Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - Vicor Technologies, Inc. | v233012_ex32-1.htm |
EX-31.1 - EXHIBIT 31.1 - Vicor Technologies, Inc. | v233012_ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - Vicor Technologies, Inc. | v233012_ex31-2.htm |
EX-32.2 - EXHIBIT 32.2 - Vicor Technologies, Inc. | v233012_ex32-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
R QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-51475
VICOR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
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20-2903491
|
(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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2300 NW Corporate Boulevard, Suite 123, Boca Raton, Florida
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33431
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(Address of principal executive office)
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(Zip Code)
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(561) 995-7313
(Registrant’s telephone number, including area code)
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 R No ¨
Indicate by check mark whether the registrant has electronically submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
|
Accelerated filer ¨
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Non-accelerated filer ¨
|
Smaller reporting company R
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(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 ¨ No R
APPLICABLE ONLY TO CORPORATE ISSUERS
As of June 30, 2011, there were 51,448,457 shares of the Registrant’s Common Stock, $.0001 par value, outstanding.
Transitional Small Business Disclosure Form (Check one): Yes ¨ No R
VICOR TECHNOLOGIES, INC.
Quarterly Report on Form 10-Q for the Period Ended June 30, 2011
— TABLE OF CONTENTS —
Page
|
|
PART I — Financial Information
|
|
Item 1. Condensed Consolidated Financial Statements:
|
|
Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2011 (unaudited)
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3
|
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2011 and the period from August 4, 2000 (inception) through June 30, 2011 (unaudited)
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4
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Condensed Consolidated Statement of Changes in Net Capital Deficiency for the six months ended June 30, 2011 (unaudited)
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6
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and June 30, 2011 and the period from August 4, 2000 (inception) through June 30, 2011 (unaudited)
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7
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Notes to Condensed Consolidated Financial Statements (unaudited)
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9
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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17
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
|
22
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Item 4. Controls and Procedures
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23
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PART II — Other Information
|
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Item 1. Legal Proceedings
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23
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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23
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Item 3. Defaults Upon Senior Securities
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23
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Item 4. Removed and reserved
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23
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Item 5. Other Information
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23
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Item 6. Exhibits
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23
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Signatures
|
2
(A Development Stage Company)
Condensed Consolidated Balance Sheets
December 31, 2010 and June 30, 2011
December 31,
2010
|
June 30, 2011
(unaudited)
|
|||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash
|
$ | 1,119,000 | $ | 26,000 | ||||
Accounts receivable
|
58,000 | 132,000 | ||||||
Inventory
|
58,000 | 23,000 | ||||||
Prepaid expenses
|
411,000 | 311,000 | ||||||
Total current assets
|
1,646,000 | 492,000 | ||||||
Property and equipment:
|
||||||||
Equipment
|
213,000 | 244,000 | ||||||
Furniture and fixtures
|
24,000 | 24,000 | ||||||
Less accumulated depreciation
|
(82,000 | ) | (127,000 | ) | ||||
Net property and equipment
|
155,000 | 141,000 | ||||||
Other assets:
|
||||||||
Deposits
|
18,000 | 18,000 | ||||||
Deferred financing costs
|
8,076,000 | 6,161,000 | ||||||
Intellectual property, net of accumulated amortization of $260,000 and $284,000 at December 31, 2010 and June 30, 2011, respectively
|
192,000 | 224,000 | ||||||
$ | 10,087,000 | $ | 7,036,000 | |||||
LIABILITIES AND NET CAPITAL DEFICIENCY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable and accrued expenses
|
$ | 1,166,000 | $ | 2,528,000 | ||||
Current debt
|
360,000 | 910,000 | ||||||
Due to related party
|
88,000 | 146,000 | ||||||
Total current liabilities
|
1,614,000 | 3,584,000 | ||||||
Long-term liabilities:
|
||||||||
Long-term debt
|
8,277,000 | 7,829,000 | ||||||
Accrued dividends
|
932,000 | 1,153,000 | ||||||
Derivative financial instruments payable in shares of common stock
|
7,692,000 | 1,274,000 | ||||||
Total long-term liabilities
|
16,901,000 | 10,256,000 | ||||||
Commitments and contingencies
|
||||||||
Net capital deficiency:
|
||||||||
Preferred stock, $.0001 par value; 25,000,000 shares authorized: | ||||||||
Series B Voting Junior Convertible Cumulative, 5,185,101 shares issued and outstanding at December 31, 2010 and June 30,2011; preference in liquidation of $5,795,000 and $6,016,000 at December 31, 2010 and June 30, 2011, respectively
|
- | - | ||||||
Common stock, $.0001 par value; 150,000,000 shares authorized; 46,799,324 and 51,448,457 shares issued and outstanding at December 31, 2010 and June 30, 2011, respectively
|
5,000 | 5,000 | ||||||
Additional paid-in capital
|
51,275,000 | 52,662,000 | ||||||
Deficit accumulated during the development stage
|
(59,708,000 | ) | (59,471,000 | ) | ||||
Net capital deficiency
|
(8,428,000 | ) | (6,804,000 | ) | ||||
$ | 10,087,000 | $ | 7,036,000 |
See accompanying notes to condensed consolidated financial statements.
3
Vicor Technologies,Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
For the three months ended June 30, 2010 and 2011
(Unaudited)
Three
months
ended June
30, 2010
|
Three
months
ended June
30, 2011
|
|||||||
Revenue:
|
||||||||
Sales
|
$ | 8,000 | $ | 129,000 | ||||
Leases
|
- | 10,000 | ||||||
Grants and other
|
- | - | ||||||
8,000 | 139,000 | |||||||
Cost of revenue
|
2,000 | 72,000 | ||||||
Gross profit
|
6,000 | 67,000 | ||||||
Operating expenses:
|
||||||||
Research and development
|
193,000 | 163,000 | ||||||
Selling, general and administrative
|
1,488,000 | 1,670,000 | ||||||
Interest
|
558,000 | 1,172,000 | ||||||
Total operating expenses
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2,239,000 | 3,005,000 | ||||||
(2,233,000 | ) | (2,938,000 | ) | |||||
Gain on derivative financial instruments:
|
||||||||
Realized
|
200,000 | 62,000 | ||||||
Unrealized
|
254,000 | 3,145,000 | ||||||
454,000 | 3,207,000 | |||||||
Net income (loss)
|
(1,779,000 | ) | 269,000 | |||||
Dividends for the benefit of preferred stockholders:
|
||||||||
Payable on Series A and Series B preferred stock
|
(114,000 | ) | (106,000 | ) | ||||
Amortization of derivative discount on Series B preferred stock
|
(250,000 | ) | (249,000 | ) | ||||
Value of warrants issued in connection with sales of Series B preferred stock
|
- | - | ||||||
Total dividends for the benefit of preferred stockholders
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(364,000 | ) | (355,000 | ) | ||||
Net loss applicable to common stock
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$ | (2,143,000 | ) | $ | (86,000 | ) | ||
Net loss per common share - basic and diluted
|
$ | (0.05 | ) | $ | - | |||
Weighted average number of shares of common stock outstanding
|
44,603,885 | 48,610,806 |
See accompanying notes to condensed consolidated financial statements.
