SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER: 0-20580
SYNTHEMED, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1745197
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
PO BOX 219 LITTLE SILVER, NEW JERSEY 07739
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(732) 728-1769
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 registrant 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|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $.001 PAR VALUE - 66,596,447 SHARES OUTSTANDING AT OCTOBER 31,
2005
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES |_| NO |X|
SYNTHEMED, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations (unaudited) for the three-month 3
and nine-month periods ended September 30, 2004 and 2005
Condensed Balance Sheets as of December 31, 2004 and 4
September 30, 2005 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
nine-month periods ended September 30, 2004 and 2005
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Item 3. Controls and Procedures 10
PART II - OTHER INFORMATION
Item 6. Exhibits 11
Signature 11
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNTHEMED, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data) (In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ---------------------------------------
2004 2005 2004 2005
---------------- ------------------ ------------------- ------------------
Revenue
Royalties 6 23
---------------- ------------------ ------------------- ------------------
Revenue 6 23
Operating expenses:
Research and development 313 467 1,032 1,161
General and administrative 166 217 807 683
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Operating expenses 479 684 1,839 1,844
---------------- ------------------ ------------------- ------------------
(Loss) from operations (473) (684) (1,816) (1,844)
Other income/(expense):
Interest income 4 8 9 24
Interest expense (2) (2) (5) (5)
Gain on deferred royalty income 174 174
---------------- ------------------ ------------------- ------------------
Other income/(expense) 176 6 178 19
Net (loss) (297) (678) (1,638) (1,825)
Beneficial conversion on
convertible preferred stock (74)
---------------- ------------------ ------------------- ------------------
Net (loss) to common stockholders $ (297) (678) $ (1,712) (1,825)
================ ================== =================== ==================
Net (loss) per common
share-basic and diluted $ (0.00) $ (0.01) $ (0.03) $ (0.03)
===================================== =================== ==================
Weighted average shares outstanding 59,962 66,596 54,400 64,538
3
SYNTHEMED, INC.
BALANCE SHEETS
(In thousands, except per share data)
DECEMBER 31, SEPTEMBER 30,
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2004 2005
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ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,861 $ 917
Prepaid expenses and advances 40 28
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Total current assets 1,901 945
Acquired technology, less accumulated amortization 225 174
Machinery and equipment, less accumulated depreciation 134 111
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TOTAL $ 2,260 $ 1,230
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 310 $ 281
Accrued expenses 364 382
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Total current liabilities 674 663
Deferred royalty income
Convertible notes payable-long term 110 110
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Total liabilities 784 773
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STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized - 5,000; issued
and outstanding - none
Common stock, $.001 par value; shares authorized-100,000
issued and outstanding - 59,962 and 66,596 60 66
Additional paid-in capital 43,518 44,318
Accumulated deficit (42,102) (43,927)
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Total stockholders' equity 1,476 457
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TOTAL $ 2,260 1,230
================== =================
4
SYNTHEMED, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands, except for per share data)
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30,
----------------------------------------
2004 2005
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Cash flows from operating activities:
Net loss $ (1,638) $ (1,825)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 6 23
Amortization of acquired technology 51 51
Stock based compensation 157 10
Deferred royalty income (23)
Gain on deferred royalty income (174)
Changes in operating assets and liabilities:
Decrease/(increase) in prepaid expenses (60) 12
(Decrease) in accounts payable (58) (29)
Increase in accrued expenses 298 18
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Net cash (used in) operating activities (1,441) (1,740)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of machinery and equipment (92)
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Net cash (used in) investing activities (92)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 2,833 796
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Net cash provided by financing activities 2,833 796
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Net Increase/(decrease) in cash and cash equivalents 1,300 (944)
Cash and cash equivalents at beginning of period 680 1,861
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Cash and cash equivalents at end of period $ 1,980 $ 917
================== ==================
Non-cash investing and financing activities:
Conversion of Series C preferred stock into common stock $ 7
5
SYNTHEMED, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying condensed financial statements do not include all
of the information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles; but, in the opinion of management, contain all adjustments
(which consist of only normal recurring adjustments) necessary for a fair
presentation of such financial information. Results of operations for
interim periods are not necessarily indicative of those to be achieved for
full fiscal years. These condensed financial statements have been
presented on a going concern basis and do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern. These condensed financial statements should be read in
conjunction with the Company's audited financial statements for the year
ended December 31, 2004 included in the Company's Annual Report on Form
10-KSB filed with the Securities and Exchange Commission.
Certain items in the condensed financial statements for the three
and nine months ended September 30, 2005 have been reclassified for
comparative purposes.
