RNS Number:3978T
AOI Medical, Inc.
30 April 2008
AOI Medical, Inc.
("AOI" or "the Company")
Preliminary Results
London, UK, 30 April 2008 - AOI Medical, Inc., (AIM: AOI), the medical device
company focusing on the development and commercialisation of innovative
orthopaedic medial devices for the spine and trauma markets, today announces its
preliminary results for the year ended 31 December 2007.
Highlights
* Successful Initial Public Offering (IPO) on the AIM market of the
London Stock Exchange, raising #8 million (gross proceeds)
* FDA grants AOI approval to proceed with 60 patient confirmatory
clinical study for Ascendx(TM) VCF Reduction System (treatment for
vertebral compression fractures)
* Clinical trial for Ascendx(TM) to commence by mid May 2008
* Intellectual Property Portfolio expanded with three new patent
applications submitted
* Clinical advisory board established and expanded
* Moved into a new 9,700 sq.ft. corporate facility that includes a 400
sq.ft. biomechanical lab
Bill Christy, CEO of AOI said:
"We have made good progress in 2007 having advanced our technology, listed on
AIM, raised significant finance, and attracted a powerful clinical advisory
board. With the clinical trial for Ascendx(TM) about to start, the Company is a
step closer to the market. We strongly believe that the product has substantial
potential and we expect to be able to rapidly penetrate a high growth and high
value market.
"Our Ascendx(TM) system will give the clinician the ability to reduce a
vertebral compression fracture and deploy bio-material uniformly in a minimally
invasive approach. We see the clinical data, FDA clearance of Ascendx(TM) and
the beginning of our sales to be major value drivers for the Company.
Additionally the progress on our other technology platforms, while early, is
encouraging."
Enquiries:
AOI Medical Inc. Tel: +1 407 770 1800
William J. Christy, CEO
Angela Johnston, CFO
Financial Dynamics Tel: +44 (0) 20 783 3113
Ben Atwell
Susan Quigley
Numis Securities Ltd Tel: +44 (0)20 7260 1000
David Poutney
Michael Meade
Overview
2007 was an important year in AOI's development. In January we were working
primarily in the laboratory on product development and by the end of the first
half of the year we had finalized prototypes. We now have a complete set of
sterilized tools for Ascendx(TM), ready for clinical trials and available for
commercialization in the spine market upon regulatory approval.
We also raised gross proceeds of #8 million through our IPO on the AIM market of
the London Stock Exchange in June 2007 and raised our profile in the industry.
This has enabled us to form a highly impressive clinical advisory board and
attract a strong Board of Directors.
Ascendx(TM) VCF Reduction System ("Ascendx(TM)")
Ascendx(TM) is a set of tools designed to treat vertebral compression fractures
of the spine caused by osteoporosis, cancer or trauma. Ascendx(TM) will
comprise two main instruments: a cutting device that creates a cavity in the
cancellous bone, and a reduction device that is used to restore the height of
the fractured vertebra and which can deliver and contain the bio-material
(bonding agent) in the cavity.
On 4 July 2007, the Company successfully processed its 510(k) submission for
Ascendx(TM). At this time, it was the Company's expectation that, subject to
the FDA approving the 510(k) submission by the fourth quarter of 2007,
Ascendx(TM) would be launched by the end of 2007.
In October 2007, the FDA extended the consultation period for a further 90 days
before deciding whether to give the Company approval to market Ascendx(TM) in the
United States. This was followed on 26 October 2007, by the FDA asking AOI to
conduct a clinical study of its Ascendx(TM) technology. The Company then expected
the commercial launch of Ascendx(TM) in the US to be delayed to H2 2008.
AOI received final approval from the FDA on 23 April 2008, to commence a
clinical trial for its Ascendx(TM) technology, with the study expected to start by
mid-May 2008. Whilst the Company remains hopeful of obtaining FDA regulatory
approval in time to launch Ascendx(TM) commercially before the end of Q4 2008 it
is possible that commercial launch might be delayed into early 2009 based on
response time from the FDA.
Ascendx(TM) presents an attractive market opportunity. The size of the market is
estimated,to be in the region of $400 million annually, rising to over $700
million by 2012 (source: Cowen and Company, LLC, 18 January 2008).
BAMF Trauma (Balloon Assisted Management of Trauma Fractures)
BAMF Trauma (Balloon Assisted Management of Trauma Fractures) is a removable,
inflatable nail for the stabilisation of fractures of the long bones of the arms
and legs. AOI's BAMF Trauma differs from the nails currently on the market in
that it is a combination of a stainless steel nail inside a balloon.
The development of the BAMF trauma products has progressed well this year, with
work focussed on the design and development of the intramedullary nail. In
addition, histology examination of the testing models in vivo came off station
and the initial histological data demonstrates that the device is well tolerated
by no tissue reaction. After further laboratory testing, the Company is planning
to follow the 510(k) with clinical data route for BAMF Trauma, with clinical
studies carried out under an investigational device exemption ("IDE").
AOI believes that BAMF Trauma will have a technological advantage over existing
products in the market because it will potentially: require a smaller gauge at
the point of insertion; provide a firm structure; adapt to the bone cavity while
in place; and be easily removed by deflating the balloon, thus narrowing the
diameter of the device again. This last feature should make the device
particularly useful for treatment of children, for whom growth in the affected
limb is impaired if a stabilisation device is left in place.
