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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 SEPTEMBER 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO_____________
COMMISSION FILE NUMBER: 001-31925
VASO ACTIVE PHARMACEUTICALS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 02-0670926
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
99 ROSEWOOD DRIVE, SUITE 260
DANVERS, MA 01923
(Address of principal executive offices) (Zip code)
ISSUER'S TELEPHONE NUMBER: (978) 750-1991
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common stock, Class A, $0.0001 par value 5,828,613 shares outstanding on
November 6, 2007
Common stock, Class B, $0.0001 par value 4,500,000 shares outstanding on
November 6, 2007
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VASO ACTIVE PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
Page
PART I. FINANCIAL INFORMATION
ITEM 1 - Condensed Financial Statements (unaudited):
Condensed Balance Sheets as of September 30, 2007 and December 31, 2006 .... 3
Condensed Statements of Operations for the Three and nine-month Periods
Ended September 30, 2007 and 2006 ..................................... 4
Condensed Statements of Cash Flows for the Nine-Month Periods Ended
September 30, 2007 and 2006 ........................................... 5
Notes to the Condensed Financial Statements ................................ 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 8
ITEM 3 - Controls and Procedures ........................................... 15
PART II. OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K .................................. 16
Signature .................................................................. 17
Unless the context requires otherwise, references in this Quarterly Report to
"Vaso Active," "the Company," "we," "our" and "us" refer to Vaso Active
Pharmaceuticals, Inc. Vaso Active, A-R Extreme(R), Termin8(R), RepiDerm(R), and
our logo are trademarks of the Company. Osteon(R) and PENtoCORE(R) are
registered trademarks of BioChemics, Inc. This Quarterly Report on Form 10-QSB
may contain trademarks and trade names of other parties.
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VASO ACTIVE PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31
2007 2006
---------------- ----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,372 $ 8,627
Restricted cash 11,683 136,319
Accounts receivable 16,395 30,446
Inventory 9,386 93,608
Debt issuance costs - 68,713
Prepaid expenses 53,801 26,650
---------------- ----------------
TOTAL CURRENT ASSETS 98,637 364,363
Property and equipment - net 27,538 38,794
---------------- ----------------
$ 126,175 $ 403,157
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 572,468 $ 637,427
Accrued compensation 183,651 149,543
Other accrued expenses 264,352 73,510
Obligations under capital leases - short-term portion 2,528 2,510
Senior secured convertible notes, net of discount 2,612,500 2,389,503
Notes payable 870,000 870,000
Due to parent company 2,048,506 941,621
Deferred revenue 20,000 14,000
---------------- ----------------
TOTAL CURRENT LIABILITIES 6,574,005 5,078,114
LONG-TERM LIABILITIES:
Obligations under capital leases - long-term portion 7,207 9,111
---------------- ----------------
TOTAL LONG-TERM LIABILITIES 7,207 9,111
---------------- ----------------
6,581,212 5,087,225
---------------- ----------------
Commitments and contingencies (Note 1)
STOCKHOLDERS' EQUITY:
Preferred stock - $0.0001 par value; authorized
10,000,000 shares; issued and outstanding, none - -
Common stock - $0.0001 par value; authorized
60,000,000 shares; issued and outstanding, 10,328,613 1,033 1,033
Additional paid-in capital 8,996,058 8,858,178
Deferred compensation (19,108) (64,411)
Accumulated deficit (15,433,020) (13,478,868)
---------------- ----------------
TOTAL STOCKHOLDERS' DEFICIENCY (6,455,037) (4,684,068)
---------------- ----------------
$ 126,175 $ 403,157
================ ================
See notes to the unaudited condensed financial statements
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VASO ACTIVE PHARMACEUTICALS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
------------------------------------ ------------------------------------
2007 2006 2007 2006
---------------- ---------------- ---------------- ----------------
Net revenues $ 14,804 $ 42,783 $ 38,668 $ 58,933
Cost of revenues 12,535 21,066 31,121 48,559
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 2,269 21,717 7,547 10,374
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Marketing, advertising and promotion 63,212 999 178,626 64,488
Selling, general and administrative (1) 357,750 407,256 1,130,073 1,501,066
Research and development - - 150 -
Stock based compensation 15,101 15,101 45,303 45,303
---------------- ---------------- ---------------- ----------------
Loss from operations (433,794) (401,639) (1,346,605) (1,600,483)
Interest income (expense), net (113,543) (197,452) (451,054) (586,336)
Charge for default premium on senior
Secured convertible notes - - (112,500) -
Debt restructuring expense - - (43,993) -
---------------- ---------------- ---------------- ----------------
(113,543) (197,452) (607,547) (586,336)
NET LOSS $ (547,337) $ (599,091) $ (1,954,152) $ (2,186,819)
================ ================ ================ ================
Net loss per share - basic and
diluted (Note 2) $ (0.05) $ (0.06) $ (0.19) $ (0.21)
================ ================ ================ ================
Weighted average shares outstanding -
basic and diluted (Note 2) 10,328,613 10,328,613 10,328,613 10,328,613
================ ================ ================ ================
(1) Includes stock based compensation of: 45,960 45,960 137,880 137,880
See notes to the unaudited condensed financial statements.
