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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2007
¨ | 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 000-51925
ALCiS HEALTH, INC.
A DELAWARE CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 72-1235451
2001 Gateway Place, Suite 520W
San Jose, CA 95110
408-437-1060
Check whether the issuer (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 issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x
As of February 7, 2008, there were 9,021,902 outstanding shares of common stock, par value $.001 per share.
Transitional Small Business Disclosure Format: Yes ¨ No x
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ALCiS Health, Inc.
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Item 1. | Financial Statements |
Consolidated Balance Sheets
December 31, 2007 | March 31, 2007 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 40,761 | $ | 1,771,989 | ||||
Inventory | 247,312 | 221,848 | ||||||
Accounts receivable | 129,339 | 9,513 | ||||||
Prepaid expenses and other current assets | 172,049 | 135,918 | ||||||
Total current assets | 589,461 | 2,139,268 | ||||||
Property and equipment, net of accumulated depreciation of $37,959 and $20,503 at December 31, 2007 and March 31, 2007, respectively | 31,956 | 43,958 | ||||||
Other assets | 39,673 | 41,541 | ||||||
Total assets | $ | 661,090 | $ | 2,224,767 | ||||
Liabilities and Shareholders’ Equity (Deficit) | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 467,975 | $ | 623,916 | ||||
Deferred revenue | 41,767 | 13,978 | ||||||
Line of credit | 230,000 | — | ||||||
Convertible notes payable | 600,000 | — | ||||||
Total current liabilities | 1,339,742 | 637,894 | ||||||
Commitments and contingencies | — | — | ||||||
Shareholders’ equity (deficit) | ||||||||
Preferred stock; $0.001 par value, 500,000 shares authorized | — | — | ||||||
Common stock; $0.001 par value, 20,000,000 shares authorized, 9,021,902 and 8,936,902 shares issued and outstanding at December 31, 2007 and March 31, 2007, respectively | 9,022 | 8,937 | ||||||
Additional paid-in capital | 12,226,549 | 11,698,806 | ||||||
Accumulated deficit | (12,914,223 | ) | (10,120,870 | ) | ||||
Total shareholders’ equity (deficit) | (678,652 | ) | 1,586,873 | |||||
Total liabilities and shareholders’ equity | $ | 661,090 | $ | 2,224,767 | ||||
See accompanying notes to the consolidated financial statements.
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Consolidated Statements of Operations
(Unaudited)
Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenue | $ | 388,067 | $ | 380,293 | $ | 1,139,730 | $ | 1,719,164 | ||||||||
Operating expenses | ||||||||||||||||
Cost of sales | 148,747 | 132,583 | 430,717 | 659,357 | ||||||||||||
Advertising and promotion | 668,874 | 566,409 | 1,854,821 | 2,540,105 | ||||||||||||
Selling, general and administrative | 421,131 | 556,409 | 1,363,995 | 1,726,230 | ||||||||||||
Product development | 88,847 | 78,906 | 261,344 | 1,182,097 | ||||||||||||
Total operating expenses | 1,327,599 | 1,334,307 | 3,910,877 | 6,107,789 | ||||||||||||
Operating loss | (939,532 | ) | (954,014 | ) | (2,771,147 | ) | (4,388,625 | ) | ||||||||
Interest income (expense), net | (9,898 | ) | 17,339 | 5,747 | 34,034 | |||||||||||
Other expense, net | (24,654 | ) | — | (27,954 | ) | (1,660 | ) | |||||||||
Total other income (expense), net | (34,552 | ) | 17,339 | (22,207 | ) | 32,374 | ||||||||||
Net loss available to common shareholders | $ | (974,084 | ) | $ | (936,675 | ) | $ | (2,793,354 | ) | $ | (4,356,251 | ) | ||||
Net loss per common share: | ||||||||||||||||
Basic and fully diluted | $ | (0.11 | ) | $ | (.011 | ) | $ | (0.31 | ) | $ | (0.58 | ) | ||||
Number of common shares: | ||||||||||||||||
Weighted average outstanding, basic and fully diluted | 9,021,902 | 8,346,407 | 9,000,898 | 7,573,017 | ||||||||||||
See accompanying notes to the consolidated financial statements.
