10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2018

or

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

For the transition period from

 to

Commission File Number: 0-28034

AdvanSource Biomaterials Corporation
(Exact name of registrant as specified in its charter)
Delaware	04-3186647
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
229 Andover Street, Wilmington, Massachusetts	01887
(Address of principal executive offices)	(Zip Code)

(978) 657-0075

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

☐  Large Accelerated Filer                                                                       ☐  Accelerated Filer

☐  Non-accelerated Filer                                                                          ☒  Smaller reporting company

Emerging growth company      ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ☐

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

As of February 19, 2019, there were 21,490,621 shares of the registrant’s Common Stock outstanding.

ADVANSOURCE BIOMATERIALS CORPORATION

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements
	Condensed Balance Sheets as of December 31, 2018 (unaudited) and March 31, 2018	3
	Condensed Statements of Operations for the three and nine months ended December 31, 2018 and 2017 (unaudited)	4
	Condensed Statements of Cash Flows for the nine months ended December 31, 2018 and 2017 (unaudited)	5
	Notes to Condensed Financial Statements (unaudited)	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4	Controls and Procedures	17
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3	Defaults Upon Senior Securities	19
Item 4	Mine Safety Disclosures	19
Item 5	Other Information	19
Item 6	Exhibits	19
	Signatures	20

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PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

AdvanSource Biomaterials Corporation
Condensed Balance Sheets
(In thousands, except share and per share amounts)
	December 31, 2018 (Unaudited)	March 31, 2018
ASSETS
Current assets:
Cash	$ 93	$ 120
Accounts receivable-trade, net of allowance of $5 as of December 31, 2018 and March 31, 2018	436	202
Accounts receivable-other	241	368
Inventories, net	242	297
Prepaid expenses and other current assets	4	4
Total current assets	1,016	991
Property, plant and equipment, net	1,805	1,823
Deferred financing costs, net	54	59
Other assets	47	47
Total assets	$ 2,922	$ 2,920
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$ 535	$ 544
Accrued expenses	237	265
Customer advance	243	295
Related party notes payable	140	145
Deferred revenue	25	13
Total current liabilities	1,180	1,262
Long-term liabilities:
Long-term financing obligation	1,986	1,986
Accrued interest on financing obligation	172	175
Total long-term liabilities	2,158	2,161
Total liabilities	3,338	3,423
Commitments and contingencies (See Note 13 and 14)
Stockholders' deficit:
Preferred stock; $.001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of December 31, 2018 and March 31, 2018	-	-
Common stock; $.001 par value; 50,000,000 shares authorized; 21,567,313 shares issued; and 21,490,621 shares outstanding as of December 31, 2018 and March 31, 2018	21	21
Additional paid-in capital	38,423	38,404
Accumulated deficit	(38,830)	(38,898)
	(386)	(473)
Less: treasury stock, 76,692 shares at cost as of December 31, 2018 and March 31, 2018	(30)	(30)
Total stockholders' deficit	(416)	(503)
Total liabilities and stockholders' deficit	$ 2,922	$ 2,920

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

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AdvanSource Biomaterials Corporation
Condensed Statements of Operations
(Unaudited - In thousands, except per share amounts)
	For the Three Months Ended December 31,		For the Nine Months Ended December 31,
	2018	2017	2018	2017
Revenues:
Product sales	$ 608	$ 397	$ 1,564	$ 1,343
License, royalty and development fees	281	213	708	645
Total revenues	889	610	2,272	1,988
Cost of sales	259	178	670	603
Gross profit	630	432	1,602	1,385
Operating expenses:
Research, development and regulatory	77	87	253	284
Selling, general and administrative	325	295	999	1,272
Total operating expenses	402	382	1,252	1,556
Income (loss) from operations	228	50	350	(171)
Interest expense	(94)	(94)	(282)	(289)
Income (loss) before income taxes	134	(44)	68	(460)
Provision for income taxes	-	-	-	-
Net income (loss)	$ 134	$ (44)	$ 68	$ (460)
Net income (loss) per common share:
Basic	$ 0.01	$ (0.00)	$ 0.00	$ (0.02)
Diluted	$ 0.01	$ (0.00)	$ 0.00	$ (0.02)
Shares used in computing net income (loss) per common share:
Basic	21,491	21,491	21,491	21,491
Diluted	22,711	21,491	22,627	21,491

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

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AdvanSource Biomaterials Corporation
Condensed Statements of Cash Flows
(In thousands)
	Nine Months Ended December 31,
	2018	2017
Cash flows from operating activities:
Net income (loss)	$ 68	$ (460)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Depreciation	43	38
Amortization of deferred financing costs	5	5
Stock-based compensation	19	300
Changes in assets and liabilities:
Accounts receivable-trade	(234)	(21)
Accounts receivable-other	127	(90)
Inventories	55	(115)
Prepaid expenses and other current assets	-	1
Accounts payable	(9)	24
Accrued expenses	(32)	25
Customer advance	(52)	326
Deferred revenue	12	12
Net cash flows provided by operating activities	2	45
Cash flows from investing activities:
Purchase of equipment	(24)	(10)
Net cash flows used in operating activities	(24)	(10)
Cash flows from financing activities:
Repayment of related party promissory note	(5)	(5)
Net cash flows used in financing activities	(5)	(5)
Net change in cash	(27)	30
Cash at beginning of period	120	27
Cash at end of period	$ 93	$ 57
Supplemental disclosure of cash flow information:
Income taxes paid	$ -	$ -
Interest paid	$ 280	$ 279

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

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ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2018

1.

Description of Business

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

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

Our corporate, development and manufacturing operations are located in our leased facility in Wilmington, Massachusetts.

2.

Interim Financial Statements and Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these unaudited condensed financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments), which we consider necessary, for a fair presentation of those financial statements. The results of operations and cash flows for the nine months ended December 31, 2018 may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year. The information contained in this quarterly report on Form 10-Q should be read in conjunction with our audited financial statements included in our annual report on Form 10-K, as amended, as of and for the year ended March 31, 2018 as filed with the Securities and Exchange Commission (the “SEC”).

Additionally, the accompanying unaudited financial statements have been prepared on a going concern basis which implies we will continue to meet our obligations for the next twelve months as of the date these financial statements are issued and contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the nine months ended December 31, 2018, we recognized net income of approximately $68,000, had positive net cash flows of approximately $2,000 from operating activities and had a working capital deficit of approximately $164,000. Management believes that substantial doubt of our ability to meet our obligations for the next twelve months from the date these financial statements were first made available has been alleviated due to, but not limited to, i) certain arrangements entered into during the fiscal year ended March 31, 2018 with three of our significant customers which provide inventory purchase financing and long-term commitments for continued product purchase; ii) continued growth of product sales from our current customer base and new customers; and iii) stable to increasing license fees and royalties pursuant to long-term contracts and arrangements. However, management cannot provide any assurances that we will be successful in accomplishing any of our plans. Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for us to raise additional capital on an immediate basis. However, based upon our evaluation, management believes that we are a going concern.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments, which are evaluated on an ongoing basis, and that affect the amounts reported in our unaudited condensed financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, allowance for doubtful accounts, inventory reserves, useful lives and valuation of property and equipment.

Other than as stated below, our significant accounting policies are described in Note 3 to the financial statements included in Item 8 of our annual report on Form 10-K as of March 31, 2018.

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ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2018

Revenue Recognition

We adopted the Accounting Standard Codification (“ASC”) 606, “Revenue from Contracts with Customers” as of April 1, 2018, using the modified retrospective method, and concluded that, consistent with prior reporting, we have two separate revenue streams: (i) product sales, and (ii) royalty and licensing revenues. Results for reporting periods after April 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting guidance under ASC 605, “Revenue Recognition.” The adoption of ASC 606 had no impact upon adoption, to our net income (loss) for the three and nine months ended December 31, 2018.

ASC 606 defines a five-step process to recognize revenues at the time and in an amount that reflects the consideration expected to be received for the performance obligations that have been provided. ASC 606 defines contracts as written, oral and through customary business practice. Under this definition, the Company considers contracts to be created at the time that an order to purchase product is agreed upon regardless of whether or not there is a written contract or when a contract is entered into for licensing and royalties.

We have two separate and distinct performance obligations offered to our customers: a product sales performance obligation and a licensing and royalty performance obligation. These performance obligations are related to separate revenue streams and at no point are they combined into a single transaction.