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VASO ACTIVE PHARMACEUTICALS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Nine-Month Period Ended
September 30,
------------------------------------
2007 2006
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,954,152) $ (2,186,819)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 11,256 11,256
Stock-based compensation (Note 4) 183,183 183,177
Amortization of discount and offering costs associated with convertible debt 179,211 403,222
Inventory write-off 22,591 -
Accrued debt restructuring expenses 43,993 -
Increase in senior secured convertible notes for default premium 112,500 -
Increase (decrease) in cash from change in:
Accounts receivable 14,051 (40,633)
Inventory 61,631 (153,351)
Prepaid expenses (27,151) 51,812
Accounts payable (64,959) 344,833
Accrued compensation 34,108 90,284
Deferred revenue 6,000 4,401
Other accrued expenses 146,848 (63,213)
---------------- ----------------
Net cash used in operating activities (1,230,890) (1,355,031)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (additions) in restricted cash 124,636 186,636
---------------- ----------------
Net cash provided by (used in) investing activities 124,636 186,636
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Accrued legal settlement - (15,000)
Obligations under capital leases (1,886) (1,778)
Due to/from parent company 1,106,885 486,210
---------------- ----------------
Net cash provided by financing activities 1,104,999 469,432
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,255) (698,963)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,627 707,640
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,372 $ 8,677
================ ================
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 451,054 $ 586,336
Income taxes paid $ - $ -
NONCASH DISCLOSURES:
Issuance of capital leases and acquired equipment $ - $ -
See notes to the unaudited condensed financial statements.
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VASO ACTIVE PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-QSB. Accordingly,
certain information and footnote disclosure required for complete financial
statements are not included herein. It is recommended that these financial
statements be read in conjunction with the financial statements and related
notes of Vaso Active Pharmaceuticals, Inc. (the "Company") as reported in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2006. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial position,
results of operations, and cash flows at the dates and for the periods presented
have been included. The results of operations for the three and nine months
ended September 30, 2007 may not be indicative of the results that may be
expected for the year ending December 31, 2007, or any other period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN - These financial statements have been prepared on the
assumption that the Company will be able to realize its assets and discharge its
liabilities in the normal course of business. This assumption is presently in
question and contingent upon the Company's ability to raise additional funds.
Management is in the process of identifying various fund-raising strategies it
will pursue in the fourth quarter of 2007 and in 2008. These strategies may
include an additional private placement of the Company's equity securities.
There are no assurances that Management will successfully execute such
strategies.
ACCOUNTS RECEIVABLE - Accounts receivable consist primarily of trade
receivables from the sale of OTC pharmaceutical products. The allowance for
doubtful accounts is based on the Company's assessment of the collectability of
specific customer accounts and an assessment of economic risk as well as the
aging of the accounts receivable. The Company's policy is to write-off
uncollectible trade receivables after significant measures have failed to result
in their collection. An allowance for doubtful accounts is established to
represent the estimated uncollectible trade receivables. The allowance for
doubtful accounts was $33,000 at December 31, 2006. No reserve was recorded at
September 30, 2007.
DUE TO PARENT - The Company reimburses the cost of certain administrative
services provided by BioChemics as well as general overhead fees pursuant to
agreements between the Company and BioChemics. In addition, Biochemics has
provided working capital to the Company during 2006 and 2007 under a verbal
agreement. The due to parent balance represents the net obligation from the
Company to BioChemics at September 30, 2007 and December 31, 2006.
REVENUE RECOGNITION - The Company recognizes revenue from product sales in
accordance with accounting principles generally accepted in the United States of
America, including the guidance in Staff Accounting Bulletin ("SAB") Bulletin
No. 104 "Revenue Recognition" and Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition When Right of Return Exists."
Specifically, revenue is recognized when there is persuasive evidence of an
arrangement, delivery has occurred, the price is fixed and determinable and
collectability is reasonably assured.
In general, revenue is recognized when products are shipped to customers.
It is the Company's policy that all sales are final. As is common in the
consumer products industry, customers return products for a variety of reasons
including products damaged in transit, packaging changes, product discontinuance
and shipping errors. As sales are recorded, the Company accrues an estimated
amount for product returns as a reduction of revenue. These estimates are based
on historical experience and known specific events such as product expiration
dates.
