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SECURITIES AND EXCHANGE COMMISSION
þ | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
o | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
Florida | 59-2007840 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
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(In thousands, except share and per share data)
January 31, 2010 | July 31, 2009 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 171 | $ | 886 | ||||
Royalties and other receivables, net | 285 | 60 | ||||||
Inventories, net | 845 | 911 | ||||||
Advances to contract manufacturer | 93 | 144 | ||||||
Prepaid expenses, deposits, and other current assets | 18 | 75 | ||||||
Total current assets | 1,412 | 2,076 | ||||||
Tooling and equipment, net | 398 | 460 | ||||||
Total assets | $ | 1,810 | $ | 2,536 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Notes payable — other | $ | — | $ | 34 | ||||
Accounts payable and accrued expenses | 293 | 242 | ||||||
Customer deposits | 9 | 9 | ||||||
Total current liabilities | 302 | 285 | ||||||
Total liabilities | $ | 302 | $ | 285 | ||||
Commitments (Note 10) | — | — | ||||||
Shareholders’ equity | ||||||||
Series B Preferred Stock, par value $1.00 per share; 100 shares authorized, issued and outstanding; liquidation preference $10 | — | — | ||||||
Series C Convertible Preferred Stock, par value $1.00 per share; 62,048 shares authorized, issued and outstanding; liquidation preference $62 | 62 | 62 | ||||||
Series D Convertible Preferred Stock, par value $1.00 per share; 5,500 shares authorized; 2,891 shares issued and outstanding; liquidation preference $4,337 | 3 | 3 | ||||||
Common Stock, par value $0.01 per share; 100,000,000 shares authorized; 68,423,165 and 68,385,637 shares issued and outstanding | 684 | 684 | ||||||
Additional paid-in-capital | 21,381 | 21,327 | ||||||
Accumulated deficit | (20,600 | ) | (19,803 | ) | ||||
Accumulated other comprehensive loss | (22 | ) | (22 | ) | ||||
Total shareholders’ equity | 1,508 | 2,251 | ||||||
Total liabilities and shareholders’ equity | $ | 1,810 | $ | 2,536 | ||||
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(In thousands, except per share amounts)
Three months ended January 31, | Six months ended January 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues | ||||||||||||||||
Product sales, net | $ | 154 | $ | 117 | $ | 309 | $ | 123 | ||||||||
Royalties | 45 | 93 | 87 | 156 | ||||||||||||
Research, consulting and warranty | — | 1 | — | 2 | ||||||||||||
Total revenues | 199 | 211 | 396 | 281 | ||||||||||||
Operating costs and expenses | ||||||||||||||||
Cost of sales | 83 | 56 | 150 | 61 | ||||||||||||
Selling, general and administrative | 453 | 439 | 989 | 944 | ||||||||||||
Research and development | 15 | 38 | 55 | 91 | ||||||||||||
Total operating costs and expenses | 551 | 533 | 1,194 | 1,096 | ||||||||||||
Operating loss | (352 | ) | (322 | ) | (798 | ) | (815 | ) | ||||||||
Interest expense, net | — | (3 | ) | — | (8 | ) | ||||||||||
Other (expense) income, net | (10 | ) | — | 1 | — | |||||||||||
Net loss | $ | (362 | ) | $ | (325 | ) | $ | (797 | ) | $ | (823 | ) | ||||
Other comprehensive income Currency translation adjustment | 3 | — | — | — | ||||||||||||
Comprehensive net loss | $ | (359 | ) | $ | (325 | ) | $ | (797 | ) | $ | (823 | ) | ||||
Loss per common share: | ||||||||||||||||
Net loss | $ | (362 | ) | $ | (325 | ) | $ | (797 | ) | $ | (823 | ) | ||||
Deemed dividend on Series D Preferred Stock | — | 1,078 | — | 1,078 | ||||||||||||
Net loss attributable to common shareholders | $ | (362 | ) | $ | (1,403 | ) | $ | (797 | ) | $ | (1,901 | ) | ||||
Weighted average number of common shares outstanding — Basic and diluted | 68,392 | 68,042 | 68,400 | 68,041 | ||||||||||||
Basic and diluted loss per common share | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | ||||
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For the six months ended January 31, 2010
(Dollars in Thousands)
Accumu- | ||||||||||||||||||||||||||||||||||||||||||||||||
lated Other | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Additional | Accum- | Compre- | |||||||||||||||||||||||||||||||||||||||||||||