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Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended December 31, | ||||||||
2007 | 2006 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (2,793,354 | ) | $ | (4,356,251 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Consultant, director and product development option and warrant expense | 260,612 | 1,576,240 | ||||||
Amortization of debt issue costs | 20,555 | — | ||||||
Depreciation | 17,456 | 7,573 | ||||||
Changes in operating assets and liabilities: | ||||||||
Inventory | (25,464 | ) | (47,317 | ) | ||||
Accounts receivable | (119,826 | ) | 752 | |||||
Prepaid expenses and other current assets | 25,531 | (80,166 | ) | |||||
Other assets | 1,868 | (47,936 | ) | |||||
Accounts payable and accrued liabilities | (155,941 | ) | (28,566 | ) | ||||
Deferred revenue | 27,789 | 3,456 | ||||||
Net cash used in operating activities | (2,740,774 | ) | (2,972,215 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (5,454 | ) | (47,422 | ) | ||||
Net cash used in investing activities | (5,454 | ) | (47,422 | ) | ||||
Cash flows from financing activities: | ||||||||
Net proceeds from line of credit | 230,000 | — | ||||||
Proceeds from issuance of common stock | 185,000 | 3,483,982 | ||||||
Proceeds from convertible notes payable | 600,000 | — | ||||||
Net cash provided by financing activities | 1,015,000 | 3,483,982 | ||||||
Net increase (decrease) in cash and cash equivalents | (1,731,228 | ) | 464,345 | |||||
Cash and cash equivalents at beginning of period | 1,771,989 | 2,004,625 | ||||||
Cash and cash equivalents at end of period | $ | 40,761 | $ | 2,468,970 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 1,273 | $ | — | ||||
See accompanying notes to the consolidated financial statements
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Notes to the Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of ALCiS Health, Inc. (“ALCiS” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). This financial information reflects all adjustments, which are, in the opinion of the Company’s management, of normal recurring nature and necessary to present fairly the financial position as of December 31, 2007 and March 31, 2007, results of operations for the three and nine months ended December 31, 2007 and 2006 and cash flows for the nine months ended December 31, 2007 and 2006. The March 31, 2007 balance sheet was derived from the audited financial statements included in the 2007 annual report on Form 10-KSB.
The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in these financial statements have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures which are made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements of ALCiS Health, Inc. for the fiscal year ended March 31, 2007, which were included in the annual report on Form 10-KSB.
Interim results are not necessarily indicative of results for the full fiscal year. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements. The results of operations for the three and nine months ended December 31, 2007 are not necessarily indicative of the results to be expected for any future periods.
Note 2 - Organization and Business
ALCiS markets and distributes over-the-counter health care products, including ALCiS® Daily Relief Pain Relief Cream and related products. Initially the products were sold primarily through direct-response advertising and web commerce. During the quarter ending June 30, 2007, the Company began selling its products to small and regional drug and specialty stores.
Prior to September 30, 2006, the Company was in the development stage as it had been primarily engaged in developing its marketing strategy and infrastructure and raising capital. Since then, the Company was able to develop and begin execution of its retail strategy. In the course of its development activities, the Company has sustained losses and expects such losses to continue through at least 2008. The Company will finance its operations primarily through its existing cash, future financing (debt or equity) and revenues from product sales.
Note 3 - Summary of Significant Accounting Policies
Cash and cash equivalents
For the purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Inventory
Inventory consists of ALCiS® Daily Relief Pain Relief Cream and related products available for sale to consumers and packing materials. Inventory is valued at the lower of first-in, first-out cost or market.
Prepaid Royalties
Under the license and manufacturing agreement with the patent owner of the liposomal delivery system used in ALCiS® Daily Relief Pain Relief Cream, prepaid royalties consist of the difference between the actual royalties owed and the minimum monthly payment due, when the minimum monthly payment exceeds the actual royalties owed. In addition, certain up-front payments are characterized as prepaid royalties. Prepaid royalties are available to offset future royalties when actual royalties owed exceed the minimum monthly payment due. At that time, the prepaid royalties can be applied to the actual royalties owed and reduce the actual payment to the minimum amount due. The prepaid royalties expire upon the termination of the license and manufacturing agreement.
The Company charges to expense the prepaid royalties, that is the excess of the amounts paid over the royalties due on the current period sales. The Company does not record an asset for prepaid royalties available for future sales.
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ALCiS Health, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
Property and equipment
Property and equipment, consisting primarily of computer equipment, is carried at cost, less accumulated depreciation. Depreciation is provided by the straight-line method over estimated useful lives of three to five years. Expenditures for maintenance and repairs are charged to expense as incurred.
Revenue recognition
Net sales consist primarily of products sold directly to consumers via a telephone call center and the internet, plus shipping revenue, net of estimated returns and promotional discounts. The Company recognizes revenue when all of the following have occurred: persuasive evidence of an agreement with the customer exists, products are shipped and the customer takes delivery and assumes the risk of loss; the selling price is fixed or determinable and collectibility of the selling price is reasonably assured.
For direct to consumer sales the Company requires payment at the point of sale. Amounts received prior to delivery of goods to customers are not recorded as revenue. Instead, they are recorded as deferred revenue and reported as a current liability. Delivery is considered to occur when title to our products has passed to the customer, which typically occurs at physical delivery of the products from our fulfillment center to a common carrier. The Company offers a return policy of generally 30 days and provides an allowance for sales returns during the period in which the sales are made. At December 31, 2007, the reserve for sales returns was $23,000 and was recorded as an accrued liability.
