UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-K





x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended June 30, 2011





 ̈  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________ to __________





Commission File Number0-21537





NorWesTech, Inc.


(Exact name of registrant as specified in its charter)





Pacific Biomarkers, Inc.


(Former Name, if Changed Since Last Report)





Delaware

93-1211114(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)





220 West Harrison Street


Seattle, Washington 98119


(Address of principal executive offices)





(206) 436-3945


(Registrant’s telephone number, including area code)





Securities registered pursuant to Section 12(b) of the Exchange Act:
NoneSecurities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YesoNox





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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 x No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No o.





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





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer  o
Accelerated filer  oNon-accelerated filer  o
Smaller reporting company  x(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes xNo o





The aggregate market value of the registrant’s common stock held by non-affiliates on December 31, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was $3,111,528 based on the average of the bid and ask prices of such stock on that date of $0.21, as reported on the OTC Bulletin Board.





On September 26, 2011, there were 16,796,151 shares of the registrant’s common stock issued and outstanding.





Documents Incorporated By Reference:  None








NORWESTECH, INC.





Form 10-K Annual Report





Table of Contents





PagePART IItem 1
Description of Business
2Item 1A
Risk Factors
3Item 1B
Unresolved Staff Comments
6Item 2
Properties
6Item 3
Legal Proceedings
6Item 4
[Removed and Reserved]
6PART IIItem 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6Item 6
Selected Financial Data
7Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
7Item 7A
Quantitative and Qualitative Disclosures About Market Risk
15Item 8
Financial Statements and Supplementary Data
16Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
16Item 9A
Controls and Procedures
16Item 9B
Other Information
17PART IIIItem 10
Directors, Executive Officers and Corporate Governance
17Item 11
Executive Compensation
19Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
26Item 13
Certain Relationships and Related Transactions, and Director Independence
28Item 14
Principal Accountant Fees and Services
29PART IVItem 15
Exhibits and Financial Statement Schedules
30SIGNATURES
32


-i-





EXPLANATORY NOTE





On August 31, 2011, subsequent to the end of our fiscal year ended June 30, 2011, we sold substantially all of our assets, pursuant to the terms of the Asset Purchase Agreement that we entered into with Emerald Star Holdings, LLC on May 23, 2011.  The asset sale was approved by stockholders holding a majority of our outstanding shares of common stock at our special meeting of stockholders held on August 29, 2011.  Under the terms of the Asset Purchase Agreement, at closing of the asset sale we have approximately $2.32 million in cash from Emerald Star.





Following the asset sale, we changed our name to NorWesTech, Inc. from Pacific Biomarkers, Inc.  We also changed our telephone number to (206) 436-3945.  We have an arrangement with Emerald Star for us to continue using its office located at 220 West Harrison Street, Seattle, Washington 98119 as our mailing address and for holding our corporate records, until such time as we establish a new executive office.





This Annual Report on Form 10-K discusses our business for the fiscal year ended June 30, 2011, which primarily consisted of our specialty reference laboratory services and clinical biomarker services which were sold to Emerald Star.  We refer to this business that we sold as our “Discontinued Operations”.





Following the closing of the asset sale on August 31, 2011, we continue to be a public company, although we are deemed a “shell company” under applicable rules of the Securities and Exchange Commission.  Being a public shell company means that we have no or nominal operations, our assets solely consist of cash and nominal other assets, and our business will be primarily to seek a potential merger or acquisition with an operating company.





Unless otherwise indicated or the context otherwise requires, all references in this Report to “we,” “us,” “our,” and the “Company” are to NorWesTech, Inc. and our wholly-owned subsidiaries.





CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS





This Annual Report on Form 10-K contains certain forward-looking statements, including statements about





·
our ability to identify and successfully engage in a business combination with a suitable operating company;


·
our expectations for timing for engaging in a business combination with an operating company; and


·
our estimate for ongoing expenses for the public shell company;


·
our estimate of the impact on our stockholders from a reverse merger or other potential future business combination; and


·
our ability to develop, commercialize or license our dormant technology assets or intellectual property.





The forward-looking statements in this Report reflect management’s current views and expectations with respect to our business, strategies, services, future results and financial performance. All statements other than statements of historical fact, including statements addressing projected results of operations or our future financial position, made in this Annual Report on Form 10-K are forward looking. In particular, the words “expect,” “anticipate,” “estimate”, “desire”, “goal”, “ believe”, “may”, “will”, “should”, “could”, “intend”, “objective”, “seek”, “plan”, “strive”, variations of such words, or similar expressions, or the negatives of these words, are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. The absence of these words does not mean that any particular statement is not a forward-looking statement.





These forward-looking statements are subject to risks and uncertainties. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated or implied by these forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this Report to reflect any change in management’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.





For a discussion of some of the factors that may affect our business, results and prospects, see “ITEM 1A – RISK FACTORS” beginning on page 3. Readers are urged to carefully review and consider the various disclosures made by us in this Report and in our other reports previously filed with the Securities and Exchange Commission, including our periodic reports on Forms 10-K, 10-Q and 8-K, and those described from time to time in our press releases and other communications, which attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.


1





PART I





ITEM 1
BUSINESS





Continuing Business




Since September 1, 2011, we have no active operations and our assets primarily consist of the net cash proceeds we received from the asset sale, and we also continue to own certain dormant technology and intellectual property.




Public Shell Company




Effective September 1, 2011, we could be classified as a non-operating shell corporation, because we have no active operations and our assets primarily consist of the net cash proceeds we received from the asset sale, and we also continue to own certain dormant technology and intellectual property assets. Our primary focus is to seek an acceptable operating company with which we can complete a business combination, whether by merger, acquisition or other business combination by using a combination of capital stock, cash on hand, or other funding sources, if available. We intend to devote substantially all of our time to identifying potential merger or acquisition candidates. We cannot predict whether or when we will enter into such a transaction or what the terms of such a transaction would be.




Our board of directors, which was reconstituted upon the asset sale, is evaluating the future business plan for our company, including strategies for exploring and evaluating potential future business combination opportunities. Such transaction, if it were to arise, could take a number of different forms, but most likely would be with a private company that would be looking to become public and gain access to funding in the capital markets. As of the date of this Annual Report, we have no current acquisition targets or specific plans. Two of our directors, Mr. Fred Burstein and Mr. Andrew Ecclestone, are currently on the board of directors of another public shell company, Tempco, Inc.




Technology Assets




Following the asset sale, we also continue to own certain dormant technologies and intellectual property assets held in our subsidiary Newco Tech, Inc. (formerly known as PBI Technology, Inc.). These technologies include our isothermal DNA amplification method (LIDA), our Cell Viability technology, and our Osteopatchä and Saliva Sac® diagnostic devices. During fiscal 2004, we wrote off the value of these assets from our financial statements, because we determined that, without significant expenditure of funds and development efforts, we may not be able to successfully develop these technologies and they may not generate revenue, and accordingly the value of these assets may not be recoverable over their remaining useful lives. Since 2005, we have not pursued further development or commercialization of these technologies. None of these products or technologies is market-ready and all require additional testing and regulatory approvals before they can be brought to market.




Our prior board of directors previously believed that these technology assets, although unproven, were potentially useful technologies and with funding could potentially be developed and commercialized. We have not done any recent analysis on these assets and cannot predict whether there is any potential value or use for these technology assets. We cannot predict whether these assets will have any value, will receive financing, or whether any development or commercialization efforts will be successful.




Our current board of directors intends to reevaluate these assets and determine whether to seek financing for further commercial development, enter into potential licensing or joint venture arrangements or to finally abandon them.




Discontinued Operations; Cessation of Laboratory Services Business




During our fiscal year ended June 30, 2011 and through August 31, 2011, we were a provider of specialty reference laboratory services to the pharmaceutical, biotechnology, and diagnostics industries. Our clients included a number of the world’s largest multi-national pharmaceutical, biotechnology and diagnostic companies. Our well-recognized specialty areas included cardiovascular disease, diabetes, obesity, and rheumatology and bone diseases including osteoporosis as well as osteoarthritis and rheumatoid arthritis. Coupled with our specialty testing, we had central laboratory capability and provided full-service central laboratory support for multi-center clinical trials, including routine safety lab tests. We also performed clinical biomarker services for novel biomarkers, as well as custom assay services for our pharmaceutical and biotechnology clients. We conducted our business primarily through our wholly-owned subsidiary, Pacific Biomarkers, Inc., a Washington corporation.


2





On August 31, 2011, subsequent to the end of the 2011 fiscal year, we sold all of this business and our operating assets to Emerald Star Holdings, LLC.




The assets that we sold included all of our accounts receivable, customer contracts, equipment, intellectual property (other than intellectual property held by Newco Tech, Inc.), name and website, permits, office and equipment leases, other contracts and other rights. In addition, upon closing of the asset sale, all of our employees were terminated and were hired as employees of Emerald Star. At closing, Emerald Star assumed substantially all of the liabilities related to these assets and the business that we sold. These liabilities included our accounts payable, obligations under our leases and contracts, tax liabilities, the remaining obligations under our $4 million secured loan, and all employee-related liabilities.




At closing of the asset sale, we have approximately $2.32 million in cash from Emerald Star as the purchase price. Under the terms of the Asset Purchase Agreement, Emerald Star agreed to pay cash to us in an amount equal to $2.5 million less the amount of transaction expenses that we incurred. Our transaction expenses were approximately $180,000, which included professional fees (including our financial advisor, legal counsel and accountants), costs of the proxy solicitation and holding the special meeting, and our allocated share of taxes due on the asset sale. We expect to do a post closing true-up with Emerald Star based on final invoices from third-parties for these transaction expenses. We have no indemnification obligations under the Asset Purchase Agreement, and there is no escrow account for the net cash proceeds paid to us.




Corporate Structure




Our company is a Delaware corporation, incorporated in May 1996. We have three inactive wholly-owned subsidiaries – Bio-Newco, Inc. (formerly known as Pacific Biomarkers, Inc., a Washington corporation), Newco Tech, Inc. (formerly known as PBI Technology, Inc.), and Bioquant, Inc.




Employees




On June 30, 2011, we had 57 full time and 2 part time employees. On August 31, 2011, upon closing of the asset sale, all of our employees were terminated and were hired as employees of Emerald Star. As of September 27, 2011, we have no current employees.





ITEM 1A
RISK FACTORS





The following discussion in this Annual Report on Form 10-K contains forward-looking statements regarding our company, our business plans, prospects and results of operations that involve risks and uncertainties. Our actual results could differ materially from the results that may be anticipated by such forward-looking statements and discussed elsewhere in this Report. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as those discussed elsewhere in this Report.  In evaluating our business, prospects and results of operations, readers should carefully consider the following factors in addition to other information presented in this Report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations. See “Cautionary Notice Regarding Forward Looking Statements.”





Risks Relating to Our Company





There are risks of being a “shell company”.





Effective September 1, 2011, we became a non-operating public shell company and we are seeking to effect a merger, acquisition or other business combination with an operating company by using a combination of capital stock, cash on hand, or other funding sources, if available.  There are risks associated with being a public shell company, including the following:


3





·
The form of transaction by which a shell company seeks to acquire an operating company may result in significant dilution to the stockholders of the public shell.  Although there are many different forms of acquisition transactions, a typical one involving public shell involves a “reverse merger” or a “reverse takeover.”  In these transactions, the stockholders of the private company acquire stock ownership in the public company, in consideration for the operating business, and often obtain a majority or controlling interest in the public shell.  With this type of transaction, the existing stockholders in the public shell can experience significant dilution.





·
The SEC’s Investor Bulletin (June 9, 2011) sets forth additional sample risk factor disclosure that some public shell or reverse merger companies have used in their SEC filings (see http://www.sec.gov/investor/alerts/reversemergers.pdf).  The SEC’s Investor Bulletin included a list of risk factors that the SEC identified as common risks disclosed by reverse shell companies.  Stockholders should be aware that one or more of these may apply, particularly if we complete a reverse merger.  We encourage all stockholders to review the SEC’s Investor Bulletin in its entirety.





·
Liquidity and trading of our common stock may be limited and may be subject to significant fluctuations based on actions of stock manipulators (which is a risk that we have faced on an on-going basis by virtue of being a penny stock company).





We may not be successful in identifying a suitable business combination opportunity.





As a “shell company,” our primary function is to acquire an operating company.  It may be difficult to identify suitable acquisition candidates or, even if identified, to successfully consummate a business combination on terms acceptable to us.  We cannot predict whether we will be successful in finding an acceptable business combination.





It may take a long time to consummate a suitable business combination opportunity.





We cannot predict how long it will take for us identify and successfully engage in a business combination with a suitable operating company.  Although we are hopeful that there will be attractive opportunities presented to us during the 2012 fiscal year, this may not happen in the time frame that we expect, or at all.  We may be a shell company for a long time.





Our limited resources make it impracticable to conduct a complete and exhaustive search for a business combination.





Our limited resources and the lack of extensive management will likely make it impracticable to conduct a complete and exhaustive investigation for attractive and available business opportunities, or to complete analysis of a business opportunity before we commit our resources to it.  Management decisions, therefore, may be made without detailed feasibility studies, independent analysis, market surveys and the like which could be desirable. We will be particularly dependent in making decisions upon information provided by the promoter, owner, sponsor, or others associated with the business opportunity seeking our participation.  As a result, we may fail to identify problems with the target operating company that could have been identified in a more thorough due diligence or conventional “going public” transaction though an underwritten public offering.





Our directors may have a conflict of interest.





Two of our directors, Mr. Fred Burstein and Mr. Andrew Ecclestone, are currently on the board of directors of another public shell company, Tempco, Inc.  As a result, either Mr. Burstein or Mr. Ecclestone may face a conflict of interest if he identifies a business combination opportunity that is suitable for both us and for Tempco, Inc.





Our ability to use net operating loss carryforwards may be limited.





We have certain net operating loss carryforwards held in our subsidiary, Bioquant, Inc.  Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. We have preliminarily reviewed the applicability of the annual limitations imposed by Section 382 caused by previous changes in our stock ownership and believe the availability of our net operating loss carryforwards is substantially limited. These limitations mean that we may not be able to utilize our net operating loss carryforwards in the future in a meaningful way.  This limitation may adversely affect our ability to attract certain business combination candidates and may affect how a business combination with an operating business may be consummated.


4





Stockholders will not get any distribution from the asset sale, and may never get any return of value.





We do not intend to distribute to stockholders any cash proceeds from the asset sale with Emerald Star and the only return to stockholders will be based on any future appreciation in the stock price or upon a future sale or liquidation of the company.  Much depends on the future business of the company, including the success or failure in identifying and consummating a business combination with an operating business.  We may never be successful.  Current stockholders may never get a return on their investment.





Risks Related to Our Common Stock





Our common stock is traded on the OTC Bulletin Board and is considered a “penny stock”.  Our stockholders’ ability to sell shares in the secondary trading market may be limited.





Our common stock is currently quoted for trading on the OTC Bulletin Board. As a result, the liquidity of our common stock is limited, not only in the number of shares that are bought and sold, but also through delays in the timing of transactions, and the lack of coverage by security analysts and the news media of our company.





In addition, because our stock is quoted on the OTC Bulletin Board, our common stock is subject to certain rules and regulations relating to “penny stock.” A “penny stock” is generally defined as any equity security that has a price less than $5.00 per share and that is not quoted on the NASDAQ Stock Market or a national securities exchange. Being a penny stock generally means that any broker who wants to trade in our shares (other than with established clients and certain institutional investors) must comply with certain “sales practice requirements,” including delivery to the prospective purchaser of the penny stock a risk disclosure document describing the penny stock market and the risks associated therewith. In addition, broker-dealers must take certain steps prior to selling a “penny stock,” which steps include:





·
obtaining financial and investment information from the investor;


·
obtaining a written suitability questionnaire and purchase agreement signed by the investor; and


·
providing the investor a written identification of the shares being offered and the quantity of the shares.





If these penny stock rules are not followed by the broker-dealer, the investor has no obligation to purchase the shares. The application of these comprehensive rules will make it more difficult for broker-dealers to sell our common stock, and as a practical matter, these requirements may mean that brokers are less likely to make recommendations on our shares to its general clients.





As a result, for as long as our common stock is quoted on the OTC Bulletin Board and subject to these penny stock rules, our stockholders may have difficulty in selling their shares in the secondary trading market. In addition, prices for shares of our common stock may be lower than might otherwise prevail if our common stock were quoted on the NASDAQ Stock Market or traded on a national securities exchange, like The New York Stock Exchange or American Stock Exchange. This lack of liquidity may also make it more difficult for us to raise capital in the future through the sale of equity securities.