Series B | Series C | Series D | Common Stock | Paid-in- | Ulated | hensive | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||
Balance at July 31, 2009 | 100 | $ | — | 62,048 | $ | 62 | 2,891 | $ | 3 | 68,385,637 | $ | 684 | $ | 21,327 | ($19,803 | ) | (22 | ) | $ | 2,251 | ||||||||||||||||||||||||||||
Common stock issued for cash on exercise of options and warrants | — | — | — | — | — | — | 13,333 | — | 1 | — | — | 1 | ||||||||||||||||||||||||||||||||||||
Cashless Exercise of 39,999 options | — | — | — | — | — | — | 24,195 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | — | — | — | — | 53 | — | — | 53 | ||||||||||||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | (797 | ) | — | (797 | ) | ||||||||||||||||||||||||||||||||||
Balance at January 31, 2010 | 100 | $ | — | 62,048 | $ | 62 | 2,891 | $ | 3 | 68,423,165 | $ | 684 | $ | 21,381 | ($20,600 | ) | (22 | ) | $ | 1,508 | ||||||||||||||||||||||||||||
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(Dollars in thousands)
2010 | 2009 | |||||||
Operating activities | ||||||||
Net loss | $ | (797 | ) | $ | (823 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Deferred warranty income | — | (2 | ) | |||||
Depreciation and amortization | 61 | 52 | ||||||
Stock based compensation expense | 53 | 105 | ||||||
Loss on disposal of assets | 3 | — | ||||||
Foreign currency transaction gain | (4 | ) | — | |||||
Changes in operating assets and liabilities | ||||||||
Accounts and royalties receivable, net | (225 | ) | (86 | ) | ||||
Inventories, net | 63 | (417 | ) | |||||
Advances to contract manufacturer | 51 | 241 | ||||||
Prepaid expenses, deposits and other current assets | 57 | 5 | ||||||
Accounts payable and accrued expenses | 55 | (16 | ) | |||||
Customer deposits | — | 60 | ||||||
Net cash used in operating activities | (683 | ) | (881 | ) | ||||
Investing activities | ||||||||
Fixed asset purchases | — | (171 | ) | |||||
Net cash used in investing activities | — | (171 | ) | |||||
Financing activities | ||||||||
Net proceeds from issuance of common stock end exercise of options | 1 | 2 | ||||||
Net proceeds from issuance of Series D Preferred Stock | — | 2,837 | ||||||
Proceeds from issuance of notes payable | — | 300 | ||||||
Repayments of notes payable | (34 | ) | (319 | ) | ||||
Net cash (used in) provided by financing activities | (33 | ) | 2,820 | |||||
Effect of exchange rate changes on cash | 1 | — | ||||||
Net (decrease) increase in cash | (715 | ) | 1,768 | |||||
Cash, beginning of period | 886 | 86 | ||||||
Cash, end of period | $ | 171 | $ | 1,854 | ||||
Supplemental disclosure | ||||||||
Cash paid for interest | $ | — | $ | 8 | ||||
Supplemental schedule of non-cash activities | ||||||||
Reversal of accrual for tooling development in progress | $ | — | $ | 142 | ||||
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The Company’s financial statements have been prepared and presented on a basis assuming it will continue as a going concern. As reflected in the accompanying financial statements, the Company had net losses in the amount of $0.8 million for each of the six month periods ended January 31, 2010 and 2009, and has experienced cash outflows from operating activities. The Company also has an accumulated deficit of $20.6 million as of January 31, 2010, and has substantial purchase commitments at January 31, 2010 (see Note 10). As of January 31, 2010, the Company had cash of approximately $171,000 and working capital of approximately $1.1 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
Although the Company has commenced sales of the Exer-Rest® in the United States and has raised approximately $2.8 million from the sales of its Series D Preferred Stock in December 2008 and January 2009 (see Note 7), the Company will need to generate additional funds during the next 12 months. Absent any significant revenues from product sales, additional debt or equity financing will be required for the Company to continue its business activities beyond March 31, 2010. It is management’s intention to obtain additional capital as needed to continue its business activities through new debt or equity financing, but there can be no assurance that it will be successful in this regard. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.