We generate the majority of our revenue from product sales, and to a lesser extent from fees generated from licensing and royalty arrangements primarily with two customers. Our revenue related to product sales is recognized upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed reasonably assured. If uncertainties regarding customer acceptance exist, we recognize revenues when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. Our revenue related to licensing and royalty arrangements is recognized in accordance with the terms of the arrangements which typically provide for quarterly payment of exclusivity fees and royalties earned on the sale of customer products on a quarterly basis.

3.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on our accounting and reporting. We believe that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on our accounting or reporting or that such impact will not be material to our financial position, results of operations and cash flows when implemented.

Recent accounting pronouncements are included in Note 3 to the financial statements included in Item 8 of our annual report on Form 10-K as of March 31, 2018.

4.

Customer Advances

In April 2017, we received approximately $581,000 from three significant customers as advances against future product sales and inventory purchases. During the three months and nine months ended December 31, 2018, we shipped and recognized revenue on the sale of product to this customer in the approximate amount of $0 and $33,000, respectively. During the three months and nine months ended December 31, 2017, we shipped and recognized revenue on the sale of product to this customer in the approximate amount of $97,000 and $248,000, respectively.

During the nine months ended December 31, 2017, we received approximately $$660,000 and $145,000 from two customers which cash was retained by us in order to purchase certain raw material inventory on their behalf. We purchased raw materials on behalf of these two customers resulting in an available balance of approximately $243,000 as of December 31, 2018 and March 31, 2018, which is included in Customer Advances in our balance sheet.

5.

Related Party Transactions

On April 26, 2016, we entered into Promissory Notes in the aggregate principal amount of $50,000 (the “Notes”) with Khristine Carroll, our Executive VP of Commercial Operations and an affiliate of Michael Adams, our Chief Executive Officer (the “Affiliate”) (collectively, the “Investors”). The Notes were initially due on May 25, 2016 and are currently being extended for consecutive monthly periods as mutually agreed upon by the parties and

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ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2018

provided for by the terms of the Notes. The Notes bear interest at the rate of 10% per annum and all principal and accrued interest, if any, is due on demand. During the three months ended December 31, 2018 and the fiscal year ended March 31, 2018, we repaid $5,000 and $5,000, respectively, of principal to Ms. Carroll. As of December 31, 2018 and March 31, 2018, the aggregate principal balance outstanding was $40,000 and $45,000, respectively. During the three months ended December 31, 2018 and 2017, we recorded interest expense of approximately $1,000 and $1,000, respectively, on the Notes. During the nine months ended December 31, 2018 and 2017, we recorded interest expense of approximately $3,000 and $3,000, respectively, on the Notes. As of December 31, 2018 and March 31, 2018, we recorded interest payable of $0 and $0, respectively.

On December 5, 2016, we entered into an additional Promissory Note in the principal amount of $100,000 (the “Second Note”) with the Affiliate. The Second Note bears interest at the rate of 12% per annum, provides for a $3,000 commitment fee, which fee was paid in February 2017. Additionally, all principal and accrued interest, if any, which is due on demand, has been extended for consecutive month-to-month periods as mutually agreed to by the parties. As of December 31, 2018 and March 31, 2018, the principal balance outstanding was $100,000 and $100,000, respectively. During the three months ended December 31, 2018 and 2017 we recorded interest expense of $3,000 and $3,000, respectively, on the Second Note. During the nine months ended December 31, 2018 and 2017 we recorded interest expense of $9,000 and $9,000, respectively, on the Second Note. As of December 31, 2018 and March 31, 2018, we recorded interest payable of $0 and $0, respectively.

On April 3, 2017, Michael Adams, our CEO and President, advanced and committed to us $20,000 pursuant to a promissory note, as amended (the “Advance Note”). The Advance Note provided the availability of up to $20,000 at the sole discretion of Mr. Adams through April 2, 2018, bears interest at the rate of 10% per annum, and provides for a $2,000 commitment fee and guaranteed interest of $2,000 payable upon execution of the Advance Note. On April 19, 2017 we paid the commitment fee and guaranteed interest of $2,000 and $2,000, respectively. Additionally, on April 19, 2017 we paid down the $20,000 advance. As of December 31, 2018 and March 31, 2018, the principal balance outstanding on the Advance Note was $0.

6.

Equity-Based Compensation

In October 2003, our shareholders approved the AdvanSource 2003 Stock Option Plan (the “2003 Plan”), which authorizes the issuance of 3,000,000 shares of common stock. Under the terms of the Plan, the exercise price of Incentive Stock Options issued under the Plan must be equal to the fair market value of the common stock at the date of grant. In the event that Non-Qualified Options are granted under the Plan, the exercise price may be less than the fair market value of the common stock at the time of the grant (but not less than par value). Total shares of common stock registered under the 2003 Plan are 7,000,000 shares. Normally, options granted expire ten years from the grant date.

Activity under the 2003 Plan for the nine months ended December 31, 2018 is as follows:

	Options Outstanding	Weighted-Average Exercise Price per Share	Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value (in thousands)
Options outstanding as of April 1, 2018	1,813,750	$ 0.21	3.00	$ -
Granted	-
Exercised
Cancelled or forfeited	(25,000)	$ 0.42	-	$ -
Options outstanding as of December 31, 2018 (unaudited)	1,788,750	$ 0.20	2.28	$ -
Options exercisable as of December 31, 2018 (unaudited)	1,788,750	$ 0.20	2.28	$ -
Options vested or expected to vest as of December 31, 2018 (unaudited)	1,788,750	$ 0.20	2.28	$ -

Our unaudited condensed statements of operations include no equity-based compensation expense related to our 2003 Plan for employee and non-employee director awards for the three and nine months ended December 31, 2018

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ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2018

and 2017, respectively, as all of the stock options pursuant to the 2003 Plan are fully vested and there remains no further unrecognized equity-based compensation costs.

On August 14, 2017, our board of directors approved and adopted the 2017 Non-Qualified Equity Incentive Plan (the “2017 Plan”), which authorized the grant of non-qualified stock options exercisable into a maximum of 7,000,000 shares of our common stock. Under the terms of the 2017 Plan, the exercise price of stock options issued under the 2017 Plan must be equal to the fair market value of the common stock at the date of grant. Options granted expire ten years from the grant date. On August 17, 2017, the board of directors approved the grant of stock options to certain directors, employees and a consultant exercisable into 5,600,000 shares of our common stock (the “2017 Plan Options”). The 2017 Plan Options were immediately vested on the date of grant and exercisable at $0.06 per share, the fair market value on the date of grant. In determining the fair value of the 2017 Stock Options, we utilized the Black-Scholes pricing model utilizing the following assumptions: i) stock option exercise price of $0.06; ii) grant date price of our common stock of $0.06; iii) expected term of option of 10 years; iv) expected volatility of our common stock of 100%; v) expected dividend rate of 0.0%; and vi) risk-free interest rate of 0.0%. We recorded stock-based compensation of approximately $300,000 on August 17, 2017, the date of grant.

On August 16, 2018, the board of directors approved the grant of an additional stock option pursuant to the 2017 Plan to our executive vice president exercisable into 750,000 shares of our common stock which was immediately vested on the date of grant and exercisable at $0.04 per share, the fair market value on the date of grant. In determining the fair value of the subject stock option, we utilized the Black-Scholes pricing model utilizing the following assumptions: i) stock option exercise price of $0.04; ii) grant date price of our common stock of $0.04; iii) expected term of option of 10 years; iv) expected volatility of our common stock of 100%; v) expected dividend rate of 0.0%; and vi) risk-free interest rate of 0.0%.

We recorded stock-based compensation of $0 and approximately $19,000 during the three and nine months ended December 31, 2018, respectively. We recorded stock-based compensation of $0 and approximately $300,000 during the three and nine months ended December 31, 2017, respectively.

7.

Inventories

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

(in thousands)	December 31, 2018 (unaudited)	March 31, 2018
Raw materials	$ 182	$ 215
Work in progress	43	64
Finished goods	129	130
	354	409
Less: allowance for obsolete and excess inventory	(112)	(112)
Total inventories, net	$ 242	$ 297

8.

Property, Plant and Equipment

Property, plant and equipment consists of the following:

(in thousands)	December 31, 2018 (unaudited)	March 31, 2018
Land	$ 500	$ 500
Building	2,705	2,705
Machinery, equipment and tooling	1,248	1,224
Furniture, fixtures and office equipment	285	285
Office equipment under capital lease	13	13
	4,751	4,727
Less:  accumulated depreciation	(2,946)	(2,904)
	$ 1,805	$ 1,823

For the three months ended December 31, 2018 and 2017, depreciation expense was approximately $14,000 and $13,000, respectively. For the nine months ended December 31, 2018 and 2017, depreciation expense was approximately $43,000 and $38,000, respectively.

