U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
COMMISSION FILE NO. 0-28413
HYPERBARIC SYSTEMS
Exact name of small business issuer as specified in its charter)
CALIFORNIA 77-048106
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1127 HARKER AVENUE
PALO ALTO, CALIFORNIA 94301
(Address of principal executive offices)
650-323-0943
(Issuer's telephone number)
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
At April 24, 2000, the registrant had outstanding 6,810,894 shares of
common stock, no par value.
Transitional Small Business disclosure format: Yes No X
HYPERBARIC SYSTEMS
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS - as of March 31, 2000
(unaudited) and December 31, 1999 3
STATEMENTS OF OPERATIONS (unaudited) -- For the
Three Month Periods Ended March 31, 2000 and 1999,
and the Period from February 26, 1998 (Commencement
of Operations) through March 31, 2000 4
STATEMENTS OF CASH FLOWS (unaudited) -- For the
Three Month Periods Ended March 31, 2000 and 1999,
and the Period from February 26, 1998 (Commencement
of Operations) through March 31, 2000 5
NOTES TO UNAUDITED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S PLAN OF OPERATION 8
PART II - OTHER INFORMATION 10
SIGNATURES 12
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYPERBARIC SYSTEMS
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 2000 December 31, 1999
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 40,900 $ 52,100
Prepaid expenses and other assets 1,800 3,300
Total Current Assets 42,700 55,400
Property and Equipment, net 9,000 3,100
$ 51,700 $ 58,500
Liabilities and Shareholders' Deficit
Current Liabilities:
Notes payable $ - $ 5,000
Accounts payable - trade 134,000 128,900
Accrued expenses -trade 66,600 104,000
Shareholder payables 104,000 113,200
Total Current Liabilities 304,600 351,100
Commitments and Contingencies
Shareholders' Deficit:
Common stock, no par value;
50,000,000 shares authorized;
6,772,200 and 6,395 000 shares
issued and outstanding at March
31, 2000 and December 31, 1999 1,697,900 1,077,600
Deficit accumulated during the
development stage (1,950,800) (1,370,200)
Total Shareholders' Deficit (252,900) (292,600)
$ 51,700 $ 58,500
</TABLE>
See accompanying notes to unaudited financial statements.
HYPERBARIC SYSTEMS.
(a development stage company)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
February 26, 1998
Three Months Ended (Inception)
March 31, Through
2000 1999 March 31, 2000
Operating Expenses:
General and administrative:
Stock based compensation $ 233,800 $ 6,100 $ 530,300
Other general and
administrative expenses 261,200 73,400 935,200
Total general and
administrative 495,000 79,500 1,465,500
Research and development 66,300 49,200 367,100
Sales and marketing 19,100 13,000 92,000
Loss From Operations 580,400 141,700 1,924,600
Other Expense (Income):
Interest income (400) (400) (2,400)
Interest expense 600 -- 27,000
Total Other Expense (Income) 200 (400) 24,600
Loss Before Income Taxes 580,600 141,300 1,949,200
Income Tax Expense -- 800 1,600
Net Loss $ (580,600) $ (142,100) $(1,950,800)
Basic and Diluted
Loss Per Share $ (0.09) $ (0.02)
Basic and Diluted
Weighted Average Common
Shares Outstanding 6,459,200 6,092,000
</TABLE>
For the three months ended March 31, 2000 and 1999, options and warrants
to purchased 2,579,900 and 950,000 shares of common stock, respectively,
were excluded from the computations of diluted earnings per share since
their effect would be antidilutive.
See accompanying notes to unaudited financial statements.
HYPERBARIC SYSTEMS.
(a development stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
February 26, 1998
Three Months Ended (Inception)
March 31, Through
2000 1999 March 31, 2000
Cash Flows From
Operating Activities:
Net loss $ (580,600) $ (142,100) $ (1,950,800)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Stock based compensation 233,800 6,100 530,300
Professional services
rendered in exchange
for stock -- -- 18,000
Depreciation 200 -- 800
Amortization of discount
on notes payable -- -- 24,800
Changes in current assets
and liabilities:
Prepaid expenses and
other assets 1,500 (1,000) (1,800)
Accounts payable - trade 5,100 (6,600) 134,000
Accrued expenses (37,400) 17,200 66,600
Related party wages and
accrued interest (2,700) (11,100) 79,800
Net Cash Used In Operating
Activities (380,100) (137,500) (1,098,300)
Cash Flows From Investing
Activities:
Purchase of property and
equipment (6,100) -- (9,800)
Cash Flows From Financing
Activities:
Proceeds from issuance of
common stock 386,500 63,100 1,124,800
Proceeds from borrowing on
notes payable -- -- 64,200
Principal payments on notes
payable (11,500) -- (40,000)
Net Cash Provided By Financing
Activities 375,000 63,100 1,149,000
Net (Decrease) Increase in Cash
and Cash Equivalents (11,200) (74,400) 40,900
Cash and Cash Equivalents,
beginning of period 52,100 125,800 --
Cash and Cash Equivalents,
end of period $ 40,900 $ 51,400 $ 40,900
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ -- $ 800 $ 1,600
Cash paid for interest 600 -- 800
</TABLE>
See accompanying notes to unaudited financial statements.