If we issue additional equity securities in the future, the ownership of our existing stockholders will be diluted.





If we issue stock or convertible securities in the future, including in any future business combination or for any future equity financing, those issuances would dilute our stockholders. If any of these additional shares are issued and are sold into the market, it could decrease the market price of our common stock and could also encourage short sales. Short sales and other hedging transactions could place further downward pressure on the price of our common stock.


5





Our stock price has been and will continue to be volatile.





The market price for our common stock has been and is likely to continue to be volatile. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control.





We do not intend to pay cash dividends, so any return on investment must come from appreciation.





We have not declared dividends on our common stock in the past, and do not intend to declare dividends on our common stock in the foreseeable future. As a result, any investment return in our common stock must come from increases in the fair market value and trading price of our common stock.





ITEM 1B
UNRESOLVED STAFF COMMENTS





Not Applicable.





ITEM 2
PROPERTIES





During the 2011 fiscal year and continuing through August 31, 2011, we leased approximately 15,000 square feet of office and primary laboratory space in Seattle, Washington for our executive offices and laboratory, with monthly rent of $22,278.  We also leased approximately 1,030 square feet of office and laboratory space in a separate Seattle, Washington location for our biomarker services laboratory, with monthly rent of $5,245.  On August 31, 2011, we assigned these leases to Emerald Star in connection with the asset sale.





As of September 1, 2011, we do not lease or own any real property.  We have an arrangement with Emerald Star for us to continue using its office located at 220 West Harrison Street, Seattle, Washington 98119 as our mailing address and for holding our corporate records, until such time as we establish a new executive office.





ITEM 3
LEGAL PROCEEDINGS





We are not a party to any pending legal proceedings.





ITEM 4
[REMOVED AND RESERVED]





PART II





ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Common Stock





During the 2011 fiscal year and through September 14, 2011, our common stock was quoted for trading on the OTC Bulletin Board under the symbol “PBMC.”  With our name change to NorWesTech, Inc., we applied for and obtained a new trading symbol.  Effective September 15, 2011, our common stock is quoted for trading on the OTC Bulletin Board under the new symbol “NWTH”.





The following table shows, for each quarter of fiscal 2011 and 2010, the high bid and ask sales prices as reported by the OTC Bulletin Board. The quotations from the OTC Bulletin Board reflect inter-dealer prices without retail mark-up, mark-down, or commissions and may not represent actual transactions.


6





OTC Bulletin BoardBid


AskFiscal 2011:Fourth quarter, ended June 30, 2011

$
0.10


$
0.25Third quarter, ended March 31, 2011


0.15



0.32Second quarter, ended December 31, 2010


0.18



0.23First quarter, ended September 30, 2010


0.28



0.40Fiscal 2010:Fourth quarter, ended June 30, 2010

$
0.46


$
0.55Third quarter, ended March 31, 2010


0.60



0.66Second quarter, ended December 31, 2009


0.87



0.96First quarter, ended September 30, 2009


1.03



1.05





Holders





As of September 26, 2011, there were 16,796,151 shares of common stock issued and outstanding, held by approximately 75 holders of record.





Dividends





We have never declared or paid any cash dividends with respect to our common stock, and do not plan to do so in the foreseeable future. Any future determination with regard to the payment of dividends will be at the discretion of our board of directors and will be dependent upon our future earnings, financial condition, applicable dividend restrictions and capital requirements and other factors deemed relevant by the Board.





Sales of Unregistered Securities





We did not sell any unregistered equity securities during the fourth quarter of the fiscal year ended June 30, 2011.





ITEM 6
SELECTED FINANCIAL DATA




As a Smaller Reporting Company as defined in Item 10(f)(1) of Regulation S-K, we are not required to provide the information requested by this Item.




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





You should read the following discussion and analysis in conjunction with our consolidated audited financial statements and related notes for the fiscal year ended June 30, 2011, included elsewhere in this Report.  Except for historical information, the following discussion contains forward-looking statements.  See “Cautionary Notice Regarding Forward Looking Statements” and “Risk Factors.”





Overview





During our fiscal year ended June 30, 2011 and through August 31, 2011, our business was to provide specialty reference laboratory services to support pharmaceutical and laboratory diagnostic manufacturers in the conduct of human clinical research, for use in their drug and diagnostic product development efforts. Our specialty areas included cardiovascular diseases (dyslipidemia, atherosclerosis, and coronary heart disease), diabetes, obesity, and rheumatology and bone diseases including osteoporosis as well as osteoarthirits and rheumatoid arthritis. We also provided clinical biomarker services for novel biomarkers, as well as custom assay services, to our pharmaceutical and biotech clients.  On August 31, 2011, we sold this business and substantially all of our assets to Emerald Star Holdings, LLC.  We refer to this business that we sold as our “Discontinued Operations”.


7





Following the asset sale on August 31, 2011, we have no active operations and our assets primarily consist of the net cash proceeds we received from the asset sale, and we also continue to own certain dormant technology and intellectual property.





The financial statements as of and for the fiscal year ended June 30, 2011 reflect the asset sale, by identifying assets and liabilities that are held for sale, and identifying income and expenses allocated to our discontinued operations and continuing operations.  See Note 3 to our Consolidated Financial Statements included in this Report. Because our business during the 2011 and 2010 fiscal years consisted of these discontinued operations, the following discussion of our results of operation focuses on these discontinued operations.





Critical Accounting Estimates and Policies





The following is a discussion of our critical accounting estimates and policies particularly as they relate primarily to our Discontinued Operations.  Because we have no current operations and our assets consist solely of cash and other nominal assets, most of the following discussion does not apply to our continuing business after August 31, 2011.





The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including, among others, those affecting revenue, the allowance for doubtful accounts, and the useful lives of tangible and intangible assets. The discussion below is intended as a brief discussion of some of the judgments and uncertainties that can impact the application of these policies and the specific dollar amounts reported on our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates. Many of our estimates or judgments are based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed below and elsewhere in this Report. We do not undertake any obligation to update or revise this discussion to reflect any future events or circumstances.





We have identified below some of our accounting policies that we consider critical to our business operations and the understanding of our results of operations. This is not a complete list of all of our accounting policies, and there may be other accounting policies that are significant to our company. For a detailed discussion on the application of these and our other accounting policies, see Note 2 to the Consolidated Financial Statements included in this Report.





Assets Sold or Held for Sale





We separate major classes of assets held for sale within twelve months according to ASC Topic 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets). Major classes of assets and liabilities classified as held for sale shall be separately disclosed either on the face of the statement of financial position or in the notes to financial statements including a description of the facts and circumstances leading to the expected disposal, the expected manner and timing of the that disposal, and, if not separately presented on the face of the statement, the carrying amount(s) of the major classes of assets and liabilities included as part of the disposal group.





Our future cash flow estimates used to test recoverability have taken into account the possible outcomes that existed at the balance sheet date of June 30, 2011, including the future sale of these assets.  We have determined that none of the assets sold or held for sale were impaired and no adjustment to their carrying amounts was warranted.





Revenue Recognition





Under fixed-price contracts, we recognize revenue as services are performed, with performance generally assessed using output measures, such as units-of-work performed to date compared to the total units-of-work contracted.  Our client contracts may be delayed or cancelled at anytime. Uncertainty surrounding continuation of existing revenues during any period is high. We believe that recognizing revenue as services are performed is the most appropriate method for our business as it directly reflects services performed in the laboratory. We would expect material differences in reporting of our revenues to occur if we changed our assumptions for revenue recognition from services performed to other methods such as percent complete or completed contract methods. While both other methods are allowed under Generally Accepted Accounting Principals, they would introduce more variables and estimates into our revenue recognition process. The percent complete method introduces estimated costs early in the process that may drive revenues higher in early periods and should the study be terminated early, previously recognized revenue would be reversed, net of a cancellation fee, if applicable. The completed contract method may recognize revenues in future contract periods, such as the first quarter after a fiscal year close and subsequent to completion of the services rendered.


8





Fair Value Measurements - Debt Financing





We follow ASC Topic 820 and 825, (SFAS 157, Fair Value Measurements) in determining the fair value in our recent repurchase of shares of common stock. SFAS 157 clarifies a number of considerations with respect to fair value measurement objectives for financial reporting and expands disclosures about the use of fair value measurements. The degree of judgment utilized in measuring the fair value of financial instruments is largely dependent on the level to which pricing is based on observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. See Note 9 to our Consolidated Financial Statements. In valuing the repurchased shares from our $4 million debt financing in September 2009, we chose a bid-ask regression model as the most appropriate method to determine the fair value of these shares. We would expect material differences in reporting of the fair value of these shares, had we chosen other methods in determining the fair value. The discount to the Note derived from the fair value of the shares and interest expense derived from the discount may have been a higher or lower amount. For example, a regression model based on restricted share regression analysis would produce a higher discount amount. Alternatively, had we chosen the market closing price for fair value, the discount would have been zero. However, due to the thin trading characteristics of our stock within the OTCBB market, the number of shares repurchased, other observable and unobservable inputs, it was our judgment that the method utilized in estimating the fair value of these shares was appropriate for this transaction.





Stock-Based Compensation





We report stock-based compensation expense applying ASC Topic 718 (SFAS No. 123(R), Share-Based Payment),using the modified prospective transition method. This requires us to estimate the fair value of our equity-based awards on the date of grant using an option-priced model. This also requires us to estimate the number of equity awards that will ultimately vest and those that will be forfeited. We record on our consolidated income statements the fair value of the portion of the award that is expected to vest, which we expense over the requisite service periods. Determining the fair value of equity-based awards at the grant date requires judgment, particularly in applying the volatility assumptions used in the Black-Scholes pricing model. With the recent volatility in the stock market, our volatility assumptions changed significantly for fiscal 2011 (117-148%) from fiscal 2010 (148-151%). See Note 2 to our Consolidated Financial Statements.  In addition, judgment is also required in estimating the amount of equity-based awards that are expected to be forfeited, which we base on actual historical data, typically over the past three years. Our current estimates are that only 2-4% of the awards will be forfeited. If we were to estimate a higher percentage of forfeitures, we would recognize a lower amount of stock based compensation expense as of the date of the grant. If actual forfeitures are significantly fewer less than our estimate, we would have to record additional equity-based compensation expense; conversely, if there are more forfeitures than we estimated, we would have to reverse previously recognized expense.





Useful Lives of Tangible Assets





The assets we acquire are subject to our best estimates of useful lives of the asset for depreciation and amortization purposes. We depreciate equipment and computers over three to five years, and we depreciate leasehold improvements over the lesser of the remaining life of the lease or ten years. In management’s judgment, these useful life periods reflect a reasonable estimate of the life over which we will use the equipment, computers and leasehold improvements. We capitalize software costs incurred in connection with obtaining and developing internal use software (“software costs”) in accordance with ASC Topic 350-40 (formerly Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use).Weamortize software costs over a period not to exceed three years. Under GAAP, we could have used other useful life periods for depreciation and amortization. A longer period, such as seven years for equipment and software costs, would result in smaller depreciation and amortization expense and higher property and equipment values on our balance sheet. We believe the useful life periods that we use are reasonable.


9





The amount of depreciation and amortization expense we record in any given period will change if our useful life estimates were to increase or decrease. In addition, from time to time we may determine that we no longer have use for a certain tangible or intangible asset. This may be because an asset was used exclusively for a study that has been cancelled, or because of changes in scientific methods for our testing. We use the discounted cash flow method according to ASC Topic 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets) to test our assets for impairment. If we were to determine that any of our assets were impaired or have a reduced useful life, we would have to take a charge against current earnings.





Results of Continuing Operations for the Fiscal Years Ended June 30, 2011 and 2010





During fiscal 2011 and 2010, we generated no revenue from continuing operations and incurred the following expenses:





Dollars in actual amounts, not rounded

Years endedJune 30,2011


2010Revenue

$
-


$
-Bioquant Inc. Operating Expenses:Selling, General and Administrative ExpenseOutside Services


365



-Other Taxes


1,600



1,118Licenses


-



75Newco Tech Inc. Operating Expenses:Selling, General and Administrative ExpenseLegal


15,650



13,470Total Operating Expenses


17,615



14,663Net Loss from Continuing Operations

$
(17,615
)

$
(14,663
)





Results of Discontinued Operations for the Fiscal Years Ended June 30, 2011 and 2010





Revenue from Discontinued Operations:





Years EndedDollars in thousands, rounded to nearest

June 30,


$


%thousand

2011


2010


Change


ChangeRevenue

$
10,514


$
9,665



849



9





During fiscal 2011 and 2010, we generated the majority of our revenue from clinical pharmaceutical trials testing (“traditional biomarker services”) and novel biomarker development services.  We also provided diagnostic services, which historically have represented less than 1% of our total revenue.




10




Our revenue increased approximately 9% to $10,514,000 from $9,665,000 for the comparable fiscal years ended June 30, 2011 and 2010. In fiscal 2011 we benefited from a large contract for direct trials testing covering the first through third fiscal quarters. We had no comparable large contract for the prior fiscal year. We also saw improved levels of testing revenue in clinical biomarker services, dyslipidemia and rheumatoid arthritis therapeutic areas. In contrast, during fiscal 2010 our revenue was negatively impacted by delays and cancellations of testing in the diabetes and rheumatoid arthritis therapeutic areas. Our revenue fluctuates due to the variability in the volume of testing services we perform, by the timing between actual receipt of test samples and scheduled testing, pace of the clinical trial itself, open work orders and prior work orders having been completed or terminated.




In fiscal 2011, we also experienced an 18% decrease in revenue sourced from other large clinical laboratories that refer specialty laboratory testing to us (“Referral Laboratory Partners).  Several of our Referral Laboratory Partners have reported decreases in their revenue from central lab services during our fiscal year that directly affect our revenue.  We believe this is responsible for the significant 9% downward shift in this revenue category as a percentage of total revenue, as noted in the chart below.





The primary component of our business development efforts has been directed towards pharmaceutical and biotech companies, which includes our biomarkers business (“Direct Clinical Services”) which showed a 9% increase over fiscal 2010 as a percentage of total revenue and 23% increase in revenue dollars.  Biomarker services showed a 2% increase as a percentage of total revenue and 33% increase in dollars.





The following table provides a breakdown of the percentage of our total revenue generated from each of our service areas for the past two fiscal years:





Direct Clinical Services


ReferralDirect Trials Testing


Biomarkers


LaboratoriesFiscal 2011


59
%


12
%


29
%Fiscal 2010


52
%


10
%


38
%





Operating Expenses from Discontinued Operations





Historically, we have segregated our recurring operating expenses between two categories: laboratory and cost of goods sold and selling, general and administrative expenses, which includes research and development. Laboratory expenses and cost of goods sold consist of amounts necessary to complete the revenue and earnings process, and includes direct labor and related benefits, other direct costs, and an allocation of facility charges and information technology costs, and depreciation and amortization. Also, laboratory expenses and cost of goods sold include shipping and handling fees and reimbursable out-of-pocket costs.  Laboratory expenses and cost of goods sold, as a percentage of net revenue, tends, and is expected, to fluctuate from one period to another, as a result of changes in labor utilization and the mix of service offerings involving studies conducted during any period of time. Selling, general and administrative expenses include business development activities, sales and marketing expenses, laboratory administration expenses and research and development activities through our science and technology department. Selling, general and administrative expenses consist primarily of administrative payroll and related benefit charges, legal and accounting fees, advertising and promotional expenses, administrative travel and an allocation of facility charges, information technology costs, and depreciation and amortization.





Laboratory Expense and Cost of Goods Sold from Discontinued Operations:





Years EndedJune 30,


$


%Dollars in thousands, rounded to nearestthousand

2011


2010


Change


ChangeLaboratory Expenses and Cost of Goods Sold

$
6,077


$
5,858



219



4Percentage of Revenue


58
%


61
%





We categorize under “laboratory expense and cost of goods sold” certain operating expenses that are necessary to complete the revenue and earnings process. These expenses consist primarily of direct labor costs and related benefits of employees performing testing and analysis of clinical trial samples, and the cost of chemical reagents and supplies for analysis ofclinical trialsamples. Also, laboratory expenses and cost of goods sold include payments to subcontractors for laboratory services, an allocation of facility charges and information technology costs, insurance, business and occupation taxes, shipping and handling fees and reimbursable out-of-pocket costs. For the comparable fiscal years ended June 30, 2011 and 2010, laboratory expense and cost of goods sold increased approximately 4% to $6,077,000 from $5,858,000.


