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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 9, 2009
TECHNISCAN, INC.
(Exact name of registrant as specified in its charter)
3216
South Highland Drive, Salt Lake City, Utah 84106
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(801) 521-0444
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
CASTILLO, INC.
771 Jamacha Road, Suite 191, El Cajon, CA 92019
(Former Name or Former Address, if Changed Since Last Report)
771 Jamacha Road, Suite 191, El Cajon, CA 92019
(Former Name or Former Address, if Changed Since Last Report)
Delaware | 333-143236 | 27-1093363 | ||
(State or other jurisdiction of incorporation or organization) |
(Commission File Number) | (I.R.S. Employer Identification No.) |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions (see General Instruction
A.2. below):
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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ITEM
1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
The disclosure set forth under Item 2.01 to this Current Report on Form 8-K is incorporated by
reference.
ITEM
2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
On October 9, 2009, the registrant TechniScan, Inc. (known as Castillo, Inc. until the
consummation of the Merger (as defined below)) (the Company) completed an acquisition of
TechniScan, Inc., a privately held company incorporated in the State of Utah (TechniScan Utah)
pursuant to an Agreement and Plan of Merger, dated as of October 9, 2009, by and among TechniScan
Utah, the Company, TechniScan Acquisition, Inc., a Utah corporation and wholly-owned subsidiary of
the Company (TechniScan Acquisition) and Emilia Ochoa (the Merger Agreement).
The Merger Agreement provides for the merger of TechniScan Acquisition with and into
TechniScan Utah, with TechniScan Utah continuing as the surviving entity in the merger and a
wholly-owned subsidiary of the Company (the Merger). Immediately after completion of the Merger,
TechniScan Utah was merged with and into the Company (the Subsidiary Merger).
Under the terms of the Merger Agreement, at the closing of the Merger,
| all of the issued and outstanding shares of common stock of TechniScan Utah (other than dissenting shares, if any) were cancelled and each share of common stock of TechniScan Utah was converted into and exchanged for the right to receive one validly issued, fully paid and nonassessable share of common stock in the Company, | |
| all outstanding options to purchase shares of TechniScan Utah common stock were cancelled and each option was converted into an option to purchase the equivalent number of the Companys common stock, pursuant to the terms of the Employee Stock Option Plan of the Company, | |
| all of the issued and outstanding shares of common stock of TechniScan Acquisition were converted into and represent the right to receive validly issued, fully paid and nonassessable shares of TechniScan Utahs common stock. |
On September 21, 2009, TechniScan Utah entered into a Purchase and Sale Agreement with Ms.
Ochoa whereby TechniScan Utah agreed to purchase from Ms. Ochoa, the Companys sole officer and
director prior to the completion of the Merger, 3,000,000 shares of the common stock of the Company
owned of record by Ms. Ochoa for $65,000. Closing on this purchase and sale occurred on October 9,
2009, immediately prior to the completion of the Merger, and pursuant to the Merger all of the
shares purchased by TechniScan Utah were canceled and retired and ceased to exist, and no
consideration was delivered to TechniScan Utah in exchange therefor.
At the closing of the Merger, the shares of common stock of TechniScan Utah issued and
outstanding were converted into and exchanged for the right to receive an aggregate of 76,824,535
shares of common stock of the Company, par value $.001 per share. At the closing of the Merger,
all outstanding options to purchase shares of TechniScan Utahs common stock were converted into
12,284,778 options to purchase the equivalent number of the Companys common stock. As a result of
the Merger, and immediately following the closing, the former shareholders of TechniScan Utah own
approximately 92% of the issued and outstanding common stock of the Company and approximately 93%
of the Company on a fully diluted basis (consisting of 83,824,535 shares of common stock and
options to purchase 12,284,778 shares of common stock).
Each holder of a share of common stock of the Company is entitled to one vote per share. The
shares of the Companys common stock issued to TechniScan Utahs shareholders as part of the Merger
were not registered under the Securities Act of 1933, as amended (the Securities Act). These
shares may not be sold or offered for sale except as permitted under Rule 144 or another exception
promulgated under the Securities Act. Prior to the Merger, the Company was a publicly traded shell
company and as such, shares of the Companys common stock issued to TechniScan Utahs shareholders
as part of the Merger are not eligible for resale under the Securities Act without registration,
for a period of at least one year following the filing of this report.
In connection with the consummation of the Merger, the Company changed its name from
Castillo, Inc. to TechniScan, Inc. The Companys common stock is quoted on the
Over-the-Counter Bulletin Board, or the OTC Bulletin Board, under the symbol
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CLLO.OB, which the Company expects to change in connection with the name change.
Upon the closing of the Merger, Ms. Ochoa, our sole officer and director prior to the Merger,
resigned from each of her positions effective immediately. Following Ms. Ochoas resignation and
pursuant to the Merger Agreement, David C. Robinson was appointed Chief Executive Officer and Chief
Financial Officer of the Company and Barry K. Hanover was appointed Chief Operating Officer of the
Company. Upon the closing of the Merger, the Board of Directors of the Company consists of five
directors, Mr. Robinson, Kenneth G. Hungerford II, Richard J. Stanley, Gerald A. Richardson and
Cheryl D. Cook. Mr. Hungerford was appointed as Chairman of the Board of the Company. As a result
of the Merger, the Company is now headquartered in Salt Lake City, Utah.
The summary discussion of material terms of the Merger Agreement set forth above does not
purport to be complete and is subject to, and is qualified in its entirety by reference to, the
Merger Agreement, a copy of which is attached to this Current Report as Exhibit 2.1, and is
incorporated herein by reference.
Subsequent to the Merger, the Company continued as the surviving entity and ceased being a
shell company as that term is defined in Rule 12b-2 of the Securities Exchange Act of 1934, as
amended (Exchange Act).
Lock up Agreements
Effective on the closing date of the Merger, the Company entered into lock up agreements
covering 3,000,000 shares of its common stock that is able to be sold without restriction under the
Securities Act. Each lock up agreement provides that these shares may not be, directly or
indirectly, sold for a period of 180 days following completion of the Merger, provided however,
that one-third of the shares issued will be released from the transfer restrictions 60 days after
the effective date of the lock up agreement and an additional one-third of the shares issued will
be released from the transfer restrictions 120 days after the effective date of the lock up
agreement. Also, the Company reserves the right to terminate the transfer restrictions as to all
or some of the shares at anytime, in its sole discretion.
FORM 10 DISCLOSURES
As disclosed under Item 2.01 of this Current Report on Form 8-K, on October 9, 2009, Castillo,
Inc., a Delaware corporation (Castillo) acquired TechniScan Utah in the Merger. Item 2.01(f) of
Form 8-K states that if the registrant was a shell company, as the Company was immediately before
the Merger, then the registrant must disclose the information that would be required if the
registrant were filing a general form for registration of securities on Form 10 under the Exchange
Act.
Accordingly, the Company provides the following information that would be included in Form 10.
Please note that the information provided below relates to the Company after the completion of the
Subsidiary Merger and the Merger, except that information relating to periods before the date of
the Subsidiary Merger and the Merger only relates to TechniScan Utah, unless otherwise specifically
indicated. Except where specified or the context otherwise requires, the term we, us, our
or the Company refers to the combined business of TechniScan Utah and Castillo.
EXPLANATORY NOTE REGARDING DISCLOSURES ABOUT
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
Except where the context otherwise requires, disclosures presented in this Current Report on
Form 8-K, including the disclosures in accordance with Form 10, regarding all directors and
executive officers are as of the date of the Merger. Prior to the date of the Merger, Ms. Ochoa
was Castillos President, Chief Executive Officer, Chief Financial Officer, Principal Accounting
Officer, Director and Secretary. Information regarding Ms. Ochoa can be found in Castillos
Current Report on Form 10-K/A, filed September 30, 2009, which is incorporated by reference as
specifically referred to herein.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Current Report on Form 8-K, including the disclosures in accordance with Form 10, contain
forward-looking statements, as that term is defined under the Private Securities Litigation
Reform Act of 1995, or the PSLRA. Forward-looking statements include statements about our
expectations, beliefs or intentions regarding our product development efforts, business,
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financial condition, results of operations, strategies or prospects. You can identify
forward-looking statements by the fact that these statements do not relate strictly to historical
or current matters. Rather, forward-looking statements relate to anticipated or expected events,
activities, trends or results as of the date they are made. Without limiting the foregoing, the
words believes, anticipates, plans, expects and similar expressions are intended to
identify forward-looking statements.
Because forward-looking statements relate to matters that have not yet occurred, these
statements are inherently subject to risks and uncertainties that could cause our actual results to
differ materially from any future results expressed or implied by the forward-looking statements.
Many factors could cause our actual activities or results to differ materially from the
activities and results anticipated in forward-looking statements. These factors include those
described under the caption Risk Factors in Item 1A of these Form 10 disclosures, some of which
are briefly listed below. Other factors besides those listed there also could adversely affect us.
Any or all of our forward-looking statements in this Current Report on Form 8-K may turn out
to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Many factors mentioned in our discussion in this Current Report on Form
8-K will be important in determining future results. Consequently, no forward-looking statement can
be guaranteed. Actual future results may vary materially. While we may elect to update these
forward-looking statements at some point in the future, we specifically disclaim any obligation to
do so to reflect actual results, changes in assumptions or changes in other factors affecting
forward-looking statements. We intend that all forward-looking statements be subject to the
safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and
reflect our views as of the date they are made with respect to future events and financial
performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include
the following:
| our ability to market, commercialize and achieve market acceptance of our products or any product candidates that we are developing or may develop in the future, and the acceptance of those products; | |
| our reliance on a single product; | |
| our ability to obtain regulatory approval for our products and our ability to comply with ongoing regulation of our products; | |
| the effect of Medicare and other third-party insurance programs and insurance reimbursement programs on the pricing or relative attractiveness of our system by regulating the levels of reimbursement; | |
| our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, liquidity and our need to raise additional financing; | |
| our ability to comply with industry standards in regulatory compliance matters; | |
| our ability to control our costs and achieve profitability; | |
| our ability to attract and retain a qualified management team, as well as other qualified personnel and advisors; | |
| our management teams ability to accommodate growth and manage a larger organization; | |
| our ability to protect our intellectual property, and to not infringe upon the intellectual property of third parties; | |
| because our common stock may be a penny stock, it may be more difficult for investors to sell shares of our common stock, and the market price of our common stock may be adversely affected; | |
| our ability to conclude that we have effective disclosure controls and procedures; and | |
| our ability to comply with corporate governance programs and with changing regulations concerning corporate governance and public disclosure. |
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ITEM 1. BUSINESS.