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Tooling and Equipment.These assets are stated at cost and depreciated or amortized using the straight-line method, over their estimated useful lives. | ||
Long-lived Assets.The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In performing the review for recoverability, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the assets, an impairment loss is recognized as the difference between the fair value and the carrying amount of the asset. | ||
Income Taxes.The Company provides for income taxes using an asset and liability based approach. Deferred income tax assets and liabilities are recorded to reflect the tax consequences in future years of temporary differences between the carrying amounts of assets and liabilities for financial statement and income tax purposes. The Company recognizes income tax benefits for loss carryforwards, however these tax benefits are reduced by a valuation allowance if it is more likely than not that loss carryforwards will expire before the Company is able to realize their benefit, or if future deductibility is uncertain. For financial statement purposes, the deferred tax asset for loss carryforwards has been fully offset by a valuation allowance since it is uncertain whether any future benefit will be realized. | ||
As of July 31, 2009, the Company had net Federal and State operating loss carry forwards of approximately $10.7 million and Foreign operating loss carry forwards of $0.2 million available to offset future taxable income. The net operating loss carryforwards expire in various years through 2029 and may be subject to limitation due to change of ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions. | ||
The Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates. Tax years ranging from 2005 to 2009 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired. It is the Company’s policy to include income tax interest and penalties expense in its tax provision. | ||
Revenue Recognition.Revenue from product sales is recognized when persuasive evidence of an arrangement exists, the goods are shipped and title has transferred, the price is fixed or determinable, and the collection of the sales proceeds is reasonably assured. The Company recognizes royalties as they are earned, based on reports from licensees. Research and consulting revenue and revenue from sales of extended warranties on therapeutic platforms are recognized over the term of the respective agreements. | ||
Advertising Costs.The Company expenses all costs of advertising as incurred. Advertising and promotional costs are included in selling, general and administrative costs and expenses for all periods presented, and totaled $29,000 and $54,000, respectively, for the three and six months ended January 31, 2010. Advertising and promotional costs totaled $4,000 and $5,000, respectively, for the three and six months ended January 31, 2009. | ||
Research and Development Costs.Research and development costs are expensed as incurred, and primarily consist of payments to third parties for research and development of the Exer-Rest® device and regulatory testing and other costs to obtain FDA approval. | ||
Warranties.The Company’s warranties are two years on all Exer-Rest® products sold domestically and one year for products sold outside of the U.S. and are accrued based on management’s estimates and the history of warranty costs incurred. There were no material warranty costs incurred during the six months ended January 31, 2010 and 2009, and management estimates that the Company’s accrued warranty expense at January 31, 2010 will be sufficient to offset claims made for units under warranty. | ||
Stock-based compensation.The Company recognizes all share-based payments, including grants of stock options, as an operating expense, based on their grant date fair values. Stock-based compensation expense is recognized over the vesting life of the underlying option and is included in selling, general and administrative costs and expenses in the comprehensive statements of operations for all periods presented. | ||