The Company generally does not extend credit to consumers, except through third party credit cards. The majority of sales are through credit cards, and accounts receivable are composed primarily of amounts due from financial institutions related to credit card sales. The Company does not maintain an allowance for doubtful accounts because payment is typically received within two business days after the sale is complete.
The Company periodically provides incentive offers to our customers to encourage purchases. Such offers include current discount offers and offers for free product when multiple units are purchased. Current discount offers are treated as a reduction on the purchase price of the related transaction, while the cost of the free product is included in cost of sales at the time of shipment.
During the first quarter of fiscal year 2008, the Company began selling product to small and regional drug and specialty stores; however, the majority of the current revenue is from direct to consumer sales.
Advertising expenses
The cost of advertising is expensed in the period in which the related advertising takes place. Production and communication costs are expensed in the period in which the related advertising begins running. Costs for direct-response advertising are capitalized and amortized over the estimated useful life of the advertisement.
Product development
Product development costs relate to costs incurred in the development of the Company’s product, ALCiS® Daily Relief Pain Relief Cream, and are expensed as incurred.
Shipping and handling costs
Shipping and handling costs are included in cost of sales as incurred.
Stock based compensation
The Company accounts for its stock based compensation plans under Statement on Financial Accounting Standards (“SFAS”) No. 123R,“Share Based Payments,” whereby the cost of share based payments to employees and directors, including grants of employee stock options and director warrants, are measured based on the grant date fair value of the award. That cost is recognized over the period during which an employee or director is required to provide service in order for the award to vest, which is called the requisite service period. No compensation cost is recognized for equity instruments for which employees or directors do not render the requisite service. The grant date fair value of employee share options, director warrants, and similar instruments is estimated using the Black-Scholes option-pricing model adjusted for the unique characteristics of those instruments.
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ALCiS Health, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
The Company from time to time issues common stock, stock options or common stock warrants to acquire services or goods from persons who are not employees or directors. Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, which is measured as of the date required by Emerging Issues Task Force (“EITF”) Issue 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”
In accordance with EITF 96-18, the stock options or common stock warrants are valued using the Black-Scholes option-pricing model on the basis of the market price of the underlying common stock on the “valuation date”, which for options and warrants related to contracts that have substantial discentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes option-pricing model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent change in the market price of the underlying common stock through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.
Loss per share
Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share includes the effects of the potential dilution of outstanding options, warrants, and convertible debt on the Company’s common stock, determined using the treasury stock method if it is an equity instrument or the “if converted” method if it is a debt instrument.
Loss per share is as follows:
Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Basic and Diluted: | ||||||||||||||||
Net loss available to common shareholders | $ | (974,084 | ) | $ | (936,675 | ) | $ | (2,793,354 | ) | $ | (4,356,251 | ) | ||||
Net loss per share available to common shareholders | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.31 | ) | $ | (0.58 | ) | ||||
Weighted average shares outstanding | 9,021,902 | 8,346,407 | 9,000,898 | 7,573,017 | ||||||||||||
At December 31, 2007 and 2006, potential dilutive common shares under the warrant agreements and stock option plan of 4,317,600 and 4,160,100, respectively, were not included in the calculation of diluted earnings per share as they were antidilutive.
Income taxes
An asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
Management’s estimates and assumptions
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from such estimates. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance.
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ALCiS Health, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 3 - Summary of Significant Accounting Policies (Continued)
Recently issued accounting standards
On April 1, 2007, the Company adopted Staff Accounting Bulletin (“SAB”) No. 108. This Bulletin was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. In SAB No. 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. At December 31, 2007, the Company did not have any financial statement misstatements that required quantification or disclosure.
On April 1, 2007, the Company adopted the Financial Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 48,“Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2007, the Company had no material uncertain tax positions.
Note 4 – Equity
Common stock
During the first quarter of fiscal year 2008, the Company issued 25,000 shares of its common stock at $2.00 per share for cash proceeds of $50,000. Also, the Company issued 50,000 shares of its common stock at $2.30 per share for warrants exercised for cash proceeds of $115,000. Lastly, the Company issued 10,000 shares of its common stock at $2.00 per share for warrants exercised for total cash proceeds of $20,000.
Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock at a par value of $0.001. At December 31, 2007, there are no shares of preferred stock issued or outstanding.
2004 Stock Plan
Effective September 28, 2004, the Company’s Board of Directors approved the ALCiS Health, Inc. 2004 Stock Plan (the “Stock Plan”). The Stock Plan as amended on March 31, 2006 in conjunction with the Merger, is discretionary and allows for an aggregate of up to 1,300,000 shares of the Company’s common stock to be awarded through incentive and non-qualified stock options and stock purchase rights. The Stock Plan is administered by the Board of Directors which has exclusive discretion to select participants who will receive the awards and determine the type, size and terms of each award granted.