Information about the Company Before the Merger
Castillo was incorporated in the State of Nevada on February 2, 2007. Castillo was a
development stage company that intended to open and operate retail establishments selling perfume
and body products in Mexico. Ms. Ochoa was the sole director and officer of Castillo. Activities
to date were limited to capital formation, organization, development of its business plan and
limited activities by Ms. Ochoa. Castillo planned to open its first store in 2009 if market
conditions improved and it was able to secure funding; however, Castillos financial resources were
substantially depleted and to date, it has not opened its initial store. Castillos auditors
issued an opinion on Castillos financial statements that included an explanatory paragraph stating
that substantial doubt existed about its ability to continue as a going concern based on its
current financial condition. From its inception, and until the closing of the Merger, Castillo had
not commenced substantial business operations and had no revenues. As such, prior to the Merger,
Castillo was a publicly traded shell company. Pursuant to an Agreement and Plan of Merger, dated
September 4, 2009, effective as of October 8, 2009, Castillo was reincorporated in the State of
Delaware (the Reincorporation Merger). Upon consummation of the Merger on October 9, 2009,
Castillo acquired TechniScan Utah, including its business, assets and operations, which was
subsequently merged with and into Castillo in the Subsidiary Merger. Accordingly, we are no longer
a shell company. We changed our name to TechniScan, Inc. to reflect our current business plan. As
a result of the Reincorporation Merger, the legal domicile of the Company is now Delaware. You
should read the discussion below in conjunction with the financial statements contained in this
Current Report on Form 8-K.
Information about TechniScan Utah
Overview/History
TechniScan Utah is a development stage company that was incorporated in the State of Utah on
November 19, 1984 for the purpose of conducting research on advanced ultrasound imaging and inverse
scatter technology. TechniScan Utah was founded by Steven A. Johnson, PhD., who was Chairman of
the Board of the Company until November 2004 and Chief Scientist of the Company until his
resignation in May 2009. Dr. Johnson continues to work as a Staff Scientist and Principal
Investigator on our grants from the National Institutes of Heath and the National Cancer Institute.
We also do business under the d/b/a/ TechniScan Medical Systems, Inc.
We are a medical device company engaged in the research, development, and commercialization of
an ultrasound breast imaging system. We developed a unique ultrasound technology platform, known
as the Whole Breast Ultrasound (WBU) imaging system, which utilizes computational software to
produce high resolution images and unique information about the bulk properties of tissues in the
breast. The WBU system produces three separate images as a series of planar slices of the breast
that are reconstructed into a coherent three-dimensional CT image for screening and localization of
lesions and calculation of mass size in the detection of breast cancer. Our business objectives
are to commercialize our product developed to aid in the detection of breast cancer and to further
expand our services in the same area. We consider our operations to comprise one business segment.
Our technology was developed through years of research supported, in part, by federal research
grants and private and government research contracts. To date, our revenues have been from
government grants and other research revenues. We endeavor to market and sell the WBU system, and
to license our technology, in the United States and in Europe. We also endeavor to implement a
reading service to radiologists and centers that service radiology.
Pursuant to United States Food and Drug Administration (FDA) regulations, we must obtain
either a 510(k) clearance or pre-marketing approval (PMA) prior to marketing our products in the
United States. The 510(k) submission is a premarket submission made to the FDA to demonstrate that
the device to be marketed is at least as safe and effective, or substantially equivalent, as a
legally marketed device that is not subject to PMA. The WBU system will be cleared for marketing
in the United Sates upon receipt of a letter from the FDA which finds the WBU system to be
substantially equivalent (SE). We have been working with Esaote, S.p.A., an Italian ultrasound
manufacturer (Esaote), and also a stockholder of ours,
and The Anson Group (Anson Group), a
regulatory consulting group in connection with our submission of a 510(k) application. On May 11,
2009, we submitted a 510(k) application for the WBU system to an FDA third-party reviewer, InterTek
Group, PLC (InterTek) and on August 13, 2009, InterTek forwarded our application to the FDA with
a recommendation for an SE finding. We anticipate that the FDA will issue a final ruling on our
application for the WBU system sometime prior to the end of 2009. If we receive an SE finding by
the FDA, the 510(k) approval by the FDA will be issued in the name of Esaote and Esaote will assign
the 510(k) approval to us.
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In May 2003, we formed SafeScan Medical Systems, LLC, a Utah limited liability company
(SafeScan) which was a joint venture with TSI Medical Inc. (TSI). SafeScan was formed for the
purpose of developing and commercializing certain medical applications of our technology. We
contributed our medical application patent rights, know-how and related hardware, software and
other property, including a prototype, to SafeScan and TSI was to contribute several installments
of capital contributions and also installments of the purchase of our common stock. However, the
joint venture was terminated and SafeScan was dissolved in January 2004.
Prior to the Merger, TechniScan Utahs outstanding securities included common stock and
preferred stock, and warrants and options to purchase common stock. The outstanding TechniScan
Utah preferred stock was issued as Series D Preferred Stock and Series E Preferred Stock.
Immediately preceding the Merger, all of the issued and outstanding preferred stock and warrants of
TechniScan Utah were converted into common stock of TechniScan Utah (the Conversion). Pursuant
to the Conversion, all of TechniScan Utahs authorized preferred stock and all rights and
privileges in connection therewith were extinguished. Pursuant to the Conversion, each share of
TechniScan Utahs preferred stock and each warrant was converted into that number of shares of
common stock, based upon the following conversion ratios:
Conversion | ||||
Security | Ratio | |||
Series D Preferred Stock |
1.1 | |||
Series E Preferred Stock |
1.2 | |||
Common Stock Warrants (exercise price $0.05) |
0.9 | |||
Common Stock Warrants (exercise price $0.75) |
0.5 |
In connection with the Conversion, all of the TechniScan Utah common stock underwent a forward
split in which each outstanding share of common stock of TechiniScan Utah, including all shares
deemed issued in the Conversion, were exchanged for two shares of TechniScan Utah common stock (2:1
ratio).
Immediately following the Conversion and the forward stock split, TechniScan Utahs
outstanding securities consisted of 76,824,535 shares of common stock and options to purchase an
additional 12,284,778 shares of common stock.
Industry Background
Despite the massive attention given to cancer prevention and treatment, in 2009, the American
Cancer Society reported that an estimated 192,370 women will be diagnosed with invasive and an
additional 62,280 will be diagnosed with non-invasive breast cancer, and it is estimated that
breast cancer will claim the lives of approximately 40,170 women. We believe that high visibility,
media coverage, effective public education and a continued focus on womens health issues in the
medical community have resulted in a rapidly growing market for breast cancer screening. According
to a U.S. Markets for Breast Cancer Detection and Diagnostic Technologies Report by Medtech
Insight, due to several factors, the breast cancer detection and diagnostic technologies market
(including mammography, MRI, and ultrasound, as well as genetic testing and minimally invasive
breast biopsy) totaled approximately $1.5 billion in the United States in 2008, and is expected to
grow at a compound annual rate of 5% over the next five years.
There is widespread agreement that screening for breast cancer, when combined with appropriate
follow-up, will reduce mortality from the disease. In October 2009, the FDA reported that there
were approximately 37 million mammography procedures performed annually at centers licensed by the
FDA under the Mammography Quality Standards Act (MQSA) (based on numbers reported by the MQSA
centers during the three year period prior to October 2009). However, mammography still misses
identifying a significant number of cancers. The incidence of false-negative results range from
10% to 20% as reported by the American Cancer Society in 2009, and up to 20% as reported by a 2004
study by Hologic, Inc. The study by Hologic, Inc. further found that the incidence of
false-negatives increased to 40% for mammography procedures performed on women under the age of 50.
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Radiologists are required to spend significant time screening, re-screening and ultimately
performing biopsies that could have been avoided had there been better imaging, detection, and
diagnostic information available. The Center for Medical Consumers reported in 2009 that there are
approximately 1.6 million breast biopsies performed in the United States each year and the American
Cancer Society reported in 2008 that approximately 80% of all breast changes that are biopsied are
found to be benign. In 2007, the National Cancer Institute estimated the total expenditures in the
United States for breast cancer treatment to be over $8 billion.
Currently, there are several dominant screening and diagnostic technologies in the medical
industry that are used both dependently and independently of each other in an effort to locate
cancers before they are fatal; each of the currently available non-surgical modalities for breast
cancer detection has various clinical limitations. Industry methods and technologies include:
| breast self-examination; | |
| clinical breast examination; | |
| mammography, including screening mammography and diagnostic mammography; | |
| full field digital mammography; | |
| computer aided detection; | |
| conventional diagnostic ultrasound; and | |
| breast biopsy. |
We believe that the WBU system offers a painless and efficient method, without ionizing
radiation, to screen and diagnose the breast and provide unique information about bulk tissue
properties that may aid in the effective diagnosis of breast cancer. We anticipate that the WBU
system will accurately calculate the speed and attenuation of sound throughout the breast. We
believe that these properties will provide radiologists with unique information about the actual
tissue properties at each point of the breast, allowing them to more accurately distinguish between
cancerous tumors and benign or normal tissues. We expect to be able to image these tumors when
they are approximately 1 mm in size. The American Cancer Society reported in 2009 that when the
breast cancer is diagnosed at a localized stage, the five-year survival rate is 98%.