11





As a percentage of revenue, laboratory expense and cost of goods sold fluctuate from period to period as a result of changes in labor utilization and the mix of service offerings.  For the comparable fiscal years 2011 and 2010, laboratory expense and cost of goods was approximately 58% and 61% as a percentage of revenue.





Years EndedJune 30,Dollars in thousands, rounded

to nearest thousand

2011


% of

revenue


2010


% of

revenue


$

Change


%

ChangeFixed Cost DetailRent, Utilities, Certain Taxes

$
733



7
%

$
694



7
%

$
39



6
%Variable Cost DetailWages, Taxes, Benefits


2,533



24
%


2,630



28
%


(97
)


(4
)%Reagent Chemicals


2,190



21
%


1,972



20
%


218



11
%Other Variable Costs


621



6
%


562



6
%


59



10
%Total


5,344



51
%


5,164



54
%


180



3
%Total Cost of Goods Sold

$
6,077



58
%

$
5,858



61
%

$
219



4
%





The largest component of laboratory expense during fiscal 2011 was salaries and related benefits. During the fiscal years ended June 30, 2011 and 2010, salaries and related benefits decreased by 4% to approximately $2,533,000 from $2,630,000 following a company-wide reduction in force in December 2010, which eliminated seven staff positions in our laboratory and client services, and reduced other expenses. During the fiscal years ended June 30, 2011 and 2010, salaries and related benefits were 24% and 28% of our revenue and accounted for approximately 42% and 45% of total laboratory expense and cost of goods sold.





The other major component of laboratory expense during fiscal 2011 was the cost of laboratory reagents and supplies for analysis of clinical trial samples. During the fiscal years ended June 30, 2011 and 2010, laboratory reagents and supplies increased by 11% to approximately $2,190,000 from $1,972,000 as a result of  the increase in revenues and validation (R&D) work on several new assays. Over the last three fiscal years, reagent chemicals used in our laboratory testing have averaged approximately 20% in cost as a percentage of revenue, but may vary considerably depending on the type of specific testing we perform, and constitute a significant expense item for our business.  During the fiscal years ended June 30, 2011 and 2010, laboratory supplies were approximately 21% and 20% of our revenue and accounted for approximately 36% and 34% of total laboratory expense and cost of goods sold. The reagent costs and shipping costs are generally borne by us and are not passed through to our clients. Accordingly, our margins are negatively impacted as these costs increase, without a corresponding increase in revenue to cover the costs.





Another component of laboratory expense during fiscal 2011 was other variable costs. Other variable costs increased 10% to approximately $621,000 from $562,000 during the fiscal years ended June 30, 2011 and 2010. The major reason for this increase was an increase in our expenses for outside services that consists mainly of contracted laboratory services. These outside service costs were directly related to the large contract in process.





Fixed costs for the fiscal year ended June 30, 2011 increased 6% compared to the fiscal year ended June 30, 2010, to approximately $733,000 from $694,000. This overall increase was mainly due to increases in depreciation expense.


12





Selling, General and Administrative Expense from Discontinued Operations:





Years EndedJune 30,


$


%Dollars in thousands, rounded to nearest thousand

2011


2010


Change


ChangeSelling, General and Administrative Expense

$
4,819


$
4,628



191



4Percentage of Revenue


46
%


48
%





We categorize under “selling, general and administrative expenses” operating costs associated with our executive and administrative, business development activities and marketing, laboratory administration and research and development activities through our science and technology department. Our selling, general and administrative expense consists primarily of administrative payroll and related benefits (including compensation for our executive officers, Board members and administrative personnel in business development, laboratory administration, and our science and technology department), and secondarily of share-based compensation, business development expenses, legal, accounting and public company expenses.





For the comparable years ended June 30, 2011 and 2010 our selling, general and administrative expense increased approximately 4% to approximately $4,819,000 from $4,628,000. As a percentage of revenue, selling, general and administrative expenses were approximately 46% and 48%, respectively.





The dollar increase in our selling, general and administrative expenses for the comparable periods is due in large part to increases in salaries and related benefits, legal expenses, accounting expenses, public company expenses and share-based compensation. These increases were offset somewhat by decreases in bonus expense, travel, training and trade show expenses. Our bonus expense decreased because the performance targets were not fully achieved in fiscal 2011.





Other Expense from Discontinued Operations:





Years EndedJune 30,


$


%Dollars in thousands, rounded to nearest thousand

2011


2010


Change


ChangeOther Expense

$
(308
)

$
(547
)


239



44Percentage of Revenue


(3
)%


(6
)%





We had other expense of approximately $308,000 for the fiscal year ended June 30, 2011, compared to other expense of approximately $547,000 for the fiscal year ended June 30, 2010. For the fiscal year ended June 30, 2011, we had interest expense of approximately $414,000 related to our $4 million debt financing from September 2009 and approximately $74,000 of amortization expense for the discount on the debt, plus approximately $122,000 of other interest expense. For the fiscal year ended June 30, 2010, we had interest expense of approximately $399,000 related to our $4 million debt financing from September 2009 and approximately $63,000 of amortization expense for the discount on the debt, plus approximately $84,000 of other interest expense.





In fiscal 2011 we received other income that offset our other expenses. For our Section 48D grant, the IRS approved a total of $244,479, and we received approximately $73,000 and recorded approximately $73,000 as other receivable for the fiscal year ended June 30, 2011. In fiscal 2011 we also received tax refunds of approximately $29,000 from City of Seattle B&O taxes and approximately $115,000 from Washington State Department of Revenue sale and use taxes.


13





Net Loss from Discontinued Operations:





Years EndedDollars in thousands, rounded to nearest

June 30,


$


%thousand

2011


2010


Change


ChangeNet Loss

$
(689
)

$
(1,368
)


679



50Percentage of Revenue


(7
)%


(14
)%





We had a net loss of approximately $689,000 for the fiscal year ended June 30, 2011, compared to a net loss of approximately $1,368,000 for the fiscal year ended June 30, 2010. This 50% reduction in our net loss is attributable to higher revenues reported in fiscal 2011, expense reductions as well as Section 48D grant money; B&O, sales and use tax refunds we received, as described above in Other Income/Expense.




Liquidity and Capital Resources




Continuing Operations:




Subsequent to the end of the 2011 fiscal year, we completed the sale of substantially all of our assets to Emerald Star Holdings, LLC on August 31, 2011. The assets that we sold included all of our accounts receivable, customer contracts, equipment, intellectual property (other than intellectual property held by Newco Tech, Inc.), name and website, permits, office and equipment leases, other contracts and other rights. At closing, Emerald Star assumed substantially all of the liabilities related to these assets and the business being sold, including our accounts payable, obligations under our leases and contracts, tax liabilities, the remaining obligations under our $4 million secured loan, and all employee-related liabilities.




As of June 30, 2011, we had cash and cash equivalents of approximately $870,000. At closing of the asset sale on August 31, 2011 we had approximately $2.32 million in cash.




We believe that our cash resources will be sufficient to cover our operating needs through the 2012 calendar year. Our auditors informally advised us that if the asset sale had not been completed, they likely would have had to qualify their audit report on our financial statements to indicate that there could be a substantial doubt about our ability to continue as a going concern. With the asset sale completed, $2.32 million in cash and reduced annual expenses of maintaining the public company, no going concern issues remain.




We currently estimate our continuing public company expense for the public shell after the asset sale will be approximately $80,000 annually, consisting of $25,000 in legal expenses, $25,000 in auditing expenses, $10,000 for filing and Edgarizing costs and $20,000 in accounting and other administrative support. The actual amount of our continuing public company expense may be different from these estimates. Other expenses will include premiums for D&O insurance, Board compensation expense, corporate maintenance for us and our subsidiaries, and expenses associated with our technology assets.




We intend to continue devoting substantially all of our time to identifying merger or acquisition candidates. In the event we locate an acceptable operating business, we intend to effect the transaction utilizing any combination of our common stock, cash on hand, or other funding sources that we reasonably believe are available. However, there can be no assurances that we will be able to consummate a merger or acquisition of an operating business on terms favorable to us, if at all, or that other funding sources will be available.




Discussion of Cash Flows




Net cash used in operating activities for the year ended June 30, 2011 was $17,270 compared to net cash used in operating activities for the year ended June 30, 2010 of $14,663. Included in the net cash used in operating activities for the year ended June 30, 2011 is a $345 increase in accounts payable.


14





We had no net cash provided by or used in investing activities in the year ended June 30, 2011 and 2010 related to our continuing operations.





We had no net cash provided by or used in financing activities in the year ended June 30, 2011 and 2010 related to our continuing operations.





Discontinued Operations:





Assets Held for Sale:  Total assets held for sale recorded on our balance sheet as of June 30, 2011 were approximately $4,001,000 compared to approximately $4,108,000 as of June 30, 2010. These assets included: accounts receivable, other receivable, inventory, prepaid expenses and other assets: property and equipment and restricted cash. At June 30, 2011, we had approximately $2,252,000 in accounts receivable, compared to approximately $1,853,000 as of June 30, 2010, reflecting timing of revenues billed and collected. These assets were subsequently sold to Emerald Star Holdings, LLC on August 31, 2011.





Liabilities Held for Sale:  Total liabilities held for sale on our balance sheet as of June 30, 2011 were approximately $5,286,000 compared to approximately $5,930,000 as of June 30, 2010. These liabilities included: accounts payable, accrued liabilities, advances from customers, capital lease obligations and secured note. The decrease in liabilities is primarily attributable to principal payments we made that applied to our long-term secured note balance. During fiscal 2011 we paid approximately $806,000 of the principal amount due on our debt financing. The liabilities recorded on the balance sheet for our debt financing are net of approximately $84,000 and $143,000, respectively, as of June 30, 2011 and June 30, 2010 as an unamortized discount on the secured note. This discount is recorded solely for U.S. GAAP purposes, but it doesn’t actually reduce our total payment obligations on the note. As of June 30, 2011, the principal balance outstanding on the note was approximately $3,029,000.  These current and long-term liabilities were assumed by Emerald Star Holdings, LLC on August 31, 2011.





At June 30, 2011, we had working capital of approximately $672,000, compared to approximately $1,796,000 at June 30, 2010. The decrease of approximately $1,124,000 in our working capital is mainly attributable to our decreased cash and cash equivalents due to loan and capital lease payments. Other changes providing a negative impact included decreases in inventory and increases in advances from customers. Changes providing a positive impact included increases in accounts receivable, other receivable, prepaid expenses, and decreases in accounts payable and accrued liabilities.





Discussion of Cash Flows





Net cash used by operating activities was approximately $324,000 for the fiscal year ended June 30, 2011 andincluded the effect of approximately $414,000 in depreciation and amortization, $254,000 in expense from share-based compensation and $59,000 in amortization of fair value assigned to repurchased shares of common stock, related to the debt financing.





Our investing activities provided cash of approximately $577,000 for the fiscal year ended June 30, 2011 and included approximately $167,000 from purchases of capital equipment, $294,000 from returns of capital equipment and $450,000 from maturities of our short-term investments.





Cash flow used in financing activities included approximately $806,000 used in payments on our debt, $270,000 used in payments on capital lease obligations and $150,000 of restricted cash used as collateral under our letter of credit required by the capital lease agreement we entered into October 2010.





Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements.





ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not Applicable.


15





ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The information required by this Item is set forth in our Consolidated Financial Statements and Notes thereto beginning at page F-1 of this Annual Report on Form 10-K.





ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None.





ITEM 9A
CONTROLS AND PROCEDURES





Disclosure Control and Procedures





We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) accumulated and communicated to management, including our President and Treasurer, as appropriate, to allow timely decisions regarding required disclosure.





As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our President and Treasurer. Based upon that evaluation, management and our President and Treasurer concluded that our disclosure controls and procedures are effective at June 30, 2011.





A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.





There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth quarter of fiscal 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





Management continually reviews, modifies and improves its systems of accounting and controls in response to changes in business conditions and operations and in response to recommendations in reports prepared by the independent registered public accounting firm and outside consultants.





Management’s Annual Report on Internal Control Over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)).Under the supervision and with the participation of our management, including our President and Treasurer, we conducted an evaluation of our internal control over financial reporting as of June 30, 2011, based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, management concluded that our internal control over financial reporting was effective as of June 30, 2011.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.


16





This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to recent federal legislation (the Dodd-Frank Wall Street Reform and Consumer Protection Act) that exempts nonaccelerated filers from this obligation.





/S/Stanley L. Schloz

/S/Curtis J. ScheelStanley L. Schloz

President

Curtis J. Scheel

Secretary and Treasurer





THE FOREGOING MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING SHALL NOT BE DEEMED TO BE “FILED” WITH THE SEC, NOR SHALL SUCH INFORMATION BE INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT WE SPECIFICALLY INCORPORATE IT BY REFERENCE INTO SUCH FILING.





ITEM 9B
OTHER INFORMATION





None.





PART III





ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Board of Directors





As of September 27, 2011, our board of directors consists of four directors.  Set forth below is biographical information for each of our current directors.





Name
Age
Current Position
Director SinceStanley L. Schloz
67
President and Director
2008Curtis J. Scheel
51
Secretary, Treasurer and Director
2006Fred Burstein
76
Director
2011Andrew Ecclestone
50
Director
2011





Name of Director

Background / ExperienceStanley L. Schloz

Mr. Schloz became a Director in June 2008, and was appointed as our President on September 1, 2011.  During the 2011 fiscal year, Mr. Schloz served on our Compensation (Chair) and Governance Committees.  Mr. Schloz previously served on the board of directors of Oncologix Tech Inc. (formerly BestNet Communications) from 2003 to 2007, and Mr. Schloz as President and on the board of directors of Tempco Inc., a public shell company, until May 2011.  Mr. Schloz’s prior business positions include serving as director of the Tactical Systems Operations, Space and Systems Technology Group, Motorola Inc.  Mr. Schloz holds a degree of Bachelor of Science in Electrical Engineering from Iowa State University and has completed advanced business studies at Arizona State University.Curtis J. Scheel

Mr. Scheel became a Director in January 2006, and was appointed as our Secretary and Treasurer on September 1, 2011.  During the 2011 fiscal year, Mr. Scheel served on our Governance (Chair), Audit and Science & Technology Committees.  Mr. Scheel currently serves as Chief Operating Officer for G.L. Cornell Company, a privately owned regional equipment distributor based in Gaithersburg, Maryland.  Previously, Mr. Scheel was a partner in Tatum, LLC, an executive services consulting firm, from April 2009 to September 2010.  Mr. Scheel served in several positions with Ritz Camera Centers, Inc., including as Chief Financial Officer from 2003 to 2005, as Chief Operating Officer from September 2005 to March 2009, and as President from December 2007 to March 2009.  Ritz Camera Center, Inc. filed for Chapter 11 bankruptcy protection in February 2009.  Mr. Scheel believes that the bankruptcy filing was a result of many factors, including the company’s inability to respond to dramatic shifts in technology, the recession of 2008, and limitations imposed by its principal financial institution, and that his actions helped mitigate the severity of the bankruptcy proceedings, enabling the company to be acquired out of bankruptcy and continue to be operated.  We believe that Ritz Camera’s bankruptcy filing does not reflect Mr. Scheel’s ability or integrity.  Mr. Scheel’s prior business positions include President and Chief Financial Officer of Cameraworld.com from December 1999 to May 2002 and Director of National Marketing, Technology Division, Deutsche Financial Services Corp. from July 1996 to December 1999. He has also served as Vice President and Chief Financial Officer at Artisoft, Inc. from September 1995 to June 1996 and Vice President and Treasurer at Microage, Inc. from September 1989 to 1995.  Mr. Scheel holds a B.B.A. and an M.B.A. from the University of Wisconsin-Madison.


17





Name of Director

Background / ExperienceFred Burstein

Mr. Burstein became a Director on September 1, 2011.  Mr. Burstein also serves as a member of the board of directors of Tempco, Inc., a public shell company, since 2008 and was appointed as its chief executive officer in May 2011 (previously serving as vice president from 2008 until May 2011).  Previously, Mr. Burstein was a lawyer practicing law in Minneapolis, Minnesota from 1960 until his retirement in 2010.  Mr. Burstein received his J.D. from the University of Minnesota Law School and a Bachelor of Business Administration from the University of Minnesota Business School.Andrew Ecclestone

Mr. Ecclestone became a Director on September 1, 2011.  Mr. Ecclestone, age 50, is currently the portfolio manager for Mountainview Asset Management, Inc., a private investment fund in Toronto, Canada that he founded in June 2002.  He is also a lecturer with the University of Waterloo in Ontario, Canada.  Mr. Ecclestone was recently appointed to the board of directors of Tempco, Inc., a public shell company, in May 2011.  From October 2000 to May 2002, Mr. Ecclestone was the portfolio manager of Thomson Kernaghan Company Ltd, in Toronto, Canada.  From June 1999 to September 2000, Mr. Ecclestone was the corporate finance consultant for Storm Investment Management Ltd. in North York, Ontario, Canada. For the previous three years, he was the senior equity portfolio manager for the Independent Order of Foresters in North York, Ontario. From 1988 until 1996, he performed various portfolio manager responsibilities and held business analyst positions with several companies.  Mr. Ecclestone is a Chartered Financial Analyst, and he received a Bachelor of Technology Degree in industrial engineering from the Ryerson Polytechnical Institute, Toronto, Canada, and an MBA from York University, North York, Ontario.