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ALCiS Health, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 4 – Equity (Continued)
Options and warrants issued to employees, directors and consultants
The Company uses the Black-Scholes option-pricing model to compute the fair value of stock options and warrants which require the Company to make the following assumptions:
Three months ended December 31, | ||||||
2007 | 2006 | |||||
Expected life (years) | 5.44 | 5.63 | ||||
Risk-free interest rate | 3.45 | % | 4.3 | % | ||
Dividend yield | — | — | ||||
Volatility | 55 | % | 104 | % |
• | The term of grants is based on the simplified method as described in Staff Accounting Bulletin No. 107. |
• | The risk free rate is based on the five year Treasury bond at the date of grant. |
• | The dividend yield on the Company’s common stock is assumed to be zero since the Company does not pay dividends and has no current plans to do so in the future. |
• | The market price volatility of the Company’s common stock is based on the Company’s recent stock activity and the volatility of other companies at a similar stage of development. |
Expense relating to the options and warrants granted to directors was $51,278 and $45,846 for the three month periods ended December 31, 2007 and 2006, respectively, and there is $243,310 associated with non-vested awards that will be expensed in the future over a weighted average period of .89 years. Expense relating to the options and warrants granted to directors was $153,832 and $204,784 for the nine month periods ended December 31, 2007 and 2006, respectively.
Note 5 – Commitments and Contingencies
License and manufacturing agreement
The Company has entered into a license and manufacturing agreement with the patent owner (the “Manufacturer”) of the liposomal delivery system used in ALCiS® Daily Relief Pain Relief Cream. The agreement grants the Company an exclusive, world-wide license for the commercialization of the liposomal delivery system for topical analgesic pain relief applications and body soak preparations and a non-exclusive, world-wide license for the commercialization of the liposomal delivery system for similar preparations such as body lotions and soap.
Under the agreement, the Company pays a royalty on monthly net sales or $25,000 per month, if greater. After December 31, 2008, the minimum monthly royalty of $25,000 increases to $50,000. To the extent that the actual royalties owed based on net monthly sales are less than the minimum monthly payment, the difference is available to offset future royalties, however, these royalties are not capitalized in the Company’s balance sheet. Per the agreement with the Manufacturer, these excess payments are available to offset future royalties when the monthly royalty owed based on net monthly sales exceeds the monthly payment. At that time, the prepaid royalties can be applied to the royalty owed based on net monthly sales to the Manufacturer and reduce the actual payment to the monthly minimum.
Additionally, the Company is required to pay the Manufacturer a non-refundable prepaid royalty totaling $400,000 of which $250,000 was paid during the year ended March 31, 2006. The remaining $150,000 was payable in 18 equal monthly payments of $8,333 with the last payment having been paid in January 2008.
In general, the agreement terminates upon the expiration of the Manufacturer’s patents used in ALCiS® Daily Relief Pain Relief Cream. The Manufacturer is currently the Company’s sole provider of ALCiS® Daily Relief Pain Relief Cream.
Operating Lease
The Company leases its office space under a non-cancelable operating lease which expires in August 2008. Rent expense was $97,008 and $38,057 for the nine months ended December 31, 2007 and 2006, respectively.
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ALCiS Health, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 6 – Bank Operating Line of Credit
On October 1, 2007, the Company entered into a revolving line of credit with Heritage Bank of Commerce. The original borrowing base under the agreement was established at $500,000. The line is secured by the Company’s assets and matures on September 30, 2008, subject to renewal or conversion to a term loan at the bank’s discretion. The line bears interest at the banks prime rate plus 1.5% and was guaranteed by a current investor who was provided 75,000 five-year warrants to purchase the Company’s common stock with an exercise price of $2.00 per share as consideration for the guarantee. The warrants vest immediately and are exercisable for a term of 5 years. The fair value of the warrants was estimated to be $82,217 using the Black-Scholes option pricing model and will be recorded as interest expense over the life of the loan. $20,555 was recorded as interest expense in the statement of operations for the three months ended December 31, 2007. Interest only payments are due on the note each month. At December 31, 2007 the interest rate was 8.75% and the borrowings were $230,000.
