10-Q 1 a07-18885_110q.htm 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549


FORM 10-Q


(Mark One)

 

 

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended June 30, 2007

 

 

 

 

 

OR

 

 

 

 

 

o 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 0-15360


BIOJECT MEDICAL TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)

Oregon

 

93-1099680

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

20245 SW 95th Avenue
Tualatin, Oregon

 

97062

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (503) 692-8001


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o  Accelerated filer o  Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock without par value

 

15,152,937

(Class)

 

(Outstanding at August 9, 2007)

 

 




BIOJECT MEDICAL TECHNOLOGIES INC.
FORM 10-Q
INDEX

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets – June 30, 2007 and December 31, 2006 (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations - Three and Six Month Periods Ended June 30, 2007 and 2006 (unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows - Six Months Ended June 30, 2007 and 2006 (unaudited)

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

Signatures

 

 

 

1




PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

421,440

 

$

1,977,546

 

Short-term marketable securities

 

1,700,000

 

1,675,000

 

Accounts receivable, net of allowance for doubtful accounts of $13,702 and $13,702

 

673,418

 

1,323,684

 

Inventories

 

962,017

 

1,058,315

 

Other current assets

 

211,292

 

320,580

 

Total current assets

 

3,968,167

 

6,355,125

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation

 

 

 

 

 

 of $5,667,834 and $5,257,662

 

2,642,614

 

2,983,925

 

Goodwill

 

94,074

 

94,074

 

Other assets, net

 

1,282,802

 

1,190,997

 

Total assets

 

$

7,987,657

 

$

10,624,121

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term notes payable

 

$

1,017,477

 

$

838,567

 

Current portion of long-term debt

 

333,333

 

333,333

 

Accounts payable

 

548,221

 

583,744

 

Accrued payroll

 

339,991

 

333,304

 

Derivative liabilities

 

1,609,375

 

782,161

 

Accrued severance and related liabilities

 

517,961

 

836,854

 

Other accrued liabilities

 

81,020

 

90,094

 

Deferred revenue

 

319,067

 

1,166,870

 

Total current liabilities

 

4,766,445

 

4,964,927

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Long-term debt

 

 

166,667

 

Deferred revenue

 

20,840

 

52,088

 

Other long-term liabilities

 

334,883

 

358,389

 

 

 

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, no par value, 10,000,000 shares authorized; issued and outstanding:

 

 

 

 

 

Series D Convertible - 2,086,957 shares at June 30, 2007 and December 31, 2006, no stated value, liquidation preference of $1.15 per share

 

1,878,768

 

1,878,768

 

Series E Convertible - 3,308,392 shares at June 30, 2007 and December 31, 2006, no stated value, liquidation preference of $1.37 per share

 

5,113,156

 

4,922,233

 

Common stock, no par, 100,000,000 shares authorized; issued and outstanding 15,131,712 shares and 14,492,838 shares at June 30, 2007 and December 31, 2006

 

112,528,834

 

111,653,067

 

Accumulated deficit

 

(116,655,269

)

(113,372,018

)

Total shareholders’ equity

 

2,865,489

 

5,082,050

 

Total liabilities and shareholders’ equity

 

$

7,987,657

 

$

10,624,121

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2




BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Net sales of products

 

$

1,950,393

 

$

2,121,534

 

$

3,586,909

 

$

3,380,802

 

License and technology fees

 

801,827

 

638,152

 

1,293,514

 

1,072,923

 

 

 

2,752,220

 

2,759,686

 

4,880,423

 

4,453,725

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Manufacturing

 

1,634,843

 

2,504,924

 

3,231,066

 

3,940,615

 

Research and development

 

778,241

 

1,343,179

 

1,752,016

 

2,376,495

 

Selling, general and administrative

 

635,127

 

949,279

 

1,930,552

 

2,637,474

 

Total operating expenses

 

3,048,211

 

4,797,382

 

6,913,634

 

8,954,584

 

Operating loss

 

(295,991

)

(2,037,696

)

(2,033,211

)

(4,500,859

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

28,305

 

32,897

 

65,093

 

77,978

 

Interest expense

 

(157,154

)

(1,300,157

)

(296,996

)

(1,478,456

)

Change in fair value of derivative liabilities

 

(553,758

)

434,143

 

(827,214

)

434,143

 

 

 

(682,607

)

(833,117

)

(1,059,117

)

(966,335

)

Net loss

 

(978,598

)

(2,870,813

)

(3,092,328

)

(5,467,194

)

Preferred stock dividend

 

(96,965

)

(37,563

)

(190,923

)

(37,563

)

Beneficial conversion on issuance of preferred stock

 

 

(109,489

)

 

(109,489

)

Net loss allocable to common shareholders

 

$

(1,075,563

)

$

(3,017,865

)

$

(3,283,251

)

$

(5,614,246

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share allocable to common shareholders

 

$

(0.07

)

$

(0.21

)

$

(0.22

)

$

(0.40

)

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations

 

14,986,559

 

14,251,962

 

14,867,664

 

14,152,233

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3




BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

For the Six Months Ended June 30,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(3,092,328

)

$

(5,467,194

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Compensation expenses related to fair value of stock-based awards

 

368,827

 

424,140

 

Stock contributed to 401(k) Plan

 

46,440

 

55,838

 

Contributed capital for services

 

114,401

 

 

Depreciation and amortization

 

465,973

 

938,789

 

Interest expense exchanged for Series E preferred stock

 

 

32,500

 

Other non-cash interest expense

 

159,060

 

183,834

 

Loss on settlement of debt

 

 

600,731

 

Loss on write-down of property, plant and equipment

 

 

968,871

 

Change in fair value of derivative instruments

 

827,214

 

434,143

 

Change in deferred rent

 

(289

)

7,996

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

650,266

 

964,107

 

Inventories

 

96,298

 

(422,762

)

Other current assets

 

99,825

 

(13,393

)

Accounts payable

 

(35,523

)

(475,618

)

Accrued payroll

 

6,687

 

(6,533

)

Accrued severance and related liabilities and other accrued liabilities

 

(12,883

)

(385,798

)

Deferred revenue

 

(879,051

)

(945,104

)

Net cash used in operating activities

 

(1,185,083

)

(3,105,453

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of marketable seucrities

 

(25,000

)

(1,620,000

)

Maturity of marketable securities

 

 

400,000

 

Proceeds from sale of fixed assets

 

 

1,061,803

 

Capital expenditures

 

(68,862

)

(124,370

)

Other assets

 

(172,866

)

(83,193

)

Net cash used in investing activities

 

(266,728

)

(365,760

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from (payments on) revolving note payable, net

 

54,574

 

(315,589

)

Proceeds from issuance of short-term notes payable

 

 

2,750,000

 

Payments made on capital lease obligations

 

(23,217

)

(28,257

)

Payments made on long-term debt

 

(166,667

)

(1,631,586

)

Debt issuance costs

 

 

(152,227

)

Net proceeds from sale of preferred stock

 

 

3,000,000

 

Net proceeds from sale of common stock

 

31,015

 

48,478

 

Net cash provided by (used by) financing activities

 

(104,295

)

3,670,819

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(1,556,106

)

199,606

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

1,977,546

 

1,045,442

 

End of period

 

$

421,440

 

$

1,245,048

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

137,104

 

$

170,223

 

 

 

 

 

 

 

Supplemental non-cash information:

 

 

 

 

 

Conversion of short-term debt and accrued interest to preferred stock

 

$

 

$

1,532,500

 

Warrant issued in connection with debt financing

 

 

667,112

 

Severance costs settled in restricted stock

 

501,435

 

83,000

 

Preferred stock dividend to be settled in Series E preferred stock

 

190,923

 

37,563

 

Beneficial conversion on the issuance of Series E preferred stock

 

 

109,489

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4




BIOJECT MEDICAL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

Note 1.  Basis of Presentation

The financial information included herein for the three and six-month periods ended June 30, 2007 and 2006 is unaudited; however, such information reflects all adjustments consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2006 is derived from Bioject Medical Technologies Inc.’s 2006 Annual Report on Form 10-K for the year ended December 31, 2006. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Bioject’s 2006 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Due to our limited amount of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm for the year ended December 31, 2006 expressed substantial doubt about our ability to continue as a going concern.

