront fees from collaborative research arrangements that are refundable are deferred and recognized once the refundable period has lapsed.

 

Milestone Revenue – Our collaboration agreements generally include contingent contractual payments related to achievement of specific research, development and regulatory milestones that are based in whole or in part upon our performance. Research, development and regulatory contingent contractual payments and milestone payments are typically payable under our collaborations upon completion of assay development, upon completion of clinical trial testing of the developed assay, and upon receipt of actual marketing approvals of a developed assay.

 

At the inception of each arrangement that includes contingent contractual payments, we evaluate whether each potential payment and milestone is substantive and at risk to both parties based on the basis of the contingent nature of the milestone event. We evaluate factors such as scientific, regulatory, and other risks that we must overcome to achieve the respective milestone event, whether the contractual payments due at each milestone event is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment and whether the contingent contractual payment relates solely to past performance. The determination of whether a milestone is substantive requires judgment by the Company.

 

We recognize any payment that is contingent upon the achievement of a substantive milestone entirely in the period in which the milestone is achieved. A milestone is defined as an event that can only be achieved based in whole or in part either on our performance, or the performance of our collaborators, or the occurrence of a specific outcome resulting from our past performance for which there is a substantive uncertainty at the date the arrangement is entered into that the event will be achieved.

 

 
-44-

 

 

WARRANT LIABILITY

 

We account for warrants, issued in the 2011 rights offering, pursuant to the authoritative guidance on accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock. We have classified the warrants on the consolidated balance sheet as a liability that is revalued at each balance sheet date subsequent to the initial issuance. Determining the appropriate fair-value model, and calculating the fair value of warrants requires considerable judgment, including estimating stock price volatility and expected warrant life. The computation of expected volatility was based on the historical volatility of shares of our common stock for a period that coincides with the expected life of the warrants. A small change in the estimates used may have a relatively large change in the estimated valuation. We use the Black-Scholes pricing model to value the warrants.

 

STOCK-BASED COMPENSATION

 

The Company uses the fair value method of accounting for all stock-based awards for non-employees and for all stock-based awards to employees that were granted, modified or settled since January 1, 2003. The fair value of stock options is determined using the Black-Scholes option-pricing model, which requires certain assumptions, including future stock price volatility, estimated forfeiture rates and expected time to exercise. Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Changes to any of these assumptions could produce different fair values for stock-based compensation. The expense is amortized on a straight-line basis over the graded vesting period.

 

For information on the recent accounting pronouncements impacting our business, see Note 4 of the Notes to Consolidated Financial Statements included in Item 8.

 

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Currency Fluctuations and Exchange Risk

 

We are subject to foreign exchange risk as a significant portion of our revenues are denominated in U.S. dollars. Significant losses may occur due to significant balances of cash held in or receivables denominated in U.S. dollars that may be affected negatively by a decline in the value of the U.S. dollar as compared to the Canadian dollar. In addition, we have significant trade payables and long term debt denominated in U.S. dollars that may be negatively impacted by an increase in the value of the U.S. dollar as compared to the Canadian dollar. We mitigate foreign exchange risk by maintaining a U.S. dollar bank account for all U.S. revenues and expenditures, thereby minimizing currency exchange. A 10% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of approximately $184,000 in the our loss as a result of revaluing the Company’s balance sheet items as at December 31, 2015.

 

Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to interest rate risk is limited as its restricted cash are long-term in nature and the interest rate related to both its repayable leasehold improvement allowance is fixed over the term of the debt. The Company is exposed to interest rate risk on its SVB term loan as it has a variable interest rate that will vary with changes to the Wall Street Journal Prime Rate.

 

 
-45-

 

  

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

 

 

 

RESPONSE BIOMEDICAL CORP.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

(EXPRESSED IN CANADIAN DOLLARS)

 

(PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPALS USED IN THE UNITED STATES OF AMERICA (U.S. GAAP))

 

AS AT DECEMBER 31, 2015 AND 2014, AND FOR EACH OF THE THREE YEARS ENDED

DECEMBER 31, 2015

 

 
-46-

 

 

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

 

The consolidated financial statements contained in this annual report have been approved by the board of directors and were prepared by management in accordance with United States generally accepted accounting principles. Management is responsible for the preparation and integrity of the consolidated financial statements and all other information in the annual report, and for ensuring that this information is consistent, where appropriate, with the information contained in the financial statements.

 

Management has developed and is maintaining a system of policies and procedures and internal controls to obtain reasonable assurance that the Company’s assets are safeguarded, transactions are authorized and financial information is reliable.

 

The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and internal control. The Board of Directors exercises this responsibility principally through the Audit Committee. The Audit Committee consists of directors not involved in the daily operations of the Company. The Audit Committee meets with management, and, the independent registered public accounting firm, satisfied itself that management’s responsibilities are properly discharged, and reviewed the financial statements prior to their presentation to the Board of Directors for approval. The independent registered public accounting firm, PricewaterhouseCoopers LLP, conducted an independent audit of the consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Their report expresses their opinion on the consolidated financial statements of the Company. The external auditors have free and full access to the Audit Committee with respect to their findings.