Sales of intramedullary nails in 2008, estimated by Frost and Sullivan for
indications targeted by AOI, are expected to be approximately $890 million,
rising to a projected $943 million by 2010.
Cervical Plate (Motion Preserving Cervical Dynamic Stabilization Plate)
The Cervical Plate (Motion Preserving Cervical Dynamic Stabilization Plate) is
an anterior, semi-constrained artificial ligament designed to provide some
translational and rotational motion when used subsequent to a cervical spine
disc replacement surgery. The current practice for severe intractable disc
disease is spinal fusion, the failure rate after lumbar fusion has been reported
to be as high as 40 - 50 per cent. (source: www.Spine-Health.com August 2007).
The Company is planning to obtain FDA approval via the 510(k) with supportive
clinical data for Cervical Plate and will apply for an IDE for the product to
establish range of motion data. Provided that an appropriate motion preserving
disc or nucleus replacement device is identified by the end of 2008, AOI
estimates that the initial sales of the Cervical Plate will commence in the
fourth quarter of 2009 through the IDE. The Company aims to gain FDA approval,
with range of motion, in the fourth quarter of 2011, when full commercialisation
will begin.
The current market in the US for a cervical plate featuring dynamic
stabilisation is estimated at $410 million and is forecast to grow to almost
$500 million by 2010 (source: Bank of America LLC, 15 February 2008 and AOI
internal pricing estimates).
Clinical Advisory Board
During 2007, the Company established a clinical advisory board that consists of
orthopedic surgeons and neurosurgeons that have a broad range of experience and
background in the development of innovative orthopedic medical devices. We view
our clinical advisory board as an integral part of our product development
effort and overall commercialization strategy. The opportunity to discuss and
interact on a daily basis with orthopedic thought leaders, orthopaedic surgeons,
interventional radiologists, and physicians who have a keen understanding of
what doctors and patients require is invaluable in order that we develop novel
medical devices that meet the needs of the market.
At the end of 2007, there were 10 members on AOI's clinical advisory board, and
this figure has now increased to 20 members. By the end of 2008 we expect to
further expand the clinical advisory board to nearly 30 members.
Intellectual Property (Patent) Protection
We believe that the protection of the Company's intellectual property is
fundamental to our commercial strategy, and we actively seek to protect our
proprietary technologies and individual medical devices through licensing
patents or by applying for our own patents where appropriate. In the US, AOI has
three granted patents (one for Ascendx(TM), and two relating to Cervical Plate)
and seven patents pending applications (four relating to Ascendx(TM) or BAMF
Trauma, one for Cervical Plate, and two that relate to other spinal procedures).
Since medical devices in general, and the orthopaedics segment specifically,
are areas that are driven by innovation, we understand that litigation is
possible, and we therefore believe that the full commercial exploitation of such
innovation is only possible with strong intellectual property protection. The
AOI Platform has been bolstered by six patent applications, four for Ascendx(TM),
one for BAMF Trauma and one for Cervical Plate.
Marketing and Commercializing AOI's Products
To fully commercialize our three technology platforms and products in the US in
the spine, trauma, and cervical markets, we intend to follow a broad approach
that includes setting up our own marketing and distribution infrastructure and
proprietary sales force, and in parallel we intend to recruit a large healthcare
company to act as a US co-marketing partner in each of the different markets we
are pursuing. The right co-marketing partner will be able to provide increased
marketing and a greater commercial presence in AOI's key markets, and given that
there are approximately 21,000 practising orthopaedists in the US today, the
market opportunity for AOI is without question very attractive.
Possible fundraise and Notice of Special Meeting
Because of the delays to the commercial launch of Ascendx(TM), resulting primarily
from the FDA requiring the Company to conduct a clinical study of its Ascendx(TM)
technology, AOI believes that it would be prudent to position the Company now to
be able to raise additional capital through the issue of further common shares
or convertible securities in excess of the existing issuance authorities of the
Company.
The Company is currently in discussions with its advisers in relation to the
precise nature and timing of any issuance of common shares and/or convertible
securities, however, in deciding the final form of any such issuance, the
Directors will have regard to the best interests of the shareholders of the
Company.
The Company's By-laws provide that issues of shares should be first offered to
existing shareholders in proportion to the Common Shares that they hold unless
the shareholders have waived such pre-emption rights. The Company is therefore
seeking the authority of shareholders at a Special Meeting of the Company to
waive such pre-emption rights for the issuance of relevant securities up to a
specified amount in order to give the Directors the maximum flexibility to
attract new investors to the Company and to thereby secure the future financing
of the Company.
A circular explaining why the Company is seeking to increase its existing
issuance authorities and a Notice convening the Special Meeting is to be
dispatched to shareholders today. The circular also explains the process for
shareholders exchanging their restricted common shares for unrestricted
unlegended common shares following the passing of the one-year holding period on
22 June 2008. The Special Meeting of the Company is to be held on 15 May 2008
at 10.00 a.m. at the offices of Financial Dynamics, Holborn Gate, 26 Southampton
Buildings, London WC2A 1PB.
Outlook
AOI has made good progress in 2007 having advanced its technology, listed on
AIM, raised significant finance, and attracted a powerful clinical advisory
board. With the clinical trial for Ascendx(TM) about to start, the Company is a
step closer to the market. We strongly believe that the product has substantial
potential and we expect to be able to rapidly penetrate a high growth and high
value market. Our Ascendx(TM) system will give the clinician the ability to
reduce a vertebral compression fracture and deploy bio-material uniformly in a
minimally invasive approach. We see the clinical data, FDA clearance of Ascendx
(TM)and the beginning of our sales to be major value drivers for the Company.