Products and Services
WBU. The WBU system produces three separate images; two images generated from sound
transmission properties (one for the speed of sound and one for the attenuation of sound) and one
image, a more standard reflection image, generated from data collected from three reflection
transducers with different focal depths. All three images are produced as a series of planar
slices of the breast that are reconstructed into a coherent three-dimensional CT image. These
images, which have never before been available to radiologists, contain information about bulk
tissue properties within the breast that may aid physicians in diagnosing breast cancer. Our
research has found that studies demonstrated that the unique properties of sound speed and
attenuation may be effective in assisting radiologists to distinguish between normal or benign
tissues and many types of cancers. We expect that our scanner will provide women of all ages and
breast densities with an effective test for the presence of breast cancer.
We believe that images produced by the WBU system possess important advantages over
traditional ultrasound methods including:
| standardized, high-quality images that are generated independent of operator skill; | |
| images that are accurately registered in 3-D; | |
| images that are of high spatial resolution and low noise that allow for accurate localization of lesions and calculation of mass size; and | |
| images that show either coronal slice of the total breast or a complete 3-D representation of the section imaged, rather than a |
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small flashlight view of the breast as shown by traditional ultrasound. |
The WBU system breast positioning setup maintains the breast in a fixed position, within a
water bath, without compression or other breast tissue disturbances during scanning. Maintaining
the position and shape of the breast allows for a tumor or lesion to be more easily located and
allows the 3-D refraction corrected tomographic image to be utilized to guide treatment instruments.
This would not be possible in any other modes where compression, physical pressure, or other
measures are used which change or distort breast tissue during the exam. The WBU system
(incorporating both transmission and reflection ultrasound) can obtain true undistorted reflection
ultrasound images of the female breast. For calculating reflection ultrasound characteristics of
the female breast, the reflection images are refraction-corrected by utilizing the speed of sound
traveling through human breast tissue.
Additionally, we are incorporating a 3-D version of B-mode ultrasound (or reflective
ultrasound) into the WBU imaging platform. The WBU system produces three unique images based on
both traditional B-mode (reflective) ultrasound and on transmission ultrasound (one applies to
speed of sound, the other to attenuation of sound). The unique combination of these image
generating processes will provide physicians with a new way of interpreting ultrasound images as
well as new information about the bulk tissue properties of the breast. The WBU system uses
proprietary, patented software algorithms that utilize the mathematics of inverse scattering to
produce transmission images based on the speed and the attenuation of sound through the breast.
This software is the result of a synergistic confluence of academics from physics, mathematics,
electromagnetic wave propagation, scientific computation, and numerical analysis. The complexity
of the algorithms and intellectual property protections present a formidable barrier to entry for
any competitor. We have also designed proprietary methods that improve the collection and
reconstructing of the reflected ultrasound data.
The WBU system is comprised of several individual systems that support patient imaging, data
management and image display. The physical system is a collection of modular components that
control the electrical and mechanical systems, gather and manage the ultrasound data, imaging
software that produces images of both reflection and transmission ultrasound, and workstation
software that allows users to access the images in a standard DICOM (Digital Imaging and
Communications in Medicine) format (DICOM is a global information technology standard for handling,
storing, printing, and transmitting information in medical imaging that is used in virtually all
hospitals worldwide). The system is designed to allow easy plug-and-play modification and/or
upgrade of the physical system as well as remote query, system diagnosis, and upgrades. We intend
to include a hand held probe that physicians can utilize to get closer to the chest wall and for
guidance in conducting breast biopsies.
The procedure is non-invasive and does not require breast compression or ionizing radiation,
and the procedure provides unique information to help radiologists differentiate cancerous from
benign and normal tissues. In an exam, the patient lies face down on the scanning table with one
breast placed through a hole in the table and into a water bath at body temperature. The ultrasound
transducers rotate around the breast, gathering data that is used to reconstruct multiple
cross-sectional images of the breasts internal structures. Due to the suspension of the breast in
the WBU system scanning tank, and the ability of the ultrasonic arrays to image the breast from the
chest wall to the nipple, data can be collected for the entire breast. We believe that the
resulting information will provide radiologists with increased accuracy in lesion location, as well
as unique information about tissue properties to aid in the specificity of a diagnosis and the
existence and extent of breast disease. The WBU system is also expected to be able to produce true
three-dimensional images that will help to accurately locate lesions for surgery staging and/or
biopsy. A diagnostic breast exam utilizing the WBU system can be performed by a medical technician
in 10-15 minutes.
Since the technology is relatively operator-independent, the cost of implementation is low and
it does not expose patients to ionizing radiation or discomfort. We also expect that radiologists
could be able to monitor changes in breast tissue over a period of time in the same individual. We
also expect to be able to pinpoint the exact location of a tumor for biopsy. We believe that
present ultrasound technology has a limited field of view. It displays only a small portion of the
breast at one time. Our technology will image the entire breast at one time, with uniform spatial
resolution throughout the breast.
WBU Workstation. While the WBU system is designed to work with currently available commercial
digital medical workstation software (DICOM standard), we are also developing a dedicated image
viewing workstation that we expect will allow clinicians to better utilize the full spectrum of the
information available from the WBU system. Over time, we expect to aggregate clinical information
from WBU exams allowing us to enhance the value of the diagnostic data and generate additional
recurring revenues by selling a library of aggregated information for volumetric breast density,
and other uniquely measured data such as speed and attenuation from installed systems.
WBU Handheld Probe. The WBU system is integrated with the MyLab70 handheld system, and is
designed to accept commonly available handheld ultrasound probes. The MyLab 70 handheld system is
a high frequency linear hand-held ultrasound
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probe developed by Esaote, which can be used for conducting area specific examinations using
standard B-mode ultrasound. The handheld probe also provides a tool to conduct ultrasound-guided
biopsies. We added this feature to provide a complementary option for the physician. After
scanning the patient and discovering a suspicious lesion, the physician can ask the patient to roll
over and then examine the lesion further with the handheld probe or perform an ultrasound-guided
biopsy. The images collected are of the entire breast and are retained for viewing and
interpretation by the radiologist. As with conventional B-mode ultrasound, the radiologist is able
to review the images on a standard workstation in conjunction with other patient information
including mammography results. The images are retained in DICOM format for viewing on either the
integral workstation provided with the scanning system or on a separate viewing platform.
Ultrasound-Guided Biopsy. Ultrasound-guided biopsy is another tool to evaluate suspicious
lesions that are found in the WBU exam. The ultrasound-guided biopsy procedure prevents the need
to remove tissue surgically and there is no radiation exposure (as in x-ray) to locate a lesion for
biopsy. The physician will place an ultrasound probe over the site of the breast lesion and using
local anesthesia, guides a biopsy needle directly into the lesion to take a tissue sample.
We expect to offer support services to help minimize market barriers to entry, such as
physician training. We contracted with Reimbursement Principals Inc. (RPI) to evaluate
reimbursement options and determine which services and financing methods would provide the best
opportunity to accomplish these goals. Based upon RPIs review and discussions with our
management, we propose: (1) to incorporate a new service to read images for radiologists; and (2)
to develop a financing model based on providing ancillary services to physicians that would pay a
fee per scan with contracted minimum requirements.
Reading Service. We intend to offer a new service to read images for radiologists. Our
imaging system offers a completely new way to take and evaluate ultrasound images. Reading these
images remotely would allow physicians, who are not radiologists, to provide new services to
patients, thereby creating new revenue opportunities for the Company. We believe that this would
also provide MQSA breast screening centers with a chance to expand their service offering without
having to increase the workload on an already overloaded image reading staff.
By offering a reading service, we expect to mitigate some of the market adoption hurdles such
as training time, workflow disruption, additional workload and staffing requirements that might
deter imaging centers or physician groups from purchasing our equipment. The general idea is to
offer a turn-key system that can start generating revenues for the Company without a major
disruption to potential customers operations and an increase in potential customers overhead
expenses.
We have contacted several third-party readers to discuss potential partnerships and are
evaluating the potential to develop reading service capability within our own company if the market
shows potential. If and when we obtain 510(k) approval of our device from the FDA, we expect that
RPI will begin working with several third-party payers to allow us to obtain payment for the scans
at the proposed reimbursement levels. We expect to continue to discuss partnering with outside
reading services and, with our clinical advisors, evaluate the potential for developing the
capabilities to support nationwide reading within the Company.
Ultimately, the reading service is designed to lay the groundwork for the Companys planned
evolution into an information company from a capital equipment company.
Testing
In order to test the theory and application of the WBU system to be able to market and sell
the technology and related services, we conducted a series of studies using laboratory phantoms, in
vivo patient studies, and in-clinic validation studies. We conducted laboratory testing to validate
the speed and attenuation values produced by its inverse scattering technology; that is, the
imaging algorithms that underlie the WBU system. The manufacturers speed and attenuation
specifications for all objects within the phantom were reliably reproduced by our inverse
scattering technology. The first in vivo testing was designed to assess the ability of the system
to accurately image identifiable characteristics in the breast that are visible in traditional
mammography. The results showed that the WBU system was able to reliably produce images in which
characteristics (including lesions) detectable in a patients mammogram were also visible in the
WBU image. Next we designed a short series of tests to evaluate the reliability and repeatability
of the WBU system over a period of time that would encompass normally occurring physical changes.
Results demonstrated that the WBU system images are consistent across repeated testing and are not
significantly affected by common physiological changes.
To assess the capability of the WBU system to differentiate cancerous from benign or normal
tissue, we conducted a proof-of-concept test from which a predictive hypothesis could be developed
from the unique characteristics of sound speed and attenuation,
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using 26 living volunteers. Results of biopsies were compared with the speed and attenuation
values collected from the WBU system. Mean comparisons indicated higher attenuation values for
malignant lesions than for benign abnormalities.
In 2004, we began testing of the WBU system at St. Marks Hospital in Salt Lake City, Utah.
