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EX-5.1 - Predictive Oncology Inc. | v162409_ex5-1.htm |
EX-23.1 - Predictive Oncology Inc. | v162409_ex23-1.htm |
As
filed with the Securities and Exchange Commission October 8,
2009
Registration Statement No.
333-155299
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 11 TO FORM S-1/A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
BIODRAIN
MEDICAL, INC.
(Exact
name of registrant as specified in its charter)
Minnesota
|
3842
|
33-1007393
|
||
(State
or other jurisdiction
of
incorporation or
organization)
|
(Primary
Standard Industrial
Classification
Code
Number)
|
(I.R.S.
Employer
Identification
No.)
|
2060
Centre Pointe Boulevard, Suite 7
Mendota
Heights, Minnesota 55120
(651)
389-4800
(Address, Including Zip
Code and Telephone Number,
Including
Area Code, of Registrant’s Principal Executive Offices)
Kevin
R. Davidson
Chief
Executive Officer
2060
Centre Pointe Boulevard, Suite 7
Mendota
Heights, Minnesota 55120
(651)
389-4800
(Name,
Address, Including Zip Code and Telephone Number,
Including
Area Code, of Agent for Service)
Copy
to:
Ryan
Hong, Esq.
RICHARDSON
& PATEL LLP
10900
Wilshire Boulevard, 5th Floor
Los
Angeles, California 90024
Telephone:
(310) 208-1182
Facsimile:
(310) 208-1154
Approximate
date of proposed sale to the public: From time to time after the effective date
of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer (Do not check if a smaller reporting company) o
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title of each class of
securities to be registered
|
|
|
Amount to
be
Registered
|
|
Proposed
maximum
offering
price
per share
|
|
Proposed
maximum
aggregate
offering
price
|
|
|
Amount of
registration
fee
|
||||||
Common
stock, $0.01 par value (1)
|
7,101,266
|
.46
|
$
|
3,266,583
|
$
|
182.27
|
||||||||||
Common
stock underlying warrants to purchase common stock (2)
|
4,689,291
|
$
|
.46
|
$
|
2,157,074
|
$
|
120.36
|
|||||||||
Common
stock underlying convertible debentures (1)
|
620,095
|
.46
|
$
|
285,244
|
$
|
15.92
|
||||||||||
Common
stock underlying warrants (3)
|
620,095
|
$
|
.46
|
$
|
285,244
|
$
|
15.92
|
|||||||||
TOTAL
|
13,030,747
|
N/A
|
$
|
5,994,145
|
$
|
334.47
|
(1)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(o) under the Securities Act of 1933, as amended. As a result,
only the title of class of securities to be registered, the proposed
maximum aggregate offering price and the amount of registration fee need
to appear in this Calculation of Registration Fee
table.
|
(2)
|
Calculated
in accordance with Rule 457 (g) under the Securities Act on the basis of
an exercise price of $.46 per
share.
|
(3)
|
Calculated
in accordance with Rule 457 (g) under the Securities Act on the basis of
an exercise price of $.35 per
share.
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
Subject
to Completion, dated October 8, 2009
PRELIMINARY
PROSPECTUS
BioDrain
Medical, Inc.
13,030,747
Shares of Common Stock
$0.01
par value
This
prospectus covers the resale by selling shareholders named on page 69 of up
to 13,030,747 shares of common stock which include:
•
|
7,101,266
shares of common stock;
|
|
•
|
5,309,386
shares of common stock underlying common stock purchase warrants, which
includes 4,689,291 and 620,095 shares of common stock underlying warrants
issued in conjunction with an October 2008 financing and bridge loans we
undertook in July 2007, respectively; and
|
|
•
|
620,095
shares of common stock underlying the convertible
notes.
|
There
is no current trading market for our securities and this offering is not being
underwritten. These securities will be offered for sale by the selling
shareholders identified in this prospectus in accordance with the methods and
terms described in the section of this prospectus titled “Plan of Distribution.”
The selling shareholders will sell the securities at $0.46 per share, until our
shares are quoted on the OTC Bulletin Board (“OTCBB”) and thereafter at
prevailing market prices or privately negotiated prices. We intend to seek and
obtain quotation of our common stock for trading on the OTC Bulletin Board. We
intend to cause a market maker to submit an application for quotation to the OTC
Bulletin Board before September 30, 2009. Newbridge Securities Corporation
has agreed to submit an application to the OTC Bulletin Board on our
behalf.
AN
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK
FACTORS” BEGINNING AT PAGE 3. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
You
should rely only on the information contained in this prospectus to make your
investment decision. We have not authorized anyone to provide you with different
information. This prospectus may be used only where it is legal to sell these
securities. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front page of this
prospectus.
The
following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus carefully.
The date
of this prospectus is October 8, 2009
Table
of Contents
Page
|
||||
Prospectus
Summary
|
1 | |||
Risk
Factors
|
3 | |||
Special
Note Regarding Forward-Looking Statements
|
12 | |||
Use
of Proceeds
|
13 | |||
Determination
of Offering Price
|
13 | |||
Market
Price of and Dividends on the Registrant’s Common Equity and Related
Stockholder Matters
|
14 | |||
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
18 | |||
Description
of Business
|
34 | |||
Legal
Proceedings
|
57 | |||
Description
of Property
|
57 | |||
Directors,
Executive Officers, Promoters and Control Persons
|
58 | |||
Executive
Compensation
|
61 | |||
Corporate
Governance
|
68 | |||
Certain
Relationships and Related Transactions
|
69 | |||
Selling
Security Holders
|
69 | |||
Plan
of Distribution
|
74 | |||
Security
Ownership of Certain Beneficial Owners and Management
|
75 | |||
Description
of Securities
|
78 | |||
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
81 | |||
Where
You Can Find More Information
|
84 | |||
Experts
|
84 | |||
Legal
Matters and Interests of Named Experts
|
84 | |||
Financial
Information
|
85 | |||
Exhibits
Index
|
II-8
|
|||
Signatures
|
II-14
|
Neither
we nor the selling shareholders have authorized anyone to provide you with
information different from that contained in this prospectus. These securities
may be sold only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the effective
date of this offering, regardless of the time of delivery of this prospectus or
of any sale of the securities. You must not consider that the delivery of this
prospectus or any sale of the securities covered by this prospectus implies that
there has been no change in our affairs since the effective date of this
offering or that the information contained in this prospectus is current or
complete as of any time after the effective date of this
offering.
Neither
we nor the selling shareholders are making an offer to sell the securities in
any jurisdiction where the offer or sale is not permitted. No action is being
taken in any jurisdiction outside the United States to permit a public offering
of our securities or the possession or distribution of this prospectus in any
such jurisdiction. Persons who come into possession of this prospectus in
jurisdictions outside of the United States are required to inform themselves
about and to observe any restrictions as to this offering and the distribution
of this prospectus applicable in that jurisdiction.
Prospectus
Summary
This
summary highlights material information contained elsewhere in this prospectus.
It is not complete and does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the section titled “Risk Factors” and
our financial statements and the related notes. In this prospectus,
we refer to BioDrain Medical, Inc. as “BioDrain,” “our company,” “we,” “us” and
“our.”
Our
Company
BioDrain
is an early-stage company developing a patented medical device designed to
provide medical facilities with effective, efficient and affordable means to
safely dispose of potentially contaminated fluids generated in the operating
room and other similar medical locations in a manner that protects hospital
workers from exposure to such fluids, reduces costs to the hospital, and is
environmentally conscientious. We recently filed a 510(k) submission with the
U.S. Food and Drug Administration (the “FDA”) with respect to our products, the
fluid management system (“FMS”) and related products and received written
confirmation of our clearance on April 1, 2009.
BioDrain
was incorporated in Minnesota on April 23, 2002. We are the registered owner of
a U.S. and European patent for our current FMS. We plan to distribute our
products to medical facilities where bodily and irrigation fluids produced
during surgical procedures must be contained, measured, documented and disposed
of with minimal exposure potential to the healthcare workers who handle them.
Our goal is to create products that dramatically decrease staff exposure without
significant changes to established operative procedures, historically a major
stumbling block to innovation and product introduction. In addition to
simplifying the handling of these fluids, our technologies will provide cost
savings to facilities over the aggregate costs incurred today using their
current methods of collection, neutralization and disposal. Initially, our
products will be sold through independent distributors and manufacturers
representatives in the United States and Europe.
Risks
Related to Our Business
Our
business is subject to a number of risks, which you should be aware of before
making an investment decision. These risks are discussed more fully in the
section of this prospectus titled “Risk Factors.”
The
Offering
The shares issued and outstanding as of August 31, 2009 consist of
10,103,651 shares of common stock and do not include:
•
|
6,937,813
shares of common stock issuable upon the exercise of warrants having a
range of exercise prices from $.02 to $1.67 per share (consisting of
5,309,386 shares of common stock underlying the warrants we are
registering pursuant to this registration statement, 1,050,000 shares
underlying warrants issued in a private placement in April, May, June and
August 2009 and 578,427 shares of common stock reserved for issuance upon
the exercise of outstanding warrants granted to certain other investors
and consultants.
|
•
|
outstanding
options to purchase 1,466,174 shares of our common
stock;
|
•
|
77,595
shares of common stock remaining reserved for issuance under our 2008
Equity Incentive Plan;
|
•
|
620,095
shares of common stock issuable in conjunction with a bridge loan we
undertook in July 2007; and
|
•
|
297,142
shares subject to issuance upon conversion of certain
notes.
|
1
We are
registering 13,030,747 shares for sale by the selling shareholders identified in
the section of this prospectus titled “Selling Security Holders.” The shares
included in the table identifying the selling shareholders consist
of:
•
|
7,101,266
shares of common stock;
|
•
|
5,309,386
shares of common stock underlying common stock purchase warrants, which
includes 620,095 shares of common stock underlying warrants issued in
conjunction with a bridge loan we undertook in July 2007;
and
|
•
|
620,095
shares of common stock underlying the 2007 convertible
notes.
|
After
this offering, assuming the exercise of all warrants and options and conversion
of convertible debt, including underlying shares which are covered by this
prospectus, we would have 19,424,875 shares of common stock outstanding as of
August 31, 2009, which does not include the 77,595 shares of common stock
remaining reserved for issuance under our 2008 Equity Incentive
Plan.
BioDrain
Medical, Inc. will not receive any of the proceeds from the sale of these
shares. However, we may receive up to $2,374,107 upon the exercise of warrants.
If some or all of the warrants are exercised, the money we receive will be used
for general corporate purposes, including working capital requirements. We will
pay all expenses incurred in connection with the offering described in this
prospectus, with the exception of the brokerage expenses, fees, discounts and
commissions which will all be paid by the selling shareholders. Information
regarding our common stock, warrants and convertible notes is included in the
section of this prospectus entitled “Description of
Securities.”
Corporate
Information
Our
corporate offices are located at 2060 Centre Pointe Boulevard, Suite 7, Mendota
Heights, Minnesota 55120. Our telephone number is (651) 389-4800 and our website
address is www.biodrainmedical.com.
Information contained on our website shall not be deemed to be part of this
prospectus.
Reverse
Stock Split
On
June 6, 2008, our board of directors approved a 1-for-1.2545 reverse stock split
of our common stock, which resulted in the authorized number of our common stock
of 20,000,000 to be proportionately divided by 1.2545 to 15,942,607. Pursuant to
Section 302A.402 of the Minnesota Business Corporations Act, since the reverse
stock split did not adversely affect the rights or preferences of the holders of
our outstanding common stock and did not result in the percentage of authorized
shares of any class or series of our stock that remains unissued after the
reverse stock split exceeding the percentage of authorized shares of that class
or series that were unissued before the reverse stock split, no shareholder
approval was required.
On
October 20, 2008, our board of directors approved a subsequent 1-for-1.33176963
reverse stock split. As a result, the authorized number of our common stock of
15,942,607 was proportionately divided by 1.33177 to 11,970,994. On October 20,
2008, our board of directors also approved a resolution to increase the number
of authorized shares of our common stock from 11,970,994 to 40,000,000 and such
action was approved by the Company’s shareholders holding a majority of the
shares entitled to vote thereon at a special meeting of shareholders held on
December 3, 2008.
2
Unless
otherwise indicated, all discussions included in this prospectus relating to the
outstanding shares of our common stock, including common stock to be issued upon
exercise of outstanding warrants, refer to post-second reverse stock split
shares.
Risk
Factors
You
should carefully consider the risks described below before making an investment
decision. Our business could be harmed by any of these risks. The trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment. In assessing these risks, you should also refer
to the other information contained in this prospectus, including our financial
statements and related notes.
Risks
Related to Our Business
Our
limited operating history makes evaluation of our business
difficult.
We
were formed on April 23, 2002 and to date have generated only
minimal revenue. Our ability to implement a successful business plan
remains unproven and no assurance can be given that we will ever generate
sufficient revenues to sustain our business. We have a limited operating history
which makes it difficult to evaluate our performance. You must consider our
prospects in light of these risks, expenses, technical obstacles, difficulties,
market penetration rate and delays frequently encountered in connection with the
development of new businesses. These factors include uncertainty whether we will
be able to:
•
|
Raise
capital;
|
•
|
Develop
and implement our business plan in a timely and effective
manner;
|
•
|
Be
successful in uncertain
markets;
|
•
|
Respond
effectively to competitive
pressures;
|
•
|
Successfully
address intellectual property issues of
others;
|
•
|
Protect
and expand our intellectual property rights;
and
|
•
|
Continue
to develop and upgrade our
products.
|
Because
we are a development stage company, not profitable and expect to incur
additional losses, we will require additional financing to sustain our
operation. Our Independent Public Accounting firm has indicated in their audit
opinion, contained in our Financial Statements, that they have serious doubt
about our ability to remain a going concern.
We
incurred a net loss of approximately $1,763,000 and $752,000, respectively, for
the fiscal years ended December 31, 2008 and 2007, respectively and a net loss
of approximately $1,742,000 for the six months ended June 30, 2009. We have
never earned a profit and we anticipate that we will continue to incur losses
for at least the next 12 months. We continue to operate on a negative cash flow
basis. We have generated only minimal revenues and are still developing our
planned principal operations. We believe that we will need to raise at least an
aggregate of $3 million from future offerings in order to have sufficient
financial resources to fund our operations for the next 12 months because we are
running a cash flow deficit.
3
Although
we will not receive any proceeds from the sale of the shares offered in this
offering, we may receive up to $2,374,107 upon exercise of warrants, the
underlying shares of which are included in the registration statement of which
this prospectus is a part. If received, such funds will be used for general
corporate purposes, including working capital requirements. However,
shareholders are not obligated, and we are not currently depending on any
exercising of the warrants. Accordingly, we will rely on pursuing alternative
sources to obtain the entire amount of funding needed to fund our operations for
the next 12 months. We may need additional funds to continue our operations, and
such additional funds may not be available when required at attractive prices or
at all. If we are unable to obtain additional funds at reasonable rates or at
all we will be required to substantially curtail our operations and could cease
to exist in our current form. Our Independent Public Accounting firm has
indicated in their audit opinion, contained in our Financial Statements, that
they have serious doubt about our ability to remain a going
concern.
To
date, we have financed our operations through the sale of stock and certain
borrowings. From 2002 to 2006 we received approximately $110,000 in debt
financing of which approximately $38,000 remains outstanding as of the date of
this prospectus and approximately $1,692,200 in equity financing. In March 2007
we obtained a $100,000 convertible note from two private investors. In July 2007
we arranged a convertible bridge loan of $170,000 from seven private investors.
By October 30, 2008, we closed a private placement financing of our common stock
and warrants, through which we raised approximately $1.594 million to date with
net proceeds of approximately $1.238 million. We raised an additional $525,000
in a private placement of stock at $.50 per share and warrants to purchase stock
at $.65 per share during April, May, June and August 2009. Approximately
$331,000 will be allocated to outstanding legal fees ($75,000), finder fees
($86,000), and investor relations fees ($170,000 over the next two
years).
We
expect to continue to depend upon outside financing to sustain our operations
for at least the next 12 months. Our ability to arrange financing from third
parties will depend upon our performance and market conditions. Our inability to
raise additional working capital at all or to raise it in a timely manner would
negatively impact our ability to fund our operations, to generate revenues, and
to otherwise execute our business plan, leading to the reduction or suspension
of our operations and ultimately forcing us to go out of business. Should this
occur, the value of any investment in our securities could be adversely
affected, and an investor could lose a portion of or even lose their entire
investment.
Although
we have been able to fund our current working capital requirements, principally
through debt and equity financing, there is no assurance that we will be able to
do so in the future.
We
are an early-stage company with a limited operating history with minimal
revenues.
Since
our formation in 2002, we have engaged in the formulation of a business strategy
and the design and development of technologically advanced products. We have
generated only minimal revenues to date. Our ability to implement a successful
business plan remains unproven and no assurance can be given that we will ever
generate sufficient revenues to sustain our business.
Our
business is dependent upon proprietary intellectual property rights, which if we
were unable to protect, could have a material adverse effect on our
business.
We
currently own and may in the future own or license additional patent rights or
trade secrets in the U.S., Europe, Asia, Canada and elsewhere in the world that
cover certain of our products. We rely on patent laws, and other intellectual
property laws, nondisclosure and other contractual provisions and technical
measures to protect our products and intangible assets. These intellectual
property rights are important to our ongoing operations and no assurance can be
given that any measure we implement will be sufficient to protect our
intellectual property rights. We may lose the protection afforded by these
rights through patent expirations, legal challenges or governmental action. If
we cannot protect our rights, we may lose our competitive advantage or our
competitive advantage could be lost if these patents were found to be invalid in
the jurisdictions in which we sell or plan to sell our products. The loss of our
intellectual property rights could have a material adverse effect on our
business.
4
If
we become subject to intellectual property actions, this could hinder our
ability to deliver our products and services and our business could be
negatively impacted.
We may
be subject to legal or regulatory actions alleging intellectual property
infringement or similar claims against us. Companies may apply for or be awarded
patents or have other intellectual property rights covering aspects of our
technologies or businesses. Moreover, if it is determined that our products
infringe on the intellectual property rights of third parties, we may be
prevented from marketing our products. While we are currently not subject to any
material intellectual property litigation, any future litigation alleging
intellectual property infringement could be costly, particularly in light of our
limited resources. Similarly, if we determine that third parties are infringing
on our patents or other intellectual property rights, our limited resources may
prevent us from litigating or otherwise taking actions to enforce our rights.
Any such litigation or inability to enforce our rights could require us to
change our business practices, could potentially hinder or prevent our ability
to deliver our products and services, and could result in a negative impact to
our business. Expansion of our business via product line enhancements or new
product lines to drive increased growth in current or new markets may be
inhibited by the intellectual property rights of our competitors and/or
suppliers. Our inability to successfully mitigate those factors may
significantly reduce our market opportunity and subsequent
growth.
Our
business would be materially and adversely affected if we were obligated to pay
royalties under a competing patent purchase agreement.
Our
revenues would be adversely affected if our intellectual property
were found to infringe the intellectual property rights of others. Two
individuals, Jay D. Nord and Jeffrey K. Drogue, filed a provisional patent
application disclosing a particular embodiment for a medical waste fluid
collection system (the “Nord/Drogue Embodiment”). We engaged the services of
Marshall C. Ryan to further develop the medical waste fluid collection system
for commercialization. Mr. Ryan conceived of an alternative embodiment for the
medical waste fluid collection system (the “Ryan Embodiment”). An international
(PCT) patent application was subsequently filed claiming priority to the earlier
filed provisional application of Nord and Drogue and disclosing and claiming
both the Nord/Drogue Embodiment and the Ryan Embodiment. The national stage
applications were filed in the U.S., Europe and Canada based on the PCT
application. During the national stage prosecutions, the European and U.S.
patent offices each rejected the patent claims covering the Nord/Drogue
Embodiment as being un-patentable over the prior art. The Canadian patent office
has not yet examined the Canadian national stage application. The claims were
amended in both the U.S. and European applications to claim only the subject
matter of the Ryan Embodiment and Mr. Ryan was added as a named inventor. As
required under U.S. law, we removed Nord and Drogue as named inventors from the
U.S. application because they were no longer inventors to the subject matter of
the remaining patent claims. A U.S. patent was granted to us on December 30,
2008 (U.S. Patent No. 7,469,727). A European patent was granted to us on April
4, 2007 (Patent No. EP1539580) (collectively, “the Patents”).
We
entered into a patent purchase agreement in September 2002 with Nord and Drogue
prior to engaging Mr. Ryan. Under the patent purchase agreement, certain
royalties were to be paid to Nord and Drogue upon issuance of a U.S. patent.
However, upon learning that the Nord/Drogue Embodiment was un-patentable, we
notified Mr. Nord that the patent purchase agreement we had entered into with
Nord and Drogue was no longer valid. Nord and Drogue could pursue legal action
against us purportedly for breach of contract and may sue for damages and
ownership interest in the patents. Although our management believes that we
would prevail in such lawsuit, there is no assurance that we would. We believe
that Nord and Drogue have no valid claims of inventorship or ownership of the
Patents. Even if Mr. Nord or Mr. Drogue were to assert such a claim, we believe
that, independent of our dealings with them, we obtained rights to the Patents
from Mr. Ryan, who even if found not to be the sole inventor of the subject
matter of the claims of the Patents, is at least a joint inventor. As a joint
inventor, Mr. Ryan would have co-ownership of the Patents and would have the
power to transfer to us his undivided co-ownership interest in the
Patents.
5
We
face significant competition, including competition from companies with
considerably greater resources than ours, and if we are unable to compete
effectively with these companies, our market share may decline and our business
could be harmed.
Our
industry is highly competitive with numerous competitors ranging from
well-established manufacturers to innovative start-ups. A number of our
competitors have significantly greater financial, technological, engineering,
manufacturing, marketing and distribution resources than we do. Their greater
capabilities in these areas may enable them to compete more effectively on the
basis of price and production and more quickly develop new products and
technologies.
We
estimate that the total market for surgical suction canisters is approximately
$100 million and has a compound annual growth rate of 5%. We estimate the total
cost of using surgical canisters is a multiple of $100 million because this
amount does not include the labor to handle the canisters, disposal costs and
solidifying compounds commonly used to minimize exposure to health care
workers. Cardinal Health, Inc., a $90 billion plus medical
manufacturer and distributor, is a leading competitor. Another one of
our competitors is Stryker Instruments, a wholly-owned subsidiary of Stryker
Corporation, which is a publicly-traded company with revenues of approximately
$5 billion, and has a leading position in this market. Cardinal
Health, Inc. has recently begun advertising a powered device similar to that
which Stryker currently markets. Both of these competitors are better
capitalized than we are.
Although
the BioDrain Streamway™ FMS is directly connected to the sanitary sewer, helping
to reduce potential exposure to infectious fluids, it is possible that
installation of the system will cause inconvenience and lost productivity as the
operating rooms in which they are installed will need to be temporarily shut
down. In addition, remodel work may be necessary in preparation for, or as a
result of, an installation. In some cases, the costs to rework plumbing lines to
accommodate for our system may outweigh the expected savings and/or lengthen the
expected return on investment time.
Companies
with significantly greater resources than ours may be able to reverse engineer
our products and/or circumvent our intellectual property position. Such action,
should it prove successful, would greatly reduce our competitive advantage in
the marketplace.
We
believe that our ability to compete successfully depends on a number of factors,
including our innovative and advanced research and development capabilities,
strength of our intellectual property rights, sales and distribution channels
and advanced manufacturing capabilities. We plan to employ these and other
elements as we develop our products and technologies, but there are many other
factors beyond our control. We may not be able to compete successfully in the
future, and increased competition may result in price reductions, reduced profit
margins, loss of market share and an inability to generate cash flows that are
sufficient to maintain or expand our development and marketing of new products,
which could adversely impact the trading price of our common
shares.
Our
products require FDA clearance and our business will be subject to intense
governmental regulation and scrutiny, both in the U.S. and
abroad.
In
March 2009 we filed a 510(k) submission with the U.S. Food and Drug
Administration (the “FDA”) with respect to a product classification as a Class
II non-exempt device. We cannot generate revenues from our
product to be used in the surgical operating room without FDA
clearance. We received written confirmation of final FDA clearance on
April 1, 2009.
The
potential production and marketing of some of our products and our ongoing
research and development, any pre-clinical testing and clinical trial activities
are subject to extensive regulation and review by FDA and other governmental
authorities both in the United States and abroad. In addition to testing and
approval procedures, extensive regulations also govern marketing, manufacturing,
distribution, labeling, and record keeping. If we do not comply with applicable
regulatory requirements, violations could result in warning letters,
non-approvals, suspensions of regulatory approvals, civil penalties and criminal
fines, product seizures and recalls, operating restrictions, injunctions, and
criminal prosecution.
6
Periodically,
legislative or regulatory proposals are introduced that could alter the review
and approval process relating to medical products. It is possible that the FDA
will issue additional regulations further restricting the sale of our present or
proposed products. Any change in legislation or regulations that govern the
review and approval process relating to our current and future products could
make it more difficult and costly to obtain approval for new products, or to
produce, market, and distribute existing products.
Our
product may never be commercially viable or producible to satisfy
demand.
The
BioDrain FMS is currently a fourth-generation prototype. We have engaged a
contract manufacturing entity and we have finalized the product design. These
improvements are expected to make the product attractive to the target market;
however, other unknown or unforeseen market requirements may appear. There is no
assurance that such a product can be produced in sufficient volume to satisfy
projected sales volumes.
If
our product is not accepted by our potential customers, it is unlikely that we
will ever become profitable.
The
medical industry has historically used a variety of technologies for fluid waste
management. Compared to these conventional technologies, our technology is
relatively new, and the number of companies using our technology is limited. The
commercial success of our product will depend upon the widespread adoption of
our technology as a preferred method by hospitals and surgical centers. In order
to be successful, our product must meet the technical and cost requirements for
these facilities. Market acceptance will depend on many factors,
including:
|
•
|
the
willingness and ability of customers to adopt new
technologies;
|
•
|
our
ability to convince prospective strategic partners and customers that our
technology is an attractive alternative to conventional methods used by
the medical industry;
|
•
|
our
ability to select and execute agreements with effective distributors and
manufacturers representatives to market and sell our product;
and
|
•
|
our
ability to assure customer use of the BioDrain proprietary cleaning
fluid.
|
Because
of these and other factors, our product may not gain market acceptance or become
the industry standard for the health care industry. The failure of such
companies to purchase our products would have a material adverse effect on our
business, results of operations and financial condition.
We
are dependent for our success on a few key executive officers. Our inability to
retain those officers would impede our business plan and growth strategies,
which would have a negative impact on our business and the value of an
investment.
Our
success depends on the skills, experience and performance of key members of our
management team. We are heavily dependent on the continued services of Lawrence
Gadbaw; our Chairman, Kevin Davidson; our Chief Executive Officer and Chief
Financial Officer, Kirsten Doerfert; our Vice President of Sales and Marketing
and Chad Ruwe; our Chief Operating Officer. We have entered into employment or
consulting agreements with all members of our senior management team and we plan
to expand the relatively small number of executives. Were we to lose one or more
of these key individuals, we would be forced to expend significant time and
money in the pursuit of a replacement, which could result in both a delay in the
implementation of our business plan and the diversion of limited working
capital. We can give you no assurance that we can find satisfactory replacements
for these key individuals at all, or on terms that are not unduly expensive or
burdensome to our company. Although we intend to issue stock options or other
equity-based compensation to attract and retain employees, such incentives may
not be sufficient to attract and retain key personnel.
7
We
are dependent for our success on our ability to attract and retain technical
personnel, sales and marketing personnel and other skilled
management.
Our
success depends to a significant degree upon our ability to attract, retain and
motivate highly skilled and qualified personnel. Failure to attract and retain
necessary technical, sales and marketing personnel and skilled management could
adversely affect our business. If we fail to attract, train and retain
sufficient numbers of these highly qualified people, our prospects, business,
financial condition and results of operations will be materially and adversely
affected.
The
relative lack of public company experience of our management team may put us at
a competitive disadvantage.
Our
management team has limited public company experience, which could impair our
ability to comply with legal and regulatory requirements such as those imposed
by the Sarbanes-Oxley Act of 2002. The individuals who now constitute our senior
management have had limited responsibility for managing a publicly traded
company. Such responsibilities include complying with federal securities laws
and making required disclosures on a timely basis. Our senior management may not
be able to implement and effect programs and policies in an effective and timely
manner that adequately respond to such increased legal, regulatory compliance
and reporting requirements. Our failure to do so could lead to the imposition of
fines and penalties and result in the deterioration of our
business.
New
rules, including those contained in and issued under the Sarbanes-Oxley Act of
2002, may make it difficult for us to retain or attract qualified officers and
directors, which could adversely affect the management of our business and our
ability to obtain or retain listing of our common stock.
We may
be unable to attract and retain qualified officers, directors and members of
board committees required to provide for our effective management as a result of
the recent and currently proposed changes in the rules and regulations which
govern publicly held companies, including, but not limited to, certifications
from executive officers and requirements for financial experts on the board of
directors. The perceived increased personal risk associated with these recent
changes may deter qualified individuals from accepting these roles. The
enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a
series of new rules and regulations and the strengthening of existing rules and
regulations by the Securities and Exchange Commission (the “SEC”). Further,
certain of these recent and proposed changes heighten the requirements for board
or committee membership, particularly with respect to an individual’s
independence from the Company and level of experience in finance and accounting
matters. We may have difficulty attracting and retaining directors with the
requisite qualifications. If we are unable to attract and retain qualified
officers and directors, the management of our business could be adversely
affected.
Our
internal controls over financial reporting may not be effective, and our
independent auditors may not be able to certify as to their effectiveness, which
could have a significant and adverse effect on our business.
If we
become a publicly traded company, as intended, we will be subject to various
regulatory requirements, including the Sarbanes-Oxley Act of 2002. We, like
other public companies, would then incur additional expenses and, to a lesser
extent, diversion of our management’s time, in our efforts to comply with
Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal controls over
financial reporting.
Since
we are a small developing company with a small management team, we have not yet
evaluated our internal controls over financial reporting in order to allow
management to report on, and our independent auditors to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which we
collectively refer to as “Section 404”. We will be required to include our
Section 404 management’s assessment of internal control over financial reporting
beginning with our second annual report filed after we become publicly
registered, and we will be required to include our independent auditor’s
attestation on management’s report on internal control over financial reporting
beginning with our annual report for the fiscal year ending December 31,
2010.
8
We
intend to comply with the Section 404, Management
Assessment of Internal Control over Financial Reporting , beginning with
our second annual report filed after we become publicly registered.
However, our lack of familiarity with Section 404 may unduly divert management’s
time and resources in executing our business plan. If, in the future, management
identifies one or more material weaknesses, or our external auditors are unable
to attest that our management’s report is fairly stated or to express an opinion
on the effectiveness of our internal controls, this could result in a loss of
investor confidence in our financial reports, have an adverse effect on our
stock price and/or subject us to sanctions or investigation by regulatory
authorities.
Risks
Related to Our Securities
There
is currently no public trading market for our common stock and we cannot assure
you that an active public trading market for our common stock will develop or be
sustained. Even if a market develops, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
There
is currently no public trading market for our common stock and no such market
may ever develop. While we intend to seek and obtain quotation of our common
stock for trading on the OTC Bulletin Board (“OTCBB”) during the third quarter
of 2009, there is no assurance that our application will be approved. An
application for quotation on the OTC Bulletin Board must be submitted by one or
more market makers who agree to sponsor the security and who demonstrate
compliance with SEC Rule 15(c)2-11 before initiating a quote in a security on
the OTC Bulletin Board. In order for a security to be eligible for quotation by
a market maker on the OTC Bulletin Board, the security must be registered with
the SEC and the company must be current in its required filings with the SEC.
There are no listing requirements for the OTC Bulletin Board and accordingly no
financial or minimum bid price requirements. We intend to cause a market maker
to submit an application for quotation to the OTC Bulletin Board
before September 30, 2009. Newbridge Securities Corporation, or an
associate firm, has agreed to submit an application to the OTC Bulletin Board on
our behalf.
Even
if our application for quotation is approved, the number of institutions or
persons interested in purchasing our common stock at or near ask prices at any
given time may be relatively small or nonexistent. This situation may be
attributable to a number of factors, including the fact that we are a small
company that is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk averse and may be reluctant to follow a relatively
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
assuming that our common stock is accepted for quotation, there may be periods
of several days or more when trading activity in our shares is minimal or non
existent, as compared to a seasoned issuer which has a large and steady volume
of trading activity that will generally support continuous sales without an
adverse effect on share price. We cannot assure you that an active public
trading market for our common stock will develop or be
sustained.
Limitations
on director and officer liability and indemnification of our officers and
directors by us may discourage shareholders from bringing suit against a
director.
Our
articles of incorporation and bylaws provide, with certain exceptions as
permitted by governing state law, that a director or officer shall not be
personally liable to us or our shareholders for breach of fiduciary duty as a
director, except for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law, or unlawful payments of dividends. These
provisions may discourage shareholders from bringing suit against a director for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by shareholders on our behalf against a director. In addition, our
articles of incorporation and bylaws may provide for mandatory indemnification
of directors and officers to the fullest extent permitted by governing state
law.
9
We
do not expect to pay dividends for the foreseeable future, and we may never pay
dividends.
We
currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. Our payment of any future dividends will be at the
discretion of our board of directors after taking into account various factors,
including but not limited to, our financial condition, operating results, cash
needs, growth plans and the terms of any credit agreements that we may be a
party to at the time. In addition, our ability to pay dividends on our common
stock may be limited by state law. Accordingly, investors must rely on sales of
their common stock after price appreciation, which may never occur, as the only
way to realize their investment.
If
our common stock is accepted for quotation on the OTC Bulletin Board it may be
thinly traded, so you may be unable to sell at or near ask prices or at all if
you need to sell your shares to raise money or otherwise desire to liquidate
your shares.
If our
common stock is accepted for quotation on the OTC Bulletin Board, it may be
thinly traded on the OTC Bulletin Board, meaning there has been a low volume of
buyers and sellers of the shares. Through this registration statement, we are
going public without the typical initial public offering procedures which
usually include a large selling group of broker-dealers who may provide market
support after going public. Thus, we will be required to undertake efforts to
develop market recognition for us and support for our shares of common stock in
the public market. The price and volume for our common stock that will develop
cannot be assured. The number of institutions or persons interested in
purchasing our common stock at or near ask prices at any given time may be
relatively small or non-existent. This situation may be attributable to a number
of factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, there may be periods of several days, weeks or
months when trading activity in our shares is minimal or non-existent, as
compared to a seasoned issuer which has a large and steady volume of trading
activity that will generally support continuous sales without an adverse effect
on share price.
We
cannot give you any assurance that a broader or more active public trading
market for our common stock will develop or be sustained. In addition to trading
on the OTC Bulletin Board, our ultimate intention is to apply for trading on
either the Nasdaq Capital Market or the NYSE Alternext U.S. LLC (formerly
American Stock Exchange) at such time that we meet the requirements for listing
on those exchanges. We currently do not meet the objective listing criteria for
listing on those exchanges and there can be no assurance as to when we will
qualify for either of these exchanges or that we will ever qualify for these
exchanges.
In
order for us to be eligible to trade on the Nasdaq Capital Market, we would
need, among other things, a bid price of $4, $5 million in stockholders’ equity,
and $15 million market value of publicly held shares. In order for us to be
eligible to trade on the NYSE Alternext U.S. LLC, which is a market for small
and mid-sized companies, we would need, among other things, at least $3 million
market value of public float, a minimum price of $3 and $4 million in
shareholders’ equity.
Currently,
our market capitalization, revenues and stockholders’ equity are insufficient to
qualify for these exchanges. We also do not have a sufficient number
of shareholders. We would also need to meet the corporate governance
and independent director and audit committee standards of Nasdaq and/or the NYSE
Alternext U.S. LLC. We do not satisfy such standards at this
time.
If our
common stock is accepted for quotation and begins trading on the OTC Bulletin
Board, the trading volume we develop may be limited by the fact that many major
institutional investment funds, including mutual funds, as well as individual
investors follow a policy of not investing in OTC Bulletin Board stocks and
certain major brokerage firms restrict their brokers from recommending OTC
Bulletin Board stocks because they are considered speculative, volatile and
thinly traded.
10
The
application of the “penny stock” rules to our common stock could limit the
trading and liquidity of the common stock, adversely affect the market price of
our common stock and increase your transaction costs to sell those
shares.
If our
common stock is accepted for quotation on the OTC Bulletin Board, as long as the
trading price of our common stock is below $5 per share, the open-market trading
of our common stock will be subject to the “penny stock” rules, unless we
otherwise qualify for an exemption from the “penny stock” definition. The “penny
stock” rules impose additional sales practice requirements on certain
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with net assets in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 together with their
spouse). These regulations, if they apply, require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks. Under these regulations, certain
brokers who recommend such securities to persons other than established
customers or certain accredited investors must make a special written
suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale. These regulations
may have the effect of limiting the trading activity of our common stock,
reducing the liquidity of an investment in our common stock and increasing the
transaction costs for sales and purchases of our common stock as compared to
other securities.
The
OTC Bulletin Board is a quotation system, not an issuer listing service, market
or exchange. Therefore, buying and selling stock on the OTC Bulletin Board is
not as efficient as buying and selling stock through an
exchange.
The
OTC Bulletin Board is a regulated quotation service that displays real-time
quotes, last sale prices and volume limitations in over-the-counter securities.
Because trades and quotations on the OTC Bulletin Board involve a manual
process, the market information for such securities cannot be guaranteed. In
addition, quote information, or even firm quotes, may not be available. The
manual execution process may delay order processing and intervening price
fluctuations may result in the failure of a limit order to execute or the
execution of a market order at a significantly different price. Execution of
trades, execution reporting and the delivery of legal trade confirmation may be
delayed significantly. Consequently, one may not be able to sell shares of our
common stock at the optimum trading prices.
When
fewer shares of a security are being traded on the OTC Bulletin Board,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Lower trading volumes in a security may
result in a lower likelihood of an individual’s orders being executed, and
current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry.
Orders
for OTC Bulletin Board securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at the
optimum trading prices.
The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss
due to the price spread. Moreover, dealers trading on the OTC Bulletin Board may
not have a bid price for securities bought and sold through the OTC Bulletin
Board. Due to the foregoing, demand for securities that are traded through the
OTC Bulletin Board may be decreased or eliminated.
11
Shares
eligible for future sale may adversely affect the market.
From
time to time, certain of our shareholders may be eligible to sell all or some of
their shares of common stock pursuant to Rule 144, promulgated under the
Securities Act of 1933, as amended, subject to certain limitations. In general,
pursuant to Rule 144 as in effect as of the date of this prospectus, a
shareholder (or shareholders whose shares are aggregated) who has satisfied the
applicable holding period and is not deemed to have been one of our affiliates
at the time of sale, or at any time during the three months preceding a sale,
may sell their shares of common stock. Any substantial sale, or cumulative
sales, of our common stock pursuant to Rule 144 or pursuant to any resale
prospectus may have a material adverse effect on the market price of our
securities.
We
expect volatility in the price of our common stock, which may subject us to
securities litigation.
If
established, the market for our common stock may be characterized by significant
price volatility when compared to seasoned issuers, and we expect that our share
price will be more volatile than a seasoned issuer for the indefinite future. In
the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
Special
Note Regarding Forward-Looking Statements
This
prospectus, including the sections titled “Prospectus Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Description of Business,” contains forward-looking
statements.
Forward-looking
statements include, but are not limited to, statements about:
•
|
our
ability to raise capital when we need
it;
|
•
|
our
ability to market and distribute or sell our
Fluid
Management System (FMS) and related products;
and
|
•
|
our
ability to protect our intellectual property and operate our business
without infringing upon the intellectual property rights of
others.
|
These
statements relate to future events or our future financial performance, and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
risks and other factors include those listed under “Risk Factors” and elsewhere
in this prospectus. In some cases, you can identify forward-looking statements
by terminology such as “may,” “could” “expects,” “intends,” “plans,”
“anticipates,” “believes,” “potential,” “continue” or the negative of these
terms or other comparable terminology. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. We do not
intend to update any of the forward-looking statements after the date of this
prospectus or to conform these statements to actual results. Neither the Private
Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act
of 1933, as amended, provides any protection for statements made in this
prospectus.
12
Use
of Proceeds
We
will not receive any proceeds from the sale of the shares by the selling
shareholders. All proceeds from the sale of the shares offered hereby will be
for the account of the selling shareholders, as described below in the sections
entitled “Selling Security Holders” and “Plan of Distribution.” However, we may
receive up to $2,374,107 upon exercise of warrants with exercise prices ranging
from $.35 to $.46 per share, the underlying shares of which are included in the
registration statement of which this prospectus is a part. If received, such
funds will be used for general corporate purposes, including working capital
requirements. With the exception of any brokerage fees and commissions which are
the obligation of the selling shareholders, we are responsible for the fees,
costs and expenses of this offering which are estimated to be approximately
$225,000, inclusive of our legal and accounting fees, printing costs and filing
and other miscellaneous fees and expenses.
Determination
of Offering Price
There
has been no public market for our common stock prior to this offering and there
will be no public market until our common stock is approved for quotation on the
OTC Bulletin Board. The offering price has been arbitrarily determined and does
not bear any relationship to our assets, results of operations, or book value,
or to any other generally accepted criteria of valuation.
We
cannot assure you that an active or orderly trading market will develop for our
common stock or that our common stock will trade in the public markets
subsequent to this offering at or above the offering price.
13
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
At
this time, our common shares are not traded on any public markets. We have
10,103,651 shares of common stock issued and outstanding as of August 31, 2009.
We have 106 shareholders of record of our common stock.
We
also have outstanding warrants as of August 31, 2009, to purchase 6,937,813
shares of our common stock, which include (i) 5,309,386 shares of common stock
underlying the warrants we are registering pursuant to this registration
statement; and (ii) 1,628,427 shares of common stock reserved for issuance upon
the exercise of outstanding warrants granted to certain consultants and
investors. We also have outstanding options to purchase 1,466,174 shares of our
common stock, which include 943,292 shares of common stock reserved for issuance
upon the exercise of outstanding options granted pursuant to employment
agreements with three officers and an employee of the Company.
After
this offering, assuming exercise of all the warrants and options and conversion
of convertible debt, we will have 19,424,875 shares of common stock outstanding,
which does not include 77,595 shares of common stock remaining reserved for
issuance under our 2008 Equity Incentive Plan, but which does include
outstanding notes that may be converted into 620,095 shares of our common stock
which were issued in conjunction with a bridge loan we undertook in July 2007.
Of the amount outstanding, 950,995 shares could be sold pursuant to Rule 144
under the Securities Act of 1933, as amended (assuming compliance with the
requirements of Rule 144).
Dividends
We
have never paid dividends and do not currently intend to pay dividends on our
common stock in the foreseeable future. Instead, we anticipate that any future
earnings will be retained for the development of our business. Any future
determination relating to dividend policy will be made at the discretion of our
board of directors and will depend on a number of factors, including, but not
limited to, our financial condition, operating results, cash needs, growth
plans, the terms of any credit agreements that we may be a party to at the time
and the Minnesota Business Corporations Act, which provides that dividends are
only payable out of surplus or current net profits.
Securities
Authorized for Issuance under Equity Compensation Plans
On
October 20, 2008, our board of directors approved the BioDrain Medical, Inc.
2008 Equity Incentive Plan (the “Plan”) to promote the success of the Company by
providing incentives to our directors, officers, employees and contractors by
linking their personal interests to the long-term financial success of the
Company, and to promote growth in shareholder value. The Plan was subject to the
approval of our shareholders, and if it is not so approved on or before 12
months after the date of adoption of the Plan by our board of directors, it
would not come into effect and any options granted pursuant to the Plan would be
deemed cancelled. Shareholder approval was obtained in a special meeting of
shareholders held on December 3, 2008. Awards may be granted only to a person
who on the date of the grant is a director, officer, employee or contractor of
the Company (or a parent or subsidiary of the Company), subject to certain
restrictions set forth in the Plan. Awards granted under the Plan shall be
evidenced by an award agreement and shall consist of:
(i)
|
incentive
stock options, as defined in Section 422 of the Internal Revenue Code of
1986 (the “Code”);
|
(ii)
|
nonqualified
stock options, defined as any option granted under the Plan other than an
incentive stock option;
|
14
(iii)
|
stock
appreciation rights (“SARs”), defined as an award granted under the Plan
that is exercisable either in lieu of options, in addition to options,
independent of options or in any combination thereof, which, upon
exercise, entitles the holder to receive payment of an amount determined
by multiplying (a) the difference between the fair market value of a share
on the date of exercise and the exercise price established by the
administrator of the Plan on the date of grant by (b) the number of shares
with respect to which the SAR is exercised, the payment of which will be
made in cash or stock; or
|
(iv)
|
restricted
stock, defined as stock granted under the Plan that is subject to
restrictions on sale, transfer, pledge, or
assignment.
|
The
Plan is administered by a committee whose members are appointed by our board of
directors (the Plan is administered by our board of directors during such times
as no committee is appointed or during such times as the board of directors is
acting in lieu of the committee). At any time that our securities are listed on
a national securities exchange or quoted on Nasdaq Global Markets (“Nasdaq GM”),
or Nasdaq Global Select Markets (“Nasdaq GS”), the committee shall consist of
not less than three independent directors, as determined by applicable
securities and tax laws. The committee has the authority to (i) construe and
interpret the Plan; (ii) to establish, amend or waive rules for its
administration; (iii) to accelerate the vesting of any options or SARs; (iv) to
amend the terms and conditions of any outstanding option, SAR or restricted
stock award (provided that the committee shall not replace or re-grant options
or SARs with an exercise price that is less than the original exercise price or
change the exercise price to a lower price than the original exercise price
without prior shareholder approval); (v) to choose grantees of Plan awards; (vi)
to impose conditions on the exercisability terms of the awards granted under the
Plan; (vii) to determine the number of shares subject to options granted; and
(viii) to make all other determinations necessary or advisable for the
administration of the Plan.
Subject
to adjustment, the aggregate number of shares that may be delivered under the
Plan will not exceed 975,405 shares. As of August 31, 2009 897,810 shares have
been issued under the Plan. If any award granted under the Plan terminates,
expires or lapses, any stock subject to such award shall be available for future
grant under the Plan, provided, however, that if any outstanding shares are
changed into or exchanged for a different number or kind of shares or other
security in another company by reason of reorganization, merger, consolidation,
recapitalization, stock split, reverse stock split, combination of shares or
stock dividends, an appropriate adjustment will be made in the number and kind
of shares as to which awards may be granted and as to which outstanding options
and SARs then unexercised shall be exercisable, such that the proportionate
interest of the grantee will be maintained. Such adjustment will be made without
change in the total price applicable to the unexercised portion of such awards
and with a corresponding adjustment in the exercise price per
share.
In the
event of a change of control of the Company (as defined in the Plan), any award
granted under the Plan, to the extent not already terminated, shall become
vested and immediately exercisable, and any period of restriction on restricted
stock shall terminate, provided, however, that the period during which any
option or SAR is exercisable shall not be limited or shortened. If an option or
SAR provides for exercisability during a period of time after a triggering event
and the initial exercisability is accelerated by means of a change in control,
the expiration of the option or SAR shall be delayed until after the period
provided for has ended and the option or SAR shall remain exercisable for the
balance of the period initially contemplated by the grant. In addition, if the
Company is then subject to the provisions of Section 280G of the Code and if the
acceleration or vesting or payment pursuant to a change in control could be
deemed a parachute payment, as defined in the Code, then the payments to the
grantee shall be reduced to an amount as will result in no portion of such
payments being subject to the excise tax imposed by Section 4999 of the
Code.
Fair
market value, for the purposes of the Plan, means the price per share of the
Company’s common stock determined as follows: (i) if the security is listed on
one or more national securities exchanges or quoted on the Nasdaq GS or Nasdaq
GM, the reported last sales price on such exchange on the date in question (or
if not traded on such date, the reported last sales price on the first day prior
thereto on which the security was traded); or (ii) if the security is not listed
on a national securities exchange and not quoted on Nasdaq GS or Nasdaq GM but
is quoted on the Nasdaq Capital Market System or otherwise traded in the
over-the-counter market, the mean of the highest and lowest bid prices for such
security on the date in question (or if there are no such bid prices on such
date, the mean of the highest and lowest bid prices on the most recent day prior
thereto on which such prices existed, not to exceed 10 days prior to the date in
question); or (iii) if neither (i) or (ii) is applicable, by any means
determined fair and reasonable by the committee.