HYPERBARIC SYSTEMS.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements at March 31, 2000 and for the
three month periods ended March 31, 2000 and 1999 are unaudited and have
been prepared by HyperBaric Systems (the "Company").
Certain information and footnote disclosures normally included in the
Company's audited annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted in
the Company's interim financial statements. In the opinion of management,
the interim financial statements reflect all adjustments (consisting of
normal recurring adjustments) necessary for a fair representation of
financial position and results of operations and cash flows for the interim
periods presented.
The results of operations for the interim periods may not necessarily
be indicative of the results of operations expected for the full year,
although the Company expects to incur a significant loss for the year ending
December 31, 2000. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 1999, which are contained in the Company's most recent Annual
Report on Form 10-KSB.
2. USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date(s) of the financial statements and the reported amounts of revenues
and expenses during the reporting period(s). Actual results could differ
from those estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
HyperBaric Systems (a development stage company referred to as the
"Company") was incorporated on February 26, 1998 under the laws of the state
of California. The business purpose of the Company is to develop the
technology for preservation of certain biologic material, including
platelets (a blood component), red blood cells, heart valves, tissue and
organs. The Company is beginning its third year of research and development
activities. The Company's goal is to develop the technology to extend and
maintain functionality of these materials for much longer periods of time
than is currently possible. The Company's research facility is located in
Krasnoyarsk, Russia
Going Concern Uncertainty
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
is in the development stage, has no operating revenue and incurred a net
loss of approximately $580,600 for the quarter ended March 31, 2000. The
Company is in the third year of research and development, with an
accumulated loss during the development stage of $1,950,800, a shareholders'
deficit of $252,900 and a working capital deficiency of $261,900. As of
March 31, 2000, management is uncertain as to the completion date or if
the product will be completed at all.
These conditions give rise to substantial doubt about the Company's
ability to continue as a going concern. These financial statements do not
include adjustments relating to the recoverability and classification of
reported asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependent upon
its ability to obtain additional financing or sale of its common stock as
may be required and ultimately to attain profitability.
Management's plan, in this regard, is to complete a private placement
of 2,000,000 shares of common stock at $1.50 per share. Each two shares
will have a warrant to purchase an additional share of common stock at
$2.50 per share. The anticipated proceeds to the Company will be $2,640,000,
net of offering costs. Management believes this amount will be
sufficient to finance the continuing research for the upcoming nine months,
and is prepared to raise additional funds through other offerings of debt
or equity. However, there is no assurance that the private placement will
be completed. The sales of common stock under this private placement offering
have been less than management's expectations. Through March 31, 2000,
the Company sold 283,600 shares of its common stock for an aggregate amount
of $425,400 under this private placement, and there is no assurance that the
entire amount of the private placement will, in fact, be received.
Stock Based Compensation
The Company applies Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees, and Related Interpretations in
accounting for stock options issued to employees. Under APB Opinion No. 25,
employee compensation cost is recognized when the estimated fair value of
the underlying stock on date of grant exceeds the exercise price of the stock
option. For stock options and warrants issued to non-employees, the Company
applies SFAS No. 123, Accounting for Stock-Based Compensation, which requires
the recognition of compensation cost based upon the fair value of stock
options at the grant date using the Black-Scholes option pricing model.
4. Common Stock and Stock Options and Warrants
During the three months ended March 31, 2000, the Company sold 283,600
shares of its common stock for an aggregate amount of $425,400 and issued
141,800 warrants under the terms of the private placement offering discussed
above. In addition, options and warrants to purchase 93,600 shares of
common stock were exercised resulting in $12,600 of proceeds to the Company.
On January 2, 2000, the Company entered into a promotion agreement with
a consultant to produce a thirty-minute television documentary that will be
aired nationally. The Company shall participate equally in any revenues
derived from the sales of the show for a period of ten years. In
consideration for this production, the Company paid $45,000 and granted
warrants to purchase up to 700,000 shares of common stock at an exercise
price of $1.50 per share. The warrants will expire on January 2, 2010.
Under the agreement, the warrants will vest as certain milestones are met.