There was no downtime during which the scanner could not be operated and the use of the scanner was
seamlessly integrated into the normal patient flow of the center. Overall, we believe the trial
established that the WBU scanner can operate efficiently and reliably in a clinical setting.
During the trial period at St. Marks the WBU system was staffed by operators that had widely
variable skill sets and training. Each operator received about one hour of training from the
radiology technician (who had done all of the WBU testing to this point), including instructions on
patient placement, operation of the scanner bed, breast docking rod, and computerized user
interface. The success of this trial illustrated the ease with which operators with no prior
experience can be trained to scan patients. We discovered that variations among the operators
experience and skill level had no impact to the image quality or level of patient satisfaction.
Patient response to the trials was also positive.
Between October and December 2008, 34 women were scanned at the Breast Care & Imaging Center
of Orange County in Orange, California. The results of these studies were provided to Esaote and
also used for presenting representative case studies to physicians at the 2008 RSNA (Radiological
Society of North America) meeting in Chicago, Illinois. The valuable insights gained from this
deployment within a clinical diagnostic center were integrated into the production prototypes,
which were deployed to another clinical investigation at the University of San Diego, Moores Cancer
Center in June 2009. A controlled protocol has been implemented at this site to further refine the
WBU algorithms and image quality. In the interim, systematic improvements and changes to the
scanner will be evaluated through further in-house and clinical patient testing, phantom studies,
and computer simulations.
Marketing and Distribution
We expect to pursue marketing strategies aimed at both the general consumer and the clinical
marketplace that are focused on the enhanced diagnostic capability of the WBU system. We expect to
do this by deploying systems to clinical sites supported by key opinion leaders and leveraging the
clinical results, images and luminary testimonials to educate our target market and customer base
about the scanner and patient benefits. This will be accomplished using an aggressive marketing
campaign via presentations, hands-on workshops, professional society meetings, publications and
targeted advertising. The primary target market for the WBU system are MQSA licensed breast cancer
screening centers. As of October 1, 2008, the FDA reported that there were 8,814 MQSA-certified
mammography facilities in the United States with 12,813 accredited mammography units.
We plan to initially use a direct sales force to market the WBU system. Additionally, we will
evaluate independent distribution organizations and companies who we might license to sell the WBU
system through existing sales and support networks. We also expect to make sales through the
private labeling of equipment for large medical manufacturers and strategic partners.
While the target market described above is narrowly defined, there are several segments of the
overall market that we will have to address in order to effectively market the WBU system. They
include:
| screening centers and hospitals; | |
| radiologists; | |
| physicians and technical personnel; and | |
| consumers. |
We expect suppliers to fabricate components for the WBU system and we will then assemble, test
and sell the system. We will require our manufacturing partners to meet the appropriate FDA
standards for manufacturing medical devices. We expect to capitalize on retaining the control of
product research and development, control of manufacturing, and supervision of sales. We believe
that this business model will reduce the capital costs for manufacturing through the use of
subcontracted manufacturing of subsystems. This business plan will require us to establish
incoming inspection, final assembly and testing, including a small manufacturing engineering group
to: (a) subcontract major assemblies for initial prototypes; (b) perform final assembly and testing
of clinical trial and demonstration systems; and (c) optimize the designs for larger-scale
production. We expect to establish a quality control and quality assurance program designed to
assure that the WBU system is designed and manufactured in accordance with
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standards of Good Manufacturing Practice, Quality System Regulations, and ISO 9001 (quality
management standards under the International Organization for Standardization).
Once we have begun to penetrate the market of less price-sensitive facilities, we must fully
address the needs of a traditional radiology practice or screening center to justify the expense of
purchasing or leasing a WBU system. The final unit price of the WBU system will depend largely on
the total reimbursements customers receive for a WBU procedure, and is expected to be approximately
$400,000. We have projected the WBU system unit price based on the reimbursement rates available
to breast screening centers using reimbursement codes already in place for other screening systems.
We believe that the WBU system is competitive with other digital imaging systems and will be
cost-justified at the breast screening facilities in our target market.
We have performed an extensive analysis of the practice economics of a breast imaging center.
These results showed that a procedure known as screen film mammography is the least profitable but
the highest volume procedure in the facility. The most profitable procedures were the core needle
biopsies, vacuum assisted biopsies, and the WBU system. The contribution margin of a WBU system
was nearly triple that of a standard screen film mammography system. We believe that our analysis
clearly supports the proposition that diagnostic services generate more revenues for breast care
facilities than screening services.
We intend to pursue the sale of the WBU system following 510(k) clearance, and expect to
continue to engage in controlled clinical application of the WBU system to establish the acceptance
of the scanning technology by the potential user community. We expect to accomplish this through
aggressive clinical trials. These are not clinical trials in the same sense that the FDA would
require trials prior to beginning the sale of a new technology. Instead, these trials are intended
to provide a demonstration of the clinical results accomplished by leading radiologists. While we
will not be allowed to make claims of superiority under our proposed 510(k) clearance, we will be
able to disseminate published information that describes the efficacy and diagnostic capability of
the WBU system.
In February 2008, we entered into an Original Equipment Manufacturing Agreement and
Engineering Support Agreement with Esaote, whereby Esaote is providing engineering and design
support and original equipment manufacturing prototype equipment and supplies to us. In addition,
in February 2008, we entered into a Distribution Agreement with Esaote and in October 2008, we
entered into a European Marketing Development Agreement with Esoate, whereby Esaote is assisting us
with completion of the regulatory approval process in Europe, and is appointed to exclusively
promote, market, sell and distribute the WBU system in the European Union, Switzerland, Norway,
Ukraine and the CIS (Russian Federation of related countries). Pursuant to the Distribution
Agreement and European Market Development Agreement, an initial five WBU systems will be delivered
to Esoate for an aggregate amount of $600,000; two WBU systems have been delivered and are
pre-production scanners to be used for research and clinical trials. The remaining three WBU
systems are to be production scanners, meeting regulatory specifications for approved sale in
Europe. To date, Esaote paid us an aggregate of $500,000 for these systems.
Third-Party Reimbursement
We believe that adequate third-party reimbursement arrangements will be essential to achieving
commercial acceptance of the WBU system. We plan to sell the WBU system primarily to screening
centers, clinics, hospitals and other medical institutions that bill various third-party payors,
such as Medicare, Medicaid, other government programs and private insurance plans, for the health
care services provided to their patients for using our product. Additionally, managed care
organizations and insurance companies directly pay for services provided to their patients. Four
potential reimbursement codes can be utilized to obtain reimbursement from third-party insurance or
Medicare for a WBU scan. However, there is no code that specifically describes the testing and
scan of the WBU system and certain codes have lower reimbursement rates than others. Ultimately,
the correct coding for any procedure is a decision made by the medical provider and the payer
reimbursing for the procedure. Medical reimbursement rates are unpredictable, and we cannot
project the extent to which our business may be affected by future legislative and regulatory
developments, including by reducing reimbursement rates.
Competition
We believe that established product lines, FDA clearance, know-how and reputation in the
industry are key competitive factors. Additionally, although there is a recognized need for a
system that supplements the sensitivity of mammography with a greater specificity, the vast
majority of practices today still use a second mammogram or reflective ultrasound for the
diagnostic exam. As such, we believe our device, which fits into this somewhat unique market
segment, is likely to compete for capital dollars with both mammography and biopsy. We also expect
to compete directly with conventional ultrasound systems, including high definition ultrasound
systems, and other new entrants into this unique market segment.
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Currently, mammography is widely used and we expect that sales of the WBU system will, in
large part, be dependent on our ability to demonstrate the clinical utility of the WBU system. We
believe our primary competitors are likely to be those firms that dominate the current market for
mammography equipment including both film and full-field digital mammography units. These large
medical products companies offer current technologies (mammography and ultrasound) that are widely
used in the industry. These companies could also serve as potential partners for us if and when
the WBU system is approved for sale in the United States.
The market for breast specific ultrasound is difficult to assess since most general-purpose
ultrasound devices can be used for breast exams. The competition for developing a commercial device
utilizing ultrasound is difficult to ascertain given the proprietary nature of the technology and
the fact that, to our knowledge, there is no device that serves this specific market. There are a
number of academic institutions involved in various areas of research involving high definition
ultrasound and other methods that may provide information about tissue properties.
Other companies are engaged in developing products to detect and aid in the diagnosis of
breast cancer using various technologies. Some of these companies have already commenced FDA
clinical testing and will release their products ahead of ours.
We believe that within this specific breast cancer imaging segment of the medical imaging
market, the primary competitive factors are technological innovation, image quality, and
reliability. We believe that our technological expertise provides a competitive advantage not
enjoyed by our competitors. We believe that inverse scattering imaging is the only ultrasound
imaging method that is capable of making quantitative, high-spatial resolution images of acoustical
tissue properties. Utilizing our proprietary inverse scattering algorithms, we have achieved fast
imaging speeds, provided higher spatial and contrast resolutions, and have used a higher number of
independent imaging parameters for diagnosis than currently available screening methods in our
informal testing. We expect our patent protection for inverse scattering, to create a significant
barrier to entry for competing technologies.
Intellectual Property; Patents
We currently have five patents that were primarily invented by our founders and employees.
In addition, we have six patents pending and two provisional patents. As is often the case,
there are multiple inventors listed on some of these patents. Some of the inventors listed on the
patents are our current officers and directors and some are previous directors of the Company. All
of such inventors have assigned their rights in the patents to us except for the University of
Utah, which has granted to us an exclusive, irrevocable and permanent world-wide license to the
intellectual property, pursuant to an Amended and Restated License Agreement, dated January 10,
2002. Pursuant to the agreement, the University of Utah received stock in TechniScan Utah in lieu
of a right to a royalty payment. Notwithstanding the license from the University of Utah, most of
the intellectual property developed by us since 1984, and particularly in the last five years, has
been developed independently of the University of Utah and is not subject to the Amended and
Restated License Agreement. To date, we have not engaged in any litigation or other proceedings
challenging the scope or application of any of our patents, nor have we contested any patent filing
by another party.