STOCK-BASED COMPENSATION
In the first fiscal quarter of 2006 the Company adopted Statement of
Financial Accounting Standards No. 123(R) "Share-Based Payments" ("SFAS
123(R)"), which requires all share-based payments to employees, including stock
options and stock issued under certain employee stock purchase plans, to be
recognized in the Company's financial statements at their fair value. SFAS
123(R) requires the Company to estimate future forfeitures of stock-based
compensation. The Company uses the Black-Scholes option pricing model to
determine the fair value of options under SFAS 123(R) and has elected to use the
modified-prospective transition method, in which prior period financial
statements will not be restated but disclosure of the pro forma net loss
calculation will be included in the footnotes to the financial statements for
periods prior to fiscal 2006 and the adoption of SFAS 123(R). The Company has an
employee stock incentive plan and a non-employee director compensation plan,
which are described more fully in Note 8 to the Company's Annual Report on Form
10-KSBA for the period ended December 31, 2006.
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During the three months ended September 30, 2007 and 2006, the Company
recorded stock compensation expense of $45,960 and $45,960 respectively in
accordance with SFAS 123(R). During the nine months ended September 30, 2007 and
2006, the Company recorded stock compensation expense of $137,880 and $137,880
respectively in accordance with SFAS 123(R).
NET LOSS PER SHARE - Basic net loss per share is computed by dividing net
loss by the weighted average number of common shares outstanding for the period.
Diluted net loss per share reflects, in addition to the weighted average number
of common shares, the potential dilution if stock options and warrants
outstanding were exercised and/or converted into common stock, unless the effect
of such equivalent shares was anti-dilutive.
For the three-month and nine-months periods ended September 30, 2007 and
2006, the effect of stock options and other potentially dilutive shares were
excluded from the calculation of diluted net loss per common share as their
inclusion would have been anti-dilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-QSB contains "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), that are based on management's exercise of business
judgment as well as assumptions made by, and information currently available to
management. When used in this document, the words "may," "will," anticipate,"
believe," estimate," intend," and words of similar import, are intended to
identify any forward-looking statements. You should not place undue reliance on
these forward-looking statements. These statements reflect our current view of
future events and are subject to certain risks and uncertainties as noted below.
Should one or more of these risks and uncertainties materialize, or should
underlying assumptions prove incorrect, our actual results could differ
materially from those anticipated in these forward-looking statements. We
undertake no obligation and do not intend to update, revise or otherwise
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
any unanticipated events after the date hereof or to reflect the occurrence of
any unanticipated events. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our expectations will
materialize.
Management's Discussion and Analysis should be read together with our
condensed financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-QSB and the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2006. This Quarterly Report on Form
10-QSB, including the following discussion, contains trend analysis and other
forward-looking statements within the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Any statements in this Quarterly
Report on Form 10-QSB that are not statements of historical facts are
forward-looking statements. These forward looking statements made herein are
based on our current expectations, involve a number of risks and uncertainties
and should not be considered as guarantees of future performance.
Factors that could cause actual results to differ materially include
without limitation:
o our ability to repay our indebtedness, including repayment of the Senior
Secured Convertible Notes or the notes issued in connection with certain
litigation.
o an inability to arrange additional debt or equity financing;
o our ability to finance our business;
o the impact of new technologies;
o changes in laws or rules or regulations of governmental agencies;
o outcome in pending litigation matters;
o interruptions or cancellation of existing contracts;
o impact of competitive products and pricing;
o product demand and market acceptance and risks;
o the presence of competitors with greater financial resources;
o product development and commercialization risks;
o our ability to maintain our current pricing model and/or decrease our cost
of sales;
o continued availability of supplies or materials used in manufacturing at
the current prices;
o adverse regulatory developments in the United States;
o entrance of competitive products in our markets;
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o the ability of management to execute plans and motivate personnel in the
execution of those plans;
o adverse publicity related to our products or the company itself;
o adverse claims relating to our intellectual property licensed from
Biochemics;
o the adoption of new, or changes in, accounting principles;
o legal proceedings;
o the costs inherent with complying with new statutes and regulations
applicable to public reporting companies, such as the Sarbanes-Oxley Act
of 2002;
o other new lines of business that the Company may enter in the future; and
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in the
forward-looking statements in this quarterly report. Other unknown or
unpredictable factors also could have material adverse effects on our future
results, including the factors described under the heading "Risk Factors" in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
2006. The forward-looking statements in this quarterly report are made only as
of the date of this quarterly report, and we do not have any obligation to
publicly update any forward-looking statements to reflect subsequent events or
circumstances.
BUSINESS OVERVIEW
Vaso Active is an early stage company, organized in January 2003, which
focuses on commercializing, marketing and selling over-the-counter
pharmaceutical products that we believe incorporate a proprietary PENtoCORE
technology. Vaso Active's focus on pre-clinical testing and research on a
patented vaso active lipid encapsulated ("VALE") technology has been has been
limited due to working capital constraints.
We began our operations in January 2001, as a division of BioChemics, a
privately-owned pharmaceutical company engaged in the development of transdermal
and topical drug delivery systems. BioChemics is based in Danvers,
Massachusetts. BioChemics was founded in 1989 by John J. Masiz and was
incorporated in Delaware in 1991. BioChemics began developing the VALE
technology in 1989 and has subsequently been issued four U.S. patents in
connection with this technology. BioChemics has licensed the VALE patents and
the PENtoCORE technology to us.