We have historically suffered recurring operating losses and negative cash flows from operations. As of June 30, 2007, we had an accumulated deficit of $116.7 million with total shareholders’ equity of $2.9 million. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.

Based on our projected cash required for operations, debt service and capital expenditures for the next twelve-month period, we believe that our current cash, cash equivalents and marketable securities of $2.1 million at June 30, 2007, and funds available under our revolving credit facility, in conjunction with the anticipated expense reductions related to our recent restructuring and the anticipated signing of additional licensing agreements, will be sufficient to fund our operations and anticipated cash expenditures through June 30, 2008. However, if we are unable enter into the anticipated licensing agreements with our current partners or enter into new licensing, development and supply agreements, we may need to do one or more of the following:

·                  reduce our current expenditure run-rate;

·                  delay capital and maintenance expenditures;

·                  restructure current debt financing;

·                  secure additional short-term financing;

·                  secure additional long-term debt financing;

·                  secure additional equity financing; or

·                  secure a strategic partner

There is no guarantee that such resources will be available to us on terms acceptable to us, or at all, or that such resources will be received in a timely manner, if at all, or that we will be able to reduce our expenditure run-rate without materially and adversely affecting our business.

Note 2.  Inventories

Inventories are stated at the lower of cost or market. Cost is determined in a manner which approximates the first-in, first out (FIFO) method. Costs utilized for inventory valuation purposes include labor, materials and manufacturing overhead. Inventories, net of valuation reserves of $706,000 and $694,000, respectively, at June 30, 2007 and December 31, 2006, consisted of the following:

 

June 30,
2007

 

December 31,
2006

 

Raw materials and components

 

$

356,262

 

$

485,420

 

Work in process

 

73,428

 

75,355

 

Finished goods

 

532,327

 

497,540

 

 

 

$

962,017

 

$

1,058,315

 

 

5




Note 3. Net Loss Per Common Share

The following common stock equivalents are excluded from the diluted loss per share calculations, as their effect would have been antidilutive:

 

Three and Six Months Ended June 30,

 

 

 

2007

 

2006

 

Stock options and warrants

 

4,574,468

 

4,831,246

 

Convertible preferred stock

 

5,395,349

 

5,395,349

 

Total

 

9,969,817

 

10,226,595

 

 

Note 4. Creation of Executive Committee to Serve as COO and Reduction in Force

In March 2007, we restructured our corporate organization and created an executive committee consisting of Dr. Richard Stout, Executive Vice President and Chief Medical Officer, and Christine Farrell, Vice President of Finance, which reports to Mr. Cobbs, Chairman and Interim President and CEO. In connection with the restructuring, on March 23, 2007, our Board of Directors authorized the elimination of 13 positions to reduce expenses and streamline operations. We recorded a charge of $289,000 in the first quarter of 2007 related to these actions. Of the $289,000, $249,000 is cash severance and related charges and $40,000 is a non-cash charge for the acceleration of vesting of restricted stock awards. We anticipate these charges to be paid through the first quarter of 2008. We anticipate cost savings of approximately $1.3 million in 2007 and approximately $1.9 million in 2008 related to these actions.

In addition, on April 12, 2007, we entered into a Separation Agreement with Mr. J. Michael Redmond, our Senior Vice President of Business Development, wherein his employment with us terminated effective May 1, 2007. Pursuant to Mr. Redmond’s previously existing employment agreement, he will receive cash severance benefits of $217,350, which is equal to 12 months of his current base pay, plus approximately $17,000 for certain other benefits, to be paid over a 12 month period. In addition, 163,508 outstanding, but unvested, restricted stock units vested, resulting in a non-cash charge of $147,000. The terms of the agreement were substantially agreed upon at March 31, 2007, and, as such, the total severance charge of $381,000 was recognized as a component of selling, general and administrative expense in the first quarter of 2007.

The following table summarizes the activity in the first two quarters of 2007 related to our restructurings:

Six-Month Period Ended June 30, 2007

 

Beginning
Accrued
Liability

 

Charged
to
Expense

 

Expend-
itures/
Transfer
to Equity

 

Ending
Accrued
Liability

 

Severance and related benefits for terminated employees

 

$

521,770

 

$

483,175

 

$

(486,984

)

$

517,961

 

Acceleration of vesting to be settled in common stock

 

315,084

 

186,351

 

(501,435

)

 

 

 

$

836,854

 

$

669,526

 

$

(988,419

)

$

517,961

 

 

Note 5. Product Sales and Concentrations

Product sales to customers accounting for 10% or more of our total product sales were as follows:

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Serono

 

36

%

19

%

30

%

15

%

Merial

 

26

%

20

%

26

%

13

%

Chronimed

 

21

%

17

%

12

%

18

%

Amgen

 

16

%

23

%

18

%

30

%

Ferring

 

3

%

10

%

7

%

11

%

 

At June 30, 2007, accounts receivable from these customers accounted for approximately 75% of total accounts receivable. In addition, Serono, Merial and Amgen individually represented 26%, 18% and 16%, respectively, of the June 30, 2007 accounts receivable balance. No other customers accounted for 10% or more of our accounts receivable as of June 30, 2007.

6




Note 6. Stock-Based Compensation

In the first quarter of 2007, we issued 100,000 restricted stock units (“RSUs”). The RSUs vest as to 50% of the total on each of March 8, 2008 and 2009. The fair value of the RSUs on the date of grant was $122,000 based on the closing price of our common stock on the date of grant, and is being recognized over the two-year vesting period.

In June 2007, we issued the following:

·                  101,000 RSUs to our non-employee directors. These RSUs vest 50% six months from the grant date and 50% one year from the grant date. The total fair value of the RSUs was $135,340 and is being recognized over the one-year vesting period.

·                  174,000 performance based RSUs to officers and employees. These RSUs vest over three years from December 31, 2007, if the performance criteria are met at December 31, 2007. If the performance criteria are not met, the RSUs will be canceled. The total fair value of the RSUs was $233,160 and is being recognized through the vesting period.

·                  25,750 performance stock options were granted to employees. These stock options vest over three years from December 31, 2007, if the performance criteria are met at December 31, 2007. If the performance criteria are not met, the stock options will be canceled. The fair value of the stock options granted was $23,292 and is being recognized through the vesting period.

·                  74,627 shares of our common stock were issued to our interim CEO as compensation. The fair value of these shares was $100,000 and was recognized immediately.

Also, during the first quarter of 2007, in connection with the restructuring activities described in Note 4, we incurred a non-cash charge of $186,000 related to the early vesting of 201,675 RSUs.