Note 7 – Notes Payable
During the third quarter the Company received $600,000 in cash from the placement of unsecured subordinated convertible promissory notes which bear interest at 8%. $75,000 of the total was received from two directors. The notes and accrued interest automatically convert into debt or equity upon a “Qualified Financing” which is defined as any debt or equity offering by which the Company secures gross proceeds of $4 million or more (whether as equity, debt or other consideration), including the amounts received under these convertible notes. If a Qualified Financing does not occur, the notes and any accrued interest are due and payable on demand, which may be made at any time after March 31, 2009; provided that the Company may extend the note maturity date to December 31, 2009, in which case the interest rate would increase to 10%. Each note holder also received five-year warrants to purchase that number of Company common shares equal to 25% of the note principal divided by the price per share of the stock sold in the Qualified Financing or the price per share at which the equity underlying or associated with the debt is issuable.
Note 8 – Subsequent Events
Subsequent to December 31, 2007, the Company obtained an $800,000 increase to its revolving line of credit with Heritage Bank of Commerce, increasing the line to $1,300,000. The additional line is guaranteed by four current investors who were provided a total 120,000 five-year warrants to purchase the Company’s common stock with an exercise price of $2.00 per share as consideration for the guarantee.
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS |
You must read the following discussion of the plan of the operations and financial condition of the Company in conjunction with its financial statements, including the notes, included in this Form 10-QSB filing. The Company’s historical results are not necessarily an indication of trends in operating results for any future period.
Cautionary Statement Regarding Forward Looking Statements
This Management’s Discussion and Analysis includes forward-looking statements. These forward-looking statements are not historical facts, and are based on current expectations, estimates, and projections about the Company’s industry, its beliefs, its assumptions, and its goals and objectives. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “forecasts,” and “estimates,” and variations of these words and similar expressions, are intended to identify forward-looking statements. Examples of such forward-looking statements in this are the Company’s growth strategy of achieving increased sales in the direct-to-consumer channel, launching our current products into the retail channel, and introducing and marketing new products and technologies that meet our customers’ requirements; our expectation that the full Walgreens’ rollout will occur during February, 2008; our expectation for increased quarterly revenues resulting from planned increased advertising; our expectation that our revenue mix will move toward the majority of our revenue coming from sales to retail stores versus direct to consumer sales; our plans to conduct product development activities to enhance our product offerings in order to meet current and future requirements of our customers and markets and therefore increase our R&D expenses; our plans to further expand our sales and marketing initiatives in the next several quarters including increased headcount; increase in direct to consumer media, and public relations, which can be expected to cause continued increases in advertising and promotion expenses; the belief that the Company through its contract manufacturer has ample production capacity in place to handle any projected increase in business for the next fiscal year; the anticipation that the available funds and expected cash usage from operations and our plans to raise debt and equity financing will be sufficient to meet the liquidity and capital requirements; our expectation that net interest expense will increase as the Company draws up to $1.3 million on the operating line of credit; our belief that sales into the retail channel will yield higher profit than our direct sales to consumers and our strategy of introducing and marketing new products and technologies that meet our customers’ requirements. These statements are only predictions, not a guaranty of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond the Company’s control and are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include no material adverse changes in the demand for the Company’s products; competition to supply OTC products in the markets in which the Company competes does not increase and cause price erosion; that there are no unexpected manufacturing issues as production ramps up; customers not cutting back, delaying, or canceling orders or reducing the number of stores that carry our product; the demand for the Company’s products is such that it would be unwise not to decrease research and development; our not being able to obtain an increased accounts receivable credit line on commercially reasonable terms; our having unanticipated cash requirements; our ability to effectively reduce cash expenses quickly or raise additional financing on attractive terms as a contingency; and our being successful in our retail channel launch and development of new products as well as other risks and factors set forth in this Form 10-QSB, including those incorporated by reference from our 10-KSB at the end of this Item 2 under “Risk Factors.” The information included in this Form 10-QSB is provided as of the filing date with the SEC and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, the readers are cautioned not to place undue reliance on such statements. Except as required by law, the Company undertakes no obligation to update any forward-looking statement, as a result of new information, future events, or otherwise.
Critical Accounting Policies
Our critical accounting policies are those that both (1) are most important to the portrayal of the financial condition and results of operations and (2) require management’s most difficult, subjective, or complex judgments, often requiring estimates about matters that are inherently uncertain. The critical accounting policies are described in Item 6, “Management’s Discussion and Analysis or Plan of Operations” of our annual report on Form 10-KSB for the year ended March 31, 2007.
Critical accounting policies affecting us, the critical estimates made when applying them, and the judgments and uncertainties affecting their application have not changed materially since March 31, 2007.
Overview
ALCiS’ principal business is researching, developing, marketing and distributing body therapy solutions, including but not limited to the area of pain management products such as topical analgesics. In order to reduce its capital requirements and increase its flexibility, ALCiS uses a contract manufacturer to manufacture its products. The products are then shipped to a fulfillment center to await shipment to customers. ALCiS licenses certain patented technology exclusively in its field of use from its contract manufacturer.