As an early stage company, we are subject to a number of risks typical of
early stage companies including, but not limited to, our need to obtain
additional financing and generate profitability and cash flows from operations.
As a company engaged in the pharmaceutical industry, we are subject to a number
of risks typical of pharmaceutical companies including, but not limited to, our
need to adhere to strict governmental regulations, our ability to withstand
intense competition from larger companies with greater financial resources and
our ability to defend our intellectual property, as licensed from BioChemics.
Our general business strategy was adversely affected beginning in April
2004 by regulatory action taken against us and our former President, and by
private securities actions taken against us and our management. At the same
time, we suspended the marketing and sale of our products until we were
reasonably sure that our product marketing was consistent with the FDA's
requirements and policies. We also voluntarily delisted our common stock from
trading on NASDAQ. As a result of our voluntary delisting, the action taken by
the SEC against us, issues regarding the regulatory status of our products, and
the significant decline in the market value of our securities concurrent with
and subsequent to these matters, several shareholder actions were filed against
Vaso Active and its officers and directors. Since February 17, 2006 our Class A
common stock has been quoted on the Over the Counter Bulletin Board under the
symbol "VAPH.ob".
In September 2005, the Company and certain of its officers and directors
settled (i) a consolidated securities class action lawsuit that alleged that the
Company and those individuals violated the federal securities laws with respect
to certain disclosures concerning the Company; and (ii) derivative lawsuits
based on the class action allegations. The parties to the agreements obtained
the court's final approval of the settlements on December 14, 2005. For further
information, see Item 3, "Legal Proceedings." on form 10KSB/A filed on April 24,
2007.
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During 2006 the Company commenced wholesale distribution under purchase
order to chain drug and grocery stores. At November 14, 2007 products are being
distributed through eight drug and grocery chains totaling more than 1,000
retail stores plus 120 independent pharmacies. In addition our products are
available for purchase on Amazon.com, AmericaRX.com, HarmonDiscount.com, and
AlleonPharmacy.net. Online sales have not been significant to date.
CRITICAL ACCOUNTING ESTIMATES
GOING CONCERN ASSUMPTION - The financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should we be
unable to continue as a going concern. If the financial statements were prepared
on a liquidation basis, the carrying value of our assets and liabilities would
be adjusted to net realizable amounts. In addition, the classification of the
assets and liabilities would be adjusted to reflect the liquidation basis of
accounting.
REVENUE RECOGNITION - We recognize revenue from product sales in
accordance with generally accepted accounting principles in the United States,
including the guidance in Staff Accounting Bulletin, or SAB, No. 104, "Revenue
Recognition," which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements," and Statement of Financial Accounting Standards, or SFAS, No. 48,
"Revenue Recognition When Right of Return Exists."
Revenue from product sales is recognized when there is persuasive evidence
of an arrangement, delivery has occurred, the price is fixed and determinable,
and collectibility is reasonably assured. However, because our products are sold
with limited rights of return, revenue is recognized when the price to the buyer
is fixed, the buyer is obligated to pay us and the obligation to pay is not
contingent on resale of the product, the buyer has economic substance apart from
the us, we have no obligation to bring about the sale of the product and the
amount of returns can be reasonably estimated.
We record allowances for product returns, rebates and discounts, and
report revenue net of such allowances. We must make judgments and estimates in
preparing the allowances that could require adjustments in the future. For
instance, our customers have the right to return any product that is held past
the labeled expiration date. We base our estimates on historic patterns of
returns and on the expiration dates of product currently being shipped, or as a
result of an actual event that may give rise to a significant return amount such
as the discontinuance of a product. At September 30, 2007 we recorded deferred
revenue in the amount of $20,000.
We do not recognize revenue unless collectibility is reasonably assured.
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate and result in an impairment of
their ability to make payments, additional allowances may be required.
EXPENSE ALLOCATIONS / MANAGEMENT FEES - BioChemics provides us with
certain administrative, marketing and management services, as well as our
facilities and general corporate infrastructure. Our statement of operations
includes allocations of these costs that BioChemics and we considered to be
reasonable.
INCOME TAXES - We account for income taxes and deferred tax assets and
liabilities in accordance with SFAS No. 109 "Accounting for Income Taxes."
Because we project future operating losses in the near term, we have provided a
full valuation allowance against the deferred tax assets created by these
losses.
STOCK-BASED COMPENSATION - As part of our compensation programs offered to
our employees, we grant stock options. We grant stock options to employees based
on the fair value of the Class A common stock at the grant date.
In the first fiscal quarter of 2006 the Company adopted Statement of
Financial Accounting Standards No. 123(R) "Share-Based Payments" ("SFAS
123(R)"), which requires all share-based payments to employees, including stock
options and stock issued under certain employee stock purchase plans, to be
recognized in the Company's financial statements at their fair value. SFAS
123(R) requires the Company to estimate future forfeitures of stock-based
compensation. The Company uses the Black-Scholes option pricing model to
determine the fair value of options under SFAS 123(R) and has elected to use the
modified-prospective transition method, in which prior period financial
statements will not be restated but disclosure of the pro forma net loss
calculation will be included in the footnotes to the financial statements for
periods prior to fiscal 2006 and the adoption of SFAS 123(R).