15
Options
Only
employees are eligible to receive incentive stock options. Directors who are not
also employees and consultants are not eligible to receive incentive stock
options and instead are entitled to receive nonqualified stock options. Subject
to this restriction and other terms and conditions of the Plan, options may be
granted by the committee with such number of underlying shares, such vesting
terms and such exercise times and prices with such restrictions as the committee
shall determine. The aggregate fair market value (determined at the time the
option is granted) of the stock with respect to which incentive stock options
are exercisable for the first time by a grantee during any calendar year shall
not exceed $100,000. To the extent that the aggregate fair market value of the
stock with respect to which such incentive stock options are exercisable for the
first time exceeds $100,000, the excess options will be treated as nonqualified
stock options.
If a
vesting schedule is not specified by the committee at the time an option is
granted, such option shall vest, with respect to 25% of the options on the first
anniversary date of the grant, and, with respect to 2.083% of the options,
beginning on 30 days immediately following the first anniversary of the date of
grant and continuing on the same day of each month for the next 35 months
thereafter (in each case, rounding up to the nearest whole share). The price at
which an option may be exercised shall be determined by the committee but may
not be less than the fair market value of the stock on the date the option is
granted, provided, however, that the exercise price of an incentive stock option
granted to an employee who, on the date of execution of the option agreement
owns more than 10% of the total combined voting power of all series of stock
then outstanding (“10% Shareholder”), shall be at least 110% of the fair market
value of a share on the date the option agreement is signed. No option may be
exercised after 10 years from the date on which the option was granted (or on
the date preceding the 10 th
anniversary in the case of an incentive stock option) and unless specified by
the committee at the time of grant, each option shall expire at the close of
business on the 10 th
anniversary of the date of grant, provided, however, that in the case of an
incentive stock option held by a 10% Shareholder, such option shall expire at
the close of business on the date preceding the 5 th
anniversary of the date of grant.
An
option may be exercised at such times and with such rights as provided in the
applicable option agreement. An option shall be deemed exercised immediately
prior to the close of business on the date the Company is in receipt of the
original option agreement, written notice of intent to exercise the option, and
payment for the number of shares being acquired upon exercise. There shall be no
exercise at any one time for fewer than 100 shares or all of the remaining
shares then purchasable by the person exercising the option.
In the
case of death or disability of a director, officer, employee or contractor, any
of such individual’s outstanding options, which were not vested and exercisable
on the date of death or the date the committee determines that the individual
incurred a disability, shall immediately become 100% vested, and all outstanding
options shall be exercisable at any time prior to the sooner of the expiration
date of the options or 12 months following the date of death or disability. In
the case of termination for “cause” (defined as (i) willful breach of any
agreement entered into with the Company; (ii) misappropriation of the Company’s
property, fraud, embezzlement, breach of fiduciary duty, or other acts of
dishonesty against the Company; or (iii) conviction of any felony or crime
involving moral turpitude), all of the grantee’s outstanding options, whether or
not then vested, shall be immediately forfeited back to the Company. In the case
of termination for any reason other than death, disability or cause, (i) with
respect to outstanding nonqualified options which were then vested and
exercisable, such options shall be exercisable at any time prior to the sooner
of the expiration date of such options or 12 months following the date of
termination and (ii) with respect to outstanding incentive stock options which
were then vested and exercisable shall be exercisable at any time prior to the
sooner of the expiration date of such options or 3 months following the date of
termination, provided, however, that in the event of the individual’s death
during such 3-month period and prior to the expiration date of the options, such
options then vested and unexercised may be exercised within 12 months following
the date of termination by the individual’s beneficiary or in accordance with
the laws of descent and distribution. Any options not then vested and
exercisable shall be forfeited back to the Company.
16
Incentive
stock options are transferable only by will or pursuant to the laws of descent
and distribution. Nonqualified stock options are transferable to a grantee’s
family member or family trust by a bona fide gift or pursuant to a domestic
relations order, by will or pursuant to the laws of descent and distribution, or
as otherwise permitted pursuant to the rules and regulations of the SEC. No
other transfers, assignments, pledges, or dispositions of any options, or the
rights or privileges conferred thereby, are permitted by the Plan and options
are only exercisable, during the grantee’s lifetime, by the grantee or his
guardian or legal representative.
Stock
Appreciation Rights
The
committee shall have the sole discretion, subject to the requirements of the
Plan, to determine the actual number of shares subject to SARs granted, to
specify the period of time over which vesting shall occur and to provide for the
acceleration of vesting upon the attainment of certain goals, provided, however
that the exercise of a SAR shall not be less than the fair market value of a
share of the Company’s stock on the date of grant. Unless specified by the
committee at the time the SAR is granted, SARs shall have the same vesting
schedule as options. The term of a SAR granted under the Plan shall be
determined by the committee, but shall not exceed 10 years and if not specified
by the committee at the time of grant, each SAR shall expire at the close of
business on the date preceding the 10 th
anniversary of the date of grant.
SARs
granted in lieu of options may be exercised for all or part of the shares
subject to the related option upon the surrender of the related options
representing the right to purchase an equivalent number of shares. The SAR may
be exercised only with respect to the shares for which its related option is
then exercisable. SARs granted in addition to options shall be deemed to be
exercised upon the exercise of the related options. SARs granted independently
of options may be exercised upon whatever terms and conditions the committee
imposes.
SARs
have the same termination consequences as nonqualified stock options, no SAR
granted under the Plan may be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated, and all SARs granted shall be exercisable during a
grantee’s lifetime only by such grantee.
Restricted
Stock
The
committee may grant shares of restricted stock under the Plan to such grantees,
in such amounts, with such purchase price and under such other conditions or
restrictions as the committee may determine. Each restricted stock grant shall
be evidenced by a restricted stock agreement that must specify the period of
time over which the shares of restricted stock shall vest (the period of
restriction) and the number of shares of restricted stock granted. The committee
may also provide for the acceleration of the lapse of a period of restriction
upon the attainment of certain goals. Restricted stock shall at all times be
valued at its fair market value without regard to restrictions. If not specified
by the committee, the period of restriction shall elapse in accordance with the
same vesting schedule as options and SARs.
The
committee may legend the restricted stock certificates with such restrictions as
it determines, provided that each certificate must bear a legend stating that
the sale or other transfer of the shares of restricted stock is subject to the
BioDrain Medical, Inc. 2008 Equity Incentive Plan and the related restricted
stock agreement. Shares of restricted stock shall become freely transferable by
the grantee after the last day of the period of restriction and once released
from restrictions, the grantee shall be entitled to have the legend removed.
Under no other conditions may the restricted stock granted be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated until the termination
of the period of restriction.
17
During
the period of restriction, grantees holding shares of restricted stock may
exercise full voting rights with respect to those shares and shall be entitled
to receive all dividends and distributions paid with respect to those shares. In
the case of termination of a grantee due to death or disability during a period
of restriction, any remaining period of the period of restriction applicable to
the restricted stock shall automatically terminate and unless the committee
imposed additional restrictions on the shares, the shares shall thereafter be
free of restrictions and be fully transferable. In the case of termination of a
grantee other than by death or disability during a period of restriction, all
shares of restricted stock still subject to restrictions as of the date of the
termination shall automatically be forfeited and returned to the Company and any
amounts paid by the grantee to the Company for the purchase of such shares shall
be returned to the grantee, subject to any modifications or waivers as the
committee deems appropriate.
Other
Securities For Issuance Upon Certain Contingencies
Please
refer to the Management’s Discussion and Analysis of Financial Condition and
Result of Operations Section on page 32 for a discussion of other securities for
issuance upon certain contingencies.
Management
’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the notes to
those statements included elsewhere in this prospectus. In addition to the
historical financial information, the following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under “Risk Factors” and elsewhere in this
prospectus.
Overview
Our
Company was incorporated in Minnesota in April 2002. We are an early-stage
development company developing an environmentally conscientious system for the
collection and disposal of infectious fluids that result from surgical
procedures and post-operative care. We achieved our first sale in June 2009.
Since our inception in 2002, we have invested significant resources into product
development and in preparing for approval from the FDA. We believe that our
success depends upon converting the traditional process of collecting and
disposing of infectious fluids from the operating rooms of medical facilities to
our wall-hung Fluid Management System (“FMS”) and use of our proprietary
cleaning fluid.
Since
inception, we have been unprofitable. We incurred net losses of approximately
$1,763,000 for the fiscal year ended 2008, approximately $752,000 for the fiscal
year ended 2007 and a net loss of approximately $1,742,000 for the six months
ended June 30, 2009. As of June 30, 2009, we had an accumulated deficit of
approximately $4,880,000. As a company in the early stage of development, our
limited history of operations makes prediction of future operating results
difficult. We believe that period to period comparisons of our operating results
should not be relied on as predictive of our future
results.
We are
an early-stage development stage company and we have been focused on finalizing
our production and obtaining final FDA clearance to sell our product to the
medical facilities market. FDA final clearance was obtained on April 1,
2009. Our innovative FMS will be sold through experienced,
independent medical distributors and manufacturers representatives that are
intended to enhance acceptability in the marketplace. We are currently in the
process of signing agreements with independent sales representative and product
installation organizations and conducting training sessions. We achieved
our first billable shipment in June 2009 and are hopeful to receive several
orders during the second half of 2009. Since our FDA clearance to
sell our FMS product was only received on April 1, 2009 it is too early to know
with a high degree of confidence how quickly, and in what amounts, new orders
will develop.
Since we
do not expect to generate sufficient revenues in 2009 to fund our capital
requirements, our capital needs for the next 12 months are expected to be
approximately $3 million even though we plan to use outside third party contract
manufacturers to produce the FMS and independent sales representatives to sell
the FMS. Our future cash requirements and the adequacy of available funds will
depend on our ability to sell our FMS and related products now that FDA final
clearance has been obtained. We expect that we will require additional funding
to finance operating expenses and to enter the international
marketplace.
18
As of
December 31, 2008, we have funded our operations through a bank loan of $41,400,
an equity investment of $68,000 from the Wisconsin Rural Enterprise Fund
(“WREF”) and $30,000 in early equity investment from several individuals. WREF
had also previously held debt in the form of three loans of $18,000, $12,500 and
$25,000. In December 2006, WREF converted two of the loans totaling $37,500 into
43,000 shares of common stock. In August 2006, we secured a $10,000
convertible loan from one of our vendors. In February 2007, we obtained $4,000
in officer and director loans and in March 2007, we arranged a $100,000
convertible note from two private investors. In July 2007, we obtained a
convertible bridge loan of $170,000. In June 2008, we paid off the remaining
$18,000 loan from WREF and have raised approximately $1.6 million through our
October 2008 financing. During April, May, June and August 2009 we raised an
additional $525,000 in a private placement of 1,050,000 stock units at $.50 per
unit, including one share of stock and a warrant to purchase one share of stock
at $.65 per share.
Critical
Accounting Policies and Estimates and Recent Accounting
Developments
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are
based upon our audited Financial Statements, which have been prepared in
accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The
preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of our financial statements, the reported amounts of
revenues and expenses during the reporting periods presented, as well as our
disclosures of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates and assumptions, including, but not limited to, fair
value of stock-based compensation, fair value of acquired intangible assets and
goodwill, useful lives of intangible assets and property and equipment, income
taxes, and contingencies and litigation.
We
base our estimates and assumptions on our historical experience and on various
other information available to us at the time that these estimates and
assumptions are made. We believe that these estimates and assumptions are
reasonable under the circumstances and form the basis for our making judgments
about the carrying values of our assets and liabilities that are not readily
apparent from other sources. Actual results and outcomes could differ from our
estimates.
Our
significant accounting policies are described in Note 1 Summary of Significant Accounting
Policies, in Notes to Financial Statements of this Form S-1. We believe
that the following discussion addresses our critical accounting policies and
reflect those areas that require more significant judgments, and use of
estimates and assumptions in the preparation of our Financial
Statements.
Revenue Recognition We
recognize revenue in accordance with the SEC’s Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial
Statements, as amended by Staff Accounting Bulletin No. 104
(together, SAB 101), and Statement of Financial Accounting Standards
No. 48, Revenue
Recognition When Right of Return Exists (SFAS 48).
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is probable.
Delivery is considered to have occurred upon either shipment of the product or
arrival at its destination based on the shipping terms of the transaction. Our
standard terms specify that shipment is FOB BioDrain and we will, therefore
recognize revenue upon shipment in most cases. This revenue recognition policy
applies to shipments of our FMS units as well as shipments of cleaning solution
kits. When these conditions are satisfied, we recognize gross product revenue,
which is the price we charge generally to our customers for a particular
product. Under our standard terms and conditions there is no
provision for installation or acceptance of the product to take place prior to
the obligation of the customer. The Customer’s right of return is
limited only to our standard one year warranty whereby we replace or repair, at
our option, and it would be very rare that the unit or significant quantities of
cleaning solution kits may be returned. Additionally, since we buy both the FMS
units and cleaning solution kits from “turnkey” suppliers we would have the
right to replacements from the suppliers if this situation should
occur.
19
Stock-Based
Compensation. Effective January 1, 2006, we adopted SFAS
No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R)) which replaced SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and superseded Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). Under SFAS 123(R), stock-based employee
compensation cost is recognized using the fair value based method for all new
awards granted after January 1, 2006 and unvested awards outstanding at
January 1, 2006. Compensation costs for unvested stock options and
non-vested awards that were outstanding at January 1, 2006, are being
recognized over the requisite service period based on the grant-date fair value
of those options and awards as previously calculated under SFAS 123 for pro
forma disclosures, using a straight-line method. We elected the
modified-prospective method in adopting SFAS 123(R), under which prior
periods are not retroactively restated.
SFAS 123(R)
requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model. We use the Black-Scholes-Merton
option-pricing model which requires the input of significant assumptions
including an estimate of the average period of time employees and directors will
retain vested stock options before exercising them, the estimated volatility of
our common stock price over the expected term, the number of options that will
ultimately be forfeited before completing vesting requirements and the risk-free
interest rate.
Because
we do not have historical trading data on our stock we relied upon trading data
from a composite of 10 medical companies traded on major exchanges and 15
medical companies traded on the OTCBB to help us arrive at expectations as to
volatility of our own stock when public trading commences. Likewise,
we have no history of option and warrant exercises because there is no liquidity
in our stock as a private company and we were required to make a significant
judgment as to expected option and warrant exercise patterns in the future
regarding employee and director options and warrants. In the case of
options and warrants issued to consultants and investors we used the legal term
of the option/warrant as the estimated term unless there was a compelling reason
to use a shorter term. The measurement date for employee and non-employee
options and warrants is the grant date of the option or warrant. The
vesting period for options that contain service conditions is based upon
management’s best estimate as to when the applicable service condition will be
achieved. Changes in the assumptions can materially affect the estimate of fair
value of stock-based compensation and, consequently, the related expense
recognized. The assumptions we use in calculating the fair value of stock-based
payment awards represent our best estimates, which involve inherent
uncertainties and the application of management's judgment. As a result, if
factors change and we use different assumptions, our equity-based compensation
expense could be materially different in the future. See Note 3, Stock-Based Compensation, in
Notes to Financial Statements of this Form S-1for additional
information.
When an
option or warrant is granted in place of cash compensation for services we deem
the value of the service rendered to be the value of the option or
warrant. In most cases, however, an option or warrant is granted in
addition to other forms of compensation and its separate value is difficult to
determine without utilizing an option pricing model. For that reason
we also use the Black-Scholes-Merton option-pricing model to value options and
warrants granted to non-employees, which requires the input of significant
assumptions including an estimate of the average period that investors or
consultants will retain vested stock options and warrants before exercising
them, the estimated volatility of our common stock price over the expected term,
the number of options and warrants that will ultimately be forfeited
before completing vesting requirements and the risk-free interest rate. Changes
in the assumptions can materially affect the estimate of fair value of
stock-based compensation and, consequently, the related expense recognized that.
Since we have no trading history in our stock and no first-hand experience with
how these investors and consultants have acted in similar circumstances, the
assumptions we use in calculating the fair value of stock-based payment awards
represent our best estimates, which involve inherent uncertainties and the
application of management's judgment. As a result, if factors change and we use
different assumptions, our equity-based consulting and interest expense could be
materially different in the future.
20
Since
our company stock has no public trading history we were required to take an
alternative approach to estimating future volatility and the future results
could vary significantly from our estimates. We compiled historical
volatilities over a period of 2-7 years of 15 small-cap medical companies traded
on major exchanges and10 medical companies in the middle of the market cap size
range on the OTC Bulletin Board and combined the results using a weighted
average approach. In the case of standard options to employees we
determined the expected life to be the midpoint between the vesting term and the
legal term. In the case of options or warrants granted to
non-employees we estimated the life to be the legal term unless there was a
compelling reason to make it shorter.
Valuation of
Intangible Assets We review identifiable intangible assets
for impairment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), whenever events or changes
in circumstances indicate the carrying amount may not be recoverable. Our
intangible assets are currently solely the costs of obtaining trademarks and
patents. Events or changes in circumstances that indicate the
carrying amount may not be recoverable include, but are not limited to, a
significant change in the medical device marketplace and a significant adverse
change in the business climate in which we operate. If such events or changes in
circumstances are present, the undiscounted cash flows method is used to
determine whether the intangible asset is impaired. Cash flows would include the
estimated terminal value of the asset and exclude any interest charges. If the
carrying value of the asset exceeds the undiscounted cash flows over the
estimated remaining life of the asset, the asset is considered impaired, and the
impairment is measured by reducing the carrying value of the asset to its fair
value using the discounted cash flows method. The discount rate utilized is
based on management's best estimate of the related risks and return at the time
the impairment assessment is made
Our
accounting estimates and assumptions bear various risks of change, including the
length of the current recession facing the United States, the expansion of the
slowdown in consumer spending in the U.S. medical markets despite the early
expressed opinions of financial experts that the medical market would not be as
affected as other markets and failure to gain acceptance in the medical
market.
Recent
Accounting Developments
In
June 2008, the Financial Accounting Standards Board (“FASB”) ratified Emerging
Issues Task Force (EITF) Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF 07-5).
EITF-07-5 mandates a two-step process for evaluating whether an equity-linked
financial instrument or embedded feature is indexed to the entity’s own stock.
It is effective for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years, which is our first quarter of 2009. Most of
the warrants issued by the Company contain a strike price adjustment feature
which upon adoption of EITF-07-5 changed the classification (from equity to
liability) and the related accounting for many warrants with an estimated fair
value of $479,910 as of December 31, 2008. As of January 1, 2009 the Company
removed $486,564 from paid-in-capital (representing the combined fair values of
the warrants on their date of grant), recorded a positive adjustment to
accumulated deficit representing the gain on the valuation of the warrants from
the grant dates to January 1, 2009, and established a liability for
equity-linked instruments in the net amount of $479,910. The Company also
re-computed the value of the warrants as of March 31, 2009 and June 30, 2009 and
recorded a loss of $496,502 in the first quarter and a loss of $436,423 in the
six-month period ended June 30, 2009 as a result of the increase in the
valuation of the liability. See Note 12 to the Financial Statements.
In May
2008, the FASB issued FSB APB No. 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSB APB No. 14-1”), to clarify that convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants. The FSP
requires the issuer of certain convertible securities that may be settled in
cash on conversion to separately account for the liability and equity components
in a manner that will reflect the entity’s nonconvertible debt borrowing rate
when interest cost is recognized in subsequent periods. The Company’s
convertible debt instruments do not provide that the instruments may be settled
in cash and this FSP does not apply.
21
Results
of Operations
Twelve
Months Ended December 31, 2008 and 2007
Revenue.
None.
General and Administrative
expense. General and administrative expense consists of, management
salaries, professional fees, consulting fees, travel expense, administrative
fees and general office expenses.
General
and administrative expense increased to $1,316,000 for the year ended December
31, 2008 from $637,000 for the year ended December 31, 2007. General and
administrative expense increased primarily due to an increase of $120,000 in
stock based compensation expense, a $234,000 increase in legal fees and a
$336,000 increase in consulting fees including stock based consulting. The
increase in stock based compensation expense resulted from a significant
increase the number of stock options that were granted in 2008 and expensed in
accordance with SFAS 123 R. Legal fees increased primarily due to
expenses related to the preparation and filing of our Form S-1 and amendments as
well as general corporate legal expense in connection with issuance of stock
certificates and warrants, creation of the 2008 Equity Incentive Plan and other
general corporate legal work. Consulting fees, including stock based consulting
expense, increased primarily in connection with our preparation for making
application for FDA clearance to sell our FMS unit. We anticipate
that general and administrative expense will increase in absolute dollars in
2009 as we incur increased costs associated with a growing company, of adding
personnel, paying market rate salaries, proceeding from the development phase to
the operating phase, and operating as a public company.
Operations
expense. Operations expense primarily consists of expenses related to
product development and prototyping and testing in the company’s current
stage.
Operations
expense, including product development expense, increased to $321,000 in the
year ended December 31, 2008 compared to $1,400 in the year ended December 31,
2007 as the Company aggressively worked on developing the FMS for FDA clearance
and commercial sale in 2009. Salaries and stock based compensation
grew to $131,000 in 2008 compared to no expense in 2007 and product development
expense grew to $183,000 in 2008 compared to $1,400 in 2007.
Sales
and Marketing expense. Sales and marketing expense consists of expenses required
to sell products through independent reps, attendance at trades shows, product
literature and other sales and marketing activities.
Sales
and marketing expenses grew to $36,000 in the year ended December 31, 2008
compared to $13,000 in the year ended December 31, 2007 as a result of an
increase of $25,000 in salaries and stock based compensation offset, in part, by
a reduction of $4,500 in business meeting expense. On February 1,
2009 the Company also hired a Vice President of Sales and Marketing and began
purchasing marketing literature and attending trade shows in anticipation of
receiving clearance from the FDA, which the Company received on April 1,
2009, to begin commercial sale of the Streamway™ Fluid Management
System. Consequently, the Company expects sales and marketing
expenses in 2009 to exceed, by a significant amount, the expenses incurred in
2008.
Interest expense. Interest
expense decreased to $89,000 in the year ended December 31, 2008 from $101,000
in the year ended December 31, 2007 primarily due to a reduction in the
amortization of debt discount as additional interest, using the interest method
of amortization related to the value assigned to the warrants issued in
connection with debt incurred in 2007.
Six
months ended June 30, 2009 and 2008
Revenue. The Company recorded
revenue of $15,737 during the six-month period ended June 30, 2009 compared to
$0 in the six-month period ended June 30, 2008 as the Company received its first
order for 4 FMS units and a case of cleaning solution kits from a hospital in
Texas and shipped the first FMS unit and the cleaning solution kits in June
2009. The revenue was approximately $14,000 for the FMS unit, approximately
$1,000 for the cleaning solution kits and $750 for installation. The
remaining 3 FMS units and additional cleaning solution kits are expected to be
shipped during the third and fourth quarters of
2009.
Cost of sales. Cost
of sales was $7,450 for the six months ended June 30, 2009 and $0 for the six
months ended June 30, 2008 as there were no sales in the 2008
period. The gross profit margin was approximately 53% for both the
hardware and the cleaning solution kits in the six months ended June 30, 2009
but should increase over time as volume purchasing discounts on both the
equipment and the cleaning solution begin to take effect.
22
General and Administrative
expense . General and administrative expense primarily consists of,
management salaries, professional fees, consulting fees, travel expense,
administrative fees and general office expenses.
General
and Administrative (G&A) expenses increased to $872,000 in the six months
ended June 30, 2009 from $409,000 in the six months ended June 30, 2008
primarily due to an accrual of $318,700 for a registration payment arrangement,
a $60,000 increase in legal and audit fees, a $12,000 increase in board of
director fees, an $18,000 increase in rent and utilities and a $221,000 increase
in consulting fees. This was offset, in part, by a $90,000 decrease in salaries
and a $221,000 decrease in stock based compensation expense. The increase in
legal and audit fees was primarily related to accounting and legal work in
connection with amendments to the Form S-1. The increase in
consulting fees was primarily related to finalization of the application for FDA
clearance and consulting work related to the Form S-1 amendments and general
corporate work. Salaries declined as a result of the departure of our former
Chief Financial Officer and former Chief Executive Officer. The
decrease in stock-based compensation expense was due to significant stock option
grants in 2008 compared to relatively few in the 2009 period. Total G&A
expenses are expected to increase due to increased insurance premiums and audit
fees, resulting from becoming a public company, but otherwise remain
relatively constant, except
for the registration payment expense incurred in June 2009, over the next
several quarters.
Operations
expense. Operations expense primarily consists of expenses related to
product development and prototyping and testing in the company’s current stage.
Operations
expense increased to $195,000 in the six months ended June 30, 2009 from $91,000
in the six months ended June 30, 2008 due to a $69,000 increase in salaries, a
$32,000 increase in consulting expense and a $40,000 increase in testing expense
offset, in part, by a reduction of $64,000 in product development expense. The
increase in salaries is the result of hiring an Executive Vice President of
Operations (promoted to Chief Operating Officer in 2009) in June,
2008. The increases in consulting expense and testing expense were
directly related to finalizing the product design and preparing for the
application to the FDA for 510k clearance. Consulting and testing
expenses are expected to decline in the next several quarters but other expenses
related to ramping up production, establishing a shipping and receiving function
and other expenses necessary to support sales growth will likely more than
offset the decreases in consulting and testing.
Sales
and Marketing expense. Sales and marketing expense consists of expenses required
to sell products through independent reps, attendance at trades shows, product
literature and other sales and marketing activities.
Sales
and marketing expenses increased to $209,000 in the six months ended June 30,
2009 compared to $0 in the six months ended June 30, 2008 primarily due to a
$93,000 increase in salaries and benefits, an $16,000 increase in stock based
compensation, a $58,000 increase in trade show expense and marketing supplies, a
$14,000 increase in travel expenses and a $17,000 increase in web development,
promotion and consulting. Sales and marketing expense is expected to grow
significantly in the next several quarters as we ramp up our sales and marketing
activities to establish our products in the marketplace and we commence the
payment of commissions to independent sales reps.
Interest expense .
Interest
expense, including loss on revaluation of warrants, increased to $476,000 in the
six months ended June 30, 2009 from $7,000 in the six months ended June 30,
2008. The increase in expense was primarily due to the $436,000 loss on
valuation of equity-linked instruments (increase in the liability) resulting
from adoption of EITF 07-5 in January 2009. The valuation of the warrants
liability is likely to continue to increase over the next several quarters as
EITF 07-5 requires a revaluation of the liability on every balance sheet date
and, provided the market value of the underlying stock continues to increase,
the Black-Scholes valuation formula will produce a higher valuation until such
time that the warrants are either exercised or expire.
Liquidity
and Capital Resources
We had
a cash balance of $463,838 as of December 31, 2008 and $235,227 as of June 30,
2009. Since our inception, we have incurred significant losses. As of December
31, 2008 we had an accumulated deficit of $3,144,000, and as of June 30, 2009
our accumulated deficit was $4,880,000. We have not achieved profitability and
anticipate that we will continue to incur net losses for the foreseeable future.
We expect that our operations expense, including product development expense,
sales and marketing and general and administrative expenses will increase, and
as a result we will need to generate significant revenue to achieve
profitability.
23
The
table below summarizes our currently known capital requirements and amounts
needed to satisfy our outstanding obligations. The following amounts do not
include the outstanding balances on our long term debt, long term convertible
debt, current portions of long term debt and current portions of convertible
debt and convertible debenture. Those amounts are shown on page
27 and may not be payable in cash because it is the intention of the
parties, except for the bank, to convert their debt into common stock upon
commencement of trading on the OTCBB.
Capital
Requirements
Expense Item
|
Amount
|
Total
|
||||||
Expected
expenses in connection with our current offering
|
225,200 | |||||||
SEC
registration fee
|
200 | |||||||
Printing
fees
|
30,000 | |||||||
Legal
fees and expenses
|
80,000 | |||||||
Accounting
fees and expenses
|
60,000 | |||||||
Miscellaneous
|
55,000 | |||||||
Financing
fees owed in connection with our current offering (1)
|
0 | |||||||
Accounts
payable:
|
640,000 | |||||||
Marshall
C. Ryan
|
100,000 | |||||||
Richardson
& Patel LLP
|
200,000 | |||||||
Complete
Automation
|
25,000 | |||||||
TriVirix
|
22,000 | |||||||
Evergreen
Medical
|
20,000 | |||||||
Olsen
Thielen, CPAs
|
35,000 | |||||||
Larkin
Hoffman
|
87,000 | |||||||
Various
accounts payable
|
121,000 | |||||||
Andcor
Companies, Inc.
|
50,000 | |||||||
Sales,
marketing, administrative, operations and other operating
expenses
|
1,200,000 | |||||||
Market
expansion to Europe and Pacific Rim
|
500,000 | |||||||
Personnel
additions
|
200,000 | |||||||
Miscellaneous
|
100,000 | |||||||
Total
|
$ | 2,885,200 |
(1)
|
All fees were withheld by the
broker of our current
offering.
|
There
is no certainty that access to needed capital will be successful. We have not
depended on the future exercise of outstanding warrants to provide additional
funding.
To
date, our operations have been funded through a bank loan in the original amount
of $41,400, private party loans totaling $10,000, convertible debt in the
amounts of $170,000 and $100,000 and equity investments totaling approximately
$2,177,000. As of December 31, 2008, we had accounts payable of $497,029 and
accrued liabilities of $93,339, and as of June 30, 2009 we had accounts payable
of $649,445 and accrued liabilities of $593,343.
24
Years
Ended December 31, 2008 and 2007
Net
cash used in operating activities was $901,000 for 2008 as compared with net
cash used of $225,000 for 2007. The increased use of cash was due primarily to
an increase in net loss to $1,763,000 offset, in part, by an increase of
$290,000 in accounts payable and the net loss including $394,000 in stock based
compensation and consulting fees and amortization of debt discount that did not
consume cash.
Cash
flows used in investing activities was $42,000 for 2008 as compared to cash used
in investing activities of $46,000 for 2007. The amount in both years primarily
represented investments in intellectual property and also included $12,258 in
purchases of furniture in 2008.
Net
cash provided by financing activities was $1,402,000 for 2008 as compared to net
cash provided by financing activities of $273,000 for 2007. The increase in 2008
was primarily the result of selling approximately $1.6 million in stock in 2008,
offset by a $28,125 reduction in debt.
Six
months ended June 30, 2009 and 2008
Net
cash used in operating activities was $707,000 in the six months ended June 30,
2009 compared to $410,000 net cash used in operating activities in the six
months ended June, 2008. The additional cash used in the 2009 period was
primarily due to the $1,742,000 loss compared to a loss of $508,000 in the 2008
period offset, in part, by the $497,000 in loss on valuation of equity-linked
instruments and $82,000 in stock based compensation and consulting fees that did
not consume cash. Additionally, accounts payable increased by $152,000 in the
2009 period compared to $44,000 in the 2008 period and accrued expenses
increased by $288,000 in the 2009 period compared to $64,000 in
2008.
Net
cash used in investing activities was $0 in the 2009 period compared to $6,000
used in the 2008 period. The company will likely increase its cash
used in investing activities in the next several quarters as we prepare to
support the expected growth in sales.
Net
cash provided by financing activities was $478,000 in the 2009 period compared
to $761,000 in the 2008 period. The Company expects to show cash provided by
financing activities in the next few quarters as we raised $525,000 in April,
May, June and August 2009 and plan to raise up to $3 million by December 31,
2009.
Based
on our current operating plan we believe that we have sufficient cash, cash
equivalents and short-term investment balances to last approximately through the
third quarter of 2009, during which time an additional financing of $3 million
is anticipated. The Company expects the transaction, if successful, to close by
December 31, 2009 with an early closing of up to $500,000 by September 30, 2009.
While holders of our warrants could exercise and provide cash to us during that
time frame, we are not depending on that in our fund raising
efforts.
Management
hired Newbridge Securities Corporation, an investment banker, in February 2009,
to raise an additional $3-$5 million in new equity by December 31, 2009 with an
interim closing of up to $500,000 expected by September 30, 2009. Although our
ability to raise this new capital is in substantial doubt we have received
$525,000 as of August 31, 2009 and our April 1, 2009 510(k) clearance from the
FDA to authorize us to market and sell our FMS products is being received very
positively. If the Company is successful in raising at least $3 million in new
equity we will have sufficient capital to operate our business and execute our
business plan for at least the next 12 months. If the Company raises the
additional capital by issuing additional equity securities its shareholders
could experience substantial dilution.
The funds
remaining from our October 2008 offering have allowed us to complete the testing
and certification of our FMS unit and have now submitted our application and
received, on April 1, 2009, final FDA clearance. We are confident that our
existing funds will also be sufficient to pay for normal operating expenses as
we await additional funding. We have doubts about raising capital
because of our early stage position and history of losses. We also note the
recent economic downturn which has made the overall market nervous about
investing.
25
Items
such as delinquent convertible debt, totaling $170,000, would be difficult to
fully satisfy with the remaining proceeds of the past financings. We have been
in contact with the holders of these convertible notes. These
holders, while legally able to demand payments, have been willing to work with
us regarding the satisfaction of their convertible debts, which could be either
from conversion to our common stock or through repayment of the debt from funds
raised in future financings. This note will automatically convert to
620,095 common shares upon the effective date of this registration statement.
Any formal payment demand by these convertible note holders prior to our
securing additional financing would create a severe liquidity issue for the
Company. Such note holders could bring a cause of action against the Company to
compel repayment of the debt obligations which could deplete the Company’s cash
position. Because these note holders hold a secured interest in all our assets,
they could seize our assets in such cause of action.
Certain
amounts of payroll for three current and former officers were unpaid as of June
2008 and the individuals agreed to accept a reduction in the cash to ultimately
be paid in exchange for future cash payments and new stock options. The
individuals have agreed to be paid at such time as the Company obtains at least
another $3 million of additional equity financing, with the exception of
Lawrence Gadbaw, our Chairman, who began receiving $2,000 per month in October
2008 in repayment of his $46,000 accrued salary liability in addition to a
future cash payment of $25,000 contingent on raising $3 million. After another
$3 million of additional financing has been obtained, the amount of accrued
expense items due to management and a board member that will be paid from the
proceeds of such financing including the balance remaining, if any, under Mr.
Gadbaw’s payment arrangement.
We
believe that we have sufficient funds to satisfy our obligations through the
third quarter of 2009. We will need additional funds to continue to satisfy such
obligations beyond that time period.
Our
operating plan assumes that we will achieve certain levels of operating costs
and expenses, as to which there can be no assurance that we will be able to
achieve. This plan is completely dependent on our ability to raise additional
capital through future financings. In addition, if events or circumstances occur
such that we are unable to meet our operating plan as expected, we will be
required to seek additional capital, pursue other strategic opportunities, or we
will be forced to reduce the level of expenditures, which could have a material
adverse effect on our ability to achieve our intended business objectives and to
continue as a going concern. Even if we achieve our operating plan, we will be
required to seek additional financing or strategic investments.
The
current economic turmoil has a significant impact on the overall funding
environment, and we cannot assure you that our opportunity will be positively
received by potential investors. We are not planning on any significant capital
or equipment investments and we will only have a few human resource additions
over the next 12 months. A significant amount of funds will be utilized to
launch our product into the market. With the expenses associated with FDA
clearance having already been incurred, and with the product development
primarily complete, future funds, if any, will be used primarily to launch our
product into the market.
There
can be no assurance that any additional financing will be available on
acceptable terms, or at all. Furthermore, any equity financing likely will
result in dilution to existing shareholders and any debt financing likely will
include restrictive covenants.
We expect
to continue to depend upon outside financing to sustain our operations for at
least the next 12 months. Our ability to arrange financing from third parties
will depend upon our operating performance and market conditions. Our inability
to raise additional working capital at all or to raise it in a timely manner
would negatively impact our ability to fund our operations, to generate
revenues, and to otherwise execute our business plan, leading to the reduction
or suspension of our operations and ultimately forcing us to go out of business.
Should this occur, the value of any investment in our securities could be
adversely affected, and an investor could lose a portion of or even lose their
entire investment.
26
Commitments
and Contingencies
Effective
December 31, 2008, we had notes payable, loans and debentures to several
individuals and entities, including a bank loan of $38,180; $10,000 due to
Andcor in connection with a convertible loan; $4,000 of officer and director
loans; $100,000 due to two private investors in connection with a convertible
note; and $170,000 of a convertible bridge loan with seven
individuals.
The
Company has a convertible debenture with Andcor Companies, Inc. (“Andcor”) of
$10,000 with interest at 10.25% that matured in 2007. The debenture is
convertible to shares of the Company’s common stock at the lower of $0.90 per
share or the price per share at any equity financing is completed (currently
re-set to $.35 per share). The convertible debenture has not yet been paid, and
it is currently in default. While Andcor could demand payment on this note at
any time, they have verbally expressed an interest in working with us to wait
until additional funds are secured by the Company. Further, Andcor
has left open the possibility of converting the note into shares of the
Company’s common stock, which would require no cash outlay.
Our
contractual obligations consisted of the following as of December 31,
2008.
Payment Due by Period as of December 31
|
||||||||||||||||||||
Total
|
Less than 1
Year
|
1-3 Years
|
4-5 Years
|
After 5
Years
|
||||||||||||||||
Long
Term Debt
|
$ | 322,183 | $ | 197,620 | $ | 24,563 | $ | 100,000 | — | |||||||||||
Operating
Leases
|
150,000 | 35,000 | 59,000 | 56,000 | — | |||||||||||||||
Capital
Leases
|
— | — | — | — | — | |||||||||||||||
Total
Contractual Cash Obligations
|
$ | 472,183 | $ | 232,620 | $ | 83,563 | $ | 156,000 | — |
Long-term
debt is as follows:
December 31,
|
June
30,
|
|||||||||||
2008
|
2007
|
2009
|
||||||||||
(Unaudited)
|
||||||||||||
Notes
payable to seven individuals due April 2008 including 8% fixed interest
and are now delinquent. The 2007 balance is shown net of a $30,899
debt discount based upon the Black-Scholes valuation assigned to the
warrants issued in connection with the debt. The notes are convertible
into 620,095 shares of the Company’s common stock and automatically
convert at the effective date of this registration statement.
|
$
|
170,000
|
$
|
139,101
|
$
|
170,000
|
||||||
Note
payable to bank in monthly installments of $1,275/including variable
interest at 2% above the prevailing prime rate (3.25% at December 31,
2008) to August 2011 when the remaining balance is payable. The note is
personally guaranteed by former executives of the Company.
|
38,183
|
48,308
|
31,486
|
|||||||||
Note
payable to NWBDC with interest only payments at 8% to December 2008 when
the remaining balance is payable. The note was personally guaranteed by
former executives of the Company. The note was paid in full on June 24,
2008.
|
—
|
18,000
|
—
|
|||||||||
Notes
payable to two individuals, net of discounts of $26,157, $34,205 and
$21,631 with interest only payments at 12% to March 2012 when the
remaining balance is payable. The notes are convertible into 285,715
shares of stock in the Company at $.35 per share.
|
73,843
|
65,794
|
78,369
|
|||||||||
Notes
payable to four shareholders of the Company that are overdue. The notes
are convertible into 11,429 shares of stock in the Company at $.35 per
share.
|
4,000
|
4,000
|
4,000
|
|||||||||
Total
|
286,026
|
275,203
|
283,855
|
|||||||||
Less
amount due within one year
|
187,620
|
172,901
|
187,620
|
|||||||||
Long-Term
Debt
|
$
|
98,406
|
$
|
102,302
|
$
|
96,235
|
Cash
payments for interest were $5,175 for the year ended December 31, 2008 and
$5,071 for 2007 and $950 for the six months ended June 30, 2009. The notes
payable of $10,000 (discussed in Note 6 to the financial statements), $170,000
and $4,000 (shown in the table above) are delinquent and could be called by the
holders, putting additional strains on our liquidity. The note for $170,000
contains provisions for a one-time penalty of $25,000 if this registration
statement is not filed within 120 days of August 31, 2008 and $5,000 per 30 day
period, after February 27, 2009, until the registration statement is declared
effective by the SEC. The total amount accrued as additional interest
expense at June 30, 2009 is $20,500. There is no maximum penalty. In
addition, beginning March 2009 the Company is obligated to issue additional
shares to the investors who purchased units in October 2008 financing equal to
2% of the units sold for each month until the registration is declared
effective. This represents 91,057 shares per month to a maximum of
728,458 shares, or 16% of the total units sold. At June 30, 2009 the Company
estimates that its ultimate obligation will be to issue 637,401 shares with a
value of $318,701 at $.50 per share. Payment of the accrued interest
and penalties will occur upon receipt of a significant portion of the $3 million
funding subsequent to our listing on the OTC Bulletin Board and issuance of the
additional shares will occur within 30 days of the earlier of the effective
registration of our shares or October 31, 2009 when the maximum is
reached.
27
In
July 2007, we entered into a restructuring agreement, in connection with our
October 2008 financing, whereby in the event that we failed to obtain FDA
clearance by the end of August 2009, the majority-in-interest of investors (“the
Investors”) through our October 2008 offering would have the right to cause the
Company to make significant restructuring changes. The Company received final
FDA clearance on April 1, 2009 and such restructuring will be
avoided.
In
2007, Mr. Davidson, Mr. Gadbaw and Mr. Rice each received less in base salary
than they were entitled to under their employment agreements due to lack of
funds. In December 2007, the Company reduced accrued payroll liabilities by a
total of $346,714. This total included waived compensation from Mr. Davidson in
the amount of $90,000, waived compensation from Mr. Rice in the amount of
$125,000 and waived compensation from Mr. Gadbaw in the amount of $138,500. In
addition, Mr. Davidson waived $58,350, Mr. Rice waived $40,725 and Mr. Gadbaw
waived $30,610 in underpaid compensation from 2008. In exchange, per an
agreement in June 2008, Mr. Davidson will be granted a one-time cash payment of
$23,000 as well as an option to purchase 80,000 shares of common stock at $.35
per share and Mr. Rice will be granted a one-time cash payment of $46,000 as
well as an option to purchase 160,000 shares of common stock at $.35 per share
when the Company raises an additional $3 million of funding subsequent to the
financing completed in October 2008. Mr. Gadbaw will be granted a one-time cash
payment of $25,000 and an option to purchase 160,000 shares of common stock at
$.35 per share upon the Company raising an additional $3 million and is
currently receiving $2,000 per month until a total of $46,000 of accrued salary
liability is paid . The balance remaining, if any, of the amount due Mr. Gadbaw
will also be paid upon the Company raising an additional $3 million. The
Company’s agreement to pay the cash payments and grant the stock options is
solely dependent on raising the $3 million and does not require the
participation of the three individuals in the fund raising
activity.
Waived
salaries in the amount of $90,000 for Mr. Davidson, $125,000 for Mr. Rice and
$138,500 for Mr. Gadbaw were treated as a capital contribution in 2007 in
accordance with Staff Accounting Bulletin (SAB) 79. The years to which the
waived salaries originated were $102,700 for 2007 and $244,000 for 2006 and
prior years. In addition, the company recorded a capital contribution in the
amount of $129,685 in 2008 representing $58,350, $40,375 and $30,610 in waived
2008 salaries for Mr. Davidson, Mr. Rice and Mr. Gadbaw,
respectively.
The
obligation to grant stock options is being valued under FAS123(R) using the
Black-Scholes valuation model, 55-59% expected volatility, a zero percent
dividend rate and an expected life of 3.5 years for two options and 5 years for
the other option, taking into account the likely period of time the individuals
will exercise their options. The legal term of the options will be 5 years from
the date of the grant and 6 years, therefore, from the date of the obligation
because the obligation to grant the options contingent on a $3 million funding
occurred in June 2008 and we estimated the $3 million funding will occur by July
2009.
As of
December 31, 2007, $115,000 remained in accrued expenses for the above expenses
and as of December 31, 2008 $40,000 remained in accounts payable for the
obligation to Mr. Gadbaw’s and $94,000 remained in accrued expenses for the
obligations to Mr. Rice, Mr. Gadbaw and Mr. Davidson.
28
Amortization
of Intangible Assets
Intangible
assets currently consist solely of patent costs. These assets are not subject to
amortization until the property patented is in production. The assets are
reviewed for impairment annually, and impairment losses, if any, are charged to
operations when identified. No impairment losses have been identified by
management to date.
Income
Tax Expense
The
Company provides for deferred taxes using the asset and liability approach.
Under this method, deferred tax assets and liabilities are recognized for future
tax consequences attributable to operating loss and tax credit carry-forwards,
as well as differences between the carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The major temporary differences are net operating losses.
Due to historical losses on the accrual basis, the related tax assets are not
recorded in our financial statements.
Stock
Options and Warrants
Our
2008 Equity Incentive Plan allows for the issuance of incentive and
non-qualified stock options and other forms of stock-based compensation to our
employees, directors and consultants, subject to the restrictions provided in
the plan. The exercise price for each stock option is determined by our board of
directors, or a committee designated by our board of directors, as are the
vesting requirements, which currently range from immediate to three years.
Options granted have terms varying from three to ten
years.
Effective
January 1, 2006, the Company adopted the requirements of SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123(R)). As specified in SFAS 123R, we value stock
option awards using the “grant date fair value” method and expense them on a
straight-line basis over the service period, generally the vesting period. We
opted for early adoption of the provisions of SFAS 123R. The provisions of SFAS
123R are applicable to stock options awarded beginning in 2005 and we are
recognizing compensation expense for options granted in 2005 and
thereafter. Options and warrants granted to consultants for services
rendered are similarly valued and expensed under SFAS 123 and other
guidance.
We
have elected to value the options and warrants using the Black-Scholes-Merton
option valuation model. The fair value of these options was calculated using a
risk-free interest rate of 1.2% to 4.00%, an expected life of 2 to 7.5 years, an
expected volatility ranging from 53-66%% and a dividend rate of 0%. Stock based
compensation and consulting expenses recognized in our financial statements was
$355,000 and $74,000 for the years ended 2008 and 2007,
respectively.
A
summary of stock option and warrant activity for the years ended December 31,
2008 and 2007 is presented below:
Stock Options (1)
|
Warrants (1)
|
|||||||||||||||
Number of
Shares
|
Average
Exercise
Price
|
Number of
Shares
|
Average
Exercise
Price
|
|||||||||||||
Outstanding
at December 31, 2005
|
17,956 | $ | 1.67 | 20,950 | $ | 2.62 | ||||||||||
Issued
|
23,942 | 1.67 | 71,826 | 0.85 | ||||||||||||
Outstanding
at December 31, 2006
|
41,898 | $ | 1.67 | 92,776 | $ | 1.25 | ||||||||||
Issued
|
5,985 | 1.67 | 28,502 | 0.35 | ||||||||||||
Outstanding
at December 31, 2007
|
47,882 | $ | 1.67 | 121,278 | $ | 1.04 | ||||||||||
Issued
|
1,243,293 | 0.20 | 5,075,204 | 0.45 | ||||||||||||
Expired
|
(11,971 | ) | 3.76 | |||||||||||||
Outstanding
at December 31, 2008
|
1,291,174 | $ | 0.26 | 5,184,511 | 0.45 |
(1)
Adjusted for the reverse stock splits in total at June 6, 2008 and October 20,
2008, of 1-for-1.670705.
29
At
December, 2008, 651,174 stock options were fully vested and exercisable and
5,606,606 warrants were fully vested and exercisable. At December 31, 2007,
23,942 stock options were fully vested and exercisable and 121,278 warrants were
fully vested and exercisable. At June 30, 2009 881,174 options and 6,639,606
warrants were fully vested and exercisable.
A
summary of the status of options and warrants outstanding at December 31, 2007,
December 31, 2008 and June 30, 2009 is presented below:
Range of Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Life
|
||||||
At
December 31, 2007:
|
||||||||
Options:
|
||||||||
$0.35
|
11,970
|
4.37
|
||||||
$1.67
|
41,898
|
3.31
|
||||||
Warrants:
|
||||||||
$0.02
|
35,913
|
5.45
|
||||||
$0.35
|
28,502
|
4.17
|
||||||
$1.67
|
44,892
|
3.69
|
||||||
$3.34
|
11,971
|
0.79
|
||||||
At
December 31, 2008:
|
||||||||
Options:
|
||||||||
$0.01
|
543,292
|
9.43
|
||||||
$0.35
|
700,000
|
4.29
|
||||||
$1.67
|
47,882
|
2.50
|
||||||
Warrants:
|
||||||||
$0.02
|
71,826
|
5.45
|
||||||
$0.35
|
178,502
|
4.29
|
||||||
$0.46
|
4,889,291
|
2.57
|
||||||
$1.67
|
44,892
|
2.01
|
||||||
At
June 30, 2009:
|
||||||||
Options:
|
||||||||
$0.01
|
543,292
|
8.94
|
||||||
$0.35
|
875,000
|
4.12
|
||||||
$1.67
|
47,882
|
2.26
|
||||||
Warrants:
|
||||||||
$0.02
|
71,826
|
4.95
|
||||||
$0.35
|
798,597
|
3.29
|
||||||
$0.45
|
4,954,291
|
2.05
|
||||||
$0.65
|
970,000
|
2.83
|
||||||
$1.67
|
44,892
|
2.19
|
||||||
Stock
options and warrants expire on various dates from August 2010 to June
2018.