If the services are not provided and the agreement is terminated, the
consultant will forfeit those warrants not vested. The company is
accounting for this transaction in accordance with Emerging Issues Task
Force No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling, Goods or
Services. Because this transaction does not contain a performance
commitment, the final value of the warrants will be measured as they vest
on the date that each milestone is met. During the three months ended March
31, 2000, warrants to purchase 200,000 shares of common stock vested, and
the Company recognized $230,000 in compensation expense. Additionally, if
the warrants are not registered with the Securities and Exchange Commission
by September 2000, the consultant is entitled to an additional ten-year
warrant to purchase 50,000 shares of common stock at an exercise price of
$1.50 per share. Also, the promotion agreement specifies that the Company
will issue stock options, under the Company's Non-Statutory Incentive Stock
Option Plan, to purchase 100,000 shares of common stock at $1.50 per share
for consulting services. The vesting of these options has not been
determined at this time.
Subsequent to the fiscal quarter ended March 31, 2000, the Company
sold an additional 38,700 shares of its common stock, for $58,000, and
issued 19,400 warrants under the terms of the private placement offering
noted above.
Item 2. Management's Plan of Operation.
Certain statements in this Form 10-QSB, constitute "forward-looking
statements." These forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements, expressed or implied by the
forward-looking statements.
Overview
We have a very limited operating history and have no revenue to date.
Our prospects must be considered in light of the risks and uncertainties
encountered by companies in an early stage of development involving new
technologies and overcoming regulatory approval process requirements before
any revenue is possible.
We have experienced operating losses since our inception. These losses
resulted from the significant costs incurred in the development of the
technology and the establishment of our research and development facility.
Expenditures will increase in all areas in order to execute our business
plan, particularly in research and development and in gaining regulatory
approval to market our products in the U.S. and abroad.
During the next 12 months we will continue efforts on prototype
development and the generation of preclinical data. It is anticipated that
we will submit our first IND/IDE and begin clinical testing of our first
product for blood platelet storage. Research will commence on kidney
preservation and developing solutions that will operate under sub-zero
temperature conditions.
We anticipate filing a second patent relating to platelet preservation
during the next twelve months of operation which should strengthen our
competitive position in the platelet preservation marketplace. We will also
seek strategic alliances with companies that have the capability to provide
technical and clinical expertise as well as financial and marketing
expertise to leverage our current expertise in these areas.
We also plan to relocate our current Branch facility in Russia to a
more suitable location to accommodate more equipment and personnel, as well
as to locate a central administrative facility in the U.S.
Liquidity and capital resources
Since our inception, we have financed our operations through financing
from the founders and private investors, a public offering under Regulation
D, Rule 504 and private placements under Regulation D, Rule 505.
We anticipate continued growth in our operations and a corresponding
growth in our operating expenses and capital expenditures. The Company does
not anticipate any revenue from operations for the next 2 or 3 years.
Therefore, the success of the Company is dependent on funding from private
placements. We believe that the net proceeds of a private placement of
$3 million in Common Stock currently in process will be sufficient to meet
anticipated cash requirements for working capital and capital expenditures
for 9 months if the full amount of the offering is raised, although there
is no assurance that the full amount will, in fact, be received. In order
to continue operations beyond the 9-month period following the completion
of this offering we will seek additional funds through other offerings of
debt or equity securities, which could result in additional dilution to
stockholders. There is no assurance that financing will be available on
terms acceptable to the Company.
Our operating plan for calendar year 2000 is focused on development
of our products. It is our estimate that a cash requirement of $3,288,000
is required to support this plan. The expense estimates total $2,938,000 for
operating expenses and $350,000 for capital expenditures. The cost of legal
and accounting services associated with the filing of requisite reports
under the Securities and Exchange Act of 1934 will be paid out of current
stock sales.
Going Concern
We are in the third year of research and development, with an
accumulated loss during the development stage of $1,950,800. As of March
31,2000 we are uncertain as to the completion date of this research and
development, or if a product will ever be completed as a result of this
research and development activity. We anticipate that the funds spent on
research and development activities will need to increase prior to
completion of a product. Additionally, we may not be able to secure funding,
in the future, necessary to complete our intended research and development
activities.
Additionally, if we lose key personnel or are unable to attract and
retain additional qualified personnel we may not be able to successfully
manage the business and achieve our objectives.
These conditions give rise to substantial doubt about our ability to
continue as a going concern. The Company's financial statements do not
include adjustments relating to the recoverability and classification of
reported asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern. Our continuation as a going concern is dependent upon our ability
to obtain additional financing from the sale of our common stock, as maybe
required, and ultimately to obtain profitability.
The Report of our Independent Certified Public Accountants, included
in the Company's most recent Annual Report on Form 10-KSB, contains a
paragraph regarding the Company's ability to continue as a going concern.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written
using two digits (rather than four) to define the applicable year. We
believe that all of our material systems are substantially year 2000
compliant. To our knowledge, we have not experienced any significant
problems as a result of year 2000 issues. We will continue to monitor
our mission critical computer applications and those of our suppliers and
vendors throughout the year 2000 to ensure any latent risks that may arise
are addressed promptly.