Our patent rights, proprietary know-how, and similar intellectual property are material to our
competitive position. We plan to take all reasonable action within our capability and control to
safeguard this intellectual property against piracy or infringement of any kind. We enter into
confidentiality and intellectual property agreements with our employees. These agreements
generally provide that all innovations, ideas, discoveries, improvements and copyrightable material
made or conceived by the individual arising out of the employment or consulting relationship and
all confidential information developed or made known to the individual during the term of the
relationship will be our property.
In addition to our patents, we have a registered trademark in the United States for
TechniScan Medical Systems.
Government Regulation
United States Regulation. The FDA has regulatory authority over the design processes,
testing, manufacturing, and commercial distribution of medical devices in the United States.
Because the WBU system is a medical device, it is subject to the relevant provisions of the Federal
Food, Drug and Cosmetic Act (FD&C Act) and its implementing regulations. Pursuant to the FD&C
Act, the FDA regulates, among other things, the manufacture, labeling, distribution, and promotion
of the WBU system in the United States. The FD&C Act requires that a medical device must (unless
specifically exempted by regulation) be cleared or approved by the FDA through either a 510(k)
clearance or pre-marketing approval before being commercially distributed in the United States.
The FD&C Act also requires that manufacturers of medical devices comply with specific labeling and
manufacturing
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requirements and manufacture devices in accordance with Current Good Manufacturing Processes
(CGMP) set forth in 21C.F.R. Part 820. CGMP requires, among other things, that companies
manufacture their products and maintain related documentation in a conformed manner with respect to
manufacturing, testing, and quality control activities. The FDA inspects medical device
manufacturers and has broad authority to order recalls of medical devices, to seize non-complying
medical devices, to enjoin and/or impose civil penalties, and to criminally prosecute violators.
We submitted a 510(k) application to the FDA for a reflection only Whole Breast Ultrasound
system in December 2007 as an interim step that could be used as a predicate device for future
regulatory submissions. On March 31, 2008, the FDA requested additional information and posed
questions regarding the technology of the device, software verification and validation, and
clinical use of the system. By the questions posed in the FDAs letter, we believe that the FDA
misunderstood the technology of the device. On April 23, 2008, we had a teleconference with the
FDA to resolve the misunderstandings, however, there remained questions by the FDA that required
clinical data and additional software documentation to resolve.
We decided that the 510(k) application submitted in December 2007 would be allowed to lapse
and the planned, subsequent 510(k) application would be submitted for a refraction-corrected,
B-Mode WBU System that incorporates an Esaote beam former as well as the MyLab70XVG handheld
ultrasound system, which is our current WBU system. Since mid-July 2008, our management determined
our regulatory plan was to submit a 510(k) application via third-party review by Intertek. On May
11, 2009 our 510(k) submittal to the FDA for the WBU system was submitted by Esaote through the
third-party review process. InterTek completed the third-party review on behalf of Esaote. This
submission is considered an interim step in the regulatory submission pathway, with the system
offering improved clinical utility due to incorporating the refraction-correction algorithms into
the reflection images. On August 13, 2009, InterTek forwarded our application to the FDA with a
recommendation for an SE finding. We anticipate that the FDA will issue a final ruling on the
application sometime prior to the end of 2009. If we receive an SE finding by the FDA, the 510(k)
approval by the FDA will be issued in the name of Esaote and Esaote will assign the 510(k) approval
to us.
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce
either the referral of an individual, or the furnishing or arranging for a good or service, for
which payment may be made under a federal healthcare program such as the Medicare and Medicaid
programs. Several courts have interpreted the statutes intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce referrals of federal healthcare
covered business, the statute has been violated. The Anti-Kickback Statute is broad and prohibits
many arrangements and practices that are lawful in businesses outside of the healthcare industry.
Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which
apply to the referral of patients for healthcare items or services reimbursed by any source, not
only the Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly filing or causing to be filed a
false claim to, or the knowing use of false statements to obtain payment from, the federal
government. Various states have also enacted laws modeled after the federal False Claims Act.
In addition to the laws described above, the Health Insurance Portability and Accountability
Act of 1996 created two new federal crimes: healthcare fraud and false statements relating to
healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a
scheme to defraud any healthcare benefit program, including private payors. The false statements
statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or
making any materially false, fictitious or fraudulent statement in connection with the delivery of
or payment for healthcare benefits, items or services.
Foreign Regulation
Sales of medical devices outside of the United States are subject to foreign regulatory
requirements that vary widely from country to country. The time required to obtain approval for
sale in foreign countries may be longer or shorter than that required for FDA clearance or
approval, and the requirements may differ. In order to sell our products within the European Union
(EU), companies are required to achieve compliance with requirements of the European Union
Medical Device Directive and affix a CE marking on their products to attest such compliance. The
CE mark is a mandatory conforming mark on many products marketed in the EU. It certifies that a
product has met EU consumer safety, health or environmental requirements.
Research and Development
Research and development expenses for fiscal years 2008 and 2007 were $2,803,584 and
$1,120,240, respectively. In
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connection with our research and development, we entered into contracts with research facilities
regarding testing on our technology. Our technology was developed through years of research
supported, in part, by federal research grants and private and government research contracts.
Technological changes play an important part in the advancement of our industry. We intend to
continue to devote substantial sums to research and development. Research and development efforts
inherently involve costs, risks and uncertainties that could adversely affect our projections,
outlook and operating results.
Employees
As of October 9, 2009, we have 20 employees, 18 of whom are full-time. None of our employees
is subject to any collective bargaining agreements. We believe that our relationship with our
employees is good.
ITEM 1A. RISK FACTORS
This section sets forth certain of the material risks faced by the Company. You should
carefully consider the risks described below in conjunction with the other information in this
Current Report and related financial statements. These risks are not the only risks we face. Our
business, financial condition and results of operations could be harmed by any of the following
risks or by other risks identified throughout this Current Report, or by other risks that have not
been identified or that we may believe are immaterial or unlikely.
Risks Related to the Company, Industry and Financial Results
We are a development stage company and have generated minimal revenues since inception.
We have not generated significant revenues to date from our proposed business or operations.
To date, our revenues have been from government grants and other research revenues. Moreover, we
may not be able to generate either revenues or profit in the foreseeable future. Our success is
dependent upon the successful development and marketing of the WBU system. Unanticipated problems,
expenses and delays are frequently encountered in establishing a new business and in developing new
technology. These include, but are not limited to, competition, the need to develop and gain
clinical acceptance of the WBU system, the need to develop research facilities, the need for market
expertise, the need to employ capable management and setbacks in development of new technology,
market acceptance and sales and marketing activities. We will have to overcome the barriers of
costly equipment and no established distribution relationships or experience. The failure to meet
any of these conditions will have a material adverse affect on us and may force us to cease our
proposed operations, and could even prevent us from ever selling a WBU system. No assurance is or
can be given that we can or ever will operate profitably.
We expect to continue to incur significant operating losses which endangers our viability as a
going-concern.
Due to our lack of revenue, and lack of operations, there is substantial doubt as to our
ability to continue operating as a going concern. We have never established adequate sources of
operating revenue and had incurred net operating losses since our inception. As of December 31,
2008, we had an accumulated deficit of approximately $21 million. Our losses have resulted
principally from costs incurred in research and development and clinical trials and from general
and administrative costs associated with our operations. We expect operating losses to continue,
mainly due to the anticipated expenses associated with the pre-market approval process and proposed
commercialization of our technology, research and development and marketing activities and
administration costs. Our continuing losses, among other things, have caused our independent
registered public accounting firm to add an explanatory paragraph to its audit report on our 2008
and 2007 financial statements indicating that there is substantial doubt about our ability to
continue as a going concern. Although we are focused on our research, development, and
commercialization of the WBU system, there can be no reasonable assurances, however, that such
efforts will result in the establishment of predictable and scalable sources of revenue.
We are subject to government regulation and failure to obtain and maintain required regulatory
approvals would severely limit our ability to sell our products.
We are subject to regulation by the FDA and other federal and state regulatory agencies.
Pursuant to FDA regulations, we must obtain either a 510(k) clearance or PMA prior to marketing our
products in the United States. If we do not obtain such clearance or PMA, we will not be able to
implement our current business plan, and may be unable to generate any revenues. We are also
subject to foreign regulations and are dependent upon the receipt of various types of approvals
from certain foreign government agencies prior
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to the sale of products in those countries. The clearance and approval process for both the
FDA and foreign regulatory authorities can be costly, time consuming and uncertain. There can be
no assurance that we will receive these clearances, or that we will have sufficient resources to
commence or complete the regulatory approval process. Delays in obtaining such clearances or PMAs
or changes in existing requirements could have a material adverse effect on our business and
operations. Even if we do obtain regulatory approval of a product, that approval may be subject to
limitations on the indicated uses for which it may be marketed. Even after granting regulatory
approval, the FDA and regulatory agencies in other countries continue to review and inspect
marketed products, manufacturers and manufacturing facilities, which
may create additional
regulatory burdens. Later discovery of previously unknown problems with a product, manufacturer or
facility, may result in restrictions on the product or manufacturer, including a withdrawal of the
product from the market.
Our inability to complete our clinical testing and product development activities would severly
limit our ability to operate or finance operations.
In order to commercialize our products, we must complete substantial clinical trials, and
obtain sufficient safety and efficacy results to support required registration approval and market
acceptance. We may not be able to successfully complete the development of our products, or
successfully market our technologies or products. We may encounter problems and delays relating to
research and development, regulatory approval and intellectual property rights of our technologies
and products. Our research and development programs may not be successful, and our technologies and
products may not identify tumor or lesions and may not facilitate the identification of breast
cancer with the expected result. Our technologies and products may not prove to be safe and
efficacious in clinical trials, and we may not obtain the requisite regulatory approvals for our
technologies or product candidates. If any of these events occur, we may not have adequate
resources to continue operations for the period required to resolve the issue delaying
commercialization and we may not be able to raise capital to finance our continued operations
during the period required for resolution of that issue.