Based
upon an agreement with investors in the October 2008 financing we agreed to
limit our post-financing ownership percentage and that we would cause our common
stock to be reverse split such that 1,920,000 shares of our common stock on a
fully-diluted basis would be outstanding among holder, existing prior to the new
investment (such shareholders also referred to as the “original shareholders” or
the “Founders”) and July 2007 bridge loans. Since the total of our fully-diluted
shares of common stock was greater than 1,920,000, our board of directors
approved a reverse stock split of 1-for-1.2545. After this split was approved,
additional options and warrants were identified, requiring a second reverse
stock split in order to reach the 1,920,000. The second reverse stock split on
the reduced 1-for-1.2545 balance was determined to be 1-for-1.33176963. Taken
together, if only one reverse stock were performed, the number would have been a
reverse stock split of 1-for 1.670705.
30
On
June 6, 2008, our board of directors approved the first reverse stock split. The
authorized number of common stock of 20,000,000 was proportionately divided by
1.2545 to 15,942,607.
On
October 20, 2008, our board of directors approved a second reverse stock split.
The authorized number of common stock of 15,942,607 was proportionately divided
by 1.33177 to arrive at 11,970,994.
On
October 20, 2008, our board of directors also approved a resolution to increase
the number of authorized shares of our common stock from 11,970,994 to
40,000,000, which was approved by the Company’s shareholders holding a majority
of the shares entitled to vote thereon at a special meeting of shareholders held
on December 3, 2008.
The
table below reflects the effect of the reverse stock splits on our shares
outstanding.
Reverse
Stock Split Table
Number of Shares
|
Reverse
|
|||||||||||
Outstanding
|
Split Ratio
|
|||||||||||
Before
|
After
|
|||||||||||
As
of June 30, 2008:
|
||||||||||||
-
original shareholders
|
1,376,105 | (1) | 1,096,935 | 1.2545 | ||||||||
-
new investors, other
|
3,720,293 | 3,720,293 | ||||||||||
Total
|
5,096,398 | 4,817,228 | ||||||||||
As
of September 30, 2008:
|
||||||||||||
-
original shareholders
|
1,096,935 | 1,096,935 | ||||||||||
-
new investors, other
|
6,997,842 | 6,997,842 | ||||||||||
Total
|
8,094,237 | 8,094,237 | ||||||||||
As
of October 20, 2008:
|
||||||||||||
-
original shareholders
|
1,096,935 | 823,676 | 1.33177 | |||||||||
-
new investors, other
|
7,307,165 | 7,307,165 | ||||||||||
Total
|
8,403,560 | 8,130,841 | ||||||||||
As
of October 30, 2008 (closing date):
|
||||||||||||
-
original shareholders
|
823,676 | |||||||||||
-
new investors, other
|
7,307,165 | |||||||||||
Total
|
8,130,841 |
(1)
|
1,376,105 divided by 1.670705
equals 823,676.
|
Valuation
and accounting for options and warrants
The
Company determines the grant date fair value of options and warrants using a
Black-Scholes-Merton option valuation model based upon assumptions regarding
risk-free interest rate, expected dividend rate, volatility and estimated term.
For grants during 2008 we used a 2.0 to 4.5% risk-free interest rate, 0%
dividend rate, 53-66% volatility and estimated term of 2.5 to 7.5 years. Values
computed using these assumptions ranged from $.102 per share to $.336 per share.
Warrants or options awarded for services rendered are expensed over the period
of service (normally the vesting period) as compensation expense for employees
or an appropriate consulting expense category for awards to consultants and
directors. Warrants granted in connection with a common equity financing are
included in stockholders’ equity and warrants granted in connections with a debt
financing are treated as a debt discount and amortized using the interest method
as interest expense over the term of the debt. Please
refer to Note 3 to the Financial Statements for greater details of stock options
and warrants granted.
31
Other
Securities For Issuance Upon Certain Contingencies
In
2007, Mr. Davidson, Mr. Gadbaw and Mr. Rice each received less in base salary
than they were entitled to under their employment agreements due to lack of
funds. In December 2007, the Company reduced accrued payroll liabilities by a
total of $346,714 and treated it as a contribution to capital. This total
included waived compensation from Mr. Davidson in the amount of $90,000, waived
compensation from Mr. Rice in the amount of $125,000 and waived compensation
from Mr. Gadbaw in the amount of $138,500. In addition Mr. Davidson
waived $58,350 in underpaid compensation, Mr. Rice waived $40,725 and Mr. Gadbaw
waived $30,610 in underpaid compensation from 2008 which was treated as a
contribution to capital in 2008. In exchange, per an agreement in
June 2008, Mr. Davidson will be granted a one-time cash payment of $23,000 as
well as an option to purchase 80,000 shares of common stock at $.35 per share
and Mr. Rice will be granted a one-time cash payment of $46,000 as well as an
option to purchase 160,000 shares of common stock at $.35 per share when the
Company raises an additional $3 million of funding subsequent to the financing
completed in October 2008. Mr. Gadbaw will be granted a one-time cash payment of
$25,000 and an option to purchase 160,000 shares of common stock at $.35 per
share upon the Company raising an additional $3 million and is currently
receiving $2,000 per month until a total of $46,000 of accrued salary liability
is paid . The balance remaining, if any, of the amount due Mr. Gadbaw will also
be paid upon the Company raising an additional $3 million. The Company’s
agreement to pay the cash payments and grant the stock options is solely
dependent on raising the $3 million and does not require the participation of
the three individuals in the fund raising activity.
Waived
salaries in the amount of $90,000 for Mr. Davidson, $125,000 for Mr. Rice and
$138,500 for Mr. Gadbaw were treated as a capital contribution in 2007 in
accordance with Staff Accounting Bulletin (SAB) 79. The years to which the
waived salaries originated were $102,700 for 2007 and $244,000 for 2006 and
prior years. In addition, the company recorded a capital contribution in the
amount of $129,685 in 2008 representing $58,350, $40,375 and $30,610 in waived
2008 salaries for Mr. Davidson, Mr. Rice and Mr. Gadbaw,
respectively.
In
September 2002, an oral agreement was made with director Peter Morawetz whereby
he would provide sales, marketing and general administrative consulting to the
Company for a fee of $1,770 per month. The Company’s expectation at the time was
that the Company would have received equity financing to fund these payments but
the Company did not receive that funding. Pursuant to an oral
agreement with Mr. Morawetz the Company could defer payment of these amounts
until such date that they had cash to pay him. The Company accrued these fees
through August 2006 when Mr. Morawetz’s consulting services ended. On May 15,
2009 Mr. Morawetz and the Company reached agreement whereby he would waive
payment of his consulting fees, in the amount of $84,600, and accept a cash
payment of $30,000 and an option to buy 75,000 shares of common stock at $.35
per share upon the Company raising $3 million. Mr. Morawetz has no obligation to
participate in raising the funds. The debt forgiveness was treated as a capital
contribution, in accordance with SAB 79, because Mr. Morawetz is both a director
and a significant shareholder, and the $30,000 obligation and the Black-Scholes
value of the option were expensed in the second quarter of 2009.
On
June 16, 2008, we entered into an employment agreement with Chad Ruwe, Executive
Vice President of Operations, pursuant to which we granted an option to purchase
250,000 shares of common stock at an exercise price of $.35 per share with
50,000 shares vested immediately and increments of 50,000 shares vesting upon
achievement of certain milestones related to obtaining FDA clearance and
achieving commercial sales of our Streamway™ Fluid Management System. On April
1, 2009 Mr. Ruwe earned 100,000 shares, as a result of FDA application and final
clearance, and on
June 15, 2009 he earned an additional 50,000 shares based upon achieving our
first revenue producing FMS unit.
On
August 11, 2008, we entered into an employment agreement with David Dauwalter,
Director of Sales, pursuant to which we granted him an option to purchase 50,000
shares of common stock at an exercise price of $.35 per share with 10,000 shares
vested immediately and increments of 10,000 shares vesting upon reaching certain
performance milestones. On April 1, 2009 Mr. Dauwalter earned 10,000 shares, as
a result of FDA application and final clearance, and on June 15, 2009 he earned
an additional 10,000 shares based upon achieving our first revenue producing FMS
unit.
In August
and September 2008 we issued a warrant to purchase 75,000 shares of common stock
at $.35 per share to each of two human resource consulting firms, Andcor
Companies, Inc. and Taylor & Associates, Inc., as payment for their search
for candidates to fill the position of Vice President of Sales and Marketing for
our Company. Andcor and Taylor will not earn the warrants until the candidate is
hired and remains an employee for a period of at least 1 year. Ms. Kirsten
Doerfert was hired as VP of Sales and Marketing on February 1, 2009 and the
warrants will, therefore, vest on February 1, 2010 provided Ms. Doerfert
continues as an employee on that date.
32
On
October 20, 2008, we entered into an agreement with Gregory Sachs, a regulatory
consultant, pursuant to which the Company agreed to grant a warrant to purchase
up to 50,000 shares of our common stock contingent upon reaching certain
performance goals from April 1, 2009 to June 30, 2009. Mr. Sachs assisted the
Company in obtaining FDA 510(k) clearance. The purpose of the performance goal
provision was to help to ensure a timely clearance of the 510(k). Upon reaching
FDA clearance by April 1, 2009, Mr. Sachs received a warrant to purchase 50,000
shares of our common stock at $.46 per share.
Off-Balance
Sheet Arrangements
We do
not have any off-balance sheet transactions.
Dividend
Policy
We follow
a policy of retaining earnings, if any, to finance the expansion of our
business. We have not paid, and do not expect to declare or pay, cash dividends
in the foreseeable future.
33
Description
of Business
Overview
We are
an early-stage medical device company and our mission is to provide medical
facilities with an effective, efficient and affordable means to safely dispose
of contaminated fluids generated in the operating room and other similar medical
locations in a manner that protects hospital workers from exposure and is
environmentally friendly. We have obtained patent rights in the United States
and Europe to our Streamway ™ Fluid Management System (“FMS”) and will
distribute our products to medical facilities where bodily and irrigation fluids
produced during surgical procedures must be contained, measured, documented and
disposed. Our products minimize the exposure potential to the healthcare workers
who handle such fluids. Our goal is to create products that dramatically reduce
staff exposure without significant changes to established operative procedures,
historically a major stumbling block to innovation and product introduction. In
addition to simplifying the handling of these fluids, our technologies will
provide cost savings to facilities over the aggregate costs incurred today using
the traditional canister method of collection, neutralization and disposal. Our
products will be sold through independent distributors and manufacturers
representatives in the United States and Europe, initially, and eventually to
other areas of the world.
We
were founded as a Minnesota corporation in 2002 by Lawrence Gadbaw, who has over
40 years of experience in the medical devices field, Peter L. Morawetz, who has
extensive experience consulting with development-stage companies in the medical
and high technology field, Jay Nord, Jeffery K. Drogue and Gerald Rice. Our
address is 2060 Centre Pointe Boulevard, Suite 7, Mendota Heights, Minnesota
55120. Our telephone number is (651) 389-4800 and our website address is www.biodrainmedical.com
. The website is not a part of this registration statement.
We do
not currently file reports with the Securities and Exchange Commission (the
“SEC”). Upon the effectiveness of the registration statement of which this
prospectus forms a part, we will be subject to the information and periodic
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we intend to file periodic reports, proxy statements and other information with
the SEC. We will also register our common stock under the Exchange Act at that
time.
Private
Placement Financing
From
July 2007 through October 2008, we completed a private placement financing with
certain accredited and institutional investors (the “Investors”). We received
gross proceeds of approximately $1.6 million from this financing. Pursuant to
securities purchase agreements entered into with these Investors, we sold an
aggregate total of 4,552,862 units at a price per unit of $0.35, with each unit
consisting of one share of our common stock, par value $0.01 per share, and one
warrant to purchase one share of our common stock at $0.46 per share. We also
issued 547,285 shares valued at $.35 per share and warrants to purchase 136,429
shares at an exercise price of $.46 per share to “Finders” who provided services
in connection with the private placement. The warrants issued to Investors and
Finders are immediately exercisable (other then a provision that prohibits
exercise of warrants if it would cause the holder to hold more than 4.99% of the
outstanding shares of common stock).
The
issuance of our common stock and warrants in connection with the private
placement financing, including, upon exercise, the shares of our common stock
underlying the warrants, is intended to be exempt from registration under the
Securities Act of 1933, as amended, (the “Securities Act”) pursuant to Section
4(2) and such other available exemptions. As such, these issued securities may
not be offered or sold in the United States unless they are registered under the
Securities Act, or an exemption from the registration requirements of the
Securities Act is available. No registration statement covering these securities
has been filed with the SEC or with any state securities commission in respect
of the private placement financing.
In
connection with the private placement financing, we entered into a registration
rights agreement (the “Registration Rights Agreement”) with the Investors.
Pursuant to this agreement, we are required to register all the common stock and
shares underlying the warrants issued beneficially owned by the Investors to
permit the offer and re-sale from time to time of such securities. Additional
information regarding the Registration Rights Agreement is set forth below under
the section titled “Description of Securities”.
34
Industry
and Market Analysis
Infectious
and Biohazardous Waste Management
There
has long been recognition of the collective potential for ill effects to
healthcare workers from exposure to infectious/biohazardous materials. Federal
and state regulatory agencies have issued mandatory guidelines for the control
of such materials, in particular bloodborne pathogens. The medical device
industry has responded to this need by developing various products and
technologies to limit exposure or to alert workers to potential
exposure.
The
presence of infectious materials is most prevalent in the surgical suite and
post-operative care units where often, large amounts of bodily fluids, including
blood, bodily and irrigation fluids are continuously removed from the patient
during the surgical procedure. Surgical teams and post-operative care personnel
may be exposed to these potentially serious hazards during the procedure via
direct contact of blood materials or more indirectly via splash and
spray.
According
to the Occupational Safety and Health Administration (“OSHA”), workers in many
different occupations are at risk of exposure to bloodborne pathogens, including
Hepatitis B and C, and HIV/AIDS. First aid team members, housekeeping personnel
in some settings, nurses and other healthcare providers are examples of workers
who may be at risk of exposure.
In
1991, OSHA issued the Bloodborne Pathogens Standard to protect workers from this
risk. In 2001, in response to the Needlestick Safety and Prevention Act, OSHA
revised the Bloodborne Pathogens Standard. The revised standard clarifies (and
emphasizes) the need for employers to select safer needle devices and to involve
employees in identifying and choosing these devices. The revised standard also
calls for the use of “automated controls” as it pertains to the minimization of
healthcare exposure to bloodborne pathogens. Additionally, employers are
required to have an exposure control plan that includes universal precautions to
be observed to prevent contact with blood or other potentially infectious
materials, such as implementing work practice controls, requiring personal
protective equipment and regulating waste and waste containment. The exposure
control plan is required to be reviewed and updated annually to reflect new or
modified tasks and procedures which affect occupational exposure and to reflect
changes in technology that eliminate or reduce exposure to bloodborne
pathogens.
According
to the American Hospital Association’s (AHA) Beyond Health Care January 2009
update, America’s hospitals performed 27 million surgeries. In a January 2009
report, The National Center for Health Statistics (NCHS) of the Center for
Disease Control (CDC) cites that nearly 43% of the 35 million ambulatory
surgeries, or a total of 15 million surgeries, are performed in freestanding
ambulatory surgery centers. Therefore, the total US surgeries are
estimated at approximately 42 million per year.
The
majority of these procedures produce potentially infectious materials that must
be disposed of with the lowest possible risk of cross-contamination to
healthcare workers. Current standards of care allow for these fluids to be
retained in canisters, which are located in the operating room where they can be
monitored throughout the surgical procedure. Once the procedure is complete
these canisters and their contents are disposed of using a variety of methods
all of which include manual handling and result in a heightened risk to
healthcare workers for exposure to their contents. A Frost & Sullivan
research report released in 2003 estimates that the U.S. market for suction
canisters is $94 million and, driven by the aging population, is expected to
grow at .4% per year.
With an
average cost of $2.00 per canister, $2.00 per container of solidification powder
and an average disposal cost of $0.40/lb of infectious waste at approximately 8
lbs per canister as reported by Stanley Shelver in an Infection Control Today
article. Therefore, the estimated disposal cost to the hospitals who use
solidifiers is $7.20 per canister. This number increases significantly for
disposal of high capacity containers.
35
According
to an October 2005 article from Healthcare Purchasing entitled “Safe and
Cost-Effective Disposal of Infectious Fluid Waste,” infectious fluid waste
accounts for more than 75% of U.S. hospitals biohazard disposal costs. The
article also includes findings from a bulletin published by the University of
Minnesota’s Technical Assistance Program, “A vacuum system that uses reusable
canisters or empties directly into the sanitary sewer can help a facility cut
its infectious waste volume, and save money on labor, disposal and canister
purchase costs.” The Minnesota’s Technical Assistance Program bulletin also
estimated that, in a typical hospital, “...$75,000 would be saved annually in
suction canister purchase, management and disposal cost if a canister-free
vacuum system was installed.”
We
expect the hospital surgery market to continue to increase due to population
growth, the aging of the population, expansion of surgical procedures to new
areas, (for example, use of the endoscope, which requires more fluid management)
and new medical technology. According to the most recent American Institute of
Architects Consensus Construction Forecast, Health care is expected to be one of
the strongest performers in 2009 with projected growth of 3.6
percent.
There
are an estimated 40,000 operating rooms in the U.S. The hospital market has
typically been somewhat independent of the U.S. economy; therefore we believe
that our targeted market is not cyclical, and the demand for our products will
not be dependent on the state of the economy. We benefit by having our products
address the surgical procedure market of nearly 42 million procedures performed
in the country’s 40,000 operating rooms. .
Current
Techniques of Collecting Infectious Fluids
Typically,
during the course of a surgical procedure, fluids are continuously removed from
the site via wall suction and tubing and collected in large canisters (1,500 -
3,000 milliliters (ml) capacity or 1.5 – 3.0 liters) adjacent to the surgical
table.
These
canisters, made of glass or high impact plastic, have graduated markers on them
allowing the surgical team to make estimates of fluid loss in the patient both
intra-operatively as well as for post operative documentation. Fluid contents
are retained in the canisters until the procedure is completed, or until the
canister is full and needs to be removed. During the procedure the surgical team
routinely monitors fluid loss using the measurement calibrations on the canister
and by comparing these fluid volumes to quantities of saline fluid introduced to
provide irrigation of tissue for enhanced visualization and to prevent drying of
exposed tissues. After the procedure is completed the fluids contained in the
canisters are measured and a calculation of total blood loss is determined. This
is done to ensure no excess fluids of any type remain within the body cavity or
that excessive blood loss has occurred, both circumstances that may place the
patient at an increased risk post-operatively.
Once
total blood loss has been calculated, the healthcare personnel must dispose of
the fluids. This can be done by manually transporting the fluids from the
operating room to a waste station and directly pouring the material into a sink
that drains to the sanitary sewer where it is subsequently treated by the local
waste management facility, a process that exposes the healthcare worker to the
most risk for direct contact or splash exposure. Once emptied these canisters
are placed in large, red pigmented, trash bags and disposed of as infectious
waste - a process commonly referred to as “red-bagging.”
Alternatively,
the canisters may be opened in the operating room and a gel-forming chemical
powder is poured into the canister, rendering the material gelatinous. These
gelled canisters are then red-bagged in their entirety and removed to a
biohazardous/infectious holding area for disposal. In larger facilities the
canisters, whether pre-treated with gel or not, are often removed to large carts
and transported to a separate special handling area where they are processed and
prepared for disposal. Material that has been red-bagged is disposed of
separately, and more expensively, from other medical and non-medical waste by
companies specializing in that method of disposal.
36
Although
all of these protection and disposal techniques are helpful, they represent a
partial solution to the problem and fall short of providing adequate protection
for the surgical team and other workers exposed to infectious waste. A major
spill of fluid from a canister, whether by direct contact as a result of leakage
or breakage, splash associated with the opening of the canister lid to add gel,
while pouring liquid contents into a hopper, or during the disposal process, is
cause for concern of acute exposure to human blood components–one of the most
serious risks any worker faces in the performance of their job. Once a spill
occurs, the entire area must be cleaned and disinfected and the exposed worker
faces a potential of infection from bloodborne pathogens. These pathogens
include, but are not limited to, HIV, HPV, and other infectious agents. Given
the current legal liability environment the hospital, unable to identify at-risk
patients due to concerns over patient rights and confidentiality, must treat
every exposure incident as a potentially infectious incident and treat the
exposed employee according to a specific protocol that is both costly to the
facility and stressful to the affected employee and their co-workers. In cases
of possible exposure to communicable disease the employee could be placed on
paid administrative leave, frequently involving worker’s compensation, and
additional workers must be assigned to cover the affected employee’s
responsibilities. The facility bears the cost of both the loss of the affected
worker and the replacement healthcare worker in addition to any ongoing heath
screening and testing of the affected worker to confirm if any disease has been
contracted from the exposure incident. Employee morale issues also weigh heavily
on staff and administration when a healthcare worker suffers a potentially
serious exposure to bloodborne pathogens.
Canisters
are the most prevalent means of collecting and disposing of infectious fluids in
hospitals today. Traditional, non-powered canisters and related suction and
fluid disposable products are exempt and do not require FDA clearance. Our
management believes that our virtually hands free technology will (a)
significantly reduce the risk of healthcare worker exposure to these infectious
fluids by replacing canisters, (b) further reduce the risk of worker exposure
when compared to powered canister technology that requires transport to and from
the operating room, (c) reduce the cost per procedure for handling these fluids,
and (c) enhance the surgical team’s ability to collect data to accurately assess
the patient’s status during and after procedures.
In
addition to the traditional canister method of waste fluid disposal, several new
powered medical devices have been developed which address some of the
deficiencies described above. MD Technologies, Inc., DeRoyal (formerly
Waterstone), Dornoch Medical Systems, Inc. and Stryker Instruments have all
developed systems that provide for disposal into the sanitary sewer without
pouring the infectious fluids directly through a hopper disposal or using
expensive gel powders and most are sold with 510(K) concurrence from the FDA.
Cardinal Health, Inc. has received 510(K) concurrence to market a similar device
that they have recently begun advertising. Most of them continue to
utilize some variant on the existing canister technology, and while not directly
addressing the canister, most have been successful in eliminating the need for
expensive gel and its associated handling and disposal costs.
Our
existing competitors that already have products on the market have a clear
competitive advantage in terms of brand recognition and market exposure. In
addition, the aforementioned companies have extensive marketing and development
budgets that could overpower an early-stage company like ours. Information
obtained by the Company from surgical clinicians during interviews indicates
that Stryker Instruments has the dominant market share position. Cardinal
Health, Inc., though having FDA concurrence, has not yet made significant sales
into the market place. These clinicians have also indicated that the competitive
devices are used in select procedures and often in some, but not all, surgical
rooms.
37
Products
The
Fluid Management System (“FMS”)
The
BioDrain Streamway ™ FMS, a fluid collection and measurement system, addresses
the need for a simple, safe, virtually hands-free, touch-screen
computer-controlled, method of removing, retaining, calculating fluid loss and
disposing of fluid waste during operative procedures. The FMS would replace the
manual process of collecting fluids in canisters and transporting and dumping in
sinks outside of the operating room that is still being used by many hospitals
and surgical centers. The manual process involving canisters requires that the
operating room personnel open the canisters that contain waste fluid, often
several liters, at the end of the surgical procedure and either add a
solidifying agent or empty the canisters in the hospital drain system. Some
facilities require that used canisters be cleaned by staff and reused. It is
during these processes that there is increased potential for contact with the
waste fluid through splashing or spills. The FMS eliminates the use of canisters
and these cleaning and disposal steps by collecting the waste fluid in the
internal collection chamber and automatically disposing of the fluid with no
handling by personnel. Near the end of each procedure, a proprietary cleaning
fluid, that is provided under an exclusive licensing agreement with Oculus
Innovative Sciences, for surgical fluid management applications, is attached to
the FMS and an automatic cleaning cycle ensues, making the FMS ready for the
next procedure. The cleaning fluid bottle is attached to the port on the FMS
device. The cleaning fluid bottle and its contents are not contaminated and are
used to clean the internal fluid pathway in the FMS device to which personnel
have no exposure. During the cleaning cycle, the cleaning fluid is pulled from
the bottle into the FMS, and then disposed in the same manner as the waste fluid
from the surgical case. At the end of the cleaning cycle, the bottle
is discarded. Any suction tubing used during the procedure must be disposed of
in the same manner as suction tubing used with the canister
system. Handling of this tubing does present the potential for
personnel exposure but that potential in minimal.
It is
in the facilities that still use manual processes that our product may provide
substantial cost savings and improvements in safety. In cases where healthcare
organizations re-use canisters, the FMS cleaning process eliminates the need for
cleaning of canisters for re-use. The FMS reduces the safety issues facing
operating room nurses, the cost of the handling process, and the amount of
infectious waste generated when the traditional method of disposing of canisters
is used. The FMS is fully automated, does not require transport to and from the
operating room and eliminates any canister that requires emptying. It
is positioned to penetrate its market segment due to its virtually hands free
operation, simple design, ease of use and efficiency in removal of infectious
waste with minimal exposure of operating room personnel to potentially
infectious material.
In
contrast to competitive products, the wall-mounted FMS does not take up
operating room floor space and it does not require the use of external canisters
or handling by operating room personnel. It does require a dedicated system in
each operating room where it is to be used. With the exception of MD
Technologies, Inc., to our knowledge the BioDrain FMS will be the only system
that is wall mounted and designed to collect, measure and dispose of, surgical
waste. The product from DeRoyal does not collect surgical waste fluid and is
used in conjunction with traditional canisters to assist in emptying the
canisters. Other systems on the market are portable, meaning that they are
rolled to the bedside for the surgical case and then rolled to a cleaning, are
after the case, and use canisters, which still require processing or require a
secondary device (such as a docking station) used to dispose of the fluid in the
sanitary sewer after it has been collected. They are essentially powered
canisters. A comparison of the key features of the devices currently marketed
and the FMS is presented in the table below.
Key Feature
Comparison
Feature
|
BioDrain
Medical
|
Stryker
|
Cardinal
Health
|
DeRoyal
|
Dornoch
|
MD
Technologies
|
||||||
Portable
to Bedside vs. Fixed Installation
|
Fixed
|
Portable
|
Portable
|
Fixed
|
Portable
|
Fixed
|
||||||
Uses
Canisters
|
No
|
Yes
|
Yes
|
Yes
|
Yes
|
No
|
||||||
Secondary
Installed Device Required for Fluid Disposal
|
No
|
Yes
|
Yes
|
Yes
|
Yes
|
No
|
||||||
Numeric
Fluid Volume Measurement
|
Yes
|
Yes
|
No
|
No
|
Yes
|
Optional
|
||||||
Unlimited
Fluid Capacity
|
Yes
|
No
|
No
|
No
|
No
|
Yes
|
||||||
Installation
Requirements
|
||||||||||||
·
Water
|
No
|
Yes
|
Yes
|
Yes
|
Yes
|
No
|
||||||
·
Sewer
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
||||||
·
Vacuum
|
|
Yes
|
|
No
|
|
No
|
|
No
|
|
No
|
|
Yes
|
38
The
FMS system may be installed in or on the wall, during new construction or
renovation, or installed in a current operating room by connecting the device to
the hospital’s existing sanitary sewer drain and wall suction systems. With new
construction or renovation, the system will be placed in the wall and the
incremental costs are minimal, limited to connectors to the hospital drain and
suction systems (which systems are already required in an operating room), the
construction of a wooden frame to hold the FMS in position, and minimal labor.
The fluid collection chamber is internal to the FMS unit and requires no
separate installation. Based upon management’s consultation with several
architects we believe that there is no appreciable incremental expense in
planning for the FMS system during construction.
For
on-the-wall installation in a current operating room, the location of the FMS
may be chosen based on proximity to the existing hospital drain and suction
systems. Installation will require access to those systems through the wall and
connection to the systems in a manner similar to that for within-the-wall
installation. The FMS system is mounted on the wall using a mounting bracket
supplied with the system and standard stud or drywall attachments. Labor is
estimated based on conclusions made on information gathered from third parties
at an estimated average of 6 hours but will vary depending on the actual drain
and suction systems already resident in the hospital.
By
contrast, the majority of competing products are mobile, allowing movement from
room to room. The mobility adds time and labor to the process and
increases the chance of worker exposure to waste fluids but also allows the
hospital to purchase less than one mobile unit for each operating
room. With the FMS, a unit must be purchased and installed in each
room where it is intended to be used.
Once
installed, the FMS has one inflow port positioned on the front of the device
that effectively replaces the current wall suction ports most commonly used to
remove fluids during surgery. Additionally, a disposable external manifold,
which will be provided as part of our disposable cleaning kit, allows for
expansion to up to three inflow suction ports.
Although
the BioDrain FMS is directly connected to the sanitary sewer, helping to reduce
potential exposure to infectious fluids, it is possible that installation of the
system will cause inconvenience and lost productivity as the operating rooms
will need to be temporarily shut down. In addition, remodel work may be
necessary in preparation for, or as a result of, an installation. In some cases,
the costs to rework plumbing lines to accommodate for the system may outweigh
the expected savings and/or lengthen the expected return on investment
time.
One of
the current techniques typically utilize two to eight canisters positioned on
the floor or on elaborate rolling containers with tubing connected to the
hospital suction system and to the operative field. Once the waste fluids are
collected, they must be transported out of the operating room and disposed of
using various methods. These systems take up floor space in and around the
operating room and require additional handling by hospital personnel, thereby
increasing the risk of exposure of these people to infectious waste fluids
generated by the operating room procedure. Handling infectious waste in this
manner is also more costly.
Using
the BioDrain FMS during a procedure, potentially infectious fluid suctioned from
the patient is drawn through standard surgical tubing into the FMS. There, the
fluid is separated from the air stream and deposited into a large fluid
reservoir where it is retained until a measurement cycle is initiated. Once a
certain fluid level is reached in the chamber, a solenoid switch is opened and
the fluid is pumped from the fluid reservoir using a pump. The action of the
pump removes the fluid and measures the quantity of the fluid as it is removed.
This volume measurement is then continuously transmitted to a computer display,
which allows the surgical team to immediately assess the total amount of fluid
removed from the patient to that point in the procedure. The fluid removed from
the fluid reservoir is passed through the pump and transported directly to the
hospital sanitary sewer.
39
The
FMS has completed four prototype iterations. The product has undergone
significant testing, including being utilized in veterinary cases and limited
human surgical cases. We have finalized the production specifications for the
production unit and anticipate gearing up the production capabilities for the
mass production needed to meet the projected market demand. We will utilize an
ISO 13485-certified outsource manufacturing service organization as our
manufacturer, at least until such time as it may make sense to vertically
integrate this process.
We
received written confirmation from the FDA on April 1, 2009 that our FMS
products have received final 510(k) clearance. This clearance allows
us to commence our sales and marketing efforts and to get the Company ready for
significant production capability.
A
summary of the features of the wall unit include:
•
|
Minimal
Human Interaction . The wall-mounted FMS provides
for a small internal reservoir that keeps surgical waste isolated from
medical personnel and disposes the medical waste directly into the
hospital sanitary sewer with minimal medical personnel interaction. This
minimal interaction is facilitated by the automated electronic controls
and computerized LCD touch-screen allowing for simple and safe single
touch operation of the
FMS.
|
•
|
Minimizes
Exposure . The FMS minimizes surgical team and cleaning crew
exposure to bloodborne pathogens, as the system is hands-free and fully
automated with electronic controls with regards to handling any waste
fluid. The FMS provides advanced fluid management technology in that it
eliminates the use of canisters, traditional or powered, for fluid
collection, is directly connected to the hospital sanitary sewer, provides
continuous flow of waste fluids from the operative field, allows
visualization of those fluids prior to disposal and provides measurement
of disposed fluids. It does not require any transport to and from the
operating room or any secondary procedure such as attachment to a
companion device for disposal of the waste
fluids
|
•
|
Fluid
Measurement . The FMS volume measurement allows for in-process,
accurate measurement of blood/saline suctioned during the operative
procedure, and eliminates much of the estimation of fluid loss currently
practiced in the operating room. This will be particularly important in
minimally invasive surgical procedures, where accounting for all fluids,
including saline added for the procedure, is vital to the operation. The
surgical team can view in real time the color of the extracted or
evacuated fluid through the viewing window on the
FMS.
|
•
|
Disposable Cleaning
Kit . A single-use, disposable cleaning kit that is used for the
automated cleaning cycle at the conclusion of each procedure prepares the
FMS for the next use, reducing operating room turnover time. The cleaning
kit includes a BioDrain proprietary cleaning fluid for cleaning the
internal tubing, pathways and chamber within the FMS unit and a disposable
external manifold required for each surgical procedure. The cleaning
solution bottle is attached to the FMS with a cleaning fluid adapter which
is designed to mate with the special connector on the FMS. One manifold
will be supplied with each bottle of cleaning fluid, attached to the
bottle for user convenience in securing all consumables needed for each
use of the FMS. The disposable cleaning fluid bottle collapses at the end
of the cleaning cycle rendering it unusable; therefore it cannot be
refilled with any other solution. The instructions for use clearly state
that the FMS cleaning fluid, and only the FMS cleaning fluid, must be used
with the FMS following each surgical case. The cleaning fluid should be a
substantial revenue generator for the life of the
FMS.
|
•
|
Ease of Use
. The FMS simply connects to the existing suction tubing from the
operative field (causing no change to the current operative methods).
Pressing the START button on the FMS
touch screen causes the suction tip to operate similarly to preexisting
systems, thereby minimizing the learning curve for operation at the
surgical site.
|
40
•
|
Installation
. BioDrain will arrange installation of the FMS through a partnership or
group of partnerships. Such partnerships will include but not be limited
to being executed with distribution partners, manufacturer's
representatives, hospital supply companies and the like. We will train our
partners and standardize the procedure to ensure the seamless installation
of our products. The FMS is designed for minimal interruption of operating
room and surgical room utilization. Plug-and-play features of the design
allow for almost immediate connection and hook up to hospital utilities
for wall-hung units allowing for quick start-up post
installation.
|
•
|
Sales Channel
Partners . The FMS will be sold to end-users through a
combination of independent stocking distributors, manufacturers’
representatives and, possibly later, direct sales personnel. All personnel
involved in direct contact with the end-user will have extensive training
and will be approved by BioDrain. Exclusive agreements will be in place
between BioDrain and the sales channel partners outlining stocking
expectations, sales objectives, target accounts, and the like. Contractual
agreements with the sales channel partners will be reviewed on an annual
basis and could possibly be terminated at any time by BioDrain based on
certain specified
conditions.
|
•
|
Competitive
Pricing . Estimated end-user pricing is expected to be in the
range of $12,000 - $15,000 list per system (one per operating room -
installation extra) and $15 - $20 per unit retail for the proprietary
cleaning kit to the U.S. hospital market. The distributor or channel
partner then sets the final retail price based on quantity discounts for
multiple installations.
|
Patents
and Intellectual Properties
We
were granted a European patent on April 4, 2007 (Patent No. EP1539580) and a
U.S. patent on December 30, 2008 (U.S. Patent No. 7,469,727) (collectively, the
“Patents”). We also have a divisional application pending before the U.S. Patent
Office. A feature claimed in the Patents is the ability to continue suctioning
waste fluids into a collection chamber, to measure the fluid collected, and to
pump that collected fluid from the collection chamber all while negative
pressure is being maintained. This provides for continuous operation of the FMS
unit in suctioning waste fluids, which means that the unit never has to be shut
off or paused during a surgical operation, for example, to empty a fluid
collection container or otherwise dispose of the collected fluid. We believe
that this continuous operation feature provides us with a significant
competitive advantage, particularly on large fluid generating procedures. With
the exception of one model from MD Technologies, all competing products have a
limited fluid collection capacity necessitating that the device be emptied when
capacity is reached during the surgical procedure.
We
also have an exclusive licensing agreement for surgical room fluid management
applications with Oculus Innovative Sciences (Petaluma, CA) for the supply of a
cleaning fluid manufactured according to a proprietary recipe exclusive to
BioDrain Medical. The proprietary fluid for BioDrain Medical is derived from a
fluid on which Oculus has 10 patents issued and over 80 patents
pending.
In
June 2008 we executed an agreement with Marshall C. Ryan, the named inventor of
the Patents, to secure exclusive ownership of the Patents. In exchange for the
transfer of his ownership interests in the Patents, we paid Mr. Ryan a
combination of cash and warrants, agreed to pay him 4% royalty on FMS sales for
the life of the Patents and agreed to make additional payments if there is a
change in control of the Company (defined in the agreement as either 50% or more
of the Company’s outstanding stock or substantially all of its assets being
transferred to one independent person or entity). At the signing of the
agreement, we paid Mr. Ryan $75,000 and agreed to pay a corporation wholly owned
by Mr. Ryan, Mid-State Stainless, Inc., an additional $100,000 payment on June
30, 2009 for past research and development activities. We also granted Mr. Ryan
a warrant to purchase 150,000 shares of our common stock at a price of $.35 per
share. The warrant has a term of five years, ending on June 30, 2013. Should
there be a change in control of the Company, we will pay Mr. Ryan a total of $2
million to be paid out over the life of the U.S. patent if the change in control
occurs within 12 months of the first sale of any products, or $1 million to be
paid out over the life of the U.S. patent if the change in control occurs
between 12 and 24 months of the first sale of any products, or $500,000 to be
paid out over the life of the U.S. patent if the change in control occurs
between 24 and 36 months of the first sale of any product.
41
Our
competitive advantage, if any, based upon the Patents, would be lost if these
Patents were found to be invalid in the jurisdictions in which we sell or plan
to sell our products. No assurance can be given that any measure we implement
will be sufficient to protect our intellectual property rights or that we could
afford to take such measures. If we cannot protect our rights, we may lose our
competitive advantage. There is no assurance that any of these protections can
be maintained or that they will afford us a meaningful competitive advantage.
Moreover, if it is determined that our products infringe on the intellectual
property rights of third parties, we may be prevented from marketing our
products.
In
2002, two individuals, Jay D. Nord and Jeffrey K. Drogue, who are no longer
affiliated with the Company, filed a provisional patent application disclosing a
particular embodiment for a medical waste fluid collection system (the
“Nord/Drogue Embodiment”). The Nord/Drogue Embodiment included a separation
chamber and a collection chamber. A negative pressure source in communication
with the separation chamber would cause liquid surgical waste to be drawn into
the separation chamber. When the amount of collected liquid reached a high level
sensor, a valve would open in the bottom of the separation chamber to allowing
the collected liquid to flow by gravity into the collection chamber below. When
the liquid flowing into the collection chamber reached a high level sensor, the
valve would close. A second valve would then open allowing the known volume
within the collection chamber to flow by gravity into a drain. Each time the
collection chamber was emptied, the known volume of the collection chamber was
added to the total collected volume.
We
engaged the services of Marshall C. Ryan to further develop the medical waste
fluid collection system for commercialization. Mr. Ryan conceived of an
alternative embodiment for the medical waste fluid collection system (the “Ryan
Embodiment”). In the Ryan Embodiment, a pump was utilized to measure and
discharge the collected fluid while negative pressure was maintained in the
separation and collection chambers. An international (PCT) application was
timely filed disclosing both the Nord/Drogue Embodiment and the Ryan Embodiment.
National stage applications were subsequently timely filed in the U.S., Europe
and Canada based on the PCT application. During prosecution of the U.S. and
European national stage applications, the claims directed to the Nord/Drogue
Embodiment were rejected as being an un-patentable form of prior art.
Accordingly, the claims directed to the Nord/Drogue Embodiment were canceled and
the remaining claims were amended to specifically claim only the Ryan
Embodiment. It was learned during prosecution of the U.S. and European
applications that Mr. Ryan was inadvertently omitted as a named inventor.
Appropriate documents were then filed with the European and U.S. patent offices
to add Mr. Ryan as a named inventor. Additionally, pursuant to U.S. patent law,
because the claims directed to the Nord/Drogue Embodiment were canceled, leaving
only the Ryan Embodiment claimed, appropriate documents were filed to remove
Nord and Drogue as named inventors. The U.S. patent and the European patent were
allowed after the claims were amended to relate solely to the Ryan Embodiment.
The Canadian patent office has not yet examined the Canadian national stage
application (which will be amended consistent with the U.S. and European patents
to claim only the Ryan Embodiment).
We
filed a divisional application with the U.S. Patent Office with claims directed
to the method of use of the Ryan Embodiment. We also filed, in March 2009 a
Continuation-In-Part (CIP) application to cover additional features and
functionalities of our FMS.
We
have not communicated with Mr. Nord or Mr. Drogue since notifying them that they
have been removed as inventors of the then-pending patent applications. We are
not aware of any current intention by Mr. Nord or Mr. Drogue to challenge
ownership or inventorship of the Patents. We believe that Nord and Drogue have
no valid claims of inventorship or ownership of the Patents. Even if Mr. Nord or
Mr. Drogue were to assert such a claim, we believe that, independent of our
dealings with them, we obtained rights to the Patents from Mr. Ryan, who even if
found not to be the sole inventor of the subject matter of the claims of the
Patents, is at least a joint inventor. As a joint inventor, he would have
co-ownership interest in the Patents and would have the power to transfer to us
his undivided co-ownership interest in the Patents.
42
The
Company’s patented system includes a cleaning kit that contains a pre-measured
amount of a cleaning solution for cleaning the suction unit before each use. We
signed, in March 2009, an exclusive distribution agreement with Oculus
Innovative Science, the manufacturer of the fluid we will use in the cleaning
kit to be utilized with our FMS. Our exclusive licensing agreement applies to
all surgical fluid management applications.
From
time to time, we may encounter disputes over rights and obligations concerning
intellectual property. Also, the efforts we have taken to protect our
proprietary rights may not be sufficient or effective. Any significant
impairment of our intellectual property rights could harm our business, our
reputation, or our ability to compete. Also, protecting our intellectual
property rights could be costly and time consuming.
The
Disposable Cleaning Kit
The
disposable cleaning kit is an integral, critical component of the FMS and our
total value proposition to the customer. It consists of a proprietary,
pre-measured amount of cleaning solution in a plastic pouch, bottle or similar
container with a connection mechanism to attach to the FMS. The disposal
cleaning kit also includes an external manifold allowing for up to three suction
ports. The proprietary cleaning solution placed in the specially designed holder
is attached and recommended to be used following each surgical procedure. Due to
the nature of the fluids and particles removed during surgical procedures, the
FMS is recommended to be cleaned following each use. Utilizing the available
vacuum of the wall system, the proprietary cleaning fluid is drawn into the FMS
to provide a highly effective cleaning process that breaks up bio-film at the
cellular level. Proper cleaning is required for steady, dependable and repeated
FMS performance and for maintenance of the warranty of the FMS.
The
BioDrain proprietary cleaning fluid is a critical component of our business
model. The cleaning fluid has the “razor blade business model” characteristic
with an ongoing stream of revenue for every FMS unit installed, and revenues
from the sale of fluids are expected to be significantly higher over time than
the revenues from the unit. We will have exclusive distribution rights to the
fluid and facilitate the use of our fluid for cleaning following procedures by
incorporating a special adapter to connect the fluid to the special connector on
the FMS system. We will also tie the fluid usage, which we will keep track of
with the FMS software, to the product warranty. While it could be possible for
other manufacturers to provide fluids for utilization in this process, it would
require that they manufacture an adapter compatible with our connector on the
FMS, obtain a container that fits in the specially designed container holder on
the FMS and perform testing to demonstrate that any other fluid would not damage
the FMS. We believe that these barriers and the warranty control will allow us
to achieve substantial revenue from our cleaning fluid. The instructions for use
which accompany the product will clearly state how the fluid is to be hooked up
to the FMS machine. Further, a diagram on the FMS will also assist the user in
attaching the fluid bottle to the machine. This will be a very simple task, and
we do not anticipate that any training of operating room staff will be
necessary.
All
installations of our FMS product will be completed by a service and maintenance
organization that is familiar with completing such installations in health care
settings. We have had conversations with more than one of this type of company
and we are now in the process of selecting the best company(s) to partner with
regarding this function. The general availability of these types of service and
maintenance personnel in the health care sector should not hinder us from
forming a beneficial relationship in this area.
Corporate
Strategy
BioDrain
intends to become successful by deploying a strategy of focused expansion within
its core product and market segments, while utilizing a progressive approach to
manufacturing and marketing to ensure maximum flexibility and
profitability.
43
Our
strategy will be to:
n
|
Develop a complete line of
wall-installed fluid evacuation systems (“FMS”) for use in hospitals and
free standing surgery centers as well as clinics and physicians’
offices. Initially, we have developed the FMS to work in hospital
operating rooms and surgical centers. This device was developed for use
with the wall vacuum suction currently installed in hospitals.
Opportunities for future products include an FMS developed for
post-operation and recovery rooms with multiple inlet ports and multiple
volume measurements.
|
n
|
Provide products that greatly
reduce worker and patient exposure to harmful materials present in
infectious fluids and that contribute to an adverse working
environment. As one of the few stand-alone surgical fluid disposal
systems directly connected to the sanitary sewer, the FMS could advance
the manner in which such material is collected, measured and disposed of
in operating rooms, post-operating recovery, emergency rooms and intensive
care settings by eliminating the need to transport a device to the patient
bedside and remove it for emptying and cleaning at the end of the
procedure. The cost of such exposures, measured in terms of human
suffering, disease management costs, lost productivity, liability or
litigation, will be, when properly leveraged, the strongest motivating
factor for facilities looking at investing in the FMS line of
products..
|
n
|
Utilize experienced
independent distributors and manufacturers representatives of medical
products to achieve the desired market penetration. Contacts have
been established with several existing medical products distributors and
manufacturers’ representatives and interest has been generated regarding
the sales of the BioDrain FMS and cleaning kits. In addition to their
normal sales practices, the distributors will carry a significant
inventory of cleaning kits for their current customers and could purchase
an FMS for demonstration to new potential
customers.
|
n
|
Continue to utilize operating
room consultants, builders and architects as referrals to hospitals and
day surgery centers. To date, referrals have been received from
this group resulting in several potential sales and a potential beta site.
These referrals have shortened the time frame for contacting and
demonstrating the FMS to potential customers as well as providing us with
valuable responses to the FMS from the customer base, the vast majority of
which have been extremely positive to
date.
|
n
|
Utilize a Medical Advisory
Board to assist in market penetration. We have a Medical Advisory
Board consisting of a respected surgeon, two operating room consultants
and a nurse anesthetist to assist us in understanding the needs of our
market and ways to better serve that market. From time to time executive
management may elect to change the composition of the Medical Advisory
Board, including but not limited to, expanding the size of the Medical
Advisory Board.
|
Other
strategies may include:
n
|
Employing
a lean operating structure, while utilizing the latest trends and
technologies in manufacturing and marketing, to achieve both market share
growth and projected
profitability.
|
n
|
Providing
a leasing program and/or “pay per use” program as purchasing
alternatives.
|
n
|
Providing
service contracts to establish an additional revenue
stream.
|
n
|
Utilizing
the international manufacturing experience of our management team to
develop international sources of supply and manufacturing to take
advantage of the lower cost of labor and materials while still obtaining
excellent quality. While cost is not a major consideration in the roll-out
of leading edge products we believe that being a low cost provider will be
important over time.
|
n
|
Offering
an innovative warranty program that is contingent on the exclusive use of
our disposable cleaning kit to insure the success of our after-market
disposable products.
|
44
Technology
and Competition
Fluid
Management for Surgical Procedures
The
management of infectious fluids produced during and after surgery is a complex
mix of materials and labor that consists of primary collection of fluid from the
patient, transportation of the waste fluid within the hospital to a disposal or
processing site and finally to the disposal of that waste either via
incineration or in segregated landfills.
Once
the surgical procedure has ended, the canisters and their contents must be
removed from the operating room and disposed. There are several methods used for
disposal, all of which present certain risks to the operating room team, the
crews who clean the rooms following the procedure, and the other personnel
involved in their final disposal. These methods include:
•
|
Direct Disposal Through the
Sanitary Sewer. In virtually all municipalities, the disposal of
liquid blood may be done directly to the sanitary sewer where it is
treated by the local waste management facility. This practice is approved
and recommended by the EPA. In most cases these municipalities
specifically request that disposed bio-materials not be treated with any
known anti-bacterial agents such as glutalderhyde, as these agents not
only neutralize potentially infectious agents but also work to defeat the
bacterial agents employed by the waste treatment facilities themselves.