Additionally the progress on our other technology platforms, while early, is
encouraging.
The growth of our organization in the near term is anticipated to be dramatic,
with the infrastructure to support this growth in place, or in the process of
being put into place. Consequently, the next twelve months promise to be highly
important in the rapid evolution of AOI's business and we look to the future
with confidence.
Background to AOI Medical Inc.
AOI is a medical device company focusing on the development and
commercialisation of innovative orthopaedic medical devices for the spine and
trauma markets. It is progressing the development of three separate technology
platforms: Ascendx(TM) VCF Reduction System, BAMF Trauma and Cervical Plate.
Further information can be found at www.aoimedical.net
FINANCIAL REVIEW
INCOME STATEMENT
Revenue
AOI is an early stage medical device company and as such currently has no source
of direct revenue.
Expenses
Operating expenses increased by $3.0 million to $4.8 million versus the twelve
months ended 31 December 2006 $1.8 million.
Total research and development ("R&D") expenditures increased significantly over
the prior year from $0.4 million to $1.6 million. This reflected increased
investment in the development of its technology including pre-clinical
activities. Of the total increase, compensation, employee benefits and travel
expenses account for $0.4 million with professional fees also reflecting an
increase of $0.4 million.
Sales and marketing costs were $607,000 (2006: $44,000), with this increase
largely due to additional headcount as the Company began establishing its
marketing infrastructure in the US to commercialize its technologies. Reflective
of the additional headcount is an increase of $452,000 from prior year in
compensation, employee benefits and travel expenses. Professional fees related
to sales consultants, public relations and market research of $71,000 were
incurred for the first time in 2007 in support of the Company's growth in the
sales and marketing function. Sales and marketing costs are expected to
escalate in 2008 as the Company prepares for the commercial launch of
Ascendx(TM), subject to FDA approval.
Administrative expenses were $2.5 million (2006: $1.3 million). Of this,
compensation, employee benefits and travel expenses account for $1.6 million
(2006: $1.1 million). This growth in expense of $0.5 million reflects $0.2
million in stock option compensation expense which is a non-cash item. The
remaining $0.3 million reflects increased headcount and travel expenses incurred
by Company personnel related to its successful admission to AIM. Professional
fees grew from $0.1 million to $0.6 million in 2007. Board costs account for
$0.4 million of total professional fees with no costs incurred in 2006. US
non-executive Board members receive their fees in shares valued at $0.3 million
in 2007. The share value is a non-cash item. The remaining increase in
administrative expenses reflects the Company's overall growth including the
relocation of its head office in Q4 2007.
Net other income was $298,000 (2006: ($314,000)) largely due to interest income
of $305,000 related to the investment of the proceeds from the Company's
Admission to AIM ("the IPO"). Interest expense decreased from $131,000 in 2006
to $65,000 in 2007 as the Company's notes payable converted to equity upon the
IPO. Other changes from the prior year include an unrealized gain on trading
securities of $45,000 while 2006 included a loss on an unconsummated acquisition
of $193,000 and a loss on investment of $1,956.
BALANCE SHEET
Cash and cash equivalents
The Company had cash and cash equivalents of $3.4 million as at 31 December 2007
compared with $1.0 million at 31 December 2006. The increase in cash and cash
equivalents reflects the $0.1 million, net of expenses, raised via the
sale of 227,762 common shares in January 2007 and an additional $12.2 million,
net of expenses, reflecting a placing of 2,325,583 common shares from the IPO.
$7.0 million of the proceeds from the IPO were invested in trading securities
and are reflected in Investments.
Investments
The Company has $7.0 million of the $12.2 million in net proceeds from the IPO
in fixed income trading securities to achieve a greater rate of return.
Property and equipment, net
Property and equipment, net increased $492,000 to $539,000. Of this net
increase, $377,000 reflects the purchase of tooling, machinery and equipment
needed for research and development efforts. The remaining $115,000 of the
increase relates to the acquisition of furniture, fixture and equipment for the
new leased space and headcount.
Intangible Assets, net
Intangible Assets, net is comprised of capitalized patent costs of $112,000
(2006: $62,000) and capitalized license costs of $290,000 (2006: $235,000),
net of accumulated amortization of $33,000 (2006: $12,000). The $50,000
increase in capitalized patent costs is related to the Company's patent
portfolio. The increase in capitalized license costs over 2006 largely reflects
payments of $36,000 in cash and the grant of options to purchase up to 6,306
shares of common stock in accordance with the achievement of certain milestones.
The fair market value of these options on the grant date was $27,908 and is a
non-cash item.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses increased to $765,000 in 2007 from
$251,000 in 2006 largely due to an increase in R&D efforts and operations
relating to the successful IPO in June 2007 as well as $411,000 in accrued wages
which were paid in January 2008.
Notes Payable and Convertible Promissory Notes
The notes payable of $66,000 at 31 December 2006 were repaid in 2007. The
Convertible Promissory notes of $1.4 million at 31 December 2006, together with
accrued interest, converted to ordinary share capital upon the Company's
admission to AIM.
