UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 0-20945
A Minnesota Corporation IRS Employer ID No. 41-1350192
707 Eagleview
Boulevard, Suite 414
Exton, Pennsylvania
19341
(610) 458-6200
_________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, as of November 12, 2004, was 39,918,406.
_________________
1
| PAGE | ||
|---|---|---|
| PART I. ITEM 1. ITEM 2. ITEM 3. ITEM 4. PART II. ITEM 2. ITEM 6. |
FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets, as of September 30, 2004 and December 31, 2003 Consolidated Statements of Operations for the three months and nine months ended September 30, 2004 and 2003 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Controls and Procedures OTHER INFORMATION Unregistered Sales of Equity Securities and Use of Proceeds Exhibits SIGNATURES |
3 4 5 6 17 22 23 25 25 25 26 |
2
| September 30, 2004 |
December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,135,402 | $ | 1,928,815 | ||||
| Short-term investments | 9,964,935 | — | ||||||
| Accounts receivable, net of allowances of $21,400 and $21,500, respectively | 163,985 | 481,886 | ||||||
| Other receivables | 78,662 | 7,947 | ||||||
| Inventories | 159,038 | 225,408 | ||||||
| Prepaid expenses and other assets | 174,225 | 61,239 | ||||||
| Total current assets | 11,676,247 | 2,705,295 | ||||||
| Equipment, furniture and fixtures, net | 567,761 | 801,369 | ||||||
| Patent rights, net | 1,248,061 | 1,214,356 | ||||||
| Goodwill | 1,095,355 | 1,095,355 | ||||||
| Other assets | 345,455 | 138,478 | ||||||
| Total Assets | $ | 14,932,879 | $ | 5,954,853 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 541,993 | $ | 253,336 | ||||
| Accrued expenses and other liabilities | 622,649 | 827,676 | ||||||
| Due to related parties | 20,900 | 162,964 | ||||||
| Capital lease obligations - current maturities | 3,045 | 36,003 | ||||||
| Deferred revenue - current | 816,822 | 809,945 | ||||||
| Total current liabilities | 2,005,409 | 2,089,924 | ||||||
| Deferred revenue - long term | 3,024,166 | 3,557,835 | ||||||
| Total liabilities | 5,029,575 | 5,647,759 | ||||||
| Shareholders' Equity: | ||||||||
| Series A Convertible Preferred Stock: $0.01 par; authorized 10,000 | ||||||||
| shares; 1,500 and 1,450 issued and outstanding at September 30, 2004 and | ||||||||
| December 31, 2003, respectively | 15 | 15 | ||||||
| Series D Convertible Preferred Stock: $0.01 par; authorized 245,000 shares; | ||||||||
| 63,588 and 243,749 issued and outstanding at September 30, 2004 and | ||||||||
| December 31, 2003, respectively | 636 | 2,437 | ||||||
| Common Stock: $0.01 par; authorized 100,000,000 shares; | ||||||||
| 39,913,406 and 19,831,296 issued and outstanding at | ||||||||
| September 30, 2004 and December 31, 2003, respectively | 399,135 | 198,313 | ||||||
| Additional paid-in capital | 93,753,145 | 78,054,269 | ||||||
| Accumulated deficit | (80,002,246 | ) | (74,126,619 | ) | ||||
| Prepaid license discount | (2,747,490 | ) | (2,894,677 | ) | ||||
| Deferred compensation | (878,390 | ) | (306,808 | ) | ||||
| Accumulated other comprehensive loss | (621,501 | ) | (619,836 | ) | ||||
| Total Shareholders' Equity | 9,903,304 | 307,094 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 14,932,879 | $ | 5,954,853 | ||||
See accompanying notes to consolidated financial statements.