Disposal through this method is fraught with potential exposure to the
service workers, putting them at risk for direct contact with these
potentially infectious agents through spillage of the contents or via
splash when the liquid is poured into a hopper - a specially designated
sink for the disposal of infectious fluids. Once the infectious fluids are
disposed of into the hopper, the empty canister is sent to central
processing for re-sterilization (glass and certain plastics) or for
disposal in the biohazardous/infectious waste generated by the hospital
(red-bagged).
|
•
|
Conversion to Gel for Red-Bag
Disposal. In many hospital systems the handling of this liquid
waste has become a liability issue due to worker exposure incidents and in
some cases has even been a point of contention during nurse contract
negotiations. Industry has responded to concerns of nurses over splash and
spillage contamination by developing a powder that, when added to the
fluid in the canisters, produces a viscous, gel-like substance that can be
handled more safely. After the case is completed and final blood loss is
calculated, a port on the top of each canister is opened and the powder is
poured into it. It takes several minutes for the gel to form, after which
the canisters are placed on a service cart and removed to the red-bag
disposal area for disposal with the other infectious waste. There are four
major drawbacks to this system:
|
o
|
It
does not ensure protection for healthcare workers, as there remains the
potential for splash when the top of the canister is
opened.
|
o
|
Based
on industry pricing data, the total cost per canister increases by
approximately $2.00.
|
o
|
Disposal
costs to the hospital increase dramatically as shipping, handling and
landfill costs are based upon weight rather than volume in most
municipalities. The weight of an empty 2,500 ml canister is approximately
one pound. A canister and its gelled contents weigh approximately 7.5
pounds.
|
o
|
The
canister filled with gelled fluid must be disposed; it cannot be cleaned
and re-sterilized for future
use.
|
Despite
the increased cost of using gel and the marginal improvement in health care
worker protection it provides, several hospitals have adopted gel as their
standard procedure.
45
Drainage
Systems
Several
new medical devices have been developed which address some of the deficiencies
described above. MD Technologies, Inc., DeRoyal (formerly Waterstone), Dornoch
Medical Systems, Inc. and Stryker Instruments have all developed systems that
provide disposal into the sanitary sewer without pouring the infectious fluids
directly through a hopper disposal or using expensive gel powders and all of
these newer products are currently sold with 510(K) concurrence from the FDA.
Cardinal Health, Inc. has received 510(K) concurrence to market a similar device
that they have begun advertising. Most of them incorporate an internal
collection canister with finite capacity, and while not directly eliminating the
need to transport a device to and from the surgical room, most have been
successful in eliminating the need for expensive gel and its associated handling
and disposal costs.
Our
existing competitors that already have products on the market have a clear
competitive advantage over us in terms of brand recognition and market exposure.
In addition, the aforementioned companies have extensive marketing and
development budgets that could overpower an early-stage company like ours.
Information the Company obtained from surgical clinicians during interviews
indicate that Stryker Instruments has the dominant market share position.
Cardinal Health, Inc., though having FDA concurrence, is only now beginning to
advertise their product. These clinicians have also indicated that the
competitive devices are used in select procedures and often in some, but not
all, surgical rooms.
Current
Competition, Technology, and Costs
Single
Use Canisters
In the
U.S., glass reusable containers are infrequently used as their high initial
cost, frequent breakage and costs of reprocessing are typically more costly than
single use high impact plastic canisters, even when disposal is factored in.
Each single use canister costs roughly $2.00 each and it is estimated that a
range of two to eight canisters are used in each procedure, depending on the
operation.
Our
FMS would replace the use of canisters and render them unnecessary, as storage
and disposal would be performed automatically by the FMS. It should be noted
that these canisters are manufactured by companies with substantially more
resources that BioDrain. Cardinal Health, a very significant competitor,
manufacturers both single use canisters as well as a more automated fluid
handling system that will compete with us. Accordingly, faced with this
significant competition, we may have difficulty penetrating this
market.
Solidifying
Gel Powder
The
market potential for solidifying gel was estimated at over $100 million in
2002.This market is not yet fully realized, but many hospitals, responding to
increased concerns over inadvertent worker exposure to liquid waste, are
converting to this technology. There have been many reports (Allina and Fairview
to name two Minneapolis-based health systems) of nursing contracts containing
language that requires the facilities to use gels after every procedure. Our
management is aware that at a large healthcare facility in Minneapolis,
Minnesota, routine usage of gel increased annual operating room expenditures by
$63,000, based on 14,000 procedures done in 2006. It is clear that solidifying
gels, while not providing complete freedom from exposure to workers does present
a level of safety and peace of mind to the healthcare workers who handle
gel-treated canisters. While several gel manufacturers proclaim that sterility
of the contents is achieved with the use of their product, protocols continue to
recommend that red-bag procedure is followed when using these products. One
drawback of the solidifying gels is that they increase the weight of the
materials being sent to the landfill by a factor of five to seven times,
resulting in a significant cost increase to the hospitals that elect to use the
products.
BioDrain’s
Streamway™ FMS would eliminate the need for solidifying gel, providing savings
in both gel powder usage and associated landfill costs.
46
Sterilization
and Landfill Disposal
Current
disposal methods include the removal of the contaminated canisters (with or
without the solidifying gel) to designated biohazardous/infectious waste sites.
Previously many hospitals used incineration as the primary means of disposal,
but environmental concerns at the international, domestic and local level have
resulted in a systematic decrease in incineration worldwide as a viable method
for disposing of blood, organs or materials saturated with bodily fluids. When
landfill disposal is used, canisters are included in the general red-bag
disposal and, when gel is used, comprise a significant weight factor. Where
hopper disposal is still in use, most of the contents of the red-bag consist
only of outer packaging of supplies used in surgery and small amounts of
absorbent materials impregnated with blood and other waste fluid. These,
incidentally, are retained and measured at the end of the procedure to provide a
more accurate assessment of fluid loss or retention. Once at the landfill site,
the red-bagged material is often steam-sterilized with the remaining waste being
ground up and interred into a specially segregated waste
dumpsite.
On a
related note, many countries are struggling with landfills within their own
borders, and a thriving and growing biohazardous/infectious waste disposal
business is emerging. The inevitable disputes connected with such a highly
charged and potentially politically sensitive topic have developed, particularly
in Europe and the former Soviet Republics, over the disposition and disposal of
these infectious wastes. Such disputes have also arisen in the U.S. as states
lacking landfill capacity (New Jersey, for example) seek to offload their
medical waste on less populous states or those which lack stringent
enforcement.
Moreover,
as incineration increasingly loses its appeal, and as individual countries and
states reject importation of infectious materials, the disposal of these fluids
may take on more important political and environmental overtones. For example,
there are several recent rulings within the European Union that resulted in
medical waste being categorized as a tradable commodity meaning that no member
country can reject medical waste from another European Union partner. Germany,
which used to dump its medical waste in the former East Germany, is now
exporting its waste to Belgium and France. France in particular is fighting this
waste and wants Germany to deal with its own waste within its own borders. In
other parts of the world, landfills are often occupied by otherwise homeless or
poverty level people, who scavenge the sites for food and clothing, and often
come into contact with blood soaked medical waste. Disposal of fluid down the
sanitary sewer and elimination of large numbers of canisters from the volume of
red-bag material, while not addressing all of the concerns regarding landfills,
would certainly reduce the amount of disposed and blood impregnated
waste.
By
eliminating large numbers of canisters and the gel powder, our FMS products
would reduce costs and the amount of canisters sent to landfills
dramatically.
Handling
Costs
Once
the surgical team has finished with the procedures and a blood loss estimate is
calculated, the liquid waste (with or without solidifying gels) is removed from
the operating room, and either disposed of down the sanitary sewer or
transported to an infectious waste area of the hospital for later
removal.
Our
FMS would significantly reduce the labor costs associated with the disposal of
fluid or handling of contaminated canisters, as the liquid waste is
automatically emptied into the sanitary sewer after measurements are obtained.
We will utilize the same suction tubing currently being used in the operating
room, so no additional cost is incurred with our process. While each hospital
handles fluid disposal differently, we believe that the cost of our cleaning
fluid after each procedure will be less than the current procedural cost that
could include the cost of canisters, labor to transport the canisters,
solidifying powder, gloves, gowns, mops, goggles, shipping and transportation,
as well as any costs associated with any spills that may occur due to manual
handling.
47
Nursing
Labor
Often
overlooked as a direct cost, nursing personnel spend significant time in the
operating room readying canisters for use, calculating blood loss and removing
or supervising the removal of the contaminated canisters after each procedure.
Various estimates have been made, but an internal study at a large healthcare
facility in Minneapolis, Minnesota, revealed that the average nursing team
spends twenty minutes pre-operatively and intra-operatively setting up,
monitoring fluid levels and changing canisters as needed and twenty minutes
post-operatively readying blood loss estimates or disposing of canisters.
Estimates for the other new technologies reviewed have noted few cost savings to
nursing labor.
Our
FMS products would save nursing time as compared to the manual process of
collecting and disposing of surgical waste. Set-up is as easy as attaching the
suction tube to the inflow port of the FMS. Post-operative clean-up requires
approximately five minutes, the time required to dispose of the suction tubing
to the red-bag, calculate the patient’s blood loss, attach the bottle of
cleaning solution to the inlet port of the unit, initiate the cleaning cycle,
and dispose of the emptied cleaning solution. The steps that our product avoids,
which are typically involved with the manual disposal process include, canister
setup, interpretation of an analog read out for calculating fluid, canister
management during the case (i.e. swapping out full canisters) and then
temporarily storing, transferring, dumping and properly disposing of the
canisters.
Competitive
Products
Disposable
canister system technology for fluid management within the operating room has
gone virtually unchanged for decades. As concern for the risk of exposure of
healthcare workers to bloodborne pathogens, and the costs associated with
canister systems has increased, market attention has increasingly turned toward
fluid management. The first quarter of 2001 saw the introduction of three new
product entries within the infectious material control field. Stryker
Instruments introduced the “Neptune” system, offering a combination of
bio-aerosol and fluid management in a portable two piece system; Waterstone
Medical (now DeRoyal) introduced the “Aqua Box” stationary system for fluid
disposal; and Dornoch Medical Systems, Inc. introduced the “Red Away” stationary
system for fluid collection and disposal. All companies, regardless of size,
have their own accessory kits. For purposes of comparison, based on information
obtained from a surgical center in Minnesota, the Stryker Neptune system’s
estimated cost per procedure is more than $15.00 (including single-use-manifold
plus cleaning solution).
We
differentiate from these competitors since we have the most automatic,
hands-free process of any of the systems currently on the market. Each of our
competitors, with the exception of MD Technologies, Inc., has some significant
manual handling involved in the process. It may require the need to transport
the mobile unit to a docking port and then empty the fluid or it may be that the
canister is still manually transported to a more efficient dumping station.
Regardless, most of our competitors require more human interaction with the
fluid than BioDrain. Please refer to the chart on page 39 for a comparison of
the key features of the devices currently marketed vs. the FMS.
Although
the mobility associated with most of the competing products adds time and labor
to the process and increases the chance of worker exposure to waste fluids, it
also allows the hospital to purchase only as many mobile units needed for
simultaneous procedures in multiple operating rooms. With the FMS, a unit much
be purchased and installed in each room where it is intended to be
used.
48
Marketing
and Sales
Distribution
Our
FMS products will be sold through independent distributors and manufacturers’
representatives covering the vast majority of major U.S. markets. The targeted
customer base will include nursing administration, operating room managers,
CFOs, risk management, and infection control. Other professionals with an
interest in the product include physicians, nursing, biomedical engineering,
anesthetists, anesthesiologists, human resources, legal, administration, and
housekeeping.
The
major focus of the marketing effort will be to introduce our product as a
standalone device capable of effectively removing infectious waste and disposing
of it automatically while providing accurate measurement of fluids removed, and
also limiting exposure of the surgical team and healthcare support
staff.
Governmental
and professional organizations have become increasingly aggressive in attempting
to minimize the risk of exposure by medical personnel to bloodborne pathogens.
It is believed that our technology provides a convenient and cost effective way
to collect and dispose of this highly contaminated material.
Distributors
will either have installation and service expertise, or we will contract those
functions to an independent service/maintenance company. We have been in contact
with both distributors and service companies regarding these installation
requirements. The Company will establish extensive training and standards for
the service and installation of the FMS to ensure consistency and dependability
in the field. Users of the system will require a minimal amount of training to
operate the FMS. The instructions for use and the installation guide will be
included with every system along with a quick start guide and a trouble shooting
manual.
We
will structure our pricing and relationships with distributors and/or service
companies to ensure that these entities receive at least a typical industry
level compensation for their activities. The cost and price estimates currently
in place with the Company conservatively allow for reasonable profit margins for
all entities in the FMS and the cleaning fluid supply chain. Although the
customer may arrange their own installation of the FMS unit we have contracted
with Bellimed to our preferred installation company and we are in the early
stages of training their personnel.
Promotion
The
dangers of exposure to infectious fluid waste are well recognized in the medical
community. It is our promotional strategy to effectively educate medical staff
regarding the risks of contamination using current waste collection procedures
and the advantages of the FMS in protecting medical personnel from inadvertent
exposure. We intend to leverage this medical awareness and concern with
education of regulatory agencies at the local, state and federal level about the
advantages of the FMS.
We
intend to supplement our sales efforts with a promotional mix that will include
a number of printed materials, video support and a web site. Our management team
believes its greatest challenge lies in reaching and educating the 1.6 million
medical personnel who are exposed daily to fluid waste in the operating room or
in other healthcare settings (OSHA, CPL 2-2.44C). These efforts will require
utilizing single page selling pieces, video educational pieces for technical
education, liberal use of scientific journal articles and a web page featuring
product information, educational materials, and training sites.
We
will support our sales organization by attending major scientific meetings where
large numbers of potential users are in attendance. The theme of the trade show
booth will focus on education, the awareness of the hazards of infectious waste
fluids and the Company’s innovative solution to the problem. We will focus our
efforts in initially on the Association of Operating Room Nurses (“AORN”) trade
show, where the largest concentration of potential buyers and influencers are in
attendance. We will obtain an Internet mailbox and will feature information on
protection of the healthcare worker as well as links to other relevant sites. We
intend to invest in limited journal advertising until targeted audiences have
been fully identified. The initial thrust will focus on features of the product
and ways of contacting the Company via the web page or directly through postage
paid cards or direct contact. Additionally, we will create a press release
mailing to clinician oriented periodicals for inclusion in New Product News
columns. These periodicals will provide the reader with an overview of the
product and will direct readers to pursue more information by direct contact
with us by accessing our web page.
49
Pricing
Prices
for the FMS and its disposable cleaning kit will reflect a cost saving to the
hospital compared to its current procedure costs over time. This pricing
strategy should ensure that the customer will realize actual cost savings when
using the FMS and replacing traditional canisters, considering the actual costs
of the canisters and associated costs such as biohazard processing labor and
added costs of biohazard waste disposal. Suction tubing that is currently used
in the operating room will continue to be used with our system and should not be
considered in the return on investment equation. An argument could be made that
our system produces waste through the disposable cleaning solution bottle.
However, our cleaning solution’s bottle is completely recyclable, and the
anticipated selling price of the fluid is built into our cost analysis. In
comparison, an operation using traditional disposal methods will often produce
multiple canisters destined for biohazard processing. Biohazard disposal costs
are estimated by Outpatient Surgery Magazine to be 5 times more per pound to
dispose of than regular waste (Outpatient Surgery Magazine, April 2007, p.44).
Once the canister has touched blood, it is considered “red bag” biohazard waste,
whereas the cleaning fluid bottle used in our system can be recycled with the
rest of the facility’s plastics or, less desirably, they can be thrown in the
regular trash.
The
FMS will list for approximately $17,000 per system (one per operating room -
installation extra) and $15.00 - $20.00 per unit retail for the proprietary
cleaning kit to the U.S. hospital market. By comparison, the disposal system of
Stryker Instruments, one of our competitors, retails for $10,000 plus a $9,000
docking station and requires a disposable component with an approximate cost of
$15.00 and a proprietary cleaning fluid (cost unknown per procedure). Per
procedure cost of the traditional disposal process includes approximate costs of
$2.00 per liter canister, plus solidifier at $2.00 per liter canister, plus the
biohazard premium disposal cost approximated at $1.80 per liter canister. In
addition, the labor, gloves, gowns, goggles, and other related material handling
costs are also included in the current disposal expenses.
Installation
will be done by distributors, independent contractors, or in the case of larger
facilities by in-house engineering at an estimated price of $2,000, depending on
the operating room. Installation of the FMS requires access only to the
hospital’s sanitary sewer, vacuum suction, and electricity. To help facilities
maintain their utilization rates, we will recommend installation during off peak
hours. In smaller facilities an outside contractor may be called in, larger
institutions have their own installation and maintenance workforce. Installation
time should not seriously impact the use of the operating room. Each FMS will
have an industry standard warranty period that can be extended through
documented use of the Company’s sterilization kit.
Actual
selling price of the hardware will be at a standard rate to the distributor,
permitting them to have price flexibility when selling multiple units to
hospitals and clinics. The current plan is for the disposable cleaning kit to be
priced at $15.00 - $20.00, and a commission to be paid to the distributor or
independent representative upon each sale.
Engineering
and Manufacturing
We
have are currently in negotiations to finalize our relationship with TriVirix,
Inc. for the engineering and manufacturing of our product, FMS, cleaning fluid
packaging, external manifold or any other accessories. TriVirix, Inc. is ISO
13485:2003 and GMP-certified and has the necessary expertise and experience to
build our product in a cost-effective manner. We are in negotiations, but have
not yet executed a Manufacturing Supply Agreement with
TriVirix.
Upon
execution, we believe that the Manufacturing Supply Agreement will specify the
quantities for production of our product, which we anticipate will be based on a
6-month rolling forecast, the allocation of production and the price and price
increase terms. Under the terms of the expected Manufacturing Supply Agreement,
TriVirix, Inc. would manufacture only our FMS device. Upon execution of the
Manufacturing Supply Agreement, Trivirix, Inc. would be considered a primary
supplier of the FMS device. Our management, as part of a broader manufacturing
sourcing strategy plans to identify at most two second sources of production for
the FMS device.
50
We
have entered into an exclusive licensing agreement for surgical room fluid
management applications with Oculus Innovative Sciences (Petaluma, CA) for the
supply of a cleaning fluid manufactured according to a proprietary recipe
exclusive to BioDrain Medical. The proprietary fluid for BioDrain Medical is
derived from a fluid on which Oculus has 10 patents issued and over 80 patents
pending. The agreement has an initial term of 5 years and contains minimum
quantity purchase requirements to maintain preferential pricing but does not
contain an absolute obligation to purchase the minimum
quantities.
The
disposable cleaning kit consists of a proprietary cleaning solution, a cleaning
solution package (high density polyethylene bottle), a cleaning solution adapter
assembly (barbed bottle cap, attached surgical tubing, and attached valved quick
coupling), and a multi-port external, non-sterile manifold. Oculus has multiple
production facilities located in North America and Europe. The proprietary
cleaning solution can be obtained from any of these locations. Other single use
disposable accessories, such as a fluid sampling system, will be sourced
separately, as individual components. We have not yet entered into agreements
with any suppliers for these products.
To
further our manufacturing sourcing strategy we hired, in June 2008, an Executive
Vice President of Operations, Chad Ruwe, who has 20 years of fluid management
systems experience and a demonstrated history of driving lean manufacturing
global sourcing and joint venture leadership.
Government
Regulation
To
date, no regulatory agency has established exclusive jurisdiction over the area
of biohazardous and infectious waste in healthcare facilities. Several prominent
organizations maintain oversight function concerning various aspects of
pertinent technologies and methods of protection.
These
agencies include:
•
|
OSHA
(Occupational Safety and Health
Administration)
|
•
|
EPA
(Environmental Protection
Agency)
|
•
|
DOT
(Department of Transportation)
|
•
|
JCAHO
(Joint Commission of Accreditation of
Hospitals)
|
•
|
NFPA
(National Fire Protection
Association)
|
•
|
AIA
(American Institute of
Architects)
|
•
|
AORN
(Association of Operating Room
Nurses)
|
•
|
Specific
state, county, hospital or institution
guidelines
|
51
Application
for Electrical Safety Testing and Certification
We
sought testing and certification to the IEC 60606-1 and IEC 60606-1-2, two
internationally recognized standards. In the United States there are three
Nationally Recognized Testing Laboratories (“NRTLs”), Underwriters Laboratories
(“UL”), TUV SUD America, Inc. and Intertek-Semko (ETL), that can perform such
tests for electrical safety of our FMS device. We issued request for quotes to
two of three of these NRTLs in addition to issuing initial inquiries to
certified third party testing entities conducting testing on behalf of the
NRTLs. Based on responses to our request for quotes noting pricing and timing of
conducting the testing, we have contracted with TUV SUD America, Inc. located in
New Brighton, MN for this electrical safety testing. On March 11, 2009, we
received completed test documentation from TUV SUD America, Inc. confirming the
FMS device successfully completed and passed all testing showing compliance to
IEC 60606-1 and IEC 60606-1-2.
A
previous generation BioDrain FMS device (110/240VAC) successfully passed
electrical safety testing conducted by UL in November 2005 (reference UL File
E256928).
We filed
the 510(k) submission for FDA clearance of the FMS device on March 14, 2009 and
received written confirmation on April 1, 2009 that our 510(k) has been cleared
by the FDA. The FDA
required, pursuant to a final regulation for Establishment Registration and
Device Listing for Manufacturers of Devices, that a 510(k) premarket
notification be submitted at least ninety days before marketing a device that:
(1) is being introduced into distribution for the first time by that person or
entity, or (2) is in distribution but is being significantly modified in design
or use. A 510(k) submission must contain, among other things (i) proposed
labeling sufficient to describe the device’s intended use; (ii) a description of
how the device is similar to or different from other devices of comparable type,
or information about what consequences a proposed device modification may have
on the device's safety and effectiveness; and (iii) any other information
necessary to determine whether the device is substantially equivalent (as
defined below). The FMS is a Class II device, which is less stringently reviewed
as that of a Class III device. We teamed with regulatory consultants with
significant experience in the FDA clearance process.
FDA
Process for Clearing a Device Under Section 510(k)
The
FDA Center for Devices and Radiological Health requires 510(k) submitters to
provide information that compares its new device to a marketed device of a
similar type, in order to determine whether the device is substantially
equivalent (“SE”). This means that a manufacturer can submit a 510(k) comparing
a new device to a device that has been found to be SE and the FDA can use this
as evidence to determine whether the new device is substantially equivalent to
an already legally marketed device (or a “predicate device”). The ultimate
burden of demonstrating the substantial equivalence of a new device to a
predicate device remains with the 510(k) submitter, and in those occasions when
the Center for Devices and Radiological Health is unfamiliar with certain
aspects of the predicate device, the submitter will be required to provide
information that substantiates a claim of substantial
equivalence.
As a
matter of practice, the Center for Devices and Radiological Health generally
considers a device to be SE to a predicate device if, in comparison to the
predicate device, (i) the new device has the same intended use; (ii) the new
device has the same technological characteristics (i.e. same materials, design,
energy source, etc.); (iii) the new device has new technological characteristics
that could not affect safety or effectiveness or (iv) the new device has new
technological characteristics that could affect safety or effectiveness but
there are accepted scientific methods for evaluating whether safety or
effectiveness has been adversely affected and there is data to demonstrate that
the new technological features have not diminished safety or effectiveness.
Premarket notification submissions are designed to facilitate these
determinations.
Following
FDA clearance to market our product, which we received on April 1, 2009, we will
be subject to the normal ongoing audits and reviews by the FDA and other
governing agencies. These audits and reviews are standard and typical in the
medical device industry, and we do not anticipate being affected by any
extraordinary guidelines or regulations.
52
Foreign
Jurisdictions
Each
country in Europe and the Pacific Rim has unique laws, regulations, and
directives regarding the manufacture and or marketing of medical devices within
their borders that are comparable to the laws and regulations described above.
While we have not fully researched each country and the respective laws,
regulations, and directives we will completely do so in advance and we recognize
product design changes will most likely be necessary based on practices and
procedures in the operative environment in the Pacific Rim as well as product
design changes necessitated by laws, regulations, and
directives.
In
June 2007, we entered into a restructuring agreement, in connection with our
October 2008 Financing, whereby in the event that we failed to obtain FDA
clearance by the end of August 2009, the majority-in-interest of investors (“the
Investors”) would have the right to cause the Company to make significant
restructuring changes. Since the Company received written notice of a 510(k)
clearance from the FDA on April 1, 2009 this restructuring will be
avoided.
53
The
following tables identify each of the Investors and the Founders and the number
and percentage of the Company’s common stock held by each:
Investors
|
||||||||
Name
|
Number of
Shares
|
Percentage of
Common Stock
Outstanding
|
||||||
Investors:
|
||||||||
Caron
Partners LP
|
246,500
|
2.4
|
%
|
|||||
Marc
I. Abrams
|
28,571
|
0.3
|
%
|
|||||
Douglas
Gold
|
203,571
|
2.0
|
%
|
|||||
Stuart
A. Liner
|
71,429
|
0.7
|
%
|
|||||
Steven
M & Sheila A. Gold
|
71,429
|
0.7
|
%
|
|||||
Tangiers
Investors, L.P.
|
142,857
|
1.4
|
%
|
|||||
MLPF&S:
Jerome Cowan
|
71,429
|
0.7
|
%
|
|||||
Jeremy
Roll
|
28,572
|
0.3
|
%
|
|||||
Bernard
& Twyla Vosika
|
71,429
|
0.7
|
%
|
|||||
Sally
& Naomi Maslon JTWROS
|
28,571
|
0.3
|
%
|
|||||
Michael
Sobeck
|
14,286
|
0.1
|
%
|
|||||
Cavalier
Consulting Corp.
|
71,429
|
0.7
|
%
|
|||||
RP
Capital
|
183,991
|
1.8
|
%
|
|||||
Brian
Weitman
|
42,599
|
0.4
|
%
|
|||||
Bellajule
Partners LP
|
102,429
|
1.0
|
%
|
|||||
Morris
Esquenazi
|
100,000
|
1.0
|
%
|
|||||
Schwartz
Holding
|
500,000
|
4.9
|
%
|
|||||
Jack
& Thelma Farbman
|
100,000
|
1.0
|
%
|
|||||
Morrie
R. Rubin
|
50,000
|
0.5
|
%
|
|||||
Lee
M. Terpstra & Orlando Stephenson
|
100,000
|
1.0
|
%
|
|||||
Bernard
Puder Revocable Trust
|
430,000
|
4.3
|
%
|
|||||
Thomas
J. Klas
|
71,429
|
0.7
|
%
|
|||||
Chad
Ruwe
|
571,429
|
5.7
|
%
|
|||||
Peter
Abramowicz
|
57,143
|
0.6
|
%
|
|||||
Scott
R. Storick
|
100,000
|
1.0
|
%
|
|||||
James
Dauwalter Living Trust
|
571,429
|
5.7
|
%
|
|||||
CGMI
as IRA Custodian FBO John D. Villas
|
71,429
|
0.7
|
%
|
|||||
Stan
Geyer Living Trust
|
71,429
|
0.7
|
%
|
|||||
James
Taylor, IV
|
571,429
|
5.7
|
%
|
|||||
Gregory
B, Graves
|
42,857
|
0.4
|
%
|
|||||
Fenton
Fitzpatrick
|
8,571
|
0.1
|
%
|
|||||
Peter
Persad
|
71,429
|
0.7
|
%
|
|||||
Thomas
M. Pronesti
|
55,964
|
0.6
|
%
|
|||||
Craig
Kulman
|
38,821
|
0.4
|
%
|
54
Investors
|
||||||||
Name
|
Number of
Shares
|
Percentage
of
Common Stock
Outstanding
|
||||||
Kulman
IR LLC
|
125,000
|
1.2
|
%
|
|||||
Cross
Street Partners, Inc.
|
125,000
|
1.2
|
%
|
|||||
Namaste
Financial, Inc.
|
125,000
|
1.2
|
%
|
|||||
Ryan
Hong
|
57,404
|
0.6
|
%
|
|||||
Richardson
& Patel LLP
|
60,714
|
0.6
|
%
|
|||||
Sean
Fitzpatrick
|
150,000
|
1.5
|
%
|
|||||
David
Baker
|
225,000
|
2.2
|
%
|
|||||
Si
Phillips
|
50,000
|
0.5
|
%
|
|||||
Cameron
Broumand
|
35,000
|
0.3
|
%
|
|||||
Sylvia
Karayan
|
11,646
|
0.1
|
%
|
|||||
Jason
Cavalier
|
15,000
|
0.1
|
%
|
|||||
Greg
Suess
|
104,114
|
1.0
|
%
|
|||||
Ben
Padnos
|
100,000
|
1.0
|
%
|
|||||
Nimish
Patel
|
412,411
|
4.1
|
%
|
|||||
Erick
Richardson
|
399,543
|
4.0
|
%
|
|||||
Mark
Abdou
|
32,907
|
0.3
|
%
|
|||||
Addison
Adams
|
8,227
|
0.1
|
%
|
|||||
Michael
Cavalier
|
8,227
|
0.1
|
%
|
|||||
Mick
Cavalier
|
8,227
|
0.1
|
%
|
|||||
Francis
Chen
|
2,334
|
0.0
|
%
|
|||||
Doug
Croxall
|
6,170
|
0.1
|
%
|
|||||
Jennifer
& Michael Donahue
|
28,009
|
0.3
|
%
|
|||||
EGATNIV,
LLC
|
13,710
|
0.1
|
%
|
|||||
Dan
Estrin
|
823
|
0.0
|
%
|
|||||
Kevin
Friedmann
|
1,440
|
0.0
|
%
|
|||||
Abdul
Ladha
|
4,114
|
0.0
|
%
|
|||||
Jody
Samuels
|
8,227
|
0.1
|
%
|
|||||
Yossi
Stern
|
10,284
|
0.1
|
%
|
|||||
Steve
Yakubov
|
10,284
|
0.1
|
%
|
|||||
Total
|
7,101,266
|
70.3
|
%
|
55
Founders
|
||||||||
Name
|
|
Number of
Shares |
|
|
Percentage of
Common Stock
Outstanding
|
|
||
Lawrence W.
Gadbaw
|
139,163
|
1.4
|
%
|
|||||
Peter
L. Morawetz
|
107,739
|
1.1
|
%
|
|||||
Gerald
D. Rice
|
85,294
|
0.8
|
%
|
|||||
Jay
D. Nord
|
102,336
|
1.0
|
%
|
|||||
Sophia
M. Nord, Trust
|
29,928
|
0.3
|
%
|
|||||
Emily
A. Nord, Trust
|
29,928
|
0.3
|
%
|
|||||
Jeffrey
K. Drogue
|
53,870
|
0.5
|
%
|
|||||
Jonathon
N. Drogue, Trust
|
29,928
|
0.3
|
%
|
|||||
Samantha
N. Drogue, Trust
|
29,928
|
0.3
|
%
|
|||||
Staci
M. Lauer (Spade)
|
35,913
|
0.4
|
%
|
|||||
Wisconsin
Rural Enterprise
|
180,000
|
1.8
|
%
|
|||||
Richard
E. & Carol A. Thurk
|
5,986
|
0.1
|
%
|
|||||
Thomas
W. Gadbaw
|
599
|
0.0
|
%
|
|||||
Gail
C. & Ginger L. Smith
|
2,993
|
0.0
|
%
|
|||||
Charles
W. Gadbaw
|
300
|
0.0
|
%
|
|||||
Judith
A. Bright
|
1,497
|
0.0
|
%
|
|||||
Marshall
C. Ryan
|
71,906
|
0.7
|
%
|
|||||
Alice
I. North
|
399
|
0.0
|
%
|
|||||
Arliss
A. Gadbaw
|
400
|
0.0
|
%
|
|||||
Gaynelle
A. Templin
|
399
|
0.0
|
%
|
|||||
Kevin
R. Davidson
|
29,928
|
0.2
|
%
|
|||||
Mark
K. Lawlis
|
9,577
|
0.1
|
%
|
|||||
Wisconsin
Business Innovation Corporation
|
2,993
|
0.0
|
%
|
|||||
Andcor
Companies, Inc.
|
78,571
|
0.8
|
%
|
|||||
Total
|
1,029,575
|
10.2
|
%
|
56
Employees
We
currently have 4 full-time employees; a Chief Executive Officer, a Vice
President of Sales and Marketing, a Chief Operating Officer and a
Director of Product Management. In addition, we use contractors and consultants
to supplement our functional needs. We will seek to add additional employees in
sales and marketing, operations, product development and other areas as we grow
and penetrate the market. No employee is represented by a labor union, and we
have never suffered an interruption of business caused by labor disputes.
Management believes that our relations with our employees are
good.
Legal
Proceedings
In
April 2009 a former officer of the Company made a formal demand for payment of
past wages and threatened to sue the company for in excess of $100,000 if we did
not meet his demand. The company believes that the claim is without merit but we
continue to negotiate the issue with his attorney and expect to reach a
settlement for less than the demand. We are not a party to any other pending
legal proceedings that, if decided adversely to us, would have a material
adverse effect upon our business, results of operations or financial condition
and are not aware of any threatened or contemplated proceeding by any
governmental authority against our company. To our knowledge, we are not a party
to any pending civil or criminal action or investigation.
Description
of Property
Our
corporate offices are located at 2060 Centre Pointe Boulevard, Suite 7, Mendota
Heights, Minnesota 55120. We currently lease approximately 3,600 square feet
with possible expansion to 4,700 square feet of office space at this location.
The monthly base rent for the 3,600 square feet is $3,000 per month for months 1
through 12; $2,395 per month for months 13 through 24; $2,467 per month for
months 25 through 36; $2,541 per month for months 37 through 48; and $2,617 per
month for months 49 through 60. In addition to the base rent, we also pay our
share of common area maintenance expenses, real estate tax expenses/assessments
and utilities, which are determined by the square footage of the premises we
lease in months 13 through 60. The common area maintenance expense is not
payable in months 1 through 12. The lease term began on November 1, 2008 and
will extend for a period of 5 years, ending on October 31, 2013. We expect that
the premises in which our principal executive office is located will be adequate
for our office needs for the term of the lease.
57
Directors,
Executive Officers, Promoters and Control Persons
The
following table identifies our current executive officers and
directors.
Name
|
Age
|
Position
Held
|
||
Lawrence
W. Gadbaw
|
71
|
Chairman
of the Board of Directors
|
||
Kevin
R. Davidson
|
49
|
President,
Chief Executive Officer, Chief Financial Officer and Director
|
||
Chad
A. Ruwe
|
45
|
Chief
Operating Officer and Director
|
||
Kirsten Doerfert |
52
|
Vice President of Sales and Marketing | ||
James
E. Dauwalter
|
58
|
Director
|
||
Peter
L. Morawetz
|
81
|
Director
|
||
Thomas
J. McGoldrick
|
67
|
Director
|
||
Andrew
P. Reding
|
38
|
Director
|
We
have not set a term of office for any of our directors and each director will
serve until their successors are elected and have duly
qualified.
There
are no family relationships between any of our directors or executive officers.
Our executive officers are appointed by our board of directors and serve at the
board’s discretion. There is no arrangement or understanding between any of our
directors or executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or
officer.
None
of our directors or executive officers has, during the past five
years,
•
|
had
any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer, either at the time of
the bankruptcy or within two years prior to that
time,
|
•
|
been
convicted in a criminal proceeding and none of our directors or executive
officers is subject to a pending criminal
proceeding,
|
•
|
been
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities, futures, commodities or
banking activities, or
|
•
|
been
found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or
vacated.
|
Business
Experience
Lawrence W. Gadbaw, Chairman of the
Board of Directors. Mr. Gadbaw has served as a director since our
inception in 2002. He served as our President and Chief Executive Officer from
2002 to 2006 and Executive Vice President Business Development from 2006 to
2008. Mr. Gadbaw has also been Chairman of Health Care Marketing, Inc., a
manufacturer and marketer of health care products, since 1992. From 1990 to
1992, he was President, Chief Operating Officer and Director of Augustine
Medical, Inc., a manufacturer of hypothermia treatment products. Mr. Gadbaw was
President, Chief Executive Officer, Treasurer and Director of Bio-Vascular,
Inc., a manufacturer of tissue and biosynthetic-based medical devices and grafts
for cardiovascular surgery, from 1985 to 1989. From 1979 to 1981, he was
Director of Sales and Marketing for Medical Incorporated, a manufacturer of
cardiovascular products. Mr. Gadbaw was General Manager of Sween Corporation, a
manufacturer of health care products, from 1977 to 1979. He held numerous
positions in marketing and sales with Medtronic, Inc., a manufacturer and
distributor of cardiovascular products from 1967 to 1977, including the position
of Director of U.S. Sales.
58
Kevin R. Davidson, President, Chief
Executive Officer and Chief Financial Officer. Mr. Davidson has served as
our President and Chief Executive Officer since 2006 and Chief Financial Officer
since January 2009, and has several years of experience in the medical
technology sector. He has been the Chief Financial Officer of three medical
technology companies including his most recent position beginning in 2003 as
Chief Financial Officer, Vice President of Business Development at OrthoRehab,
Inc., where he lead the successful sale of the organization to Otto Bock GmbH.
In addition to his Chief Financial Officer experience, Mr. Davidson was an
investment banker in the medical technology sector as a Managing Director with
the Arthur Andersen Global Corporate Finance Group from 1998 to 2002, where he
led and closed several transactions in this sector. Mr. Davidson also has
experience in the corporate development function in the medical area, including
holding positions at St. Jude Medical, Inc. from 1989 to 1992. In addition, he
has extensive domestic and international experience as a management consultant
in this area. Mr. Davidson received a BA in Economics from Gustavus Adolphus
College in 1982 and an MBA from The Colgate Darden Graduate School of Business
Administration at the University of Virginia in 1986.
Chad
A. Ruwe, Chief
Operating Officer.
Mr. Ruwe became our Executive Vice President of Operations in 2008 and Chief
Operating Officer in
2009. He has over 20 years experience in global business
leadership in critical fluid management industries focused on containment,
management, and delivery of highly toxic and corrosive fluids. From 2002 to 2007
he held several senior management positions with Entegris, Inc., including
General Manager of NT International, a wholly owned subsidiary of Entegris, Vice
President of the Fluid Handling Systems business, Vice President of the
Semiconductor business and Vice President & General Manager of the Liquid
MicroContamination business. From 1996 to 2002, Mr. Ruwe was with Tescom
Corporation (now part of Emerson’s Climate Technologies Group) serving as Vice
President & General Manager of the High Purity Controls Division and Hankuk
Tescom, Ltd., an assembly and test facility in South Korea. Mr. Ruwe held
several management level positions at Parker Hannifin Corporation from 1987 to
1996. Mr. Ruwe has previously served on the board of directors for two early
stage venture start-ups. He holds a Master of Science degree in Management,
specializing in Operations Research, from the University of Alabama and he
received his Bachelor of Science degree in Mechanical Engineering, specializing
in Fluid Dynamics, from The Ohio State University in Columbus,
Ohio.
Kirsten Doerfert, Vice President of
Sales and Marketing. Ms. Doerfert joined BioDrain Medical as our Vice
President of Sales and Marketing in 2009. She has over 25 years experience in
worldwide medical device sales and marketing leadership, primarily focused in
major surgical markets. From 2007 to 2008 and from 1999 to 2004, Ms. Doerfert
served as a senior executive at Urologix, Inc., a public company serving the
urology market, in the positions of Senior Vice President and General Manager,
Vice President Business Development and Strategic Planning, and Vice President
Global Marketing. From 2005 to 2007, Ms. Doerfert served as the Vice President
Marketing for Gyrus ACMI Surgical Division of Gyrus Group PLC (now wholly owned
by Olympus), a medical device company manufacturing and marketing visualization
and tissue management systems, instruments and services for the minimally
invasive surgery market. From 1991 to 1999, Ms. Doerfert held sales and
marketing positions of increasing responsibility at Circon Corporation (now
wholly owned by Olympus) also serving the minimally invasive surgery markets.
She was employed by Corometrics Medical Systems (now a division of GE Medical)
from 1983 to 1999 in sales, marketing and clinical positions. Ms. Doerfert has a
strong clinical background with 8 years in clinical practice as a registered
nurse. She received a nursing degree from Clemson University, Clemson, SC and a
Bachelor of Science degree in nursing from Georgia State University, Atlanta,
GA.
59
James E.
Dauwalter, Director. Mr. Dauwalter has served as a director of
the Company since July 31, 2009. Mr. Dauwalter served as a director of VeraSun
Energy Corporation from April 2008 to May 2009. He served as a director of US
BioEnergy from July 2006 until April 2008, and served as chairman of the board
from November 2007 until April 2008. Mr. Dauwalter also served, from August 2005
until May 2008, as the chairman of the board of directors of Entegris, Inc., a
materials integrity management company. Prior to his appointment as chairman of
Entegris in August 2005, he served as the chief executive officer of Entegris
since January 2001. Mr. Dauwalter joined Entegris in 1972 and held a variety of
positions prior to his first executive appointment in March 2000 as chief
operating officer. Mr. Dauwalter was also instrumental in founding
Metron Technology, B.V., a supplier of semiconductor products in Europe, and
served on their board of directors from their date of formation until May 2008,
and served on the boards of several subsidiaries and affiliates of Fluoroware,
Inc., a predecessor company to Entegris, Inc. Mr. Dauwalter holds a
bachelors degree in business management from Bemidji State University.
Peter L. Morawetz, PhD,
Director. Dr. Morawetz is a consultant to development-stage companies in
the medical and high technology field. He has served as a director of the
Company since its inception in 2002. From 1985 to 2002, he provided consulting
services in the fields of technology and product positioning for a large number
of U.S. and foreign corporations. Notable clients included Medtronic, EMPI,
Hutchinson Technologies, Minntech, Bauer Biopsy Needles, American Medical,
Lectec and Walker Reading Technologies. In the course of a thirty-year career,
he covered progressively important positions in engineering and R&D
management. His contributions include development of neurological devices at
Medtronic, Inc. from 1971 to 1981 and EMPI, Inc. from 1981 to 1985, as well as
magnetic-storage devices at Univac from 1958 to 1961 and again from 1965 to 1967
and Fabri-Tek from 1961 to 1965. He has seven patents and has been active in
market planning and corporate development.
Thomas J. McGoldrick,
Director. Mr. McGoldrick has served as a director of the Company since
2005. Prior to that, he served as Chief Executive Officer of Monteris Medical
Inc. from November 2002 to November 2005. He has been in the medical device
industry for over thirty years and most recently was cofounder and Chief
Executive Officer of Fastitch Surgical in 2000. Fastitch is a startup medical
device company with unique technology in surgical wound closure. Prior to
Fastitch, Mr. McGoldrick was President and Chief Executive Officer of Minntech
from 1997 to 2000. Minntech is a $75 million per year publicly traded
(Nasdaq-MNTX) medical device company offering services for the dialysis,
filtration, and separation markets. Prior to employment at Minntech from 1970 to
1997, he held senior marketing, business development and international positions
at Medtronic, Cardiac Pacemakers, Inc. and Johnson & Johnson. Mr. McGoldrick
is on the board of directors of two other startup medical device
companies
Andrew P. Reding, Director.
Mr. Reding is an executive with extensive experience in sales and marketing of
capital equipment for the acute care markets. He has served as a director of the
Company since 2006 and he is currently the President and Chief Executive Officer
of TRUMPF Medical Systems, Inc., a position he has held since April 2007. Prior
to that, he was Director of Sales at Smith & Nephew Endoscopy and prior to
that, he served as Vice President of Sales and Director of Marketing with
Berchtold Corporation from 1994 to 2006. His experience is in the marketing and
sales of architecturally significant products for the operating room, emergency
department and the intensive care unit. Mr. Reding has successfully developed
high quality indirect and direct sales channels, implemented programs to
interface with facility planners and architects and developed GPO and IDN
portfolios. Mr. Reding holds a bachelors degree from Marquette University and an
MBA from The University of South Carolina.
Medical
Advisory Board
We
have a Medical Advisory Board to assist us in understanding the needs of our
market and ways to better serve that market. From time to time our executive
management may elect to change the composition of the Medical Advisory Board,
including but not limited to, expanding the size of the Medical Advisory
Board.
Dr. Arnold S. Leonard, MD,
PhD. Dr. Leonard is a surgeon who specialized in orthopedic anterior
spine approaches and pediatric surgery from 1956 to 2006. Dr. Leonard served at
the University of Minnesota (U of M) 1956-2004 where he was a Professor of
Surgery and Chair in Pediatric Surgery, maintains membership in 13 medical
societies, is a recipient of many special honors and awards including The
Wangensteen Distinguished Professor Award for Excellence in Teaching, is a
member of several hospital and national medical committees, and a lecturer and
author of over 250 abstracts, publications and presentations. He has also
performed several research projects in the treatment of cancer using genetic
engineering to boost the immune system. The Arnold S. Leonard, M.D., Ph.D. Chair
in Pediatric Surgery was awarded to Dr. Leonard by the University of Minnesota
as an endowed scholar alongside two other distinguished Minnesota
physicians
David Feroe. Mr. Feroe is a
practicing nurse anesthetist at Fairview University Hospital and also has a
private consulting practice. He previously served as a clinical research
executive with Augustine Medical, Inc. while in practice at Fairview University
Hospital. He was instrumental in gaining medical facility acceptance of
Augustine Medical Inc.’s innovative patient warming devices.
60
Debbie Heitzman, RN. Ms.
Heitzman, a healthcare planning consultant with Strategic Hospital Resources,
has more than 25 years of international experience as a consultant in clinical
architecture and design, medical equipment planning, clinical consulting and
nursing. Ms. Heitzman is a member of the educational faculty of Harvard Graduate
School of Design Professional Development Program. She formed Strategic Hospital
Resources in 2003 and is a principal in that firm. In the course of her
Practice, she is called upon to assist medical facilities in designing and
planning equipment for operating rooms.
Mary Wells Gorman, RN, CID.
Ms. Gorman, a healthcare planning consultant with Gorman Resources Ltd., has 14
years of nursing practice and 15 years of healthcare architectural projects
experience with her own consulting firm. Like Ms. Heitzman, Ms. Gorman works
with healthcare clients in facility programming and planning. She is an advocate
for healthcare administrative policy change and was instrumental in changing the
Minnesota Health Department's guidelines for inpatient care so that healing
environments are more firmly integrated into inpatient
practice.
There
are no family relationships between any of the members of the Medical Advisory
Board and any of our directors or executive officers nor any arrangement or
understanding with any of our directors or executive officers pursuant to which
any of the Medical Advisory Board members was selected.
None
of the members of the Medical Advisory Board has, during the past five years,
(i) had any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer, either at the time of the
bankruptcy or within two years prior to that time; (ii) been convicted in a
criminal proceeding and none of our directors or executive officers is subject
to a pending criminal proceeding; (iii) been subject to any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities, futures, commodities or banking activities; or (iv) been found by a
court of competent jurisdiction (in a civil action), the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated.
Other
than the warrant agreements described below, there are no agreements between the
Company and any of the members of the Medical Advisory Board.
In
2005, we issued warrants to purchase 2,993 shares of our common stock at $1.67
per share to each of Debbie Heitzman, Mary Wells Gorman and David Feroe for
their services on the Medical Advisory Board.
In
2006, we issued a warrant to purchase 35,913 shares of our common stock at $.02
per share to Dr. Arnold Leonard for his services on the Medical Advisory Board.
The warrant contains an anti-dilution provision that provides that such shares
would double upon the Company’s total outstanding shares reaching 2 million. The
second 35,913 shares of our common stock were granted to Mr. Leonard in June
2008 when we reached the 2 million in outstanding shares of common stock through
the October 2008 financing.
In
addition, three individuals, Karen Ventura, Nancy Kolb and Kim Shelquist,
provided the Company with sales and marketing advisory services in 2006. In
consideration for their services, we granted each of them a warrant to purchase
2,993 shares of our common stock at $1.67 per share.
Executive
Compensation
Summary
of Compensation
The
following table summarizes all compensation for the fiscal years ended December
31, 2007 and 2008 paid to our President and Chief Executive Officer and our
Former Chief Financial Officer and Secretary. No other executive officer earned
total compensation exceeding $100,000 during the fiscal years ended 2008 or
2007.