4
Vicor Technologies,Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
For the six months ended June 30, 2010 and 2011 and
For the period from August 4, 2000 (inception) to June 30, 2011
(Unaudited)
Six months
ended June
30, 2010
|
Six months
ended June 30,
2011
|
Period from
August 4,
2000
(Inception) to
June 30,
2011
|
||||||||||
Revenue:
|
||||||||||||
Sales
|
$ | 108,000 | $ | 288,000 | $ | 473,000 | ||||||
Leases
|
- | 19,000 | 23,000 | |||||||||
Grants and other
|
- | - | 844,000 | |||||||||
108,000 | 307,000 | 1,340,000 | ||||||||||
Cost of revenue
|
87,000 | 156,000 | 287,000 | |||||||||
Gross profit
|
21,000 | 151,000 | 1,053,000 | |||||||||
Operating expenses:
|
||||||||||||
Research and development
|
350,000 | 285,000 | 15,950,000 | |||||||||
Selling, general and administrative
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2,857,000 | 3,125,000 | 38,163,000 | |||||||||
Interest
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1,003,000 | 2,203,000 | 12,604,000 | |||||||||
Loss from extinguishment of debt
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- | - | 1,266,000 | |||||||||
Total operating expenses
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4,210,000 | 5,613,000 | 67,983,000 | |||||||||
(4,189,000 | ) | (5,462,000 | ) | (66,930,000 | ) | |||||||
Gain on derivative financial instruments:
|
||||||||||||
Realized
|
311,000 | 62,000 | 1,463,000 | |||||||||
Unrealized
|
26,000 | 6,356,000 | 11,103,000 | |||||||||
337,000 | 6,418,000 | 12,566,000 | ||||||||||
Net income (loss)
|
(3,852,000 | ) | 956,000 | (54,364,000 | ) | |||||||
Cumulative effect of change in accounting principle
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- | - | 480,000 | |||||||||
Dividends for the benefit of preferred stockholders:
|
||||||||||||
Payable on Series A and Series B preferred stock
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(240,000 | ) | (221,000 | ) | (1,570,000 | ) | ||||||
Amortization of derivative discount on Series B preferred stock
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(499,000 | ) | (498,000 | ) | (2,481,000 | ) | ||||||
Value of warrants issued in connection with sales of Series B preferred stock
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- | - | (1,536,000 | ) | ||||||||
Total dividends for the benefit of preferred stockholders
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(739,000 | ) | (719,000 | ) | (5,587,000 | ) | ||||||
Net income (loss) applicable to common stock
|
$ | (4,591,000 | ) | 237,000 | $ | (59,471,000 | ) | |||||
Net income (loss) per common share - basic and diluted
|
$ | (0.11 | ) | $ | - | |||||||
Weighted average number of shares of common stock outstanding
|
43,524,192 | 47,792,773 |
See accompanying notes to condensed consolidated financial statements.
5
(A Development Stage Company)
Condensed Consolidated Statement of Changes in Stockholders' Equity (Net Capital Deficiency)
For the six months ended June 30, 2011
(Unaudited)
Common Stock
|
Preferred Stock - Class B
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||||||||
Balance at December 31, 2010
|
46,799,324 | 5,000 | 5,185,101 | - | 51,275,000 | (59,708,000 | ) | (8,428,000 | ) | |||||||||||||||||||
Accrued dividends on preferred stock
|
- | - | - | - | - | (221,000 | ) | (221,000 | ) | |||||||||||||||||||
Issuance of stock for interest payments
|
3,640 | - | - | - | 2,000 | - | 2,000 | |||||||||||||||||||||
Issuance of stock for consulting and fees
|
707,267 | - | - | - | 189,000 | - | 189,000 | |||||||||||||||||||||
Issuance of stock for services
|
468,677 | - | - | - | 263,000 | - | 263,000 | |||||||||||||||||||||
Issuance of stock for conversion of debt
|
3,444,549 | - | - | - | 394,000 | - | 394,000 | |||||||||||||||||||||
Issuance of warrants for consulting
|
- | - | - | - | 14,000 | - | 14,000 | |||||||||||||||||||||
Issuance of warrants with debt
|
- | - | - | - | 15,000 | - | 15,000 | |||||||||||||||||||||
Exercise of warrants
|
25,000 | - | - | - | 6,000 | - | 6,000 | |||||||||||||||||||||
Issuance of stock options
|
- | - | - | - | 6,000 | - | 6,000 | |||||||||||||||||||||
Amortization of discounts related to derivative financial instruments
|
- | - | - | - | 498,000 | (498,000 | ) | - | ||||||||||||||||||||
Net income
|
- | - | - | - | - | 956,000 | 956,000 | |||||||||||||||||||||
Balance at June 30, 2011
|
51,448,457 | $ | 5,000 | 5,185,101 | $ | - | $ | 52,662,000 | $ | (59,471,000 | ) | $ | (6,804,000 | ) |
See accompanying notes to condensed consolidated financial statements.
6
Vicor Technologies, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2010 and 2011 and
For the period from August 4, 2000 (inception) to June 30, 2011
(Unaudited)
Six months
ended June
30, 2010
|
Six months
ended June
30, 2011
|
Period from
August 4, 2000
(Inception) to
June 30, 2011
|
||||||||||
Cash flows from operating activities:
|
||||||||||||
Net income (loss)
|
$ | (3,852,000 | ) | $ | 956,000 | $ | (54,364,000 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||||||
Depreciation and amortization
|
35,000 | 69,000 | 473,000 | |||||||||
Noncash interest imputed upon conversion of debt to equity
|
- | - | 5,620,000 | |||||||||
Noncash interest and amortization of deferred financing costs
|
824,000 | 2,170,000 | 6,256,000 | |||||||||
Gain on derivative financial instruments
|
(337,000 | ) | (6,418,000 | ) | (12,566,000 | ) | ||||||
Loss from sale of assets
|
- | - | 48,000 | |||||||||
Securities issued for services
|
35,000 | 169,000 | 2,113,000 | |||||||||
Beneficial conversion feature of notes payable
|
33,000 | - | 303,000 | |||||||||
Contributed research and development services
|
- | - | 95,000 | |||||||||
Merger-related costs
|
- | - | 523,000 | |||||||||
Shares in lieu of interest payments
|
2,000 | 2,000 | 389,000 | |||||||||
Equity-based compensation
|
409,000 | 269,000 | 19,618,000 | |||||||||
Changes in assets and liabilities:
|
||||||||||||
Accounts receivable
|
(61,000 | ) | (74,000 | ) | (132,000 | ) | ||||||
Inventory
|
(141,000 | ) | 35,000 | (23,000 | ) | |||||||
Prepaid expenses and other assets
|
(731,000 | ) | (110,000 | ) | (2,008,000 | ) | ||||||
Accounts payable and accrued expenses
|
937,000 | 1,511,000 | 4,412,000 | |||||||||
Accrued royalties due to related party
|
- | 58,000 | 58,000 | |||||||||
Net cash used in operating activities
|
(2,847,000 | ) | (1,363,000 | ) | (29,185,000 | ) | ||||||
Cash flows from investing activities:
|
||||||||||||
Purchase of intellectual property
|
- | (56,000 | ) | (293,000 | ) | |||||||
Net proceeds from sale of equipment
|
- | - | 59,000 | |||||||||
Purchase of property and equipment
|
(107,000 | ) | (31,000 | ) | (386,000 | ) | ||||||
Net cash used in investing activities
|
(107,000 | ) | (87,000 | ) | (620,000 | ) | ||||||
Cash flows from financing activities:
|
||||||||||||
Due to related parties
|
- | 1,000 | 101,000 | |||||||||
Proceeds from bank loans
|
- | - | 300,000 | |||||||||
Proceeds from sale of preferred stock
|
- | - | 2,915,000 | |||||||||
Proceeds from sale of common stock
|
- | - | 11,268,000 | |||||||||
Proceeds from exercise of warrants
|
- | 6,000 | 6,000 | |||||||||
Repayment of notes
|
- | - | (1,005,000 | ) | ||||||||
Proceeds from bridge loan
|
- | - | 300,000 | |||||||||
Proceeds from sale of notes
|
3,667,000 | 350,000 | 15,752,000 | |||||||||
Proceeds for stock to be issued
|
- | - | 16,000 | |||||||||
Contributed capital
|
- | - | 178,000 | |||||||||
Net cash provided by financing activities
|
3,667,000 | 357,000 | 29,831,000 | |||||||||
Net increase (decrease) in cash
|
713,000 | (1,093,000 | ) | 26,000 | ||||||||
Cash at beginning of period
|
544,000 | 1,119,000 | - | |||||||||
Cash at end of period
|
$ | 1,257,000 | $ | 26,000 | $ | 26,000 |
See accompanying notes to condensed consolidated financial statements.