Note 7.  Fair Value of Derivative Liabilities

Certain of our convertible debt and equity agreements include derivative liabilities as defined under EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock.” These instruments were recorded at fair value and are marked to market each period. The fair value of each of these instruments is determined using the Black-Scholes valuation model. The following table summarizes the Black-Scholes assumptions used to determine fair value and certain other fair value information for each of the instruments as of June 30, 2007:

 

 

Warrants issued in
connection with
March 2006 $1.5
million bridge loan

 

$1.25 million
convertible debt
conversion
feature

 

$1.25 million
convertible debt 
convertible
interest feature

 

Black- Scholes Assumptions

 

 

 

 

 

 

 

Risk-free interest rate

 

4.5

%

4.5

%

4.9

%

Expected dividend yield

 

0

%

0

%

0

%

Contractual term (years)

 

3.5

 

3.9

 

.06 – 1.0

 

Expected volatility

 

75.9

%

74.3

%

59.4% - 86.1

%

 

 

 

 

 

 

 

 

Certain Other Information

 

 

 

 

 

 

 

Fair value at December 31, 2006

 

$

300,626

 

$

459,614

 

$

21,921

 

Fair value at June 30, 2007

 

654,426

 

942,707

 

12,242

 

Change in fair value from December 31, 2006 to June 30, 2007

 

353,800

 

483,093

 

(9,679

)

 

Note 8. Adoption of Interpretation No. 48

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” We adopted Interpretation No. 48 on January 1, 2007. There was no adjustment required to be made to our opening retained earnings balance upon adoption of Interpretation No. 48. Also, we do not expect any significant increases or decreases to our unrecognized tax benefits within the next 12 months.

7




In accordance with paragraph 19 of Interpretation No. 48, we elected to treat interest and penalties accrued on unrecognized tax benefits as tax expense within our financial statements.

We file tax returns in the U.S. and in various state and local taxing jurisdictions. With few exceptions, we are no longer subject to U.S., state or local income tax examinations for years prior to 2003.

Note 9. New Accounting Pronouncements

In December 2006, the FASB issued Final Staff Position (“FSP”) No. EITF 00-19-2, “Accounting for Registration Payment Arrangements,” to stipulate that a contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies,” and FASB Interpretation No. 14, “Reasonable Estimation of a Loss.”

This FSP further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This FSP amends various authoritative literature notably FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” and FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to December 21, 2006. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to December 21, 2006, the guidance in the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years.

The adoption of this FSP did not have any effect on our results of operations, financial position or cash flows.

ITEM 2.

 

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

 

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning payments to be received under agreements with strategic partners, new licensing agreements, capital expenditures and cash requirements. Such forward looking statements (often, but not always, using words or phrases such as “expects” or “does not expect,” “is expected,” “anticipates” or “does not anticipate,” “plans,” “estimates” or “intends,” or stating that certain actions, events or results “may,” “could,” “would,” “should,” “might” or “will” be taken, occur or be achieved) involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward looking statements. Such risks, uncertainties and other factors include, without limitation, the risk that we may not enter into anticipated licensing, development or supply agreements, the risk that we may not achieve the milestones necessary for us to receive payments under our development agreements, the risk that our products will not be accepted by the market, the risk that we will be unable to obtain needed debt or equity financing on satisfactory terms, or at all, uncertainties related to our dependence on the continued performance of strategic partners and technology and uncertainties related to the time required for us or our strategic partners to complete research and development and obtain necessary clinical data and government clearances. See also Part II, Item 1A, Risk Factors.

8




Forward-looking statements are based on the estimates and opinions of management on the date the statements are made. We assume no obligation to update forward-looking statements if conditions or management’s estimates or opinions should change, even if new information becomes available or other events occur in the future.

Overview

We develop needle-free injection systems that improve the way patients receive medications and vaccines.

Our long-term goal is to become the leading supplier of needle-free injection systems to the pharmaceutical and biotechnology industries. In 2007, we are continuing to focus our business development efforts on new and existing licensing and supply agreements with leading pharmaceutical and biotechnology companies. Our pipeline of prospective new partnerships remains strong.  We are also actively pursuing additional opportunities both domestic and overseas as we expand our current product line.

By bundling customized needle-free delivery systems with partners’ injectable medications and vaccines, we can enhance demand for these products in the healthcare provider and end user markets.

In 2007, our clinical research efforts continue to be aimed primarily at collaborations in the areas of vaccines and drug delivery. Currently, we are involved in collaborations with 12 institutions.   Further, we continue research efforts in dose sparing and intradermal delivery in collaboration with the World Health Organization (“WHO”) and the Centers for Disease Control and Prevention (CDC”). We recently presented our intradermal data from Inactivated Polio Vaccine studies in Cuba and Oman with the WHO and influenza study in the Dominican Republic with the CDC.

In 2007, our research and development efforts are focusing on the Iject® single use disposable product and the next generation spring device with auto-disable syringe. In addition, we continue to work on product improvements to existing devices and development of products for our strategic partners.  We have completed stage one of our current project with PATH and the concept phase with our undisclosed European biotech partner.  We have also completed several projects with Merial with the launch of Merial’s Derma-Vac™ needle-free device for swine and the Vitajet3 device for canine melanoma.  We are also working with the National Institutes of Health on a program in which we will fill our current polycarbonate B2000 syringe with a DNA vaccine for delivery as a pre-filled syringe.

Revenues and results of operations have fluctuated and can be expected to continue to fluctuate significantly from quarter to quarter and from year to year. Various factors may affect quarterly and yearly operating results including: i) the length of time to close product sales; ii) customer budget cycles; iii) the implementation of cost reduction measures; iv) uncertainties and changes in product sales due to third party payer policies and proposals relating to healthcare cost containment; v) the timing and amount of payments under licensing and technology development agreements; and vi) the timing of new product introductions by us and our competitors.

We began a strategic realignment of our company six month ago with a singular goal of increasing shareholder value. The realignment has two concurrent phases. Phase One was to focus on our fixed operating expenses. Phase Two of our realignment campaign is to increase our top line with profitable revenue. We are pleased to announce that we have successfully completed key milestones with a number of our current partners. Further, we believe that these existing programs will progress to the next phase of development and ultimately contribute significantly to our bottom line. We are also in discussions with a number of potential new partners. Importantly, we believe that our existing fixed cost operating base will support a meaningful increase in revenues.

We do not expect to report net income in 2007.

9




Reduction in Force and Creation of Executive Committee

In March 2007, we announced a reduction in force in order to streamline our operations, which resulted in the elimination of 13 positions. Four of these positions were in research and development, one in sales and marketing and eight in manufacturing. We recorded a charge of $289,000 in the first quarter of 2007 related to these actions. Of the $289,000, $249,000 was for cash severance and related charges and $40,000 was a non-cash charge for the acceleration of vesting of restricted stock awards. We anticipate these charges to be paid through the first quarter of 2008. We anticipate cost savings of approximately $1.3 million in 2007 and approximately $1.9 million in 2008 related to these actions.

In addition, in April 2007, we entered into a Separation Agreement with Mr. J. Michael Redmond, our Senior Vice President of Business Development, wherein his employment with us terminated effective May 1, 2007. Pursuant to Mr. Redmond’s previously existing employment agreement, he will receive cash severance benefits of $217,350, which is equal to 12 months of his current base pay, plus approximately $17,000 for certain other benefits, payable over a 12 month period. In addition, 163,508 outstanding, but unvested, restricted stock units vested, resulting in a non-cash charge of $147,000. The total severance charge of $381,000 was recognized as a component of selling, general and administrative expense in the first quarter of 2007.

Effective March 8, 2007, the Board of Directors appointed Mr. Jerald S. Cobbs as Interim President and Chief Executive Officer. Mr. Cobbs has served as our Chairman of the Board since October 2006 and, prior to that, served as a director since March 2006. In addition, also effective March 8, 2007, the Board of Directors created an Executive Committee, which serves the role of our Chief Operating Officer. The Executive Committee is composed of Ms. Christine Farrell and Dr. Richard R. Stout. Ms. Farrell also serves as our Vice President of Finance and Dr. Stout serves as our Executive Vice President and Chief Medical Officer.