61
Summary
Compensation Table
Name
and
principal
position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($) (4)
|
Non-
Equity
Incentive
Plan
Compen-
sation
($)
|
Nonquali-
fied
Deferred
Compen-
sation
Earnings
($)
|
All
Other
Compen-
sation
($)
|
Total ($)
|
||||||||||||||||||||||||||
Kevin
R. Davidson,
|
2008
|
160,000 | 25,000 | 186,307 | 371,307 | ||||||||||||||||||||||||||||||
President
and Chief Executive Officer
|
2007
|
150,000 | 23,000 | 14,966 | 187,966 | (1) | |||||||||||||||||||||||||||||
Gerald
D.
|
2008
|
114,250 | 114,250 | ||||||||||||||||||||||||||||||||
Rice,
Former Chief Financial Officer and Secretary (3)
|
2007
|
110,000 | 46,000 | 23,990 | 179,990 | (2) |
|
(1)
|
In 2008 Mr. Davidson was
entitled to $160,000 in base salary under his employment agreement and a
$25,000 board approved bonus, but was paid only $126,650, due to a
shortage of cash. The bonus was established by the board as an incentive
for Mr. Davidson to complete a financing of not less than $1 million and
was paid after the successful completion of the October 2008 financing. Of
the $126,650 paid Mr. Davidson in 2008 $25,000 was a bonus and $101,650
was salary. In 2007, although Mr. Davidson was entitled to $150,000 in
base salary under his employment agreement, he received $59,375 in base
salary due to lack of funds. In June 2008 we reached agreement with three
current and former officers to reduce accrued payroll liabilities relating
to 2007 and prior years, by a total of $346,700 (of which Mr. Davidson
waived compensation in the aggregate amount of $90,000 for 2007 and prior
years). In addition, Mr. Davidson waived $58,350 in underpaid compensation
related to 2008. In exchange therefore, Mr. Davidson will be granted a
one-time cash payment of $23,000 as well as an option to purchase 80,000
shares of common stock at $.35 per share when the Company raises an
additional $3 million of funding subsequent to the financing completed in
October 2008.
|
|
(2)
|
In 2008 Mr. Rice was entitled
to $114,250 in base salary under his employment agreement and board
approved salary increase, but was paid only $73,525 due to a shortage of
cash. In 2007, although Mr. Rice was entitled to $110,000 in base salary
under his employment agreement, he received $43,542 in base salary due to
lack of cash. In June 2008 we reached agreement with three current and
former officers to reduce accrued payroll liabilities relating to 2007 and
prior years, by a total of $346,700 (of which Mr. Rice waived compensation
in the aggregate amount of $125,000 relating to 2007 and prior years). In
addition, Mr. Rice waived $40,725 in underpaid compensation related to
2008. In exchange therefore, Mr. Rice will be granted a one-time cash
payment of $46,000 as well as an option to purchase 160,000 shares of
common stock at $.35 per share when we raise an additional $3 million of
funding subsequent to the financing completed in October 2008.
|
|
(3)
|
Mr. Rice terminated his
employment as our Chief Financial Officer and Secretary on January 15,
2009.
|
|
(4)
|
Values expressed represent the
actual compensation cost recognized by our Company during 2008 for equity
awards granted in 2008 and previous years as determined pursuant to
Statement of Financial Accounting Standards No. 123, Share-Based Payment (“SFAS 123R”)
utilizing the assumptions discussed in Note 3, “Stock Options and
Warrants,” in the notes to financial statements included as page F-7 to
this filing on Form S-1.
|
62
Outstanding
Equity Awards at Fiscal Year-End
The
table below provides information concerning unexercised options for our
President and Chief Executive Officer and our Former Chief Financial Officer and
Secretary outstanding as of December 31, 2008. To date, there have been no
stock issuances from these option
grants.
Outstanding
Equity Awards at Fiscal Year-End Table
Option awards
|
Stock awards
|
|||||||||||||||||||||||||||||||||||
Name
|
Number
of
securities
underlying
unexercised
options
(#)
exercisable
|
Number
of
securities
underlying
unexercised
options
(#)
unexercisable
|
Equity
incentive
plan
awards:
Number
of
securities
underlying
unexercised
unearned
options
(#)
|
Option
exercise
price
($)
|
Option
expiration
date
|
Number
of
shares
or
units
of
stock
that
have
not
vested
(#)
|
Market
value
of
shares
of
units
of
stock
that
have
not
vested
($)
|
Equity
incentive
plan
awards:
Number
of
unearned
shares,
units
or
other
rights
that
have
not
vested
(#)
|
Equity
incentive
plan
awards:
Market
or
payout
value
of
unearned
shares,
units
or
other
rights
that
have
not
vested
($)
|
|||||||||||||||||||||||||||
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||||||||||
Kevin
R. Davidson, President and Chief Executive Officer
|
- | 80,000 | (1) | - | $ | .35 |
12/31/13
|
- | - | - | - | |||||||||||||||||||||||||
543,292 | (2) | .01 |
06/05/18
|
|||||||||||||||||||||||||||||||||
Gerald
D. Rice, Former Chief Financial Officer and Secretary
|
- | 160,000 | (1) | - | $ | .35 |
12/31/13
|
- | - | - | - |
(1)
|
Issuance of these stock
options is contingent upon the Company achieving $3 million in total
investment funding.
|
(2)
|
Mr. Davidson was entitled to
receive 543,292 shares of company stock under terms of his employment
agreement, but agreed to accept a stock option to purchase 543,292 shares
at $.01 per share. The option vested immediately and has a 10 year
term.
|
63
Discussion
of Compensation
Our
board of directors currently evaluates and sets the compensation policies and
procedures for our executive officers but as soon as established, this function
will be performed by a compensation committee composed solely of independent
directors. Except as provided for in the employment agreements described below,
annual reviews generally determine future salary and bonus amounts for our
executive officers, as a part of the Company’s compensation
procedures.
The
amounts reflected in the descriptions of the employment agreements for Mr.
Davidson and Mr. Rice below differ from the amounts disclosed in the Summary
Compensation Table because the Company did not pay them their full salaries due
to lack of funds.
Employment
Agreements, Termination of Employment and Change-in-Control
Arrangements
The
following discussions provide a description of the material terms and conditions
of the employment agreements described below. The discussions are qualified in
their entirety by the full text of the agreements.
We
entered into an employment agreement with Kevin R. Davidson, President and Chief
Executive Officer, on October 4, 2006. The term of the agreement is four years
and is automatically renewable except by action of our board of directors. The
agreement provides for an annual base salary of $150,000 (payable beginning when
cumulative new funding for the Company reaches $250,000), with an increase to
$170,000 upon reaching funding of $1million and $200,000 upon reaching
cumulative net sales of $5 million. Mr. Davidson’s base salary was increased to
$170,000 on July 1, 2008 as a result of reaching the $1 million in new
funding. Mr. Davidson is eligible to participate in the Company’s
bonus plan when it is completed and approved by our board of directors or
compensation committee when established. In addition, pursuant to his employment
agreement, Mr. Davidson is entitled to an initial grant of 50,000 shares of
BioDrain common stock with an anti-dilution protection amounting to 3.81% of the
fully-diluted outstanding common stock of the Company up to the completion of
the first $1million of new funding raised, which pursuant to an option agreement
dated June 5, 2008 amending his employment agreement, Mr. Davidson chose to
receive in options to purchase 543,292 shares of common stock, exercisable at
$.01, in lieu of obtaining the shares to which he was entitled. The options vest
immediately, and the term of the options is 10 years from the date of issuance.
In 2008, Mr. Davidson achieved the $1 million funding target provided for in his
employment agreement and therefore his annual salary was increased to $170,000.
In addition, on September 12, 2008, our board of directors ratified the issuance
of the 543,292 options to Mr. Davidson as a result of the milestones achieved
pursuant to his employment agreement.
In
2007, Mr. Davidson was paid $59,375 in base salary, which is less than he was
entitled to under his employment agreement, due to lack of funds. In June 2008
we reached agreement with three current and former officers to reduce accrued
payroll liabilities relating to 2007 and prior years, by a total of $346,700 (of
which Mr. Davidson had waived compensation in the aggregate amount of $90,000).
In addition, Mr. Davidson waived $58,350 in underpaid compensation for
2008. In exchange therefore, Mr. Davidson will be granted a one-time
cash payment of $23,000 as well as an option to purchase 80,000 shares of common
stock at $.35 per share when we raise an additional $3 million of funding
subsequent to the financing completed in October 2008. Mr. Davidson is also
eligible for stock, stock options, deferred compensation, and life insurance, as
approved by our board of directors or compensation committee when established,
and reimbursements for all reasonable, deductible and substantiated expenses,
including, but not limited to, automobile mileage, telephone, cell phone, and
expenses related to home office and business meetings. Mr. Davidson is entitled
to a minimum of three weeks’ vacation per year. In connection with the
agreement, Mr. Davidson was granted a position on our board of directors with
the option of submitting for board approval one nominee for Board
membership.
We
entered into an employment agreement with Gerald D. Rice, our former Chief
Financial Officer and Secretary, on October 18, 2006. The term of the agreement
was four years and automatically renewable except by action of our board of
directors. The agreement provided for an annual base salary of $118,500 (payable
beginning when cumulative new funding for the Company reaches $250,000). Mr.
Rice was eligible to participate in the Company’s bonus plan when completed and
approved by our board of directors. Mr. Rice terminated his
employment on January 15, 2009.
64
In
2007, Mr. Rice was paid $43,542 in base salary, which is less than he was
entitled to under his employment agreement, due to a lack of funds. In June 2008
we reached agreement with three current and former officers to reduce accrued
payroll liabilities relating to 2007 and prior years, for a total of $346,700
(of which Mr. Rice had waived compensation in the aggregate amount of $125,000).
In addition Mr. Rice waived $40,725 in underpaid compensation for
2008. In exchange therefore, Mr. Rice will be granted a one-time cash
payment of $46,000 as well as an option to purchase 160,000 shares of common
stock at $.35 per share when we raise an additional $3 million of funding
subsequent to the financing completed in October 2008.
On February 1, 2009, we entered into an
employment agreement with Kirsten Doerfert, Vice President of Sales and
Marketing, pursuant to which we granted her an option to purchase 100,000 shares
of common stock at $.35 per share with 20,000 shares vested immediately and
increments of 20,000 shares vesting upon reaching certain performance
milestones. In addition, we granted Ms. Doerfert a warrant to
purchase 15,000 shares at $.46 per share as compensation for her consulting
services prior to becoming an employee. As of June 30, 2009 the warrant is fully
vested and a total of 60,000 shares underlying stock options are vested. The
employment agreement specifies an annual salary of $135,000 until three months
after the company receives FDA clearance to sell the FMS product and the product
is commercially ready for sale, at which time the annual salary will be reduced
to $125,000 per year but she will be entitled to commissions on sales of all
products under a commission plan to be recommended by management and approved by
the board of directors.
The
following termination, change of ownership and cessation of business clauses
apply to the employment agreements for Mr. Davidson, Mr. Rice and Ms. Doerfert,
collectively referred to as “Employee”:
We are
entitled to terminate Employee’s employment for “cause” at any time during the
term of the Employee’s employment and Employee may voluntarily resign from his
employment with us at any time. For purposes of the agreements, termination for
“cause” means termination for any of the following reasons:
a. the
continued noncompliance by the Employee with our directors’ written
instructions, directives or regulations, after fifteen (15) days’ written notice
of such noncompliance from us; a breach by the Employee of any material term of
the employment agreement, which breach is not cured within seven (7) days of
written notice thereof from us; unsatisfactory performance of employment duties,
obligations and work and production standards that is not corrected within
thirty (30) days after written notice of such unsatisfactory performance from
us, or such longer period as specified in such notice;
b. malfeasance,
misfeasance, or nonfeasance by the Employee in the course of his
employment;
c. fraud
or a criminal act committed by Employee, provided such criminal act adversely
affects our business;
d. any
breach by Employee of his fiduciary duties and obligations to us or any act or
omission of Employee constituting a breach of his obligations contained in the
confidentiality and non-competition agreements entered into by and between the
Company and the Employee; and
e. the
Employee’s voluntary resignation at any time.
In the
event of termination for cause, Employee is only entitled to receive payment of
base salary, adjusted pro-rata to the date of termination, subject to offset,
and to the extent permitted, for any amounts then owed to us by the
Employee.
65
In the
event the Employee is terminated by us without cause, Employee will be entitled
to receive an amount equal to twelve (12) months of Employee’s annual base
salary for the year of termination, conditioned upon (i) the return to us in
good condition any property owned by or belonging to us; (ii) Employee’s
disclosure of any passwords or procedures necessary for access to any computer
software or program; and (iii) Employee’s continued adherence to the
confidentiality and non-competition agreements entered into by and between the
Company and Employee for two (2) years from the date of
termination.
In the
case of any termination, the Employee’s rights and obligations regarding stock
options and shares of the Company’s common stock owned by the Employee will be
determined in accordance with and be governed by any shareholder agreement
entered into by and between the Company and the Employee and the 2008 Stock
Option Plan.
Employee
may terminate this agreement for good reason and may also terminate without good
reason by giving a notice of termination during the year immediately following a
change in control of more than 40% of our outstanding common stock, with the
exception of stock issued by us, provided that, with the exception of dilution,
Employee is adversely affected by such change in control. In the case of
termination for good reason or without good reason, Employee will be entitled to
the same payments and benefits as if Employee was terminated by us without
cause.
Upon
the death or disability of the Employee, bonuses and other related benefits will
be paid pro-rata for the year in which such event occurred. The employment
agreements will remain in force in the event the Company is sold or if majority
ownership passes from the existing majority shareholders. The employment
agreements (and the confidentiality and non-competition agreements entered into
by the Company and the Employee) will become null and void in the event the
Company becomes insolvent or ceases business due to lack of
funds.
We
entered into an employment agreement with Chad A. Ruwe, Executive Vice President
Operations, on June 16, 2008. Pursuant to the agreement, upon execution of an
investment in the Company of $200,000, we agreed to employ Mr. Ruwe for two
years, with such term to be automatically renewable annually except by action of
our President or board of directors. The agreement provides for an annual base
salary of $135,000. Pursuant to the agreement, Mr. Ruwe received a one-time
signing bonus of $15,000 and will be eligible to participate in the Company’s
bonus plan when it is completed and approved by our board of directors or
compensation committee when established. Mr. Ruwe is eligible to receive stock
options to purchase 250,000 shares of BioDrain common stock at $.35 per share,
which is governed by the 2008 Stock Option Plan. The options vest as follows:
(i) 50,000 shares upon execution of the employment agreement; (ii) an additional
50,000 shares upon submission of the 510(k) to the FDA for clearance of the FMS
unit; (iii) an additional 50,000 shares upon clearance of the 510(k) by the FDA;
(iv) an additional 50,000 shares upon the sale of the first commercial-ready FMS
unit; and (v) an additional 50,000 shares upon sale of the fiftieth
commercial-ready FMS unit. As a result of the FDA application and
April 1, 2009 clearance Mr. Ruwe earned the vesting of 100,000 shares and earned
an additional 50,000 shares in June 2009 as a result of the first sale of our
FMS unit.
Mr.
Ruwe is also eligible for stock, stock options, deferred compensation, and life
insurance, as approved by our board of directors or compensation committee when
established, and reimbursements for all reasonable, deductible and substantiated
expenses, including, but not limited to, automobile mileage, telephone, cell
phone, and expenses related to home office and business meetings. In addition,
beginning as of the date of his employment agreement, Mr. Ruwe receives a
monthly benefit amount of $1,000 until a Company-sponsored medical benefits
program is established. Mr. Ruwe is entitled to a minimum of three weeks’
vacation per year. In connection with the agreement, Mr. Ruwe was granted a
position on our board of directors.
66
Mr.
Ruwe’s employment agreement also provides that throughout his employment and for
one (1) year thereafter, he shall not, for any reason, directly or indirectly,
plan, organize, advise, own, manage, operate, control, be employed by,
participate or be connected in any manner with the ownership, management or
control of any business engaged in the development, marketing and sales of
medical devises dedicated or designed to safely manage and dispose of
contaminated fluids generated in the operating room and other similar locations.
For the purposes of the agreement, indirect competition includes any activity in
aid of a competing business such as being a partner, shareholder, officer,
director, member, owner, manager, governor, agent, employee, advisor, consultant
or independent contractor of any competing business. Furthermore, Mr. Ruwe’s
employment agreement provides that all rights, titles and interests of every
kind and nature, whether currently known or unknown, in any “Intellectual
Property” defined to include patent rights, trademarks, copyrights, ideas,
creations and properties invented, created, written, developed, furnished,
produced or disclosed by Mr. Ruwe in the course of his service to the Company,
shall be and remain the sole and exclusive property of the Company and Mr. Ruwe
shall have no right, title or interest therein or thereto or in and to any
results and proceeds therefrom. Also under the agreement, subject to applicable
Minnesota Statutes, Mr. Ruwe agreed to irrevocably assign to us, all worldwide
rights, title and interest, in perpetuity, in respect of any and all rights he
may have or acquired in the Intellectual Property, to waive any moral rights he
may have or many obtain in the Intellectual Property, and to assist us in every
proper way to apply for, obtain, perfect and enforce rights in the Intellectual
Property and to execute all documents for use in applying for, obtaining and
perfecting such rights and enforcing the same as the Company may
desire.
In
addition, the following terms apply to the employment agreement for Mr. Ruwe,
also referred to as “Employee”:
We are
entitled to terminate Employee’s employment for “cause” at any time during the
term of the Employee’s employment. For purposes of Mr. Ruwe’s employment
agreement, for “cause” shall mean termination for any of the following
reasons:
a. the
material noncompliance by Employee with written instructions, directions or
regulations of our board of directors applicable to him, the breach of any
material term of the agreement, or the unsatisfactory performance of his duties,
obligations, work and production standards and the failure of Employee to
correct such non-compliance, breach or performance within thirty (30) days after
receipt by him of written notice of the same by us;
b. any
willful or grossly negligent act by Employee having the effect of materially
injuring the Company, as determined by a majority vote of our board of directors
(excluding Employee);
c. the
commission by Employee of fraud or a criminal act that adversely affects our
business; or
d. the
determination by an affirmative vote of the majority of our board of directors
(excluding Employee), after reasonable and good faith investigation by the
Company following a written allegation by another Company employee that he
engaged in some form of harassment or other improper conduct prohibited by law,
unless such actions were specifically directed by our board.
In the
event of termination for cause, Employee is only entitled to receive payment of
base salary, adjusted pro-rata to the date of termination, subject to offset,
and to the extent permitted, for any amounts then owed to us by the Employee.
The Employee’s rights and obligations regarding stock options and shares of the
Company’s common stock owned by the Employee will be determined in accordance
with and be governed by any shareholder agreement entered into by and between
the Company and the Employee and the 2008 Stock Option Plan, as well as taking
into account the completion (or non-completion) of Mr. Ruwe’s aforementioned
milestones. Only stock options that have vested as a result of completed
milestones are eligible for ownership by the Employee in the event of
termination for cause.
In the
event the Employee is terminated by us without cause, Employee will be entitled
to receive an amount equal to twelve (12) months of Employee’s annual base
salary for the year of termination as well as bonus payments on a pro-rata basis
for the portion of the year at termination, conditioned upon (i) the return to
us in good condition any property owned by or belonging to us; and (ii)
Employee’s disclosure of any passwords or procedures necessary for access to any
computer software or program. In lieu of a shareholders’ agreement, all
non-vested stock options held by Mr. Ruwe shall immediately vest upon
termination by us without cause and we will provide outplacement services, upon
mutual agreement between the Employee and our President and Chief Executive
Officer, for an amount of $15,000 for one (1) year.
67
Employee
may terminate his employment at any time for good reason. For the purposes of
the agreement, “good reason” means (i) any material breach by us of the
agreement that is not cured by us within thirty (30) days after receipt of
written notice from Employee of such breach; (ii) any material diminution or
adverse change to Employee of his duties, responsibilities, rights, or reporting
relationships available to him before at the time of such diminution or change,
without his consent, except as a result of termination by us for cause; (iii)
any requirement from our board of directors that Employee must relocate his
office outside the Twin Cities metropolitan area; or (iv) by Employee giving a
notice of termination during the year immediately following a change in control
of more than 40% of our outstanding common stock, except stock issued by us,
provided that, with the exception of dilution, Employee is adversely affected by
the change in control.
Employee
may also terminate employment at any time for any reason with one (1) month
notice and in such case, agrees to aid in transition and exit from the Company
causing no harm or hardship during such transition. Employee is not eligible for
salary continuation or bonus if he voluntarily resigns for reasons other than
good reason.
Upon
the death or disability of the Employee, bonuses and other related benefits will
be paid pro-rata for the year in which such event occurred. The employment
agreement will remain in force in the event the Company is sold or if majority
ownership passes from the existing majority shareholders and in such case, all
of Mr. Ruwe’s non-vested stock options, whether the milestone has been achieved
or not, shall become vested with the completion of the sale. The employment
agreement and all the terms thereof will become null and void in the event the
Company becomes insolvent or ceases business due to lack of
funds.
In
2008, Mr. Ruwe invested $200,000 and received 571,429 shares of common stock and
a warrant to purchase an additional 571,429 shares of common stock at $0.46 per
share. In April 2009 Mr. Ruwe made an additional investment of
$25,000 and received 50,000 shares of common stock and a warrant to purchase
50,000 shares of common stock at $.65 per share.
Compensation
of Directors
None
of our directors received cash compensation during the fiscal year ended
December 31, 2007. Lawrence Gadbaw, Chairman of our board of directors, began
receiving $2,000 per month starting in October 2008 for his services as Chairman
of the board of directors. He also receives $2,000 per month as payment of
deferred compensation , which he accrued while serving as our President and
Chief Executive Officer.
Corporate
Governance
We
currently have five active non-employee members of the board of directors,
Lawrence W. Gadbaw, James E. Dawalter, Peter L. Morawetz, Thomas J. McGoldrick,
and Andrew P. Reding. Messrs. Dawalter, Morawetz, McGoldrick and Reding are each
considered independent directors, as defined in Nasdaq Marketplace Rule
4200.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors, and persons who beneficially own more than 10.0% of a
registered class of our equity securities to file with the Securities and
Exchange Commission initial statements of beneficial ownership, reports of
changes in ownership and annual reports concerning their ownership of our common
shares and other equity securities, on Forms 3, 4 and 5 respectively. Since
prior to this offering, we did not have a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, we
were not required to file such forms with the Securities and Exchange
Commission. We do not intend to register a class of our securities on a national
securities exchange before this registration statement is effective. Once we
have a class of equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, we intend on filing all such forms
in a timely manner and if not, to disclose any untimely filings in accordance
with Item 405 Regulation S-K.
Code of
Ethics
In
November 2008, our board of directors adopted a Code of Ethics which is
applicable to all of our officers, directors and employees.
68
Certain
Relationships and Related Transactions
Described
below are certain transactions or series of transactions since inception between
us and our executive officers, directors and the beneficial owners of 5.0% or
more of our common stock, on an as converted basis, and certain persons
affiliated with or related to these persons, including family members, in which
they had or will have a direct or indirect material interest in an amount that
exceeds the lesser of $120,000 or 1% of the average of our total assets for the
last three years, other than compensation arrangements that are otherwise
required to be described under “Executive Compensation.”
In
June 2008 we reached agreement with an employee and three current and former
officers to reduce accrued payroll liabilities relating to 2007 and prior years,
by a total of $346,700 This includes waived compensation from Mr. Davidson in
the amount of $90,000, Mr. Rice in the amount of $125,000 and Mr.
Gadbaw in the amount of $138,500 . In addition Mr. Davidson waived $58,350, Mr.
Rice waived $40,725 and Mr. Gadbaw waived $30,610 in underpaid compensation for
2008. In exchange therefore, Mr. Gadbaw and Mr. Rice will be each
granted an option to purchase 160,000 shares of common stock and Mr. Davidson
will be granted an option to purchase 80,000 shares of common stock, all at $.35
per share upon the Company raising an additional $3 million in
financing subsequent to the October 2008 financing. In addition, Mr. Rice is
entitled to receive a one-time cash payment of $46,000, Mr. Gadbaw is entitled
to receive a one-time cash payment of $25,000 and Mr. Davidson is entitled to
receive a one-time cash payment of $23,000 when the Company raises an additional
$3 million subsequent to the October 2008 financing. Mr. Gadbaw is currently
receiving $2,000 per month until a total of $46,000 is paid with the remaining
balance, if any, paid upon the Company raising an additional $3
million.
Pursuant
to the terms of the Separation Agreement and Release between Mr. Gadbaw and the
Company, if we raise at least $3 million in additional funding prior to fully
paying off Mr. Gadbaw’s accrued salary at the rate of $2,000 per month, we will
then pay off any remaining balance on the accrued salary within 30 days of
receipt of the new funding. As part of the agreement, for as long as
Mr. Gadbaw remains Chairman of our board of directors, he will receive an
additional 30,000 stock options annually, so long as he is Chairman as of
September 1 of that year. These options will be priced based on the fair market
value of the Company’s common stock at the time of grant as determined by our
board of directors.
In
September 2002, an oral agreement was made with director Peter Morawetz whereby
he would provide sales, marketing and general administrative consulting to the
Company for a fee of $1,770 per month. The Company’s expectation at the time was
that the Company would have received equity financing to fund these payments but
the Company did not receive that funding. Pursuant to an oral
agreement with Mr. Morawetz the Company could defer payment of these amounts
until such date that they had cash to pay him. The Company accrued these fees
through August 2006 when Mr. Morawetz’s consulting services ended. On May 15,
2009 Mr. Morawetz and the Company reached agreement whereby he would waive
payment of his consulting fees, in the amount of $84,600, and accept a cash
payment of $30,000 and an option (outside of the Plan) to buy 75,000 shares of
common stock at $.35 per share upon the Company raising $3
million. Mr. Morawetz has no obligation to participate in raising the
funds. The debt forgiveness was treated as a capital contribution, in
accordance with SAB 79, because Mr. Morawetz is both a director and a
significant shareholder, and the $30,000 obligation and the Black-Scholes value
of the option were expensed in the second quarter of 2009.
The
following selling shareholders beneficially own more than 5.0% of our common
stock: Schwartz Holding, Bernard Puder Revocable Trust, Chad A. Ruwe, James E.
Dauwalter Living Trust, James R. Taylor IV, Erick Richardson and Nimish
Patel. All became a related party through investing in the October
2008 funding.
Selling
Security Holders
The
following table sets forth the names of the selling shareholders who may sell
their shares under this prospectus from time to time. No selling shareholder
has, or within the past three years has had, any position, office or other
material relationship with us or any of our predecessors or affiliates other
than as a result of the ownership of our securities, except as set forth in the
footnotes of certain selling stockholders.
69
The
following table also provides certain information with respect to the selling
shareholders’ ownership of our securities as of June 30, 2009, the total number
of securities they may sell under this prospectus from time to time, and the
number of securities they will own thereafter assuming no other acquisitions or
dispositions of our securities. The selling shareholders can offer all, some or
none of their securities, thus we have no way of determining the number they
will hold after this offering. Therefore, we have prepared the table below on
the assumption that the selling shareholders will sell all shares covered by
this prospectus.
Some
of the selling shareholders may distribute their shares, from time to time, to
their limited and/or general partners or managers, who may sell shares pursuant
to this prospectus. Each selling shareholder may also transfer shares owned by
him or her by gift, and upon any such transfer the donee would have the same
right of sale as the selling shareholder.
We may
amend or supplement this prospectus from time to time to update the disclosure
set forth herein. None of the selling shareholders are or were affiliated with
any broker-dealers. See our discussion entitled “Plan of Distribution” for
further information regarding the selling shareholders’ method of distribution
of these shares.
The
common shares included in this selling security holder table
include:
·
|
Shares
underlying a convertible bridge loan from seven investors who loaned us
$170,000 in July 2007. Such securities are convertible into 620,095 shares
and the lenders also received warrants to purchase 620,095 shares at $.35
per share;
|
·
|
4,552,862
common shares and 4,552,862 common shares underlying warrants (at an
exercise price per share of $0.46) to 33 investors pursuant to an equity
private placement from June 2007 to October 2008 for $0.35 per share for
an aggregate of approximately $1.6
million;
|
·
|
547,285
common shares and 136,429 warrants to consultants who provided services in
connection with such equity private placement;
and
|
·
|
Shares
issued pursuant to a binding term sheet with a consultant pursuant to
which the consultant would assist us in obtaining bridge financing and
subsequent equity financing and the consultant and its assigns received
2,001,119 shares in satisfaction of such
obligation.
|
Name of Selling Shareholder
|
|
Number of
Shares
Owned
Before
Offering(1)
|
Number of
Shares
Underlying
Warrants
Owned
Before
Offering
|
Number of
Shares
Offered in
this
Offering(1)
|
Number of
Shares
Owned
After
Offering(2)
|
Percentage
Owned
After
Offering(2)
|
|
|||||||||||||
Caron
Partners LP(3) (25)(31)
|
246,500
|
100,000
|
246,500
|
0
|
0
|
|||||||||||||||
Alan
Topchik (25)(1)
|
200,000
|
100,000
|
200,000
|
0
|
0
|
|||||||||||||||
Marc
I. Abrams (25)(31)
|
57,142
|
28,571
|
57,142
|
0
|
0
|
|||||||||||||||
Douglas
J. Gold (21) (25) (27)(31)
|
232,142
|
28,571
|
232,142
|
0
|
0
|
|||||||||||||||
Stuart
A. Liner (25)(31)
|
142,858
|
71,429
|
142,858
|
0
|
0
|
|||||||||||||||
Steven
M. Gold and Sheila A. Gold (25)(31)
|
142,858
|
71,429
|
142,858
|
0
|
0
|
|||||||||||||||
Tangiers
Investors, L.P.(4) (25)(31)
|
285,714
|
142,857
|
285,714
|
0
|
0
|
|||||||||||||||
Jerome
M. Cowan (25)(31)
|
142,858
|
71,429
|
142,858
|
0
|
0
|
|||||||||||||||
Jeremy
Roll (25) (26)(31)
|
68,573
|
40,001
|
68,573
|
0
|
0
|
|||||||||||||||
Bernard
Vosika and Twyla Vosika (25)(31)
|
142,858
|
71,429
|
142,858
|
0
|
0
|
|||||||||||||||
Sally
Maslon & Naomi Maslon JTWROS (25)(31)
|
57,142
|
28,571
|
57,142
|
0
|
0
|
|||||||||||||||
Michael
Sobeck (25)(31)
|
28,572
|
14,286
|
28,572
|
0
|
0
|
|||||||||||||||
Cavalier
Consulting Corp.(5) (25)(31)
|
142,858
|
71,429
|
142,858
|
0
|
0
|
|||||||||||||||
RP
Capital(6) (21) (25)(31)
|
326,848
|
142,857
|
326,848
|
0
|
0
|
|||||||||||||||
Brian
Weitman (25)(31)
|
64,028
|
21,429
|
64,028
|
0
|
0
|
|||||||||||||||
Bellajule
Partners LP(7) (25)(31)
|
173,858
|
71,429
|
173,858
|
0
|
0
|
|||||||||||||||
Morris
Esquenazi (25(31))
|
200,000
|
100,000
|
200,000
|
0
|
0
|
|||||||||||||||
Schwartz
Holding (25)(28)(31)
|
1,000,000
|
500,000
|
1,000,000
|
0
|
0
|
|||||||||||||||
Jack
Farbman and Thelma Farbman (25)(31)
|
200,000
|
100,000
|
200,000
|
0
|
0
|
|||||||||||||||
Morrie
R. Rubin (25)(31)
|
225,000
|
50,000
|
100,000
|
125,000
|
1.3
|
%
|
||||||||||||||
Lee
M. Terpstra and Orlando Stephenson (25)(31)
|
200,000
|
100,000
|
200,000
|
0
|
0
|
|||||||||||||||
Bernard
Puder Revocable Trust (25)(31)
|
860,000
|
430,000
|
860,000
|
0
|
0
|
|||||||||||||||
Thomas
J. Klas (25)(31)
|
142,858
|
71,429
|
142,858
|
0
|
0
|
|||||||||||||||
Chad
A. Ruwe(22) (25) (30)(31)
|
1,642,858
|
621,429
|
1,142,858
|
500,000
|
(8)
|
4.6
|
%
|
|||||||||||||
Peter
Abramowicz (25)(31)
|
114,286
|
57,143
|
114,286
|
0
|
0
|
70
Name of Selling Shareholder
|
Number of
Shares
Owned
Before
Offering(1)
|
Number of
Shares
Underlying
Warrants
Owned
Before
Offering
|
Number of
Shares
Offered in
this
Offering(1)
|
Number of
Shares
Owned
After
Offering(2)
|
Percentage
Owned
After
Offering(2)
|
|||||||||||||||
Scott
R. Storick (25)(31)
|
200,000
|
100,000
|
200,000
|
0
|
0
|
|||||||||||||||
James
R. Taylor, IV(25)(31)
|
1,142,858
|
571,429
|
1,142,858
|
0
|
0
|
|||||||||||||||
Citigroup
Global Markets Inc. as IRA Custodian FBO John D. Villas
(25)(31)
|
242,858
|
121,429
|
142,858
|
100,000
|
1.0
|
%
|
||||||||||||||
Gregory
B. Graves (25)(31)
|
125,714
|
62,857
|
85,714
|
40,000
|
*
|
|||||||||||||||
James
E. Dauwalter Living Trust dated 12/11/01(9) (25)
(29)(31)
|
1,622,858
|
771,429
|
1,142,858
|
480,000
|
4.4
|
%
|
||||||||||||||
Stan
Geyer Living Trust dated 10/15/2001, as amended, Stan Geyer & Beverly
Geyer, Trustees(10) (25)(31)
|
142,858
|
71,429
|
142,858
|
0
|
0
|
|||||||||||||||
Fenton
Fitzpatrick (25)(31)
|
17,142
|
8,571
|
17,142
|
0
|
0
|
|||||||||||||||
Peter
Persad (25)(31)
|
142,858
|
71,429
|
142,858
|
0
|
0
|
|||||||||||||||
Nimish
Patel(11) (21) (24)
|
503,601
|
45,595
|
503,601
|
0
|
0
|
|||||||||||||||
Erick
Richardson(12) (21) (24)
|
490,733
|
45,595
|
490,733
|
0
|
0
|
|||||||||||||||
Core
Fund Management, LP(13) (24)
|
364,762
|
182,381
|
364,762
|
0
|
0
|
|||||||||||||||
James
Jensen(14) (24)
|
364,762
|
182,381
|
364,762
|
0
|
0
|
|||||||||||||||
Steve
Andress(15) (24)
|
72,952
|
36,476
|
72,952
|
0
|
0
|
|||||||||||||||
Kendall
Morrison(16) (24)
|
72,952
|
36,476
|
72,952
|
0
|
0
|
|||||||||||||||
EGATNIV,
LLC(17) (24)
|
196,092
|
91,191
|
196,092
|
0
|
0
|
|||||||||||||||
Thomas
Pronesti(23) (26)
|
55,964
|
55,964
|
0
|
0
|
||||||||||||||||
Craig
Kulman(23) (26)
|
38,821
|
38,821
|
0
|
0
|
||||||||||||||||
Kulman
IR LLC(18)(23) (26)
|
125,000
|
125,000
|
0
|
0
|
||||||||||||||||
Cross
Street Partners, Inc.(19)(23) (26)
|
125,000
|
125,000
|
0
|
0
|
||||||||||||||||
Bill
Glaser(23) (26)
|
250,000
|
125,000
|
250,000
|
0
|
0
|
|||||||||||||||
Ryan
Hong(21) (27)
|
57,404
|
57,404
|
0
|
0
|
||||||||||||||||
Richardson
& Patel, LLP(20) (27)
|
60,714
|
60,714
|
0
|
0
|
||||||||||||||||
Sean
Fitzpatrick (27)
|
150,000
|
150,000
|
0
|
0
|
||||||||||||||||
David
Baker (27)
|
225,000
|
225,000
|
0
|
0
|
||||||||||||||||
Si
Phillips (27)
|
50,000
|
50,000
|
0
|
0
|
||||||||||||||||
Cameron
Broumand (27)
|
35,000
|
35,000
|
0
|
0
|
||||||||||||||||
Sylvia
Karayan(21) (27)
|
10,000
|
10,000
|
0
|
0
|
||||||||||||||||
Jason
Cavalier (27)
|
15,000
|
15,000
|
0
|
0
|
||||||||||||||||
Greg
Suess (27)
|
104,114
|
104,114
|
0
|
0
|
||||||||||||||||
Ben
Padnos (27)
|
100,000
|
100,000
|
0
|
0
|
||||||||||||||||
Mark
Abdou (27)
|
32,907
|
32,907
|
0
|
0
|
||||||||||||||||
Addison
Adams(21) (27)
|
8,227
|
8,227
|
0
|
0
|
||||||||||||||||
Michael
Cavalier (27)
|
8,227
|
8,227
|
0
|
0
|
||||||||||||||||
Mick
Cavalier
|
8,227
|
8,227
|
0
|
0
|
||||||||||||||||
Francis
Chen (21) (27)
|
2,334
|
2,334
|
0
|
0
|
||||||||||||||||
Doug
Croxall (27)
|
6,170
|
6,170
|
0
|
0
|
||||||||||||||||
Jennifer
& Michael Donohue (21) (27)
|
28,009
|
28,009
|
0
|
0
|
||||||||||||||||
Dan
Estrin (27)
|
823
|
823
|
0
|
0
|
||||||||||||||||
Kevin
Friedmann(21) (27)
|
1,440
|
1,440
|
0
|
0
|
||||||||||||||||
Sylvia
Karayan(21) (27)
|
1,646
|
1,646
|
0
|
0
|
||||||||||||||||
Abdul
Ladha (27)
|
4,114
|
4,114
|
0
|
0
|
||||||||||||||||
Jody
Samuels(21) (27)
|
8,227
|
8,227
|
0
|
0
|
||||||||||||||||
Yossi
Stern (27)
|
10,284
|
10,284
|
0
|
0
|
||||||||||||||||
Steve
Yakubov
|
10,284
|
10,284
|
0
|
0
|
||||||||||||||||
TOTAL
|
14,275,747
|
5,629,386
|
13,030,747
|
1,245,000
|
10.4
|
%
|
71
* Less
than 1.0% based on a total of 9,225,841 shares of common stock outstanding on
June 30, 2009
(1)
Includes up to that number of shares of common stock issuable upon the exercise
of a warrant listed in the selling security holder table.
(2)
Assumes that all shares will be resold by the selling shareholders after this
offering.
(3)
The natural person with voting and dispositive powers for this stockholder is
Beth Levine.
(4)
The natural person with voting and dispositive powers for this stockholder is
Michael Sobeck.
(5)
The natural person with voting and dispositive powers for this stockholder is
Jason Cavalier.
(6)
The natural persons with voting and dispositive powers for this stockholder are
Nimish Patel and Erick Richardson.
(7)
The natural person with voting and dispositive powers for this stockholder is
Donald Levine.
(8) Includes 200,000 shares subject to
exercise of options to purchase common stock, and includes 200,000 shares of
restricted issued August 24, 2009 under the 2008 Equity Incentive Plan. Also
includes 50,000 shares purchased on April 14, 2009 and a warrant to purchase
50,000 shares at an exercise price of $.65 per shares but does not include an
option to purchase 50,000 shares at $.35 per share that have not vested as of
June 30, 2009 and does not include 200,000 shares purchased April 20, 2009 and a
warrant to purchase 200,000 at an exercise price of $.65 per share held by Dean
M. and Carol L. Ruwe, the parents of Chad A. Ruwe.
(10)
The natural persons with voting and dispositive powers for this stockholder are
Stan Geyer and Beverly Geyer.
(11)
Includes 45,595 shares of common stock subject to conversion of a convertible
bridge loan.
(12)
Includes 45,595 shares of common stock subject to conversion of a convertible
bridge loan.
(13)
The natural person with voting and dispositive powers for this stockholder is
David Baker. Includes 182,381 shares of common stock subject to conversion of a
convertible bridge loan.
(14) Includes 182,381 shares of common stock subject to conversion
of a convertible bridge loan.
(15) Includes 36,476 shares of common stock subject to conversion
of a convertible bridge loan.
(16) Includes 36,476 shares of common stock subject to conversion
of a convertible bridge loan.
(17)
Includes 91,191 shares of common stock subject to conversion of a convertible
bridge loan. The natural person with voting and dispositive powers
for this stockholder is Shai Stern.
(18)
The natural person with voting and dispositive powers for this stockholder is
Craig Kulman.
72
(19)
The natural person with voting and dispositive powers for this stockholder is
Thomas Pronesti.
(20)
The natural person with voting and dispositive powers for this stockholder is
Douglas Gold. Richardson & Patel LLP is the outside legal counsel for the
Company.
(21)
The shareholder is an employee or partner of Richardson & Patel LLP, outside
legal counsel for the Company.
(22)
Mr. Ruwe is an officer and director of the Company. Includes an
option to purchase 200,000 common shares at $.35 per share but does not include
an option to purchase 50,000 common shares at $.35 per share that have not
vested as of June 30, 2009.
(23)
The shareholder has assisted the Company in obtaining financing or investor
relations services.
(24)
Each person that participated in lending $170,000 to the Company under a
convertible promissory note has a right to convert their note into common shares
at $.27 per share and also received a warrant to purchase an equal number of
shares at $.35 per shares. In the aggregate the note holders have
rights to convert their debt into 620,095 shares and also hold warrants to
purchase 620,095 shares.
(25)
Participated in the sale of up to 4,552,862 common shares and 4,552,862 common
shares underlying warrants (at an exercise price per share of $0.46) to 33
investors pursuant to an equity private placement from June 2007 to October 2008
for $0.35 per share for an aggregate of $1.6 million;
(26)
Participated in the acquisition of 547,285 common shares and 136,429 warrants by
certain consultants who provided services in connection with such equity private
placement;
(27)
Obtained shares to a binding term sheet with a consultant pursuant to which the
consultant would assist us in obtaining bridge financing and subsequent equity
financing and the consultant and its assigns received 2,001,119 shares in
satisfaction of such obligation.
(28)
The natural person with voting and dispositive powers for this stockholder is
Charles I. Schwartz.
(29) Includes an option to purchase 30,000
shares at $.35 per share and 50,000 restricted shares, issued August 24, 2009
under the 2008 Equity Incentive Plan, held by David Dauwalter, the son of James
Dauwalter. Does not include an option to purchase 20,000 shares at $.35 per
share held by David Dauwalter that are exercisable only upon achievement of
certain performance conditions.
(30)
Participated in the sale of 970,000 units at $.50 per unit, including one share
of common stock and one warrant to purchase a share of common stock at $.65 per
share.
(31)
Shareholder is entitled to additional shares at the rate of 2% per month, based
upon the shares purchased in the October 2008 financing, commencing
March 1, 2009 until the earlier of an effective registration of the Company’s
shares or October 31, 2009 when the 16% maximum is reached. Such
shares will be issued within 30 days of the determination of their final
amount.
73
Plan
of Distribution
Each
selling shareholder of the common stock and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTC Bulletin Board or any other stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. Until such shares are traded
on the OTC Bulletin Board a selling shareholder will sell shares at a fixed
price of $.46 per shares. A selling shareholder may use any one or
more of the following methods when selling shares, subject to applicable federal
and state securities laws:
ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
block
trades in which the broker-dealer will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction;
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
an
exchange distribution in accordance with the rules of the applicable
exchange;
privately
negotiated transactions;
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a part;
broker-dealers
may agree with the selling shareholders to sell a specified number of such
shares at a stipulated price per share;
through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
a
combination of any such methods of sale; or
any
other method permitted pursuant to applicable law.
The
selling shareholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling shareholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance with
FINRA Rule 2440, and in the case of a principal transaction a markup or markdown
in compliance with FINRA IM-2440. The maximum commission or discount to be
received by any Financial Industry Regulatory Authority (“FINRA”) member or
independent broker-dealer will not be greater than 8% for the sale of any
securities included in the registration statement of which this prospectus is a
part.
In
connection with the sale of the common stock or interests therein, the selling
shareholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may, subject to applicable federal state
securities laws, in turn engage in short sales of the common stock in the course
of hedging the positions they assume. The selling shareholders may also, in
compliance with applicable federal and state securities laws, sell shares of the
common stock short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers that in turn may
sell these securities. The selling shareholders may also enter into option or
other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities that require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
74
The
selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act, in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling shareholder has informed us
that it does not have any written or oral agreement or understanding, directly
or indirectly, with any person to distribute our common stock.
We
are required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling shareholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
selling shareholders are deemed to be “underwriters” within the meaning of the
Securities Act, they will be subject to the prospectus delivery requirements of
the Securities Act, including Rule 172 thereunder. In addition, any securities
covered by this prospectus that qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the selling shareholders.
We
have agreed to use reasonable efforts to keep this registration statement
continuously effective (the “Effective Period”) until the first anniversary of
the effective date of this registration statement plus whatever period of time
as shall equal any period, if any, during the Effective Period in which the
Company was not current with our reporting requirements under the Exchange Act
of 1934, as amended (the “Exchange Act”). The resale shares will be sold only
through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the resale shares may not
be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the selling shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the selling shareholders or any other
person. We will make copies of this prospectus available to the selling
shareholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).
Security
Ownership of Certain Beneficial Owners and Management
The following tables set forth certain
information regarding beneficial ownership of our securities as of August 31,
2009 by (i) each person who is known by us to own beneficially 5% or more of the
Company’s outstanding common stock, (ii) each of our directors, (iii) each of
our named executive officers, and (iv) all of our directors and executive
officers as a group. We have determined beneficial ownership in accordance with
the rules of the Securities and Exchange Commission. Under these rules,
beneficial ownership generally includes voting or investment power over
securities. A person (or group of persons) is deemed to be the “beneficial
owner” of our securities if he or she, directly or indirectly, has or shares the
power to vote or to direct the voting of, or to dispose or direct the
disposition of such securities. Accordingly, more than one person may be deemed
to be the beneficial owner of the same security. Unless otherwise indicated, the
persons named in the table below have sole voting and/or investment power with
respect to the number of shares of common stock indicated as beneficially owned
by them. A person is also deemed to be a beneficial owner of any security, which
that person has the right to acquire within 60 days, such as options or warrants
to purchase shares of our common stock. Beneficial ownership and percentage
ownership are based on 10,103,651 shares of common stock outstanding as of
August 31, 2009. Unless otherwise stated, the address of our directors and
executive officers is c/o BioDrain Medical, Inc., 2060 Centre Pointe Boulevard,
Suite 7, Mendota Heights, Minnesota 55120.
75
Name of
Beneficial Owner
|
Amount
and
Nature of
Beneficial
Ownership
|
Percent
Of
Class
|
||||||
Lawrence
W. Gadbaw (1)
|
139,563
|
1.4
|
%
|
|||||
Kevin
R. Davidson (2)
|
873,219
|
8.0
|
%
|
|||||
Chad
A. Ruwe (3)(11)
|
1,021,429
|
9.7
|
%
|
|||||
Peter
L. Morawetz (4)
|
207,739
|
2.0
|
%
|
|||||
Thomas
J. McGoldrick (5)
|
63,942
|
0.6
|
%
|
|||||
Andrew
P. Reding (6)
|
43,942
|
0.4
|
%
|
|||||
Kirsten
Doerfert (14)
|
150,000
|
1.5
|
%
|
|||||
James
Dauwalter Living Trust (9)(11)
|
851,429
|
8.4
|
%
|
|||||
Carl
Schwartz (7)(11)
|
500,000
|
4.9
|
%
|
|||||
Bernard
Puder Revocable Trust (8)
|
430,000
|
4.3
|
%
|
|||||
James
R. Taylor IV (10) (11)
|
571,429
|
5.7
|
%
|
|||||
Nimish
Patel (12)
|
687,592
|
6.7
|
%
|
|||||
Erick
Richardson (13)
|
674,724
|
6.6
|
%
|
|||||
Total
|
6,215,008
|
60.2
|
%
|
|||||
All
directors and executive officers as a group (8 persons)
|
3,351,263
|
28.6
|
%
|
(1)
|
Includes 139,563 shares of
common stock. Does not include an option to purchase 160,000 shares at
$.35 per shares to be issued upon the Company raising an additional $3
million in equity. Mr. Gadbaw does not currently have any outstanding
options to acquire additional shares of common stock of the
Company.
|
|
(2)
|
Includes
(i) 29,927 shares of common stock, (ii) 300,000 shares of restricted stock
issued August 24, 2009 under the 2008 Equity Incentive Plan and (iii)
options to acquire up to an additional 543,292 shares of common stock of
the Company, all of which are presently exercisable. Does not include an
option to purchase 80,000 shares at $.35 per shares to be issued upon the
Company raising an additional $3 million in
equity.
|
(3) | Includes 621,429 shares of common stock, 200,000 shares of restricted stock issued August 24, 2009 under the 2008 Equity Incentive Plan and options to acquire an additional 200,000 shares of common stock at $.35 per share that are presently exercisable. Does not include (i) 621,429 shares of common stock underlying warrants that are not exercisable within 60 days and (ii) options to purchase 50,000 shares of common stock at $.35 per share that are not exercisable until achievement of certain performance targets as provided in Mr. Ruwe’s employment agreement. |
76
(4)
|
Includes 107,739
shares of common stock and 100,000 shares of restricted stock, issued
August 24, 2009 under the 2008 Equity Incentive Plan, but does not include
an option to purchase 75,000 shares at $.35 per share to be issued upon
the Company raising an additional $3 million in
equity.
|
(5)
|
Includes
40,000 restricted shares, issued August 24, 2009 under the 2008 Equity
Incentive Plan, and an option to acquire up to 23,942 shares of common
stock, which are presently exercisable, granted pursuant to a director
stock option agreement by and between Mr. McGoldrick and the
Company.
|
(6)
|
Includes
20,000 restricted shares, issued August 24, 2009 under the 2008 Equity
Incentive Plan, and an option to acquire up to 23,942 shares of common
stock, which are presently exercisable, granted pursuant to a director
stock option agreement by and between Mr. Reding and the
Company.
|
(7)
|
Includes 500,000 shares of
common stock. Does not include 500,000 shares of common stock underlying
warrants that are not exercisable within 60
days.
|
|
(8)
|
Includes 430,000 shares of
common stock. Does not include 430,000 shares of common stock underlying
warrants that are not exercisable within 60
days.
|
(9)
|
Includes
771,429 shares of common stock. Does not include 771,429 shares of common
stock underlying warrants that are not exercisable within 60 days.