Share capital
The Company had 8.4 million USD$0.0001 ordinary shares outstanding at 31
December 2007 (2006: 121,000 preferred shares, 5,440,937 ordinary shares). All
preferred shares converted to ordinary shares upon the Company's admission to
AIM on a one-to-one basis.
STATEMENTS OF OPERATIONS
Year ended 31 December
Unaudited
Unaudited Audited Cumulative
2007 2006 Since Inception
$'000 $'000 $'000
Revenues - - -
Cost of Sales - - -
_____ _____ _____
Gross Profit - - -
_____ _____ _____
Research and development 1,578 357 2,027
Operations 113 82 195
Sales and marketing 607 44 667
General and administrative 2,487 1,312 4,451
_____ _____ _____
Total operating expenses 4,785 1,795 7,340
_____ _____ _____
Operating loss (4,785) (1,795) (7,340)
_____ _____ _____
Other income (expense) net 298 (314) (183)
_____ _____ _____
Net loss and deficit accumulated during
development stage (4,487) (2,109) (7,523)
_____ _____ _____
Net loss per share, basic and diluted - dollars (0.63) (0.43)
_____ _____
Weighted average common shares outstanding
basic and diluted 7,126,702 4,958,782
_____ _____
Balance Sheets
Year ended 31 December
Unaudited Audited
2007 2006
Notes $'000 $'000
ASSETS
CURRENT ASSETS
Cash and cash equivalents 1 3,358 957
Investments 7,045 -
Other current assets 215 18
_____ _____
Total current assets 10,618 975
Property and equipment, net 539 47
Intangible assets 402 297
Other assets 31 16
_____ _____
Total assets 11,590 1,335
_____ _____
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 765 251
Notes payable 6 - 1,204
_____ _____
Total current liabilities 765 1,455
_____ _____
LONG-TERM LIABILITIES
Deferred rent 47 -
Notes payable 6 - 260
_____ _____
Total long-term liabilities 47 260
_____ _____
Commitments (Notes 3 and 7)
Stockholders' Equity(Deficit):
Preferred stock 2 - -
Common stock 2 1 1
Additional paid-in capital 2 18,300 2,654
Deficit accumulated during development stage 2 (7,523) (3,035)
_____ _____
Total stockholders' equity(deficit) 10,778 (380)
_____ _____
Total liabilities and stockholders' equity(deficit) 11,590 1,335
_____ _____
STATEMENTS OF CASH FLOWS
Year ended 31 December
Unaudited
Unaudited Audited Cumulative
2007 2006 Since Inception
$'000 $'000 $'000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (4,487) (2,109) (7,523)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 68 29 102
Write off deferred charges and other costs - 50 83
Loss on disposal of property and equipment 2 - 2
Loss on investment - 2 2
Stock grants and options 436 50 486
Deferred compensation 251 - 252
Unrealized gain on investments (45) - (45)
Changes in operating assets and liabilities:
Purchases of investments (7,000) - (7,000)
Other current assets (198) (9) (215)
Intangible assets (125) (276) (435)
Other assets (15) - (18)
Accounts payable and accrued expenses 683 160 933
Deferred rent 47 - 47
_____ _____ _____
Net cash used in operating activities (10,383) (2,103) (13,329)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (554) (36) (619)
Proceeds from disposition of property and equipment 13 - 13
_____ _____ _____
Net cash used in investing activities (541) (36) (606)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on convertible promissory notes - 315 1,070
Repayment of convertible promissory note (25) - (25)
Issuance of stock 13,416 1,996 16,001
Payment for placement costs - - (79)
Borrowings on note payable - 390 409
Repayment of note payable (66) (10) (79)
Increase in other assets - - (4)
_____ _____ _____
Net cash provided by financing activities 13,325 2,691 17,293
_____ _____ _____
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,401 552 3,358
Cash and cash equivalents, beginning of period 957 405 -
_____ _____ _____
CASH AND CASH EQUIVALENTS, END OF PERIOD 3,358 957 3,358
_____ _____ _____
Supplemental cash flow information:
Cash paid during the year for interest 12 16 30
_____ _____ _____
Cash paid during the year for taxes - - -
_____ _____ _____
Supplemental disclosure of non-cash activity:
Issuance of warrants 452 3 455
_____ _____ _____
Conversion of convertible promissory notes and related accrued
Interest to common shares upon IPO 1,543 - 1,543
_____ _____ _____
NOTES TO THE UNAUDITED PRELIMINARY RESULTS
1. BASIS OF PREPARATION
The preliminary financial information has been prepared using the accrual basis
of accounting in accordance with accounting principles generally accepted in the
United States of America.
Results for the periods ended 31 December 2007 are unaudited. The results for
the period ended 31 December 2006 have been extracted from the audited financial
statements and upon which the auditors reported with a going concern
qualification.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Deferred Charges
Deferred charges represent costs incurred directly related to a capital raise,
which would be offset against any proceeds raised.
In 2005 the Company paid $50,000 to an investment bank to be the exclusive
placement agent for a private placement. This fee was recorded as deferred
charges as of December 31, 2005. In 2006 the investment bank did not raise the
capital for this private placement memorandum and the deferred charges were
expensed.
Additionally, the Company expensed further costs incurred in 2006 of $143,359
associated with raising capital relating to a target acquisition company. The
total costs expensed in 2006 were $193,359 and are reflected in acquisition not
consummated in the accompanying statements of operations for the year ended
December 31, 2006.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the related
assets, ranging from two to seven years. Amortization of leasehold improvements
is estimated on a straight-line basis over the estimated lives of the related
asset or applicable lease term, if shorter. Repairs and maintenance are charged
to operations as incurred, while significant improvements are capitalized.