Contractual Payment Obligations

A summary of our contractual commitments and obligations as of June 30, 2007 was as follows:

 

 

Payments Due By Period

 

Contractual Obligation

 

Total

 

Remainder
of 2007

 

2008 and
2009

 

2010 and
2011

 

2012 and
beyond

 

$2.0 million revolving facility

 

$

700,000

 

$

700,000

 

$

 

$

 

$

 

$500,000 term loan

 

333,333

 

249,999

 

83,334

 

 

 

$1.25 million term loan(1)

 

1,250,000

 

 

 

1,250,000

 

 

Operating leases

 

3,073,421

 

272,984

 

751,368

 

789,403

 

1,259,666

 

Capital leases

 

136,324

 

28,455

 

84,061

 

23,808

 

 

Purchase order commitments

 

491,050

 

491,050

 

 

 

 

 

 

$

5,984,128

 

$

1,742,488

 

$

918,763

 

$

2,063,211

 

$

1,259,666

 

 

(1)

 

The accreted value of $317,477 of our $1.25 million term loan is classified as current on our consolidated balance sheet as of June 30, 2007 due to the fact that the agreement contains subjective acceleration clauses, which could result in the debt becoming due at any time. However, since none of the subjective acceleration clauses have been triggered to date, it is included in this table according to its contractual maturity.

 

Purchase order commitments relate to future raw material inventory purchases, research and development projects and other operating expenses.

10




Going Concern and Cash Requirements for the Next Twelve-Month Period

Due to our limited amount of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm for the year ended December 31, 2006 expressed substantial doubt about our ability to continue as a going concern.

We have historically suffered recurring operating losses and negative cash flows from operations. As of June 30, 2007, we had an accumulated deficit of $116.7 million with total shareholders’ equity of $2.9 million. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.

Based on our projected cash required for operations, debt service and capital expenditures for the next twelve-month period, we believe that our current cash, cash equivalents and marketable securities of $2.1 million at June 30, 2007, and funds available under our revolving credit facility, in conjunction with the anticipated expense reductions related to our recent restructuring and the anticipated signing of additional licensing agreements, will be sufficient to fund our operations and anticipated cash expenditures through June 30, 2008. However, if we are unable enter into the anticipated licensing agreements with our current partners or enter into new licensing, development and supply agreements, we may need to do one or more of the following:

·                  reduce our current expenditure run-rate;

·                  delay capital and maintenance expenditures;

·                  restructure current debt financing;

·                  secure additional short-term financing;

·                  secure additional long-term debt financing;

·                  secure additional equity financing; or

·                  secure a strategic partner

There is no guarantee that such resources will be available to us on terms acceptable to us, or at all, or that such resources will be received in a timely manner, if at all, or that we will be able to reduce our expenditure run-rate without materially and adversely affecting our business.

Results of Operations

The consolidated financial data for the three and six-month periods ended June 30, 2007 and 2006 are presented in the following table:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenue:

 

 

 

 

 

 

 

 

 

Net sales of products

 

$

1,950,393

 

$

2,121,534

 

$

3,586,909

 

$

3,380,802

 

License and technology fees

 

801,827

 

638,152

 

1,293,514

 

1,072,923

 

 

 

2,752,220

 

2,759,686

 

4,880,423

 

4,453,725

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Manufacturing

 

1,634,843

 

2,504,924

 

3,231,066

 

3,940,615

 

Research and development

 

778,241

 

1,343,179

 

1,752,016

 

2,376,495

 

Selling, general and administrative

 

635,127

 

949,279

 

1,930,552

 

2,637,474

 

Total operating expenses

 

3,048,211

 

4,797,382

 

6,913,634

 

8,954,584

 

Operating loss

 

(295,991

)

(2,037,696

)

(2,033,211

)

(4,500,859

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

28,305

 

32,897

 

65,093

 

77,978

 

Interest expense

 

(157,154

)

(1,300,157

)

(296,996

)

(1,478,456

)

Change in fair value of derivative liabilities

 

(553,758

)

434,143

 

(827,214

)

434,143

 

Net loss

 

(978,598

)

(2,870,813

)

(3,092,328

)

(5,467,194

)

Preferred stock dividend

 

(96,965

)

(37,563

)

(190,923

)

(37,563

)

Beneficial conversion on issuance of preferred stock

 

 

(109,489

)

 

(109,489

)

Net loss allocable to common shareholders

 

$

(1,075,563

)

$

(3,017,865

)

$

(3,283,251

)

$

(5,614,246

)

Basic and diluted net loss per common share allocable to common shareholders

 

$

(0.07

)

$

(0.21

)

$

(0.22

)

$

(0.40

)

Shares used in per share calculations

 

14,986,559

 

14,251,962

 

14,867,664

 

14,152,233

 

 

11




Revenue

The $0.2 million, or 8.1%, decrease and the $0.2 million, or 6.1%, increase in product sales in the three and six-month periods ended June 30, 2007, respectively, compared to the same periods of 2006, were due primarily to the following:

·                  a $0.3 million and a $0.6 million increase, respectively, in sales of cool.click™ products to Serono; and

·                  a $0.1 million and a $0.5 million increase, respectively, in sales to Merial for companion and production animal products.

These increases were partially offset by a $0.3 million and a $0.5 million decrease, respectively, in vial adapter sales to Amgen and Ferring and a $25,000 and a $0.1 million decrease, respectively, in B2000 product sales, primarily to BioScrip related to Fuzeon® customers.

We currently have significant supply agreements or commitments with Serono, Merial, Ferring Pharmaceuticals Inc., Hoffmann-La Roche Inc. and Trimeris Inc., Amgen Inc. and BioScrip Inc. (formerly Chronimed Inc.).

License and technology fees increased $0.2 million in both the three and six-month periods ended June 30, 2007 compared to the same periods of 2006 in accordance with the terms of our current agreements.

We currently have active licensing and/or development agreements, which often include commercial product supply provisions, with Serono, Merial, an undisclosed European biotechnology company, an undisclosed pharmaceutical company, the Centers for Disease Control and Prevention and Vical.

Manufacturing Expense

Manufacturing expense is made up of the cost of products sold and manufacturing overhead expense related to excess manufacturing capacity.

The $0.9 million, or 34.7%, decrease and the $0.7 million, or 18.0%, decrease in manufacturing expense in the three and six-month periods ended June 30, 2007, respectively, compared to the same periods of 2006 were due primarily to a $77,000 and a $183,000 decrease, respectively, in severance, labor and other manufacturing costs, primarily related to our past restructuring activities. In addition, the three and six-month periods ended June 30, 2006 included a $915,000 non-cash charge for the write-down of our sterile fill equipment in the second quarter of 2006. These decreases were partially offset in the six-month period by increased product sales in the six months ended June 30, 2007 compared to the same period of 2006.

Research and Development Expense

Research and development costs include labor, materials and costs associated with clinical studies incurred in the research and development of new products and modifications to existing products.

The $0.6 million, or 42.1%, decrease and the $0.6 million, or 26.3%, decrease in research and development expense in the three and six-month periods ended June 30, 2007, respectively, compared to the same periods of 2006 were primarily due to a $123,000 and a $248,000 decrease, respectively, in labor and related expenses, primarily related to our past restructuring activities. In addition, project materials and tooling expenses decreased $561,000 and $292,000 in the three and six-month periods ended June 30, 2007, respectively, compared to the same periods of 2006, as a result of the timing of projects.

Current significant projects include the Iject® needle-free injection device for an undisclosed company, a gas-powered drug delivery system utilizing our B2000 technology for an undisclosed company and the next generation auto-disable spring-powered device.

12




Selling, General and Administrative Expense

Selling, general and administrative costs include labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions.

The $0.3 million, or 33.1%, decrease and the $0.7 million, or 26.8%, decrease in selling, general and administrative expense in the three and six-month periods ended June 30, 2007, respectively, compared to the same periods of 2006 were due to $230,000 and $500,000, respectively, in savings related to our past restructuring activities, as well as a $37,000 and a $165,000 decrease, respectively, in insurance, other professional fees and consulting services.