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ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2018

9.

Income Per Share

Basic income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per common share are based upon the weighted-average common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. In addition, the numerator is adjusted for any changes in income that would result from the assumed conversion of potential shares. Potentially dilutive shares, which were included in the diluted income per share calculations for the three and nine months ended December 31, 2018 were 1,220,008 shares and 1,137,025 shares, respectively. Potentially dilutive shares, which were excluded from the diluted income per share calculations because the effect would be antidilutive or the options exercise prices were greater than the average market price of the common shares, were 8,250,250 shares for the each of the three and nine months ended December 31, 2017.

10.

Stockholders’ Deficit

Common Stock Options and Warrants

On July 22, 2015, we engaged the services of a financial and strategic advisor whose services include, but are not limited to, financial advice, strategic advice and investment banking services. In connection with this engagement, we agreed to compensate the investment bankers approximately $4,000 per quarter for a one year period and we issued them a warrant to purchase 830,500 shares of our common stock at an exercise price of $0.0301 per share, the approximate fair value of our common stock on the date of the engagement. The warrant is exercisable at any time until July 21, 2025. The warrant was valued at approximately $28,000 using the Black-Scholes model.

There were no exercises of options or warrants by employees or consultants during the nine months ended December 31, 2018 and 2017, respectively.

11.

Income Taxes

The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. We evaluate the realizability of our deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. A valuation allowance has been recorded to offset all deferred tax assets due to uncertainty of realizing the tax benefits of the underlying operating loss and tax credit carry forwards over their carry forward periods. We have no significant deferred tax liabilities as of December 31, 2018 and March 31, 2018.

We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate this tax position on a quarterly basis. We also accrue for potential interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense. As of December 31, 2018 and March 31, 2018, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Tax Act and guidance available as of the date of this filing but have kept the full valuation allowance.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The deferred tax expense recorded in connection with the remeasurement of deferred tax assets is a

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ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2018

provisional amount and a reasonable estimate at December 31, 2017 based upon the best information currently available. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

12.

Notes Payable

On April 26, 2016, we entered into Promissory Notes in the aggregate principal amount of $50,000 (the “Notes”) with Khristine Carroll, our Executive VP of Commercial Operations and an affiliate of Michael Adams, our Chief Executive Officer (the “Affiliate”) (collectively, the “Investors”). The Notes were initially due on May 25, 2016 and are currently being extended for consecutive monthly periods as mutually agreed upon by the parties and provided for by the terms of the Notes. The Notes bear interest at the rate of 10% per annum and all principal and accrued interest, if any, is due on demand. During the fiscal year ended March 31, 2018, we repaid $5,000 of principal to Ms. Carroll. As of December 31, 2018 and March 31, 2018, the aggregate principal balance outstanding was $45,000 and $50,000, respectively. During the three months ended December 31, 2018 and 2017, we recorded interest expense of approximately $1,000 and $1,000, respectively, on the Notes. During the nine months ended December 31, 2018 and 2017, we recorded interest expense of approximately $3,000 and $3,000, respectively, on the Notes. As of December 31, 2018 and March 31, 2018, we recorded interest payable of $0 and $0, respectively.

On December 5, 2016, we entered into an additional Promissory Note in the principal amount of $100,000 (the “Second Note”) with the Affiliate. The Second Note bears interest at the rate of 12% per annum, provides for a $3,000 commitment fee, which fee was paid in February 2017. Additionally, all principal and accrued interest, if any, which is due on demand, has been extended for consecutive month-to-month periods as mutually agreed to by the parties. As of December 31, 2018 and March 31, 2018, the principal balance outstanding was $100,000 and $100,000, respectively. During the three months ended December 31, 2018 and 2017 we recorded interest expense of $3,000 and $3,000, respectively, on the Second Note. During the nine months ended December 31, 2018 and 2017 we recorded interest expense of $9,000 and $9,000, respectively, on the Second Note. As of December 31, 2018 and March 31, 2018, we recorded interest payable of $0 and $0, respectively.

On April 3, 2017, Michael Adams, our CEO and President, advanced and committed to us $20,000 pursuant to a promissory note, as amended (the “Advance Note”). The Advance Note provided the availability of up to $20,000 at the sole discretion of Mr. Adams through April 2, 2018, bears interest at the rate of 10% per annum, and provides for a $2,000 commitment fee and guaranteed interest of $2,000 payable upon execution of the Advance Note. On April 19, 2017 we paid the commitment fee and guaranteed interest of $2,000 and $2,000, respectively. Additionally, on April 19, 2017 we paid down the $20,000 advance. As of December 31, 2018 and March 31, 2018, the principal balance outstanding on the Advance Note was $0.

13.

Long-Term Financing Obligation

On December 22, 2011, we entered into an agreement with an independent third-party under which we sold and leased back our land and building generating gross proceeds of $2,000,000. Pursuant to a lease agreement, the initial minimum lease term is 15 years. At the end of the initial minimum lease term, we have the option to renew the lease for three periods of five years each. In addition, we provided, as collateral, a security interest in all furnishings, fixtures and equipment owned and used by us, having a net book value of approximately $0 as of December 31, 2018. For accounting purposes, the provision of such collateral constitutes continuing involvement with the associated property. Due to this continuing involvement, this sale-leaseback transaction is accounted for under the financing method, rather than as a completed sale. Under the financing method, we include the sales proceeds received as a financing obligation. As of December 31, 2018 and March 31, 2018, the total financing obligation was $1,986,000, respectively, and accrued interest on financing obligation was approximately $172,000 and $175,000, respectively. Through December 2018, interest on the financing obligation exceeds the minimum lease payments, accordingly the principal remains constant through that date. After December 2018, the minimum lease payment will exceed interest and principal will be reduced by the excess of minimum lease payment over interest. The building, building improvements and land remain on the condensed balance sheet and the building and building improvements will continue to be depreciated over their remaining useful lives. Payments made under the lease are applied as payments of imputed interest and deemed principal on the underlying financing obligation.

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ADVANSOURCE BIOMATERIALS CORPORATION

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2018

14.

Contingencies

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

15.

Concentrations of Credit Risk and Major Customers

For the three months ended December 31, 2018 and 2017, three customers represented approximately 66% of our total revenues and four customers represented approximately 61% of our total revenues, respectively.

For the nine months ended December 31, 2018 and 2017, three customers represented approximately 53% of our total revenues and four customers represented approximately 65% of our total revenues, respectively.

As of December 31, 2018, we had accounts receivable-trade, net, of approximately $290,000, or 66%, due from two customers. As of March 31, 2018, we had accounts receivable-trade, net, of approximately $102,000, or 51%, due from three customers.

As of December 31, 2018, we had approximately $241,000 due from two customer related to receivables on royalties, license and annual usage fees. As of March 31, 2018, we had approximately $368,000 due from two customers related to receivables on royalties, license and annual usage fees. These amounts are classified as accounts receivable-other in the accompanying condensed balance sheets.

16.

Subsequent Events

We evaluated all events or transactions that occurred after the balance sheet date through the date when we issued these unaudited condensed financial statements. During this period, we did not have any material recognizable subsequent events.

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Item 2.

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

Cautionary Note Regarding Forward-Looking Statements

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

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

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this quarterly report on Form 10-Q. For example, we may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market our products; the market may not accept our existing and future products; we may not be able to retain our customers; we may be unable to retain existing key management personnel; and there may be other material adverse changes in our operations or business. Certain important factors affecting the forward-looking statements made herein also include, but are not limited to (i) continued downward pricing pressures in our targeted markets, (ii) the continued acquisition of our customers by certain of our competitors, and (iii) continued periods of net losses, which could require us to find additional sources of financing to fund operations, implement our financial and business strategies, meet anticipated capital expenditures and fund research and development costs. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our financial position and results of operations. For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof. We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law. For further information, you are encouraged to review our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 31, 2018 and the risk factors discussed therein under Part I. Item 1A.

Overview

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

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

Technology and Intellectual Property

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

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polymers are designed to overcome such degradation and reduce the incidents of infections associated with invasive devices.

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

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

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

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

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

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

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

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

Critical Accounting Policies

Our critical accounting policies are summarized in Note 2 to our consolidated financial statements included in Item 8 of our annual report on Form 10-K for the fiscal year ended March 31, 2018. However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our financial statements. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our unaudited condensed financial statements. There have been no changes to our critical accounting policies during the fiscal quarter ended December 31, 2018.