As of June 30, 2011, our board of directors consisted of six directors.  On August 31, 2011, upon closing of the asset sale, four of these directors resigned with Messrs. Scheel and Schloz continuing on the Board.





Board Committees





During fiscal 2011, there were four standing committees of our board of directors — audit, compensation, governance and science & technology committees.  Subsequent to the asset sale, in September 2011, the Board terminated these prior committees and determined that the entire Board would fill the role of the audit committee, rather than having a separately designated audit committee.  The Board also determined that Mr. Scheel is qualified as an “audit committee financial expert” within the meaning of SEC regulations based on his accounting and related financial management expertise, including his prior service on the audit committee.





Director Nomination Process





There have been no material changes to the procedures by which stockholders may recommend nominees for election to our board of directors.


18





Code of Ethics





We have a code of ethics applicable to our principal executive officer, principal financial officer, controller and other employees performing similar functions.  We have filed a copy of the code of ethics as an exhibit to this Annual Report on Form 10-K.





Compliance with Section 16(a) of the Exchange Act





Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who own more than 10% of our outstanding common stock, to file reports of ownership and change in ownership with the Securities and Exchange Commission.  Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all such ownership reports they file.





Based solely on our review of the copies of such reports we received, or written representations from our officers and directors, we believe that, during the 2011 fiscal year, all such filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners were complied with.





ITEM 11
EXECUTIVE COMPENSATION





Compensation of Executive Officers in Fiscal 2011 and 2010





The following table shows for each of the two fiscal years ended June 30, 2011 and 2010, respectively, compensation awarded or paid to, or earned by, the following persons (the “Named Executive Officers”):





·           Ronald R. Helm, our former Chief Executive Officer and former Chairman;


·           Elizabeth T. Leary, Ph.D., our former Chief Scientific Officer; and


·           Michael P. Murphy, Ph.D., our former Chief Operating Officer.





Each of Mr. Helm, Dr. Leary and Dr. Murphy resigned as an officer with our company on August 31, 2011.





Summary Compensation Table


Name and Principal

Position

Fiscal

Year

Salary

($)


Bonus

($)


Stock

Awards

($)


Option

Awards(1)

($)


Nonequity

Incentive Plan

Compensation

($)


All Other

Comp.

($)


Total

($)Ronald R. Helm

2011

$
308,833



—



—


$
234,000



—


$
5,865
(3)

$
548,698Former Chief Executive Officer and Chairman

2010


285,417



—


$
88,000



174,000


$
56,250



7,983



611,650Elizabeth T. Leary

2011


139,809



—



—



25,500



—



3,209
(4)


168,517Former Chief Scientific Officer

2010


142,500



—



5,400



12,325



15,818



5,875



181,918Michael P. Murphy

2011


170,674



—



—



25,500



—



10,960
(5)


207,134Former Chief Operating Officer

2010


170,231



—



15,000



12,325



21,852



7,351



226,759








(1)
The amounts reported in the Stock Awards and Option Awards columns represent the grant date fair value of such awards to the named executive officers, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718.  We use the Black-Scholes option-pricing model to estimate the calculated value of our share-based payments.  Stock options are valued as of the date of grant. The volatility assumption used in the Black-Scholes formula is based on the volatility of our common stock.  For the stock option awards made to the Named Executive Officers in fiscal 2011, we used the following assumptions to compute fair value:  (i) expected volatility of 117-148%; (ii) expected dividend yield of 0.00%; (iii) risk-free interest rate of 2.54-2.96%; and (iv) expected life of 10 years.


19


(3)
The amount listed under “All Other Compensation” in fiscal 2011 consists of $2,615 in life insurance premiums paid by us for Mr. Helm’s benefit and $3,250 in company-contributions for Mr. Helm’s account in the 401(k) plan.


(4)
The amount listed under “All Other Compensation” in fiscal 2011 consists of $2,120 of life insurance premiums paid by us for Dr. Leary’s benefit and $1,088 in company-contributions for Dr. Leary’s account in the 401(k) plan.


(5)
The amount listed under “All Other Compensation” in fiscal 2011 consists of $2,464 in life insurance premiums paid by us for Dr. Murphy’s benefit and $8,497 in company-contributions for Dr. Murphy’s account in the 401(k) plan.





Narrative Discussion of Summary Compensation Table Information for Fiscal 2011





The following provides a narrative discussion of the material factors which we believe are necessary to understand the information disclosed in the foregoing Summary Compensation Table. The following narrative disclosure is separated into sections, with a separate section for each of our Named Executive Officers.





Base Salary





Base salary is an important element of our executive compensation program and we generally set base salaries at levels believed to attract and retain an experienced management team that will successfully grow our business and create stockholder value.  We also utilize base salaries to reward individual performance and contributions to our overall business objectives, but seek to do so in a manner that does not detract from the executives’ incentive to realize additional compensation through our performance-based compensation programs, stock options and restricted stock awards.





With respect to compensation for fiscal 2010 and 2011, the Compensation Committee reviewed the Chief Executive Officer’s salary annually at the end of each fiscal year, subject to the terms of his employment agreement.  The Compensation Committee may recommend adjustments to the Chief Executive Officer’s base salary based upon the Compensation Committee’s review of his base salary, incentive cash compensation and equity-based compensation, as well as his performance and comparative market data.  The Compensation Committee also annually reviewed other executives’ salaries, with input from the Chief Executive Officer.





In determining base salaries, the Compensation Committee reviewed competitive trends, our overall financial performance and resources, our operational performance, and general economic conditions, as well as a number of factors relating to the particular executive officers, including their respective performance, and levels of their respective managerial and executive experience, ability and knowledge of the job.





At the beginning of the 2011 fiscal year, Mr. Helm’s base salary under his employment agreement was $300,000 per year.  As part of a company-wide expense reduction effort that began in December 2010, Mr. Helm’s base salary was reduced to $270,000 effective February 1, 2011, as part of a 10% salary reduction for all senior management positions.  Mr. Helm’s base salary was set at an amount that we believed to be generally consistent with the base salaries paid for Chief Executive Officers by other established, growth-oriented biotech companies.





At the beginning of the 2011 fiscal year, Dr. Leary’s base salary under her employment agreement was $142,500 per year for her working on a reduced 3/4th time.  As part of a company-wide expense reduction effort that began in December 2010, Dr. Leary’s base salary was reduced to $128,250 effective February 1, 2011, as part of a 10% salary reduction for all senior management positions.  Dr. Leary’s base salary was set at an amount that we believed to be generally consistent with the base salaries paid by other established growth-oriented biotech companies for similar positions.





We do not have an employment agreement with Michael Murphy, our Chief Operating Officer.  At the beginning of the 2011 fiscal year, Dr. Murphy’s base salary was $174,190 per year.  As part of a company-wide expense reduction effort that began in December 2010, Dr. Murphy’s base salary was reduced to $156,771 effective February 1, 2011, as part of a 10% salary reduction for all senior management positions.  We set Dr. Murphy’s base salary at an amount that we believed to be generally consistent with the base salaries paid by other established growth-oriented biotech companies for similar positions.


20





Performance-Based Cash Compensation for Fiscal 2011





For fiscal 2011, we established annual performance-based incentive compensation plans to provide cash incentives designed to reward our executive officers and employees for achieving and surpassing certain financial goals that we set.  We had three performance based plans – for our senior management team, our business development team and for all of our employees.





Our senior management incentive compensation plan provided for performance targets based upon company financial performance for the full fiscal year.  For fiscal 2011, the two performance targets were revenue targets ranging from $13.0 to $16.0 million and $1.5 million in operating profit.  Under this plan, eligible executive officers could receive cash incentive compensation equal to a percentage of their yearly base salaries (up to a maximum of 10%) upon achievement of each financial target – from 1.67% to 5% for the annual revenue targets and 5% for the operating profit target.  For fiscal 2011, none of the revenue targets or the operating profit target were achieved and none of the executive officers received any cash incentive compensation under this plan.





Our business development incentive compensation plan provided for performance targets based upon company financial performance.  For fiscal 2011, the two performance targets were revenue targets ranging from $13.0 to $16.0 million (determined on a quarterly basis) and backlog targets from $9.0 to $11.0 million (on the full fiscal year).  Under this plan, eligible participants could receive cash incentive compensation equal to a percentage of their yearly base salaries (up to a maximum of 27.5%) upon achievement of each financial target – 4.5% for the annual backlog target, and within a range of 2.5-5.75% per quarter for an escalating quarterly revenue target.  For fiscal 2011, none of the quarterly revenue targets or the backlog targets were achieved, and none of the eligible participants received any cash incentive compensation under this plan.





Our employee incentive compensation plan provided for performance targets based upon company financial performance. For fiscal 2011, the sole performance target was $12.5 million in revenue (determined on a quarterly basis).  Under this plan, eligible participants could receive cash incentive compensation equal to a percentage of their yearly base salaries (up to a maximum of 8%) upon achievement of each financial target –2% per quarter for the quarterly revenue target.  For fiscal 2011, none of the quarterly revenue targets were achieved, and none of the eligible participants received any cash incentive compensation under this plan.





Under Mr. Helm’s employment agreement, he was eligible for potential bonuses in fiscal 2011 of up to 30% of his salary based on criteria determined by our Board, as follows:  (a) up to a 10% bonus based on personal performance goals; and (b) up to a 20% bonus based on company performance goals – consisting solely of the senior management incentive compensation plan.  As described above, no cash incentive compensation was earned and paid under the 2011 senior management incentive compensation plan.  With respect to his 10% personal performance goals, for fiscal 2011, we established performance goals upon achievement of certain personal and company goals as follows:  a net operating income target of $2.0 million (2.5%); FY2011 ending backlog equal or greater than FY2010 ending backlog (2.5%); and progress toward a successful acquisition/merger evidenced by a letter of intent (5%).  The asset purchase agreement with Emerald Star, as a related party transaction, did not satisfy this third performance goal.  With respect to the 10% personal performance goals, none of the goals were achieved and Mr. Helm did not receive any bonuses in fiscal 2011.





Dr. Leary was eligible in fiscal 2011 to participate in the senior management incentive compensation plan and the all employee incentive compensation plan; however, as none of the performance goals were achieved, she received no bonus compensation in fiscal 2011.





Dr. Murphy was eligible in fiscal 2011 to participate in the senior management incentive compensation plan and the all employee incentive compensation plan; however, as none of the performance goals were achieved, he received no bonus compensation in fiscal 2011.





Stock Option and Restricted Stock Awards





Consistent with our compensation philosophies related to performance-based compensation, long-term stockholder value creation and alignment of executive interests with those of stockholders, we may make periodic grants of long-term compensation in the form of stock options or restricted stock to our executive officers and across our organization generally.


21





Under our 2005 Stock Incentive Plan, we may make awards of stock options or grants of restricted stock to our employees.  Stock options provide executive officers with the opportunity to purchase common stock at a price fixed on the grant date regardless of future market price.  A stock option becomes valuable only if the common stock price increases above the option exercise price and the holder of the option remains employed during the period required for the option shares to vest.  This provides an incentive for an option holder to remain employed by us.  In addition, stock options link a significant portion of an employee’s compensation to stockholders’ interests by providing an incentive to achieve corporate goals and increase stockholder value.  Restricted stock awards do not require payment by the employee, but are treated as compensation and result in tax consequences to the recipient when the shares vest.  Restricted stock awards provide employees with immediate rights as a stockholder, entitled to vote their shares, provided, however, that the shares are subject to forfeiture if the employee leaves employment with us before the shares vest.  This also provides an incentive for the recipient to remain employed by us.





Pursuant to our employment agreement with Mr. Helm, on October 1, 2010, we awarded Mr. Helm stock options to purchase up to 600,000 shares of common stock at an exercise price of $0.39 per share, which was the fair market value of our common stock on the date of grant.  The options had a term of 10 years and vested monthly over a period of three years.





On July 1, 2010, we awarded Dr. Leary stock options to purchase up to 75,000 shares of common stock at an exercise price of $0.34 per share, which was the fair market value of our common stock on the date of grant.  The options had a term of 10 years and vested monthly over a period of three years.





On July 1, 2010, we awarded Dr. Murphy stock options to purchase up to 75,000 shares of common stock at an exercise price of $0.34 per share, which was the fair market value of our common stock on the date of grant.  The options had a term of 10 years and vested monthly over a period of three years.





In connection with the asset sale, vesting on all outstanding options accelerated to become 100% vested and all options terminated upon closing of the asset sale to the extent not exercised.  None of Mr. Helm, Dr. Leary or Dr. Murphy exercised any of their options prior to their termination on August 31, 2011.  All unvested restricted stock awards vested upon closing of the asset sale on August 31, 2011.  See Note 15 to our Consolidated Financial Statements.





Limited Perquisites; Other Benefits





It is generally our policy not to extend significant perquisites to our executive officers beyond those that are available to our employees generally, such as company-matching on our 401(k) plan, short-term, long-term disability and life insurance, and health and dental benefits.





Employment Agreements





During fiscal 2011, we had an employment agreement with Mr. Helm that was amended most recently as of October 1, 2010.  During fiscal 2011, Mr. Helm’s compensation under this employment agreement was for a base salary of $300,000 and an annual bonus of up to 30% of his base salary, consisting of up to 20 percent based on the senior management goals and 10% based on personal goals.  The terms of his compensation were not changed as part of the most recent amendments.  As part of a company-wide expense reduction effort that began in December 2010, Mr. Helm’s base salary was reduced to $270,000 effective February 1, 2011, as part of a 10% salary reduction for all senior management positions, although his employment agreement was not formally amended.  The employment agreement was for a term of three years, to continue through September 30, 2012, renewable upon mutual agreement of us and Mr. Helm.  Mr. Helm’s employment and his employment agreement terminated upon closing of the asset sale on August 31, 2011, and Mr. Helm verbally agreed to waive his right to any potential severance payments to which he could be entitled under his employment agreement in connection with the asset sale with Emerald Star.


22





During fiscal 2011, we had a letter agreement with Dr. Leary for her employment, which was originally entered into in 2004. It originally specified a base salary of $190,000 per year, with potential bonuses of 2.5% paid quarterly and 10% annual bonus based on criteria determined by our board of directors. Most recently, effective March 1, 2009, Dr. Leary’s base salary was changed to $142,500 to accommodate her working on a reduced 3/4thtime.  As part of a company-wide expense reduction effort that began in December 2010, Dr. Leary’s base salary was reduced to $128,250 effective February 1, 2011, as part of a 10% salary reduction for all senior management positions, although her employment agreement was not formally amended.  Dr. Leary’s employment and her letter agreement terminated upon closing of the asset sale on August 31, 2011.





During fiscal 2011, we did not have a written employment agreement with Dr. Murphy, and his employment was at will.  Dr. Murphy’s employment terminated upon closing of the asset sale on August 31, 2011.





Outstanding Equity Awards at 2011 Fiscal Year-End





The following table presents information about unexercised stock options and unvested stock awards held by each of the Named Executive Officers as of June 30, 2011.





Option Awards


Stock AwardsName

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable


Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable


Option

Exercise

Price


Option

Expiration

Date


Number

of Shares

of Stock

That Have

Not Vested


Market

Value of

Shares of

Stock

That Have

Not Vested (1)($)





(#)


($)Ronald R. Helm


340,000



-



0.81


01/30/2014



4,167


$
1,0424,049



-



0.81


01/30/2014



62,719



15,680133,333



16,667



0.41


10/01/2018116,666



83,334



0.88


10/01/2019150,000



450,000



0.39


10/01/2020Elizabeth T. Leary


21,922



-



0.51


08/27/2012



750



188157,887



-



0.81


01/30/2014



5,000



1,25016,666



8,334



0.60


07/01/201925,000



50,000



0.34


07/01/2020Michael P. Murphy


4,000



-



0.51


08/27/2012



1,167



29290,000



-



0.86


08/29/2015



13,889



3,47218,000



-



0.99


08/25/201616,666



8,334



0.60


07/01/201925,000



50,000



0.34


07/01/2020





(1)
Market value is calculated on $0.25 per share, the closing price of our common stock on June 30, 2011.