Restructuring

Restructuring charges were as follows:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Manufacturing

 

$

 

$

 

$

55,229

 

$

108,041

 

Research and development

 

 

 

38,277

 

30,294

 

Selling, general and administrative

 

 

 

576,020

 

582,059

 

Total

 

$

 

$

 

$

669,526

 

$

720,394

 

 

The following table rolls forward our restructuring liability in the first six months of 2007:

Six-Month Period Ended June 30, 2007

 

Beginning
Accrued
Liability

 

Charged
to
Expense

 

Expend-
itures/
Transfer
to Equity

 

Ending
Accrued
Liability

 

Severance and related benefits for terminated employees

 

$

521,770

 

$

483,175

 

$

(486,984

)

$

517,961

 

Acceleration of vesting to be settled in common stock

 

315,084

 

186,351

 

(501,435

)

-

 

 

 

$

836,854

 

$

669,526

 

$

(988,419

)

$

517,961

 

 

Interest Expense

Interest expense included the following:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Contractual interest expense

 

$

78,000

 

$

96,000

 

$

139,000

 

$

192,000

 

Amortization of debt issuance costs

 

17,000

 

119,000

 

34,000

 

201,000

 

Acceleration of amortization of debt issuance costs related to early pay-down of $3.0 million term loan

 

 

300,000

 

 

300,000

 

Accretion of PFG and LOF convertible debt

 

62,000

 

184,000

 

124,000

 

184,000

 

Loss on settlement of LOF debt

 

 

601,000

 

 

601,000

 

 

 

$

157,000

 

$

1,300,000

 

$

297,000

 

$

1,478,000

 

 

In addition to contractual interest expense, in future periods, interest expense will include the following:

·                  amortization of unamortized debt issuance costs, which totaled $103,000 at June 30, 2007 and are being amortized at the rate of $17,000 per quarter; and

·                  accretion of the $1.25 million convertible debt at the rate of approximately $62,000 per quarter.

Change in Fair Value of Derivative Liabilities

Our derivative liabilities are recorded at fair value and are marked to market each period. The fair value of each of these instruments is determined using the Black-Scholes valuation model.

13




Liquidity and Capital Resources

Since our inception in 1985, we have financed our operations, working capital needs and capital expenditures primarily from private placements of securities, the exercise of warrants, loans, proceeds received from our initial public offering in 1986, proceeds received from a public offering of common stock in 1993, licensing and technology revenues and revenues from sales of products.

We currently have a line of credit agreement for up to $2.0 million of borrowings, which matures on May 11, 2008. As of June 30, 2007, $700,000 was outstanding under the line of credit and, based on borrowing limitations, there were no amounts available for borrowing.

Total cash, cash equivalents and short-term marketable securities at June 30, 2007 were $2.1 million compared to $3.7 million at December 31, 2006. We had working capital deficit of $0.8 million at June 30, 2007 compared to working capital of $1.4 million at December 31, 2006.

The overall decrease in cash, cash equivalents and short-term marketable securities during the first six months of 2007 resulted from $1.2 million used in operations, $69,000 used for capital expenditures, $173,000 used for other investing activities, primarily patent applications, and $190,000 used for principal payments on long-term debt and capital leases.

Net accounts receivable decreased $0.6 million to $0.7 million at June 30, 2007 compared to $1.3 million at December 31, 2006. Included in the balance at June 30, 2007 was an aggregate of $0.5 million due from our five largest customers. Of the amount due from these customers at June 30, 2007, $0.3 million was collected prior to the filing of this Form 10-Q.  Historically, we have not had collection problems related to our accounts receivable.

Inventories decreased $0.1 million to $1.0 million at June 30, 2007 compared to $1.1 million at December 31, 2006 and primarily included raw materials and finished goods for the Vial Adapter, B2000 Syringe products, and the spring-powered products for forecasted production in the third quarter of 2007.

Capital expenditures of $69,000 in the first six months of 2007 were primarily for the purchase of manufacturing tooling. We anticipate spending up to a total of $250,000 in 2007 for production molds for current research and development projects. We anticipate that we will be reimbursed by our partners for these expenditures.

Derivative liabilities of $1.6 million at June 30, 2007 reflect the fair value of the derivative liabilities associated with certain of our debt and equity transactions. The fair value of the derivative liabilities is adjusted on a quarterly basis using the Black-Scholes valuation model, with changes in fair value being recorded as a component of earnings.

Accrued severance and related liabilities of $0.5 million at June 30, 2007 related to the resignation and retirement of two of our executive officers during 2006, as well as charges related to our March 2007 reduction in force and the April 2007 termination of Mr. J. Michael Redmond, our Senior Vice President of Business Development. See Note 4 of Notes to Consolidated Financial Statements for additional detail.

Deferred revenue totaled $0.3 million at June 30, 2007 compared to $1.2 million at December 31, 2006. The balance at June 30, 2007 included $17,000 received from Serono, $238,000 received from Hoffman-La Roche Inc. and Trimeris and $83,000 from Vical.

We have outstanding a term loan agreement with Partners for Growth, L.P. (“PFG”) for $1.25 million of convertible debt financing (the “Debt Financing”). This loan is due in March 2011. However, due to certain subjective acceleration clauses contained in the Debt Financing agreement, the accreted value of the Debt Financing is reflected as current on our balance sheet. The loan bears interest at the prime rate and is convertible at any time by PFG into our common stock at $1.37 per share. In addition, if our common stock trades at a price of $4.11 per share or higher for 20 consecutive trading days, we can force PFG to convert the debt to common stock, subject to certain limitations on trading volume. If we prepay this loan,

14




we will issue PFG a warrant to purchase a number of shares of common stock equal to what it would have received upon conversion at a price of $1.37 per share. As a result of the derivative accounting prescribed by EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock,” at June 30, 2007, this debt was recorded on our balance sheet at $317,000 and is being accreted on a straight-line basis at the rate of approximately $62,000 per quarter to its face value of $1.25 million over the 60-month contractual term of the debt.

We also have outstanding a Loan and Security Agreement (the “Loan Agreement”) with PFG. The Loan Agreement provides for two loan facilities. One facility is a $500,000 term loan (the “Term Loan”), as described below, and the second facility permits us to borrow up to an amount equal to the sum of 75% of our eligible accounts receivable plus 30% of our eligible inventory, up to a maximum of $2.0 million plus any principal amounts of the Term Loan that have been repaid (the “Revolving Loan”). The Revolving Loan matures on May 11, 2008 and bears interest at (i) the greater of 4.5% or the prime rate of Silicon Valley Bank, (ii) plus 2%.  Under the Loan Agreement, we are obligated to pay PFG a collateral handling fee of 0.55% per month on the average amount borrowed during that month.  If the closing price of our common stock is between $2.00 and $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.38% per month.  If the closing price of our common stock is at or above $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.22% per month.  Under the Loan Agreement, we granted a security interest in substantially all of our assets to PFG to secure our obligations under the Loan Agreement. Our obligations under the Loan Agreement accelerate upon certain events, including a sale or change of control.  As of June 30, 2007, we had $700,000 outstanding under the Revolving Loan at an interest rate of 10.25% and, based on borrowing limitations, there we no amounts available for future borrowings.

The $500,000 Term Loan is being repaid in 18 equal monthly installments, with a maturity date of May 11, 2008. We borrowed the full amount of the Term Loan on December 12, 2006. The Term Loan bears interest at a monthly rate equal to (i) the greater of 4.5% or the prime rate of Silicon Valley Bank, plus (ii) 1.5%.  At June 30, 2007, we had $333,000 outstanding under this Term Loan at an interest rate of 9.75%.

Critical Accounting Policies and Estimates

We reaffirm the critical accounting policies and estimates as reported in our Form 10-K for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission on April 2, 2007.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

New Accounting Pronouncements

See Note 9. of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our reported market risks or risk management policies since the filing of our 2006 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on April 2, 2007.