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The Company has an employee stock incentive plan and a non-employee
director compensation plan, which are described more fully in Note 8 to the
Company's Annual Report on Form 10-KSBA for the period ended December 31, 2006.
During the three months ended September 30, 2007 and 2006, the Company
recorded stock compensation expense of $45,960 and $45,960 respectively in
accordance with SFAS 123(R). During the nine months ended September 30, 2007 and
2006, the Company recorded stock compensation expense of $137,880 and $137,880
respectively in accordance with SFAS 123(R).
THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
NET REVENUES - Net revenues decreased $27,979 to $14,804 for the three
month period ended September 30, 2007 as compared to $42,783 in the prior
comparable period. Revenues for the three months ended September 30, 2006
consisted primarily of initial orders to new customers consisting of chain
supermarkets. Revenues for the three months ended September 30, 2007 consisted
primarily of re-orders as we did not ship any initial orders to new customers in
this period.
COST OF SALES - Cost of sales decreased $8,531 to $12,535 during the three
month period ended September 30, 2007 from $21,066 in the comparable period in
2006. In general, our cost of sales is variable to our net revenues. However,
certain manufacturing events such as inventory adjustments may distort our cost
of sales, and therefore our gross profit, during any particular period.
GROSS PROFIT - Gross profit as a percentage of net revenues for the three
month period ended September 30, 2007 was a 15.3% as compared to a 50.1% the
three month period ended September 30, 2006. We do not believe that any
comparison between periods is meaningful in our current stage of development and
due to our limited sales to date.
MARKETING, ADVERTISING AND PROMOTION - Marketing, advertising and
promotion expenses increased by $62,213 to $63,212 for the three-month period
ended September 30, 2007 from $999 during the three-month period ended September
30, 2006. The increase is primarily related to additional print and television
media advertising and sampling programs incurred in support of our product
launch into retail chain supermarkets.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses decreased by $49,506 to $357,750 during the three-month period ended
September 30, 2007 as compared to $407,256 in the comparable period in 2006.
Legal and professional fees and investment banking fees decreased by
approximately $11,000 and $25,000 respectively for the three months ended
September 30, 2007 over the comparable period in 2006. The balance of the net
savings pertained to a decrease in the level of general operations
During the three months ended September 30, 2007, selling, general and
administrative expenses incurred were $177,955 in salaries, wages and related
personnel costs; approximately $12,395 in legal fees; approximately $37,000 for
various insurance premiums typical of a public company; approximately $15,000
for board of director compensation, approximately $11,463 in management fees
from BioChemics, approximately $6,250 in registered accountant fees,
approximately $21,171 in rent expense. The remaining selling, general and
administrative expenses pertained to our general operations.
STOCK BASED COMPENSATION - We are required to record stock-based
compensation when we grant options to purchase our common stock to employees and
non-employees in accordance with SFAS 123R. The value of these options is
calculated using the Black-Scholes option-pricing model. Stock based
compensation for both the three-month periods ended September 30, 2007 and
September 30, 2006 was $45,960 and $15,101 to employees and non-employees,
respectively. Since no grants were made to employees or non-employees during
these periods, the amount recorded was attributable to the normal amortization
of fair value of these awards into expense over the vesting period of the
awards.
INTEREST EXPENSE, net - Interest expense, net decreased by $83,909 to
$113,543 during the three months ended September 30, 2007 from $197,452 in the
comparable period in 2006. The decrease resulted from decreased interest charges
of approximately $134,000 in connection with debt issuance costs and warrant
costs. The debt issuance and warrant costs were fully accreted on May 1, 2007.
Accordingly, the three months ended September 30, 2007 has no charge for these
costs while the prior comparable recorded three months of those charges. This
decrease was partially offset by increased interest charges of approximately
$50,000 for the three months ended September 30, 2007 because the interest rate
on the Senior Secured Convertible Notes increased to 18% on May 2, 2007.
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NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
NET REVENUES - Net revenues decreased $20,265 to $38,668 for the nine
month period ended September 30, 2007 as compared to $58,933 in the prior
comparable period. Revenues for the nine months ended September 30, 2006
consisted primarily of initial orders to new customers consisting of chain
supermarkets. Revenues for the nine months ended September 30, 2007 consisted
primarily of re-orders.
COST OF SALES - Cost of Sales decreased $17,438 to $31,121 during the nine
month period ended September 30, 2007 from $48,559 in the comparable prior
period. In general, our cost of sales is variable to our net revenues. However,
certain manufacturing events such as inventory adjustments may distort our cost
of sales, and therefore our gross profit, during any particular period.