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Since formation, ALCiS’ principal activities have consisted of securing rights to proprietary technologies for its topical analgesic pain relief products, product and market research and development resulting in the filing of four trademark applications, the development of five proprietary products, research into the markets for ALCiS’ products and the best channels through which to sell them, providing samples and selling to end customers and resellers to develop these channels, business planning and raising the capital necessary to fund these activities.
ALCiS began selling its products in May 2005. During fiscal year 2007, the Company had a substantial growth of 201% compared to the 2006 fiscal year with sales of $2,278,134 and $757,219, respectively. The majority of our revenue to date is characterized as direct-to-consumer where we take orders from our call centers or on the internet and we ship directly to the end customer. Our revenue to date has been a fairly constant function of the amount spent on media partially because the vast majority of our commercials have a call to action where the viewer is prompted to call an 800 number or visit our website. The major benefit of direct-to-consumer advertising is that it creates a significant amount of product awareness at a relatively low cost.
During the nine months ending December 31, 2007, the Company gained distribution in over 7,500 drug and specialty stores. The most significant regional chains were Longs Drugs, Kinney Drugs, Duane Reade, Discount Drug Mart and Harmon Stores. The Company also became an approved vendor at two national distributors, AmerisourceBergen and Cardinal Health. In addition, the Company began shipping nationally to Walgreens in late December 2007, with the full roll-out slated for February 2008. As a result, late in the third quarter of fiscal 2008, we began to increase our advertising and promotional campaigns.
In the future, we expect an increasing amount of our revenue to come from retail due to our national distribution rather than direct-to-consumer. However, in order to increase consumer awareness and drive demand to our national distributors, we will need to increase our advertising and promotion dramatically.
Our current growth strategy relies on increased sales in the direct-to-consumer channel, the continued successful launch of our current products into the retail channel, and our ability to continuously and successfully introduce and market new products and technologies that meet our customers’ requirements. There can be no assurance that our growth strategy will be successful.
Our principal market is the United States, which accounts for 99% of all sales. The Company has made a small amount of sales to a distributor in India, but the amount is immaterial.
Our assets are all located in the United States.
Results of Operations
Net Sales
Net sales for the three months ended December 31, 2007 were $388,067 compared to $380,293 for the same period in 2006, representing a 2% increase. The bulk of these revenues were direct-to-consumer. During this period, we did increase our advertising and promotion expenses, however, most of the increases were late in the quarter to coincide with our increased national distribution activity and therefore did not impact revenues.
Due primarily to our decision to decrease direct-to-consumer advertising during the first eight months of fiscal 2008 pending our ramp up of national distribution, we decreased advertising and promotion expenses by 27% to $1,854,821 from $2,540,105 in fiscal 2008 versus 2007. Net sales for the first nine months of fiscal 2008 dropped by 34% from $1,719,164 to $1,139,730 compared to the same period of fiscal 2007.
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Gross Profit
Gross profit represents net sales less cost of net sales. Cost of sales includes the cost of purchasing product, cost associated with packaging, testing, and quality assurance, the cost of personnel, facilities, and equipment associated with manufacturing support, shipping costs and charges for excess inventory.
Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net Sales | $ | 388,067 | $ | 380,293 | $ | 1,139,730 | $ | 1,719,164 | ||||||||
Cost of Sales | $ | 148,747 | $ | 132,583 | $ | 430,717 | $ | 659,357 | ||||||||
Gross Profit | $ | 239,320 | $ | 247,710 | $ | 709,013 | $ | 1,059,807 | ||||||||
Gross Profit Percentage | 62 | % | 65 | % | 62 | % | 62 | % | ||||||||
The Gross profit percentage was at 62% for the third quarter of fiscal year 2008 compared to 65% for the same period in the previous year. During the three months ended December 31, 2007, the Company had a relatively large private label sale at a very low margin. This combined with costs associated with the beginning of our national launch caused the margin for the three months ending December 31, 2007 to be lower than the corresponding period in 2006 despite our successful efforts to reduce product costs in our flagship product, ALCiS Daily Relief.
The gross profit as a percentage remained the same during the nine months ending December 31, 2007 compared to the same period in 2006. Our relatively constant gross profit percentage in the face of reduced sales can mainly be attributed to the Company’s successful efforts to reduce product costs in our flagship product, ALCiS Daily Relief.
Advertising and Promotion Expenses
Advertising and promotion expenses consist primarily of television and print media, outside sales commissions, call center expenses, public relations, product sampling and employee related expenses.
Advertising and promotion expenses for the three months ended December 31, 2007 were $668,874 which represent an increase of $102,465 or 18% from $566,409 during the same period in the previous year. Late in the third quarter of fiscal 2008, we began to increase our advertising and promotional campaigns to coincide with shipments to major retailers. However, advertising and promotion expenses for the nine months ended December 31, 2007 decreased by $685,284 or 27% from $2,540,105 during the same period in the previous year. The decreases are primarily attributed to the reduction in media expenditures. The Company purposely decreased its spending on direct-to-consumer media to better match the advertising with the planned national retail launch of the Company’s products.