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Results of Operations

Three Months Ended December 31, 2018 vs. December 31, 2017

Revenues

Total revenues for the three months ended December 31, 2018 were approximately $889,000 as compared with approximately $610,000 for the prior year period, an increase of approximately $279,000, or 45.7%.

Product sales of our biomaterials for the three months ended December 31, 2018 were approximately $608,000 as compared with approximately $397,000 for the prior year period, an increase of approximately $211,000, or 53.1%. The increase is due to continued demand from certain key existing customers and continued penetration of the market resulting in an expanding customer base.

License, royalty and development fees for the three months ended December 31, 2018 were approximately $281,000 as compared with approximately $213,000 for the prior year period, an increase of approximately $68,000 or 31.9%. Although the license, royalty and development fees are relatively stable and consistent pursuant to the terms of the long-term contracts and arrangements with two of our significant customers, our royalty revenues are benefiting from increased sales of our customers’ products, which products incorporate our technology and polymers. We have agreements to license our proprietary biomaterial technology to medical device manufacturers and develop biomaterials for incorporation into medical devices under development by our customers. Royalties are earned when these manufacturers sell medical devices which use our biomaterials.

Gross Profit

Gross profit on total revenues for the three months ended December 31, 2018 was approximately $630,000, or 70.9% of total revenues, compared with approximately $432,000, or 70.8% of total revenues, for the prior year period. Gross profit as a percentage of total revenues for the three months ended December 31, 2018 as compared to the prior year period is relatively unchanged. Although gross profit as a percentage of total revenues remained relatively unchanged, gross profit dollars for the three months ended December 31, 2018 increased as compared to the prior year period primarily due to increased product sales.

Gross profit on product sales for the three months ended December 31, 2018 was approximately $349,000, or 57.4% of product sales, compared with approximately $219,000, or 55.2% of product sales, for the prior year period. Gross profit dollars and gross profit as a percentage of total revenues for the three months ended December 31, 2018 as compared to the prior year period increased primarily due to increased product sales.

Research, Development and Regulatory Expenses

Research and development expenses for the three months ended December 31, 2018 were approximately $77,000 as compared with approximately $87,000 for the prior year period, a decrease of approximately $10,000 or 11.5%. The decrease in research and development expense is primarily a result of decreased operating costs for materials and supplies. Our research and development efforts are focused on developing new applications for our biomaterials. Research and development expenditures consist primarily of the salaries of full time employees, research consultant fees and related expenses, and are expensed as incurred. Management believes its current research and development resources meet the needs of our customers and internal development needs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2018 were approximately $325,000 as compared with approximately $295,000 for the prior year period, an increase of approximately $30,000, or 10.2%. The increase in selling, general and administrative expensesis primarily a result of certain consulting fees.

Interest Expense

Interest expense for the three months ended December 31, 2018 was approximately $94,000 as compared to approximately $94,000 for the comparable prior year period. Interest expense is composed primarily of interest accrued in connection with the financing obligation.

Nine Months Ended December 31, 2018 vs. December 31, 2017

Revenues

Total revenues for the nine months ended December 31, 2018 were approximately $2,272,000 as compared with approximately $1,988,000 for the prior year period, an increase of approximately $284,000, or less than 14.3%.

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Product sales of our biomaterials for the nine months ended December 31, 2018 were approximately $1,564,000 as compared with approximately $1,343,000 for the prior year period, an increase of approximately $221,000, or 16.5%. The increase is due to continued demand from certain key existing customers and continued penetration of the market resulting in an expanding customer base.

License, royalty and development fees for the nine months ended December 31, 2018 were approximately $708,000 as compared with approximately $645,000 for the prior year period, an increase of approximately $63,000 or 9.8%. Although the license, royalty and development fees are relatively stable and consistent pursuant to the terms of the long-term contracts and arrangements with two of our significant customers, our royalty revenues are benefiting from increased sales of our customers’ products, which products incorporate our technology and polymers. We have agreements to license our proprietary biomaterial technology to medical device manufacturers and develop biomaterials for incorporation into medical devices under development by our customers. Royalties are earned when these manufacturers sell medical devices which use our biomaterials.

Gross Profit

Gross profit on total revenues for the nine months ended December 31, 2018 was approximately $1,602,000, or 70.5% of total revenues, compared with approximately $1,385,000, or 69.7% of total revenues, for the prior year period. Gross profit dollars and gross profit as a percentage of total revenues for the nine months ended December 31, 2018 as compared to the prior year period is relatively unchanged.

Gross profit on product sales for the nine months ended December 31, 2018 was approximately $894,000, or 57.2% of product sales, compared with approximately $740,000, or 55.1% of product sales, for the prior year period. Gross profit dollars and gross profit as a percentage of total revenues for the nine months ended December 31, 2018 as compared to the prior year period increased due to increased product sales.

Research, Development and Regulatory Expenses

Research and development expenses for the nine months ended December 31, 2018 were approximately $253,000 as compared with approximately $284,000 for the prior year period, a decrease of approximately $31,000 or 10.9%. The decrease in research and development expense is primarily a result of decreased operating costs for materials and supplies, as well as decreased research consulting fees, during the nine months ended December 31, 2017 as compared to the nine months ended December 31, 2018. Our research and development efforts are focused on developing new applications for our biomaterials. Research and development expenditures consist primarily of the salaries of full time employees, research consultant fees and related expenses, and are expensed as incurred. Management believes its current research and development resources meet the needs of our customers and internal development needs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended December 31, 2018 were approximately $999,000 as compared with approximately $1,272,000 for the prior year period, a decrease of approximately $273,000, or 21.5%. The decrease in selling, general and administrative expenses is primarily a result of stock-based compensation of approximately $284,000 recorded during the nine months ended December 31, 2017 as compared to $0 for the nine months ended December 31, 2018.

Interest Expense

Interest expense for the six months ended September 30, 2018 was approximately $282,000 as compared to approximately $289,000 for the comparable prior year period. Interest expense is composed primarily of interest accrued in connection with the financing obligation.

Liquidity and Capital Resources

As of December 31, 2018, we had cash of approximately $93,000 as compared to a cash balance of approximately $120,000 as of March 31, 2018.

During the nine months ended December 31, 2018, we had net cash of approximately $2,000 provided by operating activities as compared with net cash of approximately $45,000 provided by operating activities for the prior year period. Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees, facility and facility-related costs, material and overhead costs used in production, laboratory supplies and materials, and professional fees. The sources of our cash flow from operating activities have consisted primarily of payments received from customers on the sale of polymer products, customer advances and fees earned on license, royalty and development agreements. Our net cash provided by operating activities during the nine months ended December 31, 2018 decreased primarily as a result of a $234,000 increase in accounts receivable generated

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from product sales, which was partially offset by increased collections of $127,000 on royalties and exclusivity fees. During the nine months ended December 31, 2017, we experienced slightly greater cash provided by operations primarily as a result of significant customer advances and the benefit of the stock-based compensation which offset the approximate $460,000 net loss and increase in inventory of approximately $115,000 to meet production orders..

During the nine months ended December 31, 2018, we used cash of approximately $24,000 for investing activities in connection with the purchase of production equipment as compared to cash of approximately$10,000 used for the purchase of laboratory equipment in the comparable prior year period.

During the nine months ended December 31, 2018 and 2017, we used cash of $5,000 in each of these nine month periods for financing activities to repay a portion of a related party note.

There were no options or warrants exercised during the nine months ended December 31, 2018 and 2017, respectively. The ability to attract additional capital investments in the future will depend on many factors, including the availability of credit, rate of revenue growth, the expansion of selling and marketing and research and development activities, and the timing of new product introductions and enhancements to existing products. We believe that as of December 31, 2018 our cash position and cash flows from our fiscal 2018 operations will be sufficient to fund our working capital and research and development activities for at least the next twelve months.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the nine months ended December 31, 2018, we recognized net income of approximately $68,000, had positive net cash flows of approximately $2,000 from operations and had a working capital deficit of approximately $164,000. Management believes that certain arrangements entered into during the fiscal year ended March 31, 2018 with three of our significant customers, which provided for long-term commitments for continued product purchase; and an advance from one customer for future product purchases should alleviate any substantial doubt as to our ability to meet our obligations for the next twelve months as of the date these financial statements are issued. However, management cannot provide any assurances that we will be successful in accomplishing any of our plans. Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for us to raise additional capital on an immediate basis. However, based upon an evaluation, management believes that we are a going concern.