Includes an option to purchase 30,000 shares and 50,000 restricted shares,
issued August 24, 2009 under the 2008 Equity Incentive Plan, held by David
Dauwalter, the son of James Dauwalter. Does not include an option to
purchase 20,000 held by David Dauwalter because they vest only upon
achieving certain performance conditions and are, therefore, not
exercisable within 60
days.
|
|
(10)
|
Includes 571,429 shares of
common stock. Does not include 571,429 shares of common stock underlying
warrants that are not exercisable within 60
days.
|
(11)
|
These warrants are fully
vested. However they include a clause that prohibit the warrants to be
exercised if it would cause the holdings of such equity holder to be in
excess of 4.99% of our total outstanding shares. The warrant holder may
amend this clause to eliminate this requirement. However, such clause will
not take effect until the 61 day after notice has been given. Consequently
they cannot exercise their warrants within 60 days of the current date,
and those warrants are not included in the total outstanding and
percentage of outstanding
shares.
|
|
(12)
|
Includes 412,411 shares of
common stock, 45,595 shares of common stock underlying warrants and,
45,595 shares of common stock underlying convertible notes. Also includes
183,991 shares of common stock held by RP Capital LLC, for which Nimish
Patel and Erick Richardson have shared voting and dispositive control.
Does not include a warrant for 142,857 shares held by RP Capital LLC
because these warrants are not exercisable within 60 days. Does not
include 60,714 shares of common stock held by Richardson & Patel LLP.
The voting and dispositive control of such shares are held by Mr. Douglas
Gold. Mr. Patel does not currently have options to acquire additional
shares of common stock of the
Company.
|
(13)
|
Includes 399,543 shares of
common stock, 45,595 shares of common stock underlying warrants and,
45,595 shares of common stock underlying convertible notes. Also includes
183,991 shares of common stock held by RP Capital LLC, for which Nimish
Patel and Erick Richardson have shared voting and dispositive control.
Does not include a warrant for 142,857 shares held by RP Capital LLC
because these warrants are not exercisable within 60 days. Does not
include 60,714 shares of common stock held by Richardson & Patel LLP.
The voting and dispositive control of such shares are held by Mr. Douglas
Gold. Mr. Richardson does not currently have options to acquire additional
shares of common stock of the
Company.
|
(14)
|
Includes
a warrant to purchase 15,000 shares at $.46 per share, an option to
purchase 60,000 shares at $.35 per share and 75,000 restricted shares
issued August 24, 2009 under the 2008 Equity Incentive Plan. Does not
include an option to purchase 40,000 shares at $.35 per share that are not
excercisable until achievement of certain performance targets as provided
in Ms. Doerfert’s employment
agreement.
|
77
Description
of Securities
General
We are
authorized to issue only one class of shares, which is designated as common
stock. On October 20, 2008, our board of directors approved a resolution to
increase the total number of shares of common stock that we are authorized to
issue from 11,970,994 to 40,000,000 with $0.01 par value per share. Such action
was approved by the Company’s shareholders holding a majority of the shares
entitled to vote thereon at a special meeting of shareholders held on December
3, 2008.
Common
Stock
The securities being offered by the selling
shareholders are shares of our common stock. Prior to this offering there has
been no public or private trading market for our common stock and there will be
no such trading market until our common stock is approved for quotation on the
OTC Bulletin Board. As of August 31, 2009, there were issued and outstanding
10,103,651 shares of common stock that were held by 106 shareholders of record.
The
holders of common stock are entitled to one vote per share on all matters to be
voted upon by the shareholders; provided that no proxy shall be voted if
executed more than one year prior to the date of the stockholders’ meeting
except as may otherwise be provided by our board of directors from time to time.
Only stockholders of record at the close of business on day twenty prior to the
date of the meeting are entitled to vote at the stockholders’ meeting. Holders
of our common stock do not have cumulative voting rights.
The
holders of common stock are entitled to receive ratably any dividends that may
be declared from time to time by our board of directors out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities. The common stock has no
preemptive or conversion rights or other subscription rights and there are no
redemption provisions applicable to our common stock. All outstanding shares of
common stock are fully paid and non-assessable, and the shares of common stock
offered in this offering will be fully paid and not liable for further call or
assessment.
Except
for directors, who are elected by receiving the highest number of affirmative
votes of the shares entitled to be voted for them, or as otherwise required by
Minnesota law, and subject to the rights of the holders of preferred stock then
outstanding (if any), all shareholder action is taken by the vote of a majority
of the issued and outstanding shares of common stock present at a meeting of
shareholders at which a quorum consisting of a majority of the issued and
outstanding shares of common stock is present in person or proxy. In the absence
of a quorum for the transaction of business, any meeting may be adjourned from
time to time. The stockholders present at a duly called or held meeting may
continue to do business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum. The Company’s President or, in
his absence, the Vice-President or any other person designated from time to time
by the board of directors, shall preside at all meetings of
stockholders.
Warrants
and Convertible Debt
As of August 31, 2009, there were
outstanding warrants to purchase 6,937,813 shares of our common stock, including
620,095 warrants exercisable at a price of $0.35 per share, issued in
conjunction with a convertible bridge loan we undertook in July 2007, and
4,689,291 warrants exercisable at a price of $0.46 per share, issued in
conjunction with the private offering we completed in October 2008, including
4,552,862 warrants issued to investors and 136,429 warrants issued to
consultants who provided services in connection with the offering. These
warrants are immediately exercisable (except for a provision that prohibits
exercise of warrants if it would cause the holder to hold more than 4.99% of the
outstanding shares of common stock) and have a three year term. If there is no
effective registration statement registering the underlying shares by August 31,
2009, these warrants contain cashless exercise provisions that allow the holder
to exercise the warrant for a lesser number of shares of common stock in lieu of
paying cash. The number of shares that would be issued in this case would be
based upon the market price of the common stock at the time of the net exercise,
or if there is no market price, the price per share as determined by mutual
agreement of the Company and the holder. As of August 31, 2009, there were
warrants to purchase 1,050,000 shares at $.65 issued in connection with a
private placement in April, May, June and August 2009, and there are other
outstanding warrants to purchase 578,427 shares of our common stock at exercise
prices ranging from $.02 to $1.67 per share.
78
There
are also bridge loan notes outstanding convertible into shares of our common
stock at a conversion price of $.27 per share, which were issued in conjunction
with the bridge loan we undertook in July 2007 but also considered part of the
October 2008 financing. The bridge loan was undertaken primarily to give the
private placement agents sufficient time to raise additional equity and they
were ultimately successful in raising approximately $1.6 million by October
2008. The convertible notes total $170,000 and are held by seven
holders. The names, individual face amounts of the convertible bridge loan notes
and the number of shares upon conversion is as follows:
Conversion
Price
|
||||||||
0.274151
|
||||||||
Shares
of
|
||||||||
Name
|
Amount
|
Stock
|
||||||
Core
Fund Mgmt LP
|
$
|
50,000
|
182,381
|
|||||
C.
James Jensen
|
50,000
|
182,381
|
||||||
Steve
Andress
|
10,000
|
36,476
|
||||||
Kendall
Morrison
|
10,000
|
36,476
|
||||||
EGATNIV,
LLC
|
25,000
|
91,191
|
||||||
Erick
Richardson
|
12,500
|
45,595
|
||||||
Nimish
Patel
|
12,500
|
45,595
|
||||||
Total
|
$
|
170,000
|
620,095
|
The
notes are convertible into 620,095 shares of common stock and warrants to
purchase 620,095 shares of common stock at $.35 per share were granted in
connection therewith. The notes bear interest at 8% and have passed their
original maturity date of April 2008. If there is no effective registration
statement registering the underlying shares by within 180 days of the closing of
the October 2008 private placement offering, these notes contain certain
monetary penalties imposed upon the Company. The Company will incur a penalty of
$5,000 payable pro-rata to note holders for each 30 day period after February
27, 2009 until such registration is declared effective or until the shares are
available for sale under Rule 144.
In addition, the Company will be required to
issue additional shares to the purchasers of units in the October 2008
financing, equal to 2% of the shares purchased in the financing, for each 30 day
period beyond 180 days from the August 31, 2008 closing date until the
registration is declared effective with a maximum of 16% or 728,458 shares. This
penalty was provided to create an incentive for the Company to complete the
registration of the securities tied to this investment in a timely manner. As of
June 30, 2009 the Company is obligated to pay $20,500 in accrued penalties to
the note holders, in addition to regular accrued interest of $43,360. The
penalty will continue to accrue at $5,000 for each 30 day period after February
27, 2009 until there is an effective registration of the Company’s shares and
there is no maximum. The accrued penalties are included as interest expense in
the financial statements contained in the Form S-1. Additionally, the company
estimated that it will be obligated to issue an additional 637,401 shares of
stock to the purchasers of the 4,552,862 units in the October 2008
financing and has accrued $318,701 in expense as of June 30, 2009 to reflect
this obligation. The accrued interest and penalties will be paid at such time as
the Company raises a significant portion of the $3 million in new capital
subsequent to getting our shares listed on the OTC Bulletin Board. The
additional shares will be issued within 30 days of the earlier of an effective
registration of the Company’s shares or October 31, 2009 when the 16% maximum is
reached.
The
exercise price and the number of shares issuable upon exercise of all the
above-referenced warrants will be adjusted upon the occurrence of certain
events, including reclassifications, reorganizations or combinations of the
common stock. At all times that the warrants are outstanding, we will authorize
and reserve at least that number of shares of common stock equal to the number
of shares of common stock issuable upon exercise of all outstanding
warrants.
79
Stock
Options
As of August 31, 2009, there were employee,
consultant and director stock option agreements outstanding with options to
purchase 1,466,174 shares of common stock with various vesting periods and
amounts. We have 77,595 shares remaining reserved for issuance under the 2008
Equity Incentive Plan.
Dividends
We
have never paid dividends and do not currently intend to pay any dividends on
our common stock in the foreseeable future. Instead, we anticipate that any
future earnings will be retained for the development of our business. Any future
determination relating to dividend policy will be made at the discretion of our
board of directors and will depend on a number of factors, including, but not
limited to, our financial condition, operating results, cash needs, growth
plans, the terms of any credit agreements that we may be a party to at the time
and the Minnesota Business Corporations Act, which provides that dividends are
only payable out of surplus or current net profits.
Registration
Rights
Under
the Registration Rights Agreement entered into in connection with the October
2008 financing with certain accredited and institutional investors (the
“Investors”), we are obligated to register the following securities beneficially
owned by the Investors to permit the offer and resale from time to time of such
securities: (i) all of the common stock issued or issuable upon the conversion
of shares of common stock (including the shares underlying the warrants we
issued in conjunction with our private placement financing) acquired from the
Company pursuant to a Subscription Agreement entered into between the Investors
and the Company; and (ii) any securities issued or issuable directly or
indirectly with respect to the securities referred to in (i) by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other
reorganization.
Anti-Takeover
Effects of Certain Provisions of Minnesota Law
Certain
provisions of Minnesota law described below could have an anti-takeover effect.
These provisions are intended to provide management flexibility, to enhance the
likelihood of continuity and stability in the composition of our board of
directors and in the policies formulated by our board of directors and to
discourage an unsolicited takeover if our board of directors determines that
such a takeover is not in our best interests or the best interests of our
shareholders. However, these provisions could have the effect of discouraging
certain attempts to acquire us that could deprive our shareholders of
opportunities to sell their shares of our stock at higher
values.
Section
302A.671 of the Minnesota Business Corporation Act applies, with certain
exceptions, to any acquisitions of our stock (from a person other than us, and
other than in connection with certain mergers and exchanges to which we are a
party) resulting in the beneficial ownership of 20% or more of the voting stock
then outstanding. Section 302A.671 requires approval of any such acquisition by
a majority vote of our shareholders prior to its consummation. In general,
shares acquired in the absence of such approval are denied voting rights and are
redeemable by us at their then-fair market value within 30 days after the
acquiring person has failed to give a timely information statement to us or the
date the shareholders voted not to grant voting rights to the acquiring person’s
shares.
Section
302A.673 of the Minnesota Business Corporation Act generally prohibits any
business combination by us, or any of our subsidiaries, with an interested
shareholder, which means any shareholder that purchases 10% or more of our
voting shares within four years following such interested shareholder’s share
acquisition date, unless the business combination is approved by a committee of
all of the disinterested members of our board of directors before the interested
shareholder’s share acquisition date.
80
Disclosure
of Commission Position of Indemnification for Securities Act Liabilities
We are
a Minnesota corporation and certain provisions of the Minnesota Statutes and our
Bylaws provide for indemnification of our officers and directors against
liabilities which they may incur in such capacities. A summary of the
circumstances in which indemnification is provided is discussed below, but this
description is qualified in its entirety by reference to our Bylaws and to the
statutory provisions.
Section
302A.521, Subd. 2 of the Minnesota Statutes requires a corporation to indemnify
a person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person against judgments, penalties,
fines, including, without limitation, excise taxes assessed against the person
with respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys’ fees and disbursements, incurred by the person in
connection with the proceeding, if, with respect to the acts or omissions of the
person complained of in the proceeding, the person:
(1)
|
has
not been indemnified by another organization or employee benefit plan for
the same judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys’
fees and disbursements, incurred by the person in connection with the
proceeding with respect to the same acts or
omissions;
|
(2)
|
acted
in good faith;
|
(3)
|
received
no improper personal benefit and Section 302A.255, if applicable, has been
satisfied;
|
(4)
|
in
the case of a criminal proceeding, had no reasonable cause to believe the
conduct was unlawful;
and
|
(5)
|
in
the case of acts or omissions occurring in the person’s performance in the
official capacity of director or, for a person not a director, in the
official capacity of officer, board committee member or employee,
reasonably believed that the conduct was in the best interests of the
corporation or, in the case of performance by a director, officer or
employee of the corporation involving service as a director, officer,
partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the
best interests of the corporation. If the person’s acts or omissions
complained of in the proceeding relate to conduct as a director, officer,
trustee, employee, or agent of an employee benefit plan, the conduct is
not considered to be opposed to the best interests of the corporation if
the person reasonably believed that the conduct was in the best interests
of the participants or beneficiaries of the employee benefit
plan
|
Section
302A.521 Subd. 2 further provides that the termination of a proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent does not, of itself, establish that the person did not meet the
criteria set forth in this subdivision.
In
addition, Section 302A.521, Subd. 3, requires that if a person is made or
threatened to be made a party to a proceeding, the person is entitled, upon
written request to the corporation, to payment or reimbursement by the
corporation of reasonable expenses, including attorneys’ fees and disbursements,
incurred by the person in advance of the final disposition of the proceeding,
(a) upon receipt by the corporation of a written affirmation by the person of a
good faith belief that the criteria for indemnification set forth in Section
302A.521, Subd. 2 have been satisfied and a written undertaking by the person to
repay all amounts so paid or reimbursed by the corporation, if it is ultimately
determined that the criteria for indemnification have not been satisfied, and
(b) after a determination that the facts then known to those making the
determination would not preclude indemnification under this section. The written
undertaking required by clause (a) is an unlimited general obligation of the
person making it, but need not be secured and shall be accepted without
reference to financial ability to make the repayment.
81
Section
302A.521 Subd. 4 provides that the articles of incorporation or bylaws of a
corporation either may prohibit indemnification or advances of expenses
otherwise required by Section 302A.521 or may impose conditions on
indemnification or advances of expenses in addition to the conditions contained
in Subd. 2 and 3 including, without limitation, monetary limits on
indemnification or advances of expenses, if the prohibition or conditions apply
equally to all persons or to all persons within a given class. A prohibition or
limit on indemnification or advances may not apply to or affect the right of a
person to indemnification or advances of expenses with respect to any acts or
omissions of the person occurring prior to the effective date of a provision in
the articles of incorporation or the date of adoption of a provision in the
corporation’s bylaws establishing the prohibition or limit on indemnification or
advances.
Section
302A.521 Subd. 5 provides that Section 302A.521 does not require, or limit the
ability of a corporation to reimburse expenses, including attorneys’ fees and
disbursements, incurred by a person in connection with an appearance as a
witness in a proceeding at a time when the person has not been made or
threatened to be made a party to a proceeding
Section
302A.521 Subd. 6 further provides that:
(a)
all determinations whether indemnification of a person is required because the
criteria set forth in Subd. 2 have been satisfied and whether a person is
entitled to payment or reimbursement of expenses in advance of the final
disposition of a proceeding as provided in Subd. 3 shall be
made:
(1)
|
by
the board by a majority of a quorum, if the directors who are at the time
parties to the proceeding are not counted for determining either a
majority or the presence of a
quorum;
|
(2)
|
if
a quorum under clause (1) cannot be obtained, by a majority of a committee
of the board, consisting solely of two or more directors not at the time
parties to the proceeding, duly designated to act in the matter by a
majority of the full board including directors who are
parties;
|
(3)
|
if
a determination is not made under clause (1) or (2), by special legal
counsel, selected either by a majority of the board or a committee by vote
pursuant to clause (1) or (2) or, if the requisite quorum of the full
board cannot be obtained and the committee cannot be established, by a
majority of the full board including directors who are
parties;
|
(4)
|
if
a determination is not made under clauses (1) to (3), by the affirmative
vote of the shareholders required by Section 302A.437 of the Minnesota
Statutes, but the shares held by parties to the proceeding must not be
counted in determining the presence of a quorum and are not considered to
be present and entitled to vote on the determination;
or
|
(5)
|
if
an adverse determination is made under clauses (1) to (4) or under
paragraph (b), or if no determination is made under clauses (1) to (4) or
under paragraph (b) within 60 days after (i) the later to occur of the
termination of a proceeding or a written request for indemnification to
the corporation or (ii) a written request for an advance of expenses, as
the case may be, by a court in this state, which may be the same court in
which the proceeding involving the person’s liability took place, upon
application of the person and any notice the court requires. The person
seeking indemnification or payment or reimbursement of expenses pursuant
to this clause has the burden of establishing that the person is entitled
to indemnification or payment or reimbursement of
expenses.
|
(b)
With respect to a person who is not, and was not at the time of the acts or
omissions complained of in the proceedings, a director, officer, or person
possessing, directly or indirectly, the power to direct or cause the direction
of the management or policies of the corporation, the determination whether
indemnification of this person is required because the criteria set forth in
Subd. 2 have been satisfied and whether this person is entitled to payment or
reimbursement of expenses in advance of the final disposition of a proceeding as
provided in Subd. 3 may be made by an annually appointed committee of the board,
having at least one member who is a director. The committee shall report at
least annually to the board concerning its actions.
82
Section
302A.521 Subd 7 allows a corporation to purchase and maintain insurance on
behalf of a person in that person’s official capacity against any liability
asserted against and incurred by the person in or arising from that capacity,
whether or not the corporation would have been required to indemnify the person
against the liability under the provisions of section 302A.521 of the Minnesota
Statutes.
Section
302A.521 Subd. 8 requires a corporation that indemnifies or advances expenses to
a person in accordance with Section 302A.521 in connection with a proceeding by
or on behalf of the corporation to report to the shareholders in writing the
amount of the indemnification or advance and to whom and on whose behalf it was
paid not later than the next meeting of shareholders.
Section
302A.521 Subd. 9 provides that nothing in Section 302A.521 shall be construed to
limit the power of the corporation to indemnify persons other than a director,
officer, employee, or member of a committee of the board of the corporation by
contract or otherwise.
Pursuant
to our Bylaws, we may indemnify our directors and executive officers to the
fullest extent not prohibited by any applicable law; provided, however, that we
may modify the extent of such indemnification by individual contracts with our
directors and executive officers; and, provided, further, that we shall not be
required to indemnify any director or executive officer in connection with any
proceeding (or part thereof) initiated by such person unless: (i) such
indemnification is expressly required to be made by law; (ii) the proceeding was
authorized by our Board of Directors; or (iii) such indemnification is provided
by the Company, in our sole discretion, pursuant to the powers vested in the
Company under any applicable law. We shall have the power to indemnify our other
officers, employees and other agents as set forth in any other applicable law.
Our Board of Directors shall have the power to delegate the determination of
whether indemnification shall be given to any such person to such officers or
other persons as our board of directors shall determine.
In
addition, our Bylaws provide that we will advance to any person who was or is a
party to a threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or executive officer, of the Company, prior to the final
disposition of the proceeding, promptly following request therefore, all
expenses incurred by any director or executive officer in connection with such
proceeding; provided, however, that the advancement of expenses shall be made
only upon delivery to the Company of an undertaking by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses.
Notwithstanding the foregoing, unless otherwise determined, no advance shall be
made by the Company to an officer of the Company (except by reason of the fact
that such officer is or was a director of the Company in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made: (i) by a majority vote of directors who are not parties to the
proceeding; (ii) by a committee of such directors designated by a majority vote
of such directors; or (iii) if there are no such directors, or such directors so
direct, by a written opinion from independent legal counsel, that the facts
known to the decision making party at the time such determination is made
demonstrate clearly and convincingly that such person acted in bad faith or in a
manner that such person did not believe to be in the best interests of the
Company.
Our
Bylaws also provide that without the necessity of entering into an express
contract, all rights to indemnification and advances to our directors and
executive officers shall be deemed to be contractual rights and to be effective
to the same extent and as if provided for in a contract between the Company and
the director or executive officer. Any right to indemnification or advances
granted to a director or executive officer shall be enforceable by or on behalf
of the person holding such right in any court of competent jurisdiction if: (i)
the claim for indemnification or advances is denied, in whole or in part; or
(ii) no disposition of such claim is made within ninety (90) days of request
therefore. The claimant in such enforcement action, if successful, shall be
entitled to be paid also the expense of prosecuting the claim. In connection
with any claim for indemnification, the Company shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under applicable law for the Company to
indemnify the claimant for the amount claimed. In connection with any claim by
an executive officer of the Company (except in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such executive officer is or was a director of the Company) for advances,
the Company shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in the best interests of the Company, or with
respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that his conduct was lawful. A determination by the
Company (including the board of directors, independent legal counsel or the
stockholders) that indemnification of the claimant is proper because he has met
the applicable standard of conduct or that the claimant has not med such
applicable standard of conduct shall not be a defense to the action nor shall it
create a presumption that claimant has not met the applicable standard of
conduct.
83
Where
You Can Find More Information
We
have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock being offered in this offering.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed as part of the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedules filed as a part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, we refer you to the copy of the contract
or document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. The reports and other information we file with the SEC can be
read and copied at the SEC’s Public Reference Room at 100 F Street, N.E,,
Washington D.C. 20549, on official business days during the hours of 10 a.m. to
3 p.m. Copies of these materials can be obtained at prescribed rates from the
Public Reference Section of the SEC at the principal offices of the SEC, 100 F
Street, N.E., Washington D.C. 20549. You may obtain information regarding the
operation of the public reference room by calling 1(800) SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC.
After
this offering, we will be subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, and we intend
to file periodic reports and other information with the Securities and Exchange
Commission. We are not required by these requirements to deliver an annual
report to our shareholders and, due to the cost involved, it is not likely that
we will deliver an annual report with audited financial statements to our
shareholders.
Experts
Olsen
Thielen & Co., Ltd., our independent registered public accounting firm,
audited our financial statements at December 31, 2008 and December 31, 2007, as
set forth in their report. We have included our financial statements and
financial information in this prospectus and elsewhere in this registration
statement in reliance on the report of Olsen Thielen & Company, Ltd. given
on their authority as experts in accounting and auditing.
Legal
Matters and Interests of Named Experts
Richardson
& Patel LLP has given us an opinion relating to the due issuance of the
common stock being registered. The law firm of Richardson & Patel, LLP (“R
& P”) owns 60,714 shares of our common stock. Nimish Patel, a principal of R
& P, holds 412,411 shares of our common stock, 45,595 shares underlying
certain convertible notes, and 45,595 shares underlying certain warrants. Erick
Richardson, another principal of R & P, holds 399,543 shares of our common
stock, 45,595 shares underlying certain convertible notes, and 45,595 shares
underlying certain warrants. RP Capital, a limited liability company owned by
Mr. Richardson and Mr. Patel, holds 183,991 shares of our common stock and
warrants to purchase 142,857 shares of our common stock. Other R & P
employees and principals beneficially own 320,858 shares of our common stock and
warrants to purchase 28,571 shares of our common stock. The aggregate
number of BioDrain securities held by Richardson & Patel LLP and its
affiliates includes 1,336,383 shares of common stock, 91,190 shares of common
stock underlying convertible notes, and 353,808 shares of common stock subject
to exercise of warrants. This describes all Company securities held
by Richardson & Patel LLP and its affiliates. All of these shares are being
registered pursuant to this registration statement.
Nimish
Patel and Erick Richardson, both principals of Richardson & Patel LLP, hold
notes in the amount of $12,500 each, as participants in the convertible bridge
loan dated July 23, 2007, that was due April 23, 2008 and is now in default. As
of June 30, 2009 the Company has accrued $3,188 in interest and $1,507 in
penalties on each of the notes. In addition, the Company owes
Richardson & Patel approximately $200,000 in unpaid legal fees as of June
30, 2009.
84
Financial
Information
The
audited financial statements for the periods ended December 31, 2008 and
December 31, 2007 and unaudited financial statements for the periods ended June
30, 2009 and June 30, 2008 are included on the following pages:
INDEX
TO FINANCIAL STATEMENTS
Page
|
||||
Financial
Statements:
|
85
|
|||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|||
Balance
Sheets
|
F-2
|
|||
Statements
of Operations
|
F-3
|
|||
Statements
of Changes in Stockholders’
Deficit
|
F-4
|
|||
Statements
of Cash Flows
|
F-5
|
|||
Notes
to Financial Statements
|
F-6
|
85
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
BioDrain
Medical, Inc.
Mendota
Heights, MN
We
have audited the accompanying balance sheets of BioDrain Medical, Inc. (a
development stage company) as of December 31, 2008 and 2007 and the related
statements of operations, stockholders’ deficit and cash flows for the years
then ended. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits. As shown in Note 11, the Company
has restated its 2008 and 2007 financial statements to properly record debt
forgiveness, stock option and warrant valuation and debt discounts in conformity
with accounting principles generally accepted in the United States of
America.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of BioDrain Medical, Inc. (a
development stage company) as of December 31, 2008 and 2007, and the results of
its operations and its cash flows for the years then ended in conformity with
U.S. generally accepted accounting principles.
The
accompanying financial statements have been prepared assuming that the company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the company has incurred losses since inception, has an
accumulated deficit and has not received revenue from sales of products and
services. These factors raise substantial doubt about its ability to
continue as a going concern. Managements’ plan in regard to these
matters are also described in Note 1. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Olsen
Thielen & Co., Ltd.
St.
Paul, Minnesota
May
14, 2009
F-1
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEET
June
30,
|
December
31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
|
(Restated)
(Unaudited)
|
(Restated) | (Restated) | |||||||||
ASSETS
|
||||||||||||
Current Assets: | ||||||||||||
Cash
|
$ | 235,227 | $ | 463,838 | 4,139 | |||||||
Prepaid expense and other assets
|
6,166 | 7,974 | 4,558 | |||||||||
Accounts receivable
|
15,737 | - | - | |||||||||
Restricted cash in escrow (See Note 4)
|
163,333 | 163,333 | - | |||||||||
Total Current Assets
|
420,463 | 635,145 | 8,737 | |||||||||
Fixed assets, net
|
10,475 | 11,689 | - | |||||||||
Intangibles, net
|
141,532 | 142,145 | 112,456 | |||||||||
Total Assets
|
$ | 572,470 | $ | 788,979 | $ | 121,283 | ||||||
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
||||||||||||
Current Liabilities:
|
||||||||||||
Current portion of long term debt (See Note 8)
|
$ | 17,620 | $ | 17,620 | $ | 33,800 | ||||||
Current portion of convertible debt, net of
discount of $30,899 in 2007
|
170,000 | 170,000 | 139,101 | |||||||||
Accounts payable
|
649,445 | 497,150 | 207,148 | |||||||||
Accrued expenses
|
593,343
|
305,248 | 341,429 | |||||||||
Convertible debenture
|
10,000 | 10,000 | 10,000 | |||||||||
Total Current Liabilities
|
1,440,407
|
1,000,018 | 731,478 | |||||||||
Long term debt and convertible debt, net of
discounts
|
||||||||||||
of $21,631, $26,157 and $34,206 (See Note 8)
|
96,235 | 98,406 | 102,302 | |||||||||
Liability for equity-linked financial
instruments (See Note 12)
|
1,086,186 | - | - | |||||||||
Commitments and contingencies (See Note 9)
|
- | - | - | |||||||||
Stockholders Deficit:
|
||||||||||||
Common stock, 40,000,000 authorized, 9,225,841,
8,130,841, and 823,676 outstanding
|
92,258 | 81,308 | 8,237 | |||||||||
Additional paid-in capital
|
2,736,946 | 2,753,039 | 660,430 | |||||||||
Deficit accumulated during development stage
|
(4,879,563
|
) | (3,143,792 | ) | (1,381,164 | ) | ||||||
Total Shareholder' Deficit
|
(2,050,358 | ) | (309,445 | ) | (712,497 | ) | ||||||
Total Liabilities and Shareholders' Deficit
|
$ | 572,470 | $ | 788,979 | $ | 121,283 |
See
Accompanying Notes to Financial Statements.
F-2
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF OPERATIONS
Period From
|
||||||||||||||||||||
April 23, 2002
|
||||||||||||||||||||
(Inception)
|
||||||||||||||||||||
Year ended December 31,
|
Six Months Ended June 30,
|
To June 30,
|
||||||||||||||||||
2008
|
2007
|
2009
|
2008
|
2009
|
||||||||||||||||
(Restated)
|
(Restated)
|
(Unaudited)
(Restated)
|
(Unaudited)
|
(Unaudited)
(Restated)
|
||||||||||||||||
Sales
|
$
|
-
|
$
|
-
|
$
|
15,737
|
$ |
-
|
$
|
15,737
|
||||||||||
Cost of goods sold
|
-
|
-
|
7,450
|
-
|
7,450
|
|||||||||||||||
Gross margin
|
-
|
-
|
8,287
|
-
|
8,287
|
|||||||||||||||
General and administrative expense
|
1,316,398
|
636,517
|
871,540
|
409,159
|
3,301,680
|
|||||||||||||||
Operations expense
|
321,205
|
1,434
|
194,926
|
91,449
|
648,800
|
|||||||||||||||
Sales and marketing expense
|
35,682
|
13,392
|
208,503
|
210
|
257,578
|
|||||||||||||||
Interest expense
|
89,343
|
101,071
|
39,320
|
7,001
|
250,023
|
|||||||||||||||
Loss on valuation of equity-linked
|
||||||||||||||||||||
financial instruments
|
-
|
-
|
436,423
|
-
|
429,769
|
|||||||||||||||
|
|
|
|
|
||||||||||||||||
Total expense
|
1,762,628
|
752,414
|
1,750,712
|
507,819
|
4,887,850
|
|||||||||||||||
Net loss available to
|
$
|
(1,762,628
|
)
|
$
|
(752,414
|
)
|
$
|
(1,742,425
|
)
|
$
|
(507,819
|
)
|
$
|
(4,879,563
|
)
|
|||||
common shareholders
|
||||||||||||||||||||
Loss per common share
|
||||||||||||||||||||
basic and diluted
|
$
|
(0.41
|
)
|
$
|
(0.91
|
)
|
$
|
(0.20
|
)
|
$
|
(0.38
|
)
|
$
|
(2.72
|
)
|
|||||
Weighted average shares used in
|
||||||||||||||||||||
computation, basic and
diluted
|
4,335,162
|
823,676
|
8,531,200
|
1,349,506
|
1,793,898
|
See
Accompanying Notes to Financial Statements.
F-3
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF STOCKHOLDERS’
DEFICIT
PERIOD
FROM APRIL 23, 2002 (INCEPTION) TO JUNE 30, 2009
Accumulated
|
||||||||||||||||||||
Shares
|
Amount
|
Paid-in
Capital
|
Deficit
|
Total
|
||||||||||||||||
Issuance
of common stock 9/1/02, $.0167 (1)
|
598,549 | $ | 5,985 | $ | 4,015 | $ | - | $ | 10,000 | |||||||||||
- | ||||||||||||||||||||
Issuance
of common 10/23/02, $1.67/share
|
2,993 | 30 | 4,970 | 5,000 | ||||||||||||||||
Net
loss
|
(51,057 | ) | (51,057 | ) | ||||||||||||||||
Balance
12/31/02
|
601,542 | $ | 6,015 | $ | 8,985 | $ | (51,057 | ) | $ | (36,057 | ) | |||||||||
Issuance
of common 2/12/03, $.0167 (2)
|
23,942 | 239 | 161 | 400 | ||||||||||||||||
Issuance
o common 6/11&12,$1.67 (3)
|
21,548 | 216 | 34,784 | 35,000 | ||||||||||||||||
Net
Loss
|
(90,461 | ) | (90,461 | ) | ||||||||||||||||
Balance
12/31/03
|
647,032 | $ | 6,470 | $ | 43,930 | $ | (141,518 | ) | $ | (91,118 | ) | |||||||||
Issuance
of common 5/25/04, $.0167 (4)
|
6,567 | 66 | 44 | 110 | ||||||||||||||||
Net
Loss
|
(90,353 | ) | (90,353 | ) | ||||||||||||||||
Balance
12/31/04
|
653,599 | $ | 6,536 | $ | 43,974 | $ | (231,871 | ) | $ | (181,361 | ) | |||||||||
Issuance
of common 12/14/05, $.0167 (5)
|
14,964 | 150 | 100 | 250 | ||||||||||||||||
Vested
stock options and warrants
|
2,793 | 2,793 | ||||||||||||||||||
Net
Loss
|
(123,852 | ) | (123,852 | ) | ||||||||||||||||
Balance
12/31/05
|
668,563 | $ | 6,686 | $ | 46,867 | $ | (355,723 | ) | $ | (302,170 | ) | |||||||||
Issuance
of common 5/16 & 8/8, $.0167 (6)
|
86,869 | 869 | 582 | 1,451 | ||||||||||||||||
Issuance
of common 10/19 & 23, $.0167 (7)
|
38,906 | 389 | 261 | 650 | ||||||||||||||||
Issuance
of common 12/01, $1.67 (8)
|
28,739 | 287 | 44,523 | 44,810 | ||||||||||||||||
Vested
stock options and warrants
|
13,644 | 13,644 | ||||||||||||||||||
Net
Loss
|
(273,026 | ) | (273,026 | ) | ||||||||||||||||
Balance
12/31/06
|
823,077 | $ | 8,231 | $ | 105,877 | $ | (628,749 | ) | $ | (514,641 | ) | |||||||||
Issuance
of common 1/30/07 @ 1.67 (9)
|
599 | 6 | 994 | 1,000 | ||||||||||||||||
Value
of equity instruments issued with debt
|
132,938 | 132,938 | ||||||||||||||||||
Capital
contributions resulting from waivers of debt
|
346,714 | 346,714 | ||||||||||||||||||
Vested
stock options and warrants
|
73,907 | 73,907 | ||||||||||||||||||
Net
loss
|
(752,415 | ) | (752,415 | ) | ||||||||||||||||
Balance
12/31/07 (Restated)
|
823,676 | $ | 8,237 | $ | 660,430 | $ | (1,381,164 | ) | $ | (712,497 | ) | |||||||||
Issuance
of common 6/11 to 9/30, $.35 (10)
|
4,552,862 | 45,528 | 1,547,974 | 1,593,502 | ||||||||||||||||
Shares
issued to finders, agents
|
2,012,690 | 20,127 | (20,127 | ) | - | |||||||||||||||
Shares
issued to pay direct legal fees
|
285,714 | 2,857 | (2,857 | ) | ||||||||||||||||
Issuance
of common due to anti-dilution provisions
|
205,899 | 2,059 | (2,059 | ) | - | |||||||||||||||
Shares
issued to pay investor relations
|
||||||||||||||||||||
services 6/23/08,
$.35
|
250,000 | 2,500 | 85,000 | 87,500 | ||||||||||||||||
Vested
stock options and warrants
|
354,994 | 354,994 | ||||||||||||||||||
Capital
contributions resulting from waivers of debt
|
129,684 | 129,684 | ||||||||||||||||||
Net
loss
|
(1,762,628 | ) | (1,762,628 | ) | ||||||||||||||||
Balance
12/31/08 (Restated)
|
8,130,841 | $ | 81,308 | $ | 2,753,039 | $ | (3,143,792 | ) | $ | (309,445 | ) | |||||||||
Cumulative
effect of adoption of EITF 07-5
|
(486,564 | ) | 6,654 | (479,910 | ) | |||||||||||||||
Vested
stock options and warrants
|
81,676 | 81,676 | ||||||||||||||||||
Shares
issued 3/20/09 to pay for fund raising
|
125,000 | 1,250 | (1,250 | ) | - | |||||||||||||||
Shares
issued under PPM in April 2009, $.50
|
700,000 | 7,000 | 343,000 | 350,000 | ||||||||||||||||
Shares
issued under PPM in May 2009, $.50
|
220,000 | 2,200 | 107,800 | 110,000 | ||||||||||||||||
Shares
issued under PPM in June 2009, $.50
|
50,000 | 500 | 24,500 | 25,000 | ||||||||||||||||
Capital
contributions resulting from waivers of debt
|
84,600 | 84,600 | ||||||||||||||||||
Value
of equity-linked financial instruments issued
|
(169,855 | ) | (169,855 | ) | ||||||||||||||||
in
connection with PPM
|
||||||||||||||||||||
Net
Loss
|
(1,742,425 | ) | (1,742,425 | ) | ||||||||||||||||
Balance 6/30/09
(Restated
unaudited)
|
9,225,841 | $ | 92,258 | $ | 2,736,946 | $ | (4,879,563 | ) | $ | (2,050,358 | ) |
(1)
|
Founders
shares, 1,000,000 pre-split
|
(2)
|
23,492
(40,000 pre-split) shares valued at $.0167 per share as compensation for
loan guarantees by management
|
(3)
|
Investment
including 670 shares issued as a 10% finders fee
|
(4)
|
For
payment of patent legal fees
|
(5)
|
Compensation
for loan guarantees by management
|
(6)
|
For
vendor contractual consideration
|
(7)
|
Employment
agreements
|
(8)
|
Investment
|
(9)
|
Conversion
of convertible notes by management
|
(10)
|
Investment,
"October 2008 financing".
|
See
Accompanying Notes to Financial Statements.
F-4
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF CASH FLOWS
April
23,
|
||||||||||||||||||||
2002
|
||||||||||||||||||||
(Inception)
|
||||||||||||||||||||
Year
Ended December 31,
|
Six
Months Ended June 30,
|
To
June 30,
|
||||||||||||||||||
2008
|
2007
|
2009
|
2008
|
2009
|
||||||||||||||||
(Restated)
|
(Restated)
|
(Unaudited)
(Restated)
|
(Unaudited)
|
(Unaudited)
|
||||||||||||||||
Cash
flow from operating activities:
|
||||||||||||||||||||
Net
loss
|
$ | (1,762,628 | ) | $ | (752,414 | ) | $ | (1,742,425 | ) | $ | (507,818 | ) | $ | (4,879,563 | ) | |||||
Adjustments
to reconcile net loss to
|
||||||||||||||||||||
net
cash used in operating activities:
|
||||||||||||||||||||
Depreciation
and amortization
|
569 | 47 | 1,827 | - | 2,746 | |||||||||||||||
Vested
stock options and warrants
|
354,994 | 73,907 | 81,675 | 6,084 | 527,004 | |||||||||||||||
Stock
issued for consulting services
|
87,500 | 87,500 | ||||||||||||||||||
Conversion
of accrued liabilites to capital
|
129,684 | 346,714 | 84,600 | - | 560,998 | |||||||||||||||
Amortization
of debt discount
|
38,948 | 67,833 | 4,526 | - | 111,307 | |||||||||||||||
Loss
on valuation of equity-linked instruments
|
436,423 | - | 429,769 | |||||||||||||||||
Changes
in assets and liabilities:
|
||||||||||||||||||||
Accounts
receivable
|
- | - | (15,737 | ) | - | (15,737 | ) | |||||||||||||
Prepaid
expense and other
|
(3,417 | ) | (4,287 | ) | 1,808 | (6,792 | ) | (6,166 | ) | |||||||||||
Notes
payable to shareholders
|
- | (10,973 | ) | - | (8,500 | ) | (10,964 | ) | ||||||||||||
Accounts
payable
|
290,003 | 126,616 | 152,293 | 43,801 | 649,445 | |||||||||||||||
Accrued
expenses
|
(36,181 | ) | (72,092 | ) | 288,115 | 63,684 |
593,343
|
|||||||||||||
Net
cash used in operating activities:
|
(900,528 | ) | (224,649 | ) | (706,894 | ) | (409,542 | ) | (1,950,319 | ) | ||||||||||
Cash
flow from investing activities:
|
||||||||||||||||||||
Purchase
of fixed assets
|
(12,258 | ) | - | - | - | (12,258 | ) | |||||||||||||
Purchase
of intangibles
|
(29,599 | ) | (45,583 | ) | - | (5,796 | ) | (142,495 | ) | |||||||||||
Net
cash used in investing activities
|
(41,857 | ) | (45,583 | ) | - | (5,796 | ) | (154,753 | ) | |||||||||||
Cash
flow from financing activities:
|
||||||||||||||||||||
Proceeds
from long term debt
|
- | 264,000 | - | - | 421,505 | |||||||||||||||
Principal
payments on long term debt
|
(28,125 | ) | (1,592 | ) | (6,697 | ) | (18,065 | ) | (95,046 | ) | ||||||||||
Restricted
cash in escrow
|
(163,333 | ) | - | - | (163,333 | ) | (163,333 | ) | ||||||||||||
Issuance
of common stock
|
1,593,502 | (1) | 11,000 | 485,000 | 941,898 | 2,177,173 | ||||||||||||||
Net
cash provided by (used in) financing activities
|
1,402,044 | 273,408 | 478,303 | 760,500 | 2,340,299 | |||||||||||||||
Net
increase (decrease) in cash
|
459,659 | 3,176 | (228,591 | ) | 345,162 | 235,227 | ||||||||||||||
Cash
at beginning of period
|
4,179 | 1,003 | 463,818 | 4,179 | - | |||||||||||||||
Cash
at end of period
|
$ | 463,838 | $ | 4,179 | $ | 235,227 | $ | 349,341 | $ | 235,227 | ||||||||||
Supplemental
disclosure:
|
||||||||||||||||||||
Non-cash
financing activities:
|
||||||||||||||||||||
Discount
of issuance of debt
|
$ | - | $ | 132,938 | $ | - | $ | - | $ | 132,938 |
(1)
|
All
funds were a part of the October 2008 financing at $.35 per unit, which
included one share of common stock and one warrant to purchase and an
equal number of shares at $.46 per share.
|
See
Accompanying Notes to Financial Statements.
F-5
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the six months ended June 30, 2008 and
June
30, 2009 are unaudited)
NOTE
1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Continuance of Operations
BioDrain
Medical, Inc. was incorporated under the laws of the State of Minnesota in 2002.
The Company is developing an environmentally safe system for the collection and
disposal of infectious fluids that result from surgical procedures and
post-operative care.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The company has suffered recurring losses from
operations and has a stockholders’ deficit. These factors raise
substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Management
hired Newbridge Securities Corporation, an investment banker, in February 2009,
to raise an additional $3-$5 million in new equity by December 31, 2009 with an
interim closing of up to $500,000 expected by September 30,
2009. Although our ability to raise this new capital is in
substantial doubt we have received $525,000 in April, May, June and August 2009,
and our April 1, 2009 510(k) clearance from the FDA to authorize us to market
and sell our FMS products is being received very positively. If the
Company is successful in raising at least $3 million in new equity we will have
sufficient capital to operate our business and execute our business plan for at
least the next 12 months. If the Company raises the additional capital by
issuing additional equity securities its shareholders could experience
substantial dilution.
Recent
Accounting Developments
In
June 2008, the Financial Accounting Standards Board (“FASB”) ratified Emerging
Issues Task Force (EITF) Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock (EITF
07-5). EITF 07-5 mandates a two-step process for evaluating whether an
equity-linked financial instrument or embedded feature is indexed to the
entity's own stock. It is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, which is our
first quarter of 2009. Most of the warrants issued by the Company contain
a strike price adjustment feature, which upon adoption of EITF 07-5, will result
in the instruments no longer being considered indexed to the Company’s own
stock. Accordingly, adoption of EITF 07-5 changed the classification (from
equity to liability) and the related accounting for many warrants with an
estimated fair value of $479,910 as of January 1, 2009. See Note 12 for
explanation of the impact of adoption.
In May
2008, the FASB issued FSP APB No. 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSP APB No. 14-1”), to clarify that convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14,
Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants. The FSP requires the
issuer of certain convertible securities that may be settled in cash on
conversion to separately account for the liability and equity components in a
manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. The Company’s convertible
debt instruments do not provide that the instruments may be settled in cash and
this FSP does not apply.
Accounting
Estimates
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Interim
Financial Statements
The
Company has prepared the unaudited interim financial statements and related
unaudited financial information in the footnotes in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) and
the rules and regulations of the Securities and Exchange Commission (“SEC”) for
interim financial statements. These interim financial statements reflect all
adjustments consisting of normal recurring accruals, which, in the opinion of
management, are necessary to present fairly the Company’s financial position,
the results of its operations and its cash flows for the interim periods. These
interim financial statements should be read in conjunction with the annual
financial statements and the notes thereto contained herein. The nature of the
Company’s business is such that the results of any interim period may not be
indicative of the results to be expected for the entire year.
Revenue Recognition We
recognize revenue in accordance with the SEC’s Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial
Statements, as amended by Staff Accounting Bulletin No. 104
(together, SAB 101), and Statement of Financial Accounting Standards
No. 48, Revenue
Recognition When Right of Return Exists (SFAS 48).
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is probable.
Delivery is considered to have occurred upon either shipment of the product or
arrival at its destination based on the shipping terms of the transaction. Our
standard terms specify that shipment is FOB BioDrain and we will, therefore
recognize revenue upon shipment in most cases. This revenue recognition policy
applies to shipments of our FMS units as well as shipments of cleaning solution
kits. When these conditions are satisfied, we recognize gross product revenue,
which is the price we charge generally to our customers for a particular
product. Under our standard terms and conditions there is no
provision for installation or acceptance of the product to take place prior to
the obligation of the customer. The Customer’s right of return is
limited only to our standard one year warranty whereby we replace or repair, at
our option, and it would be very rare that the unit or significant quantities of
cleaning solution kits may be returned. Additionally, since we buy
both the FMS units and cleaning solution kits from “turnkey” suppliers we would
have the right to replacements from the suppliers if this situation should
occur.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets. Estimated
useful asset life by classification is as follows:
Years
|
||||
Computers
and office equipment
|
3
|
|||
Furniture
and fixtures
|
5
|
Upon
retirement or sale, the cost and related accumulated depreciation are removed
from the balance sheet and the resulting gain or loss is reflected in
operations. Maintenance and repairs are charged to operations as
incurred.
Intangible
Assets
Intangible
assets consist of patent costs. These assets are not subject to amortization
until the property patented is in production. The assets are reviewed for
impairment annually, and impairment losses, if any, are charged to operations
when identified. No impairment losses have been identified by
management.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes (“SFAS No. 109”). Under SFAS No. 109,
deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities and net
operating loss and credit carry forwards using enacted tax rates in effect for
the year in which the differences are expected to impact taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. In June 2006, the FASB issued
Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),
which became effective for the Company beginning January 1, 2007. FIN 48
addresses how tax benefits claimed or expected to be claimed on a tax return
should be recorded in the financial statements. Under FIN 48, the tax benefit
from an uncertain tax position can be recognized only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate resolution. The adoption of FIN 48 had no impact on the
Company’s financial condition, results of operations or cash
flows.