As we are now in the midst of our national retail launch, the Company has plans to further expand its sales and marketing initiatives in the next several quarters including increased headcount, ramp up in direct-to-consumer media, and public relations, which can be expected to cause continued increases in advertising and promotion expenses.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses consist primarily of employee-related expenses, stock based compensation, insurance, occupancy expenses, and professional fees such as legal, auditing, and tax services.
SG&A expenses for the three months ended December 31, 2007 decreased $135,278 or 24% to $421,131 from $556,409 for the comparable period in the previous year. The primary decrease was due to stock-based compensation which decreased from $216,545 in the previous year to $84,858 in the current year.
SG&A expenses for the nine months ended December 31, 2007 decreased $362,235 or 21% to $1,363,995 from $1,726,230 for the comparable period of last year. The primary decrease was due to stock-based compensation which decreased from $633,528 in the previous year to $260,612 in the current year.
Product Development Expenses
Product development expenses are primarily comprised of consulting payments to the manufacturer and formulator of our products. The Company incurred $88,847 in product development costs during the three months ended December 31, 2007 as compared to $88,605 in the previous quarter ended September 30, 2007 and $78,906 in the corresponding period in the previous year. The Company incurred $261,344 in product development costs during the nine months ended December 31, 2007 as compared to $1,182,097 in the previous year. The decrease was primarily due to $942,713 of stock-based compensation from warrants issued to the Manufacturer for the exclusive license of the technologies during the first quarter of fiscal year 2007.
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We plan to conduct product development activities to enhance our product offerings in order to meet current and future requirements of our customers and markets. As such, product development expenses are likely to increase in the next quarter and throughout the next fiscal year. However, product development expenses as a percentage of net sales may fluctuate.
Other Income (Expense), Net
The Company incurred net interest expense of $9,898 during the three months ending December 31, 2007 and earned net interest income of $5,747 during the nine month period ending December 31, 2007. As we will be borrowing up to $1.3 million under our credit line, we expect our net interest expense to increase substantially.
Provision for Income Taxes
Provision for income taxes represents federal and state taxes. There was no provision for income taxes for the periods ended December 31, 2007 and 2006. The Company has generated net operating losses since inception which may be available to reduce future taxable income. There is currently a full valuation allowance against our deferred tax asset.
Financial Condition
Liquidity and Capital Resources
The Company ended the quarter with $40,761 in cash and cash equivalents. Our cash and cash equivalents decreased $1,731,228 during the nine months ended December 31, 2007, from $1,771,989 at March 31, 2007. The decrease is mainly attributed to negative cash flows from operating activities.
Our operating activities used cash of $2,740,774 for the nine months ended December 31, 2007, compared to cash usage of $2,972,215 for the same period in the prior fiscal year. The negative cash flows during the first three quarters of fiscal 2008 from operating activities were primarily attributable to the increased infrastructure, inventory, accounts receivable and sales and marketing expenses required to support our introduction into the retail drug and specialty stores. Our net loss was $2,793,354 which includes non-cash charges for consultant warrant expense of $15,255 and SFAS No. 123R stock based compensation expenses associated with employee options and director warrants of $245,357. Working capital sources of cash included a decrease in prepaid expenses and other current assets of $25,531, and an increase in deferred revenue of $27,789. Working capital uses of cash included an increase in inventory of $25,464 and accounts receivable of $119,826. Working capital uses also included a decrease in accounts payable and accrued liabilities of $155,941.
In the nine month period ending December 31, 2006, the negative cash flows from operating activities were $2,972,215 which were primarily attributable to developing our line of products and marketing plan. Our net loss was $4,356,251 while working capital uses of cash included an increase in inventory of $47,317, prepaid expenses of $80,166 and other assets of $47,936. Working capital uses also included a decrease of accounts payable and accrued liabilities of $28,566. Of this net loss, $1,576,240 resulted from stock-based compensation charges and was therefore non-cash, including $942,713 from warrants issued to the Manufacturer for the exclusive license of the technologies during the first quarter of fiscal year 2007.
The Company used cash in investing activities by purchasing property and equipment totaling $5,454 during the nine months ending December 31, 2007 compared to $47,422 the same period last fiscal year.
There was $1,015,000 of net cash provided from financing activities during the nine months ended December 31, 2007. The proceeds consisted of net advances on the Company’s operating line of credit of $230,000, the issuance of convertible promissory notes of $600,000 and the sale of common stock of $185,000. During the same period of fiscal year 2007, net cash provided from financing activities was $3,483,982 which resulted from the sale of the Company’s common stock or from exercise of warrants.