Potential Payments Upon Resignation, Retirement, or Change of Control





During fiscal 2011, other than the employment agreement with Mr. Helm (as described above), we did not have any plans or agreements that are specific and unique to executive officers regarding termination of employment or a change of control of the company.  Mr. Helm verbally agreed to waive his right to any severance payments under his employment agreement in connection with the asset sale with Emerald Star.





Our 2005 Stock Incentive Plan provides for accelerated vesting of all unvested stock options and unvested restricted stock awards upon a “corporate transaction” (as defined in the plan), irrespective of the scheduled vesting date for these awards.  Upon closing of the asset sale, all outstanding stock options and unvested restricted stock accelerated to become 100% vested.


23





Compensation Policies and Practices as they relate to Risk Management





With respect to executive compensation during fiscal 2011, our Compensation Committee believed that our compensation practices are designed and implemented in a way that does not promote excessive risk-taking.  Rather, we attempt to develop an overall compensation program that incentivizes our executive officers, as well as our employees generally, to achieve their objectives without encouraging them to take risky business decisions that could maximize short-term results at the expense of long-term value.  We believe this is accomplished through the balance of various elements of our compensation program:





·
we used a mix of cash compensation and equity that was not overly weighted toward annual incentive awards and represents a balance of cash and long-term equity based compensation vesting over three to five years;





·
we used stock options and restricted stock awards that featured (a) vesting over a relatively long period (three to five years) and (b) annual grants so that there are multiple and overlapping vesting periods, helping to ensure that one period is not significantly more important to an individual than another;





·
the maximum annual compensation under our performance-based incentive compensation plans was capped at amounts we believed would incentivize the employees, but that would not promote risk taking.  For fiscal 2011, we had caps of 10%, 27% and 8%, respectively, as a percentage of a participant’s annual base salary for bonus payments under our senior management, business development and all-employee incentive compensation plans, and no bonus compensation was earned or paid;





·
performance targets were tied to several financial metrics, including revenues, backlog and operating profit, which were quantitative, measurable, and are aligned with stockholders’ interests, and based on our performance history, we believed the financial performance targets were reasonable and appropriate.





We recognized that with respect to the performance target for backlog under our incentive compensation plans, there is some measure of risk.  Backlog is financial metric we use internally to track our business development efforts, and is calculated on signed contracts, as the anticipated revenues that may be realized in the future for work that has not yet been performed under those contracts.  The risk with the backlog performance target was that the target was based solely on entering into a signed contract and there may be incentive to manipulate the timing for when an agreement gets signed merely to satisfy the target.  We believed that backlog was an appropriate performance metric for us, because we wanted to encourage our business development team to be actively pursuing new work.  We also believed that we mitigated the risk by placing a reasonable cap on the incentive compensation (4.5% of base salary for our business development team for fiscal 2011), and we did not believe that the risk was reasonably likely to have a material adverse effect on us.





We intend to assess risk management issues in our compensation practices and policies on an ongoing basis.  In particular, we are aware of various risk mitigation techniques used by other public companies (including clawback policies, stock ownership guidelines, and non-competitive provisions, among others).  We will consider these and other risk management approaches as appropriate.





Compensation of Executive Officers in Fiscal 2012 following the Asset Sale





As of September 1, 2011, we have no employees and we have two executive officers – Stanley L. Schloz, President, and Curtis J. Scheel, Secretary and Treasurer.  We do not currently intend to pay any compensation to either Mr. Schloz or Mr. Scheel in connection with their service as an executive officer.  Mr. Schloz and Mr. Scheel will be entitled to the same compensation as other members of our board of directors.





Because we no longer have any employees or executive compensation, the board of directors terminated the compensation committee and the Board as a whole will fill this role rather than having a separately designated compensation committee.


24





Compensation of Directors in Fiscal 2011





Management Directors





During fiscal 2011, we did not separately pay directors who were also our employees any additional compensation for serving as a director, other than customary reimbursement of expenses.  This applied to Ronald R. Helm, our Chairman and Chief Executive Officer, and Kenneth R. Waters, our Director of Strategic Planning and Corporate Secretary.





Non-Employee Directors





We believe that compensation for non-employee directors should be at a level which is sufficient to attract talented and diverse individuals to serve on our board of directors.  We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our board of directors.





Director Compensation Table for 2011 Fiscal Year





The following table presents information about the compensation that was paid or earned during fiscal 2011 by our directors for their service on the Board (other than Ronald R. Helm, our Chairman and Chief Executive Officer, whose compensation is presented in the Summary Compensation Table in this Proxy Statement as a “Named Executive Officer”).





Name

Fees Earned or

Paid in Cash


Stock Awards


Option Awards


Total($)


($)(1)


($)(1)(2)


($)Mario Ehlers (3)

$
19,000



—


$
18,700


$
37,700Paul G. Kanan (3)


15,313



—



11,900



27,213Richard W. Palfreyman (3)


23,750



—



11,900



35,650Curtis J. Scheel


23,750



—



11,900



35,650Stanley L. Schloz


21,375



-



11,900



33,275Kenneth R. Waters (3)(4)


—



—



—



—





(1)
As of the end of the 2011 fiscal year, the directors listed in the Director Compensation Table held the following aggregate number of stock awards and stock options:


·
Dr. Ehlers held 17,500 shares of restricted stock and 176,178 stock options.


·
Mr. Kanan held zero shares of restricted stock and zero stock options.


·
Mr. Palfreyman held 30,000 shares of restricted stock and 106,761 stock options.


·
Mr. Scheel held 30,000 shares of restricted stock and 60,000 stock options.


·
Mr. Schloz held 30,000 shares of restricted stock and 35,000 stock options.


·
Mr. Waters held 39,000 shares of restricted stock and 238,043 stock options.


(2)
The amounts reported in the Option Awards columns represent the grant date fair value of their awards, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718.  We use the Black-Scholes option-pricing model to estimate the calculated value of these Option Awards as of the date of grant. The volatility assumption used in the Black-Scholes formula is based on the volatility of our common stock.  For the Option Awards granted to the directors in fiscal 2011, we used the following assumptions to compute the fair value:  (i) expected volatility of 117%; (ii) expected dividend yield of 0.00%; (iii) risk-free interest rate of 2.96%; and (iv) expected life of 10 years.


(3)
Dr. Ehlers, Mr. Palfreyman and Mr. Water resigned from the board of directors on August 31, 2011.  Mr. Kanan resigned from the board of directors on February 26, 2011.


(4)
During fiscal 2011, Mr. Waters was an employee, serving as our Director of Strategic Planning, and he received no separate cash or equity compensation for serving on the board of directors.


25





Narrative to Director Compensation Table for Fiscal 2011





During fiscal 2011, we paid to our non-employee directors an annual retainer of $15,000 ($3,750 paid quarterly in connection with each quarterly Board meeting).  In addition, committee members received $2,500 annually ($625 paid quarterly) and committee chairs received $5,000 annually ($1,250 paid quarterly).  At the board of directors meeting held in December 2010, the Board members agreed to reduce their Board retainer and committee fees by 10%.  Our directors who were employees (Messrs. Helm and Waters) received no additional compensation for serving as a director.





During fiscal 2011, non-employee directors were also eligible to receive awards of stock options or restricted stock under our equity compensation plans.  In fiscal 2011, we granted each non-employee director stock options for 35,000 shares, although we granted Dr. Ehlers stock options for 55,000 shares for his additional work in setting up the Science & Technology Committee.  In addition, non- management directors were reimbursed their expenses associated with attending Board meetings.





We maintain directors’ and officers’ insurance and liability insurance on our directors and officers.





Compensation of Directors in Fiscal 2012 following the Asset Sale





On September 16, 2011, the Board approved compensation for the four current directors, consisting of a grant of performance based stock options and cash compensation.  All directors are treated equally and there is no separate compensation for directors who are executive officers.  Specifically, the Board approved an award of 3-year stock options for 100,000 shares of common stock to each director at an exercise price of $0.30 per share.  These options are performance based such that they would vest and become exercisable only upon consummation of an acquisition transaction with an operating company, with the effect of the transaction that we would longer be deemed a shell company.  The Board also approved monthly cash compensation to each director in the amount of $1,500.





ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





Principal Stockholders





The following table sets forth as of September 26, 2011, certain information regarding the beneficial ownership of our common stock by the following persons or groups:





·
each person who, to our knowledge, beneficially owns more than 5% of our common stock;


·
each Named Executive Officer identified in the Executive Compensation table above (each of whom is a former officer, having resigned on August 31, 2011 upon closing of the asset sale);


·
each of our current directors; and


·
all of our current directors and executive officers as a group.





As of September 26, 2011, there were 16,796,151 shares of common stock issued and outstanding.





Amount and Nature of Beneficial Ownership (1)Name and Address

Total Common Stock

Beneficially Owned


Percentage OwnershipCurrent Officers and Directors (2):Fred Burstein (3)


359,949



2.1
%Andrew Ecclestone (4)


—



—Curtis J. Scheel


42,500



**Stanley L. Schloz (5)


539,460



3.2All current directors and executive officers as a group (4 persons)


941,909



5.6Former Officers(6):Ronald R. Helm


624,368



3.7Elizabeth T. Leary, Ph.D.


74,898



**Michael P. Murphy, Ph.D.


41,250



**5% Owners:Anthony Silverman (7)

7625 E. Via Del Reposo

Scottsdale, AZ  85258


1,493,335



8.9




26





**
Less than one percent


(1)
This table is based upon information supplied by executive officers, directors and principal stockholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, to our knowledge, each of the stockholders named in this table has sole voting and investment power with respect to the common stock shown as beneficially owned.


(2)
The address of each of our current officers and directors is c/o NorWesTech, Inc., 220 West Harrison Street, Seattle, WA  98119.  Each of our four current directors received an award of 3-year stock options for 100,000 shares of common stock at an exercise price of $0.30 per share.  These options are performance based such that they would vest and become exercisable only upon consummation of an acquisition transaction with an operating company, with the effect of the transaction that we would longer be deemed a shell company.  These options are not reflected in the above table as they are not currently exercisable.


(3)
The address for Mr. Burstein is 8913 Minnehaha Circle So., Minneapolis, MN 55403.  Pursuant to SEC rules, the shares listed as being beneficially owned by Mr. Burstein include 7,500 shares held by his wife, but does not include 3,000 shares held by his adult son who lives in a separate household.  Mr. Burstein disclaims beneficial ownership over all shares held by his wife and his son.


(4)           The address for Mr. Ecclestone is 69 Lord Seaton Road, North York, Ontario, Canada.


(5)
Includes 272,034 shares held in a family trust, 6,500 shares held by a corporation controlled by Mr. Schloz and 22,500 shares of common stock held by Mr. Schloz’s wife.


(6)
Each of these persons resigned from all of his or her respective officer and directors positions with us on August 31, 2011.


(7)
The number of shares listed as being owned by Mr. Silverman is based on information provided by Mr. Silverman in a Schedule 13D filed on April 7, 2009.





Equity Compensation Plan Information





The following table gives information as of June 30, 2011, regarding our common stock that may be issued upon the exercise of options, warrants and other rights under our equity compensation plans. See also “Note 11 to Consolidated Financial Statements” to our Consolidated Financial Statements for the fiscal year ended June 30, 2011 included in this Report.


27


(a)


(b)


(c)Plan Category

No. of Shares

to be Issued

Upon Exercise of

Outstanding Options,

Warrants and Rights


Weighted Average

Exercise Price of

Outstanding Options,

Warrants and Rights


No. of Shares Available

for Future Issuance,

excluding securities

reflected in Column (a)Equity Compensation Plans Approved by Stockholders (1)


1,048,851


$
0.94



-Equity Compensation Plans Approved by Stockholders (2)


2,008,440


$
0.55



319,168Equity Compensation Plans Not Approved by Stockholders


117,625


$
0.51



-TOTAL


3,174,916


$
0.68



319,168
 
 (1)
Consists solely of our 1996 Stock Incentive Plan.  The Plan has been terminated and no additional shares or options may be awarded.  Upon closing of the asset sale on August 31, 2011, all outstanding options under the 1996 Plan terminated.
 (2)
Consists solely of our 2005 Stock Incentive Plan.  Upon closing of the asset sale on August 31, 2011, all outstanding options under the 2005 Plan terminated.  The 2005 Plan continues in accordance with its terms following the asset sale, and options and stock awards may be granted under the 2005 Plan in the future.
 
 ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 Transactions With Related Persons
 
 Except as described below, no relationships or transactions existed or occurred between us and any of our executive officers, directors or nominees for director, or any affiliate of or person related to any of them, since the beginning of 2010 fiscal year of the type and amount that are required to be disclosed under applicable Securities and Exchange Commission rules.
 
 Loan with Terry Giles
 
 On September 1, 2009, we closed a $4 million term loan with Terry M. Giles, a then-member of our board of directors.  The loan is secured by a blanket security interest on our assets and the assets of our subsidiaries.  The loan bears interest at a fixed rate of 12.0% per annum, and was originally due and payable over 48 months with the first 8 months of payments being interest only ($40,000 per month, beginning September 30, 2009) and the remaining 40 months at a monthly payment of $121,822 of principal and interest.  We are obligated to pay a quarterly finance fee of $12,000 to Mr. Giles during the 48-month term of the loan.  In connection with and as required by the loan, on September 1, 2009, we repurchased 2,391,906 shares of common stock from Mr. Giles and certain other stockholders at a price of $0.70 per share, pursuant to a Stock Redemption Agreement. We received net loan proceeds of $2,325,666, after payment of the stock repurchase, but excluding our legal and other expenses for the transaction. Effective upon closing of the loan transaction, Mr. Giles resigned from our Board.  Mr. Giles is entitled to certain ongoing Board observation rights while the loan remains outstanding.
 
 Our loan with Mr. Giles was approved by all of the members of Board (with Mr. Giles abstaining), and the Board determined that the terms of the loan transaction were more favorable than we could have obtained from an unaffiliated third party, and that the terms of the loan were fair to and in the best interest of our stockholders.
 
 Subsequently, on October 1, 2010, we amended the loan with Mr. Giles to extend the term of the loan on a portion of the principal balance and to reamortize the loan, reducing the required monthly payment, as follows:  (i) for the remainder of the original 48-month term of the loan (thru August 31, 2013), we are required to make monthly payments of principal and interest in the amount of $104,644.68; (ii) for an extended 19 month term (thru March 31 , 2015), we are required to make monthly payments of principal and interest in the amount of $20,000.00; and (iii) on April 30, 2015, we are required to make a final balloon payment in the amount of $600,000.00.
  28
 
 Subsequently, on December 9, 2010, we further amended the loan (i) to decrease the interest rate on a portion of the loan from 12.0% to 11.5% per annum and to adjust the amortization schedule accordingly, and (ii) to add an event of default for a Change of Control, in the event that a majority of the directors on the Board changes following a person or group owning 25% or more of the voting stock of the Company.
 
 Asset Purchase Agreement with Emerald Star Holdings LLC
 
 On May 23, 2011, we entered into an asset purchase agreement with Emerald Star Holdings, LLC, an entity newly formed and controlled by Ronald R. Helm, our then President, Chief Executive Officer and Director.  On August 31, 2011, pursuant to the asset purchase agreement, we sold to Emerald Star Holdings substantially all of the assets and liabilities related to our core business of providing specialty reference laboratory services and clinical biomarker services.
 
 All ongoing and any future related-party transactions have been and will be made or entered into on terms that are no less favorable to us than those that may be obtained from an unaffiliated third party.  In addition, any future related-party transactions must be approved by a majority of the disinterested members of our board of directors.  If a related person proposes to enter into such a transaction with us, such proposed transaction must be reported to us, preferably in advance.
 
 Director Independence
 
 Of the four current members on the Board, Messrs. Burstein and Ecclestone are considered “independent” within the meaning of the listing standards of The Nasdaq Stock Market.  Because Messrs. Scheel and Schloz hold officer positions with us, they are technically not considered independent, even though neither is an employee or has any other relationship with us that would disqualify them as independent.
 
 During fiscal 2011, our board of directors determined that four of our non-employee directors (Mario Ehlers, Richard Palfreyman, Curtis J. Scheel and Stanley L. Schloz), collectively constituting a majority of our Board, were “independent” within the meaning of the listing standards of The Nasdaq Stock Market.  In addition, our Board made a subjective determination as to each of the foregoing individuals that no relationships exist that, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out their responsibilities as a director.  During fiscal 2011, Paul G. Kanan also served on the board of directors until his resignation from the Board on February 26, 2011.  Prior to his resignation, Mr. Kanan also satisfied the independence standards of the Nasdaq listing rules.
 
 ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Selection of Independent Registered Public Accounting Firm for Fiscal 2012
 
 Our board of directors approved the continued engagement of PMB Helin Donovan, LLP, independent registered public accounting firm, as our auditors for the fiscal year ending June 30, 2012.  PMB Helin Donovan, LLP has served as our auditors since September 5, 2007.
 
 Audit and Related Fees for Fiscal 2011 and 2010
 
 The following table set forth the aggregate fees billed by PMB Helin Donovan, LLP, our independent registered public accounting firm, for professional services rendered to us during the two fiscal years ended June 30, 2011 and 2010.  The audit committee has considered these fees and services and has determined that the provision of these services is compatible with maintaining the independence of each firm.
  29
 
 PMB Helin Donovan, LLP2011


2010Audit Fees (1)

$
83,888


$
93,048Audit Related Fees (2)


2,392



8,192Tax Fees (3)


-



-All Other Fees


-



-
  
 (1)
“Audit Fees” represent fees for professional services provided in connection with the audit of our annual financial statements and review of our quarterly financial statements included in our reports on Form 10-Q, and audit services provided in connection with other statutory or regulatory filings.
 (2)
“Audit Related Fees” generally represent fees for assurance and related services reasonably related to the performance of the audit or review of our financial statements.
 (3)
“Tax Fees” generally represent fees for tax compliance, tax advice and tax planning services, including preparation of tax returns.  We did not engage PMB Helin Donovan for tax services during fiscal 2011 or 2010, and instead we use a third-party consulting firm.
 
 Policy for Approval of Audit and Permitted Non-Audit Services
 
 All audit and audit-related services were pre-approved by the audit committee for the fiscal year ended June 30, 2011 and 2010, which concluded that the provision of such services by PMB Helin Donovan, LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.  PMB Helin Donovan, LLP did not provide any tax services to us during fiscal 2011 or 2010.  The audit committee’s charter requires that the committee review the scope and extent of audit services to be provided, including the engagement letter, prior to the annual audit, and review and pre-approve all audit fees to be charged by the independent auditors.  In addition, all additional non-audit matters to be provided by the independent auditors must be pre-approved.
 
 On September 16, 2011, the Board terminated the audit committee and decided that the entire Board would fill the role of the audit committee.  The board of directors’ policy is to pre-approve all audit, audit-related and permissible non-audit services provided by the independent registered public accountants in order to assure that the provision of such services does not impair the auditor’s independence. These services may include audit services, audit-related services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Management is required to periodically report to the Board regarding the extent of services provided by the independent registered public accountants in accordance with this pre-approval, and the fees for the services performed to date.
 
 PART IV
 
 ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 Documents filed as part of this Report are as follows:
 
 1.           Financial Statements: The following consolidated financial statements, related notes and report of independent registered public accounting firm are incorporated by reference into Item 8 of Part II of this Annual Report on Form 10-K for the fiscal year ended June 30, 2011:
 
 Report of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets as of June 30, 2011 and 2010
F-3Consolidated Statements of Operations for the Years Ended June 30, 2011 and 2010
F-4Consolidated Statements of Cash Flows for the Years Ended June 30, 2011 and 2010
F-5Consolidated Statement of Stockholders’ Equity (Deficit) for the Years Ended June 30, 2011 and 2010
F-6Notes to the Consolidated Financial Statements
F-7
  30
 
 2.           Financial Statement Schedules: All schedules have been omitted because they are not applicable or not required, or the required information is included in the financial statements or notes thereto.
 
 3.           Exhibits.
  Exhibit

No.

Description2.1

(1)
Asset Purchase Agreement, dated May 23, 2011, among, Pacific Biomarkers, Inc., a Delaware corporation, Pacific Biomarkers, Inc., a Washington corporation, and Emerald Star Holdings, LLC, a Washington limited liability company*3.1

**
Second Amended and Restated Certificate of Incorporation of the Company, dated December 15, 2009, as amended by Amendment to Second Amended and Restated Certificate of Incorporation of the Company, dated August 31, 20113.2

(2)
Amended and Restated By-Laws of the Company, dated September 16, 20114.1

**
Specimen Stock Certificate10.1

(3)
2005 Stock Incentive Plan10.2

(4)
Form of stock option agreement under 2005 Stock Incentive Plan10.3

(5)
Form of restricted stock award agreement under 2005 Stock Incentive Plan14.1

**
Code of Ethics for Financial Officers21.1

**
Subsidiaries of the Company23.1

**
Consent of PMB Helin Donovan, LLP31.1

**
Certification by Stanley L. Schloz, President31.2

**
Certification by Curtis J. Scheel, Treasurer32.1

**
Certification by Stanley L. Schloz, President, and Curtis J. Scheel, Treasurer, of NorWesTech, Inc., pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
 **
Filed herewith
 (1)
Incorporated by reference to Exhibit to Registrant’s Current Report on Form 8-K, filed on May 25, 2011.
 (2)
Incorporated by reference to Exhibit to Registrant’s Current Report on Form 8-K, filed on September 19, 2011.
 (3)
Incorporated by reference to Appendix A of Registrant’s Definitive Proxy Statement on Schedule 14A filed on October 25, 2005.
 (4)
Incorporated by reference to Exhibit to Registrant’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2006, filed on October 3, 2006.
 (5)
Incorporated by reference to Exhibit to Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2007, filed on February 13, 2008.
  31
 
 SIGNATURES
 
 In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 27, 2011.
 
 NORWESTECH, INC.By:
/s/ Stanley L. SchlozStanley L. SchlozPresident
 
 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 Signature

Capacities

Date/s/ Stanley L. Schloz

President and Director

September 27, 2011Stanley L. Schloz

(Principal Executive Officer)/s/ Curtis J. Scheel

Secretary, Treasurer and Director

September 27, 2011Curtis J. Scheel

(Principal Financial Officer andPrincipal Accounting Officer)/s/ Fred Burstein

Director

September 27, 2011Fred Burstein/s/ Andrew Ecclestone

Director

September 27, 2011Andrew Ecclestone
  32
 
 NORWESTECH, INC.
 
 Form 10-K Annual Report
 
 Index to Consolidated Financial Statements
 
 PageReport of Independent Registered Public Accounting Firm
F-2Consolidated Financial Statements:Consolidated Balance Sheets as of June 30, 2011 and 2010
F-3Consolidated Statements of Operations for the years ended June 30, 2011 and 2010
F-4Consolidated Statements of Cash Flows for the years ended June 30, 2011 and 2010
F-5Consolidated Statement of Stockholders’ Equity (Deficit) for the years ended June 30, 2011 and 2010
F-6Notes to Consolidated Financial Statements
F-7
  F-1
 
 PMB Helin Donovan, LLP
 Consultants and Certified Public Accountants
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and
 Stockholders of NorWesTech, Inc.
 
 We have audited the accompanying consolidated balance sheets of NorWesTech, Inc. (formerly Pacific Biomarkers, Inc.) as of June 30, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2011. NorWesTech, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NorWesTech, Inc. as of June 30, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2011, in conformity with accounting principles generally accepted in the United States of America.
 
 In the year ended June 30, 2011, the Company’s board of directors made a decision to conclude efforts to seek strategic alternatives regarding the operating assets and intellectual property relating to the Company’s laboratory services business. On August 31, 2011, subsequent to the end of its fiscal year ended June 30, 2011, the Company sold substantially all of its assets, pursuant to the terms of the Asset Purchase Agreement that it entered into with Emerald Star Holdings, LLC on May 23, 2011.  The asset sale was approved by stockholders holding a majority of its outstanding shares of common stock at a special meeting of stockholders held on August 29, 2011.
 
 /s/ PMB Helin Donovan, LLP
 
 PMB Helin Donovan, LLP
 San Francisco, California
 September 26, 2011
 
 50 Francisco Street,
 Suite 120 San Francisco, CA 94133
 Phone (415) 399-1330- Fax (415) 399-9212- www.pmbhd.com
  F-2
 
 NORWESTECH, INC. [PACIFIC BIOMARKERS, INC.]
 CONSOLIDATED BALANCE SHEETS
 
 June 30,


June 30,2011


2010ASSETSCurrent assets:Cash and cash equivalents

$
870,726


$
1,861,155Assets held for sale


4,001,056



4,107,535Total assets

$
4,871,782


$
5,968,690LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
345


$
-Liabilities held for sale


5,285,828



5,930,026Total liabilities


5,286,173



5,930,026Stockholders' equity:Common stock, $0.01 par value, 30,000,000 shares authorized, 16,909,651 shares issued and outstanding at June 30, 2011, 16,669,856  shares issued and outstanding at June 30, 2010


169,096



166,699Additional paid-in-capital


27,974,271



27,723,024Accumulated deficit


(28,557,758
)


(27,851,059
)Total stockholders' equity (deficit)


(414,391
)


38,664Total liabilities and stockholders' equity

$
4,871,782


$
5,968,690
 
 See accompanying notes to these consolidated financial statements.
  F-3
 
 NORWESTECH, INC. [PACIFIC BIOMARKERS, INC.]
 CONSOLIDATED STATEMENTS OF OPERATIONS
 
 2011


2010Revenues

$
-


$
-Laboratory expenses and cost of sales


-



-Gross profit


-



-Operating expenses:Selling, general and administrative


17,615



14,663Operating loss


(17,615
)


(14,663
)Other expense


-



-Net loss from continuing operations before tax expense


(17,615
)


(14,663
)Income tax expense


-



-Net loss from continuing operations


(17,615
)


(14,663
)Discontinued operations:Loss from discontinued operations


(689,084
)


(1,367,879
)Income tax benefit


-



-Loss from discontinued operations, net of taxes


(689,084
)


(1,367,879
)Net loss after discontinued operations

$
(706,699
)

$
(1,382,542
)Net loss per share from continuing operations before income taxes

$
(0.00
)

$
(0.00
)Income tax expense (per share)


-



-Net loss per share before discontinued operarions


0.00



0.00Loss per share from discontinued operations


(0.04
)


(0.08
)Net loss per share after discontinued operations

$
(0.04
)

$
(0.08
)Weighted average common shares outstanding, basic and diluted:


16,909,651



17,528,746
 
 See accompanying notes to these consolidated financial statements.
  F-4
 
 NORWESTECH, INC. [PACIFIC BIOMARKERS, INC.]
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 2011


2010Cash flows from operating activities:Net loss from continuing operations

$
(17,615
)

$
(14,663
)Loss from discontinued operations


(689,084
)


(1,367,879
)Reconciliation of net loss to net cash provided by (used in) operating activities:Changes in assets and liabilities:Accounts payable


345



-Net cash used in operating activities (continuing operations)


(17,270
)


(14,663
)Net cash used in operating activities (discontinued operations)


(323,590
)


(638,970
)Net cash used in operating activities


(340,860
)


(653,633
)Cash flows from investing activities:Net cash provided by (used in) investing activities (continuing operations)


-



-Net cash provided by (used in) investing activities (discontinued operations)


576,557



(786,332
)Net cash provided by (used in) investing activities


576,557



(786,332
)Cash flows from financing activities:Net cash provided by (used in) financing activities (continuing operations)


-



-Net cash provided by (used in) financing activities (discontinued operations)


(1,226,126
)


1,935,714Net cash provided by (used in) financing activities


(1,226,126
)


1,935,714Net increase (decrease) in cash and cash equivalents


(990,429
)


495,749-Cash and cash equivalents, beginning of period


1,861,155



1,365,406Cash and cash equivalents, end of period

$
870,726


$
1,861,155Supplemental Information:Cash paid during the period for interest

$
450,220


$
398,641Cash paid during the period for income tax

$
-


$
-Non-cash investing and financing activities:Capital expenditures funded by capital lease borrowings

$
168,578


$
531,484Capital expenditures funded by accounts payable

$
8,695


$
193,463
 
 See accompanying notes to these consolidated financial statements.
  F-5
 
 NORWESTECH, INC. [PACIFIC BIOMARKERS, INC.]
 CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
 
 Additional





TotalCommon Stock


Treasury


Paid-in


Accumulated


Stockholders’Shares


Amount


Stock


Capital


Deficit


Equity (Deficit)Balance June 30, 2009


19,099,539


$
190,995



-


$
29,121,334


$
(26,468,517
)

$
2,843,812Restricted shares issued - compensation


53,355



534



-



34,909



-



35,443Stock options issued - compensation


-



-



-



76,175



-



76,175Common stock repurchased


(2,483,038
)


-



(1,534,224
)


-



-



(1,534,224
)Retired treasury stock


-



(24,830
)


1,534,224



(1,509,394
)


-



-Net loss for year ended June 30, 2010


-



-



-



-



(1,382,542
)


(1,382,542
)Balance June 30, 2010


16,669,856


$
166,699



-


$
27,723,024


$
(27,851,059
)

$
38,664Restricted shares issued - compensation


56,336



563



-



35,141



-



35,704Restricted shares unvested


183,309



1,833







(1,833
)






0Stock options issued - compensation


-



-



-



217,940



-



217,940Miscellaneous treasury share adjustment


150



1







(1
)Net loss for year ended June 30, 2011


-



-



-



-



(706,699
)


(706,699
)Balance June 30, 2011


16,909,651


$
169,096



-


$
27,974,271


$
(28,557,758
)

$
(414,391
)
 
 See accompanying notes to these consolidated financial statements.
  F-6
 
 NORWESTECH, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.  Organization and Basis of Presentation
 
 As of September 1, 2011, NorWesTech, Inc., a Delaware corporation (the “Company”, formerly Pacific Biomarkers, Inc.), became a non-operating public shell company, our assets primarily consist of cash and certain intellectual property assets, and our primary focus is to seek an acceptable operating company with which we can complete a business combination. Prior to September 1, 2011, we were a provider of specialty reference laboratory services to the pharmaceutical and diagnostics industries. The Company was incorporated in Delaware in May 1996. The Company’s wholly-owned subsidiaries are Bio-Newco, Inc. (formerly known as Pacific Biomarkers, Inc., a Washington corporation), Newco Tech, Inc. (formerly known as PBI Technology, Inc.), a Washington corporation, and BioQuant, Inc., a Michigan corporation. All material intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. All references in this report to “we,” “our,” “us” or similar expressions are to the Company and its wholly-owned subsidiaries.
 
 On August 31, 2011, subsequent to the end of our fiscal year ended June 30, 2011, we sold substantially all of our operating assets to Emerald Star Holdings, LLC pursuant to the terms of the Asset Purchase Agreement that we entered into on May 23, 2011.  The asset sale was approved by stockholders holding a majority of our outstanding shares of common stock at our special meeting of stockholders held on August 29, 2011.  Under the terms of the Asset Purchase Agreement, at closing of the asset sale we have approximately $2.32 million in cash from Emerald Star.  See “Note 3. Discontinued Operations” below.
 
 Following the asset sale, we changed our name to NorWesTech, Inc. from Pacific Biomarkers, Inc.  We also changed our telephone number to (206) 436-3945.  We have an arrangement with Emerald Star for us to continue using its office located at 220 West Harrison Street, Seattle, Washington 98119 as our mailing address and for holding our corporate records, until such time as we establish a new executive office.
 
 2.   Summary of Significant Accounting Policies
 
 Principles of Consolidation
 
 These consolidated financial statements include our consolidated financial position, results of operations, and statements of stockholders’ equity and cash flows. All material intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.
 
 Cash and Cash Equivalents
 
 Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased.
 
 Short-term bank deposit
 
 Bank deposits with original maturities of more than three months but less than one year are presented as part of short-term investments. Deposits are presented at their cost including accrued interest. Interest on deposits is recorded as financial income.
 
 Accounts Receivable
 
 Trade accounts receivable are stated at amounts billed to and due from clients, net of an allowance for doubtful accounts. Credit is extended based on evaluation of a client’s financial condition, and collateral is not required.  In determining the adequacy of the allowance, management identifies specific receivables for which collection is not certain and estimates the potentially uncollectible amount based on the most recently available information. We write off accounts receivable when they are determined to be uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. At June 30, 2011, we deemed no accounts receivable uncollectible.
  F-7
 
 Other accounts receivable consist of non-trade receivables such as state business and occupation tax refunds, notes receivable and employee advances. These receivables are stated at amounts per invoice or agreement and due from other parties, net of an allowance for doubtful accounts. They are evaluated with the same methods as utilized for trade accounts receivable. At June 30, 2011 and 2010, we had approximately $73,000 and $6,500 in other receivables, respectively.
 