7
Vicor Technologies, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2010 and 2011 and
For the period from August 4, 2000 (inception) to June 30, 2011
(Unaudited)
Six months
ended June
30, 2010
|
Six months
ended June
30, 2011
|
Period from
August 4, 2000
(Inception) to
June 30, 2011
|
||||||||||
Supplemental cash flow information:
|
||||||||||||
Issuance of previously-subscribed common stock
|
$ | - | $ | - | $ | 16,000 | ||||||
Conversion of accounts payable to note payable
|
- | - | 100,000 | |||||||||
Repurchase of common stock for cancellation of subscription note receivable
|
- | - | 750,000 | |||||||||
Contributed research and development
|
- | - | 95,000 | |||||||||
Acquisition of intellectual property from related party
|
- | - | 200,000 | |||||||||
Beneficial conversion features for promissory notes
|
- | - | 912,000 | |||||||||
Warrants issued in connection with 15% promissory notes
|
- | 15,000 | 276,000 | |||||||||
Warrants issued in connection with 8% Subordinated Convertible Notes
|
557,000 | - | 674,000 | |||||||||
Exercise of warrants to purchase common stock
|
- | - | 1,000 | |||||||||
Cash paid for interest expense
|
36,000 | 36,000 | 1,065,000 | |||||||||
Accrued equity-based compensation
|
- | - | 41,000 | |||||||||
Accrued dividends
|
240,000 | 221,000 | 3,041,000 | |||||||||
Interest on promissory notes paid in common stock
|
- | - | 520,000 | |||||||||
Related-party accrual converted to common stock
|
- | - | 561,000 | |||||||||
Conversion of debt to Series B preferred stock
|
- | - | 1,567,000 | |||||||||
Conversion of notes to common stock
|
1,206,000 | 394,000 | 6,209,000 | |||||||||
Accrued expenses paid with notes
|
- | - | 703,000 | |||||||||
Accrued expenses paid with preferred stock
|
- | - | 108,000 | |||||||||
Accrued expenses paid with common stock
|
- | - | 772,000 | |||||||||
Fair value of equity-based derivative financial instruments issued
|
2,535,000 | - | 816,000 | |||||||||
Fair value of debt-based derivative financial instruments issued
|
- | - | 8,316,000 | |||||||||
Deferred costs paid with common stock
|
- | 34,000 | 392,000 | |||||||||
Amortization of derivative discounts
|
499,000 | 498,000 | 1,843,000 | |||||||||
Conversion of Series A preferred stock and accrued dividends to common stock
|
- | - | 335,000 | |||||||||
Conversion of Series B preferred stock and accrued dividends to common stock
|
- | - | 91,000 |
See accompanying notes to condensed consolidated financial statements.
8
Organization
Vicor Technologies, Inc. (“Vicor”) is a development-stage company. Vicor began generating operating revenues in 2010, but management does not believe these revenues were significant enough for Vicor to be classified as an operating enterprise at June 30, 2011.
The accompanying condensed consolidated financial statements include Vicor Technologies, Inc. and its wholly-owned subsidiaries, Nonlinear Medicine, Inc. (“NMI”) and Stasys Technologies, Inc (“STI”). Vicor has no operations independent of its wholly-owned subsidiaries. NMI owns all intellectual property related to Vicor’s diagnostic products, and STI owns all intellectual property related to the Company’s therapeutic products.
Nature of the business
Vicor is a medical diagnostics company focused on commercializing noninvasive diagnostic technology products based on its patented, proprietary point correlation dimension algorithm (the PD2i® Algorithm”). The PD2i®Algorithm facilitates the ability of physicians to accurately risk stratify a specific target population to predict future pathological events such as cardiac mortality (either from arrhythmic death or congestive heart failure), autonomic nervous system dysfunction and imminent death from trauma. The Company believes that the PD2i® Algorithm represents a noninvasive monitoring technology that physicians and other members of the medical community can use as a new and accurate vital sign and is currently commercializing two proprietary diagnostic medical products which employ software utilizing the PD2i® Algorithm: the PD2i Analyzertm (sometimes also referred to as the PD2i Cardiac Analyzertm and the PD2i-VStm (Vital Sign). It is also anticipated that the PD2i® Algorithm applications will allow for the early detection of cerebral disorders as well as other disorders and diseases.
Risks
The Company needs additional sources of financing. See Note 2.
The Company is subject to all the risks inherent in an early stage company in the biotechnology industry. The biotechnology industry is subject to rapid and technological change. The Company has numerous competitors, including major pharmaceutical and chemical companies, medical device manufacturers, specialized biotechnology firms, universities and other research institutions. These competitors may succeed in developing technologies and products that are more effective than any that are being developed by the Company or that would render the Company’s technology and products obsolete and noncompetitive. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company. In addition, many of the Company’s competitors have significantly greater experience than the Company in pre-clinical testing and human clinical trials of new or improved pharmaceutical products and in obtaining FDA and other regulatory approvals on products or devices for use in health care.
The Company has limited experience in conducting and managing pre-clinical testing necessary to enter clinical trials required to obtain government approvals and has limited experience in conducting clinical trials. Accordingly, the Company’s competitors may succeed in obtaining FDA approval for products more rapidly than the Company, which could adversely affect the Company’s ability to further develop and market its products. If the Company commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which the Company has limited or no experience.
NOTE 2 — LIQUIDITY AND GOING CONCERN
The Company’s financial statements as of and for the three and six months ended June 30, 2011 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $4,806,000 for the year ended December 31, 2010. Although the Company had net income of $956,000 for the six months ended June 30, 2011, this was affected by a $6,418,000 gain on derivative financial instruments; absent this gain, the Company had a loss of $5,462,000. At June 30, 2011 the Company had a working capital deficiency of $3,092,000, an accumulated deficit of $59,471,000 and a net capital deficiency of $6,804,000. The Company expects to continue to incur expenditures to further the commercial development of its products. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Management recognizes that the Company must generate additional funds to successfully commercialize its products. Management plans include the sale of additional equity or debt securities, alliances or other partnerships with entities interested in and having the resources to support the further development of its products as well as other business transactions to assure continuation of the Company’s development and operations. The Company is executing its plan to secure additional capital through a multi-part funding strategy.
9
However, no assurances can be given that the Company will be successful in raising additional capital or entering into business alliances. Further, there can be no assurance, assuming the Company successfully raises additional funds or enters into a business alliance, that the Company will achieve profitability or positive cash flow. If the Company is not able to timely and successfully raise additional capital and/or achieve positive cash flow, its business, financial condition, cash flows and results of operations will be materially and adversely affected.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company and the notes thereto have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 31, 2011.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company’s condensed consolidated financial statement amounts have been rounded to the nearest thousand dollars.
The information presented as of June 30, 2011 and for the three and six months ended June 30, 2010 and 2011 has not been audited. In the opinion of management, the unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s condensed consolidated financial position as of June 30, 2011, the condensed consolidated results of its operations for the three and six months ended June 30, 2010 and 2011, and its condensed consolidated changes in net capital deficiency and cash flows for the six months ended June 30, 2011. The results of operations for the three and six months ended June 30, 2010 and 2011 are not necessarily indicative of the results for the full year.
Receivables
Receivables are reported net of an allowance for doubtful accounts. The allowance is based on management’s evaluation of the collectibility of outstanding balances and is $20,000 at June 30, 2011.
Intellectual Property
Intellectual property, consisting of patents and other proprietary technology acquired by the Company is stated at cost and amortized on a straight-line basis over the estimated useful lives of the assets.
December
31, 2010
|
June 30,
2011
|
|||||||
Patents
|
$ | 252,000 | $ | 252,000 | ||||
Purchased software
|
200,000 | 256,000 | ||||||
452,000 | 508,000 | |||||||
Less accumulated amortization
|
(260,000 | ) | (284,000 | ) | ||||
Net intellectual property
|
$ | 192,000 | $ | 224,000 |
Financial Instruments
The carrying amount of financial instruments, including cash, accounts receivable, accounts payable and notes payable approximates fair value as of December 31, 2010 and June 30, 2011.