 

/s/ Dr. Barbara R. Kinnaird  

/s/ William J. Adams     

 

 

Dr. Barbara R. Kinnaird 

William J. Adams

 

 

Chief Executive Officer 

Chief Financial Officer

 

 
-47-

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Directors of

Response Biomedical Corp.

 

We have audited the accompanying consolidated balance sheets of Response Biomedical Corp. and its subsidiaries as of December 31, 2015 and December 31, 2014 and the related consolidated statements of loss and comprehensive loss, shareholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2015. Management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We were not engaged to perform an audit of the company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Response Biomedical Corp. and its subsidiaries as of December 31, 2015 and December 31, 2014 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

 

Emphasis of matter

 

The accompanying consolidated financial statements have been prepared assuming the company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the company has incurred recurring losses from operations and has an accumulated deficit at December 31, 2015 that raises substantial doubt about its ability to continue as a going concern. Management’s plans in this regard are also described in note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

(signed) PricewaterhouseCoopers LLP

 

Chartered Accountants

Vancouver, Canada

March 24, 2016

 

 
-48-

 

  

RESPONSE BIOMEDICAL CORP.

CONSOLIDATED BALANCE SHEETS

[SEE NOTE 2 - BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY]

(IN THOUSANDS OF CANADIAN DOLLARS)

 

 

 

 

   

December 31, 2015

   

December 31, 2014

 

ASSETS

    $       $  

Current

               

Cash and cash equivalents

    2,511       3,221  

Trade receivables, net [note 6]

    466       702  

Other receivables

    100       89  

Inventories [note 7]

    1,819       2,056  

Prepaid expenses and other

    134       183  

Deferred debt financing costs - current portion [note 11]

    90       88  

Total current assets

    5,120       6,339  

Deferred debt financing costs [note 11]

    3       45  

Long-term prepaid expenses

    93       93  

Restricted deposits [note 10]

    901       901  

Property, plant and equipment [note 8]

    5,689       6,250  

Total assets

    11,806       13,628  
                 

LIABILITIES AND SHAREHOLDERS' DEFICIT

               

Current

               

Accounts payable and accrued liabilities [note 6 and 9]

    3,297       3,867  

Term loan - current portion [note 11]

    843       494  

Lease inducements - current portion [note 10]

    169       169  

Repayable leasehold improvement allowance - current portion [note 6 and 10]

    514       461  

Deferred revenue

    1,311       873  

Warrant liability [notes 5 and 12]

    301       1,249  

Total current liabilities

    6,435       7,113  

Term loan (note 11)

    360       1,004  

Lease inducements [note 10]

    1,028       1,197  

Repayable leasehold improvement allowance [note 10]

    4,694       5,208  
      12,517       14,522  

Commitments [note 15]

               

Shareholders' deficit

               

Common shares [note 12]

    104,314       104,124  

Additional paid-in capital [note 12]

    15,384       15,241  

Deficit

    (120,409 )     (120,259 )

Total shareholders' deficit

    (711 )     (894 )

Total liabilities and shareholders’ deficit

    11,806       13,628  

 

See accompanying notes

 

 
-49-

 

 

RESPONSE BIOMEDICAL CORP.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(IN THOUSANDS OF CANADIAN DOLLARS)

 

   

2015

   

2014

   

2013

 
   

$

   

$

   

$

 

REVENUE

                       

Product sales [note 16]

    11,973       10,828       11,531  

Collaborative revenue [note 2 and 13]

    3,445       186       0  

Total revenue

    15,418       11,014       11,531  
                         

Cost of sales [notes 7, 8, 12 and 15]

    7,339       6,647       6,588  

Gross profit

    8,079       4,367       4,943  
                         

EXPENSES [notes 8, 10, 12, 13 and 15]

                       

Research and development

    2,901       3,525       2,402  

General and administrative

    2,564       3,297       3,574  

Sales and marketing

    2,329       2,578       2,171  

Total operating expenses

    7,794       9,400       8,147  
                         

OTHER EXPENSES (INCOME)

                       

Interest expense and amortization of deferred financing costs and debt discount [note 11]

    878       874       696  

Interest income

    (10 )     (15 )     (15 )

Other expense/(income)

    43       68       (17 )

Foreign exchange loss

    472       132       16  

Unrealized (gain) loss on revaluation of warrant liability [note 5]

    (948 )     (4,002 )     2,114  

Total other expenses (income)

    435       (2,943 )     2,794  

Net loss and comprehensive loss for the year

    (150 )     (2,090 )     (5,998 )
                         

Loss per common share - basic and diluted [note 12]

    (0.02 )     (0.26 )     (0.89 )
                         

Weighted average number of common shares outstanding - basic and diluted [note 12]

    9,879,148       8,025,143       6,747,369  

 

 

See accompanying notes

 

 
-50-

 

 

RESPONSE BIOMEDICAL CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE DATA)

 

   

Common

Stock
Issued and

Outstanding

   

Additional 

paid in capital

   

Deficit

   

Total

Shareholders' Deficit

 
   

# of shares

   

$

   

$

   

$

   

$

 

Balance at December 31, 2013

    7,870,925       101,945       14,742       (118,169 )     (1,482 )

Net loss

    -       -       -       (2,090 )     (2,090 )

Private placement, net of issue costs

    1,800,000       2,024       -       -       2,024  

Net shares issued upon conversion of restricted share units

    88,635