 The balance of the bad debt allowance was approximately $34,000 for the fiscal years ended June 30, 2011 and June 30, 2010.
 
 Inventory
 
 Inventory is stated the lower of cost or market. Cost is determined on a first in, first out (FIFO) basis.  Our inventory consists of chemical reagents used in our laboratory testing.
 
 Long –Lived Assets
 
 Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the remaining term of the lease. The cost and related accumulated depreciation of property or equipment sold or otherwise disposed of are removed from the accounts and the resulting gains or losses are included in the statement of operations.
 
 In accordance with the U.S. GAAP, all of our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered. If the sum of the expected future cash flows is less than the carrying amount of the asset, a loss is recognized. As of June 30, 2011 and 2010, no impairment was deemed necessary.
 
 Restricted Cash
 
 At June 30, 2011, restricted cash of approximately $150,000 was classified as a non-current asset, pledged to support a bank credit facility. The bank credit facility was required to be issued on a capital equipment lease.
 
 Client Advances
 
 We receive advances from certain clients to perform consulting, laboratory services, and clinical studies. We apply these advances as payments to invoices as work is completed until the amounts advanced are exhausted. Advances are also applied to invoices for setup and administrative fees, billed upon contract approval. These setup and administrative fees are deferred as unearned income when billed and amortized over the life of the project.
 
 Treasury Stock
 
 Shares of common stock repurchased by us are recorded at cost and are included as a separate component of stockholders’ equity. In December 2009 we retired all our treasury stock and this stock is no longer considered treasury stock, but returned to authorized and unissued stock. At June 30, 2011 and June 30, 2010, the total value of our treasury stock was zero.
  Income Taxes
 
 We accounts for income taxes under an asset and liability approach. This process involves calculating the temporary and permanent differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The temporary differences result in deferred tax assets and liabilities, which are recorded on our consolidated balance sheets. We must assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent we believes that recovery is not likely, we must establish a valuation allowance. Changes in the valuation allowance in a period are recorded through the income tax provision on the consolidated statements of operations. The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. We recognized no material adjustments in the liability for unrecognized income tax benefits.  At the adoption date of January 1, 2007, we had $176,639 of unrecognized tax benefits, none of which would affect its effective tax rate if recognized.
  F-8
 
 Assets Sold or Held for Sale
 
 We separate major classes of assets held for sale within twelve months according to ASC Topic 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets). Major classes of assets and liabilities classified as held for sale shall be separately disclosed either on the face of the statement of financial position or in the notes to financial statements including a description of the facts and circumstances leading to the expected disposal, the expected manner and timing of the that disposal, and, if not separately presented on the face of the statement, the carrying amount(s) of the major classes of assets and liabilities included as part of the disposal group.
 
 Our future cash flow estimates used to test recoverability have taken into account the possible outcomes that existed at the balance sheet date of June 30, 2011, including the future sale of these assets.  We have determined that none of the Assets Held for Sale were impaired and no adjustment to their carrying amounts was warranted.
 
 We estimate a gain from the Assets Held for Sale of $2,251,669 to be recognized August 31, 2011, the closing date of the asset sale to Emerald Star.
 
 Reclassifications
 
 Certain amounts in the June 30, 2010 consolidated financial statements have been reclassified to conform to the June 30, 2011 discontinued operations presentation. These reclassifications had no effect on previously reported results of accumulated deficit.
 
 Fair Value Measurements
 
 Fair value is defined as the price that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP also establishes a framework for measuring fair value, and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation.
 
 The three-tier hierarchy of inputs is summarized below.
 
 Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
 Level 2 Inputs – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
 Level 3 Inputs – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing our own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
  F-9
 
 The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.  All assets and liabilities are measured at fair value on a recurring basis by level within the fair value hierarchy as reported on the statements of assets and liabilities.
 
 Debt Financing – Fair Value of Repurchased Shares
 
 We applied ASC Topics 820 and 825 (SFAS 157, Fair Value Measurements) to assess the fair value of 2,391,906 shares of common stock that we repurchased during the first quarter of fiscal 2010. On September 1, 2009, we obtained $4,000,000 in debt financing, and pursuant to the terms of the loan agreement, we were required to use a portion of the loan proceeds to repurchase 2,391,906 shares of common stock at an aggregate price of $1,674,336 ($0.70 per share). At the time we negotiated the term sheet with Mr. Giles, the closing trading price for our common stock ranged from $0.60 to $0.79 per share, and on September 1, 2009 (the closing date of the loan transaction), the closing trading price of our common stock was $0.95.
 
 We recorded the repurchased shares on our balance sheet as treasury stock having a fair value of $1,468,609 ($0.614 per share). We determined fair value using a bid-ask regression model which uses Level 2 inputs for the determination of fair value, which take into account the quoted market price of the common stock and historic trading volumes. We recorded $205,725 on our balance sheet as a discount on the secured note, representing the difference between the fair value of the common stock repurchased ($1,468,609) and the repurchase price ($1,674,336). The discount on the Note is being amortized as interest expense using the effective interest method over the 48-month term of the Note. At June 30, 2011, the unamortized discount on the Note was approximately $83,719.
 
 Stock-Based Compensation
 
 We use the Black-Scholes option-pricing model to estimate the calculated value of our share-based payments. Stock options are valued as of the date of grant. The volatility assumption used in the Black-Scholes formula is based on the volatility of our common stock. The following assumptions were used to compute the fair value of option grants for the fiscal years ended June 30:
 
 2011


2010Expected volatility


117-148
%


148-151
%Expected dividend yield


0
%


0
%Risk-free interest rate


2.54-2.96
%


3.21-3.53
%Expected life

10 years


10 years
 
 We granted 1,469,900 stock options (including 30,000 stock options to non-employees) under our incentive compensation plan for the fiscal year ended June 30, 2011, compared to 351,700 stock options under our incentive compensation plan for the fiscal year ended June 30, 2010. We issued no incentive-based restricted shares for the fiscal year ended June 30, 2011, compared to 87,500 incentive-based restricted shares for the fiscal year ended June 30, 2010.
 
 According to the change in ownership provided by the asset sale, all outstanding stock options and restricted stock awards automatically accelerated to be 100% vested and exercisable immediately prior to the close of the asset sale. None of the outstanding stock options were exercised as their exercise prices were above the market prices for the shares.  Subsequently, all unexercised stock options were cancelled on August 31, 2011, the closing date of the asset sale.
 
 Revenue Recognition
 
 We recognize revenue in the period that the related services are performed and collectability is reasonably assured.  During the fiscal years ended June 30, 2011 and 2010, we derived substantially all of our revenues from laboratory services. Service contracts generally take the form of fixed-price contracts. Under fixed-price contracts, revenue is recognized as services are performed, with performance generally assessed using output measures, such as units-of-work performed to date as compared to the total units-of-work contracted. Changes in the scope of work generally result in a renegotiation of contract pricing terms and/or a contract amendment. Renegotiated amounts are not included in net revenues until earned, and realization is assured. Advance payments on service contracts are treated as a deposit and applied to periodic billing during the contract period. Setup and administrative fees are billed upon contract approval. Revenues from setup and administrative fees are amortized over the life of the contract. Historically, costs are not deferred in anticipation of work on contracts after they are awarded, but instead are expensed as incurred. All out-of-pocket costs are included in expenses.
  F-10
 
 Net Loss Per Share
 
 Basic loss per share is based upon the weighted average number of shares of our outstanding common stock. Diluted loss per share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of outstanding stock options and warrants using the “treasury stock” method, which excludes treasury shares. There were no treasury shares at June 30, 2011.
 
 For the years ended June 30, 2011 and 2010, we did not include common stock equivalents related to our (i) in-the-money, vested options and (ii) in-the-money warrants in the computation of diluted loss per share because we had net losses in these periods and the effect would be anti-dilutive.
 
 The following table shows for the comparable periods the numerator (net loss) and the denominator (number of shares) used in the basic and diluted EPS calculations:
 
 Years EndedJune 30,2011


2010Numerator-basic and diluted net loss before discontinued operations

$
(17,615
)

$
(14,663
)Numerator-basic and diluted net loss after discontinued operations


(706,699
)


(1,382,542
)Denominator-basic or diluted weighted average number of common shares outstanding


16,909,651



17,528,746Net loss per share before discontinued operations-basic and diluted


0.00



0.00Net loss per share after discontinued operations-basic and diluted

$
(0.04
)

$
(0.08
)
 
 Comprehensive Income
 
 We have adopted U.S. GAAP standards for reporting comprehensive income and its components in the financial statements. Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under generally accepted accounting principles are excluded from net income. For the years ended June 30, 2011 and 2010, our comprehensive income (loss) equaled our net income (loss). Accordingly, a statement of comprehensive income (loss) is not presented.
 
 Use of Estimates
 
 In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
  F-11
 
 Recent Accounting Pronouncements
 
 In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).” The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS. The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. We do not expect that the adoption of ASU 2011-04 will have a material impact on our consolidated financial statements.
 
 In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” Specifically, the new guidance allows an entity to present components of net income or other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and is to be applied retrospectively. We do not expect that the adoption of ASU 2011-05 will have a material impact on our consolidated financial statements.
 
 Accounting Standards Issued But Not Yet Adopted
 
 Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on our financial position, results of operations and cash flows.
 
 3. Discontinued Operations
 
 On August 31, 2011, we sold substantially all of our operating assets and liabilities related to our core business of providing specialty reference laboratory services and clinical biomarker services to Emerald Star Holdings, LLC, pursuant to the Asset Purchase Agreement we entered into on May 23, 2011.  The assets that we sold included all of our accounts receivable, customer contracts, equipment, intellectual property (other than intellectual property held by Newco Tech, Inc.), name and website, permits, office and equipment leases, other contracts and other rights, and at closing, Emerald Star assumed substantially all of the liabilities related to these assets and the business that we sold, including our accounts payable, obligations under our leases and contracts, tax liabilities, the remaining obligations under our $4 million secured loan, and all employee-related liabilities.
 
 The results of operations for this sold business have been classified as “discontinued operations” in the consolidated statements of operations and cash flows and the assets and associated liabilities have been classified as “held for sale” in the consolidated balance sheets for the fiscal years ended June 30, 2011 and 2010, respectively. At closing of the asset sale, we have $2,320,013 in cash after purchase price adjustments.  The loss from “continuing operations” presented in our financial statements consists of direct expenses of maintaining the corporate structure of the two retained inactive wholly-owned subsidiaries –Newco Tech, Inc. (formerly as PBI Technology, Inc.), and Bioquant, Inc.  In addition, all legal and other fees associated with maintaining the technology assets of Newco Tech, Inc. are included in these expenses.
 
 The following table illustrates the reporting of the discontinued operations on the face of the Statements of Operations for the years ended June 30, 2011, and June 30, 2010.
 
 2011


2010Loss from continuing operations before income taxes

$
(17,615
)

$
(14,663
)Provision for income taxes


-



-Loss from continuing operations


(17,615
)


(14,663
)Discontinued operations:Loss from discontinued operations


(689,084
)


(1,367,879
)Income tax benefit


-



-Loss from discontinued operations, net of taxes


(689,084
)


(1,367,879
)Net loss

$
(706,699
)

$
(1,382,542
)
  F-12
 
 The assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations,” respectively, in the accompanying Balance Sheets at June 30, 2011 and June 30, 2010, and consist of the following:
 
 2011


2010Assets of discontinued operations:Accounts receivable, net

$
2,252,034


$
1,852,987Other receivable, net


72,878



6,500Inventory


134,963



239,863Prepaid expenses and other assets


327,632



698,421Property and equipment, net


1,063,258



1,309,764Restricted cash


150,291



-Total assets

$
4,001,056


$
4,107,535Liabilities of discontinued operations:Accounts payable

$
346,340


$
605,944Accrued liabilities


536,550



632,429Advances from customers


842,248



408,455Capital lease obligations


343,956



200,806Secured note, net of discount


917,108



1,015,603Total liabilities

$
5,285,828


$
5,930,026
 
 4.           Concentration of Credit Risk
 
 The following disclosure relates to our laboratory services business, which is classified as discontinued operations. Our largest client in fiscal 2011 individually accounted for approximately 16% of our total revenues. Our largest client in fiscal 2010 individually accounted for approximately 27% of our total revenues. This was the same client in each fiscal period. Component clients included in the largest client calculation may vary from period to period. As of June 30, 2011 and 2010, respectively, approximately 21% and 38% of our accounts receivable balance were from the two largest clients at that time. These were the same clients in each fiscal period.
 
 The majority of our clients are pharmaceutical companies, many of which are on the list of Fortune 500 companies. For our revenue calculations, we aggregate revenues we receive from several divisions within one pharmaceutical company client as a single client. For the year ended June 30, 2011, 26% of our revenue was derived from Fortune 500 clients compared to 37% for the year ended June 30, 2010. We believe that our exposure to concentration of credit risk is very low considering the financial strength of our clients.
 
 During fiscal 2011 and 2010, we maintained cash in three insured commercial accounts and one uninsured investment account at major financial institutions.  Although the financial institutions are considered creditworthy and have not experienced any losses on client deposits, our cash balance exceeded Federal Deposit Insurance Corporation (FDIC) limits by $472,022 at June 30, 2011 and by $1,361,155 at June 30, 2010.
  F-13
 
 5.           Prepaid Expenses and Other Assets– Discontinued operations
 
 Prepaid expenses consisted of the following at June 30:
 
 2011


2010Insurance

$
145,761


$
141,236Service Contracts


26,801



26,676Trade Show and Conference Fees


4,050



12,083Security and Lease Deposits


66,508



9,759Investments


-



468,619Loan Payment


84,512



-Other


-



40,048$
327,632


$
698,421
 
 All of the prepaid expenses and other assets were purchased by Emerald Star on August 31, 2011.
 
 6.           Property and Equipment– Discontinued operations
 
 Property and equipment consisted of the following at June 30:
 
 2011


2010Laboratory equipment

$
2,461,276


$
2,307,641Computer equipment


433,216



419,328Internal use software


233,477



233,477Office furniture and equipment


193,931



217,645Leasehold improvements


238,262



238,262Total property and equipment


3,560,162



3,416,353Less: accumulated depreciation and amortization


2,496,904



2,106,589Net property and equipment

$
1,063,258


$
1,309,764
 
 At June 30, 2011 and 2010, respectively, these amounts included assets under capital leases of $1,423,656 and $1,309,311, and related accumulated amortization of $719,417 and $473,783.  Depreciation expense for the fiscal years ended June 30, 2011 and 2010 was $414,028 and $343,716, respectively.
 
 All of the property and equipment assets were purchased by Emerald Star on August 31, 2011.
 
 7.  Accrued Liabilities– Discontinued operations
 
 Accrued liabilities consisted of the following at June 30:
 2011


2010Accrued bonuses

$
-


$
110,462Accrued payroll and related payroll taxes


173,671



195,539Accrued insurance


95,715



77,680Accrued vacation


93,312



96,745Accrued audit fees


77,000



73,000Accrued board of directors fees


41,625



27,500Accrued interest expense


13,336



5,433Other


41,891



46,070$
536,550


$
632,429
 
 All of these accrued liabilities were assumed by Emerald Star on August 31, 2011.
  F-14
 
 8.  Capital Lease Obligations– Discontinued operations
 
 During fiscal 2011 and 2010, we leased laboratory and other equipment under capital lease arrangements.  The obligations under capital leases had interest rates ranging from approximately 6.5% to 19.35% and matured at various dates through 2015. As of June 30, 2010, the annual future minimum lease payments for fiscal years subsequent to June 30, 2011 were as follows:
 
 2012

$
399,5442013


234,3092014


40,6002015


21,815Total minimum payments


696,268Less: amount representing interest


(81,260
)Obligations under capital leases

$
615,008Total minimum payments

$
615,008Less: current portion


343,956Long-term portion

$
271,052
 
 In January 2011, we obtained financing for certain laboratory equipment under a capital lease. The cost of equipment under the capital lease was approximately $294,000 and is included in our balance sheet as property and equipment. The terms of the capital lease require an irrevocable standby letter of credit from a bank. To obtain this letter of credit facility, the bank required us to place $150,000 in deposit with the bank to serve as collateral for the credit facility, which has earned interest of $291 for the fiscal year. There are restrictions on withdrawal as long as the credit facility is in place. This capital lease has a term of two years.
 
 All of these lease obligations were assumed by Emerald Star on August 31, 2011.
 