Convertible securities with detachable warrants that do not contain features requiring them to be accounted for as embedded derivatives are valued by allocating the proceeds between the warrant and the convertible security based on relative fair values, with any resulting fixed beneficial conversion feature (“BCF”) embedded in the convertible security being recorded at its intrinsic value.
10
Convertible securities containing detachable warrants where the conversion price of the security and/or the exercise price of the warrants are affected by the current market price of the Company’s common stock are accounted for as derivative financial instruments when the exercise and conversion prices are not considered to be indexed to the Company’s own stock. These derivatives are recorded as a liability and presented in the consolidated balance sheet under the caption “derivative financial instruments payable in common stock”.
For such issuances of convertible securities with detachable warrants, the Company initially records both the warrant and the BCF at fair value, using options pricing models common used by the financial services industry (Black-Scholes-Merton options pricing model) using inputs generally observable in the financial services industry. These derivative financial instruments are marked to market each reporting period, with unrealized changes in value reflected in earnings under the caption “gain (loss) on derivative financial instruments”.
For discounts arising from issuances of instruments embedded in a debt security, the discount is accounted for as a noncurrent asset under the caption “deferred financing costs”. For discounts arising from issuances of instruments embedded in an equity security, the discount is accounted for as a reduction to additional paid-in capital.
The discounts arising from the initial recording of the warrants are amortized over the term of the host security, and the discounts arising from the BCF are amortized over the period when the conversion right first becomes exercisable. The classification of the amortization is based on the nature of the host instrument. In this respect, amortization of discounts associated with debt issuances are classified as interest expense, whereas amortization of discounts associated with preferred stock issuances are classified as preferred stock dividends.
At the time a warrant is exercised or a BCF is exercised, the fair value of the derivative financial instrument at time of exercise/conversion is calculated, and a realized gain or loss on conversion is determined and reported as “gain (loss) from derivative financial instruments”.
NOTE 4 — CURRENT DEBT
At December 31, 2010 and June 30, 2011 current debt consists of:
December 31,
2010
|
June 30, 2011
|
|||||||
2004 Notes, 12%
|
$ | 250,000 | $ | 250,000 | ||||
12% Convertible Promissory Notes
|
110,000 | 110,000 | ||||||
15% Promissory Notes
|
- | 350,000 | ||||||
Bank loan, unsecured, 3.45%, due February 2012
|
- | 200,000 | ||||||
$ | 360,000 | $ | 910,000 |
The maturity of the 2004 Notes and the 12% Convertible Promissory Notes is currently being extended on a month-by-month basis by the noteholders.
The 15% Promissory Notes are unsecured and mature $250,000 in November 2011 and $100,000 in April 2012.
NOTE 5 — LONG-TERM DEBT
Long-term debt consists of:
December 31,
2010
|
June 30, 2011
|
|||||||
8% Subordinated Convertible Notes
|
$ | 5,273,000 | $ | 5,273,000 | ||||
10% Convertible Promissory Notes
|
2,804,000 | 2,556,000 | ||||||
Bank loan, unsecured, 3.54%
|
200,000 | - | ||||||
$ | 8,277,000 | $ | 7,829,000 |
8% Subordinated Convertible Notes
The 8% Subordinated Convertible Notes (“8% Subordinated Notes”) are due on October 7, 2012 and at issuance were subordinated to 8% Convertible Notes sold in 2009. All of the 8% Convertible Notes were converted in 2010, and the holders of the 8% Subordinated Notes may convert these notes into shares of the Company’s common stock. The 8% Subordinated Notes are mandatorily convertible into shares of the Company’s common stock at a conversion price equal to the lesser of $0.80 per share of common stock or 80% of the price per share of common stock sold in a qualified funding event, defined as the sale of convertible debt or equity in an offering resulting in at least $3,000,000 of gross proceeds to the Company.
11
The conversion rights embedded in the 8% Subordinated Notes are accounted for as derivative financial instruments because of the beneficial conversion feature embedded therein. The beneficial conversion feature was valued at date of issuance using the Black- Scholes-Merton options pricing model.
Warrants to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.00 per share were issued for each $10,000 of 8% Subordinated Notes sold and expire 5 years from date of issue. The warrants were valued using the Black-Scholes-Merton options pricing model.
10% Convertible Promissory Notes
The 10% Convertible Promissory Notes (“10% Convertible Notes”) are due on September 30, 2012 and are convertible into common stock at the option of the holder at any time prior to maturity at an initial fixed conversion price of $0.45 per share. After the 10% Convertible Notes have been outstanding for six months, the conversion price adjusts to 75% of the average of the three lowest closing bid prices during the 10-day period preceding the conversion date. If the Company conducts a registered public offering, as defined, of its common stock (or securities convertible into or exercisable for shares of common stock), the conversion price is subject to adjustment.
If the Company raises $5,000,000 or more from the sale of capital stock or debt securities, it shall offer to redeem the outstanding 10% Convertible Notes for cash at rates ranging from 110% - 115%, depending on the date of the redemption after the issue date, plus accrued but unpaid interest. The holders are not required to tender the 10% Convertible Notes for redemption.
For a financing of less than $5,000,000, the Company shall offer to redeem a pro rata portion of the 10% Convertible Notes.
Warrants to purchase 22,200 shares of the Company’s common stock at $0.80 per share were issued for each $10,000 of 10% Convertible Notes sold and expire 4 years from date of issue. The warrants may be exercised in full or in part and, at the option of the holder, may be exercised on a net issuance basis.
The conversion rights embedded in the 10% Convertible Notes are accounted for as derivative financial instruments because of the beneficial conversion feature embedded therein. The beneficial conversion feature was valued at date of issuance using the Black- Scholes-Merton options pricing model.
The warrants contain an embedded net issuance feature that causes them to be accounted for as derivative financial instruments because of the variable number of common stock shares that could be issued. This was valued at date of issuance using the Black-Scholes-Merton options pricing model.
During the three months ended June 30, 2011, $248,000 of the 10% Notes were converted into common stock as provided for by terms of the debt instrument. This resulted in a $62,000 realized gain to the Company, included in the amount reported in the condensed consolidated statement of operations as “gain on derivative financial instruments”, and measured by the difference between the fair value of the beneficial conversion feature just prior to the conversion and the fair value of the beneficial conversion feature as of the most recent mark-to-market calculation. The beneficial conversion feature was valued at dates of conversion using the Black-Scholes-Merton option pricing model with the following assumptions: risk-free interest rates ranging from 0.38% to 0.83%, expected life of 1.5 years, expected volatility of 63% and dividend yield of zero. Related unamortized discount of $175,000 was recognized as interest expense as a result of the conversions.
Bank Loan
At December 31, 2010 the bank loan bore interest at 3.54% and was due in January 2011. The bank loan was renewed at 3.45% and is currently due in February 2012. It was classified as long-term at December 31, 2010 and as current debt at June 30, 2011. See Note 4.
As a condition to making the loan, the bank received a Certificate of Deposit for $200,000 from the Company’s Chief Executive Officer (“CEO”) as standby collateral. As consideration for this standby collateral, the Company’s Board of Directors authorized (i) the reimbursement of the CEO’s out-of-pocket cash costs associated with this transaction, (ii) the Company’s receipt of interest from the Certificate of Deposit as an offset to the Company’s interest expense, and (iii) the monthly issuance of 728 shares of the Company’s common stock to the CEO.
12
NOTE 6 — WARRANTS
The Company has issued stock warrants to certain employees, vendors, investors and independent contractors. The warrants are immediately exercisable for a period of three to ten years and enable the holders to purchase shares of the Company’s common stock at exercise prices ranging from $0.01 - $3.12. The warrants were valued using the Black-Scholes-Merton options pricing model. The weighted average remaining contractual term for the outstanding warrants is 2.84 years.