Fair Value of Financial Instruments.Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of January 31, 2010 and July 31, 2009. The respective carrying value of certain on-balance-sheet financial instruments such as cash, royalties and other receivables, accounts payable, accrued expenses and notes payable approximate fair values because they are short term in nature or they bear current market interest rates. | ||
Foreign Currency Translation.The functional currency for the Company’s foreign subsidiary is the local currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date while income and expense amounts are translated at average exchange rates during the period. The resulting foreign currency translation adjustments are disclosed as a separate component of stockholders’ equity and other comprehensive loss in the unaudited condensed consolidated financial statements. |
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January 31, 2010 | July 31, 2009 | |||||||
Work-in-progress, including sub-assemblies and spare parts | $ | 11 | $ | 11 | ||||
Finished goods | 834 | 900 | ||||||
Total inventories | $ | 845 | $ | 911 | ||||
Six months ended | Six months ended | |||||||
January 31, 2010 | January 31, 2009 | |||||||
Expected volatility | n/a | 110.18 | % | |||||
Expected dividend yield | n/a | 0.00 | % | |||||
Risk-free interest rate | n/a | 2.83 | % | |||||
Expected life | n/a | 5.0 years | ||||||
Forfeiture rate | n/a | 0.00 | % |
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Weighted average | ||||||||||||||||
remaining | ||||||||||||||||
Weighted Average | contractual term | Aggregate intrinsic | ||||||||||||||
Shares | Exercise Price | (years) | Value | |||||||||||||
Options outstanding, July 31, 2009 | 2,350,164 | $ | 0.56 | |||||||||||||
Options granted | — | n/a | ||||||||||||||
Options exercised | 53,332 | $ | 0.15 | |||||||||||||
Options forfeited or expired | — | n/a | ||||||||||||||
Options outstanding, January 31, 2010 | 2,296,832 | $ | 0.57 | 2.95 | $ | 94,200 | ||||||||||
Options expected to vest, January 31, 2010 | 2,276,291 | $ | 0.58 | 2.93 | $ | 92,497 | ||||||||||
Options exercisable, January 31 , 2010 | 1,929,832 | $ | 0.61 | 2.41 | $ | 59,750 | ||||||||||
Weighted Average Grant | ||||||||
Stock Options | Date Fair Value | |||||||
Non-vested at July 31, 2009 | 497,000 | $ | 0.35 | |||||
Options granted | — | n/a | ||||||
Options vested | (130,000 | ) | $ | 0.52 | ||||
Non-vested at January 31, 2010 | 367,000 | $ | 0.28 | |||||
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January 31, 2010 | January 31, 2009 | |||||||
Stock options | 2,296,832 | 2,085,164 | ||||||
Stock warrants | — | 325,000 | ||||||
Series C Preferred Stock | 1,551,200 | 1,551,200 | ||||||
Series D Preferred Stock | 14,455,000 | 14,455,000 | ||||||
Total | 18,303,032 | 18,416,364 | ||||||
The Company signed a five year lease for office space in Miami, Florida with a company owned by Dr. Phillip Frost, who is the beneficial owner of more than 10% of the Company’s Common Stock. The current rental payments under the Miami office lease, which commenced January 1, 2008, are approximately $4,000 per month and escalate 4.5% annually over the life of the lease. The Company recorded rent expense related to the Miami lease of approximately $13,000 and $28,000, respectively, in the three and six months ended January 31, 2010, and approximately $13,000 and $22,000, respectively, in the three and six months ended January 31, 2009.
The Company signed a three year lease for warehouse space in Hialeah, Florida with a company jointly controlled by Dr. Frost and Dr. Jane Hsiao, the Company’s Chairman. The rental payments under the Hialeah warehouse lease, which commenced February 1, 2009, are approximately $5,000 per month for the first year and escalate 3.5% annually over the life of the lease. In the three and six months ended January 31, 2010, the Company recorded approximately $10,000 and $24,000, respectively of rent expense related to the Hialeah warehouse.