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

Off-Balance Sheet Arrangements

As of December 31, 2018, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not required pursuant to Item 305(e) of Regulation S-K.

Item 4.

Controls and Procedures

The certificates of our principal executive officer and principal financial and accounting officer attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures, and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications.

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a

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company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions to be made regarding required disclosure. It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our chief executive officer concluded that our disclosure controls and procedures as of December 31, 2018 were not effective at the reasonable assurance level due to limited resources in the finance and accounting functions. We intend to take appropriate and reasonable steps to make improvements to remediate these deficiencies.

Changes in Internal Control Over Financial Reporting

There were no changes to the Company’s internal control over financial reporting during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

Exhibit No.	Description
31.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Principal Executive, Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document.
101.SCH**	XBRL Taxonomy Extension Schema Document.
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document.

*

Included herewith.

**

Filed with this report in accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subjected to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AdvanSource Biomaterials Corporation
By:	/s/ Michael F. Adams
	Michael F. Adams President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer)

Dated:  February 19, 2019

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael F. Adams, hereby certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of AdvanSource Biomaterials Corporation (the “Company”);

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the condensed consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.

The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a.

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: February 19, 2019

/s/ Michael F. Adams

Michael F. Adams

Chairman, Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael F. Adams, hereby certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of AdvanSource Biomaterials Corporation (the “Company”);

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the condensed consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.

Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.

Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.

The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a.

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: February 19, 2019

/s/ Michael F. Adams

Michael F. Adams

Chairman, Chief Executive Officer

(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANESOXLEY ACT OF 2002

In connection with the Quarterly Report of AdvanSource Biomaterials Corporation, a Delaware corporation (the “Company”), on Form 10-Q for the fiscal quarter ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael F. Adams, Chief Executive Officer and President of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 19, 2019

/s/ Michael F. Adams

Michael F. Adams

Chief Executive Officer and President

This certification accompanies each report of the Company on Form 10-Q and Form 10-K pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by §906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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Document and Entity Information - USD ($)	9 Months Ended
	Dec. 31, 2018	Feb. 14, 2019	Sep. 30, 2018
Document and Entity Information:
Entity Registrant Name	Advansource Biomaterials Corp
Document Type	10-Q
Document Period End Date	Dec. 31, 2018
Amendment Flag	false
Entity Central Index Key	0001011060
Current Fiscal Year End Date	--03-31
Entity Common Stock, Shares Outstanding		21,490,621
Entity Public Float			$ 17,380,000
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Trading Symbol	asnb

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Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2018		Mar. 31, 2018
Current assets
Cash	$ 93		$ 120
Accounts receivable-trade, net	436	[1]	202	[2]
Accounts receivable-other	241		368
Inventories, net	242		297
Prepaid expenses and other current assets	4		4
Total current assets	1,016		991
Property, plant and equipment, net	1,805		1,823
Deferred financing costs, net	54		59
Other assets	47		47
Total assets	2,922		2,920
Current liabilities
Accounts payable	535		544
Accrued expenses	237		265
Customer advance	243		295
Notes payable	140		145
Deferred revenue	25		13
Total current liabilities	1,180		1,262
Long-term liabilities
Long-term financing obligation	1,986		1,986
Accrued interest on financing obligation	172		175
Total long-term liabilities	2,158		2,161
Total liabilities	3,338		3,423
Commitments and contingencies
Stockholders' equity
Preferred stock		[3]		[4]
Common stock	21	[5]	21	[6]
Additional paid-in capital	38,423		38,404
Accumulated deficit	(38,830)		(38,898)
Treasury stock	(30)	[7]	(30)	[8]
Total stockholders' equity	(416)		(503)
Total liabilities and stockholders' equity	$ 2,922		$ 2,920

[1] Net of allowance of $5 as of12/31/2018.

[2] Net of allowance of $5 as 3/31/2018.

[3] $.001 par value, 5,000,000 shares authorized; no shares issued and outstanding as of 12/31/2018.

[4] $.001 par value, 5,000,000 shares authorized; no shares issued and outstanding as of 3/31/2018.

[5] $.001 par value, 50,000,000 shares authorized; 21,567,313 shares issued and 21,490,621 shares outstanding as of 12/31/2018.

[6] $.001 par value, 50,000,000 shares authorized; 21,567,313 shares issued and 21,490,621 shares outstanding as of 3/31/2018.

[7] 76,692 shares at cost at 12/31/2018.

[8] 76,692 shares at cost at 3/31/2018.

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Statements of Operations - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
Revenues
Total revenues	$ 889	$ 610	$ 2,272	$ 1,988
Cost of sales	259	178	670	603
Gross profit	630	432	1,602	1,385
Operating expenses
Research, development and regulatory	77	87	253	284
Selling, general and administrative	325	295	999	1,272
Total operating expenses	402	382	1,252	1,556
Income (loss) from operations	228	50	350	(171)
Interest expense	94	94	282	289
Net income (loss)	$ 134	$ (44)	$ 68	$ (460)
Net income (loss) per common share, basic	$ 0.01	$ (0.00)	$ 0.00	$ (0.02)
Net income (loss) per common share, diluted	$ 0.01	$ (0.00)	$ 0.00	$ (0.02)
Shares used in computing net income (loss) per common share, basic	21,491	21,491	21,491	21,491
Shares used in computing net income (loss) per common share, diluted	22,711	21,491	22,627	22,631

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Statement of Cash Flows - USD ($)	9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Cash flows from operating activities
Net income (loss)	$ 68,000	$ (460,000)
Adjustments to reconcile net income (loss) to net cash flows used in operating activities:
Depreciation	43,000	38,000
Amoritization of deferred financing costs	5,000	5,000
Stock-based compensation	19,000	300,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable-trade	(234,000)	(21,000)
(Increase) decrease in accounts receivable-other	127,000	(90,000)
(Increase) decrease in inventories	55,000	(115,000)
(Increase) decrease in prepaid expenses and other current assets		1,000
Increase (decrease) in accounts payable	(9,000)	24,000
Increase (decrease) in accrued expenses	(32,000)	25,000
Increase (decrease) in customer advance	(52,000)	326,000
Increase (decrease) in deferred revenue	12,000	12,000
Net cash flows provided by (used in) operating activities	2,000	45,000
Cash flows from investing activities
Purchase of equipment	(24,000)	(10,000)
Net cash flows provided by (used in) investing activities	(24,000)	(10,000)
Cash flows from financing activities
Repayment of promissory note	(5,000)	(5,000)
Net cash flows provided by (used in) financing activities	(5,000)	(5,000)
Net change in cash	(27,000)	30,000
Cash at beginning of period	120,000	27,000
Cash at end of period	93,000	57,000
Supplemental disclosures of cash flow information
Interest paid	$ 280,000	$ 279,000

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Description of Business

9 Months Ended

Dec. 31, 2018

Notes

Description of Business

1.      Description of Business

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

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

Our corporate, development and manufacturing operations are located in our leased facility in Wilmington, Massachusetts.

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Interim Financial Statements and Basis of Presentation

9 Months Ended

Dec. 31, 2018

Notes

Interim Financial Statements and Basis of Presentation

2.Interim Financial Statements and Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these unaudited condensed financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments), which we consider necessary, for a fair presentation of those financial statements. The results of operations and cash flows for the nine months ended December 31, 2018 may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year. The information contained in this quarterly report on Form 10-Q should be read in conjunction with our audited financial statements included in our annual report on Form 10-K, as amended, as of and for the year ended March 31, 2018 as filed with the Securities and Exchange Commission (the “SEC”).

Additionally, the accompanying unaudited financial statements have been prepared on a going concern basis which implies we will continue to meet our obligations for the next twelve months as of the date these financial statements are issued and contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the nine months ended December 31, 2018, we recognized net income of approximately $68,000, had positive net cash flows of approximately $2,000 from operating activities and had a working capital deficit of approximately $164,000. Management believes that substantial doubt of our ability to meet our obligations for the next twelve months from the date these financial statements were first made available has been alleviated due to, but not limited to, i) certain arrangements entered into during the fiscal year ended March 31, 2018 with three of our significant customers which provide inventory purchase financing and long-term commitments for continued product purchase; ii) continued growth of product sales from our current customer base and new customers; and iii) stable to increasing license fees and royalties pursuant to long-term contracts and arrangements. However, management cannot provide any assurances that we will be successful in accomplishing any of our plans. Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for us to raise additional capital on an immediate basis. However, based upon our evaluation, management believes that we are a going concern.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments, which are evaluated on an ongoing basis, and that affect the amounts reported in our unaudited condensed financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, allowance for doubtful accounts, inventory reserves, useful lives and valuation of property and equipment.