GROSS PROFIT - Gross profit as a percentage of net revenues for the nine
month period ended September 30, 2007 was a 19.6% compared to a 17.6% for the
nine month period ended September 30, 2006. We do not believe that any
comparison between periods is meaningful in our current stage of development and
due to our limited sales to date.
MARKETING, ADVERTISING AND PROMOTION - Marketing, advertising and
promotion expenses increased $114,138 to $178,626 for the nine-month period
ended September 30, 2007 from $64,488 for the nine-month period ended September
30, 2006. The increase is primarily related to additional print and television
media advertising and sampling programs incurred in support of our product
launch into retail chain supermarkets
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses decreased by $370,993 to $1,130,073 during the nine-month period ended
September 30, 2007 as compared to $1,130,073 in the comparable period in 2006.
Approximately $228,000 of the savings was realized through lower legal fees. The
balance of the net savings pertained to a decrease in the level of general
operations..
During the nine-months ended September 30, 2007, other selling, general
and administrative expenses we incurred were $535,163 in salaries, wages and
related personnel costs; approximately $60,592 in legal fees; approximately
$112,787 for various insurance premiums typical of a public company;
approximately $45,000 for board of director compensation, approximately $34,389
in management fees from BioChemics, approximately $73,700 in registered
accountant fees; approximately $51,362 in rent expense. The remaining selling,
general and administrative expenses pertained to our general operations.
RESEARCH AND DEVELOPMENT - Research and development expenses increased by
$150 to $150 for the nine-month period ended September 30, 2007 as compared to
$0 in the comparable prior period in 2006. Due to working capital constraints,
we suspended substantially all research and development activities at the end of
2005.
STOCK-BASED COMPENSATION -
During the nine months ended September 30, 2007 and 2006 the Company
recorded stock compensation expense of $137,880 and $45,303 for employees and
consultants, respectively, in accordance with SFAS 123(R).
INTEREST EXPENSE, net - Interest expense, net decreased by $135,282 to
$451,054 during the nine months ended September 30, 2007 from $586,336 in the
comparable period in 2006. The decrease resulted from decreased interest charges
of approximately $224,000 in connection with debt issuance costs and warrant
costs. The debt issuance and warrant costs were fully accreted on May 1, 2007.
Accordingly, the nine months ended September 30, 2007 has only five months of
charges for these costs while the prior comparable recorded nine months of those
charges. This decrease was partially offset by increased interest charges of
approximately $83,000 for the nine months ended September 30, 2007 because the
interest rate on the Senior Secured Convertible Notes increased to 18% on May 2,
2007.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial operating losses and negative cash
flows from operations since inception. In 2004 and 2005, until the completion of
our private financing in August 2005, operations were financed primarily from
the proceeds of our December 2003 initial public offering and from the exercise
of warrants. Net of offering costs, we raised approximately $6.4 million and
$450,000, respectively, through these transactions. Prior to our receipt of
these proceeds, we relied on BioChemics, together with the proceeds from an
offering of convertible notes in early 2003, as the source of our working
capital. We have expended all of the funds raised from our initial public
offering.
On August 16, 2005, under a Securities Purchase Agreement (the "Purchase
Agreement"), we issued a series of Senior Secured Convertible Notes (the
"Notes") due May 1, 2007 in the aggregate principal amount of $2,500,000. The
Company received approximately $1,700,000 in net cash proceeds from financing
after placement fees, legal expenses, other offering costs, and funding of an
escrow for future interest payments on the Notes. Placement fees, legal expenses
and other offering costs paid were approximately $360,000 and approximately
$440,000 was placed into escrow to fund substantially all of the Company's
interest payments on the Notes (assuming that the Notes continue to accrue
interest at the initial rate of 10% per annum).
THE NOTES. The Notes had a term of 21 months, and the principal of the
Notes was due and payable in a single payment on May 1, 2007. Prior to May 1,
2007 the Notes bore interest at the six month LIBOR plus 6% with a floor of
10.0% and a ceiling of 12.0%. As noted below, the Company was not able to repay
the amounts outstanding under the Notes on May 1, 2007.
The Notes are secured by all of the assets of the Company. The Notes are
convertible at any time into shares of the Company's Class A Common Stock at a
price of $0.70 per share (subject to adjustment under certain circumstances,
e.g., anti-dilution adjustments).
THE WARRANTS. The investors also received five-year warrants ("Warrants"),
which entitle the investors to purchase a total of 1,298,701 shares of the
Company's Class A Common Stock at an exercise price of $0.77 per share. The
number of shares which may be purchased upon exercise of the Warrants and the
exercise price per share of the Warrants are subject to adjustment under certain
circumstances, e.g., anti-dilution adjustments.
ADDITIONAL INVESTMENT RIGHTS (AIRS). In addition, the investors received
AIRs to purchase up to $1,875,000 in aggregate principal amount of additional
Notes at any time through May 1, 2007, which is the maturity date of the notes,
together with additional five-year Warrants to purchase a total of 974,026
shares of Class A Common Stock. Any additional Notes would be convertible and
any additional Warrants would be exercisable at the same respective initial
prices per share as the Notes and Warrants issued on August 16, 2005. The AIRs
expired on May 1, 2007 without being exercised.