Dr. Hsiao, Dr. Frost and directors Steven Rubin and Rao Uppaluri are each significant stockholders, officers and/or directors of SafeStitch Medical, Inc. (“SafeStitch”), a publicly-traded, developmental-stage medical device manufacturer, Aero Pharmaceuticals, Inc. (“Aero”), a privately held pharmaceutical distributor, Cardo Medical, Inc. (“Cardo”), a publicly-traded medical device company, and SearchMedia Holdings Limited (“SearchMedia”), a publicly-traded media company operating primarily in China. Commencing in March 2008, the Company’s Chief Financial Officer also serves as the Chief Financial Officer and supervises the accounting staffs of SafeStitch and Aero under a board-approved cost sharing arrangement whereby the total salaries of the accounting staffs of the NIMS, SafeStitch and Aero are shared. Commencing in December 2009, the Company’s Chief Legal Officer also serves under a similar board-approved cost sharing arrangement as Corporate Counsel of SearchMedia and as the Chief Legal Officer of each of SafeStitch and Cardo. The Company recorded selling, general and administrative costs and expenses to account for the sharing of costs under these arrangements of $7,000 and $14,000, respectively, for the three and six months ended January 31, 2010, and $10,000 and $22,000, respectively, for the three and six months ended January 31, 2009. Accounts payable to SafeStitch related to these arrangements totaled approximately $5,000 and $3,000, respectively, at January 31, 2010 and July 31, 2009.
Dr. Hsiao is a director of Great Eastern Bank of Florida, a bank where the Company maintains a bank account in the normal course of business. As of January 31, 2010 and July 31, 2009, the Company had approximately $144,000 and $846,000, respectively, on deposit with Great Eastern Bank of Florida. Approximately $119,000 and $821,000 of these balances were collateralized by repurchase contracts for US Government securities at January 31, 2010 and July 31, 2009, respectively.
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Estimated Useful | ||||||||||||
Life | January 31, 2010 | July 31, 2009 | ||||||||||
Tooling and equipment | 5 years | $ | 471 | $ | 471 | |||||||
Furniture and fixtures, leasehold improvements, office equipment and computers | 3 — 5 years | 93 | 94 | |||||||||
Website and software | 3 years | 26 | 26 | |||||||||
590 | 591 | |||||||||||
Less accumulated depreciation | (192 | ) | (131 | ) | ||||||||
Tooling and equipment, net | $ | 398 | $ | 460 | ||||||||
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
ITEM 4. | CONTROLS AND PROCEDURES. |
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Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. | Defaults upon Senior Securities |
Item 4. | Submissions of Matters to a Vote of Security Holders |
Nominee | For | Withheld | ||||||
Jane H. Hsiao, Ph.D., MBA | 35,275,814 | 293,415 | ||||||
Marvin A. Sackner, M.D. | 35,479,435 | 89,794 | ||||||
Taffy Gould | 35,479,435 | 89,794 | ||||||
Morton J. Robinson, M.D. | 35,479,285 | 89,944 | ||||||
Steven D. Rubin | 35,473,564 | 95,665 | ||||||
Subbarao V. Uppaluri, Ph.D. | 35,473,564 | 95,665 |
Item 5. | Other Information |
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Item 6. | Exhibits |
3.1 | Articles of Incorporation, as amended, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 8, 2008 and incorporated by reference herein. | |
3.2 | Articles of Amendment to Articles of Incorporation, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 4, 2008 and incorporated by reference herein. | |
3.3 | Articles of Amendment to Articles of Incorporation. | |
31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934. | |
31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934. | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Dated: March 16, 2010 | By: | /s/ Dr. Marvin A. Sackner | ||
Dr. Marvin A. Sackner, Chief Executive Officer | ||||
Dated: March 16, 2010 | By: | /s/ Adam S. Jackson | ||
Adam S. Jackson, Chief Financial Officer | ||||
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