We must successfully complete our clinical trials to be able to market certain of our products.
We have been testing the WBU system on human subjects since April 2002 and have conducted more
than 600 subject scans to date. These tests have focused on system reliability, algorithm
development, image reproducibility, and clinical utility. While the data from this testing has
been promising, there is not enough information to make statistically significant statements about
our product or its diagnostic capabilities. We face additional challenges in attempting to develop
the WBU system, including, but not limited to development of reliable testing protocols for future
multi-center testing and gaining scientific and clinical acceptance of the WBU system. We must
successfully overcome these challenges to prove the technology and move beyond the final stages of
development to a commercially viable product. If we are unable to overcome these or other
difficulties, it is highly unlikely that we can or ever will be profitable.
Even if we obtain regulatory approvals to sell our products, lack of commercial acceptance could
impair our business.
Even if we obtain all required regulatory approvals, we cannot be certain that our products
and processes will be accepted in the marketplace at a level that would allow us to operate
profitably. Our products may be unable to achieve commercial acceptance for a number of reasons,
such as the availability of alternatives that are less expensive, more effective, or easier to use;
the perception of a low cost-benefit ratio for the product amongst our market, including screening
centers, hospitals, radiologists and physicians; or an inadequate level of product support. Our
technologies or product candidates may not be employed in all potential applications being
investigated, and any reduction in applications would limit the market acceptance of our
technologies and product candidates, and our potential revenues.
The market for our products will be heavily dependent on third-party reimbursement policies.
In the United States, suppliers of health care products and services are greatly affected by
Medicare, Medicaid, and other government insurance programs, as well as by private insurance
reimbursement programs. Third-party payors (Medicare, Medicaid, private health insurance companies
and other organizations) may affect the pricing or relative attractiveness of our system by
regulating the coverage or level of reimbursement provided by such payors to the physicians and
clinics utilizing the WBU system. If examinations utilizing the WBU system are not reimbursed
under these programs, or adequately reimbursed, our ability to sell the system may be materially
and/or adversely affected. There can be no assurance that third-party payors will provide
reimbursement for use of our system. In international markets, reimbursement by third-party
medical insurance providers, including governmental insurers and independent providers, varies from
country to country. In certain countries, our ability to achieve significant market penetration
may depend upon the availability of third-party governmental reimbursement.
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Certain foreign governments may not give a reimbursement code for our device.
Government health authorities, especially in the countries where most of the reimbursements
flow through government agencies, may not provide us with a reimbursement code, which is required
for claiming the cost for the use of our technology and products from government agencies. If we
are unable to obtain such reimbursement codes in major markets, marketability of our technology and
products may be severely restricted, which could negatively impact our results of operations and
our stock price.
We face competition in the medical technology field and if we do not keep pace with our competitors
and with technological and market changes, we may not be able to successfully compete.
The medical device industry generally, and the cancer diagnostic imaging segments in
particular, are characterized by rapidly evolving technology and intense competition. Other
companies in the medical device industry may be developing, or could in the future attempt to
develop, products that are competitive with the WBU system. The market in which we intend to
participate is highly competitive. Many of the companies in the cancer diagnostic and screening
markets have substantially greater technological, financial, research and development, regulatory,
manufacturing, human and marketing resources, and experience than we do. Our competitors may
succeed in developing or marketing technologies and products that are more effective or less costly
than ours, or that would render our technology and products obsolete or noncompetitive. We may not
be able to compete against such competitors and potential competitors in terms of manufacturing,
marketing, and sales. If we are unable to compete successfully, it could have a negative impact on
our results of operations and our stock price.
Potential product liability claims could affect our earnings and financial condition.
The nature of our business exposes us to risk for product liability claims, which are inherent
in the testing, manufacturing and marketing of cancer detection products. Significant litigation,
not involving us, has occurred in the past based on allegations of false negative diagnoses of
cancer. Accordingly, there can be no assurance that we can avoid significant product liability
exposure. We currently maintain product liability insurance coverage for up to $1 million in
aggregate claims. There is substantial doubt that product liability insurance will cover all
liabilities should we face significant claims. A successful products liability claim brought
against us could have a material adverse affect on our business, operating results and financial
condition. Should we be unable to maintain adequate product liability insurance, our ability to
market our products will be significantly impaired. Any losses we may suffer for future claims or
a voluntary or involuntary recall of our products and the damage that any product liability
litigation or voluntary or involuntary recall may do to the reputation or marketability of our
products would have a material adverse affect on our business, operating results, financial
condition and stock price.
We are currently dependent on a single product.
Because our sole source of revenues for the foreseeable future is expected to come from
licensing or marketing of the WBU system and the technology behind the WBU system, our operations
may be adversely affected by economic, regulatory or similar problems or events that may apply only
to us, only to medical devices of the type similar to the WBU system or only within a particular
market area in which the WBU system is licensed or marketed. The adverse effect of any such
problems or events could be more easily absorbed in an investment in a more diversified business or
one that operates in a different industry.
Our product is new and unproven.
The science and technology of medical products, including ultrasound equipment, is rapidly
evolving. The WBU system may require significant further research, development, testing, and
regulatory clearances and is subject to the risk of failure inherent in the development of products
based on innovative technologies. These risks include the possibility that the WBU system will
prove to be ineffective or unsafe, or otherwise fail to receive necessary regulatory clearances;
that the WBU system, if effective, may prove uneconomical to market; that third parties hold
proprietary rights that preclude us from marketing the WBU system; or that third parties market
superior or equivalent products. Accordingly, we are unable to predict whether our research and
development activities will result in a commercially viable product. Further, due to the extended
testing and regulatory review process required before marketing clearance can be obtained for the
WBU system, we cannot predict with certainty when or if we will be able to sell the system. There
is also no guarantee that we will be able to develop and sell other products based upon the
technology behind the system.
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Methods for the detection of cancer are subject to rapid technological innovation and there
can be no assurance that future technical changes will not render the WBU system obsolete. There
can be no assurance that the development of new types of diagnostic medical equipment or technology
will not have a material adverse effect on our business, financial condition, results of operations
or stock price.
We changed our business model.
We have recently made modifications to our business model. In the past, our business model
has been based upon a build and sell model where customers pay an upfront fee to purchase
hardware and software that we have developed and distributed. Under this build and sell model, the
customer bears the risks of putting the capital equipment into profitable use. We recently decided
to change our business model by incorporating a new reading service, whereby third-party readers
would be contracted to provide remote image reading, data, and related services over the Internet
and developing a financing model based on providing ancillary services to physicians, who would pay
a fee per scan with contracted minimum requirements.
We expect to be devoting significant resources toward developing strategies for implementing
the reading service. It is uncertain whether these market penetration strategies will prove
successful. The fee per service model places us in a situation where we share some of the business
risk with the customer. We will attempt to negate as much of that risk as possible through
contracting arrangements, but ultimately, we will assume some additional risk. The risk may not be
offset through increased sales and revenue.
If our patents and proprietary rights do not provide substantial protection, then our business and
competitive position will suffer.
Our ability to commercialize the WBU system as well as other products will depend, in part, on
our ability both in the United States and in other countries to obtain patents, enforce those
patents, preserve trade secrets and operate without infringing on proprietary rights of third
parties. We currently have five issued United States patents. Furthermore, six patent
applications relating to our technologies are currently pending in the United States and we have
two provisional patents that provide only short term protection of intellectual property. There
can be no assurance that we will be able to obtain additional domestic or any foreign patents.
Also, the scope of any of our issued patents may not be sufficiently broad to offer meaningful
protection.
The patent positions of medical device companies are uncertain and involve complex legal and
factual questions. There can be no assurance that any patents that now or in the future are owned
or licensed by us, will prevent other companies from developing similar or medically equivalent
products, or that other companies will not be issued patents that may prevent the sale of our
products or that will require us to enter into licenses and pay significant fees or royalties.
Furthermore, there can be no assurance that any of our products or methods will be patentable, will
not infringe upon the patents of third parties, or that our existing patents or future patents will
give us an exclusive position in the subject matter claimed by those patents. We may be unable to
avoid infringement of third-party patents and may have to obtain licenses, defend infringement
actions or challenge the validity of those patents in court. There can be no assurance that a
license will be available to us, if at all, on terms and conditions acceptable to us, or that we
will prevail in any patent litigation or that we will have the financial resources to finance such
patent litigation. Patent litigation is costly and time-consuming, and there can be no assurance
that we will have or will devote sufficient resources to pursue such litigation. If we do not
obtain a license under such third-party patents, are found liable for infringement or are not able
to have such third-party patents declared invalid, we may be liable for significant monetary
damages, may encounter significant delays in bringing products to market or may be precluded from
participating in the manufacture, use or sale of products or methods of treatment protected by such
third-party patents. There can be no assurance that any patent applications now pending or
hereafter filed by us or on our behalf will result in issued patents, that patent protection will
be secured for a particular device or technology, that any patents that may be issued will be valid
or enforceable or that such patents will provide us meaningful protection.
We have previously engaged in, and in the future may engage in, additional sponsored research
agreements and other arrangements with academic researchers and institutions that have received or
may receive funding from government agencies or private parties. As a result of these
arrangements, the government agencies or private parties may have rights in certain inventions
developed during the course of the performance of such agreements as required by law or the
agreements.
Any claims relating to our making improper payments to physicians for consulting services, or other
potential violations of regulations governing interactions between us and healthcare providers,
could be time-consuming and costly.
Our relationship with physicians, hospitals and marketers of our products are subject to
scrutiny under various state and federal anti-kickback, self-referral, false claims and similar
laws, often referred to collectively as healthcare fraud and abuse laws.