Other than as stated below, our significant accounting policies are described in Note 3 to the financial statements included in Item 8 of our annual report on Form 10-K as of March 31, 2018.

Revenue Recognition

We adopted the Accounting Standard Codification (“ASC”) 606, “Revenue from Contracts with Customers” as of April 1, 2018, using the modified retrospective method, and concluded that, consistent with prior reporting, we have two separate revenue streams: (i) product sales, and (ii) royalty and licensing revenues. Results for reporting periods after April 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting guidance under ASC 605, “Revenue Recognition.” The adoption of ASC 606 had no impact upon adoption, to our net income (loss) for the three and nine months ended December 31, 2018.

ASC 606 defines a five-step process to recognize revenues at the time and in an amount that reflects the consideration expected to be received for the performance obligations that have been provided. ASC 606 defines contracts as written, oral and through customary business practice. Under this definition, the Company considers contracts to be created at the time that an order to purchase product is agreed upon regardless of whether or not there is a written contract or when a contract is entered into for licensing and royalties.

We have two separate and distinct performance obligations offered to our customers: a product sales performance obligation and a licensing and royalty performance obligation. These performance obligations are related to separate revenue streams and at no point are they combined into a single transaction.

We generate the majority of our revenue from product sales, and to a lesser extent from fees generated from licensing and royalty arrangements primarily with two customers. Our revenue related to product sales is recognized upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed reasonably assured. If uncertainties regarding customer acceptance exist, we recognize revenues when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. Our revenue related to licensing and royalty arrangements is recognized in accordance with the terms of the arrangements which typically provide for quarterly payment of exclusivity fees and royalties earned on the sale of customer products on a quarterly basis.

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New Accounting Pronouncement

9 Months Ended

Dec. 31, 2018

Notes

New Accounting Pronouncement

3.    Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on our accounting and reporting. We believe that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on our accounting or reporting or that such impact will not be material to our financial position, results of operations and cash flows when implemented.

Recent accounting pronouncements are included in Note 3 to the financial statements included in Item 8 of our annual report on Form 10-K as of March 31, 2018.

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Customer Advances

9 Months Ended

Dec. 31, 2018

Notes

Customer Advances

4.Customer Advances

In April 2017, we received approximately $581,000 from three significant customers as advances against future product sales and inventory purchases. During the three months and nine months ended December 31, 2018, we shipped and recognized revenue on the sale of product to this customer in the approximate amount of $0 and $33,000, respectively. During the three months and nine months ended December 31, 2017, we shipped and recognized revenue on the sale of product to this customer in the approximate amount of $97,000 and $248,000, respectively

During the nine months ended December 31, 2017, we received approximately $$660,000 and $145,000 from two customers which cash was retained by us in order to purchase certain raw material inventory on their behalf. We purchased raw materials on behalf of these two customers resulting in an available balance of approximately $243,000 as of December 31, 2018 and March 31, 2018, which is included in Customer Advances in our balance sheet.

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Related Party Transactions

9 Months Ended

Dec. 31, 2018

Notes

Related Party Transactions

5.      Related Party Transactions

On April 26, 2016, we entered into Promissory Notes in the aggregate principal amount of $50,000 (the “Notes”) with Khristine Carroll, our Executive VP of Commercial Operations and an affiliate of Michael Adams, our Chief Executive Officer (the “Affiliate”) (collectively, the “Investors”). The Notes were initially due on May 25, 2016 and are currently being extended for consecutive monthly periods as mutually agreed upon by the parties and provided for by the terms of the Notes. The Notes bear interest at the rate of 10% per annum and all principal and accrued interest, if any, is due on demand. During the three months ended December 31, 2018 and the fiscal year ended March 31, 2018, we repaid $5,000 and $5,000, respectively, of principal to Ms. Carroll. As of December 31, 2018 and March 31, 2018, the aggregate principal balance outstanding was $40,000 and $45,000, respectively. During the three months ended December 31, 2018 and 2017, we recorded interest expense of approximately $1,000 and $1,000, respectively, on the Notes. During the nine months ended December 31, 2018 and 2017, we recorded interest expense of approximately $3,000 and $3,000, respectively, on the Notes. As of December 31, 2018 and March 31, 2018, we recorded interest payable of $0 and $0, respectively.

On December 5, 2016, we entered into an additional Promissory Note in the principal amount of $100,000 (the “Second Note”) with the Affiliate. The Second Note bears interest at the rate of 12% per annum, provides for a $3,000 commitment fee, which fee was paid in February 2017. Additionally, all principal and accrued interest, if any, which is due on demand, has been extended for consecutive month-to-month periods as mutually agreed to by the parties. As of December 31, 2018 and March 31, 2018, the principal balance outstanding was $100,000 and $100,000, respectively. During the three months ended December 31, 2018 and 2017 we recorded interest expense of $3,000 and $3,000, respectively, on the Second Note. During the nine months ended December 31, 2018 and 2017 we recorded interest expense of $9,000 and $9,000, respectively, on the Second Note. As of December 31, 2018 and March 31, 2018, we recorded interest payable of $0 and $0, respectively.

On April 3, 2017, Michael Adams, our CEO and President, advanced and committed to us $20,000 pursuant to a promissory note, as amended (the “Advance Note”). The Advance Note provided the availability of up to $20,000 at the sole discretion of Mr. Adams through April 2, 2018, bears interest at the rate of 10% per annum, and provides for a $2,000 commitment fee and guaranteed interest of $2,000 payable upon execution of the Advance Note. On April 19, 2017 we paid the commitment fee and guaranteed interest of $2,000 and $2,000, respectively. Additionally, on April 19, 2017 we paid down the $20,000 advance. As of December 31, 2018 and March 31, 2018, the principal balance outstanding on the Advance Note was $0.

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Equity-Based Compensation

9 Months Ended

Dec. 31, 2018

Notes

Equity-Based Compensation

6.Equity-Based Compensation

In October 2003, our shareholders approved the AdvanSource 2003 Stock Option Plan (the “2003 Plan”), which authorizes the issuance of 3,000,000 shares of common stock. Under the terms of the Plan, the exercise price of Incentive Stock Options issued under the Plan must be equal to the fair market value of the common stock at the date of grant. In the event that Non-Qualified Options are granted under the Plan, the exercise price may be less than the fair market value of the common stock at the time of the grant (but not less than par value). Total shares of common stock registered under the 2003 Plan are 7,000,000 shares. Normally, options granted expire ten years from the grant date.

Activity under the 2003 Plan for the nine months ended December 31, 2018 is as follows:

	Options Outstanding	Weighted-Average Exercise Price per Share	Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value (in thousands)
Options outstanding as of April 1, 2018	1,813,750	$              0.21	3.00	$                    -
Granted	-
Exercised
Cancelled or forfeited	(25,000)	$              0.42	-	$                    -
Options outstanding as of December 31, 2018 (unaudited)	1,788,750	$              0.20	2.28	$                    -
Options exercisable as of December 31, 2018 (unaudited)	1,788,750	$              0.20	2.28	$                    -
Options vested or expected to vest as of December 31, 2018 (unaudited)	1,788,750	$              0.20	2.28	$                    -

Our unaudited condensed statements of operations include no equity-based compensation expense related to our 2003 Plan for employee and non-employee director awards for the three and nine months ended December 31, 2018 and 2017, respectively, as all of the stock options pursuant to the 2003 Plan are fully vested and there remains no further unrecognized equity-based compensation costs.

On August 14, 2017, our board of directors approved and adopted the 2017 Non-Qualified Equity Incentive Plan (the “2017 Plan”), which authorized the grant of non-qualified stock options exercisable into a maximum of 7,000,000 shares of our common stock. Under the terms of the 2017 Plan, the exercise price of stock options issued under the 2017 Plan must be equal to the fair market value of the common stock at the date of grant. Options granted expire ten years from the grant date. On August 17, 2017, the board of directors approved the grant of stock options to certain directors, employees and a consultant exercisable into 5,600,000 shares of our common stock (the “2017 Plan Options”). The 2017 Plan Options were immediately vested on the date of grant and exercisable at $0.06 per share, the fair market value on the date of grant. In determining the fair value of the 2017 Stock Options, we utilized the Black-Scholes pricing model utilizing the following assumptions: i) stock option exercise price of $0.06; ii) grant date price of our common stock of $0.06; iii) expected term of option of 10 years; iv) expected volatility of our common stock of 100%; v) expected dividend rate of 0.0%; and vi) risk-free interest rate of 0.0%. We recorded stock-based compensation of approximately $300,000 on August 17, 2017, the date of grant.

