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Response Biomedical Restates Earnings Results After Ongoing Internal Review

NEW YORK (GenomeWeb News) – Response Biomedical today said that it is restating and refiling numerous financial results, following an ongoing internal review and consultation with its external auditors.

The changes affect previously disclosed earnings results for full-year 2010 as well as the first half of 2011.

Today's announcement is the latest in a string of setbacks to the company, which announced earlier this month that Roche Diagnostics had terminated a sales and distribution deal with Response Bio following an unsuccessful bid to get US Food and Drug Administration approval of its cardiovascular tests on its most current platform.

In addition, CEO Wayne Kay abruptly resigned from the firm last month.

Today, the Vancouver, British Columbia-based diagnostic test maker said that in the fourth quarter of 2010 it had improperly recognized C$500,000 (US$480,472) as revenue. The amount related to a shipment of products to a distributor in December 2010. The distributor was obligated to pay for the products only if certain conditions were met, which they weren't as of Dec. 31.

"As a result, Response has determined that it was inappropriate to recognize the associated revenue in 2010," the company said. It will restate its audited 2010 financial statements and its unaudited first and second quarter statements of 2011, which had shown the amounts due as accounts receivable, to exclude the amounts.

The restated results also will reflect various adjustments to cost of goods sold "associated with the reversal of this transaction reducing them by approximately C$30,000," Response Bio said, and an adjustment associated to the reclassification of an accrued liability and a long-term prepaid asset resulting from the reversal of the sale. The adjustment is for about C$60,000.

Response Bio also has determined that C$70,000 in sales of RAMP 200 cardiovascular products to Roche recorded in the second quarter was improperly recognized as it was recorded after FDA told the company in May that its NTproBNP assay for the diagnosis of heart failure did not receive 510(k) clearance for Response Bio's Ramp 200 platform.

The products should not have been shipped, as doing so violated FDA's instructions as stated in the agency's May letter to the company.

"Reversing these transactions will result in a revenue reduction in the second quarter with no associated reduction of cost of goods sold as the inventory items are not resaleable and therefore will be written off," the company said.

A shipment worth about C$35,000 to Roche was completed before Response Bio received its FDA letter. Payment remains outstanding on the shipment, but because of issues surrounding regulatory approval of the Ramp 200 cardiovascular products, "Response will record an allowance for doubtful accounts against this entire receivable as it is unlikely that this receivable will be collected."

In addition, the company has found that certain costs "were improperly capitalized" during the first quarter and first half of 2011. Capitalized overhead expenses were overstated to finished goods "at a rate that was less than the normal capacity that has been assessed by management," and adjustments for the error will result in a C$45,000 reduction in the cost of goods sold for the first quarter of 2011 and a C$120,000 reduction for the first half of the year.

An adjustment will also be required to stock-based compensation for the first quarter and first half of 2011 to account for differences in estimated and actual forfeiture rates, Response Bio said. For the first quarter, this will result in a reduction of C$4,000 to stock-based compensation expenses. For the first half of the year, though, there will be an increase of C$65,000 to stock-based compensation expenses.

The company added that the lease inducement on its balance sheet should be separated into a non-repayable and repayable portion. The lease inducement comprises a rent-free inducement, a non-repayable inducement, and a repayable portion.

Response Bio expects to file its restated results with Canadian and US regulators "within the next several weeks" and is continuing its financial review to assess whether additional restatements will be necessary, it said.

"Obviously restatements of previously filed financial statements are a serious matter," Peter Thompson, interim CEO and executive chairman of Response Bio, said in a statement. "We are confident that, after these restatements are completed, our financial statements will be true and correct and that we will have taken the necessary steps to ensure that our financial reporting adheres to the highest standards of accuracy going forward."