Under the Purchase Agreement, the Company is required to reserve, and has
reserved, for the issuance of a total of 4,870,130 shares of Class A Common
Stock, in connection with the possible conversion of Notes (excluding the
additional Notes) and the possible exercise of the Warrants (excluding the
additional Warrants).
At September 30, 2007, we had unrestricted cash of approximately $7,000
and working capital deficit of approximately $6.45 million. This deficit
includes the senior secured convertible notes we sold in 2005 that matured on
May 1, 2007. This deficit also includes approximately $2.05 million due to our
parent, and approximately $237,000 in legal fees payable to our initial public
offering counsel that we are contesting.
We are actively pursuing alternative financing sources for important
funding to repay existing debt and to provide working capital, but we are
uncertain whether we will be successful in obtaining any such financing, or if
we obtain any such financing that it will be on favorable terms to the Company.
On May 1, 2007, the Company failed to pay the principal amount outstanding
under the Notes. Under the terms of the Notes, this may be deemed to be an Event
of Default, which gives the holders of the Notes the right to require the
Company to repurchase the notes at 115% of the outstanding principal, plus
interest or, if greater, 115% of the value of the shares that such holder could
receive upon conversion of the Notes, based on a five day trading average price,
(the "Event Price"). The default rate of interest on any unpaid amounts is 18%.
In addition, Iroquois Master Fund, L.P. ("Iroquois"), as collateral agent for
the purchasers of the Notes, may assert its rights under the Security Agreement,
dated August 16, 2005, among the Company, Iroquois and the purchasers of the
Notes.
The Company has been in discussions with representatives of Iroquois
regarding the terms of a possible restructuring of these obligations, but no
agreements have been reached. If the Company is unable to negotiate a
forbearance, extension or other arrangement, may be forced to seek relief from
its creditors in bankruptcy, or the holders of such notes might seek to
foreclose on the Company assets, liquidate the Company, or have it declared
insolvent.
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On May 18, 2007, the Company received written notice (the "Notice") from
Portside Growth and Opportunity Fund, ("Portside") that an Event of Default had
occurred under the Portside Note and that Portside had elected to require the
Company to redeem the Portside Note at the Event Price.
On July 17, 2007 Portside entered into a Secondary Securities Purchase
Agreement (the "Agreement") with Frontier Holdings Company, Inc. ("Frontier")
whereby Portside sold to Frontier an interest in its Senior Secured Convertible
Note (the "Note") due May 1, 2007, representing $253,771.66 in principal amount
of the Note of $341,616.66. John Masiz, a key employee and stockholder of the
Company, holds a controlling interest in Frontier.
Simultaneously with the execution of the Agreement, Portside entered into
an Amendment to Senior Secured Convertible Note (the "Amendment") with the
Company. Under the terms of the Amendment, in exchange for an extension fee in
the amount of $43,993.00, payable December 31, 2007, Portside has agreed to
extend the original maturity date of its remaining $87,845.00 in principal
amount of the Note. The amended maturity date is December 31, 2007. Upon the
amended maturity date, the Company agrees to pay Portside (i) $87,845.00
representing the principal amount of the Note outstanding, (ii) any accrued and
unpaid interest thereunder, and (iii) the extension fee in the amount of
$43,993.00. As part of the Amendment, Portside waived any Default or Event of
Default by the Company based on the failure by the Company to repay amounts due
under the Note any time prior to December 31, 2007 and rescinds the Notice of an
Event of Default previously disclosed in the Form 8-K dated May 18, 2007.
Portside also dismissed the lawsuit it had filed in the Supreme Court in
the State of New York. The Company also agreed that it would give Portside the
benefit of any higher extension fee that it may agree to pay to other holders of
the Company's Senior Secured Convertible Notes due May 1, 2007. The Company has
recorded debt restructuring expense in the amount of $43,993 for the six months
ended June 30, 2007 in connection with the Agreement.
On June 1, 2007, the Company received written notice (the "Smithfield
Notice") from Smithfield Fiduciary, LLC ("Smithfield") that an Event of Default
had occurred under the Smithfield Note and that Smithfield had elected to
require the Company to redeem the Smithfield Note at the Event Price, as defined
in the Smithfield Note. The Event Price is equal to 115% of the outstanding
principal,plus accrued interest (or, if greater, 115% of the value of shares
that such holder could receive upon conversion of the Smithfield Note, based on
a five day trading average price). In addition, the default rate of interest on
any unpaid amounts is 18%. In connection with receipt of the Smithfield Notice,
the Company has recorded a charge for default premium on senior secured
convertible notes in the amount of $112,500 during the nine months ended
September 30, 2007.