B) STOCK-BASED COMPENSATION
The Company follows the intrinsic value based method in accounting
for stock-based employee compensation under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standard ("SFAS") No. 123 and SFAS No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure."
The following table illustrates the effect on net loss and loss per
share if the fair value based method had been applied to all awards (in
thousands, except per share data):
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2004 2005
------- -------
Reported net loss attributable to common stockholders $(1,712) $(1,825)
Stock-based employee compensation determined under
the fair value based method (500) (401)
------- -------
Pro forma net loss attributable to common stockholders $(2,212) $(2,226)
======= =======
Loss per common share attributable to common stockholders
(basic and diluted):
As reported $ (0.03) $ (0.03)
======= =======
Pro forma $ (0.04) $ (0.03)
======= =======
6
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Quarter Ended
September 30,
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2004 2005
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Dividend yield 0% 0%
Expected volatility 103% 99%
Risk free interest rate 2.2% 4.0%
Expected life 2.5 years 2.5 years
During the nine months ended September 30, 2005, the Company granted
830,000 stock options to employees. These options have exercise prices at
or above the market price as the date of issue. Of these options, 293,334
vest immediately and the balance vest at various times through 2007. The
Company granted 605,000 stock options to current members of the Board of
Directors. These options have exercise prices equal to the market price at
the date of issue and they vested immediately. The Company granted 100,000
stock options to consultants to the Company. These options have exercise
prices equal to the market price at the date of issue. Of these options,
33,334 vest immediately and the balance vest at various times through
2007. A charge of $10,000 was included in operating expenses for the nine
months ended September 30, 2005, to reflect the fair value of the stock
options granted to consultants which vested on the date of the grant.
C) GAIN ON DEFERRED ROYALTY INCOME
During the quarter ended September 30, 2004, the Company recorded a
gain on deferred royalty income of $174,000. This gain was associated with
the write off of the remaining balance of deferred royalty income
associated with the Sure Closure System upon the September 30, 2004,
expiration of the royalty period of the underlying agreement.
D) ACQUIRED TECHNOLOGY
In March 2003, the Company purchased certain polymer technology from
Phairson Medical, Ltd., a private medical technology company based in the
United Kingdom, for approximately 6,896,000 shares of restricted common
stock of the Company. These assets comprise a series of United States and
foreign patent applications as well as scientific and clinical
documentation. In connection with this transaction, the Company recorded
$344,000 as the fair value of this technology which includes (i) $330,000,
representing the deemed value of the shares issued (approximately $0.0478
per share) paid by investors in the contemporaneous private placement of
Series C Convertible Preferred Stock and related warrants; (ii) $11,000 in
transaction-related costs and (iii) $3,000 representing the fair value of
options to purchase 100,000 shares of Common Stock issued as a finder's
fee. A useful life of 5 years was assigned to the acquired technology
considering the stage of product development, the estimated period during
which patent protection could be enforced, which would go well beyond five
years from the acquisition date, the development cycle time for medical
devices of the type envisioned by the Company based on such technology, as
well as potential technology obsolescence over time. For the periods ended
September 30, 2004 and 2005, the Company recorded amortization of $51,000
and $51,000, respectively.
The fair value of the options to purchase 100,000 shares of common
stock issued as a finder's fee was determined to be $3,000 at the time of
the transaction using the Black Scholes pricing model.
E) NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is computed using the
weighted average number of shares outstanding during each period, which
excludes potential common shares issuable from the exercise of outstanding
options and warrants and the conversion of outstanding shares of preferred
stock since their inclusion would, in the case of a net loss, reduce the
loss per share.
7
F) EXERCISE OF WARRANTS
In March 2005, the Company received proceeds of $796,000 from the
exercise of warrants to purchase 6,634,000 shares of the Company's common
stock. The warrants were issued in the Series C Convertible Preferred
Stock private placement in March 2003. In March 2004, the Company received
net proceeds of $2,833,000 from the exercise of warrants to purchase
11,833,000 shares of the Company's common stock. The warrants were issued
in the Series B Convertible Preferred Stock private placement in March
2002.
G) REVENUE RECOGNITION POLICY:
Royalty income is based on the quarterly sales of the Sure-Closure
System and any line extensions or embodiments thereof through June 2004.