Development plan
We have engaged Quintiles, Inc., an international regulatory consulting
firm, to assist with planning and managing the regulatory approval process.
This firm specializes in the design and implementation of regulatory
strategies including experiment design and monitoring. We have not made any
payments to Quintiles in the reported periods and are committed to pay only
what is expended on a work order basis. We are have paid $3,000 and
committed to pay an additional $4,645 of a work order total maximum of
$20,000 for developing a detailed strategic development plan for our
platelet storage system. The remaining $12,355 will be paid as we authorize
additional work from Quintiles.
As an overall strategy, we intend to limit the system claims and to
progressively expand them as FDA and/or EU approval is granted for each
succeeding claim. We believe that this should provide a shorter time to
market.
Development Phases
We have developed a 3-phase development strategy that considers FDA
and international approval processes.
Phase 1 Platelet Preservation - Solution Only
The plan starts with a platelet preservation product using the
PlexLife solution by itself. A solution development process is underway
with the planned outcome of platelets that can be stored under refrigeration
for a period greater than 7 days. These platelets are to be strong viable
platelets with little or no bacterial growth. Currently the industry
stores platelets at ambient temperature for a maximum of 5 days, a FDA
imposed limit due to historic bacterial infection of the platelets.
Phase 2 Platelet Preservation - Complete PlexLife System
This phase of development is to result in longer storage times for
platelets. The development will combine the use of solutions, sub-zero
temperature and high pressure. It is our goal to develop a storage method
that will preserve the viability of platelets with little or no bacterial
growth for a period greater than 13 days. This will provide the medical
community with a new and economical method for long-term platelet storage
thereby reducing the current loss of product.
Phase 3 Organs and Heart Valves
The third phase will incorporate storage of organs and heart valves.
This development will involve experiments with animal organs to demonstrate
our ability to harvest, store and transplant organs. The goal is to achieve
a level of physical condition and viability of these organs that is equal to
or superior to present storage methods and storage times. The development
process includes the development of solutions, chambers and cooling methods.
As the development experiments are proven to be successful, higher life
forms will be involved, until the goal of human organ and heart valve
preservation is obtained.
We have recently made the decision to start Phase 3 concurrently with
Phase 1 because of newly acquired expertise in the area of organ
preservation solutions. The development of a preservation solution for the
kidney and other organs that would compete with currently available products
such as the University of Wisconsin (UW) solution and the Euro-Collins
solution will be our immediate goal with respect to Phase 3 objectives.
This will be followed by the development of longer term storage systems,
which will require a new solution that is able to withstand sub-zero
temperatures.
Governmental approval for human testing will be required for each of
these three phases of development. Our plan is to obtain the necessary
approvals for each stage.
Intellectual property
We consider our intellectual property a key cornerstone and asset of
our business. As such, the intellectual property, which consists of
applied-for patents, trade secrets, copyrights and know-how will be both
developed and protected as a primary goal of the company. We plan to gain
wide protection for our intellectual property worldwide by patent and
trademark filings in major foreign markets as well as the careful
protection of trade secrets through contract and procedure. Information
regarding our patents is contained in the Company's most recent Annual
Report on Form 10-KSB.
Plant and Significant Equipment Requirements
It is our plan to purchase computer equipment, laboratory equipment
and office furniture over the next twelve months. The estimate for these
expenditures is $350,000. We do not expect to purchase any plant or
significant equipment. Our plan is to rent or lease facilities and any
significant equipment necessary during our development stage.
Changes in the Number of Employees
We anticipate hat the growth of the company will require the addition
of several employees. We anticipate the number of employees will grow from
our present level of 17 employees to as many as 40 employees by the end of
the year 2000. The Company has hired Luis Toledo, M.D., Ph.D. as our Chief
Medical Officer, who is an expert in the field of organ preservation and
transplantation. The addition of employees will be made on an as required
basis.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYPERBARIC SYSTEMS
Date: May 15, 2000 /s/ ARDETH N. SEALY
----------------------------
Ardeth N. Sealy
Chief Financial Officer
EXHIBITS
27 Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS QTR. SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S
BALANCE SHEET AND STATEMENT
OF OPERATIONS FOR PERIOD ENDED MAR 31.2000
</LEGEND>
<MULTIPLIER>1
<S> <C>
<CURRENCY> U.S.DOLLARS
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 40,900
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,700
<PP&E> 9,800
<DEPRECIATION> 800
<TOTAL-ASSETS> 51,700
<CURRENT-LIABILITIES> 304,600
<BONDS> 0
0
0
<COMMON> 1,697,900
<OTHER-SE> (1,950,800)
<TOTAL-LIABILITY-AND-EQUITY> 51,700
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 580,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 600
<INCOME-PRETAX> (580,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (580,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (580,600)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