Long-lived assets held and used by the Company are reviewed for impairment
whenever changes in circumstances indicate the carrying value of an asset may
not be recoverable.
Research and Development
Expenditures for research and development are expensed as incurred.
Intangible Assets
Intangible assets for the years ended December 31, 2007 and 2006, consist of
capitalized patent costs of $111,657 and $62,313 and capitalized license costs
of $290,091 and $234,931, net of accumulated amortization of $32,513 and
$11,948, respectively. Amortization of existing capitalized license costs for
each of the next five years will be approximately $23,000, with approximately
$175,000 of amortization to be recorded thereafter.
The Company records the acquisition and amortization of license and patent costs
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and other Intangible Assets. License costs include payments to the
licensor, grants of options to purchase shares of common stock, and legal costs
incurred to obtain certain license agreements. Costs to obtain the licenses are
capitalized as incurred per the license agreements. The Company amortizes
capitalized license costs over the estimated useful lives ranging from 14 to 15
years.
Patent costs include legal costs incurred in the pursuit of acquiring a patent
including various patent applications and filing fees. Once a patent is
granted, the Company will amortize the capitalized patent costs over the
remaining life of the patent using the straight-line method. If the patent is
not granted, the Company will write-off any capitalized patent costs at that
time. There was no amortization expense relating to patents for the years ended
December 31, 2007 and 2006, because no Company owned patents have been granted.
The Company reviews license and patent costs for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Internal and external facts and circumstances are considered for indication of
the ability to recover the carrying value of the unamortized license costs and
patent costs. For the years ended December 31, 2007 and 2006, the Company had
no impairment on its unamortized license and patent costs.
Investments
Management determines the classification of their investments upon acquisition,
based upon the purpose for which the investments were acquired, and reevaluates
this designation at each reporting date. Investments include trading
securities. Such investments are accounted for under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Unrealized gains and
losses are charged to operations and the investment is carried at its new basis.
The Company recorded an unrealized gain on investments of $45,324 in 2007 and
realized a loss of $1,956 on an investment during 2006.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share. SFAS No. 128 provides for the calculation of basic and
diluted earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share in the
earnings of the Company. The impact of stock options was anti-dilutive,
therefore basic and diluted net loss per share are the same. All options were
excluded for the year ended December 31, 2007 and 2006, due to the Company's net
loss.
Fair Values of Financial Instruments
In accordance with the reporting requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, the Company calculates the fair value of
its assets and liabilities which qualify as financial instruments under this
statement and includes this additional information in the notes to consolidated
financial statements when the fair value is different than the carrying value of
those financial instruments. The estimated fair value of cash equivalents and
accounts payable approximate the carrying amounts due to the relatively short
maturity of these instruments. The carrying values of notes payable and
convertible promissory notes also approximate fair value since these instruments
bear market rates of interest. None of these instruments are held for trading
purposes.
Revenue Recognition
The Company will recognize revenue upon shipment to distributors or customers as
title to such product transfers and collectibility is deemed probable.
Income Taxes
Deferred income taxes are determined using the asset and liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. In addition, a valuation allowance is established to reduce any
deferred tax asset for which it is determined that it is more likely than not
that some portion of the deferred tax asset will not be realized (see Note 11).
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Stock-Based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123(R), Share-Based Payment ("SFAS 123R"). Prior to January 1, 2006,
the Company accounted for share-based payments under the recognition and
measurement provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). In accordance with APB 25, no compensation cost was
required to be recognized for options granted that had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The Company adopted SFAS 123R using the modified prospective application method.
Under this method, compensation cost recognized for the years ended December
31, 2007 and 2006, includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS 123, and (b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R. In addition, deferred stock
compensation related to non-vested options is required to be eliminated against
additional paid-in capital upon adoption of SFAS 123R.
Accounting for the Issuance of Debt with Warrants
The Company accounts for debt issued with warrants under the provisions of APB
Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants ("APB 14") as a result of the issuance of a debt security with
warrants. In accordance with APB 14, the portion of the proceeds of debt issued
with detachable warrants that is allocable to the warrants shall be accounted
for as additional paid-in capital. The allocation is based on the relative fair
values of the two securities at time of issuance. The resulting discount on the
debt securities is amortized over the term of the debt instrument and recorded
as interest expense.
Recent Accounting Pronouncements
In June 2006 the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of SFAS No. 109, Accounting for Income Taxes
("FIN 48"), to create a single model to address accounting for uncertainty in
tax positions. FIN 48 clarifies the accounting for income taxes by prescribing
a minimum recognition threshold that a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. The Company will adopt FIN 48
as of January 1, 2008, as required. The cumulative effect of adopting FIN 48
will be recorded in retained earnings and other accounts as applicable. The
Company believes that the adoption of FIN 48 will not have a material effect on
the Company's financial position, results of operations, or cash flows.