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The federal anti-kickback laws prohibit unlawful inducements for the referral of business
reimbursable under federally-funded health care programs, such as remuneration provided to
physicians to induce them to use certain medical devices reimbursable by Medicare or Medicaid.
Healthcare fraud and abuse laws are complex and subject to evolving interpretations, and even
minor, inadvertent violations potentially can give rise to claims that the relevant law has been
violated. Certain states have similar anti-kickback, anti-fee splitting and self-referral laws,
imposing substantial penalties for violations. Any violations of these laws could result in a
material adverse effect on the market price of our common stock, as well as our business, financial
condition and results of operations. We cannot assure you that any of the healthcare fraud and
abuse laws will not change or be interpreted in the future in a manner which restricts or adversely
affects our business activities or relationships with physicians, screening centers, hospitals and
marketers of our products. In addition, possible sanctions for violating these anti-kickback laws
include monetary fines, civil and criminal penalties, exclusion from Medicare and Medicaid programs
and forfeiture of amounts collected in violation of these prohibitions.
Federal anti-kickback laws and regulations prohibit any knowing and willful offer, payment,
solicitation or receipt of any form of remuneration by an individual or entity in return for, or to
induce:
| the referral of an individual for a service or product for which payment may be made by Medicare, Medicaid or other government-sponsored healthcare program; or | |
| purchasing, leasing, ordering or arranging for any service or product for which payment may be made by a government-sponsored healthcare program. |
Federal anti-kickback laws also restrict the kinds of relationships we may have with
physicians, including clinical research investigators and consultants. We must comply with a
variety of other laws, such as laws prohibiting false claims for reimbursement under Medicare and
Medicaid, which also can be triggered by violations of federal anti-kickback laws; Healthcare
Insurance Portability and Accountability Act of 1996, which protects the privacy of individually
identifiable healthcare information; and the Federal Trade Commission Act and similar laws
regulating advertisement and consumer protections. In certain cases, federal and state authorities
pursue actions for false claims on the basis that manufacturers and distributors are promoting
unapproved or off-label uses of their products.
The scope and enforcement of these laws is uncertain and subject to rapid change, especially
in light of the lack of applicable precedent and regulations. We cannot assure you that federal or
state regulatory authorities will not challenge or investigate our current or future activities
under these laws. Any challenge or investigation could have a material adverse effect on our
business, financial condition and results of operations. Any state or federal regulatory review of
us, regardless of the outcome, would be costly and time-consuming. Additionally, we cannot predict
the impact of any changes in these laws, and whether or not they will be retroactive.
We depend on third-party suppliers and manufacturers, and if they are unable to deliver, our
business would suffer.
We expect to purchase all of our components and supplies from third-party suppliers and to
outsource any manufacturing to contract manufacturers. Because of regulatory restrictions on
manufacturers of medical devices, we may experience significant difficulty in locating suppliers
and manufacturers qualified to manufacture our products or components thereof. Further,
manufacturers of medical devices generally have the right to manufacture similar products that may
compete with our products, and to terminate their agreements without significant penalty under
certain conditions. In addition, disclosure of our proprietary technology to a third-party for
manufacturing purposes increases the risk of theft or loss of trade secrets. There can be no
assurance that we will be successful in locating manufacturers or suppliers on terms and conditions
or with reputations and experience acceptable to us or that our trade secrets will not be stolen.
Changes to health care reform could adversely affect us and our business.
Political, economic and regulatory influences are subjecting the health care industry in the
United States to fundamental changes. We anticipate the United States Congress, state legislatures
and the private sector will continue to review and assess alternative health care delivery and
payment systems. Potential approaches that have been considered include mandated basic health care
benefits, controls on health care spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing
groups, price controls and other fundamental changes to the health care delivery system. We
believe that the legislative debate will continue in the future, and that market forces will demand
reduced costs. If adopted and implemented, health care reforms could have a material adverse
effect on our business, financial condition and results of operations. We cannot predict what
impact the adoption of any future federal or state health care reform measures, private
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sector reform or other market forces may have on our business, either currently or in the
future. Even the existence of pending health care reform could have a material adverse impact on
us by making it difficult to raise capital or establish commercial relationships.
We will need additional financing, which we may not be able to receive.
We currently have no significant operations from which to generate cash flows. Our operations
to date have consumed substantial capital resources and we expect to require additional financing
to fund our continued operations and implement our business plan. Our future capital requirements
will depend on many factors, including technological and market developments, our ability to
license and market the WBU system or the underlying software, and cash flows from operating
activities. If we raise additional funds through equity or debt financings to finance our future
operations, any equity financings could result in dilution to our stockholders and debt financing
would result in increased interest expense. Any financing, if available, may be on terms
unfavorable or not acceptable to us. If adequate funds are not obtained, we may be required to
reduce or curtail our proposed operations.
Disruptions in the capital and credit markets, as have been experienced during 2008 and 2009,
could adversely affect our ability to obtain financing. If we do obtain debt financing in the
future, those banks may not be able to meet their funding commitments to us if they experience
shortages of capital and liquidity or if they experience excessive volumes of borrowing requests
from us and other borrowers within a short period of time.
We expect to incur substantial losses so long as we continue our planned manufacturing,
regulatory, and research and development activities. If we ultimately receive regulatory approval
for the WBU system, our manufacturing, marketing and sales activities are likely to substantially
increase our expenses and our need for additional working capital. In the future, it is possible
that we will not have adequate resources to support continuation of our business activities.
Risks Related to Ownership of Our Common Stock
Our common stock may be thinly traded.
There is a very minimal public market for our common stock. We cannot predict how liquid the
market for our common stock might become. Our common stock will likely be thinly traded compared to
larger more widely known companies.
Trades of our common stock are conducted on the OTC Bulletin Board. Should our common stock
be suspended from the OTC Bulletin Board, the trading price of our common stock could suffer, the
trading market for our common stock may be less liquid and our common stock price may be subject to
increased volatility.
Furthermore, for companies whose securities are traded in the OTC Bulletin Board, it is more
difficult to obtain accurate stock quotations or needed capital. Also, because major wire services
generally do not publish press releases about these companies, it is also more difficult for them
to obtain coverage for significant news and events.
In addition, the price at which our common stock may be sold is very unpredictable because
there could be very few trades in our common stock. We cannot predict the extent to which an
active public market for our common stock will develop or be sustained at any time in the future.
If our common stock is thinly traded, a large block of shares traded can lead to a dramatic
fluctuation in the share price.
We expect that the price of our common stock will fluctuate substantially, potentially adversely
affecting the ability of stockholders to sell their shares.
Before the Merger, there was no public market for TechniScan Utahs securities or Castillos
common stock. The market price of our common stock after the Merger is likely to be highly
volatile and subject to wide fluctuations in response to the following factors, many of which are
generally beyond our control. These factors may include:
| the introduction of new products or services by us or our competitors; | |
| quarterly variations in our or our competitors results of operations; | |
| the acquisition or divestiture of businesses, products, assets or technology; |
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| disputes, litigation or other developments with respect to intellectual property rights or other potential legal actions; | |
| sales of large blocks of our common stock, including sales by our executive officers and directors; | |
| changes in earnings estimates or recommendations by securities analysts; and | |
| general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. |
Market price fluctuations may negatively affect the ability of investors to sell our shares at
consistent prices.
We may become involved in securities class action litigation that could divert managements
attention and harm its business.
The stock market in general has experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating performance of the
companies involved. If these fluctuations occur in the future, the market price of our shares
could fall regardless of our operating performance. In the past, following periods of volatility
in the market price of a particular companys securities, securities class action litigation has
been brought against that company. If the market price or volume of our shares suffers extreme
fluctuations, then it may become involved in this type of litigation which would be expensive and
divert managements attention and resources from managing the business.
Securities analysts may elect not to report on our common stock or may issue negative reports that
adversely affect the price of our common stock.
At this time, no securities analyst provides research coverage of our common stock. Further,
securities analysts may never provide this coverage in the future. Rules mandated by the
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and other restrictions led to a number of fundamental
changes in how analysts are reviewed and compensated. In particular, many investment banking firms
are required to contract with independent financial analysts for their stock research. It may
remain difficult for a company with a smaller market capitalization such as ours to attract
independent financial analysts that will cover our common stock. If securities analysts do not
cover our common stock, the lack of research coverage may adversely affect our actual and potential
market price and trading volume.
The trading market for our common stock may be affected in part by the research and reports
that industry or financial analysts publish about our business. If one or more analysts elect to
cover our Company and then downgrade the stock, the stock price would likely decline rapidly. If
one or more of these analysts cease coverage of our Company, we could lose visibility in the
market, which in turn could cause our stock price to decline. This could have a negative effect on
the market price of our shares.
Because we acquired TechniScan Utah by means of a reverse merger, we may not be able to attract the
attention of major brokerage firms.
Additional risks to our investors may exist since, prior to the Merger, the Company was a
publicly traded shell company and, as a result of the Merger, acquired an operating business
through a reverse merger. Security analysts of major brokerage firms may not provide coverage for
us. In addition, because of past abuses and fraud concerns stemming primarily from a lack of public
information about new public businesses, there are many people in the securities industry and
business in general who view reverse merger transactions with public shell companies with
suspicion. Without brokerage firm and analyst coverage, there may be fewer people aware of us and
our business, resulting in fewer potential buyers of our securities, less liquidity and depressed
stock prices for our investors.
Our stock is a penny stock. Trading of our stock may be restricted by the SECs penny stock
regulations and the FINRAs sales practice requirements, which may limit a stockholders ability to
buy and sell our stock.
Our common stock is a penny stock. The Securities and Exchange Commissions (SEC) rule
generally defines penny stock to be any equity security that has a market price (as defined) less
than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Our securities are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than established customers and
accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure
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document in a form prepared by the SEC which provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account statements showing the
market value of each penny stock held in the customers account. The bid and offer quotations, and
the broker-dealer and salesperson compensation information, must be given to the customer orally or
in writing prior to effecting the transaction and must be given to the customer in writing before
or with the customers confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for the purchaser and
receive the purchasers written agreement to the transaction. These disclosure requirements may
have the effect of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock rules may affect the
ability of broker-dealers to trade our securities. We believe that the penny stock rules may
discourage investor interest in, and limit the marketability of, our common stock.