Shares under
warrants
|
Weighted
average
exercise
price
|
|||||||
Exercisable at December 31, 2010
|
24,466,460 | $ | 0.93 | |||||
Granted
|
200,000 | $ | 0.36 | |||||
Expired or canceled
|
(191,382 | ) | $ | 2.30 | ||||
Exercised
|
(131,000 | ) | $ | 1.57 | ||||
Exercisable at June 30, 2011
|
24,344,078 | $ | 1.02 |
The weighted-average grant date fair market value of all warrants granted during the six months ended June 30, 2011 was $0.36 per share.
The warrants expire as follows:
Year of
expiration
|
Quantity
|
Average
exercise
price
|
||||||
2013
|
9,207,213 | $ | 0.96 | |||||
2014
|
9,302,363 | $ | 0.91 | |||||
2015
|
5,180,752 | $ | 1.00 | |||||
2016
|
278,750 | $ | 0.31 | |||||
2017
|
375,000 | $ | 1.00 |
In June 2011, 385,532 warrants that were scheduled to expire in July and August 2011 were extended for three years. No additional expense was recognized as a result of this extension.
2008 Stock Incentive Plan
In 2008 the Company’s stockholders approved the Vicor Technologies, Inc. 2008 Stock Incentive Plan (the “2008 Plan”). This plan provides for the granting of options to purchase up to 5,000,000 shares of the Company’s common stock. Directors, officers and other employees of the Company and its subsidiaries, and other persons who provide services to the Company are eligible to participate in the 2008 Plan, and both incentive stock options and nonqualified stock options may be issued under the provisions of the 2008 Plan. The 2008 Plan is administered by the Board of Directors and its Compensation Committee.
Information regarding the 2008 Plan is as follows:
Number of
Shares
|
Weighted-
Average
Exercise
Price
|
Options
Exercisable
|
Weighted-
Average
Exercise
Price
|
|||||||||||||
Outstanding at December 31, 2010
|
3,817,500 | $ | 0.73 | 2,983,750 | $ | 0.76 | ||||||||||
Granted or vested
|
275,000 | $ | 0.44 | 169,000 | $ | 0.42 | ||||||||||
Canceled
|
(150,000 | ) | $ | 0.65 | (138,000 | ) | $ | 0.65 | ||||||||
Outstanding at June 30, 2011
|
3,942,500 | $ | 0.71 | 3,014,750 | $ | 0.55 | ||||||||||
Reserved for future option grants at June 30, 2011
|
1,057,500 |
13
Activity in nonvested options is as follows:
Number of
Shares
|
Weighted
average
grant-date
fair value
|
|||||||
Outstanding at December 31, 2010
|
833,750 | $ | 332,000 | |||||
Granted
|
200,000 | 70,000 | ||||||
Vested or canceled
|
(106,000 | ) | (46,000 | ) | ||||
927,750 | $ | 356,000 |
The fair value for these options was estimated at the date of grant using the Black-Scholes-Merton options pricing model.
The 2008 Plan has a weighted average grant date fair value of $0.56 and weighted average remaining contractual term for the vested options of 5.5 years.
Compensation expense related to the granting of options under the 2008 Plan was approximately $272,000 and $76,000 for the six months ended June 30, 2010 and 2011, respectively.
NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”. This Topic defines fair value, establishes a measurement framework and expands disclosures about fair value measurements.
The Company measures financial assets in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
•
|
Level 1 — Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow a company to sell its ownership interest back at net asset value (“NAV”) on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities or funds.
|
|
•
|
Level 2 — Valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active.
|
|
•
|
Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, such as options pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
|
The availability of observable inputs can vary from instrument to instrument and in certain cases the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument.
Recurring Fair Value Measurement Valuation Techniques
The fair value for certain financial instruments is derived using pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available will generally have a higher degree of price transparency than financial instruments that are thinly traded or not quoted. In accordance with ASC Topic 820, the criteria used to determine whether the market for a financial instrument is active or inactive is based on the particular asset or liability. As a result, the valuation of these financial instruments included significant management judgment in determining the relevance and reliability of market information available. The Company considered the inactivity of the market to be evidenced by several factors, including limited trading of the Company’s stock since the commencement of trading in July 2007.
14
Derivative Financial Instruments
The Company’s derivative financial instruments consist of conversion options embedded in 8% Subordinated Convertible Promissory Notes, 10% Convertible Notes and Series B Preferred Stock and warrants to purchase common stock issued with 10% Convertible Notes and preferred stock. These instruments are valued with pricing models commonly used by the financial services industry using inputs generally observable in the financial services industry. These models require significant judgment on the part of management, including the inputs utilized in its pricing models. The Company’s derivative financial instruments are categorized in Level 3 of the fair value hierarchy. The Company estimates the fair value of derivatives utilizing the Black-Scholes-Merton option pricing model and the following assumptions:
Warrants
|
Beneficial
Conversion -
Preferred Stock
|
Beneficial
Conversion -
Convertible Notes
|
||||||||||
Year ended December 31, 2010:
|
||||||||||||
Risk-free interest rate
|
1.27% - 2.55 | % | 1.27% - 2.55 | % | 0.64% - 1.43 | % | ||||||
Expected volatility
|
63 | % | 63 | % | 63 | % | ||||||
Expected life (in years)
|
2.25 - 4.50 | 2.25 - 4.50 | 1.50 - 3.00 | |||||||||
Expected dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
Six months ended June 30, 2011:
|
||||||||||||
Risk-free interest rate
|
1.29% - 2.54 | % | 2.24% - 2.54 | % | 0.38% - 1.64 | % | ||||||
Expected volatility
|
63 | % | 63 | % | 63 | % | ||||||
Expected life (in years)
|
1.25 - 3.25 | 1.50 - 3.50 | 1.25 - 1.59 | |||||||||
Expected dividend yield
|
0 | % | 0 | % | 0 | % |
The Company’s methodology to estimate volatility of its common stock is based on an average of published volatilities contained in the most recent audited financial statements of other publicly-reporting companies in industries similar to that of the Company.
Level 3 Assets and Liabilities
Level 3 liabilities include instruments whose value is determined using pricing models and for which the determination of fair value requires significant management judgment or estimation. As of December 31, 2010 and June 30, 2011 instruments measured at fair value on a recurring basis categorized as Level 3 represented approximately 42% and 28% of the Company’s total liabilities, respectively.
Fair values of liabilities measured on a recurring basis at as follows:
Fair Value
|
Quoted prices in
active markets for
identical liabilities
(Level 1)
|
Significant
other observ-
able inputs
(Level 2)
|
Significant
Unobservable
inputs (Level
3)
|
|||||||||||||
Liabilities:
|
||||||||||||||||
Derivative financial instruments - December 31, 2010
|
$ | 7,692,000 | $ | - | $ | - | $ | 7,692,000 | ||||||||
Derivative financial instruments - June 30, 2011
|
$ | 1,274,000 | $ | - | $ | - | $ | 1,274,000 |
Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the gains for liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs. The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2011:
15
Warrants
|
Beneficial
Conversion -
Preferred
Stock
|
Beneficial
Conversion -
Convertible
notes
|
Total
|
|||||||||||||
Balance, December 31, 2010
|
$ | 2,956,000 | $ | 1,256,000 | $ | 3,480,000 | $ | 7,692,000 | ||||||||
Included in earnings:
|
||||||||||||||||
Realized loss (gain)
|
- | - | (62,000 | ) | (62,000 | ) | ||||||||||
Unrealized loss (gain)
|
(2,613,000 | ) | (1,003,000 | ) | (2,740,000 | ) | (6,356,000 | ) | ||||||||
Purchases, sales and other
|
- | - | - | - | ||||||||||||
Settlements and issuances - net
|
- | - | - | - | ||||||||||||
Net transfers in and/or out of Level 3
|
- | - | - | - | ||||||||||||
Balance, June 30, 2011
|
$ | 343,000 | $ | 253,000 | $ | 678,000 | $ | 1,274,000 |
NOTE 9 — RELATED PARTY TRANSACTIONS
In 2003 the Company purchased the software related to the PD2i Cardiac Analyzer™ from one of its founding scientists, who is now an employee and a director. Terms of the Purchase and Royalty Agreement provide that $100,000 of the purchase price be deferred until the Company begins receiving revenue from the PD2i Cardiac Analyzer™. Accordingly, this amount, less payments plus accrued royalties, is included in the accompanying Condensed Consolidated Balance Sheet as Due to Related Party. The Agreement further provides for an ongoing royalty to be paid to the scientist amounting to 10% of amounts received by the Company from any activities relating to the PD2i Cardiac Analyzer™ for the life of the patents. Royalty payments will commence after the Company has recovered its development costs in full.