NOTE 2 RECONCILIATION OF CHANGES IN STOCKHOLDERS' EQUITY(DEFICIT)
Preferred Stock Common Stock
Shares Amount Shares Amount
'000 $'000 '000 $'000
BALANCE, DECEMBER 31, 2005 121 $ .01 4,660 $ .47
Sale of common stock, net - - 651 .06
Issuance of warrants and stock options - - - -
Stock grants to clinical and scientific
advisory board members - - 130 .01
Net loss - - - -
_____ _____ _____ _____
BALANCE, DECEMBER 31, 2006 121 .01 5,441 .54
Sale of common stock, net - - 2,554 .25
Conversion of preferred stock to
common shares upon IPO (121) (.01) 121 .01
Conversion of convertible debt to
common shares upon IPO - - 307 .03
Issuance and exercise of warrants and
issuance of stock options - - 8 .01
Deferred compensation - - - -
Net loss - - - -
_____ _____ _____ _____
BALANCE, DECEMBER 31, 2007 - $ - 8,431 $ .84
_____ _____ _____ _____
Additional Total
Paid-In Accumulated Stockholders'
Capital Deficit Equity(Deficit)
$'000 $'000 $'000
BALANCE, DECEMBER 31, 2005 $ 605 $ (927) $ (321)
Sale of common stock, net 1,996 - 1,996
Issuance of warrants and stock options 40 - 40
Stock grants to clinical and scientific
advisory board members 13 - 13
Net loss - (2,109) (2,109)
_____ _____ _____
BALANCE, DECEMBER 31, 2006 2,654 (3,036) (381)
Sale of common stock, net 12,964 - 12,964
Conversion of preferred stock to
common shares upon IPO - - -
Conversion of convertible debt to
common shares upon IPO 1,543 - 1,543
Issuance and exercise of warrants and
issuance of stock options 887 - 887
Deferred compensation 252 - 252
Net loss - (4,487) (4,487)
_____ _____ _____
BALANCE, DECEMBER 31, 2007 $ 18,300 $ (7,523) $ 10,778
_____ _____ _____
NOTE 3 COMMITMENTS
During 2007 the Company entered into a lease agreement for a period of three
years for office space which commenced October 1, 2007, when the Company had
physical control over the property. The Company is required to pay
approximately $17,006 per month in rent, as defined in the lease to include base
rent, operating expenses, and applicable sales tax. The terms of the lease
include annual base rent increases of 3.5% upon each anniversary of the
commencement date and allow for increases to the operating expenses. The
Company has the option to renew the lease upon expiration for an additional
three-year term. The lease granted the Company $40,000 of free rent and a
leasehold improvement allowance of $10,000. The Company was also required to
pay the landlord a refundable security deposit of $16,000. The Company records
rent expense of approximately $16,555, as calculated on a straight-line basis,
net of free rent. The difference between the cash payment and the straight-line
rent expense is charged to deferred rent. The leasehold improvement allowance
was recorded to deferred lease incentive, a component of deferred rent, and is
amortized over the life of the lease as a reduction to rental expense of
approximately $278 per month.
Total rental expense for 2007 and 2006, net of deferred lease incentive
amortization of approximately $800 in 2007, was approximately $84,000 and
$23,800, respectively.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 2007, are summarized as
follows:
Year Ending
December 31, Total
2008 $ 190,200
2009 215,100
2010 166,000
2011 -
2012 -
Thereafter -
_____
$ 571,300
_____
NOTE 4 CAPITAL STRUCTURE
The Company's capital structure is as follows at December 31, 2007:
Type Par Value Authorized Issued and outstanding
Common $ 0.0001 50,000,000 8,430,720
Preferred $ 0.0001 10,000,000 -
The Company designated 400,000 shares of preferred stock as Series A Convertible
Preferred Stock. Each share was convertible into one share of common stock and
was entitled to vote with common stock on an as converted basis. These shares
were originally entitled to pre-emptive rights with respect to the issuance of
any new securities by the Company. During 2006 the Board elected to delete the
pre-emptive rights for the Series A Convertible Preferred Stock in their
entirety. The Company originally intended to raise a minimum of $2,000,000 in a
Series A offering of 400,000 shares of Convertible Preferred Stock at $5.00 a
share. The Company received $605,000 in proceeds from the Series A offering of
121,000 shares in 2005, and does not intend to raise any further proceeds from
this offering. All 121,000 shares of the Company's preferred stock issued and
outstanding were converted to common stock upon the Company's Initial Public
Offering ("IPO") on the AIM in 2007 on a one-to-one basis.
During 2006 the Company entered into an agreement with an overseas investment
bank to raise up to $3 million in capital through a private placement memorandum
(the "Private Placement"). The Company issued 650,937 shares of common stock to
various shareholders for $1,996,019, net of offering expenses of approximately
$256,000. The investment bank raised an additional net $811,626 in 2007 through
the sale of 227,762 shares of common stock. Additionally, during 2007 upon the
closing of the Private Placement and pursuant to the agreement, the Company
issued a warrant to the overseas investment bank with a fair market value of
approximately $65,000 (see Note 5).
On June 22, 2007, the Company raised approximately $15.8 million in capital
through the sale of 2,325,583 shares of common stock pursuant to an IPO on the
AIM, and incurred approximately $3.6 million in total costs related to the IPO,
resulting in approximately $12.2 million of net proceeds. Costs related to the
IPO included investment bank fees and commissions paid in cash (see below) and
warrants (see Note 5) as well as legal, audit, and professional consultancy
fees.