 

15




ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Interim President and Chief Executive Officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Interim President and Chief Executive Officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Interim President and Chief Executive Officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1A. RISK FACTORS

In addition to the other information contained in this Form 10-Q, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.

We may need additional funding to support our operations beyond 2007; sufficient funding is subject to conditions and may not be available to us, and the unavailability of funding could adversely affect our business. We believe that, as a result of the restructuring we undertook in March 2007 and the new development, licensing and supply agreements we anticipate entering into in 2007, our current cash, cash equivalents and marketable securities will be sufficient to fund our operations and anticipated cash expenditures through June 30, 2008. If we are not able to enter into an adequate number of licensing, development and supply agreements by June 30, 2008, we will need to do one or more of the following in order to continue as a going concern: reduce our expenditure run-rate, secure additional long-term debt financing, secure additional equity financing or secure additional short-term financing. There is no guarantee that we will be able to reduce our expenditure run-rate sufficiently or that such resources will be available to us on terms acceptable to us, or at all, or that such resources will be received in a timely manner, if at all. In addition, reducing our expenditure run-rate may materially and adversely affect our business and operations.

We have a history of losses and may never be profitable. Since our formation in 1985, we have incurred significant annual operating losses and negative cash flow. At June 30, 2007, we had an accumulated deficit of $116.7 million and a net working capital deficit of $0.8 million. Due to our limited amount of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm dated April 2, 2007 expressed substantial doubt about our ability to continue as a going concern. We may never be profitable, which could have a negative effect on our stock price, our business and our ability to continue operations. Our revenues are derived from licensing and technology fees and from product sales. We sell our products to strategic partners, who market our products under their brand name and to end-users such as public health clinics for vaccinations and nursing organizations for flu immunizations. We have not attained profitability at these sales levels. We may never be able to generate significant revenues or achieve profitability. In the future, we are likely to require substantial additional financing. Such financing may not be available on terms acceptable to us, or at all, which would have a material adverse effect on our business. Any future equity financing could result in significant dilution to shareholders.

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If our products are not accepted by the market, our business could fail. Our success will depend on market acceptance of our needle-free injection drug delivery systems, the Biojector® 2000 system and the Vitajet® system and on market acceptance of other products under development. If our products do not achieve market acceptance, our business could fail. Currently, the dominant technology used for intramuscular and subcutaneous injections is the hollow-needle syringe, which has a cost per injection that is significantly lower than that of our products. The Biojector® 2000, the Iject® system, the Vitajet® system or any of our products under development may be unable to compete successfully with needle-syringes.

We may be unable to enter into additional strategic corporate licensing and distribution agreements or maintain existing agreements, which could cause our business to suffer. A key component of our sales and marketing strategy is to enter into licensing and supply arrangements with leading pharmaceutical and biotechnology companies for whose products our technology provides either increased medical effectiveness or a higher degree of market acceptance. If we cannot enter into these agreements on terms favorable to us or at all, our business may suffer.

In prior years, several agreements, including those with Hoffman La Roche Pharmaceuticals, Merck & Co. and Amgen, have been canceled by our partners prior to completion. These agreements were canceled for various reasons, including costs related to obtaining regulatory approval, unsuccessful pre-clinical vaccine studies, changes in vaccine development and changes in business development strategies. These agreements resulted in significant short-term revenue. However, none of these agreements developed into the long-term revenue stream anticipated by our strategic partnering strategy. No revenue resulted from any of the canceled agreements in 2006, 2005 or 2004.

We may be unable to enter into future licensing or supply agreements with major pharmaceutical or biotechnology companies. Even if we enter into these agreements, they may not result in sustainable long-term revenues which, when combined with revenues from product sales, could be sufficient for us to operate profitably.

We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our business. Our success depends upon the personal efforts and abilities of our senior management. We may be unable to retain our key employees, namely our management team, or to attract, assimilate or retain other highly qualified employees. Although we have implemented workforce reductions, there remains substantial competition for highly skilled employees. Our key employees are not bound by agreements that could prevent them from terminating their employment at any time. If we fail to attract and retain key employees, our business could be harmed.

Our operating results could suffer as a result of the retirement of our President and Chief Executive Officer. On October 18, 2006, Mr. James O’Shea retired as our Chairman effective immediately and as a Director and President and Chief Executive Officer effective December 31, 2006.  Mr. Jerald S. Cobbs was appointed our Chairman effective October 18, 2006 and as our Interim President and CEO effective March 8, 2007. We are conducting a search for a new permanent chief executive officer.

In addition, also effective March 8, 2007, the Board of Directors created an Executive Committee, which will serve the role of our Chief Operating Officer. The Executive Committee is composed of Ms. Christine Farrell and Dr. Richard R. Stout, Ms. Farrell also serves as our Vice President of Finance and Dr. Stout was promoted, effective March 8, 2007, to serve as our Executive Vice President and Chief Medical Officer.

This change in our chief executive officer and the creation of the Executive Committee may be disruptive to our business and negatively impact our operating results and may result in the departure of existing employees or customers. Further, it could take an extended period of time to locate, retain and integrate a new chief executive officer.

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We may not be able to effectively implement our restructuring activities, and our restructuring activities may not result in the expected benefits, which would negatively impact our future results of operations. In March 2007 and 2006, we restructured our operations, which included reducing the size of our workforce. Despite our restructuring efforts, we cannot assure you that we will achieve all of the operating expense reductions and improvements in operating margins and cash flows currently anticipated from these restructuring activities in the periods contemplated, or at all. Our inability to realize these benefits, and our failure to appropriately structure our business to meet market conditions, could negatively impact our results of operations. As part of our recent restructuring activities, we have reduced the workforce in certain portions of our business. This reduction in staffing levels could require us to forego certain future opportunities due to resource limitations, which could negatively affect our long-term revenues. In addition, these workforce reductions could result in a lack of focus and reduced productivity by remaining employees due to changes in responsibilities or concern about future prospects, which in turn may negatively affect our future revenues. Further, we believe our future success depends, in large part, on our ability to attract and retain highly skilled personnel. Our restructuring activities could negatively affect our ability to attract such personnel as a result of perceived risk of future workforce reductions. We cannot assure you that we will not be required to implement further restructuring activities or reductions in our workforce based on changes in the markets and industries in which we compete or that any future restructuring efforts will be successful.

We may not be able to comply with Nasdaq listing requirements, which could result in our common stock being delisted from the Nasdaq Capital Market. On October 3, 2006, we received a Nasdaq Staff Deficiency Letter stating that we failed to comply with the minimum bid price requirement for continued listing set forth in Marketplace Rule 4310(c)(4) because for 30 consecutive business days the bid price of our common stock closed below the minimum $1.00 bid requirement. Compliance would be regained if at any time prior to April 2, 2007 the bid price of our common stock closed at $1.00 per share or more for a minimum of 10 consecutive business days. On November 1, 2006, Nasdaq notified us that we were in compliance with the minimum bid requirement. While we are again in compliance with the minimum bid requirement, our common stock continues to trade near $1.00 and, as a result, we may not be able to maintain compliance. In addition, we may be unable to comply with Nasdaq’s other listing standards on an ongoing basis. As a result, our stock may be delisted from the Nasdaq Capital Market, which could have a negative effect on the price of our common stock, as well as on our ability to raise additional debt or equity resources.

The fair value of accounting for derivative liabilities may materially impact the results of our operations in future periods. We recorded derivative liabilities in connection with our convertible debt and equity financing agreements in 2006. In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Common Stock” and SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” these derivative liabilities are reported at fair value each reporting period. Changes in the fair value are recorded as a component of earnings. Changes in the value of the derivative liabilities may materially impact results of operations in future periods.