3
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2004 |
2003 | ||||||||||||
| Revenue: | |||||||||||||||
| Product sales | $ | 417,846 | $ | 692,830 | $ | 1,324,202 | $ | 2,068,387 | |||||||
| Development revenue | 35,706 | 115,028 | 180,668 | 165,328 | |||||||||||
| Licensing fees | 135,307 | 183,916 | 464,472 | 513,752 | |||||||||||
| Royalties | 24,316 | 48,185 | 61,034 | 110,920 | |||||||||||
| Total revenue | 613,175 | 1,039,959 | 2,030,376 | 2,858,387 | |||||||||||
| Cost of sales: | |||||||||||||||
| Cost of product sales | 255,939 | 540,622 | 960,030 | 1,600,005 | |||||||||||
| Cost of development revenue | 9,734 | 1,271 | 53,926 | 13,445 | |||||||||||
| Total cost of sales | 265,673 | 541,893 | 1,013,956 | 1,613,450 | |||||||||||
| Gross margin | 347,502 | 498,066 | 1,016,420 | 1,244,937 | |||||||||||
| Operating expenses: | |||||||||||||||
| Research and development | 879,297 | 666,210 | 2,147,260 | 2,068,325 | |||||||||||
| Sales and marketing | 216,469 | 137,677 | 450,802 | 340,586 | |||||||||||
| General and administrative | 1,477,672 | 2,026,421 | 4,180,110 | 4,844,016 | |||||||||||
| 2,573,438 | 2,830,308 | 6,778,172 | 7,252,927 | ||||||||||||
| Net operating loss | (2,225,936 | ) | (2,332,242 | ) | (5,761,752 | ) | (6,007,990 | ) | |||||||
| Other income (expense): | |||||||||||||||
| Loss on debt extinguishments | — | — | — | (885,770 | ) | ||||||||||
| Loss on conversions of debt to equity | — | (16,283,677 | ) | — | (16,283,677 | ) | |||||||||
| Loss on common stock warrants | — | (4,379,686 | ) | — | (5,960,453 | ) | |||||||||
| Interest income | 34,739 | 4,481 | 80,351 | 14,148 | |||||||||||
| Interest expense | (21,875 | ) | (356,834 | ) | (100,959 | ) | (894,139 | ) | |||||||
| Foreign exchange gains (losses) | (2,727 | ) | 4,768 | (13,467 | ) | (9,341 | ) | ||||||||
| Other, net | (3,386 | ) | (1,798 | ) | (8,371 | ) | (4,778 | ) | |||||||
| 6,751 | (21,012,746 | ) | (42,446 | ) | (24,024,010 | ) | |||||||||
| Net loss | (2,219,185 | ) | (23,344,988 | ) | (5,804,198 | ) | (30,032,000 | ) | |||||||
| Preferred stock dividends | — | — | (71,429 | ) | (50,000 | ) | |||||||||
| Net loss applicable to common shares | $ | (2,219,185 | ) | $ | (23,344,988 | ) | $ | (5,875,627 | ) | $ | (30,082,000 | ) | |||
| Basic and diluted net loss per common share | $ | (0.06 | ) | $ | (1.40 | ) | $ | (0.17 | ) | $ | (2.23 | ) | |||
| Basic and diluted weighted average common shares outstanding | 38,825,537 | 16,687,449 | 35,145,638 | 13,501,701 | |||||||||||
See accompanying notes to consolidated financial statements.
4
| For the Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (5,804,198 | ) | $ | (30,032,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 445,538 | 634,261 | ||||||
| Loss on disposal and abandonment of assets | 5,701 | 5,576 | ||||||
| Stock-based compensation expense | 599,727 | 1,517,645 | ||||||
| Loss on conversions of debt to equity | — | 16,283,677 | ||||||
| Noncash interest expense | 75,388 | 862,308 | ||||||
| Provision for doubtful accounts | — | 34,629 | ||||||
| Loss on debt extinguishments | — | 741,570 | ||||||
| Losses on common stock warrants | — | 5,960,453 | ||||||
| Amortization of prepaid license discount | 147,186 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 317,901 | (252,246 | ) | |||||
| Other receivables | (116,460 | ) | (20,094 | ) | ||||
| Inventories | 66,370 | 445,491 | ||||||
| Prepaid expenses and other assets | (112,985 | ) | (68,924 | ) | ||||
| Accounts payable | 288,657 | (343,888 | ) | |||||
| Accrued expenses and other | (205,027 | ) | (196,087 | ) | ||||
| Deferred revenue | (526,792 | ) | 970,792 | |||||
| Due to related parties | (141,765 | ) | 69,108 | |||||
| Other | (206,973 | ) | (2,593 | ) | ||||
| Net cash used in operating activities | (5,167,732 | ) | (3,390,322 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of equipment, furniture and fixtures | (123,981 | ) | (1,160 | ) | ||||
| Additions to patent rights | (133,638 | ) | (112,853 | ) | ||||
| Purchase of short-term investments | (15,919,190 | ) | — | |||||
| Proceeds from maturity of short-term investments | 6,000,000 | — | ||||||
| Net cash used in investing activities | (10,176,809 | ) | (114,013 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sales of common stock | 13,753,400 | 2,357,663 | ||||||
| Proceeds from exercise of warrants | 847,500 | 1,588,586 | ||||||
| Proceeds from loans from shareholders | — | 1,600,000 | ||||||
| Proceeds from loans from debenture holder | — | 621,025 | ||||||
| Principal payments on convertible debentures | — | (464,000 | ) | |||||
| Principal payments on capital lease obligations | (32,217 | ) | (88,404 | ) | ||||
| Payment of preferred stock dividends | (21,429 | ) | — | |||||
| Net cash provided by financing activities | 14,547,254 | 5,614,870 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 3,874 | (97,906 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | (793,413 | ) | 2,012,629 | |||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | 1,928,815 | 267,945 | ||||||
| End of period | $ | 1,135,402 | $ | 2,280,574 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 25,571 | $ | 20,439 | ||||
See accompanying notes to consolidated financial statements.
5
| The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying financial statements and notes should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003, as amended. Operating results for the three-month and nine-month periods ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. |
Critical Accounting Policies