On June 12 2007, the Company entered into a placing agreement ("the Agreement")
with an investment bank to act as a financial advisor, broker, and joint
bookrunner in connection with its proposed IPO. The Agreement called for
payment of a corporate finance fee to the investment bank, which totaled
approximately $600,000, and $250,000 to the joint bookrunner, reimbursement for
all out-of-pocket expenses, and a cash placing commission of 5% calculated on
the basis of the aggregate value, at the placing price, of the new common shares
issued by the Company pursuant to the IPO. The investment bank separately
reached an agreement on the division of this placing commission with another
investment bank (the "Joint Bookrunner"). The total amount paid to the
investment bank and the Joint Bookrunner in connection with the IPO, as
converted to US dollars, was approximately $1,100,000 and $590,000,
respectively. In addition, the Agreement called for the investment bank and the
Joint Bookrunner to receive a warrant to subscribe for 1% and $12,500 worth of
the issued and outstanding share capital of the Company, immediately post IPO,
exercisable, in whole or in part, at any time following IPO at an exercise price
equal to the placing price of the new common shares issued by the Company
pursuant to the IPO. These warrants shall expire five years after admission to
the AIM or June 22, 2012. Two separate agreements supporting these warrants
were entered into between the Company and the investment bank and the Company
and the Joint Bookrunner.
The Company entered into a separate agreement with the investment bank to serve
as nominated adviser and broker to the Company on and after admission to the AIM
for a minimum initial period of 12 months for an annual fee of approximately
$100,000.
In January 2007, pursuant to the Private Placement, the Company entered into an
agreement with the investment bank to grant them a warrant for 0.5% of the share
capital of the Company following the Private Placement equating to 28,948 Common
Shares at an exercise price of #1.82 ($3.64 at December 31, 2007), the price at
which the Common Shares were issued in the private placement. This warrant is
exercisable in whole or in part at any time from January 4, 2007 until January
4, 2012.
Upon the IPO, the Company converted all outstanding convertible promissory notes
together with accrued interest to 307,287 shares of common stock (see Note 7).
Certain convertible promissory notes included detachable warrants, which when
the underlying notes converted, became exercisable into common shares (see Note
5). During 2007 warrants to purchase 8,151 shares of common stock were
exercised.
NOTE 5 STOCK BASED COMPENSATION
Common stock may, at the discretion of the Board of Directors, be granted.
Common stock grants require no payment from the employee and compensation cost
is recorded based on the fair market value on the grant date over the related
vesting period. The Board approves the fair market value, which is determined
by using an appropriate valuation method, including a comparable transaction
approach. Vesting periods are determined by the Board.
During 2006 the Company granted 130,000 shares of common stock to certain
members of their clinical and scientific advisory board. Based on the fair
market value at the date of grant of $.10 a share, the Company recorded
compensation and consultation expense, common stock, and
additional-paid-in-capital of $13,000.
The Company reserved 500,000 shares of common stock for issuance under the 2007
Incentive Plan (the "2007 Plan"), excluding any awards granted prior to the
Company's IPO on June 22, 2007. Under the 2007 Plan, the Compensation Committee
is authorized to issue incentive stock options to employees and nonqualified
stock options to consultants or employees of the Company.
During 2007 and 2006 the Company granted options to purchase 358,917 and 165,000
shares of common stock, respectively, to employees and consultants (the "2007
grant" and the "2006 grant", respectively). Of the 2007 grant, options to
purchase 50,000 shares of common stock were granted prior to the Company's IPO.
All of these options were outstanding at December 31, 2007. During 2007 the
Company rescinded 11,000 options from the 2007 grant and 10,000 options from the
2006 grant. Upon the Company's IPO, 20,000 shares of common stock of the 2007
grant and the remaining 155,000 common shares of the 2006 grant vested fully.
The 2007 grant included a grant to a certain licensor, pursuant to the license
agreement, to purchase 6,306 shares of common stock. These options were fully
vested upon issuance and their fair value of $27,908 was recorded in intangible
assets and additional paid-in capital. Options expire five to ten years from
the grant date and outstanding options are exercisable at $0.01 to $7.07 per
share. The remaining 2007 grant to purchase up to 321,611 shares of common
stock will vest over a period of six months to four years and are exercisable at
$4.04 to $6.75 per share. All options vest immediately upon a change of
control, as defined in the Company's Incentive Stock Option Plan.
The following table summarizes the plan's stock option activity during the years
ended December 31, 2007 and 2006:
Number of Options Weighted Average
Exercise Price
Granted 165,000 $ 1.37
Forfeited - $ -
_____
Outstanding at December 31, 2006 165,000 $ 1.37
Granted 358,917 $ 6.18
Forfeited (21,000) $ 5.34
_____
Outstanding at December 31, 2007 502,917 $ 4.64
_____
The following table shows total stock-based compensation expense:
Year Ended December 31,
2007 2006
Research and development $ 140,062 $ 39,009
Sales and marketing 13,432 65,380
General and administrative 136,604 13,356
_____ _____
$ 290,098 $ 117,745
_____ _____
The options outstanding and exercisable at December 31, 2007, are as follows:
Options Outstanding
Range of Exercise Number Weighted Average Weighted Aggregate
Prices outstanding Remaining Average Intrinsic Value
Expected Life in Exercise
Years Price
$0.01 - $3.45 155,000 3.6 $ 1.23 $ 510,650
$4.04 - $5.99 112,000 4.6 5.15 1,760
$6.04 - $6.75 229,611 5.0 6.62 -
$7.05 - $7.07 6,306 4.6 7.07 -
_____ _____ _____ _____
502,917 4.5 $ 4.60 $ 512,410
_____ _____ _____ _____
Options Exercisable
Range of Exercise Options Weighted Average Aggregate
Prices Exercisable Exercise Price Intrinsic Value
$0.01 - $3.45 155,000 $ 1.23 $ 510,650
$4.04 - $5.99 20,000 5.85 -
$6.04 - $6.75 - - -
$7.05 - $7.07 6,306 7.07 -
_____ _____ _____
181,306 $ 1.90 $ 510,650
_____ _____ _____
The fair value of the options issued in 2007 and 2006 using the Black Scholes
Options Pricing Model, net of forfeitures and rescissions of $54,827 and $0,
respectively, was determined to be $1,327,167 and $180,938, respectively. At
December 31, 2007, approximately $1,009,000 of deferred compensation expense
remained to be expensed over a weighted average period of 1.5 years.