We have limited manufacturing experience, and may be unable to produce our products at the unit costs necessary for the products to be competitive in the market, which could cause our financial condition to suffer. We have limited experience manufacturing our products in commercially viable quantities. We have increased our production capacity for the Biojector® 2000 system and the Vitajet® product line through automation of, and changes in, production methods, in order to achieve savings through higher volumes of production.  If we are unable to achieve these savings, our results of operations and financial condition could suffer. The current cost per injection of the Biojector® 2000 system and Vitajet® product line is substantially higher than that of traditional needle-syringes, our principal competition. In order to reduce costs, a key element of our business strategy has been to reduce the overall manufacturing cost through automating production and packaging. There can be no assurance that we will achieve sales and manufacturing volumes necessary to realize cost savings from volume production at levels necessary to result in significant unit manufacturing cost reductions. Failure to do so will continue to make competing with needle-syringes on the basis of cost very difficult and will adversely affect our financial condition and results of operations. We may be unable to successfully manufacture

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devices at a unit cost that will allow the product to be sold profitably. Failure to do so would adversely affect our financial condition and results of operations.

We are subject to extensive government regulation and must continue to comply with these regulations or our business could suffer. Our products and manufacturing operations are subject to extensive government regulation in both the U.S. and abroad. If we cannot comply with these regulations, we may be unable to distribute our products, which could cause our business to suffer or fail. In the U.S., the development, manufacture, marketing and promotion of medical devices are regulated by the Food and Drug Administration (“FDA”) under the Federal Food, Drug, and Cosmetic Act (“FFDCA”). The FFDCA provides that new pre-market notifications under Section 510(k) of the FFDCA are required to be filed when, among other things, there is a major change or modification in the intended use of a device or a change or modification to a legally marketed device that could significantly affect its safety or effectiveness. A device manufacturer is expected to make the initial determination as to whether the change to its device or its intended use is of a kind that would necessitate the filing of a new 510(k) notification. The FDA may not concur with our determination that our current and future products can be qualified by means of a 510(k) submission or that a new 510(k) notification is not required for such products.

Future changes to manufacturing procedures could require that we file a new 510(k) notification. Also, future products, product enhancements or changes, or changes in product use may require clearance under Section 510(k), or they may require FDA pre-market approval (“PMA”) or other regulatory clearances. PMAs and regulatory clearances other than 510(k) clearance generally involve more extensive prefiling testing than a 510(k) clearance and a longer FDA review process. It is current FDA policy that pre-filled syringes are evaluated by the FDA by submitting a Request for Designation (“RFD”) to the Office of Combination Products (“OCP”). The pharmaceutical or biotechnology company with which we partner is responsible for the submission to the OCP. A pre-filled syringe meets the FDA’s definition of a combination product, or a product comprised of two or more regulated components, i.e. drug/device. The OCP will assign a center with primary jurisdiction for a combination product (CDER, CDRH) to ensure the timely and effective pre-market review of the product. Depending on the circumstances, drug and combination drug/device regulation can be much more extensive and time consuming than device regulation.

FDA regulatory processes are time consuming and expensive. Product applications submitted by us may not be cleared or approved by the FDA. In addition, our products must be manufactured in compliance with Good Manufacturing Practices, as specified in regulations under the FFDCA. The FDA has broad discretion in enforcing the FFDCA, and noncompliance with the FFDCA could result in a variety of regulatory actions ranging from product detentions, device alerts or field corrections, to mandatory recalls, seizures, injunctive actions and civil or criminal penalties.

Sales of our Iject® pre-filled syringe product are dependent on regulatory approval being obtained for the product’s use with a given drug to treat a specific condition. It is the responsibility of the strategic partner producing the drug to obtain this approval. The failure of a partner to obtain regulatory approval or to comply with government regulations after approval has been received could harm our business. In order for a strategic partner to sell our Iject® pre-filled device for delivery of its drug to treat a specific condition, the partner must first obtain government approval. This process is subject to extensive government regulation both in the U.S. and abroad. As a result, sales of the Iject® product to any strategic partner are dependent on that partner’s ability to obtain regulatory approval. Accordingly, delay or failure of a partner to obtain that approval could cause our financial results to suffer. In addition, if a partner fails to comply with governmental regulations after initial regulatory approval has been obtained, sales of Iject® product to that partner may cease, which could cause our financial results to suffer. The Iject® is still in development and has not yet been sold commercially.

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If we cannot meet international product standards, we will be unable to distribute our products outside of the United States, which could cause our business to suffer.  Distribution of our products in countries other than the U.S. may be subject to regulation in those countries. Failure to satisfy these regulations would impact our ability to sell our products in these countries and could cause our business to suffer.

Bioject has received the following certifications from Underwriters Laboratories or TŰV Product Services that our products and quality systems meet the applicable requirements, which allows us to label our products with the CE Mark and sell them in the European Community and non European Community countries.

Certificate

 

Dated

ISO 13485:2003 and CMDCAS (Underwriters Laboratories)

 

December 2006

 

 

 

Annex V of the Directive 93/42/EEC on Medical Devices (TUV)

 

Audit February 2006

 

 

 

Annex II, section 3 of the Directive 93/42/EEC on Medical Devices (TUV)

 

Audit February 2006

 

If we are unable to continue to meet the standards of ISO 9001 or CE Mark certification, it could have a material adverse effect on our business and cause our financial results to suffer.

If the healthcare industry limits coverage or reimbursement levels, the acceptance of our products could suffer. The price of our products exceeds the price of needle-syringes and, if coverage or reimbursement levels are reduced, market acceptance of our products could be harmed. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare facilities. During the past several years, the healthcare industry has been subject to increased government regulation of reimbursement rates and capital expenditures. Among other things, third party payers are increasingly attempting to contain or reduce healthcare costs by limiting both coverage and levels of reimbursement for healthcare products and procedures. Because the price of the Biojector® 2000 system and Vitajet® product line exceeds the price of a needle-syringe, cost control policies of third party payers, including government agencies, may adversely affect acceptance and use of the Biojector® 2000 system and Vitajet® product line.

We depend on outside suppliers for manufacturing. Our current manufacturing processes for the Biojector® 2000 jet injector and disposable syringes as well as manufacturing processes to produce the Vitajet® consist primarily of assembling component parts supplied by outside suppliers. Some of these components are currently obtained from single sources, with some components requiring significant production lead times. In the past, we have experienced delays in the delivery of certain components. To date, such delays have not had a material adverse effect on our operations.  We may experience delays in the future, and these delays could have a material adverse effect on our financial condition and results of operations.

If we are unable to manage our growth, our results of operations could suffer. If our products achieve market acceptance or if we are successful in entering into significant product supply agreements with major pharmaceutical or biotechnology companies, we expect to experience rapid growth. Such growth would require expanded customer service and support, increased personnel, expanded operational and financial systems, and implementing new and expanded control procedures. We may be unable to attract sufficient qualified personnel or successfully manage expanded operations. As we expand, we may periodically experience constraints that would adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage growth effectively could adversely affect our financial condition and results of operations.

We may be unable to compete in the medical equipment field, which could cause our business to fail. The medical equipment market is highly competitive and competition is likely to intensify. If we cannot compete, our business will fail. Our products compete primarily with traditional needle-syringes, “safety syringes” and also with other alternative drug delivery systems. In addition, manufacturers of needle-syringes, as well as other companies, may develop new products that compete directly or indirectly with our products. There can be no assurance that we will be able to compete successfully in this market.

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A variety of new technologies (for example, transdermal patches) are being developed as alternatives to injection for drug delivery. While we do not believe such technologies have significantly affected the use of injection for drug delivery to date, there can be no assurance that they will not do so in the future. Many of our competitors have longer operating histories as well as substantially greater financial, technical, marketing and customer support resources.