On January 1, 2007 the Company entered into a Service Agreement (“Service Agreement”) with ALDA & Associates International, Inc. (“ALDA”), a consulting company owned and controlled by the Company’s Chief Executive and Financial Officer whereby the Company’s employees became employees of ALDA under a Professional Employer Organization (“PEO”) arrangement. Associated costs amounted to $380,000 for the three months ended June 30, 2010. The Service Agreement, which was a cost reimbursement only contract, provided for reimbursement of all of ALDA’s actual payroll and insurance related costs for these employees and was terminated effective January 1, 2011.
As discussed in Note 4 the Company has a bank loan. As a condition to making the loan, the bank received a certificate of deposit valued at $200,000 from the Company’s Chief Executive Officer as standby collateral.
NOTE 10 — COMMITMENTS AND CONTINGENCIES
From time to time the Company may become subject to threatened and/or asserted claims arising in the ordinary course of business. Management is not aware of any matters, either individually or in the aggregate, that are reasonably likely to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
On April 11, 2011 the Company was served with a derivative suit (styled Craig Hudson, Mark Woods and Edward Wiesmeier, derivatively on behalf of nominal defendant Vicor Technologies, Inc., a Delaware corporation, Plaintiffs vs. David H. Fater, et al., Defendants — Circuit Court of the Fifteenth Judicial Circuit, In and For Palm Beach County, Florida, Case No. 50-2011 CA 005338). This derivative suit alleges claims for breach of fiduciary duty, abuse of control and gross mismanagement against all of the directors as well as a claim for unjust enrichment against David H. Fater, the Company’s President and Chief Executive Officer.
NOTE 11 — SUBSEQUENT EVENTS
In July 2011 the Company entered into a Securities Purchase Agreement (“SPA”) with Centaurian Fund LP (“Centaurian”) pursuant to which Vicor may, from time to time, issue and sell to Centaurian up to $10,000,000 of common stock over a 3-year period.
Also in July 2011 the Company filed a Registration Statement with the SEC to register 15,140,000 shares of common stock pursuant to the SPA with Centaurian. The SPA became effective on August 10, 2011, the date the registration statement became effective. The Company has the ability to raise approximately $2,100,000 from this offering, based on current market prices, and has the ability to register additional shares in the future through the use of additional registration statements. However, there can be no assurance that the SPA and Registration Statement will be utilized, and the actual amounts raised will depend on the Company’s use of the SPA and Registration Statement as well as market conditions at those times.
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In this Quarterly Report on Form 10-Q, “Vicor,” and the terms “Company”, “we”, “us” and “our” refer to Vicor Technologies, Inc. and its subsidiaries, unless the context indicates otherwise.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial condition, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including those risks described in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2011, and the risks discussed in other SEC filings. These risks and uncertainties as well as other risks and uncertainties could cause our actual results to differ significantly from management’s expectations. The forward-looking statements included in this Quarterly Report on Form 10-Q reflect the beliefs of our management on the date of this report. We undertake no obligation to update publicly any forward-looking statements for any reason.
Plan of Operations
The Company is a development-stage enterprise. Operating revenues commenced in 2010, and the Company has engaged various independent sales agents and sales representatives to market and sell its products in selected geographic areas in the United States. Revenues will be predominately the result of equipment sales, fees from physicians and other health-care providers related to the analysis of test results and licensing fees.
In April 2011 the Company received 510(k) clearance from the U.S. Food and Drug Administration for its PD2i® nonlinear algorithm and software to be used as a measure of heart rate variability at rest and in response to controlled exercise and paced respiration (Ewing Maneuvers) in patients specifically undergoing cardiovascular disease testing. Physician use of the PD2i Analyzer™ is supported by an expanding body of literature demonstrating the value of the PD2i® nonlinear algorithm as a metric for risk stratifying specific target populations for future pathological events, including cardiovascular disease patients for death resulting from arrhythmia or congestive heart failure, diabetics for the presence of diabetic autonomic neuropathy (DAN) and trauma victims for imminent death absent immediate lifesaving intervention.
This approval enables Vicor to market the PD2i Analyzer™ directly to cardiologists as a diagnostic specifically targeted for use in cardiovascular disease testing, including the Ewing Maneuvers which are performed during PD2i Analyzer™ ECG data collection. We view this as recognition of the PD2i Analyzer™ as a meaningful metric for cardiovascular testing and validation of, from a regulatory perspective, our use of the Internet for the delivery of test data and analyses. While cardiologists are already among users of the PD2i Analyzer™ as a diagnostic for heart rate variability, which is a widely-accepted measure of autonomic nervous system health and by extension cardiac health, we believe this new clearance will contribute positively to our cardiologist-directed marketing efforts of the PD2i Analyzer™ and spur market acceptance of the PD2i Analyzer™ as a valuable new diagnostic for cardiovascular disease testing.
Our plan of operations consists of:
|
1.
|
Increasing sales of the PD2i Analyzer™ to physicians and health care facilities in the United States through the use of independent sales agents and direct sales personnel.
|
|
2.
|
Raising additional capital with which to expand the sales and administrative infrastructure and fund ongoing operations until our operations generate positive cash flow.
|
|
3.
|
Completing various clinical trials and 510(k) submissions to secure additional marketing claims for the PD2i Analyzer™ to enhance and accelerate marketing efforts.
|
|
4.
|
Initiating international sales of the PD2i Analyzer™ and PD2i-VS™ (Vital Sign), including securing CE Mark Clearance.
|
However, we cannot assure that we will be successful in raising additional capital to implement our business plan. Further, we cannot assure, assuming that we raise additional funds, that we will achieve profitability or positive cash flow. If we are not able to timely and successfully raise additional capital and/or achieve profitability and positive cash flow, our operating business, financial condition, cash flows and results of operations may be materially and adversely affected.
17
The following are deemed to be the most significant accounting estimates affecting us and our results of operations:
Research and Development Costs
Research and development costs include payments to collaborative research partners and costs incurred in performing research and development activities, including wages and associated employee benefits, facilities and overhead costs. These are expensed as incurred.
Intellectual Property
Intellectual property, consisting of patents and other proprietary technology, are stated at cost and amortized on the straight-line basis over their estimated useful economic lives. Costs and expenses incurred in creating intellectual property are expensed as incurred. The cost of purchased intellectual property is capitalized. Software development costs are expensed as incurred.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. Revenue is considered realized and earned when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; fees to the customer are fixed or determinable; and collection of the resulting receivable is reasonably assured.
The Company sells equipment to physicians and other health care providers (“Customer” or “Customers”) through both sales representatives employed by the Company and also independent sales agents. Revenues from equipment sales to Customers are generally recognized when title transfers to the Customer, typically upon delivery and acceptance, and includes training that is provided at the time of product delivery. Revenues from sales of equipment to independent sales agents to be used by the agents as demonstration units are recognized upon shipment.
The Company’s normal payment terms are net 30 days. However, in those cases where the Company grants extended payment terms to a Customer, the Company defers revenue recognition until Customer acceptance of the equipment.
The Company also enters into lease agreements for certain equipment sales. Revenue from the leases is recognized ratably over the term of the lease.
Revenues from the analysis of test results are recognized upon provision of the test results to the Customers.