Product
Development
Product
development costs are charged to operations as incurred. Product development
costs were $182,893 and $1,434 for the year ended December 31, 2008 and 2007,
respectively. Product development costs in our financial statements are the same
as research and development costs as defined in SFAS 2.
Patents
and Intellectual Property
The
Company, in June 2008, completed and executed an agreement to secure exclusive
ownership of the patent- from an inventor, Marshall Ryan. Mr. Ryan received a
combination of cash and warrants, and he will receive a 4% royalty on FMS (the
Product) sales for the life of the patent. At the signing of the agreement, Mr.
Ryan received $75,000 in exchange for the exclusive assignment of the
patent. In addition, on June 30, 2009, Mr. Ryan, through his
Mid-State Stainless, Inc. entity, was entitled to receive $100,000 as payment
(currently recorded as an account payable with the Company) for past research
and development activities. Should Mr. Ryan be utilized in the future
for additional product development activities, he will be compensated at a rate
of ninety five dollars ($95.00) per hour.
Mr.
Ryan also received a warrant, with immediate vesting, to purchase 150,000 shares
of our common stock at a price of $.35 per share. The warrant has a
term of five years, ending on June 30, 2013 and is assigned a value of $28,060
using a Black-Scholes formula and this amount was expensed as consulting expense
in 2008 using a 5 year expected life, a 3.73% risk free interest rate, an
expected 59% volatility and a zero dividend rate. Should there be a change in
control of the Company (defined as greater than 50% of the Company’s outstanding
stock or substantially all of its assets being transferred to one independent
person or entity), Mr. Ryan will be owed a total of $2 million to be paid out
over the life of the patent if the change in control occurs within 12 months of
the first sale of the Product; or $1 million to be paid out over the life of the
patent if the change in control occurs between 12 and 24 months of the first
sale of the Product; or $500,000 to be paid out over the life of the patent if
the change in control occurs between 24 and 36 months of the first sale of the
Product. There will be no additional payment if a change in control occurs more
than 36 months after the first sale of the Product.
F-6
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the six months ended June 30, 2008 and
June
30, 2009 are unaudited)
NOTE
2 – DEVELOPMENT STAGE OPERATIONS
The
Company was formed April 23, 2002. Since inception to June 30, 2009,
9,225,841 shares have been issued between par value and
$1.67. Operations since incorporation have been devoted to raising
capital, obtaining financing, development of the Company’s product, and
administrative services.
NOTE
3 – STOCKHOLDERS’ DEFICIT, STOCK OPTIONS AND WARRANTS
In
connection with the financing completed in October 2008, the Company has
effected two reverse stock splits, one on June 6, 2008 and another on October
20, 2008. In accordance with SAB Topic 4C, all stock options and warrants and
their related exercise prices are stated at their post-reverse stock split
values.
The
Company has an equity incentive plan, which allows issuance of incentive and
non-qualified stock options to employees, directors and consultants of the
Company, where permitted under the plan. The exercise price for each stock
option is determined by the board of directors. Vesting requirements are
determined by the board of directors when granted and currently range from
immediate to three years. Options under this plan have terms ranging from three
to ten years.
Accounting
for share-based payment
Effective
January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R)) which replaced SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and superseded Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). Under SFAS 123(R), stock-based employee
compensation cost is recognized using the fair value based method for all new
awards granted after January 1, 2006 and unvested awards outstanding at
January 1, 2006. Compensation costs for unvested stock options and
non-vested awards that were outstanding at January 1, 2006, are being
recognized over the requisite service period based on the grant-date fair value
of those options and awards as previously calculated under SFAS 123 for pro
forma disclosures, using a straight-line method. We elected the
modified-prospective method in adopting SFAS 123(R), under which prior
periods are not retroactively restated.
SFAS 123(R)
requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model or other acceptable means. We
use the Black-Scholes option valuation model which requires the input of
significant assumptions including an estimate of the average period of time
employees will retain vested stock options before exercising them, the estimated
volatility of our common stock price over the expected term, the number of
options that will ultimately be forfeited before completing vesting
requirements, the expected dividend rate and the risk-free interest rate.
Changes in the assumptions can materially affect the estimate of fair value of
stock-based compensation and, consequently, the related expense recognized. The
assumptions we use in calculating the fair value of stock-based payment awards
represent our best estimates, which involve inherent uncertainties and the
application of management's judgment. As a result, if factors change and we use
different assumptions, our equity-based compensation expense could be materially
different in the future.
Since
our company stock has no public trading history, and we have experienced no
option exercises in our history, we were required to take an alternative
approach to estimating future volatility and estimated life and the future
results could vary significantly from our estimates. We compiled
historical volatilities over a period of 2-7 years of 15 small-cap medical
companies traded on major exchanges and 10 medical companies in the middle of
the size range on the OTC Bulletin Board and combined the results using a
weighted average approach. In the case of ordinary options to
employees we determined the expected life to be the midpoint between the vesting
term and the legal term. In the case of options or warrants granted
to non-employees we estimated the life to be the legal term unless there was a
compelling reason to make it shorter.
When
an option or warrant is granted in place of cash compensation for services we
deem the value of the service rendered to be the value of the option or warrant.
In most cases, however, an option or warrant is granted in addition to other
forms of compensation and its separate value is difficult to determine without
utilizing an option pricing model. For that reason we also use the
Black-Scholes-Merton option-pricing model to value options and warrants granted
to non-employees, which requires the input of significant assumptions including
an estimate of the average period the investors or consultants will retain
vested stock options and warrants before exercising them, the estimated
volatility of our common stock price over the expected term, the number of
options and warrants that will ultimately be forfeited before
completing vesting requirements, the expected dividend rate and the risk-free
interest rate. Changes in the assumptions can materially affect the estimate of
fair value of stock-based consulting and/or compensation and, consequently, the
related expense recognized.
Since
we have no trading history in our stock and no first-hand experience with how
these investors and consultants have acted in similar circumstances, the
assumptions we use in calculating the fair value of stock-based payment awards
represent our best estimates, which involve inherent uncertainties and the
application of management's judgment. As a result, if factors change and we use
different assumptions, our equity-based consulting and interest expense could be
materially different in the future.
Valuation
and accounting for options and warrants
The
Company determines the grant date fair value of options and warrants using a
Black-Scholes-Merton option valuation model based upon assumptions regarding
risk-free interest rate, expected dividend rate, volatility and estimated
term. For grants during 2008 we used a 2.0 to 4.5% risk-free interest
rate, 0% dividend rate, 53-66% volatility and estimated term of 2.5 to 7.5
years. Values computed using these assumptions ranged from $.102 per
share to $.336 per share. Warrants or options awarded for services
rendered are expensed over the period of service (normally the vesting period)
as compensation expense for employees or an appropriate consulting expense
category for awards to consultants and directors. Warrants granted in
connection with a common equity financing are included in stockholders’ equity,
provided that there is no re-pricing provision that requires they be treated as
a liability (See Note 12) and warrants granted in connections with a debt
financing are treated as a debt discount and amortized using the interest method
as interest expense over the term of the debt. Warrants issued in
connection with the $100,000 convertible debt, closed March 1, 2007, created a
debt discount of $40,242 that is being amortized as additional interest over its
5 year term. Warrants issued in connection with the $170,000 in
convertible “bridge” debt, closed in July 2007, created a calculated debt
discount of $92,700 that was fully expensed over its loan term that matured
April 30, 2008.
F-7
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the six months ended June 30, 2008 and
June
30, 2009 are unaudited)
The
following summarizes transactions for stock options and warrants for the periods
indicated:
|
Stock Options (1)
|
Warrants (1)
|
||||||||||||||
|
Number of
Shares
|
Average
Exercise
Price
|
Number of
Shares
|
Average
Exercise
Price
|
||||||||||||
Outstanding
at December 31, 2005
|
17,956
|
$ | 1.67 |
20,950
|
$ | 2.62 | ||||||||||
Issued
|
23,942
|
1.67
|
71,826
|
0.85
|
||||||||||||
Outstanding
at December 31, 2006
|
41,898
|
$ | 1.67 |
92,776
|
$ | 1.25 | ||||||||||
Issued
|
5,984
|
1.67
|
28,502
|
0.35
|
||||||||||||
Outstanding
at December 31, 2007
|
47,882
|
$ | 1.67 |
121,278
|
$ | 1.04 | ||||||||||
Issued
|
1,243,292
|
0.20
|
5,075,204
|
0.45
|
||||||||||||
Expired
|
(11,971)
|
3.76
|
||||||||||||||
Outstanding
at December 31, 2008
|
1,291,174
|
$ | 0.26 |
5,184,511
|
0.45
|
|||||||||||
Issued
|
175,000
|
0.35
|
635,095
|
0.35
|
||||||||||||
Outstanding
at June 30, 2009
|
1,466,174
|
0.27
|
6,839,606
|
0.48
|
|
(1)
|
Adjusted for the reverse stock
splits in total at June 6, 2008 and October 20, 2008. There
were no options or warrants exercised in the periods.
|
The
weighted average grant date fair value of stock options granted
through June 30, 2009 and the fair value of shares vesting in each
year are as follows:
Year
|
Options
|
Fair Value
|
||||||
2005
|
17,956
|
$ | 0.671 | |||||
2006
|
23,942
|
$ | 0.682 | |||||
2007
|
5,984
|
$ | 0.687 | |||||
2008
|
1,243,292
|
$ | 0.232 | |||||
2009
|
175,000
|
$ | 0.141 | |||||
Total
|
1,466,174
|
$ | 0.236 |
Year
|
Fair value vested
|
|||
2005
|
$ | 1,673 | ||
2006
|
$ | 12,919 | ||
2007
|
$ | 71,038 | ||
2008
|
$ | 220,287 | ||
2009
|
$ | 48,956 | ||
Total
|
$ | 354,873 |
At
December 31, 2008, 651,174 stock options are fully vested and currently
exercisable and 4,984,511 warrants are fully vested and exercisable. There are
640,000 unvested stock options at December 31, 2008 with a total unrecognized
compensation expense of $15,698 to be amortized over a weighted average
remaining term of 5.5 months. There are 200,000 unvested warrants at
December 31, 2008 with a total unrecognized consulting expense of $13,301 to be
amortized over a weighted average remaining term of 18 months.
At
June 30, 2009, 881,174 stock options are fully vested and currently exercisable
with a weighted average exercise price of $.29 and a weighted average remaining
term of 5.8 years. There are 6,639,606 warrants that are fully vested and
exercisable. There are 585,000 unvested stock options at June 30, 2009 with
a total unrecognized compensation expense of $3,316 to be amortized over a
weighted average remaining term of 3.8 months. Stock based
compensation recognized in the years ended December 31, 2008 and 2007 were
$220,287 and $71,038, respectively, and stock based compensation recognized in
the six months ended June 30, 2009 and 2008 were $28,958 and $6,084,
respectively.
The
following summarizes the status of options and warrants outstanding at December
31, 2008 and June 30, 2009
December
31, 2008
Range of Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Life
|
||||||
Options
|
||||||||
$0.01
|
$
|
543,292
|
$
|
9.43
|
||||
$0.35
|
700,000
|
4.46
|
||||||
$1.67
|
47,882
|
2.50
|
||||||
Total
|
1,291,174
|
|||||||
Warrants
|
||||||||
$0.02
|
71,826
|
5.45
|
||||||
$0.35
|
178,502
|
4.29
|
||||||
$0.46
|
4,889,291
|
2.57
|
||||||
$1.67
|
44,892
|
2.69
|
||||||
Total
|
5,184,511
|
F-8
June
30, 2009
Range of Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Life
|
||||||
Options
|
||||||||
$0.01
|
$
|
543,292
|
$
|
8.94
|
||||
$0.35
|
875,000
|
4.12
|
||||||
$1.67
|
47,882
|
2.26
|
||||||
Total
|
1,466,174
|
|||||||
Warrants
|
||||||||
$0.02
|
71,826
|
4.95
|
||||||
$0.35
|
798,597
|
3.29
|
||||||
$0.46
|
4,954,291
|
2.05
|
||||||
$0.65
|
970,000
|
2.83
|
||||||
$1.67
|
44,892
|
2.19
|
||||||
Total
|
6,839,606
|
Stock
options and warrants expire on various dates from August 2010 to June
2018.
Under
terms of our agreement with investors in the October 2008 financing 1,920,000
shares of common stock were the maximum number of shares allocated to our
existing shareholders at the time of the offering (also referred to as the
original shareholders or the Founders). Since the total of our fully-diluted
shares of common stock was greater than 1,920,000, in order for us to proceed
with the offering, our board of directors approved a reverse stock split of
1-for-1.2545. After this split was approved, additional options and warrants
were identified, requiring a second reverse stock split in order to reach the
1,920,000. The second reverse stock split on the reduced 1-for-1.2545 balance
was determined to be 1-for-1.33176963. Taken together, if only one reverse stock
were performed, the number would have been a reverse stock split of 1-for
1.670705.
On
June 6, 2008, the Board of Directors approved the first reverse stock split. The
authorized number of common stock of 20,000,000 was proportionately divided by
1.2545 to 15,942,607.
On
October 20, 2008, the Board of Directors (i) approved the second reverse stock
split pursuant to which the authorized number of shares of common stock of
15,942,607 was proportionately divided by 1.33177 to 11,970,994 and (ii)
approved a resolution to increase the number of authorized shares of our common
stock from 11,970,994 to 40,000,000, which was approved by the Company’s
shareholders holding a majority of the shares entitled to vote thereon at a
special meeting of shareholders held on December 3, 2008.
F-9
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the six months ended June 30, 2008 and
June
30, 2009 are unaudited)
Stock,
Stock Options and Warrants Granted by the Company
Warrants
In
2005 and 2006, the Company granted warrants to purchase an aggregate of 17,958
shares (options to purchase 2,993 shares each) of common stock at $1.67 per
share to Debbie Heitzman, Mary Wells Gorman and David Feroe for their services
on the Medical Advisory Board and to Karen Ventura, Nancy Kolb and Kim Shelquist
for their sales and marketing advisory services.
In
2006, the Company granted a warrant to purchase 35,913 shares of common stock at
$.02 per share to Dr. Arnold Leonard for his services on the Medical Advisory
Board. The warrant contains an anti-dilution provision that provides that such
shares would double upon the Company’s total outstanding shares reaching 2
million. The second warrant to purchase 35,913 shares of the Company’s common
stock at $.02 were granted in June 2008 upon reaching 2 million outstanding
shares of common stock through the October 2008 financing. The 2008 warrant was
valued at $12,060 using the Black-Scholes valuation model with a 3.57% risk free
interest rate, a zero dividend rate, a 66% expected volatility and a 7 year
expected life. The full amount was expensed as consulting expense in 2008 as the
warrant was immediately vested.
On
December 1, 2006, the Company fully repaid two of our three loans, in the
combine amount of $37,500, due to Wisconsin Rural Enterprise Fund (“WREF”). To
pay the outstanding loan to WREF, the Company issued a warrant to purchase
20,949 shares of common stock at $1.67 per share to WREF. The warrant expired
October 31, 2008.
In
2006, the Company issued a warrant to purchase 5,985 shares of common stock at
$1.67 per share to Andcor Companies, Inc. as part of a convertible loan
agreement. The warrant was valued at $3,130 using the Black-Scholes
valuation model with a 3.00% risk free interest rate, a zero dividend rate, a
45% expected volatility and a 3 year expected life.
In
2007, the Company granted a warrant to purchase up to 28,502 shares of common
stock at $.46 per share to Roy Moore and Carl Moore as part of a convertible
loan agreement with them. The warrants contained a provision enabling the two
individuals to pay a per share price equal to that of the October 2008 financing
when exercising their warrants. The warrants were valued at $40,240 using the
Black-Scholes valuation model with a 3.06% risk free interest rate, a zero
dividend rate, a 62% expected volatility and a 5 year expected life. The $40,250
value is accounted for as a debt discount and is being amortized using the
interest method as additional interest expense over the five year term of the
convertible loan.
In
2007, the Company agreed to issue warrants to purchase 620,095 shares of common
stock at $.35 per share to seven individuals who provided $170,000 in a
convertible bridge loan. The warrants were issued February 24, 2009 and valued
at $92,700 using the Black-Scholes valuation model with a 1.37% risk free
interest rate, a zero dividend rate, an 63% expected volatility and a 3 year
expected life. The $92,700 value was accounted for as a debt discount and was
amortized using the interest method as additional interest expense over the one
year term of the convertible loan that matured in April 2008.
In
June 2008 we executed an agreement with Marshall C. Ryan, the named inventor of
the Patents, to secure exclusive ownership of the Patents. In
addition to a cash down payment and an agreement to provide future cash payments
we also granted Mr. Ryan a warrant to purchase 150,000 shares of our common
stock at a price of $.35 per share. The warrant has a term of five years, ending
on June 30, 2013. The warrant has a term of five years, ending on
June 30, 2013 and is assigned a value of $28,060 using a Black-Scholes formula
and this amount was expensed as consulting expense in 2008 using a 5 year
expected life, a 3.73% risk free interest rate, an expected 59% volatility and a
zero dividend rate.
In
August 2008, the Company issued a warrant to purchase 50,000 shares of common
stock at $.46 per share to Thomas Bachinski, a regulatory consultant, for his
past services. The warrant was valued at $7,875 using the Black-Scholes
valuation model with a 3.06% risk free interest rate, a zero dividend rate, a
58% expected volatility and a 5 year expected life. The warrant has a three year
vesting schedule and $1,092 was amortized in 2008.
In
August and September 2008 we issued warrants to purchase 75,000 shares of common
stock to each of two human resource consulting firms, Andcor Companies, Inc. and
Taylor & Associates, Inc., as payment for their search for candidates to
fill the position of Vice President of Sales and Marketing for our Company.
Andcor and Taylor will not earn the warrants until the candidate is hired and
remains an employee for a period of at least 1 year. The Vice President of Sales
and Marketing was hired on February 1, 2009 and the warrants will vest,
therefore, on February 1, 2010 provided she is still employed with the Company
on that date. Andcor and Taylor are valued at a total of $60,000
under guidance from EITF 96-18 because that was the value of the cash
consideration that was agreed to prior to them accepting warrants in lieu of
cash.
The
Company issued warrants to purchase an aggregate of 4,552,862 units to investors
in connection with the October 2008 financing, which included one share of
common stock for $.35 per share and one warrant to purchase one share of common
stock for $.46 per share. The warrants were valued at $465,950 using the
Black-Scholes valuation model with a 2.75% risk free interest rate, a zero
dividend rate, a 53% expected volatility and a 3 year expected life. The value
of the warrants is accounted for in the equity section of the balance sheet. In
addition, the Company granted warrants to purchase 136,429 shares to finders who
helped in raising the $1.6 million in new equity. The warrants were valued at
$13,965 using the Black-Scholes valuation model with a 2.75% risk free interest
rate, a zero dividend rate, a 53% expected volatility and a 3 year expected
life. The full value of the warrants was treated as an incremental
cost of raising capital and netted against the gross proceeds under the guidance
from SAB Topic 5-A.
On
February 1, 2009 we issued a warrant to Kirsten Doerfert, in return for
consulting work prior to becoming an employee, to purchase 15,000 shares at $.35
per share. The warrant vested immediately and was valued at $2,502 using the
Black-Scholes valuation model using a 5 year expected term, a 63% expected
volatility, a 1.75% risk free interest rate, and a zero dividend
rate. The warrant was expensed in February 2009 because it was
immediately vested. We used the Black-Scholes model to establish the
valuation because the value of the services performed was difficult to
measure.
On
October 20, 2008, we entered into an agreement with Gregory Sachs, a regulatory
consultant, pursuant to which the Company granted an agreement to purchase up to
50,000 shares of our common stock contingent upon reaching certain performance
goals from April 1, 2009 to June 30, 2009. Mr. Sachs assisted the Company in
obtaining FDA 510(k) clearance. The purpose of the performance goal provision
was to help to ensure a timely clearance of the 510(k). Upon reaching FDA
clearance on April 1, 2009, Mr. Sachs received a warrant to purchase 50,000
shares of our common stock. The warrant has a 5 year term and an
exercise price of $.46 per share. We determined the value of the warrant to be
$8,318 using the Black-Scholes valuation model using a 5 year expected term, 63%
expected volatility, 1.65% risk free interest rate and a zero expected dividend
rate. The full amount was expensed in April 2009 because the warrant
vested immediately.
Changes
in exercise prices or number of warrants would occur if the Company issues any
shares of its common stock (other than excluded securities, as defined in the
warrant) for a consideration per share less than the exercise price in effect at
the time of exercise of the warrant. The warrant contains a cashless exercise
provision which provides that after one year following the closing date of the
offering, if a registration statement covering the warrants is not available for
resale for the warrants, the warrant holder may exercise the warrant in whole or
in part in lieu of making a cash payment by electing to receive the net number
of common stock determined by the following formula: net number = ((A x B) - (A
x C))/B. A equals the total number of shares with respect to which the warrant
is then being exercised. B equals the closing sale price of the shares of common
stock (as reported by Bloomberg) on the date immediately preceding the date of
notice of an exercise. C equals the exercise price then in effect for the
applicable warrant shares at the time of such exercise. There are no
registration obligations on the Company nor are there any liquidated damages or
potential penalties to which the Company is subject.
Stock
and Stock Options
On
August 22, 2005, we issued an option agreement to purchase 17,957 shares (30,000
shares at $1 pre-split) of our common stock at $1.67 per share to Thomas
McGoldrick, for his services as a director. In addition to the initial grant the
option agreement specifies that he will we granted an option for 5,985 shares
per year, on his anniversary date of joining the board, at the market price on
the grant date. On August 22, 2006, we issued an option to purchase 5,985 shares
of common stock at $.1.67 per share to Mr. McGoldrick.
On
November 11, 2006 we issued an option agreement to purchase 17,957 shares
(30,000 at $1 pre-split) of common stock at $1.67 per share to Andrew Reding,
for his services as a director. In addition to the initial grant the option
agreement specifies that he will we granted an option for 5,985 shares per year,
on his anniversary date of joining the board, at the market price on the grant
date. On November 11, 2007, we issued an option to purchase 5,985
shares of common stock at $1.67per share to Mr. Reding.
On
December 14, 2005, we issued 7,482 shares of common stock to officers Lawrence
Gadbaw and Gerald Rice as compensation for personal guarantees on Company
loans.
On May
16, 2006, the Company issued 71,906 shares of common stock to the inventor of
our intellectual property, Marshall C. Ryan, for the development work he
performed with respect to our product.
On
August 8, 2006, we issued 14,964 shares of common stock to Andcor Companies,
Inc. in partial payment of an invoice.
In
2006, Kevin Davidson was granted 29,927 (as split adjusted from the original
50,000 share grant) shares of the Company’s common stock in connection with his
entering into an employment agreement with the Company. The grant contained an
anti-dilution protection amounting to 3.81% of the fully-diluted outstanding
common stock of the Company up to the completion of the first $1,000,000 of new
funding raised, which pursuant to an option agreement dated June 5, 2008
amending his employment agreement, Mr. Davidson chose to receive an option to
purchase 543,292 shares of common stock, exercisable at $.01, in lieu of
obtaining the additional shares to which he was entitled. The options vest
immediately and the term of the options is 10 years from the date of issuance.
In 2008, Mr. Davidson achieved the $1 million funding target provided for in his
employment agreement and on September 12, 2008 the Board of Directors ratified
the issuance of the 543,292 options to Mr. Davidson as a result of the
milestones achieved. The option grant was valued at $186,826
using the Black-Scholes model. Inputs to the model include a zero
dividend rate, a 7.5 year expected life, 66% expected volatility and a 3.94%
risk free interest rate.
On
October 23, 2006, we issued 8,979 shares of common stock to a former employee as
a part of his compensation package in his employment agreement.
On
December 1, 2006, we issued 2,983 shares of common stock to pay a consulting fee
to Wisconsin Business Innovation Corporation, a related firm of
WREF.
On
January 30, 2007 we fully repaid a Company loan of $1,000 due one of its former
employees by issuing 599 shares of common stock.
On
March 10, 2008, we entered into a finder agreement for referral services for the
Company’s October 2008 Financing. This agreement covered the following finders:
Thomas Pronesti, Craig Kulman, Caron Partners, LP and Bellajule Partners, LP.
Under the agreement, in addition to a cash referral fee, the finders were
entitled to receive 10% of their gross proceeds raised for us with a fair market
value of the Company’s common stock, or $.35 per share. As a result, on June 23,
2008, the group of finders received an aggregate of 155,142 shares of common
stock. The fair value of these shares, were determined to be $54,300 at $.35 per
share and this amount is accounted for as a cost of raising capital and,
therefore, is netted against paid in capital under the guidance of SAB Topic
5-A.
On
April 15, 2008, we entered into an investor relations agreement with Kulman IR,
LLC. Under the agreement, in addition to cash fees, Kulman was entitled to
receive 250,000 shares of our common stock. On June 23, 2008 Kulman and Cross
Street Partners, Inc., a party related to Kulman, each received 125,000 shares
of common stock. The total value of these shares was determined
to be $87,500 using a fair value of $.35 per share. This amount is
shown as a separate line as $87,500 in common stock and paid in capital in the
Statement of Shareholders’ Deficit in the Financial Statements, page
F-6.
On
June 16, 2008, we entered into an employment agreement with Chad Ruwe, Executive
Vice President of Operations, pursuant to which we granted him an option to
purchase 250,000 shares of common stock with 50,000 shares vested immediately
and increments of 50,000 shares vesting upon achievement of certain milestones
related to obtaining FDA clearance and achieving commercial sales of our
Streamway™ Fluid Management System.
On
June 30, 2008, we entered into a consulting agreement with Namaste Financial,
Inc. for a one-year period of general business, strategic and growth advisory
services. Under the agreement, Namaste received 125,000 shares of common stock
and a warrant to purchase 125,000 shares of common stock at $.46 per share. This
firm was engaged to arrange new equity financing and the warrants and
shares. The shares were valued at $43,750 and the warrants were
valued at $12,800 using a Black-Scholes valuation model. The total
value of $56,550 is shown as a net reduction of paid in capital as they were
treated as an incremental cost of raising capital under the guidance of SAB
Topic 5-A.
On
August 11, 2008, we entered into an employment agreement with David Dauwalter,
Director of Sales, pursuant to which we granted him an option to purchase 50,000
shares of common stock with 10,000 shares vested immediately and increments of
10,000 shares vesting upon reaching certain performance
milestones.
In
connection with the October 2008 financing we issued 250,000 to Kulman Investor
Relations/Cross Street Partners for investor relations
services. These services were valued at $87,500 based upon $.35 per
share and were expensed as consulting expenses in 2008. In addition,
the company issued 285,714 shares to Richardson & Patel in partial payment
of legal fees in connection with the October 2008 financing. The
value was determined to be $100,000 based upon $.35 per share and was determined
to be a direct incremental cost of raising capital and netting in the gross
proceeds in accordance with SAB Topic 5-A. We also issued 2,102,690
shares valued at $704,442, based upon $.35 per share, to finders and placement
agents. This cost was also deemed an incremental direct cost of raising capital
and netted against the gross proceeds in accordance with SAB Topic
5-A.
On
February 1, 2009 the Company granted an option to purchase 100,000 shares at
$.35 per share, the market value of the stock on that date, to Kirsten Doerfert
under terms of her employment agreement. The vesting schedule called for 20,000
shares to vest immediately with increments of 20,000 shares vesting upon
achievement of certain performance criteria in her agreement. The value of the
option was computed to be $14,006 using an expected term ranging from 2.5 to 2.8
years, an expected volatility of 63%, a risk free interest rate ranging from
1.085% to 1.191% and a zero dividend rate.
The
following table is the listing of stock options and warrants as of December 31,
2008 and June 30, 2009 by year of grant:
Stock Options:
|
December 31, 2008
|
|||||||
Year
|
Shares
|
Price
|
||||||
2005
|
17,956
|
$ |
1.67
|
|||||
2006
|
23,942
|
1.67
|
||||||
2007
|
5,984
|
.35-1.67
|
||||||
2008
|
1,243,292
|
.01-.35
|
||||||
Total
|
1,291,174
|
$ |
.01-$1.67
|
|||||
Warrants:
|
||||||||
Year
|
Shares
|
Price
|
||||||
2005
|
8,979
|
$ |
1.67
|
|||||
2006
|
71,826
|
.02-1.67
|
||||||
2007
|
28,502
|
.35
|
||||||
2008
|
5,075,204
|
.02-.46
|
||||||
Total
|
5,184,511
|
$ |
.02-$1.67
|
|||||
F-10
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the six months ended June 30, 2008 and
June
30, 2009 are unaudited)
Stock
Options:
|
June
30, 2009
|
|||||||
Year
|
Shares
|
Price
|
||||||
2005
|
17,956
|
$ | 1.67 | |||||
2006
|
23,942
|
1.67
|
||||||
2007
|
5,984
|
.35-1.67
|
||||||
2008
|
1,243,292
|
.01-.35
|
||||||
2009
|
175,000
|
.35
|
||||||
Total
|
1,466,174
|
$ | .01-$1.67 | |||||
Warrants:
|
||||||||
Year
|
Shares
|
Price
|
||||||
2005
|
8,979
|
$ | 1.67 | |||||
2006
|
71,826
|
.02-1.67
|
||||||
2007
|
28,502
|
.35
|
||||||
2008
|
5,075,204
|
.02-.46
|
||||||
2009
|
1,655,095
|
.35-.65
|
||||||
Total
|
6,839,606
|
$ | .02-$1.67 |
Other
Securities For Issuance Upon Certain Contingencies
In
June 2008, three of our current and former directors/executive officers,
Lawrence Gadbaw, Gerald Rice and Kevin Davidson agreed to waive an aggregate of
approximately $346,700 in accrued, unpaid salaries relating to 2007 and 2006.
This total included waived compensation from Mr. Davidson in the amount of
$90,000, waived compensation from Mr. Rice in the amount of $125,000 and waived
compensation from Mr. Gadbaw in the amount of $138,500 . In addition, Mr.
Davidson waived $58,350, Mr. Rice waived $40,725 and Mr. Gadbaw waived $30,610
in underpaid compensation from 2008. In exchange, therefore, Mr. Gadbaw and Mr.
Rice will each be granted options to purchase 160,000 shares of common stock and
Mr. Davidson will be granted an option to purchase 80,000 shares of common
stock, all at $.35 per share upon the Company raising an additional $3 million
in financing subsequent to the October 2008 financing. In addition, Mr. Rice
will be entitled to receive a one-time cash payment of $46,000, Mr. Davidson
will be entitled to receive a one-time cash payment of $23,000 and Mr. Gadbaw
will be entitled to receive a one-time cash payment of $25,000 when the Company
raises an additional $3 million subsequent to the October 2008 financing. Mr.
Gadbaw is currently receiving $2,000 per month until a total of $46,000 of
accrued salary liability is paid. The remaining balance due Mr.
Gadbaw, if any, will be paid upon raising an additional $3 million. The
Company’s agreement to pay the cash payments and grant the stock options is
solely dependent on raising the $3 million and does not require the
participation of the three individuals in the fund raising
activity.
Waived
salaries in the amount of $90,000 for Mr. Davidson, $125,000 for Mr. Rice and
$138,500 for Mr. Gadbaw were treated as a capital contribution in 2007 in
accordance with Staff Accounting Bulletin (SAB) 79. The years to which the
waived salaries originated were $102,700 for 2007 and $244,000 for 2006 and
prior years. In addition, the company recorded a capital contribution in the
amount of $129,685 in 2008 representing $58,350, $40,375 and $30,610 in waived
2008 salaries for Mr. Davidson, Mr. Rice and Mr. Gadbaw,
respectively.
The
obligation to grant stock options is being valued under FAS123(R) using the
Black-Scholes valuation model, a 55-59% expected volatility, a zero percent
dividend rate and an expected life of 5 years for one option and 3.5 years for
the other 2 options, taking into account the likely period of time the
individuals will exercise their options. The legal term of the
options will be 5 years from the date of the grant and 6.2 years, therefore,
from the date of the obligation because the obligation to grant the options
contingent on a $3 million funding occurred in June 2008 we expect the $3
million funding will occur by August 2009.
As of
December 31, 2007, $115,000 remained in accrued expenses for the above expenses
and as of December 31, 2008 $40,000 remained in accounts payable for the
obligation to Mr. Gadbaw’s and $94,000 remained in accrued expenses for the
obligations to Mr. Rice, Mr. Gadbaw and Mr. Davidson.
On
June 16, 2008, we entered into an employment agreement with Chad Ruwe, Executive
Vice President of Operations, pursuant to which we granted him an option to
purchase 250,000 shares of common stock with 50,000 shares vested immediately
and increments of 50,000 shares vesting upon achievement of certain milestones
related to obtaining FDA clearance and achieving commercial sales of our
Streamway™ Fluid Management System. As of April 1, 2009 a total of 150,000
shares were vested and an additional 10,000 shares vested on June 15, 2009 as a
result of the Company shipping its first revenue producing FMS unit. The Company
valued the option at $33,310 using a Black-Scholes valuation model. The option
has a 5 year legal term with 5 separate vesting schedules, an estimated life of
2.5 to 3.2 years, a volatility of 54%, a dividend rate of zero and a risk free
interest rate of 3.18-3.4%. The vesting periods for each of the
performance tranches range from immediate to 15 months based upon management’s
assessment of when each of the performance steps will be
achieved.
On
June 30, 2008, we entered into a consulting agreement with Namaste Financial,
Inc. for a one-year period of general business, strategic and growth advisory
services. Under the agreement, Namaste received 125,000 shares of common stock
and a warrant to purchase 125,000 shares of common stock at $.46 per share. This
firm was engaged to arrange new equity financing and the warrants and
shares. The shares were valued at $43,750 and the warrants were
valued at $12,800 using a Black-Scholes valuation model. The total
value of $56,550 is shown as a net reduction of paid in capital as they were
treated as an incremental cost of raising capital under the guidance of SAB
Topic 5-A.
On
August 11, 2008, we entered into an employment agreement with David Dauwalter,
Director of Sales, pursuant to which we granted him an option to purchase 50,000
shares of common stock with 10,000 shares vested immediately and increments of
10,000 shares vesting upon reaching certain performance milestones. On April 1,
2009 10,000 shares were vested, as a result of obtaining FDA clearance, and an
additional 10,000 shares vested on June 15, 2009 as a result of the Company
shipping its first revenue producing FMS unit. The Company valued the option at
$6,463, an estimated life of 2.5 to 3 years, a volatility of 53%, a dividend
rate of zero and a risk free interest rate of 2.7-2.9%. The vesting
periods for each of the performance tranches range from immediate to 13 months
based upon management’s assessment of when each of the performance steps will be
achieved.
On
October 20, 2008, we entered into an agreement with Gregory Sachs, a regulatory
consultant, pursuant to which the Company granted an agreement to purchase up to
50,000 shares of our common stock contingent upon reaching certain performance
goals from April 1, 2009 to June 30, 2009. Mr. Sachs assisted the Company in
obtaining FDA 510(k) clearance. The purpose of the performance goal provision
was to help to ensure a timely clearance of the 510(k). Upon reaching FDA
clearance on April 1, 2009, Mr. Sachs received a warrant to purchase 50,000
shares of our common stock. The warrant has a 5 year term and an
exercise price of $.46 per share. The warrant issued to Sachs and
associates was valued at $8,318 using the Black-Scholes valuation model because
it was an extra incentive to finish the FDA work early and its value was not
otherwise determinable. The inputs to Black-Scholes were an expected life of 5
years based upon the 5 year legal term, a volatility of 63%, a dividend rate of
zero and a risk free interest rate of 1.65%.
In
September 2002, an oral agreement was made with director Peter Morawetz whereby
he would provide sales, marketing and general administrative consulting to the
Company for a fee of $1,770 per month. The Company’s expectation at the time was
that the Company would have received equity financing to fund these payments but
the Company did not receive that funding. Pursuant to an oral
agreement with Mr. Morawetz the Company could defer payment of these amounts
until such date that they had cash to pay him. The Company accrued these fees
through August 2006 when Mr. Morawetz’s consulting services ended. On May 15,
2009 Mr. Morawetz and the Company reached agreement whereby he would waive
payment of his consulting fees, in the amount of $84,600, and accept a cash
payment of $30,000 and an option to buy 75,000 shares of common stock at $.35
per share upon the Company raising $3 million. Mr. Morawetz has no obligation to
participate in raising the funds. The debt forgiveness was treated as a capital
contribution, in accordance with SAB 79, because Mr. Morawetz is both a director
and a significant shareholder, and the $30,000 obligation and the Black-Scholes
value of the option were expensed in the second quarter of 2009. The $84,600
capital contribution is shown on a separate line in the Statement of
Shareholders’
Deficit. The value
of the option was determined to be $22,658 based upon the Black-Scholes
valuation model using a 5 year expected term, a 59% expected volatility and a
2.03% risk free interest rate.
On
February 1, 2009, we entered into an employment agreement with Kirsten 1, Vice
President of Sales and Marketing, pursuant to which we granted her an option to
purchase 100,000 shares of common stock at $.35 per share with 20,000 shares
vested immediately and increments of 20,000 shares vesting upon reaching certain
performance milestones. In addition, we granted Ms. Doerfert a warrant to
purchase 15,000 shares at $.46 per share as compensation for her consulting
services prior to becoming an employee. As of June 30, 2009 the 15,000 shares
underlying the warrant are fully vested and a total of 60,000 shares underlying
stock options are vested. The value of the option was computed to be $14,006
using an expected term ranging from 2.5 to 2.8 years, an expected volatility of
63%, a risk free interest rate ranging from 1.085% to 1.191% and a zero dividend
rate. The warrant was valued at $2,502 using the Black-Scholes valuation model
using a 5 year expected term, a 63% expected volatility, a 1.75% risk free
interest rate, and a zero dividend rate. The warrant was expensed in
February 2009 because it was immediately vested. We used the
Black-Scholes model to establish the valuation because the value of the services
performed was difficult to measure.
F-11
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the six months ended June 30, 2008 and
June
30, 2009 are unaudited)
NOTE
4- RESTRICTED CASH IN ESCROW
Under
terms of the escrow agreement established in connection with the October 2008
financing certain amounts were to be withheld to pay legal, accounting and
placement agent fees as well as to pay for investor relations activities that
will commence upon receiving an effective registration of the Company’s stock
and an initial listing with the OTC Bulletin Board. All amounts related to
legal, accounting and placement agent fees have been disbursed and the current
balance is solely being held to fund investor relations
activities.
The
balance in this escrow account will be released to the Company if we should
withdraw our registration statement to become a public company or otherwise by
mutual agreement of the investors who established the escrow as a condition of
the October 2008 financing.
NOTE
5 - LOSS PER SHARE
The
following table presents a reconciliation of the numerators and denominators
used in the basic and diluted loss per common share
computations:
From April
23,
|
||||||||||||||||||||
Year Ended December 31,
|
Six Months Ended
|
2002 To
|
||||||||||||||||||
2008
|
2007
|
June
30,
2009
|
June
30,
2008
|
June
30,
2009
|
||||||||||||||||
(Restated)
|
(Restated)
|
(Unaudited)
(Restated)
|
(Unaudited)
|
(Unaudited)
(Restated)
|
||||||||||||||||
Numerator:
|
||||||||||||||||||||
Net
Loss available in basic and diluted calculation
|
$ | 1,762,628 | $ | 752,414 | $ | 1,724,425 | $ | 507,819 | $ | 4,879,563 | ||||||||||
Denominator:
|
||||||||||||||||||||
Weighted
average common shares oustanding-basic
|
4,335,162
|
823,627
|
8,531,200
|
1,349,506
|
1,793,898
|
|||||||||||||||
Effect
of dilutive stock options and warrants (1)
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Weighted
average common shares outstanding-diluted
|
4,335,162
|
823,627
|
8,531,200
|
1,349,506
|
1,793,898
|
|||||||||||||||
Loss
per common share-basic and diluted
|
$ | (0.41 | ) | $ | (0.91 | ) | $ | (0.20 | ) | $ | (0.38 | ) | $ | (2.72 | ) |
(1) The
number of options and warrants outstanding as of June 30, 2009, June 30, 2008,
December 31, 2008 and December 31, 2007 are 8,305,780, 4,100,511, 6,475,685 and
169,160 respectively. The effect of the shares that would be issued upon
exercise has been excluded from the calculation of diluted loss per share
because those shares are anti-dilutive.
NOTE
6 – INCOME TAXES
The
provision for income taxes consists of an amount for taxes currently payable and
a provision for tax consequences deferred to future periods. Deferred
income taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
There
is no income tax provision in the accompanying statement of operations due to
the cumulative operating losses that indicate a 100% valuation allowance for the
deferred tax assets and state income taxes is appropriate.
Federal
and state income tax return operating loss carryovers as of December 31, 2008,
were approximately $3,145,000 and will begin to expire in 2017.
The
valuation allowance has been recorded due to the uncertainty of realization of
the benefits associated with the net operating losses. Future events and changes
in circumstances could cause this valuation allowance to
change.
The
components of deferred income taxes at December 31 and June 30, 2009 are as
follows:
December 31 ,
|
June
30,
|
|||||||||||
2008
|
2007
|
2009
|
||||||||||
(Unaudited)
|
||||||||||||
Deferred
Tax Asset:
|
||||||||||||
Net
Operating Loss
|
$ | 747,000 | $ | 321,000 | $ |
1,148,000
|
||||||
Total
Deferred Tax Asset
|
747,000
|
321,000
|
1,148,000
|
|||||||||
Less
Valuation Allowance
|
747,000
|
321,000
|
1,148,000
|
|||||||||
Net
Deferred Income Taxes
|
$ | — | $ | — |
—
|
NOTE 7 –NOTES PAYABLE
The
Company has a convertible debenture with Andcor Companies, Inc. (“Andcor”) of
$10,000 at 10.25% that matured in 2007. The debenture is convertible to the
Company’s common stock at the lower of $0.90 per share or the price per share at
which the next equity financing agreement is completed, and is now re-set to
$.35 per share. The convertible debenture has not yet been paid, and it is
currently in default. While Andcor could demand payment on this note at any
time, they have verbally expressed an interest in working with us to wait until
additional funds are secured by the Company. Further, Andcor has left open the
possibility of converting the note into shares of the Company’s common stock,
which would require no cash outlay by the Company.
F-12
BIODRAIN MEDICAL,
INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the six months ended June 30, 2008 and
June
30, 2009 are unaudited)
NOTE 8 – LONG-TERM
DEBT
Long-term
debt is as follows:
December 31,
|
June
30,
|
|||||||||||
2008
|
2007
|
2009
|
||||||||||
(Unaudited)
|
||||||||||||
Notes
payable to seven individuals due April 2008 including 8% fixed interest
and are now delinquent. The 2007 balance is shown net of a $30,899 debt
discount based upon the Black-Scholes valuation assigned to the warrants
issued in connection with the debt. The notes are convertible into 620,095
shares of the Company’s common stock and automatically convert at the
effective date of this registration statement.
|
$ | 170,000 | $ | 139,101 | $ | 170,000 | ||||||
Note
payable to bank in monthly installments of $1,275/including variable
interest at 2% above the prevailing prime rate (3.25% at December 31,
2008) to August 2011 when the remaining balance is payable. The note is
personally guaranteed by former executives of the Company.
|
38,183
|
48,308
|
31,486
|
|||||||||
Note
payable to NWBDC with interest only payments at 8% to December 2008 when
the remaining balance is payable. The note was personally guaranteed by
former executives of the Company. The note was paid in full on June 24,
2008.
|
—
|
18,000
|
—
|
|||||||||
Notes
payable to two individuals, net of discounts of $26,157, $34,205 and
$23,643 with interest only payments at 12% to March 2012 when the
remaining balance is payable. The notes are convertible into 285,715
shares of stock in the Company at $.35 per share.
|
73,843
|
65,794
|
78,369
|
|||||||||
Notes
payable to four shareholders of the Company that are overdue. The notes
are convertible into 11,429 shares of stock in the Company at $.35 per
share.
|
4,000
|
4,000
|
4,000
|
|||||||||
Total
|
286,026
|
275,203
|
283,855
|
|||||||||
Less
amount due within one year
|
187,620
|
172,901
|
187,620
|
|||||||||
Long-Term
Debt
|
$ | 98,406 | $ | 102,302 |
$
|
$96,235 |
Cash
payments for interest were $5,175 for the year ended December 31, 2008, $5,071
for the year ended December 31, 2007 and $953 for the six months ended June 30,
2009. The notes payable of $10,000 (discussed in Note 6), $170,000 and $4,000
(shown in the table above) are delinquent and could be called by the holders,
putting additional strains on our liquidity. The note for $170,000 contains
provisions for a one-time penalty of $25,000 if this registration statement is
not filed within 120 days of August 31, 2008 and $5,000 per 30 day period, after
February 27, 2009, until the registration statement is declared effective by the
SEC. The total amount accrued as additional interest expense is $20,500 at June
30, 2009. There is no maximum penalty. In addition, beginning March 2009 the
Company is obligated to issue additional shares to the investors who purchased
units in October 2008 financing equal to 2% of the units sold for each month
until the registration is declared effective. This represents 91,057 shares per
month to a maximum of 728,458 shares, or 16% of the total units sold. At June
30, 2009 the Company estimates it will be obligated to issue
637,401 shares with a value of $318,701 at $.50 per share. Payment of the
accrued interest and penalties will occur upon receipt of a significant portion
of the $3 million funding subsequent to our listing on the OTC Bulletin Board
and issuance of the additional shares will occur within 30 days of the earlier
of the effective registration of our shares or October 31, 2009 when the maximum
is reached.
Principal
payments required during the next five years as of December 31, 2008
are:
2009
-
|
$ | 197,620 | ||
2010
-
|
$ | 14,353 | ||
2011
-
|
$ | 10,210 | ||
2012
-
|
$ | 100,000 | ||
2013
-
|
$ | 0 |
NOTE
9 – COMMITMENTS AND CONTINGENCIES
In
July 2007, we entered into a restructuring agreement whereby in the event that
we fail to obtain FDA clearance by the end of August 2009, the
majority-in-interest of investors (“the Investors”) through our October 2008
offering would have the right to cause the Company to make significant
restructuring changes. As a result of receiving written approval from the FDA on
April 1, 2009 this restructuring will be avoided.
F-13
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the three months ended June 30, 2008 and
June
30, 2009 are unaudited)
NOTE
10 – RENT OBLIGATION
The
Company leases it principal office under a non-cancelable lease that extends 5
years. In addition to rent the Company also pays real estate taxes, repairs and
maintenance on the leased property. Rent expense charged to operations amounted
to approximately $13,000 and $0 in 2008 and 2007, respectively.
The
Company’s
obligation for rent as of December 31, 2008 over the next 5 years is as
follows:
2009
|
$
|
35,000
|
||
2010
|
29,000
|
|||
2011
|
30,000
|
|||
2012
|
30,000
|
|||
2013
|
26,000
|
NOTE
11– RESTATEMENT OF 2007, 2008 and 2009
The
Company’s previously reported financial statements for 2007, 2008 and 2009 have
been restated herein to reflect the adoption of Staff Accounting Bulletin (SAB)
79 as the preferred accounting principle for reflecting forgiveness of debt by
certain officers/shareholders. In addition, the Company corrected errors in
accounting estimates related to expected volatility and expected term in the
Black-Scholes valuation model assumptions, for warrants and options, and applied
the applicable expense to the appropriate year. Finally, the Company recorded a
liability under a registration payment arrangement as of June 30, 2009 which
required a 2009 restatement.
2007
The
Company relied upon the guidance of SAB 79 to record expense in 2007 for waived
officer/shareholder salaries previously credited to salary expense and
re-classified as a capital contribution. The change in accounting for debt
forgiveness, applied retrospectively to 2007, consisted of reversing a $346,700
credit to salary expense with a corresponding increase in paid-in capital and
recording $115,000 in general and administrative expenses with an equal increase
in accrued expenses to reflect the future cash payments that the Company is
obligated to make upon raising $3 million. Additionally, the company corrected
an error in accounting estimate and expensed $62,945 in stock-based compensation
expense in accordance with SFAS 123(R), and a corresponding increase in paid-in
capital related to the total valuation of the Company’s obligation to issue
stock options to such officers when the Company raises an additional $3
million.
Finally,
the Company recorded a $40,242 debt discount based upon the Black-Scholes
valuation model fair value of the warrants issued in connection with the
$100,000 convertible note dated March 1, 2007 and $92,696 as a debt discount
related to warrants issued in connection with the $170,000 convertible secured
bridge loan dated July 23, 2007. Interest expense, based upon the amortization
of the debt discounts, was $67,833 in 2007 and the remaining debt discounts at
December 31, 2007 are $34,206 and $30,899 for the March 1, 2007 and July 23,
2007 notes, respectively.