The following weighted average assumptions were used to determine the fair value
of the stock options:
2007 2006
Risk free interest rate 4.6% 4.75%
Expected life of options 5.2 years 10 years
Expected dividends 0% 0%
Volatility 78% 65%
Subsequent to December 31, 2007, options to purchase 17,000 shares of common
stock from the 2007 grant were rescinded.
NOTE 6 CONVERTIBLE PROMISSORY NOTES
During 2006 and 2005 the Company entered into several convertible promissory
notes totaling $1,070,000 with detachable warrants (see Note 5). In addition,
during 2006 the Company entered into several convertible promissory notes
totaling $330,000 without detachable warrants. The notes had an interest rate
at 10% per annum and were payable on demand at any time on or after the first
anniversary date of the note. In 2006 the current portion of $1,140,000 is
reflected on the accompanying balance sheet net of $540 in unamortized warrant
value (see Note 5).
The notes were convertible into common stock in the event of: (1) a private
equity offering of at least $20 million, (2) an initial public offering of at
least $25 million, (3) a merger, acquisition, or consolidation of the Company,
as defined, or (4) maturity.
The December 31, 2006, balance included a $25,000 convertible promissory note
due to an entity related to an Officer. During 2007 this note, together with
$2,445 in related accrued interest, was repaid in full.
During 2007 the Company amended all convertible promissory notes to provide for
the notes, together with accrued interest, to be automatically converted into
shares of common stock of the Company upon an IPO, without regard to the amount
of the offering. Accordingly, upon the IPO, the outstanding convertible note
balance of $1,375,000, together with approximately $168,000 in accrued interest,
converted into 307,287 shares of common stock.
The fair value of the warrants issued in conjunction with convertible notes in
2006 was $3,242. The Company did not issue any debt during 2007. The fair
value of the warrants granted was estimated at the date of issuance utilizing
the Black Scholes pricing model and the following assumptions:
2006
Risk free interest rate 4.75%
Expected life of warrants 5 years
Expected dividends 0%
Volatility 65%
NOTE 7 LICENSE AGREEMENTS
During 2006 the Company entered into two license agreements with unrelated
parties. In consideration of the rights and licenses granted under the first
agreement, the Company must award the licensor $275,000, $168,055 which is
payable in cash and $106,945 which is payable in stock options. During 2007 and
2006, $0 and $61,110 was paid in cash to the licensor, respectively, and no
stock options were granted.
In consideration of the rights and licenses granted under the second agreement,
the Company must award the licensor $725,000, $423,612 which is payable in cash
and $301,388 which is payable in stock options. These payments will be made
based on a function of time and the achievement of certain milestones, as
defined in the agreement. The total number of options granted is a function of
the option value divided by the then current fair market value of common stock
of the Company as each milestone is achieved. As of December 31, 2007 and 2006,
$36,333 and $172,223 was paid in cash to the licensor, respectively. During
2007 options to purchase up to 6,306 shares of common stock were granted. The
fair market value of these options on the grant date was $27,908.
The current fair market value of common stock of the Company is determined by
the Company's stock price on the AIM at the date of milestone achievement. In
addition, the Company will be required to pay royalties under these agreements.
As of December 31, 2007, no amounts were due under either license agreement.
The Company has capitalized approximately $323,000 and $247,000 associated with
these agreements as of December 31, 2007 and 2006, respectively. These costs
are associated with the payments defined in the agreements and the costs to
acquire the agreements.
NOTE 8 INCOME TAXES
As of December 31, deferred income tax assets (liabilities) resulted from the
following temporary differences:
2007 2006
Current:
Net operating loss carryforward $ 2,409,775 $ 1,139,281
Noncurrent:
Stock compensation 234,291 13,844
Property and equipment depreciation (7,312) (2,562)
R&D expenditures, net related amortization 108,135 -
Other 830 -
_____ _____
Net deferred tax asset before valuation
allowance 2,745,719 1,150,563
_____ _____
Valuation allowance (2,745,719) (1,150,563)
_____ _____
Total $ - $ -
_____ _____
For financial statement purposes, no tax benefit has been reported in 2007 and
2006 because realization of the tax benefit is uncertain. Accordingly, a
valuation allowance has been established for the full amount of the net deferred
tax asset.
Deferred income tax items result from future utilization of net operating losses
generated. Federal and state income tax loss carryforwards of approximately
$6,403,000 are available to offset future federal and state taxable income.
These tax loss carryforwards begin expiring in 2024.
The utilization of the net operating loss carryforward is dependent upon the
Company's ability to generate sufficient taxable income during the carryforward
period.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR ILMTTMMATTRP
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