Accounting for Stock-Based Compensation
The Company uses the fair value-based method of accounting for stock-based employee compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the grant date and is recognized over the periods in which the related services are rendered.
The Company has also granted stock purchase warrants to independent consultants and contractors and values these warrants using the fair value-based method described in the preceding paragraph. The compensation cost so determined is recognized over the period the services are provided which usually results in compensation cost being recognized at the date of the grant.
Accounting for Derivative Financial Instruments
We evaluate financial instruments using the guidance provided by ASC 815 and apply the provisions thereof to the accounting of items identified as derivative financial instruments not indexed to our stock.
Fair Value of Financial Instruments
The Company follows the provisions of ASC 820. This Topic defines fair value, establishes a measurement framework and expands disclosures about fair value measurements.
The Company uses fair value measurements for determining the valuation of derivative financial instruments payable in shares of its common stock. This primarily involves option pricing models that incorporate certain assumptions and projections to determine fair value. These require management judgment.
Results of Operations
As a development stage enterprise, Vicor began generating revenues in 2010. Because the revenue volume is low relative to operating expenses and other gains and/or losses, management believes the most informative presentation is to present and comment separately on revenues and cost of sales, operating expenses and gain/loss on derivative financial instruments.
18
Revenues and cost of sales
Three months ended June 30,
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2010
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2011
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Revenue:
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Sales
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$ | 8,000 | 100.0 | % | $ | 129,000 | 92.8 | % | ||||||||
Lease income
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- | 0.0 | % | 10,000 | 7.2 | % | ||||||||||
8,000 | 100.0 | % | 139,000 | 100.0 | % | |||||||||||
Cost of revenue
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2,000 | 25.0 | % | 72,000 | 51.8 | % | ||||||||||
Gross profit
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$ | 6,000 | 75.0 | % | $ | 67,000 | 48.2 | % |
Six months ended June 30,
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2010
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2011
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Revenue:
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Sales
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$ | 108,000 | 100.0 | % | $ | 288,000 | 93.8 | % | ||||||||
Lease income
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- | 0.0 | % | 19,000 | 6.2 | % | ||||||||||
108,000 | 100.0 | % | 307,000 | 100.0 | % | |||||||||||
Cost of revenue
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87,000 | 80.6 | % | 156,000 | 50.8 | % | ||||||||||
Gross profit
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$ | 21,000 | 19.4 | % | $ | 151,000 | 49.2 | % |
The increased gross profit for the six months of 2011 results from an improved pricing structure and the efforts of our increased number of sales representatives.
Operating expenses and gain on derivative financial instruments
Three months ended June 30,
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2010
|
2011
|
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Operating expenses:
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Research and development
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$ | 193,000 | 8.6 | % | $ | 163,000 | 5.4 | % | ||||||||
Selling, general and administrative
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1,488,000 | 66.5 | % | 1,670,000 | 55.6 | % | ||||||||||
Interest
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558,000 | 24.9 | % | 1,172,000 | 39.0 | % | ||||||||||
Total operating expenses
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$ | 2,239,000 | 100.0 | % | $ | 3,005,000 | 100.0 | % | ||||||||
Gain on derivative financial instruments
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$ | 454,000 | $ | 3,207,000 |
Six months ended June 30,
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2010
|
2011
|
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Operating expenses:
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||||||||||||||||
Research and development
|
$ | 350,000 | 8.3 | % | $ | 285,000 | 5.1 | % | ||||||||
Selling, general and administrative
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2,857,000 | 67.9 | % | 3,125,000 | 55.7 | % | ||||||||||
Interest
|
1,003,000 | 23.8 | % | 2,203,000 | 39.2 | % | ||||||||||
Total operating expenses
|
$ | 4,210,000 | 100.0 | % | $ | 5,613,000 | 100.0 | % | ||||||||
Gain on derivative financial instruments
|
$ | 337,000 | $ | 6,418,000 |
19
Three months ended June 30, 2011 compared to the three months ended June 30, 2010
Research and Development
Research and development costs decreased $30,000 for the three months ended June 30, 2011 compared to 2010. This was primarily the result of lower costs of clinical studies and increased research by independent researchers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $182,000 for the three months ended June 30, 2011. Significant components of the net increase include:
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•
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Recurring payroll costs increased $33,000 due to higher sales-related payroll and increased employee benefit costs.
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•
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Amortization of fees included in deferred financing costs increased 2011 expense by $91,000.
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•
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Professional fees increased $71,000. This increase is primarily attributable to the services by our general counsel as well as independent counsel engaged to assist management and the Board of Directors in matters related to a special investigation authorized by the Board of Directors.
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•
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Increased 2011 investor relations expense of $40,000 compared to 2010.
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•
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Decrease of $27,000 in consulting fees as a result of changes in the mix of consultants used by Vicor and completion of certain 2010 projects that did not recur in 2011.
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•
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Decrease of $57,000 in equity-based compensation primarily because of certain options granted in 2010 but not repeated in 2011.
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Interest Expense
Interest expense increased $614,000 for the three months ended June 30, 2011, most of which did not require the expenditure of cash. The increase was primarily caused by $469,000 of increased amortization of derivative discounts and debt discount for certain nonderivative warrants, and $90,000 of interest on our debt instruments. Interest expense related to the conversion of 8% Notes in 2010 and 10% Notes in 2011 was $51,000 greater in 2011.
Gain on derivative financial instruments
The gain on derivative financial instruments increased $2,753,000 for the three months ended June 30, 2011. The primary reason for the increase was the downward movement in the Company’s stock price in the second quarter of 2011. The fair value resulting from the periodic mark-to-market calculation varies inversely to the change in the stock price used in the Black-Scholes-Merton options pricing model.
Six months ended June 30, 2011 compared to the six months ended June 30, 2010
Research and Development
Research and development costs decreased $65,000 for the six months ended June 30, 2011 compared to 2010. This was primarily the result of lower costs of clinical studies and increased research by independent researchers. We anticipate that future research and development expenses will remain relatively low due to independent research efforts and the absence of a need for large scale clinical trials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $268,000 for the six months ended June 30, 2011. Significant components of the net increase include:
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•
|
Decrease of $269,000 in payroll and related costs were affected by a decrease in 2011 in equity-based compensation expense. There were numerous management hires in the first quarter of 2010 with stock and stock option incentives. Recurring payroll costs increased $184,000 due to higher sales-related payroll and increased employee benefit costs.
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•
|
Amortization of certain fees included in deferred financing costs increased 2011 expense by $172,000.
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•
|
Professional fees increased $71,000. This increase is primarily attributable to the services by our general counsel as well as independent counsel engaged to assist management and the Board of Directors in matters related to a special investigation authorized by the Board of Directors.
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•
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Increased 2011 investor relations expense of $25,000 compared to 2010.
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20
Interest expense increased $1,200,000 for the six months ended June 30, 2011, most of which did not require the expenditure of cash. The increase was primarily caused by $1,040,000 of increased amortization of derivative discounts and debt discount for certain nonderivative warrants; and $251,000 of interest on our debt instruments. Interest expense related to the conversion of 8% Notes in 2010 and 10% Notes in 2011 was 89,000 less in 2011.
Gain on derivative financial instruments
The gain on derivative financial instruments increased $6,081,000 for the six months ended June 30, 2011. The primary reason for the increase was the downward movement in the Company’s stock price in the second quarter of 2011. The fair value resulting from the periodic mark-to-market calculation varies inversely to the change in the stock price used in the Black-Scholes-Merton options pricing model.
Liquidity and Capital Resources
The Company needs additional sources of financing.
We generated revenues of $288,000 in the six months ended June 30, 2011, which compares very favorably to 2010 annual total revenues of $189,000. While our revenues are generally in accord with our current business plan, they are not yet sufficient to fully execute our business plan and continue development of our products. Management recognizes that the Company must raise additional capital to successfully continue operations, and, accordingly, we continue to look to outside sources to raise capital.