 9.  Notes Payable– Discontinued operations
 
 Secured Note
 
 Effective September 1, 2009, we issued a secured Note in connection with our $4 million debt financing, bearing interest at 12% per annum and with a maturity date of August 31, 2013. We recorded $205,725 on our balance sheet as a discount on the Note (as the difference between the fair value of the common stock that we repurchased with the proceeds from the debt financing and the repurchase price) and we amortized this discount as interest expense using the effective interest method over the original 48-month term of the Note. With this discount, the effective interest rate on the Note was 12.727%.
 
 In connection with the Note, the terms were:
 
 ·
Interest:  The Note bears interest at 12% per annum.
 
 ·
Monthly payments: The loan is due and payable over 48 months, with the first 8 months being interest only ($40,000 per month) beginning September 30, 2009, and thereafter (beginning May 31, 2010) 40 monthly payments of principal and interest ($121,822 per month).
 
 ·
Additional Loan Rights: During the first 12 months of the term of the loan, we had the right, in our sole discretion, to obtain an additional $500,000 loan from the lender on the same terms.  We did not exercise this right.
 
 ·
Security: The loan was secured by a security interest in all of our assets. In addition, each of our subsidiaries guaranteed our obligations under the loan and granted a security interest in all of its assets.
  F-15
 
 Modification of Debt in a Nontroubled Situation
 
 Effective October 1, 2010, we agreed to a modification of terms on the Note, to extend the maturity date on a portion of the Note to March 31, 2015 (resulting in a lower payment and interest amount each period from $121,822 to $104,645) and to add a balloon payment of $600,000 due at the end of the extended term of 55 months. The effective interest rate on the modified portion of the debt increased from 12.727% to 12.735%.
 
 Effective December 1, 2010, we agreed to a second modification to the Note, to reduce the interest rate on the non-extended portion of the Note from 12.0% to 11.5% (resulting in a reduced monthly payment from $104,645 to $104,011).  The effective interest rate on the modified portion of the debt decreased from 12.725% to 12.126%.
 
 Because neither the first nor the second modification was a troubled debt restructuring, we applied the 10% significance test in ASC 470-50-40-10 (EITF 96-19) in each case to determine whether the original debt should be accounted for as an extinguishment.  The results of these tests are -.31% and .03%, respectively, less than the 10% significance and therefore the original debt has not been accounted for as an extinguishment in either modification.
  Modification I


Modification IIOriginal effective rate


12.727
%


12.725
%Present value of revised cash flows discounted at original rate

$
3,629,694


$
3,485,839Carrying amount of debt (modified)

$
3,618,412


$
3,486,820Difference


(0.31
)%


0.03
%
 
 Summary of Secured Note
 
 The summary of secure Note is presented below:
 
 2011


2010Secured Note:Secured Note to Mr. Giles, secured by all assets, interest at 12%, monthly payments of $40,000 interest only for 8 months, monthly payments of $121,822 principal and interest for 40 months.  Two amendments were made to the secured note, effective October 1, 2010 and Effective December 1, 2010.  See the amendment details in Modification of Debt in a Nontroubled Situation section above.

$
3,835,538


$
4,000,000Adjustments to Loan Balance – prepaid principal amount $85,144 less minor principal balance adjustment per loan schedule $633


84,511



-Less: Principle Payments


(890,648
)


(164,462
)Less: Fair value assigned to repurchased shares of common stock (Note Discount)


(83,719
)


(142,966
)Note Balance

$
2,945,682


$
3,692,572Less: Current Portion


(917,108
)


(1,015,603
)Long-Term Portion

$
2,028,574


$
2,676,969
 
 Future maturities on long-term debt as of June 30, 2011 are as follows:
 
 Fiscal Year 2012

$
943,173Fiscal Year 2013


1,058,176Fiscal Year 2014


310,259Fiscal Year 2015


717,793Total

$
3,029,401
  F-16
  As of June 30, 2011, the amount of the long-term note payable was stated at contract amount which approximates fair value based on current interest rates.
 
 On August 31, 2011, Emerald Star assumed the Secured Note payment obligations and the security interests in our assets and in the assets of our subsidiaries were terminated.
 
 10.   Income Taxes
 
 The income tax expense reconciled to the tax expense computed at the statutory rate was approximately as follows during the years ended June 30:
 
 2011


2010Income Tax/(Benefit) computed at federal statutory rate

$
(240,000
)

$
(470,000
)Permanent differences


24,000



28,000Other


309,000



(125,000
)Increase/(Decrease) in valuation allowance

$
(93,000
)

$
567,000
 
 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of our net deferred tax assets are approximately as follows at June 30:
 
 Net deferred tax asset:Net operating loss carryforward

$
5,475,000


$
5,678,000Research and experimentation credit


326,000



326,000Stock based compensation


320,000



234,000Accrued liabilities


20,000



21,000Allowance for bad debts


12,000



12,000Depreciation and amortization


21,000



(4,000
)6,174,000



6,267,000Less valuation allowance


(6,174,000
)


(6,267,000
)$
-


$
-
 
 At June 30, 2011, operating loss carryforwards of approximately $16 million expiring through 2031 are available to offset future taxable income. For financial reporting purposes, a valuation allowance of approximately $6,174,000 has been recognized to offset the deferred tax asset due to the uncertainty of future utilization of net operating loss (NOL) carryforwards and realization of other deferred tax assets. For the fiscal year ended June 30, 2011, the valuation allowance was decreased by approximately $93,000. For the fiscal year ended June 30, 2010, the valuation allowance was increased by approximately $567,000, respectively.
 
 Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than 50% change in ownership). We estimate a gain from the Assets Held for Sale of approximately $2,251,669 to be recognized August 31, 2011, the date the asset purchase closed.  This gain will produce an estimated tax asset of approximately $765,568 which will be booked to deferred tax asset and will consume the majority of the NOL attributable to Bio-Newco, Inc. (formerly Pacific Biomarkers, Inc., a Washington corporation). These estimates are based on the results of operations through June 30, 2011 and will change as a result of continued operations through the date of the asset purchase on August 31, 2011.  As a result of these provisions, the results of the asset sale, utilization of the NOL and credit carryforwards may be limited.
  F-17
 
 11.  Stock Incentive Plans and Stock Based Compensation
 
 1996 Stock Incentive Plan
 
 Our 1996 Stock Incentive Plan (the “1996 Plan”) provided for the issuance of up to 1,800,000 shares of common stock under this Plan. Options granted under the 1996 Plan may have been either incentive stock options within the meaning of Section 422(b) of the Internal Revenue Code, or nonqualified options. Our 1996 Stock Incentive Plan expired by its terms on July 9, 2006, but outstanding options and awards previously granted under the 1996 Plan continued in accordance with their terms.  Upon closing of the asset sale on August 31, 2011, all outstanding options under the 1996 Plan terminated.
 
 2005 Stock Incentive Plan
 
 We have a Stock Incentive Plan (the “2005 Plan”) with 3,000,000 shares of common stock reserved for issuance under this Plan. Options granted under the Plan may be either incentive stock options within the meaning of Section 422(b) of the Internal Revenue Code, or nonqualified options. We may also grant restricted stock awards. The option price of each incentive stock option granted shall not be less than the fair market value of the underlying common stock on the grant date, and will expire no later than ten years following the date of grant. With respect to nonqualified options, the exercise price and term shall be determined at the discretion of the Board. However, the exercise price shall not be less than the fair market value of the underlying common stock on the grant date, and the term will not exceed a period of ten years.  The options generally vest over a range of three to five years. As of June 30, 2011, 319,168 shares of common stock remained available for future grant under the 2005 Plan.  Upon closing of the asset sale on August 31, 2011, all outstanding options under the 2005 Plan terminated and the underlying shares returned to the plan, available for future reissuance.
 
 The following is a summary of the activity in the 1996 and 2005 Plans for the year ended June 30, 2011:
 
 Stock Options
 
 Number of

Options


Weighted

Average

Exercise

Price per

share


Weighted

Average

Remaining

Contractual

Life

(in years)


Aggregate

Intrinsic

ValueOutstanding at July 1, 2009


1,430,385


$
0.76Granted


351,700



0.77Cancelled/Forfeited


(21,607
)


0.68Reinstated


121,178



0.81Outstanding at July 1, 2010


1,881,656



0.76Granted


1,469,900



0.36Exercised


(-
)


-Cancelled/Forfeited


(294,265
)


0.54Outstanding at June 30, 2011


3,057,291



0.59



6.6


$
-Vested and expected to vest at June 30, 2011


3,057,291



0.59



6.6



-Exercisable at June 30, 2011


1,924,841


$
0.69



3.3


$
-
 
 F-18
 
 As of June 30, 2011, outstanding options had exercise periods which expire over the following time periods:
 
 Weighted AverageRemaining LifeExercise Price


Number Outstanding


(in years)


Number Exercisable$
0.27



30,000



9.5



-$
0.34



762,425



9.0



254,600$
0.39



600,000



9.3



150,000$
0.41



181,158



7.3



166,100$
0.51



21,922



1.2



21,922$
0.60



139,325



8.0



93,092$
0.70



1,000



3.2



1,000$
0.81



40,761



2.4



40,761$
0.81



765,168



2.6



765,168$
0.86



125,000



4.0



125,000$
0.88



200,000



8.3



116,666$
0.90



1,000



2.5



1,000$
0.90



1,000



2.7



1,000$
0.96



65,000



3.5



65,000$
0.99



95,532



5.2



95,532$
1.01



1,000



3.0



1,000$
1.15



25,000



4.5



25,000$
1.75



2,000



2.4



2,0003,057,291



6.6



1,924,841
 
 As of June 30, 2011, the weighted average contractual life remaining of options outstanding at June 30, 2010 was approximately 7 years.  Upon closing of the asset sale on August 31, 2011, all outstanding stock options automatically terminated.
 
 Restricted Stock
 
 Number of RS

awards


Weighted

Average Grant

Date Fair Value

per shareRS unvested at July 1, 2009


-


$
-Granted


293,000



0.64Vested


(53,355
)


0.66Forfeited


-



-RS unvested at July 1, 2010


239,645



0.63Granted


-



-Vested


(53,336
)


0.63Forfeited


-



-RS unvested at June 30, 2011


183,309


$
0.63
 
 Stock Based Compensation
 
 We granted 839,900 equity-based payment awards with an exercise price of $0.34, 600,000 equity-based payment awards with an exercise price of $0.39 and 30,000 equity-based payment awards to non-employees with an exercise price of $0.27 under our incentive compensation plan for the fiscal year ended June 30, 2011, compared to 151,700 equity-based payment awards with an exercise price of $0.60 and 200,000 equity-based payment awards with an exercise price of $0.88 for the fiscal year ended June 30, 2010. The fair value of options granted during fiscal 2011 was $496,768. The fair value of options granted during fiscal 2010 was $248,788. We did not grant any incentive-based restricted shares for the fiscal year ended June 30, 2011, compared to 293,000 incentive-based restricted shares for the fiscal year ended June 30, 2010 at fair value of $186,300.
  F-19
 
 Compensation expense for share-based awards for the fiscal years ended June 30, 2011 and 2010 was included in our consolidated statements of operations – discontinued operations as follows:
 
 Fiscal year endedJune 30, 2011


June 30, 2010Cost of sales

$
15,844


$
6,743Selling and administrative expenses


237,800



104,875Total compensation expense

$
253,644


$
111,618
 
 Modification of Stock Based Compensation
 
 In August 2011 our outstanding stock options and restricted stock awards were automatically modified under the terms of our stock plans, in conjunction with the asset sale. This modification consisted of automatic accelerated vesting of all outstanding stock options and restricted stock awards and subsequent cancellation of stock options. These modifications resulted in additional compensation expense of $455,614 that we recognized in the first quarter of fiscal 2012. We accounted for the modifications of equity-based awards in accordance with ASC Topic 718.
 
 12.  Stock Purchase Warrants
 
 The following is a summary of the activity in stock warrants for the year ended June 30, 2011:
 
 Number of Shares


Weighted Average

Exercise Price per

shareOutstanding at June 30, 2010


2,566,677


$
0.72Issued


-



-Exercised


-



-Expired


1,108,298



1.05Outstanding at June 30, 2011


1,458,379


$
0.46Exercisable at June 30, 2011


1,458,379


$
0.46
 
 As of June 30, 2011, outstanding stock warrants had exercise periods which expire over the following time periods:
 
 Weighted AverageRemaining LifeExercise Price


Number Outstanding


(in years)


Number Exercisable$
0.50



100,000



2.18



100,000$
0.51



117,625



1.16



117,625$
0.85



5,000



2.38



5,000$
0.95



5,000



2.14



5,000$
0.95



5,000



2.34



5,000$
1.00



5,000



2.18



5,000$
1.10



5,000



2.12



5,000$
1.17



20,000



4.36



20,000$
1.17



5,000



4.44



5,000$
1.17



10,000



4.53



10,000$
1.60



1,180,754



0.19



1,180,7541,458,379



2.55



1,458,379
  F-20
 
 We did not have any "in the money" options or warrants as of June 30, 2011; therefore the intrinsic value is zero.
 
 13.  Commitments and Contingencies
 
 Certain conditions may exist on the date the financial statements are issued, which may result in a loss to us but which will only be resolved when one or more future events occur or fail to occur. Our management and our legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, our legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
 
 If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
 
 Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
 
 Operating Leases
 
 On January 20, 1998, we entered into a non-cancelable operating lease for office facilities and laboratory space. Under the current lease we are responsible for our proportionate share of real estate taxes, insurance and common area maintenance costs. The office lease was renewed per agreement with the lessor on April 1, 2007, effective November 1, 2007. The monthly rent under the lease was $22,278, and the monthly rental rate increases approximately three percent on each November 1 for the remainder of the term. The lease term expires October 31, 2012.  This lease was assigned to Emerald Star on August 31, 2011.
  On August 1, 2009, we entered into a non-cancelable operating lease for our biomarker services laboratory. Under the current lease we are responsible for our proportionate share of real estate taxes, insurance and common area maintenance costs. The current monthly rent under the lease is $5,245. The lease term was 24 months and expired August 31, 2011.  We vacated these premises on August 29, 2011.
 
 Rent expense was $328,420 and $324,296 for the years ended June 30, 2011 and 2010, respectively.
 
 Security Interest
 
 In connection with our secured note agreement, we granted to Mr. Giles a security interest in all of our assets. In addition, each of our subsidiaries guaranteed our obligations under the loan and granted a security interest in all of its assets. The loan agreement provides a waiver of security interest in purchases of equipment that may be financed by other means such as leasing.  On August 31, 2011, these security interests in our assets and in the assets of our subsidiaries were terminated.
 
 14.  Retirement Plan
 
 We have a 401(k) Plan that was reopened to employees in May 2005. The 401(k) Plan covers all employees over the age of 21 with 1,000 hours of service in a 12-month eligibility computation. We make a contribution equal to one-half of the employee’s contribution up to the maximum of 6%. We temporarily suspended the company match effective January 1, 2011. This measure was taken as part of our overall company expense reduction effort that began in December 2010. We can make discretionary contributions as determined by its board of directors, not to exceed the amount permissible under the Internal Revenue Code. We have not made any discretionary contributions since the plan was reopened. For the fiscal year ended June 30, 2011, our matching expense was $43,772 and 401(k) payable balance as of June 30, 2011 was $0. The plan was transferred to Emerald Star on August 31, 2011.
  F-21
 
 15. Subsequent Events
 
 As described in Note 3 above, on August 31, 2011, we consummated the sale of our operating assets to Emerald Star.  We include disclosures in the notes and elsewhere in this report about the asset sale, which occurred subsequent to the end of the 2011 fiscal year.
 
 As described in Note 11 above, regarding “Modification of Stock Based Compensation”, immediately prior to closing of the asset sale, all outstanding stock options and restricted stock awards accelerated to be 100% vested and exercisable immediately prior to the close of the asset sale.  None of the outstanding stock options were exercised as their exercise prices were above the market prices for the shares.  Subsequently, all unexercised stock options were automatically terminated on August 31, 2011.  For any employees whose restricted stock awards vested, the board of directors authorized the cancellation of a portion of their restricted shares in satisfaction of the withholding taxes due on the vesting of such shares. A total of 113,500 shares of stock were cancelled.
 
 On September 16, 2011, our newly constituted board of directors approved compensation for the directors, consisting of a grant of performance based stock options and cash compensation. Specifically, the Board approved an award of 3-year stock options for 100,000 shares of common stock to each director at an exercise price of $0.30 per share. These options are performance based such that they would vest and become exercisable only upon consummation of an acquisition transaction with an operating company, with the effect of the transaction that NorWesTech would longer be deemed a shell company. The Board also approved monthly cash compensation to each director in the amount of $1,500.
  F-22