We believe that our manufacturing provider has substantial production capacity in place to handle any projected increase in business for the next fiscal year.
Subsequent to December 31, 2007, as described in Note 8 to our financial statements, the Company obtained an $800,000 increase in its bank line of credit to $1.3 million.
We also believe our existing cash, cash equivalents and short-term investments and funds available under our credit line combined with our current debt and equity financing efforts will be sufficient to meet liquidity and capital requirements for approximately the next six months assuming our advertising monies spent yield approximately the same amount of revenue from new orders. We are, therefore, currently actively attempting to raise both debt and equity financing. Should we have difficulty in raising such financing in a timely manner, we will reduce our discretionary spending, particularly our advertising and promotion expenses, in order to enable our existing cash and credit line availability to meet our requirements for such or possibly a longer time period.
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There can be no assurance that we will be successful in our financing efforts, or that any financing raised will be on terms we find to be attractive.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are likely to have, a current or future material effect on the financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
ALCiS has entered into a perpetual, worldwide exclusive license for use of certain technology in topical analgesic pain relief products and a nonexclusive license on a number of other products. For the license, ALCiS has agreed to pay a royalty rate based on sales with a minimum payment of $25,000 per month ($50,000 after December 31, 2008) to continue its exclusive license agreement. Additionally, the Company paid the Manufacturer a non-refundable prepaid royalty totaling $400,000, of which $250,000 was paid during the fiscal 2006, $75,000 was paid during the fiscal 2007, and $75,000 has been paid during fiscal 2008, with the last monthly payment of $8,333 having been paid in January 2008.
Available Information
We file electronically with the SEC our annual reports on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and amendments, if any, to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding ALCiS Health, Inc. and Emerging Delta Corporation (the name of the Registrant prior to the Merger).
Risk Factors
There have been no material changes to the risk factors disclosed in Item 1 of Part I of our Form 10-KSB for the fiscal year ended March 31, 2007, filed on July 13, 2007, which risk factors are hereby incorporated by reference.
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Item 3. | CONTROLS AND PROCEDURES |
(a)Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet, and management believes that they meet, reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Form 10-QSB, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, and taking into account the totality of circumstances, as of such date our disclosure controls and procedures were effective at the reasonable assurance level.
(b)Changes in Internal Control over Financial Reporting. Our internal control over our financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. There were no significant changes in the Company’s internal control over financial reporting that occurred during the third quarter of fiscal year 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
(c) Inherent Limitations on Effectiveness of Controls.Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints and competing use of resources, and the benefits of controls must be considered relative to their costs in light of competing demands on limited resources. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts or omissions of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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Item 1. | LEGAL PROCEEDINGS |
None
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES |
On October 31, 2007, the Company granted warrants to purchase 75,000 shares of common stock to the current investor who provided a bank guarantee so that the Company was able to obtain an operating line of credit. There was no cash consideration for the warrant grant. The warrants are for a term of 5 years, have an exercise price of $2.00 per share and are exercisable immediately. The Company relied on Rule 506 promulgated under Regulation D as an exemption from the registration requirements of the Securities Act of 1933, as amended, for the grant of the warrants and any subsequent issuance of the underlying common shares upon their exercise.
During the quarter ending December 31, 2007, the Company granted stock warrants to two outside consultants to purchase a total of 35,000 shares of common stock in connection with services rendered and to be rendered to the Company. There was no cash consideration for the warrant grant. The warrants are for a term of 10 years, vest quarterly over the three year period following grant, and have an exercise price of $2.00 per share. The Company relied on Rule 506 promulgated under Regulation D as an exemption from the registration requirements of the Securities Act of 1933, as amended, for the grant of the warrants and any subsequent issuance of the underlying common shares upon their exercise.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None
Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None
Item 5. | OTHER INFORMATION |
None
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Item 6. | EXHIBITS |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Brian J. Berchtold, principal executive officer; filed herewith | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Mark E. Lemma, principal accounting officer; filed herewith | |
32.1 | Section 1350 Certification of Brian J. Berchtold, chief executive officer and president; filed herewith | |
32.2 | Section 1350 Certification of Mark E. Lemma, chief financial officer; filed herewith |
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 14, 2008.
ALCIS HEALTH, INC. | ||
By: | /S/ BRIAN J. BERCHTOLD | |
Brian J. Berchtold | ||
President and Chief Executive Officer |
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ALCiS HEALTH, INC.
EXHIBIT INDEX
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Brian J. Berchtold, principal executive officer; filed herewith | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Mark E. Lemma, principal accounting officer; filed herewith | |
32.1 | Section 1350 Certification of Brian J. Berchtold, chief executive officer and president; filed herewith | |
32.2 | Section 1350 Certification of Mark E. Lemma, chief financial officer; filed herewith |
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