At June 30, 2011 we had a working capital deficiency of $3,092,000 and $26,000 in cash. Based on our cash balance as of August 10, 2011, management believes that we have sufficient funds to continue current operations through at least August 25, 2011. We anticipate various short-term financings over the next 3 - 5 months to provide liquidity in anticipation of a more significant financing event. These include short-term borrowings and sales of equity.
In July 2011 the Company entered into a Securities Purchase Agreement (“SPA”) with Centaurian Fund LP (“Centaurian”) pursuant to which Vicor may, from time to time, issue and sell to Centaurian up to $10,000,000 of common stock over a 3-year period.
Also in July 2011 the Company filed a Registration Statement with the SEC to register 15,140,000 shares of common stock pursuant to the SPA with Centaurian. The SPA became effective on August 10, 2011, the date the registration statement became effective. The Company has the ability to raise approximately $2,100,000 from this offering, based on current market prices, and has the ability to register additional shares in the future through the use of additional registration statements. However, there can be no assurance that the SPA and Registration Statement will be utilized, and the actual amounts raised will depend on the Company’s use of the SPA and Registration Statement as well as market conditions at those times.
We engaged in no significant financing activities during the three months ended June 30, 2011. As of June 30, 2011 our primary debt instruments consist of 8% Subordinated Convertible Notes (“8% Subordinated Notes”) and 10% Convertible Promissory Notes (“10% Convertible Notes”).
The 8% Subordinated Notes are due in October 2012, and there are currently no restrictions on their conversion into common stock. The 8% Subordinated Notes are mandatorily convertible into shares of the Company’s common stock at a conversion price equal to the lesser of $0.80 per share of common stock or 80% of the price per share of common stock sold in a qualified funding event, defined as the sale of convertible debt or equity in an offering resulting in at least $3,000,000 of gross proceeds to the Company. Once the 8% Subordinated Notes are converted into shares of common stock, this will eliminated the indebtedness represented by the 8% Subordinated Notes and result in there being no further interest burden to the Company for the 8% Subordinated Notes.
Warrants to purchase 12,500 shares of the Company’s common stock at $1.00 per share were issued for each $10,000 of 8% Subordinated Notes sold and expire 5 years from date of issue.
The 10% Convertible Notes are due in September 2012 and are convertible into common stock at the option of the holder at any time prior to maturity at a conversion price of 75% of the average of the three lowest closing bid prices during the 10-day period preceding the conversion date. If the Company conducts a registered public offering, as defined, of its common stock (or securities convertible into or exercisable for shares of common stock), the conversion price is subject to adjustment.
If the Company raises $5,000,000 or more from the sale of capital stock or debt securities, it shall offer to redeem the 10% Convertible Notes for cash at rates ranging from 110% - 115%, depending on the date of the redemption after the issue date, plus accrued but unpaid interest. The holders are not required to tender the 10% Convertible Notes for redemption.
For a financing of less than $5,000,000, the Company shall offer to redeem a pro rata portion of the 10% Convertible Notes.
21
Warrants to purchase 22,200 shares of the Company’s common stock at $0.80 per share were issued for each $10,000 of 10% Convertible Notes sold and expire 4 years from date of issue. The warrants may be exercised in full or in part and, at the option of the holder, may be exercised on a cashless basis.
In April 2011 the holders of the 10% Convertible Notes began the process of converting their notes into shares of common stock under the supervision of an independent investment manager. Such conversions are expected to be handled in an orderly manner, one that we expect not to have a significant impact on our common stock prices. The conversions are expected to be completed in approximately six months.
We have raised approximately $27,000,000 since our inception in 2000 in a series of private placements of our common stock, convertible preferred stock and convertible notes to accredited investors, a number of whom are physicians.
However, we may not be successful in raising additional capital. Further, assuming that we raise additional funds, the Company may not achieve profitability or positive cash flow. If we are not able to timely and successfully raise additional capital and/or achieve profitability or positive cash flow, our operating business, financial condition, cash flows and results of operations may be materially and adversely affected.
Going Concern
The Company’s financial statements as of and for the three and six months ended June 30, 2011 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $4,806,000 for the year ended December 31, 2010. Although the Company had net income of $956,000 for the six months ended June 30, 2011, this was affected by a $6,418,000 gain on derivative financial instruments; absent this gain, the Company had a loss of $5,462,000. At June 30, 2011 the Company had a working capital deficiency of $3,092,000, an accumulated deficit of $59,471,000 and a net capital deficiency of $6,804,000. Although sales commenced in 2010, the Company anticipates operating losses over the next 12 months (and likely longer) as it continues to incur expenditures necessary to further the commercial development of its products. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Management recognizes that the Company must generate additional funds to successfully commercialize its products. Management plans include the sale of additional equity or debt securities, alliances or other partnerships with entities interested in and having the resources to support the further development of its products as well as other business transactions to assure continuation of the Company’s development and operations. The Company is executing its plan to secure additional capital through a multi-part funding strategy. The Company anticipates that the amount of capital generated by this plan will be sufficient to permit completion of various clinical trials and provide sufficient working capital for the next 18 months, by which time it is expected that the Company will generate positive cash flow through the sales of its products.
However, no assurances can be given that the Company will be successful in raising additional capital or entering into business alliances. Further, there can be no assurance, assuming the Company successfully raises additional funds or enters into a business alliance, that the Company will achieve profitability or positive cash flow. If the Company is not able to timely and successfully raise additional capital and/or achieve positive cash flow, its business, financial condition, cash flows and results of operations will be materially and adversely affected.
Off-Balance Sheet Arrangements
We have not entered into any transaction, agreement or other contractual arrangement with an unconsolidated entity under which we have:
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•
|
A retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit;
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|
•
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Liquidity or market risk support to such entity for such assets; or
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•
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An obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging, or research and development services with us.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
22
Item 4. Controls and Procedures.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of David H. Fater, our Chief Executive Officer, and Thomas J. Bohannon, our Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that at June 30, 2011 our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There was no change in our internal controls or in other factors that could affect these controls during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 10 — Commitments and Contingencies and Note 11 — Subsequent Events in the Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report for information about legal proceedings in which we are involved.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended June 30 2011, Vicor:
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•
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Issued 940,044 shares of common stock and 200,000 warrants to purchase common stock at a weighted average exercise price of $0.36 for a term of 5 years to employees and consultants for services rendered.
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•
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Issued 75,000 options to an employee at an exercise price of $0.13 per share for a term of 7 years, vesting immediately, pursuant to the 2008 Stock Option Plan.
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•
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Issued 25,000 shares of common stock as a result of the exercise of warrants.
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•
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Issued 3,444,549 shares of common stock upon the conversion of $247,298 principal amount of 10% Notes and $148,617 of accrued interest.
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These securities issued in the foregoing transactions were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”) or Rule 506 of Regulation D, as transactions by an issuer not involving a public offering. All of the investors were knowledgeable, sophisticated and had access to comprehensive information about the Company and represented their intention to acquire the securities for investment only and not with a view to distribute or sell the securities. No general advertising or solicitation was used in selling the securities and no commissions or broker’s fees were paid for the sale of the securities. The Company placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Reserved and removed.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit No.
|
Description
|
|
31.1
|
Certification of David H. Fater, Chief Executive Officer and President, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.*
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31.2
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Certification of Thomas J. Bohannon, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.*
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32.1
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Certification of David H. Fater, Chief Executive Officer and President of Vicor Technologies, Inc., pursuant to 18 U.S.C. 1350.*
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32.2
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Certification of Thomas J. Bohannon, Chief Financial Officer of Vicor Technologies, Inc., pursuant to 18 U.S.C. 1350.*
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*
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Filed herewith
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23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 22, 2011
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Vicor Technologies, Inc.
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|
By:
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/s/ David H. Fater
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|
David H. Fater
|
||
Chief Executive Officer and President
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||
By:
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/s/ Thomas J. Bohannon
|
|
Name: Thomas J. Bohannon
|
||
Title: Chief Financial Officer
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24