On August 16, 2018, the board of directors approved the grant of an additional stock option pursuant to the 2017 Plan to our executive vice president exercisable into 750,000 shares of our common stock which was immediately vested on the date of grant and exercisable at $0.04 per share, the fair market value on the date of grant. In determining the fair value of the subject stock option, we utilized the Black-Scholes pricing model utilizing the following assumptions: i) stock option exercise price of $0.04; ii) grant date price of our common stock of $0.04; iii) expected term of option of 10 years; iv) expected volatility of our common stock of 100%; v) expected dividend rate of 0.0%; and vi) risk-free interest rate of 0.0%.

We recorded stock-based compensation of $0 and approximately $19,000 during the three and nine months ended December 31, 2018, respectively. We recorded stock-based compensation of $0 and approximately $300,000 during the three and nine months ended December 31, 2017, respectively.

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Inventories

9 Months Ended

Dec. 31, 2018

Notes

Inventories

7.Inventories

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

(in thousands)	December 31, 2018 (unaudited)	March 31, 2018
Raw materials	$                     182	$                     215
Work in progress	43	64
Finished goods	129	130
	354	409
Less: allowance for obsolete and excess inventory	(112)	(112)
Total inventories, net	$                     242	$                     297

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Property, Plant and Equipment

9 Months Ended

Dec. 31, 2018

Notes

Property, Plant and Equipment

8.      Property, Plant and Equipment

Property, plant and equipment consists of the following:

(in thousands)	December 31, 2018 (unaudited)		March 31, 2018
Land	$                  500		$                     500
Building	2,705		2,705
Machinery, equipment and tooling	1,248		1,224
Furniture, fixtures and office equipment	285		285
Office equipment under capital lease	13		13
	4,751		4,727
Less:  accumulated depreciation	2,946		2,904
		$              1,805		$              1,823

For the three months ended December 31, 2018 and 2017, depreciation expense was approximately $14,000 and $13,000, respectively. For the nine months ended December 31, 2018 and 2017, depreciation expense was approximately $43,000 and $38,000, respectively.

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Loss Per Share

9 Months Ended

Dec. 31, 2018

Notes

Loss Per Share

9.Income Per Share

Basic income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per common share are based upon the weighted-average common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. In addition, the numerator is adjusted for any changes in income that would result from the assumed conversion of potential shares. Potentially dilutive shares, which were included in the diluted income per share calculations for the three and nine months ended December 31, 2018 were 1,220,008 shares and 1,137,025 shares, respectively. Potentially dilutive shares, which were excluded from the diluted income per share calculations because the effect would be antidilutive or the options exercise prices were greater than the average market price of the common shares, were 8,250,250 shares for the each of the three and nine months ended December 31, 2017.

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Stockholders' Equity

9 Months Ended

Dec. 31, 2018

Notes

Stockholders' Equity

10.Stockholders’ Deficit

Common Stock Options and Warrants

On July 22, 2015, we engaged the services of a financial and strategic advisor whose services include, but are not limited to, financial advice, strategic advice and investment banking services. In connection with this engagement, we agreed to compensate the investment bankers approximately $4,000 per quarter for a one year period and we issued them a warrant to purchase 830,500 shares of our common stock at an exercise price of $0.0301 per share, the approximate fair value of our common stock on the date of the engagement. The warrant is exercisable at any time until July 21, 2025. The warrant was valued at approximately $28,000 using the Black-Scholes model.

There were no exercises of options or warrants by employees or consultants during the nine months ended December 31, 2018 and 2017, respectively.

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Income Taxes

9 Months Ended

Dec. 31, 2018

Notes

Income Taxes

11.Income Taxes

The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. We evaluate the realizability of our deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. A valuation allowance has been recorded to offset all deferred tax assets due to uncertainty of realizing the tax benefits of the underlying operating loss and tax credit carry forwards over their carry forward periods. We have no significant deferred tax liabilities as of December 31, 2018 and March 31, 2018.

We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate this tax position on a quarterly basis. We also accrue for potential interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense. As of December 31, 2018 and March 31, 2018, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Tax Act and guidance available as of the date of this filing but have kept the full valuation allowance.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The deferred tax expense recorded in connection with the remeasurement of deferred tax assets is a provisional amount and a reasonable estimate at December 31, 2017 based upon the best information currently available. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

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Notes Payable

9 Months Ended

Dec. 31, 2018

Notes

Notes Payable

12.Notes Payable

On April 26, 2016, we entered into Promissory Notes in the aggregate principal amount of $50,000 (the “Notes”) with Khristine Carroll, our Executive VP of Commercial Operations and an affiliate of Michael Adams, our Chief Executive Officer (the “Affiliate”) (collectively, the “Investors”). The Notes were initially due on May 25, 2016 and are currently being extended for consecutive monthly periods as mutually agreed upon by the parties and provided for by the terms of the Notes. The Notes bear interest at the rate of 10% per annum and all principal and accrued interest, if any, is due on demand. During the fiscal year ended March 31, 2018, we repaid $5,000 of principal to Ms. Carroll. As of December 31, 2018 and March 31, 2018, the aggregate principal balance outstanding was $45,000 and $50,000, respectively. During the three months ended December 31, 2018 and 2017, we recorded interest expense of approximately $1,000 and $1,000, respectively, on the Notes. During the nine months ended December 31, 2018 and 2017, we recorded interest expense of approximately $3,000 and $3,000, respectively, on the Notes. As of December 31, 2018 and March 31, 2018, we recorded interest payable of $0 and $0, respectively.

On December 5, 2016, we entered into an additional Promissory Note in the principal amount of $100,000 (the “Second Note”) with the Affiliate. The Second Note bears interest at the rate of 12% per annum, provides for a $3,000 commitment fee, which fee was paid in February 2017. Additionally, all principal and accrued interest, if any, which is due on demand, has been extended for consecutive month-to-month periods as mutually agreed to by the parties. As of December 31, 2018 and March 31, 2018, the principal balance outstanding was $100,000 and $100,000, respectively. During the three months ended December 31, 2018 and 2017 we recorded interest expense of $3,000 and $3,000, respectively, on the Second Note. During the nine months ended December 31, 2018 and 2017 we recorded interest expense of $9,000 and $9,000, respectively, on the Second Note. As of December 31, 2018 and March 31, 2018, we recorded interest payable of $0 and $0, respectively.

On April 3, 2017, Michael Adams, our CEO and President, advanced and committed to us $20,000 pursuant to a promissory note, as amended (the “Advance Note”). The Advance Note provided the availability of up to $20,000 at the sole discretion of Mr. Adams through April 2, 2018, bears interest at the rate of 10% per annum, and provides for a $2,000 commitment fee and guaranteed interest of $2,000 payable upon execution of the Advance Note. On April 19, 2017 we paid the commitment fee and guaranteed interest of $2,000 and $2,000, respectively. Additionally, on April 19, 2017 we paid down the $20,000 advance. As of December 31, 2018 and March 31, 2018, the principal balance outstanding on the Advance Note was $0.

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Long-Term Financing Obligation

9 Months Ended

Dec. 31, 2018

Notes

Long-Term Financing Obligation

13.Long-Term Financing Obligation

On December 22, 2011, we entered into an agreement with an independent third-party under which we sold and leased back our land and building generating gross proceeds of $2,000,000. Pursuant to a lease agreement, the initial minimum lease term is 15 years. At the end of the initial minimum lease term, we have the option to renew the lease for three periods of five years each. In addition, we provided, as collateral, a security interest in all furnishings, fixtures and equipment owned and used by us, having a net book value of approximately $0 as of December 31, 2018. For accounting purposes, the provision of such collateral constitutes continuing involvement with the associated property. Due to this continuing involvement, this sale-leaseback transaction is accounted for under the financing method, rather than as a completed sale. Under the financing method, we include the sales proceeds received as a financing obligation. As of December 31, 2018 and March 31, 2018, the total financing obligation was $1,986,000, respectively, and accrued interest on financing obligation was approximately $172,000 and $175,000, respectively. Through December 2018, interest on the financing obligation exceeds the minimum lease payments, accordingly the principal remains constant through that date. After December 2018, the minimum lease payment will exceed interest and principal will be reduced by the excess of minimum lease payment over interest. The building, building improvements and land remain on the condensed balance sheet and the building and building improvements will continue to be depreciated over their remaining useful lives. Payments made under the lease are applied as payments of imputed interest and deemed principal on the underlying financing obligation.