As of November 14, 2007 the Company has not received similar notices from
the other note holders. If the Company had received similar notices from all the
other remaining note holders, the Company would have recorded an additional
charge for default premium on senior secured convertible notes in the amount of
approximately $249,000 during the nine months ended September 30, 2007.
The Company issued and/or is obligated to issue an aggregate of $860,000
face amount of 2-year 5% subordinated callable notes convertible at $1.75 per
share with a maturity date of December 15, 2007 pursuant to the terms of the
settlement agreements with the plaintiffs in the securities class action and
shareholder derivative suits previously disclosed. At present, the Company does
not have the funds required to pay these amounts when due and no assurance can
be given that any forbearance or extension of the maturity date will be agreed
to by the holders of these notes. A small group of potential investors has
approached the holders of those notes in connection with a possible purchase of
the notes at a discount. We understand that if the purchase transaction closes
the purchaser group intends to extend the maturity date. Court approval would be
required for the purchase of the class members' notes but there can be no
assurance that such approval will be obtained. There can be no assurance that
the purchase will close or that if it does close that the maturity date will be
extended.
Working capital has been provided to the Company by Biochemics, under a
verbal agreement, in the form of cash advances and payments made on behalf of
the Company. We expect Biochemics to continue to provide working capital
although it is under no obligation to do so. There can be no assurance that
Biochemics can or will be willing or able to continue to provide working capital
to the Company.
Our ability to continue our business activities, including increasing our
marketing support for our existing products, funding of the development of our
product candidates through BioChemics and the commercialization of these product
candidates, will depend upon, among other things, raising capital from third
parties or receiving net cash flows from sales of our products. To date we have
not generated significant cash flows from the sales of our products. If we
successfully generate cash through any of these methods, our priorities will be:
(i) to contribute to support our existing products; (ii) to bring our acne
product candidate to market; and (iii) to commence clinical trials for our
ibuprofen candidate.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table sets forth our contractual obligations and commitments
for the next five years, as of September 30, 2007.
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LESS THAN 1-3 3-5 5-7
TOTAL 1 YEAR YEARS YEARS YEARS
-------------- -------------- -------------- -------------- --------------
Long-term debt $ - $ - $ - $ - $ -
Capital lease obligations 9,735 3,031 6,704 - -
Operating lease obligations - - - - -
Note maturities 3,370,000 3,370,000
Default premium on note maturities 112,500 112,500
Unconditional purchase obligations - - - - -
Employment agreements 2,205,000 315,000 630,000 630,000 630,000
-------------- -------------- -------------- -------------- --------------
Total $ 5,697,235 $ 3,800,531 $ 636,704 $ 630,000 $ 630,000
============== ============== ============== ============== ==============
In February 2005, we appointed our Chief Financial Officer, Mr. Joseph
Frattaroli, as our President. Mr. Frattaroli will continue to serve as Chief
Financial Officer and Acting Chief Executive Officer. Mr. Frattaroli is not
employed under a written contract and accordingly is omitted from this table.
The written employment agreements with Mr. Masiz and Dr. Carter terminate their
initial terms on June 30, 2008, but are deemed automatically extended for
successive periods of two years under the terms of their respective written
agreements through 2012. This table is presented assuming the automatic
extensions are reflected.
OFF-BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet financing such as a facility lease
or other long-term commitments. We have employment agreements with three key
employees. Please refer to "Contractual Obligations and Commitments" for a
summary of the employment agreement obligations.
OWNERSHIP STRUCTURE
Through our parent company, Biochemics, John J. Masiz controls
approximately 70% of the combined voting power of all classes of stock of the
Company and approximately 44% of the combined equity interest of the Company.
Biochemics owns 100% of the Class B Common Stock of the Company.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, our Acting
Chief Executive Officer and Chief Financial Officer (the "Certifying Officer")
conducted evaluations of our disclosure controls and procedures. As defined
under rules 13a-15(e) and 15d-15(e) of the 1934 Act, the term "disclosure
controls and procedures" means controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the 1934 Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
1934 Act is accumulated and communicated to the issuer's management, including
the Certifying Officer, to allow timely decisions regarding required disclosure.
Based on this evaluation, the Certifying Officer has concluded that our
disclosure controls and procedures were effective to ensure that material
information is recorded, processed, summarized and reported by our management on
a timely basis in order to comply with our disclosure obligations under the 1934
Act, and the rules and regulations promulgated thereunder.
Further, there were no changes in our internal control over financial
reporting during the quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6 (A). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
31.1 Certification of Joseph Frattaroli, Acting Chief Executive Officer
and Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.(1)
32.1 Certification of Joseph Frattaroli, Acting Chief Executive Officer
and Chief Financial Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.(1)
(1) Filed herewith.
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SIGNATURE
In accordance with Section 13 and 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on November 14, 2007.
VASO ACTIVE PHARMACEUTICALS, INC.
By: /s/ Joseph Frattaroli
----------------------------------
Joseph Frattaroli
President and Acting Chief Executive
Officer Chief Financial Officer
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