Royalties are calculated and credited to the Company within forty-five
days after the last day of each quarter. The Company recognizes such
income when the amounts earned become fixed and determinable. Royalties
earned by the Company are applied to the outstanding deferred royalty
income balance. As defined in the original agreement, the royalty period
on sales of the Sure-Closure System expired in June 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Certain statements in this Report under Item 2, Management's Discussion
and Analysis or Plan of Operation and elsewhere constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including, without limitation, statements regarding future cash
requirements, the success of any pending or proposed clinical trial, the
Company's ability to achieve necessary regulatory approvals and the ability of
the Company to raise required capital. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Reference is made to
the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004,
for a description of some of these risks and uncertainties. Without limiting the
foregoing, the words "anticipates", "plans", "intends", "expects" and similar
expressions are intended to identify such forward-looking statements that speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the results of any revisions to these forward- looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
GENERAL
SyntheMed, Inc. is a biomaterials company engaged in the development and
commercialization of innovative and cost-effective medical devices for
therapeutic applications. In May 2005, the Company changed its name to
SyntheMed, Inc. Products under development, all of which are based on the
Company's licensed proprietary, bioresorbable polymer technology, are primarily
surgical implants designed to prevent or reduce the formation of adhesions (scar
tissue) following a broad range of surgical procedures. The Company's product
development efforts are primarily focused on its lead product, REPEL-CV(TM)
Adhesion Barrier, for use in cardiac surgery. IN October 2003, the Company
initiated the multi-center pivotal clinical trial for REPEL-CV which is ongoing.
In January 2005, the Company announced that a planned interim analysis of
patient data from the REPEL-CV trial was completed by a Data and Safety
Monitoring Board ("DSMB") comprised of medical and biostatistical specialists
who are not participating in the trial. Based on data from over forty patients,
the DSMB recommended that the trial proceed as planned and that no modifications
to the trial protocol were indicated. In March 2005, the Company announced the
initiation of a multi-center clinical study for REPEL-CV involving several
leading cardiac surgery centers in Europe.
In May 2004, the Company announced the initiation of a product development
program intended to provide cardiac surgeons with the first ever localized drug
delivery product intended to prevent the onset of atrial fibrillation after
open-heart surgery. The Company is also conducting preclinical studies on an
anti-adhesion product for use in gynecologic surgery. This product development
program is based on the Company's proprietary, bioresorbable reverse thermal gel
("RTG") technology.
8
GENERAL (CONTINUED)
The Company's bioresorbable polymer technology is based on a proprietary
group of polymers. The Company believes that these polymers display desirable
properties, which enable them to be tailored to a wide variety of applications.
These properties include bioresorbability, flexibility, strength and
biocompatibility. Potential applications for products derived from these
polymers are in medical areas such as the prevention of post-operative
adhesions, sutures, stents, implantable device coatings and drug delivery.
In December 2004, the Company received $295,000 from the sale of certain
New Jersey state tax losses. In March 2005, the Company realized $796,000 from
the exercise of warrants to purchase 6,634,000 shares of the Company's common
stock. These funds are being used to fund the REPEL-CV clinical trial as well as
other product development costs and operating expenses.
RESULTS OF OPERATIONS
The Company earned no revenue in 2005 compared to revenue for the three
month and nine month periods ended September 30, 2004 of $6,000 and $23,000,
respectively. Revenue for the 2004 periods was attributable to royalty income
from product sales of the Sure-Closure System(TM). Pursuant to the underlying
agreement, tHE Company's right to receive royalties on Sure-Closure System
product sales ceased with respect to all sales occurring after June 30, 2004. As
such, the Company has not earned royalty income on Sure-Closure System product
sales since that date. The remaining balance of deferred royalty income was
written off in September 2004 resulting in a gain from deferred royalty income
of $174,000 in that quarter.
The Company incurred research and development expenses of $467,000 and
$1,161,000 for the three month and nine month periods ended September 30, 2005
compared to $313,000 and $1,032,000 for the comparable prior year periods. The
increase in expenditures during the three month and nine month periods compared
to the prior year is primarily attributable to higher expenditures associated
with the REPEL-CV pivotal clinical trial, higher product liability insurance
expenditures and increased costs for the REPEL-CV European clinical study.
General and administrative expenses totaled $217,000 and $683,000 for the
three months and nine months ended September 30, 2005, respectively, compared to
$166,000 and $807,000 for the comparable prior year periods. The increase in
expenditures for the three month period compared to the prior year is primarily
attributable to higher employee-related expenses. The decrease in expenditures
for the nine month compared to the prior year is primarily attributable to
stock-based compensation expense of $157,000 recorded in the prior year
partially offset by higher employee-related expenses.
Interest income was $8,000 and $24,000 for the three months and nine
months ended September 30, 2005, respectively, compared to $4,000 and $9,000 for
the comparable prior year periods. The increases compared to the prior year are
primarily attributable to higher investment yields.