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Contingencies

9 Months Ended

Dec. 31, 2018

Notes

Contingencies

14.Contingencies

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

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Concentrations of Credit Risk and Major Customers

9 Months Ended

Dec. 31, 2018

Notes

Concentrations of Credit Risk and Major Customers

15.Concentrations of Credit Risk and Major Customers

For the three months ended December 31, 2018 and 2017, three customers represented approximately 66% of our total revenues and four customers represented approximately 61% of our total revenues, respectively.

For the nine months ended December 31, 2018 and 2017, three customers represented approximately 53% of our total revenues and four customers represented approximately 65% of our total revenues, respectively.

As of December 31, 2018, we had accounts receivable-trade, net, of approximately $290,000, or 66%, due from two customers. As of March 31, 2018, we had accounts receivable-trade, net, of approximately $102,000, or 51%, due from three customers.

As of December 31, 2018, we had approximately $241,000 due from two customer related to receivables on royalties, license and annual usage fees. As of March 31, 2018, we had approximately $368,000 due from two customers related to receivables on royalties, license and annual usage fees. These amounts are classified as accounts receivable-other in the accompanying condensed balance sheets.

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Subsequent Events

9 Months Ended

Dec. 31, 2018

Notes

Subsequent Events

16.Subsequent Events

We evaluated all events or transactions that occurred after the balance sheet date through the date when we issued these unaudited condensed financial statements. During this period, we did not have any material recognizable subsequent events.

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Significant Accounting Policies (Policies)

9 Months Ended

Dec. 31, 2018

Policies

Significant Accounting Policies

Other than as stated below, our significant accounting policies are described in Note 3 to the financial statements included in Item 8 of our annual report on Form 10-K as of March 31, 2018.

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Revenue Recognition (Policies)

9 Months Ended

Dec. 31, 2018

Policies

Revenue Recognition

Revenue Recognition

We adopted the Accounting Standard Codification (“ASC”) 606, “Revenue from Contracts with Customers” as of April 1, 2018, using the modified retrospective method, and concluded that, consistent with prior reporting, we have two separate revenue streams: (i) product sales, and (ii) royalty and licensing revenues. Results for reporting periods after April 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting guidance under ASC 605, “Revenue Recognition.” The adoption of ASC 606 had no impact upon adoption, to our net income (loss) for the three and nine months ended December 31, 2018.

ASC 606 defines a five-step process to recognize revenues at the time and in an amount that reflects the consideration expected to be received for the performance obligations that have been provided. ASC 606 defines contracts as written, oral and through customary business practice. Under this definition, the Company considers contracts to be created at the time that an order to purchase product is agreed upon regardless of whether or not there is a written contract or when a contract is entered into for licensing and royalties.

We have two separate and distinct performance obligations offered to our customers: a product sales performance obligation and a licensing and royalty performance obligation. These performance obligations are related to separate revenue streams and at no point are they combined into a single transaction.

We generate the majority of our revenue from product sales, and to a lesser extent from fees generated from licensing and royalty arrangements primarily with two customers. Our revenue related to product sales is recognized upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed reasonably assured. If uncertainties regarding customer acceptance exist, we recognize revenues when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. Our revenue related to licensing and royalty arrangements is recognized in accordance with the terms of the arrangements which typically provide for quarterly payment of exclusivity fees and royalties earned on the sale of customer products on a quarterly basis.

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Equity-Based Compensation: Schedule of Share-Based Compensation Activity (Tables)

9 Months Ended

Dec. 31, 2018

Tables/Schedules

Schedule of Share-Based Compensation Activity

	Options Outstanding	Weighted-Average Exercise Price per Share	Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value (in thousands)
Options outstanding as of April 1, 2018	1,813,750	$              0.21	3.00	$                    -
Granted	-
Exercised
Cancelled or forfeited	(25,000)	$              0.42	-	$                    -
Options outstanding as of December 31, 2018 (unaudited)	1,788,750	$              0.20	2.28	$                    -
Options exercisable as of December 31, 2018 (unaudited)	1,788,750	$              0.20	2.28	$                    -
Options vested or expected to vest as of December 31, 2018 (unaudited)	1,788,750	$              0.20	2.28	$                    -

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Inventories: Schedule of Inventory, Current (Tables)

9 Months Ended

Dec. 31, 2018

Tables/Schedules

Schedule of Inventory, Current

(in thousands)	December 31, 2018 (unaudited)	March 31, 2018
Raw materials	$                     182	$                     215
Work in progress	43	64
Finished goods	129	130
	354	409
Less: allowance for obsolete and excess inventory	(112)	(112)
Total inventories, net	$                     242	$                     297

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Property, Plant and Equipment: Schedule of Property, Plant and Equipment (Tables)

9 Months Ended

Dec. 31, 2018

Mar. 31, 2018

Dec. 31, 2018

Tables/Schedules

Schedule of Property, Plant and Equipment

4,751

4,727

(in thousands)	December 31, 2018 (unaudited)		March 31, 2018
Land	$                  500		$                     500
Building	2,705		2,705
Machinery, equipment and tooling	1,248		1,224
Furniture, fixtures and office equipment	285		285
Office equipment under capital lease	13		13
	4,751		4,727
Less:  accumulated depreciation	2,946		2,904
		$              1,805		$              1,823

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Equity-Based Compensation: Schedule of Share-Based Compensation Activity (Details) - Employee Stock Option	9 Months Ended
	Dec. 31, 2018 $ / shares shares
Disclosure of Share-based Compensation Arrangements by Share-based Payment Award	2.28
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Beginning Balance	1,813,750
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price, Beginning Balance | $ / shares	$ 0.21
Share-based Compensation Arrangement by Share-based Payment Award, Options, Expirations in Period	(25,000)
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance	1,788,750
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number	1,788,750
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Number	1,788,750

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Inventories: Schedule of Inventory, Current (Details) - USD ($)	Dec. 31, 2018	Mar. 31, 2018
Details
Inventory, Raw Materials, Net of Reserves	$ 182	$ 215
Inventory, Work in Process, Net of Reserves	43	64
Inventory, Finished Goods, Net of Reserves	129	130
Inventory Valuation Reserves	$ (112)	$ (112)

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Property, Plant and Equipment (Details) - USD ($)

3 Months Ended

9 Months Ended

Dec. 31, 2018

Mar. 31, 2018

Dec. 31, 2018

Dec. 31, 2017

Dec. 31, 2018

Dec. 31, 2017

Details

Schedule of Property, Plant and Equipment

4,751

4,727

(in thousands)	December 31, 2018 (unaudited)		March 31, 2018
Land	$                  500		$                     500
Building	2,705		2,705
Machinery, equipment and tooling	1,248		1,224
Furniture, fixtures and office equipment	285		285
Office equipment under capital lease	13		13
	4,751		4,727
Less:  accumulated depreciation	2,946		2,904
		$              1,805		$              1,823

Land

$ 500

$ 500

$ 500

$ 500

Buildings and Improvements, Gross

2,705

2,705

2,705

2,705

Machinery and Equipment, Gross

1,248

1,224

1,248

1,248

Furniture and Fixtures, Gross

285

285

285

285

Debt and Capital Lease Obligations

13

13

13

13

Accumulated Depreciation, Depletion and Amortization, Property, Plant, and Equipment

2,946

2,904

2,946

2,946

Property, plant and equipment, net

$ 1,805,000

$ 1,823,000

1,805,000

1,805,000

Depreciation

$ 14,000

$ 13,000

$ 43,000

$ 38,000

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Long-Term Financing Obligation (Details) - USD ($)	Dec. 22, 2011	Dec. 31, 2018	Mar. 31, 2018
Details
Sale Leaseback Transaction, Date	December 22, 2011
Sale Leaseback Transaction, Historical Cost		$ 2,000,000
Interest Portion of Minimum Lease Payments, Sale Leaseback Transactions		$ 172,000	$ 175,000

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Concentrations of Credit Risk and Major Customers (Details) - USD ($)	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2017	Mar. 31, 2018
Details
Concentration Risk, Percentage	66.00%	61.00%	53.00%	65.00%
Fair Value, Concentration of Risk, Accounts Receivable	$ 290,000		$ 290,000		$ 102,000
Accrued Fees and Other Revenue Receivable	$ 241,000		$ 241,000		$ 368,000