We are dependent on a single technology, and if it cannot compete or find market acceptance, our business will suffer. Our strategy has been to focus our development and marketing efforts on our needle-free injection technology. Focus on this single technology leaves us vulnerable to competing products and alternative drug delivery systems. If our technology cannot find market acceptance or cannot compete against other technologies, business will suffer. We perceive that healthcare providers’ desire to minimize the use of the traditional needle-syringe has stimulated development of a variety of alternative drug delivery systems such as “safety syringes,” jet injection systems, nasal delivery systems and transdermal diffusion “patches.” In addition, pharmaceutical companies frequently attempt to develop drugs for oral delivery instead of injection. While we believe that for the foreseeable future there will continue to be a significant need for injections, alternative drug delivery methods may be developed which are preferable to injection.

We rely on patents and proprietary rights to protect our technology. We rely on a combination of trade secrets, confidentiality agreements and procedures and patents to protect our proprietary technologies. We have been granted a number of patents in the U.S. and several patents in other countries covering certain technology embodied in our current jet injection system and certain manufacturing processes. Additional patent applications are pending in the U.S. and certain foreign countries. The claims contained in any patent application may not be allowed, or any patent or our patents collectively may not provide adequate protection for our products and technology. In the absence of patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. In addition, the laws of foreign countries may not protect our proprietary rights to this technology to the same extent as the laws of the U.S. We believe we have independently developed our technology and attempt to ensure that our products do not infringe the proprietary rights of others. We know of no such infringement claims.

If a dispute arises concerning our technology, we could become involved in litigation that might involve substantial cost. Such litigation might also divert substantial management attention away from our operations and into efforts to enforce our patents, protect our trade secrets or know-how or determine the scope of the proprietary rights of others. If a proceeding resulted in adverse findings, we could be subject to significant liabilities to third parties. We might also be required to seek licenses from third parties in order to manufacture or sell our products. Our ability to manufacture and sell our products might also be adversely affected by other unforeseen factors relating to the proceeding or its outcome.

If our products fail or cause harm, we could be subject to substantial product liability, which could cause our business to suffer. Producers of medical devices may face substantial liability for damages in the event of product failure or if it is alleged the product caused harm. We currently maintain product liability insurance and, to date, have experienced one product liability claim. There can be no assurance, however, that we will not be subject to a number of such claims, that our product liability insurance would cover such claims, or that adequate insurance will continue to be available to us on acceptable terms in the future. Our business could be adversely affected by product liability claims or by the cost of insuring against such claims.

There are a large number of shares eligible for sale into the public market in the near future, which may reduce the price of our common stock. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. We have a large number of shares of common stock outstanding and available for resale beginning at various points in time in the future. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. 520,088 shares of our common stock currently outstanding are eligible for sale without registration pursuant to Rule 144 under the Securities Act, subject to certain conditions of Rule 144. The holder of these shares also has

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certain demand and piggyback registration rights enabling it to register its shares for sale under the Securities Act. We have registered approximately 20.9 million shares for resale on Form S-3 registration statements, including approximately 2.4 million shares issuable upon exercise of warrants. In addition, as of June 30, 2007, we had 364,000 shares of common stock reserved for future issuance under our stock incentive plan and our employee share purchase plan combined. As of June 30, 2007, options to purchase approximately 1.6 million shares of common stock were outstanding and 635,000 restricted stock units were outstanding and will be eligible for sale in the public market from time to time subject to vesting. In connection with the Loan Agreement signed in December 2006, we issued a warrant to purchase 200,000 shares of our common stock at an exercise price of $1.37 per share. The warrant expires on December 10, 2011. The shares underlying this warrant have not been registered for resale.

Our stock price may be highly volatile, which increases the risk of securities litigation. The market for our common stock and for the securities of other early-stage, small market-capitalization companies has been highly volatile in recent years. This increases the risk of securities litigation relating to such volatility. We believe that factors such as quarter-to-quarter fluctuations in financial results, new product introductions by us or our competition, public announcements, changing regulatory environments, sales of common stock by certain existing shareholders, substantial product orders and announcement of licensing or product supply agreements with major pharmaceutical or biotechnology companies could contribute to the volatility of the price of our common stock, causing it to fluctuate dramatically. General economic trends such as recessionary cycles and changing interest rates may also adversely affect the market price of our common stock.

Concentration of ownership could delay or prevent a change in control or otherwise influence or control most matters submitted to our shareholders. Certain funds affiliated with Life Sciences Opportunities Fund II (Institutional), L.P. (collectively, the “LOF Funds”) and its affiliates currently own shares of Series D preferred stock, Series E preferred stock and warrants to purchase common stock representing in aggregate approximately 32% of our outstanding voting power (assuming exercise of the warrants). As a result, the LOF Funds and their affiliates have the potential to control matters submitted to a vote of shareholders, including a change of control transaction, which could prevent or delay such a transaction.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of our shareholders was held on June 14, 2007, at which the following actions were taken:

1.               The shareholders elected the three nominees for director to the Board of Directors, two of whom were Class Three directors and one of whom was Class Two. The three directors elected, along with the voting results, were as follows:

Name

 

Class

 

No. of Shares Voting For

 

No. of Shares Withheld Voting

 

Brigid A. Makes

 

Three

 

19,447,078

 

81,890

 

John Ruedy, M.D.

 

Three

 

19,469,731

 

59,237

 

David S. Tierney

 

Two

 

19,468,751

 

60,217

 

 

2.               The shareholders approved a proposal to amend the Restated 1992 Stock Incentive Plan to eliminate automatic grants to non-employee directors and permit other types of awards to those directors as follows:

No. of Shares
Voting For:

 

No. of Shares
Voting Against:

 

No. of Shares
Abstaining:

 

No. of Broker
Non-Votes:

 

11,159,815

 

131,388

 

19,550

 

8,218,215

 

 

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ITEM 6.  EXHIBITS

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

Exhibit No.

 

Description

3.1

 

 

2002 Restated Articles of Incorporation of Bioject Medical Technologies Inc., as amended. Incorporated by reference to Form 8-K dated November 15, 2004.

3.1.1

 

 

Articles of Amendment to 2002 Restated Articles of Incorporation. Incorporated by reference to Form 8-K dated May 30, 2006 and filed June 5, 2006.

3.2

 

 

Second Amended and Restated Bylaws of Bioject Medical Technologies, Inc. Incorporated by reference to Form 8-K filed July 5, 2007.

4.1

 

 

Form of Rights Agreement dated as of July 1, 2002 between the Company and American Stock Transfer & Trust Company, including Exhibit A, Terms of the Preferred Stock, Exhibit B, Form of Rights Certificate, and Exhibit C, Summary of the Right To Purchase Preferred Stock. Incorporated by reference to Form 8-K dated July 2, 2002.

4.1.1

 

 

First Amendment, dated October 8, 2002, to Rights Agreement dated July 1, 2002 between Bioject and American Stock Transfer & Trust Company. Incorporated by reference to registration statement on Form 8-A/A filed with the Commission on October 8, 2002.

4.1.2

 

 

Second Amendment, dated November 15, 2004, to Rights Agreement dated July 1, 2002 between Bioject and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated November 15, 2004.

4.1.3

 

 

Third Amendment to Rights Agreement, dated March 8, 2006, between Bioject Medical Technologies Inc. and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006.

10.1

 

 

Bioject Medical Technologies Inc. Restated 1992 Stock Incentive Plan, as amended March 8, 2007.

31.1

 

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2

 

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1

 

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

32.2

 

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 14, 2007

 

BIOJECT MEDICAL TECHNOLOGIES INC.

 

 

(Registrant)

 

 

 

 

 

 

 

 

/s/JERALD S. COBBS

 

 

 

Chairman and Interim President

 

 

and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

/s/ CHRISTINE M. FARRELL

 

 

 

Christine M. Farrell

 

 

Vice President of Finance

 

 

(Principal Financial and Accounting Officer)

 

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