Interest expense of $2,000 and $5,000 for the three months and nine months
ended September 30, 2005, respectively, equal to the amounts in the comparable
prior year periods.
The Company's net loss was $678,000 and $1,825,000 for the three months
and nine months ended September 30, 2005, respectively, compared to $297,000 and
$1,638,000 for the comparable prior year periods. The Company expects to incur
losses in future periods.
The Company reflected a deemed non-cash dividend on preferred stock of
$74,000 for the nine months ended September 30, 2004, resulting in a net loss to
common shareholders of $1,712,000. With the conversion of the Series C
Convertible Preferred Stock into common stock in March 2004, there is no further
recognition of a deemed non-cash dividend.
LIQUIDITY AND CAPITAL RESOURCES
The cash balances were $917,000 and $1,861,000 at September 30, 2005 and
December 31, 2004, respectively. In March 2005, the Company received $796,000,
net of expenses, through the exercise of warrants to purchase the Company's
Common Stock. At September 30, 2005, the Company had working capital of
$282,000.
9
Net cash used in operating activities was $1,740,000 for the nine months
ended September 30, 2005 as compared to $1,441,000 for the prior year period.
Net cash used in operating activities for the current year period was primarily
due to a net loss of $1,825,000 and a decrease in accounts payable of $29,000
partially offset by an decrease in prepaid expenses of $12,000 and an increase
in accrued expenses of $18,000. Net cash used in operating activities for the
prior year period was primarily due to a net loss of $1,638,000 reduced by the
non-cash effect of $157,000 in stock-based compensation expense and an increase
in accrued expenses of $298,000 partially offset by a gain on deferred royalty
income of $174,000, an increase in prepaid expenses of $60,000 as well as a
decrease in accounts payable of $58,000.
Net cash used in investing activities for the nine months ended September
30, 2004 was $92,000 attributable to the purchase of machinery and equipment;
there was no similar transactions during the current year.
Net cash provided from financing activities for the nine months ended
September 30, 2005 was $796,000 as compared to $2,833,000 for the prior year
period. The current and prior year period amounts were attributable to the
exercise of outstanding warrants.
The Company's notes payable balance of $110,000 as of September 30, 2005
consists of notes with principal amounts of $40,000 and $70,000 maturing on
August 6, 2006 and February 22, 2007, respectively.
The cash balance as of September 30, 2005 should be sufficient to meet the
Company's cash requirements for operating activities through the remainder of
2005. The Company is seeking additional financing and will be required to raise
substantial additional funds in both the short and long term to continue the
pre-clinical and clinical development of its proposed products. The Company
presently has no arrangements for such financing and cannot assure investors
that such arrangements or financings will be available as needed or on terms
acceptable to the Company. The Company has received a report from the
independent auditors relating to the 2004 audited financial statements
containing an explanatory paragraph stating that certain conditions raise doubt
about the Company's ability to continue as a going concern.
At September 30, 2005, the Company had employment agreements with three
executives that expire in March 2006, May 2006 and September 12, 2006,
respectively. Pursuant to these agreements, the Company's commitment regarding
early termination benefits aggregates $402,000 at September 30, 2005.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The chief executive officer who is also the chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules13a-15(e)
and 15d-15(e); collectively, "Disclosure Controls") as of the end of the period
covered by this quarterly report (the "Evaluation Date") has concluded that as
of the Evaluation Date, our Disclosure Controls were effective to provide
reasonable assurance that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified by the SEC,
and that material information relating to our company and any consolidated
subsidiaries is made known to management, including the chief executive officer
and chief financial officer, particularly during the period when our periodic
reports are being prepared to allow timely decisions regarding required
disclosure.
In connection with the evaluation referred to in the foregoing paragraph,
we have identified no change in our internal control over financial reporting
that occurred during the quarter ended September 30, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
The Company's management, including the chief executive officer and chief
financial officer, who are the same person, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent or detect
10
all error and all fraud. A 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 the benefits of controls must be
considered relative to their costs. 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 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. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
31.1 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C.1350, as adopted pursuant to Section 906 of
the Sarbannes-Oxley Act of 2002.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SYNTHEMED, INC.
(REGISTRANT)
Date: October 31, 2005
/S/ ROBERT P. HICKEY
------------------------------
ROBERT P. HICKEY
PRESIDENT, CEO AND CFO
EXHIBIT INDEX
ITEM PAGE
- ---- ----
31.1 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. 12
32.1 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbannes- Oxley Act of 2002. 13
11