2008
As a
result of the restatement in 2007 to reflect the amortization of $67,833 in debt
discount, that had previously been expensed in 2008, the amortization of debt
discount in 2008 declined from $66,765 to $38,948. The decline in interest
expense in the restated 2008 financials compared to that originally reported was
only $27,819 because the Company also recomputed the valuation of the warrants
issued in connection with its convertible bridge loan debt using a 63% expected
volatility and a three year expected term compared to a 45% expected volatility
and 1 ½ year expected term as originally reported.
Additionally,
the Company recomputed the value of other options and warrants using a range of
volatilities from 53% to 66% and expected terms ranging from 2.5 to 7.5 years,
resulting in a $96,000 increase in the total valuation of options and warrants
and an additional $28,931 was expensed as compensation and consulting expense in
2008. The Company relied upon the guidance of SAB 79 to record expense in 2008
for officer/shareholder salaries in the amount of $129,685, to record a capital
contribution as waived salaries in an equal amount and accrued $25,000 that will
be paid to Mr. Gadbaw, in addition to the remaining balance of the $46,000 he is
being paid at $2,000 per month, upon raising an additional $3 million.
2009
The
Company is required, under terms of a financing agreement reached in 2008, to
register 4,552,862 shares of stock sold in a private placement offering. The
registration rights agreement allows the Company 180 days to register the
shares after the August 31, 2008 closing date without incurring any penalty. For
each 30 day period after the 180 days has passed the Company is obligated to
issue 91,057 additional shares, up to a maximum of 728,458 shares, until the
registration is declared effective. As of June 30, 2009 the Company has
determined that the total liability for additional shares can reasonably be
estimated to be 637,401 shares and we accrued $318,701 for the value of these
shares, at $.50 per share as of June 30, 2009. The Company relied upon FSP EITF
00-19-2 (ASC 825-20-30-5 in the codification literature) in making this
determination. Since the June 30, 2009 financial statements originally reported
did not contain this expense accrual the enclosed financial statements are
restated.
A
recap of the amounts originally reported, amounts as restated and the net change
for the 2007, 2008 and 2009 financial statements is shown below. The numbers in
( ) after the balance sheet and statement of operations category in 2007
and 2008 correspond to the adjustments that are itemized below following
the recaps.
2007
Restatement
|
||||||||||||
As Originally
|
As
|
Net
|
||||||||||
Reported
|
Restated
|
Change
|
||||||||||
Balance Sheet
|
||||||||||||
Current
portion of convertible debt, net of discounts (4)(5)
|
$
|
170,000
|
$
|
139,101
|
$
|
(30,899
|
)
|
|||||
Accrued
expenses (3)
|
$
|
226,429
|
$
|
341,429
|
$
|
115,000
|
||||||
Long-term
debt and convertible debt, (6)(7)
|
$
|
136,508
|
$
|
102,302
|
$
|
(34,206
|
)
|
|||||
net
of discounts
|
||||||||||||
Additional
paid-in capital (1)(2)(4)(6)
|
$
|
117,833
|
$
|
660,430
|
$
|
542,597
|
||||||
Deficit
accumulated during development stage (1)(2)(3)(5)(7)
|
$
|
(788,701
|
) |
$
|
(1,381,164
|
) | $ |
(592,492
|
) | |||
As
Originally
|
As
|
Net
|
||||||||||
Reported
|
Restated
|
Change
|
||||||||||
Statement of Operations | ||||||||||||
General
and administrative expense (1)(2)(3)
|
111,858
|
636,517
|
524,659
|
|||||||||
Interest
expense (5)(7)
|
33,238
|
101,071
|
67,833
|
|||||||||
Total
|
$
|
159,922
|
$
|
752,414
|
$
|
592,492
|
||||||
Loss
per share
|
$
|
(0.19
|
)
|
$
|
(0.91
|
)
|
$
|
(0.72
|
)
|
|||
Weighted
average shares used in the computation of basic and diluted loss per share
|
823,627
|
823,627
|
-
|
F-14
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
(Amounts
presented at and for the three months ended June 30, 2008 and
June 30,
2009 are unaudited)
2008 Restatement
|
||||||||||||
As Originally
|
As
|
Net
|
||||||||||
Reported
|
Restated
|
Change
|
||||||||||
Balance
Sheet
|
||||||||||||
Accrued
expenses (9)(14)
|
$
|
280,248
|
$
|
305,248
|
$
|
25,000
|
||||||
Long-term
debt and convertible debt, (10)(11)(12)(13)
|
$
|
99,608
|
$
|
98,406
|
$
|
(1,202
|
)
|
|||||
net
of discounts
|
||||||||||||
Additional
paid-in capital (8)(10)(12)(15)(16)
|
$
|
2,171,080
|
$
|
2,753,039
|
$
|
581,959
|
||||||
Deficit
accumulated during development stage (8)(9)(11)(13)(14)(15)(16)
|
$
|
(2,538,035
|
) | $ |
(3,143,792
|
) | $ |
(605,756
|
) | |||
As
Originally
|
As
|
Net
|
||||||||||
Reported
|
Restated
|
Change
|
||||||||||
Statement of Operations | ||||||||||||
Operations
expense (16)
|
$
|
318,066
|
$
|
321,205
|
$
|
3,139
|
||||||
Sales
and marketing expense (16)
|
35,199
|
35,682
|
483
|
|||||||||
General
and administrative expense (8)(9)(14)(15)(16)
|
1,278,937
|
1,316,398
|
37,461
|
|||||||||
Interest
expense (11)(13)
|
117,162
|
89,343
|
(27,819
|
)
|
||||||||
Total
|
$
|
1,749,364
|
$
|
1,762,628
|
$
|
13,264
|
||||||
Loss
per share
|
$
|
(0.40
|
)
|
$
|
(0.41
|
)
|
$
|
(0.01
|
)
|
|||
Weighted
average shares used in the computation of basic and diluted loss per share
|
4,335,162
|
4,335,162
|
-
|
Period ended June 30, 2009
Restatement
|
||||||||||||
As Originally
|
As
|
Net
|
||||||||||
Reported
|
Restated
|
Change
|
||||||||||
Balance
Sheet
|
||||||||||||
Accrued expense
|
$ | 274,642 | $ | 593,343 | $ | 318,701 | ||||||
Deficit accumulated during development
stage
|
$ | (4,560,862 | ) | $ | (4,879,563 | ) | $ | (318,701 | ) | |||
Statement of
Operations
|
||||||||||||
General and administrative
expense
|
$ | 552,839 | $ | 871,540 | $ | 318,701 | ||||||
Net loss
|
$ | (1,423,724 | ) | $ | (1,742,425 | ) | $ | (318,701 | ) | |||
Net loss per common share, basic and
diluted
|
$ | (0.17 | ) | $ | (0.20 | ) | $ | (0.03 | ) | |||
Weighted average shares used in the
computation
|
$ | 8,531,200 | $ | 8,531,200 | - |
The
following table itemizes the adjustments made to the originally reported 2007
and 2008 financial statements that resulted in the
restatements:
Paid-in
|
Accrued
|
Accumulated
|
|||||||||||||||
2007
|
Capital
|
Expenses
|
Debt
|
Deficit
|
|||||||||||||
$
|
(346,714
|
)
|
$
|
346,714
|
(1)
Reverse credit to salary expense for waived salaries, credit this amount
as a capital contribution.
|
||||||||||||
(62,945
|
)
|
62,945
|
(2)
Record FAS 123R value of stock options granted to Gadbaw, Rice and
Davidson
|
||||||||||||||
(115,000
|
)
|
115,000
|
(3)
Accrue salary expense for the estimated payout to Gadbaw, Rice and
Davidson upon raising $3 million
|
||||||||||||||
(92,696
|
)
|
92,696
|
(4)
Record the Black-Scholes value of the debt discount computed on the July
2007 convertible bridge loan
|
||||||||||||||
(61,797
|
)
|
61,797
|
(5)
Record amortization of interest expense for July 2007 through December
2007 on bridge loan debt discount
|
||||||||||||||
(40,242
|
)
|
40,242
|
(6)
Record the Black-Scholes value of the debt discount computed on the March
2007 Moore loans
|
||||||||||||||
(6,036
|
)
|
6,036
|
(7)
Record amortization of interest expense for March 2007 through December
2007 on Moore loan debt discount
|
||||||||||||||
Total
net change
|
$
|
(542,597
|
)
|
$
|
(115,000
|
)
|
$
|
65,105
|
$
|
592,492
|
|||||||
F-15
Paid-in
|
Accrued
|
Accumulated
|
|||||||||||||||
2008
|
Capital
|
Expenses
|
Debt
|
Deficit
|
|||||||||||||
27,533
|
(27,533
|
)
|
(8)
Reverse FAS 123R compensation expense previously expensed in 2008 on an
amortization schedule, entire amount has been expensed in restated 2007
financial statements
|
||||||||||||||
115,000
|
(115,000
|
)
|
(9)
Reverse accrued expense for Gadbaw, Rice and Davidson, this amount is
expensed in restated 2007 financials
|
||||||||||||||
53,328
|
(53,328
|
)
|
(10)
Reverse portion of debt discount on convertible bridge loan that was
applied to 2007 restated financials
|
||||||||||||||
22,430
|
(22,430
|
)
|
(11)
Reverse the portion of interest expense on debt discount amortization that
applies to 2007 restatement
|
||||||||||||||
38,392
|
(38,392
|
)
|
(12)
Reverse portion of debt discount on Moore loan that was applied to 2007
restated financials
|
||||||||||||||
5,389
|
(5,389
|
)
|
(13)
Reverse the portion of interest expense on Moore loan debt discount that
was applied to 2007 restatement
|
||||||||||||||
(25,000
|
)
|
25,000
|
(14)
Accrue the additional $25,000 that Gadbaw will receive upon raising $3
million in new equity
|
||||||||||||||
(129,685
|
)
|
129,685
|
(15)
Record capital contribution and salary expense for waived 2008 salaries
for Gadbaw, Rice and Davidson
|
||||||||||||||
(28,931
|
)
|
28,931
|
(16)
Record additional stock based compensation and consulting expense due to
revised expected volatility and revised expected term inputs to the
Black-Scholes model
|
||||||||||||||
1 |
(2
|
)
|
Rounding
|
||||||||||||||
Total
net change
|
$
|
(39,362
|
)
|
$
|
90,000
|
$
|
(63,903
|
)
|
$
|
13,264
|
|||||||
Cumulative change
|
$
|
(581,959
|
)
|
$
|
(25,000
|
)
|
$
|
1,202
|
$
|
605,756
|
NOTE
12 – LIABILITY FOR EQUITY-LINKED FINANCIAL INSTRUMENTS
The
Company adopted Emerging Issues Task Force (EITF) Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s
Own Stock , on January 1, 2009.
EITF
07-5 mandates a two-step process for evaluating whether an equity-linked
financial instrument or embedded feature is indexed to the entity's own stock.
It is effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years, which is our first quarter of 2009. Most of
the warrants issued by the Company contain a strike price adjustment feature,
which upon adoption of EITF 07-5, changed the current classification (from
equity to liability) and the related accounting for warrants with a $479,910
estimated fair value of as of January 1, 2009.
The
Company determined that the fair value on January 1, 2009 of 4,689,291 warrants
was $479,910, or $.1023 per share. An adjustment was made to remove $486,564
from paid-in capital (the cumulative value of the warrants on their grant
dates), booked a positive adjustment of $6,654 to accumulated deficit,
representing the gain on valuation from the grant date to January 1, 2009, and
booked the net of $479,910 as a liability. The January 1, 2009 valuation was
computed using the Black-Scholes valuation model based upon a 2.5 year expected
term, an expected volatility of 63%, an exercise price of $.46 per share a, a
stock price of $.35, a zero dividend rate and a 1.37% risk free interest rate.
On March 31, 2009 the company recomputed the value of the warrants using the
Black-Scholes valuation model with an expected volatility of 66%, an expected
term of 2.25 years, a stock price of $.50 per share and a risk free interest
rate of .895%. Primarily due to the increase in the underlying stock price the
valuation per share was $.2082 or a total of $976,412. The $496,502 increase in
the liability is reflected as a Loss on the valuation of the liability for
equity-linked instruments, on a separate line in the Income Statement for the
three months ended March 31, 2009. On June
30, 2009 the Company again recomputed the value of the warrants using the
Black-Scholes valuation model with an expected volatility of 66%, an expected
term of 2 years, a risk free interest rate of 1.11%, a zero dividend rate and a
stock price of $.50. The computed value per share of $.1967 produced a liability
of $922,344 as of June 30, 2009 for a net gain of $54,067. In addition, the
Company placed a valuation on their grant date, on warrants issued during the
second quarter of $169,654 and recomputed their value as of June 30, 2009. The
value on June 30, 2009 was $163,842 for a net gain of $6,012. The June 30, 2009
valuation of the warrants issued during the second quarter was $.1689 per share
using a 63% expected volatility, a 2.83 year expected term, a zero dividend
rate, an exercise price of $.65 per share, a stock price of $.50 per share and a
1.26% risk free interest rate. The combination of the net gains during the
second quarter resulting from these new valuations was $60,079 and reduced the
loss for the six month period ended June 30, 2009 to $436,423. This loss on
valuation of equity-linked financial instruments is show as a separate line on
the statement of operations.
F-16
Part
II
Item
24. Indemnification of Directors and Officers.
We are a
Minnesota corporation and certain provisions of the Minnesota Statutes and our
Bylaws provide for indemnification of our officers and directors against
liabilities which they may incur in such capacities. A summary of the
circumstances in which indemnification is provided is discussed below, but this
description is qualified in its entirety by reference to our Bylaws and to the
statutory provisions.
Section
302A.521, Subd. 2 of the Minnesota Statutes requires a corporation to indemnify
a person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person against judgments, penalties,
fines, including, without limitation, excise taxes assessed against the person
with respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys’ fees and disbursements, incurred by
the person in connection with the proceeding, if, with respect to the acts or
omissions of the person complained of in the proceeding, the
person:
|
(1)
|
has not been indemnified by
another organization or employee benefit plan for the same judgments,
penalties, fines, including, without limitation, excise taxes assessed
against the person with respect to an employee benefit plan, settlements,
and reasonable expenses, including attorneys’ fees and
disbursements, incurred by the person in connection with the proceeding
with respect to the same acts or omissions;
|
(2)
|
acted in good
faith;
|
|
|
(3)
|
received no improper personal
benefit and Section 302A.255, if applicable, has been
satisfied;
|
|
(4)
|
in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful;
and
|
|
(5)
|
in the case of acts or omissions
occurring in the person’s performance in the
official capacity of director or, for a person not a director, in the
official capacity of officer, board committee member or employee,
reasonably believed that the conduct was in the best interests of the
corporation or, in the case of performance by a director, officer or
employee of the corporation involving service as a director, officer,
partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the
best interests of the corporation. If the person’s acts or omissions
complained of in the proceeding relate to conduct as a director, officer,
trustee, employee, or agent of an employee benefit plan, the conduct is
not considered to be opposed to the best interests of the corporation if
the person reasonably believed that the conduct was in the best interests
of the participants or beneficiaries of the employee benefit
plan.
|
Section
302A.521 Subd. 2 further provides that the termination of a proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent does not, of itself, establish that the person did not meet the
criteria set forth in this subdivision.
In
addition, Section 302A.521, Subd. 3, requires that if a person is made or
threatened to be made a party to a proceeding, the person is entitled, upon
written request to the corporation, to payment or reimbursement by the
corporation of reasonable expenses, including attorneys’ fees and disbursements,
incurred by the person in advance of the final disposition of the proceeding,
(a) upon receipt by the corporation of a written affirmation by the person of a
good faith belief that the criteria for indemnification set forth in Section
302A.521, Subd. 2 have been satisfied and a written undertaking by the person to
repay all amounts so paid or reimbursed by the corporation, if it is ultimately
determined that the criteria for indemnification have not been satisfied, and
(b) after a determination that the facts then known to those making the
determination would not preclude indemnification under this section. The written
undertaking required by clause (a) is an unlimited general obligation of the
person making it, but need not be secured and shall be accepted without
reference to financial ability to make the repayment.
II-1
Section
302A.521 Subd. 4 provides that the articles of incorporation or bylaws of a
corporation either may prohibit indemnification or advances of expenses
otherwise required by Section 302A.521 or may impose conditions on
indemnification or advances of expenses in addition to the conditions contained
in Subd. 2 and 3 including, without limitation, monetary limits on
indemnification or advances of expenses, if the prohibition or conditions apply
equally to all persons or to all persons within a given class. A prohibition or
limit on indemnification or advances may not apply to or affect the right of a
person to indemnification or advances of expenses with respect to any acts or
omissions of the person occurring prior to the effective date of a provision in
the articles of incorporation or the date of adoption of a provision in the
corporation’s bylaws
establishing the prohibition or limit on indemnification or
advances.
Section
302A.521 Subd. 5 provides that Section 302A.521 does not require, or limit the
ability of a corporation to reimburse expenses, including attorneys’ fees and disbursements,
incurred by a person in connection with an appearance as a witness in a
proceeding at a time when the person has not been made or threatened to be made
a party to a proceeding
Section
302A.521 Subd. 6 further provides that:
(a) all
determinations whether indemnification of a person is required because the
criteria set forth in Subd. 2 have been satisfied and whether a person is
entitled to payment or reimbursement of expenses in advance of the final
disposition of a proceeding as provided in Subd. 3 shall be made:
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(1)
|
by the board by a majority of a
quorum, if the directors who are at the time parties to the proceeding are
not counted for determining either a majority or the presence of a
quorum;
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|
(2)
|
if a quorum under clause (1)
cannot be obtained, by a majority of a committee of the board, consisting
solely of two or more directors not at the time parties to the proceeding,
duly designated to act in the matter by a majority of the full board
including directors who are parties;
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|
(3)
|
if a determination is not made
under clause (1) or (2), by special legal counsel, selected either by a
majority of the board or a committee by vote pursuant to clause (1) or (2)
or, if the requisite quorum of the full board cannot be obtained and the
committee cannot be established, by a majority of the full board including
directors who are parties;
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|
(4)
|
if a determination is not made
under clauses (1) to (3), by the affirmative vote of the shareholders
required by Section 302A.437 of the Minnesota Statutes, but the shares
held by parties to the proceeding must not be counted in determining the
presence of a quorum and are not considered to be present and entitled to
vote on the determination; or
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|
(5)
|
if an adverse determination is
made under clauses (1) to (4) or under paragraph (b), or if no
determination is made under clauses (1) to (4) or under paragraph (b)
within 60 days after (i) the later to occur of the termination of a
proceeding or a written request for indemnification to the corporation or
(ii) a written request for an advance of expenses, as the case may be, by
a court in this state, which may be the same court in which the proceeding
involving the person’s liability took
place, upon application of the person and any notice the court requires.
The person seeking indemnification or payment or reimbursement of expenses
pursuant to this clause has the burden of establishing that the person is
entitled to indemnification or payment or reimbursement of
expenses.
|
(b) With
respect to a person who is not, and was not at the time of the acts or omissions
complained of in the proceedings, a director, officer, or person possessing,
directly or indirectly, the power to direct or cause the direction of the
management or policies of the corporation, the determination whether
indemnification of this person is required because the criteria set forth in
Subd. 2 have been satisfied and whether this person is entitled to payment or
reimbursement of expenses in advance of the final disposition of a proceeding as
provided in Subd. 3 may be made by an annually appointed committee of the board,
having at least one member who is a director. The committee shall report at
least annually to the board concerning its actions.
II-2
Section
302A.521 Subd 7 allows a corporation to purchase and maintain insurance on
behalf of a person in that person’s
official capacity against any liability asserted against and incurred by the
person in or arising from that capacity, whether or not the corporation would
have been required to indemnify the person against the liability under the
provisions of section 302A.521 of the Minnesota Statutes.
Section
302A.521 Subd. 8 requires a corporation that indemnifies or advances expenses to
a person in accordance with Section 302A.521 in connection with a proceeding by
or on behalf of the corporation to report to the shareholders in writing the
amount of the indemnification or advance and to whom and on whose behalf it was
paid not later than the next meeting of shareholders.
Section
302A.521 Subd. 9 provides that nothing in Section 302A.521 shall be construed to
limit the power of the corporation to indemnify persons other than a director,
officer, employee, or member of a committee of the board of the corporation by
contract or otherwise.
Pursuant
to our Bylaws, we may indemnify our directors and executive officers to the
fullest extent not prohibited by any applicable law; provided, however, that we
may modify the extent of such indemnification by individual contracts with our
directors and executive officers; and, provided, further, that we shall not be
required to indemnify any director or executive officer in connection with any
proceeding (or part thereof) initiated by such person unless: (i) such
indemnification is expressly required to be made by law; (ii) the proceeding was
authorized by our Board of Directors; (iii) such indemnification is provided by
the Company, in our sole discretion, pursuant to the powers vested in the
Company under any applicable law. We shall have the power to indemnify our other
officers, employees and other agents as set forth in any other applicable law.
Our Board of Directors shall have the power to delegate the determination of
whether indemnification shall be given to any such person to such officers or
other persons as our Board of Directors shall determine.
In
addition, our Bylaws provide that we will advance to any person who was or is a
party to a threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or executive officer, of the Company, prior to the final
disposition of the proceeding, promptly following request therefore, all
expenses incurred by any director or executive officer in connection with such
proceeding; provided, however, that the advancement of expenses shall be made
only upon delivery to the Company of an undertaking by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses.
Notwithstanding the foregoing, unless otherwise determined, no advance shall be
made by the Company to an officer of the Company (except by reason of the fact
that such officer is or was a director of the Company in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made: (i) by a majority vote of directors who are not parties to the
proceeding; (ii) by a committee of such directors designated by a majority vote
of such directors; or (iii) if there are no such directors, or such directors so
direct, by a written opinion from independent legal counsel, that the facts
known to the decision making party at the time such determination is made
demonstrate clearly and convincingly that such person acted in bad faith or in a
manner that such person did not believe to be in the best interests of the
Company.
II-3
Our
Bylaws also provide that without the necessity of entering into an express
contract, all rights to indemnification and advances to our directors and
executive officers shall be deemed to be contractual rights and to be effective
to the same extent and as if provided for in a contract between the Company and
the director or executive officer. Any right to indemnification or advances
granted to a director or executive officer shall be enforceable by or on behalf
of the person holding such right in any court of competent jurisdiction if: (i)
the claim for indemnification or advances is denied, in whole or in part; or
(ii) no disposition of such claim is made within ninety (90) days of request
therefore. The claimant in such enforcement action, if successful, shall be
entitled to be paid also the expense of prosecuting the claim. In connection
with any claim for indemnification, the Company shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under applicable law for the Company to
indemnify the claimant for the amount claimed. In connection with any claim by
an executive officer of the Company (except in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such executive officer is or was a director of the Company) for advances,
the Company shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in the best interests of the Company, or with
respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that his conduct was lawful. A determination by the
Company (including the Board of Directors, independent legal counsel or the
stockholders) that indemnification of the claimant is proper because he has met
the applicable standard of conduct or that the claimant has not med such
applicable standard of conduct shall not be a defense to the action nor shall it
create a presumption that claimant has not met the applicable standard of
conduct.
Item
25. Other Expenses of Issuance and Distribution.
The
following table sets forth an estimate of the costs and expenses payable by us
in connection with the registration of the common stock offered hereby. All of
the amounts shown are estimates except the Securities and Exchange Commission
Registration Fee:
Amount
|
||||
SEC
Registration Fee
|
$
|
200
|
||
Printing
Fees
|
$
|
30,000
|
||
Legal
Fees and Expenses
|
$
|
80,000
|
||
Accounting
Fees and Expenses
|
$
|
60,000
|
||
Miscellaneous
|
$
|
55,000
|
||
Total
|
$
|
225,200
|
Item
26. Recent Sales of Unregistered Securities.
During
the past four years, the Company has issued the following securities without
registration under the Securities Act of 1933, as amended. The discussions below
take into account the June 6, 2008 and October 20, 2008 reverse stock splits.
On August
22, 2005, we issued an option agreement to purchase 17,957 shares (30,000 shares
at $1 pre-split) of our common stock at $1.67 per share to Thomas McGoldrick,
for his services as a director. In addition to the initial grant the option
agreement specifies that he will we granted an option for 5,985 shares per year,
on his anniversary date of joining the board, at the market price on the grant
date. On August 22, 2006, we issued an option to purchase 5,985 shares of common
stock at $1.67 per share to Mr. McGoldrick. This transaction was effected under
Rule 701 promulgated under the Act on the basis that the transaction was
pursuant to a contract relating to compensation provided under Rule 701. The
recipient of the securities in this transaction represented his intentions to
acquire the securities for investment only and not with a view towards
distribution thereof. He had access, through his relationship with the Company,
to information about us.
On August
31, 2005, we issued a warrant to purchase 2,993 shares of our common stock at
$1.67 per share to each of three members of our Medical Advisory Board, Debbie
Heitzman, Mary Wells Gorman and David Feroe, for their services on the Medical
Advisory Board.
On
December 14, 2005, we issued 7,482 shares of common stock to officers Lawrence
Gadbaw and Gerald Rice as compensation for personal guarantees on Company
loans.
On
May 16, 2006, we issued 71,906 shares of our common stock to the inventor of our
intellectual property, Marshall Ryan, for the development work he performed with
respect to our product.
II-4
On
June 12, 2006, we issued a warrant to purchase 35,913 shares of our common stock
at $.02 per share to Dr. Arnold Leonard for his services on the Medical Advisory
Board. The warrant agreement contained an anti-dilution clause that would add
another 35,913 shares upon any large, dilutionary offering. The second warrant
to purchase 35,913 shares of our common stock was granted to Mr. Leonard in June
2008 when we achieved 2 million in outstanding shares of common stock through
the October 2008 financing.
On
August 8, 2006, we issued 14,964 shares of our common stock to Andcor Companies,
Inc. in partial payment of an invoice. Also in 2006, we issued warrants to
purchase 5,985 shares of common stock at $1.67 per share to Andcor Companies,
Inc. as part of a convertible loan agreement.
On
October 4, 2006, we entered into an employment agreement with Kevin Davidson,
our Chief Executive Officer. As part of this agreement, we agreed to issue
50,000 shares of our common stock to Mr. Davidson. The grant under the
employment agreement contained an anti-dilution protection amounting to 3.81% of
the fully-diluted outstanding common stock of the Company up to the completion
of the first $1,000,000 raised by the Company. On June 5, 2008, pursuant to a
stock option agreement with the Company, which amended Mr. Davidson’s
employment agreement, Mr. Davidson opted to receive an option to purchase
543,292 shares of common stock, exercisable at $.01, in lieu of obtaining the
shares to which he was entitled under his employment agreement.
On
October 23, 2006, we issued 8,979 shares of our common stock to a former
employee as a part of his compensation package in his employment agreement. This
transaction was effected under Rule 701 promulgated under the Act on the basis
that the transaction was pursuant to a contract relating to compensation
provided under Rule 701. The recipient of securities in this transaction
represented his intentions to acquire the securities for investment only and not
with a view towards distribution thereof. He had access, through his
relationship with the Company, to information about us.
On
November 11, 2006 we issued an option agreement to purchase 17,957 shares
(30,000 at $1 pre-split) of common stock at $1.67 per share to Andrew Reding,
for his services as a director. In addition to the initial grant the option
agreement specifies that he will we granted an option for 5,985 shares per year,
on his anniversary date of joining the board, at the market price on the grant
date. On November 11, 2007, we issued an option to purchase 5,985
shares of common stock at $1.67 per share to Mr. Reding. This transaction was
effected under Rule 701 promulgated under the Act on the basis that the
transaction was pursuant to a contract relating to compensation provided under
Rule 701. The recipient of securities in this transaction represented his
intentions to acquire the securities for investment only and not with a view
towards distribution thereof. He had access, through his relationship with the
Company, to information about us.
On
December 1, 2006, we fully repaid two of our three loans, in the combined amount
of $37,500, due to Wisconsin Rural Enterprise Fund (“WREF”).
To pay the outstanding loan to WREF, the Company issued warrants to purchase
20,949 shares of common stock at $1.67 per share to WREF.
On
December 1, 2006, we issued 3,986 shares of our common stock to pay a consulting
fee to Wisconsin Business Innovation Corporation, a related firm of
WREF.
On
December 7, 2006 and December 20, 2006 we issued warrants to purchase 2,993
shares of our common stock at $1.67 per share to each of Karen Ventura, Nancy
Kolb and Kim Shelquist for their sales and marketing advisory
services.
On
January 30, 2007 we fully repaid a Company loan of $1,000 due one of our former
employees by issuing him 599 shares of our common stock.
II-5
In
February 2007, Messrs. Davidson, Morawetz, Reding and McGoldrick loaned the
Company $1,000 each and obtained an 8.25% convertible promissory note in the
principal amount of $1,000. Each note matured on July 31, 2007 and the note
was convertible into common stock at the lower of (i) $1.00 per share or (ii)
the price of the sale of common stock the next financing which ultimately was
$0.35 per share.
On
March 1, 2007, we entered into a convertible debenture agreement with two
individuals, Roy Moore and Carl Moore, who loaned us $50,000 each, whereby we
granted warrants to purchase up to an aggregate of 28,502 to them at $.46 per
share. There were no special terms contained in the warrant other than that the
two individuals would pay a per share price equal to that of the October 2008
financing when exercising their warrants.
On
July 23, 2007, we entered into a convertible debenture with certain investors
who loaned us $170,000. Such securities are convertible into 620,095
shares and the lenders were also entitled to receive warrants to purchase
620,095 shares at $.35 per share. The Company issued the warrants February 24,
2009.
From July
2007 to October 2008, we issued 4,552,862 shares of our common stock at a price
per share of $0.35 to a number of investors pursuant to a private placement, and
raised gross proceeds of approximately $1.6 million. The transaction was a unit
offering, pursuant to which each investor received a unit including one
share of common stock and one warrant to purchase common stock at $0.46 per
share. Thirty-three investors, including one of our officers, Chad Ruwe,
participated in the transaction, which we completed in October 2008. The
transaction is described further in “Description of Business” Section. This
transaction
was in reliance upon the exemption from registration set forth in Rule 506 of
Regulation D. Each and
all of the investors in this financing qualified as an “accredited investor,” as
that term is defined in the
Act. The following conditions were all met with respect to this transaction: (1)
the registrant did not advertise
this issuance in any public medium or forum; (2) the registrant did not solicit
any investors with respect
to this issuance; (3) the registrant did not publicize any portion of the
purchase or sale of the shares issued;
(4) none of the shares issued were offered in conjunction with any public
offering; and (5) neither the
registrant nor the investors paid any fees to any finder or broker-dealer in
conjunction with this issuance.
In July 2007, we entered into a binding term sheet with a consultant pursuant to
which the consultant
would assist us in obtaining bridge financing and subsequent equity financing
and such term sheet
provided that the consultant and its assigns would receive 13.3% of the
Company’s anticipated issued and
outstanding common stock following the proposed bridge and equity financing on a
fully-diluted basis. The
parties subsequently agreed that we would issue 2,001,119 shares to such parties
in satisfaction of such obligation.
On
November 11, 2007, pursuant to a stock option agreement with Andrew Reding, a
member of our board of directors, we issued an option to purchase 5,985 shares
of our common stock at $.46 per share to Mr. Reding. This transaction was
effected under Rule 701 promulgated under the Act on the basis that the
transaction was pursuant to a contract relating to compensation provided under
Rule 701. The recipient of securities in this transaction represented his
intentions to acquire the securities for investment only and not with a view
towards distribution thereof. He had access, through his relationship with the
Company, to information about us.
On
February 29, 2008, we entered into a consulting agreement with Jeremy Roll for
referral services for the Company’s
funding that was completed in October 2008. Under the agreement, in addition to
a cash referral fee, Mr. Roll was entitled to receive warrants to purchase our
common stock at $.35 per share equal to 10% of his gross proceeds of the funds
raised for us. As a result, in July 7, 2008 Mr. Roll received warrants to
purchase 11,429 shares of our common stock.
On
March 10, 2008, we entered into a finder agreement for referral services for the
Company’s
funding that was completed in October 2008. This agreement also covered the
following finders: Thomas Pronesti, Craig Kulman, Caron Partners, LP and
Bellajule Partners, LP. Under the agreement, in addition to a cash referral fee,
the finders were entitled to receive 10% of their gross proceeds raised for us
with a fair market value of our common stock, or $.35 per share. As a result, on
June 23, 2008, the group of finders received an aggregate of 155,142 shares of
our common stock.
II-6
On April
15, 2008, we entered into an agreement with Kulman IR, LLC for investor
relations services. Under the agreement, in addition to cash fees, Kulman was
entitled to receive 250,000 shares of our common stock. On June 23, 2008 Kulman
and Cross Street Partners, Inc., a party related to Kulman, each received
125,000 shares of our common stock.
On
June 16, 2008, we entered into an employment agreement with Chad Ruwe, Executive
Vice President of Operations, pursuant to which we granted him an option to
purchase 250,000 shares of common stock with 50,000 shares vested immediately
and increments of 50,000 shares vesting upon achievement of certain milestones
related to obtaining FDA clearance and achieving commercial sales of our
Streamway™ Fluid Management System. This transaction was effected under Rule 701
promulgated under the Act on the basis that the transaction was pursuant to a
contract relating to compensation provided under Rule 701. The recipient of
securities in this transaction represented his intentions to acquire the
securities for investment only and not with a view towards distribution thereof.
He had access, through his relationship with the Company, to information about
us.
On
August 11, 2008, we entered into an employment agreement with David Dauwalter,
Director of Sales, pursuant to which we granted him an option to purchase 50,000
shares of common stock with 10,000 shares vested immediately and increments of
10,000 shares vesting upon reaching certain performance milestones.
On
August 15, 2008, we issued warrants to purchase 75,000 shares each of our common
stock at $.46 per share to Taylor & Associates, Inc. and Andcor Corporation
for their HR services in selecting a Vice President of Sales and
Marketing.
On August
26, 2008, we issued a warrant to purchase 50,000 shares of our common stock at
$.46 per share to a regulatory consultant, Thomas Bachinski, for his past
services.
On
October 20, 2008, we entered into an agreement with Gregory Sachs, a regulatory
consultant, pursuant to which the Company granted an agreement to purchase up to
50,000 shares of our common stock contingent upon reaching certain performance
goals from April 1, 2009 to June 30, 2009. Mr. Sachs assisted the Company in
obtaining FDA 510(k) clearance. The purpose of the performance goal provision
was to help to ensure a timely clearance of the 510(k). Upon reaching FDA
clearance on April 1, 2009, Mr. Sachs received a warrant to purchase 50,000
shares of our common stock. The warrant has a 5 year term and an
exercise price of $.46 per share.
On
February 1, 2009, we entered into an employment agreement with Kirsten Doerfert,
Vice President of Sales and Marketing, pursuant to which we granted her an
option to purchase 100,000 shares of common stock at $.35 per share with 20,000
shares vested immediately and increments of 20,000 shares vesting upon reaching
certain performance milestones. In addition, we granted Ms. Doerfert a warrant,
vested immediately, to purchase 15,000 shares at $.46 per share as compensation
for her consulting services prior to becoming an
employee.
On March
27, 2009 we issued 125,000 shares of common stock to Cross Street
Partners/Morrie Rubin as compensation in connection with raising up to $500,000
in new equity prior to June 30, 2009.
On April
6, 2009 we issued 50,000 shares and a warrant to purchase 50,000 shares at $.65
to Russell H. Yaucher for his $25,000 investment in the Company.
II-7
On April
14, 2009 we issued 50,000 shares and a warrant to purchase 50,000 shares at $.65
to Chad A. and Marianne K. Ruwe for their $25,000 investment in the
Company.
On April
20, 2009 we issued 200,000 shares and a warrant to purchase 200,000 shares at
$.65 to Dean M. and Carol L. Ruwe for their $100,000 investment in the
Company.
On April
21, 2009 we issued 200,000 shares and a warrant to purchase 200,000 shares at
$.65 to Richard J. Butler for his $100,000 investment in the
Company.
On April
30, 2009 we issued 200,000 shares and a warrant to purchase 200,000 shares at
$.65 to James Dauwalter for his $100,000 investment in the Company.
On May 5,
2009 we issued 20,000 shares and a warrant to purchase 20,000 shares at $.65 to
Gregory B. Graves for his $10,000 investment in the Company.
On May
15, 2009 we entered into an agreement with Peter Morawetz, a co-founder of the
Company, a significant shareholder and a member of the board of directors,
whereby Mr. Morawetz agreed to waive unpaid consulting fees in the amount of
$84,600, relating to 2006 and prior years and, in exchange, would receive a cash
payment of $30,000 and an option to purchase 75,000 shares at $.35 per share
upon the Company raising an additional $3 million in equity. Mr.
Morawetz is not required to participate in any way in the effort to raise $3
million.
On May
21, 2009 we issued 200,000 shares and a warrant to purchase 200,000 shares at
$.65 to Richard J. Butler for his additional $100,000 investment in the
Company.
On June 10, 2009 we issued 50,000 shares and a warrant to purchase
50,000 shares to Citigroup FBO John Villas for his $25,000 investment in the
Company.
On August
5, 2009 we issued 50,000 common shares and a warrant to purchase 50,000 shares
at $.65 per share to Arnold A. Angeloni for his $25,000 investment in the
Company.
On August
18, 2009 we issued 30,000 common shares and a warrant to purchase 30,000 shares
at $.65 per share to Peter G. Kertes for his $15,000 investment in the
Company.
On August
24, 2009 we issued restricted shares under the 2008 Equity Incentive Plan to
certain management and directors of the Company to reward them for past service
and to incentivize them for future service. The shares are subject to forfeiture
until the earlier of a Change in Control, as defined in the Plan, attainment of
6 consecutive quarters of a minimum of $250,000 in net income or attainment of a
30 day average trading volume of not less than 25,000 shares of stock. The
shares will forfeited to the Company if none of these “acceleration events”
occurs by the 10th
anniversary of the grant date. The shares granted are as
follows:
Peter
Morawetz, Director
|
100,000
shares
|
|
Thomas
McGoldrick, Director
|
40,000
shares
|
|
Andrew
Reding, Director
|
20,000
shares
|
|
Kevin
Davidson, Chief Executive Officer
|
300,000
shares
|
|
Chad
Ruwe, Chief Operating Officer
|
200,000
shares
|
|
Kirsten
Doerfert, VP Sales and Marketing
|
75,000
shares
|
|
David
Dauwalter, Direct of Product Management
|
50,000
shares
|
|
The value
of these shares was determined to be $.50 per share and the expense for their
grant was recorded in August 2009.
In
addition, on August 24, 2009 the Company issued 12,810 shares of restricted
stock under the 2008 Equity Incentive Plan and a warrant to purchase 18,207
common shares at $.46 per share to Alan Shuler as partial compensation under his
consulting arrangement with the Company. The warrant has a term of 5
years and the shares are subject to forfeiture until the earlier of a Change in
Control, as defined in the Plan, attainment of 6 consecutive quarters of a
minimum of $250,000 in net income or attainment of a 30 day average trading
volume of not less than 25,000 shares of stock. The shares will forfeited to the
Company if none of these “acceleration events” occurs by the 10th
anniversary of the grant date. The value of the warrant was determined to be
$4,943 using the Black-Scholes valuation model with an expected term of 5 years,
an expected volatility of 59%, a dividend rate of zero and a risk free interest
rate of 2.5%. The value of the restricted shares was determined to be
$6,405 at $.50 per share. These expenses were recorded in August
2009.
Unless
otherwise specified above, the Company believes that all of the above
transactions were transactions not involving any public offering within the
meaning of Section 4(2) of the Securities Act, since (a) each of the
transactions involved the offering of such securities to a substantially limited
number of persons; (b) each person took the securities as an investment for
his/her/its own account and not with a view to distribution; (c) each person had
access to information equivalent to that which would be included in a
registration statement on the applicable form under the Securities Act; (d) each
person had knowledge and experience in business and financial matters to
understand the merits and risk of the investment; therefore no registration
statement needed to be in effect prior to such issuances.
Item
27. Exhibits.
EXHIBIT
INDEX
3.1
|
Articles
of Incorporation of the Registrant, as amended**
|
|
3.2
|
Bylaws
of the Registrant, as amended**
|
|
3.3
|
Amendment
to Articles**
|
|
5.1
|
Opinion
of Richardson & Patel LLP*
|
|
10.1
|
Form
of Employment Agreement by and between the Registrant and Kevin R.
Davidson dated October 4, 2006**
|
|
10.2
|
Form
of Employment Agreement by and between the Registrant and Gerald D. Rice
dated October 18, 2006**
|
|
10.3
|
Form
of Employment Agreement by and between the Registrant and Chad A. Ruwe
dated June 16, 2008**
|
|
10.4
|
Form
of Confidential Separation Agreement and Release by and between the
Registrant and Lawrence W. Gadbaw dated August 13,
2008**
|
|
10.5
|
Form
of Nondisclosure and Non-compete Agreement by and between the Registrant
and Lawrence W. Gadbaw dated October 18,
2006**
|
II-8
10.6
|
Form
of Stock Option Agreement by and between the Registrant and Kevin R.
Davidson dated June 5, 2008**
|
|
10.7
|
Form
of Director Stock Option Agreement between the Registrant and Thomas
McGoldrick dated August 22, 2006**
|
|
10.8
|
Form
of Director Stock Option Agreement between the Registrant and Andrew P.
Reding dated November 11, 2006**
|
|
10.9
|
Form
of Consulting Agreement by and between the Registrant and Jeremy Roll
dated February 29, 2008**
|
|
10.10
|
Form
of Consulting Agreement by and between the Registrant and Namaste
Financial, Inc. dated June 30, 2008**
|
|
10.11
|
Form
of Consulting Agreement by and between the Registrant and Marshall C. Ryan
and Mid-State Stainless, Inc. dated June 2008**
|
|
10.12
|
Form
of Investor Relations Agreement by and between the Registrant and Kulman
IR, LLC dated April 15, 2008**
|
|
10.13
|
Form
of Finder Agreement by and between the Registrant and Thomas Pronesti
dated March 10, 2008**
|
|
10.14
|
Form
of Patent Assignment by Marshall C. Ryan in favor of the Registrant dated
June 18, 2008**
|
|
10.15
|
Form
of Convertible Debenture by and between the Registrant and Kevin R.
Davidson dated February 2, 2007**
|
|
10.16
|
Form
of Convertible Debenture by and between the Registrant and Peter L.
Morawetz dated February 2, 2007**
|
|
10.17
|
Form
of Convertible Debenture by and between the Registrant and Andrew P.
Reding dated February 2, 2007**
|
|
10.18
|
Form
of Convertible Debenture by and between the Registrant and Thomas
McGoldrick dated January 30, 2007**
|
|
10.19
|
Form
of Convertible Debenture by and between the Registrant and Andcor
Companies, Inc. dated September 29, 2006**
|
|
10.20
|
Form
of Convertible Debenture by and between the Registrant and Carl Moore
dated March 1, 2007**
|
|
10.21
|
Form
of Convertible Debenture by and between the Registrant and Roy Moore dated
March 1, 2007**
|
|
10.22
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and
Debbie Heitzman dated August 31, 2005**
|
|
10.23
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and Mary
Wells Gorman dated August 31,
2005**
|
II-9
10.24
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and
David Feroe dated August 31, 2005**
|
|
10.25
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and Dr.
Arnold S. Leonard dated June 12, 2006**
|
|
10.26
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and
Karen A. Ventura dated December 7, 2006**
|
|
10.27
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and
Nancy A. Kolb dated December 20, 2006**
|
|
10.28
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and Kim
Shelquist dated December 20, 2006**
|
|
10.29
|
Form
of Warrant Agreement by and between the Registrant and Wisconsin Rural
Enterprise Fund, LLC dated December 1, 2006**
|
|
10.30
|
Form
of Stock Purchase and Sale Agreement by and between the Registrant and
Wisconsin Rural Enterprise Fund, LLC dated July 31,
2006**
|
|
10.31
|
Form
of Subscription Agreement**
|
|
10.32
|
Form
of Registration Rights Agreement**
|
|
10.33
|
Form
of Escrow Agreement**
|
|
10.34
|
Form
of Warrant**
|
|
10.35
|
2008
Equity Incentive Plan**
|
|
10.36
|
Office
Lease Agreement by and between the Registrant and Roseville Properties
Management Company, as agent for Lexington Business Park,
LLC**
|
|
10.37
|
Form
of Employment Agreement by and between the Registrant and David Dauwalter
dated August 11, 2008**
|
|
10.38
|
Form
of Amendment No. 1 to Employment Agreement by and between the Registrant
and David Dauwalter dated September 11, 2008**
|
|
10.39
|
Form
of Consulting Agreement by and between the Registrant and Andcor
Companies, Inc. dated September 15, 2008**
|
|
10.40
|
Form
of Consulting Agreement by and between the Registrant and Taylor &
Associates, Inc. dated August 15, 2008**
|
|
10.41
|
Form
of Consulting Agreement by and between the Registrant and Gregory Sachs
dated October 20, 2008**
|
|
10.42
|
Form
of Restructuring Agreement dated June 9, 2008**
|
|
10.43
|
Form
of Secured Convertible Note Purchase Agreement dated July 23,
2007**
|
|
10.44
|
Form
of Secured Convertible Note dated July 2007**
|
|
10.45
|
Form
of Secured Convertible Note Security Agreement dated July
2007**
|
II-10
10.46
|
Independent
Contractor Agreement dated as of February 2, 2009 by and between Belimed,
Inc. and BioDrain Medical, Inc.**(1)
|
|
10.47
|
Supply
Agreement dated as of February 20, 2009 by and between Oculus Innovative
Sciences, Inc., and BioDrain Medical, Inc.**(1)
|
|
10.48
|
Employment
Agreement made and entered into effective the 1st of February, 2009 by and
between Kirsten Doerfert**
|
|
10.49
|
Term
Sheet by and among the Registrant and Longport Holdings, as
amended**
|
|
10.50 | Agreement between the Company and Peter Morawetz dated May 15, 2009** | |
14
|
Code
of Ethics**
|
|
21
|
Subsidiaries
of the Registrant**
|
|
23.1
|
Consent
of Olsen Thielen & Co., Ltd.*
|
|
23.2
|
Consent
of Richardson & Patel LLP (See Exhibit
5.1)* *
|
* Filed
herewith.
**
Previously filed
*** To be
filed by amendment.
(1)
Portions of this Exhibit have been omitted and are subject to a request for
confidential treatment.
II-11
Item
28. Undertakings.
The
undersigned registrant hereby undertakes:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
i.
|
Include any prospectus required
by section 10(a)(3) of the Securities Act of
1933;
|
ii.
|
Reflect in the prospectus any
facts or events which, individually or together, represent a fundamental
change in the information in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the
“Calculation of Registration
Fee” table in the effective registration statement;
and
|
iii.
|
Include any additional or changed
material information on the plan of
distribution.
|
2. For
determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
3. File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of offering.
4. If
the registrant is relying on Rule 430B:
Each
prospectus filed by the registrant pursuant to Rule 424(b)(3)shall be deemed to
be part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective date;
or
II-12
If the
registrant is subject to Rule 430C, each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons under the foregoing
provisions or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than our payment of expenses incurred or paid by any of our
directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
[
The remainder of this page
left blank intentionally ]
II-13
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of Mendota Heights,
State of Minnesota on October
8, 2009.
BIODRAIN
MEDICAL, INC.
|
||
By:
|
/s/
Kevin R. Davidson
|
|
Kevin
R. Davidson
|
||
President,
Chief Executive Officer (Principal Executive
Officer),
Chief Financial Officer (Principal Financial and
Accounting
Officer).
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated:
Name
|
Title
|
Date
|
||
*
|
Chairman
of the Board of Directors
|
October 8, 2009
|
||
Lawrence
W. Gadbaw
|
||||
President,
Chief Executive Officer (Principal
|
||||
/s/
Kevin R. Davidson
|
Executive
Officer), Chief Financial Officer
(Principal
Financial and Accounting
Officer)
and
Director
|
|||
Kevin
R. Davidson
|
|
October 8, 2009
|
*
|
Director
|
October 8, 2009
|
||
Chad
A. Ruwe
|
||||
*
|
Director
|
October 8, 2009
|
||
Peter
L. Morawetz
|
*
|
Director
|
October 8, 2009
|
||
Thomas
J. McGoldrick
|
||||
*
|
Director
|
October 8, 2009
|
||
Andrew
P. Reding
|
*
/s/ Kevin Davidson
|
Chief
Executive Officer and Power of Attorney
|
II-14