In addition to the penny stock rules promulgated by the SEC, the Financial Industry Regulatory
Authority (FINRA) has adopted rules that require that in recommending an investment to a
customer, a broker-dealer must have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information
about the customers financial status, tax status, investment objectives and other information.
Under interpretations of these rules, FINRA believes that there is a high probability that
speculative low-priced securities will not be suitable for at least some customers. FINRA
requirements make it more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock.
A significant number of shares will become eligible for future sale by our stockholders and the
sale of those shares could adversely affect the stock price.
As of the closing of the Merger, 6,000,000 shares of our common stock may be sold without
restriction under the Securities Act, however, 3,000,000 of those shares are subject to lock up
agreements for up to 180 days after the closing of the Merger. Approximately 78,000,000 of our
issued and outstanding shares of common stock, and approximately 12,000,000 shares of common stock
issuable upon exercise of outstanding options, are not eligible for resale under the Securities Act
without restriction, for a period of at least one year following the filing of this Current Report
on Form 8-K.
If our stockholders whose shares become eligible for resale in a year do sell, or indicate an
intention to sell, substantial amounts of our common stock in the public market after the legal
restrictions on resale discussed in this filing lapse, the trading price of our common stock could
decline.
Directors, executive officers and principal stockholders own a significant percentage of our
capital stock, and they may make decisions that you do not consider to be in the best interests of
our stockholders.
As of the closing of the Merger, our directors, executive officers and principal stockholders
beneficially owned, in the aggregate, approximately 35% of our outstanding voting securities. As a
result, if some or all of them acted together, they would have the ability to exert substantial
influence over the election of our Board of Directors and the outcome of issues requiring approval
by our stockholders. This concentration of ownership also may have the effect of delaying or
preventing a change in control of our Company that may be favored by other stockholders. This could
prevent transactions in which stockholders might otherwise recover a premium for their shares over
current market prices.
Our stock price could decline as a result of our failure to meet reporting and other regulatory
requirements.
Our new management team will now be responsible for our operations and reporting. This will
require outside assistance from legal, accounting, investor relations, or other professionals that
could be more costly than planned. Our failure to comply with reporting requirements and other
provisions of securities laws could negatively affect our stock price and adversely affect our
results of operations, cash flow and financial condition.
Operating as a small public company also requires us to make forward-looking statements about
future operating results and to provide some guidance to the public markets. The new management
has limited experience as a management team in a public company and as a result projections may not
be made timely or set at expected performance levels and could materially affect the price of our
shares. Any failure to meet published forward-looking statements that adversely affect the stock
price could result in
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losses to investors, stockholder lawsuits or other litigation, sanctions or restrictions
issued by the SEC or any stock market upon which our stock is traded.
If we do not implement necessary internal control over financial reporting in an efficient and
timely manner, or if we discover deficiencies and weaknesses in existing systems and controls, we
could be subject to regulatory enforcement and investors may lose confidence in our ability to
operate in compliance with existing internal control rules and regulations, either of which could
result in a decline in our share price.
It may be difficult to design and implement effective internal control over financial
reporting for combined operations as the Company integrates the business it acquired as a result of
the Merger, and perhaps other acquired businesses in the future. In addition, differences in
existing controls of acquired businesses may result in weaknesses that require remediation when
internal controls over financial reporting are combined.
If we fail to maintain an effective system of internal control, we may be unable to produce
reliable financial reports or prevent fraud. If we are unable to assert that our internal control
over financial reporting is effective at any time in the future, or if our independent registered
public accounting firm is unable to attest to the effectiveness of internal controls, is unable to
deliver a report at all or can deliver only a qualified report, we could be subject to regulatory
enforcement and investors may lose confidence in our ability to operate in compliance with existing
internal control rules and regulations, either of which could result in a decline in our share
price.
Our status as a public company may make it more difficult to attract and retain officers and
directors.
Sarbanes-Oxley and new rules subsequently implemented by the SEC have required changes in
corporate governance practices of public companies. As an operating public company, we expect these
new rules and regulations to increase our compliance costs in 2009 and beyond and to make certain
activities more time-consuming and costly than if we were not an operating public company. As an
operating public company, we also expect that these new rules and regulations may make it more
difficult and expensive for us to obtain director and officer liability insurance in the future,
and we may be required to accept reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified persons to serve on our Board of Directors or as executive officers.
Compliance with changing regulations concerning corporate governance and public disclosure may
result in additional expenses.
There have been changing laws, regulations and standards relating to corporate governance and
public disclosure, including Sarbanes-Oxley and new regulations promulgated by the SEC. These new
or changed laws, regulations and standards are subject to varying interpretations in many cases due
to their lack of specificity, and, as a result, their application in practice may evolve over time
as new guidance is provided by regulatory and governing bodies, which could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to
disclosure and governance practices. As a result, our efforts to comply with evolving laws,
regulations and standards are likely to continue to result in increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to
compliance activities. Members of our Board of Directors and Chief Executive Officer and Chief
Financial Officer could face an increased risk of personal liability in connection with the
performance of their duties. As a result, we may have difficulty attracting and retaining
qualified board members and executive officers, which could harm our business. If our efforts to
comply with new or changed laws, regulations and standards differ from the activities intended by
regulatory or governing bodies, we could be subject to liability under applicable laws or our
reputation may be harmed.
We do not intend to pay cash dividends. Any return on investment may be limited to the value of
our common stock, if any.
We have never declared or paid cash dividends on our capital stock. We currently expect to
use available funds and any future earnings in developing, operating and expanding our business and
do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of
any future debt or credit facility we may obtain may preclude us from paying any dividends. As a
result, capital appreciation, if any, of our common stock will be a stockholders only source of
potential gain from our common stock for the foreseeable future.
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Stockholders may experience significant dilution if future equity offerings are used to fund
operations or acquire complementary businesses.
If future operations or acquisitions are financed through issuing equity securities,
stockholders could experience significant dilution. In addition, securities issued in connection
with future financing activities or potential acquisitions may have rights and preferences senior
to the rights and preferences of our common stock. We expect to issue additional equity securities
pursuant to employee benefit plans. The issuance of shares of our common stock upon the exercise
of options may result in dilution to our stockholders.
Our Certificate of Incorporation grants our Board of Directors the power to designate and issue
additional shares of common stock.
Our authorized capital consists of 150,000,000 shares of common stock. The Board of
Directors, without any action by our stockholders, may issue additional shares up to 150,000,000 as
the Board of Directors deems appropriate. Any issuances of additional stock will dilute the
percentage of ownership interest of then-current holders of our capital stock and may dilute our
book value per share.
Provisions in the Delaware General Corporation Law may prevent takeover attempts that could be
beneficial to our stockholders.
Provisions in the Delaware General Corporation Law may make it difficult and expensive for a
third-party to pursue a takeover attempt we oppose even if a change in control of our Company would
be beneficial to the interests of our stockholders. Any provision of Delaware law that has the
effect of delaying or deterring a change in control could limit the opportunity for our
stockholders to receive a premium for their shares of our common stock, and could also affect the
price that some investors are willing to pay for our common stock. As a Delaware corporation, we
are subject to Section 203 of the Delaware General Corporation Law. This section generally
prohibits us from engaging in mergers and other business combinations with stockholders that
beneficially own 15% or more of our voting stock, or with their affiliates, unless our directors or
stockholders approve the business combination in the prescribed manner.
ITEM 2. FINANCIAL INFORMATION.
Managements Discussion And Analysis Of Financial Condition And Results Of Operations Of The Company
Unless the context specifies otherwise, the term we, us, our or the Company in the
following section refers to the business of TechniScan Utah prior to the Merger and of the combined
company thereafter.
OVERVIEW
The Company is a development stage company. The Companys development stage began January 1,
2002 when the Company was capitalized for the research, development, and commercialization of
innovative medical imaging products for the detection and diagnosis of breast cancer.
The Companys current commercial focus is the development of an ultrasound-based product, the
WBU system, that is expected to provide radiologists with information about the bulk properties of
tissue in the breast as well as useful images of the tissue structure.
From the Companys inception in 1984, its technology was developed through research supported,
in part, by federal research grants and private and government research contracts.
From inception through June 30, 2009, the Company has generated revenues solely from grants
and research contracts. The WBU system has not yet been approved by the FDA for commercial sale;
therefore, the Company has not yet generated revenues from product sales. The Company has incurred
losses since it began operating and it projects that it will incur a net loss for the year ending
December 31, 2009. As of June 30, 2009, December 31, 2008 and December 31, 2007, the Company had
an accumulated deficit of $22,624,704, $21,751,464 and $17,507,846, respectively. The Company is
dependent on equity raised from individual investors to support its operations, and the Company
will continue to be dependent on debt and equity financing to support its operations until it
generates significant revenues from the WBU system. There is substantial doubt about the
Companys ability to continue as a going
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concern, and no adjustments have been reflected in the Companys financial statements that may
result from the outcome of this uncertainty.
BASIS OF PRESENTATION
Revenues
Since inception, the Company has generated revenues from federal research grants and private
and government research contracts. The Company recognizes revenues when services have been
provided and invoiced to the federal government or other research partners.
During the years ended December 31, 2008 and 2007, and the six months ended June 30, 2009, the
Company recognized revenues in connection with federal grants from the Department of Health and
Human Services for cancer treatment research. In March 2009, a no-cost extension was applied for
on two of the Companys grants. On March 31, 2009, the Company received the Notice of Award for
the no-cost extension extending the project period to March 31, 2010.
The FDA has not approved the WBU system for commercial sale; therefore, the Company has not
generated revenues from commercial product sales.
During the year ended December 31, 2008, the Company received $300,000 in connection with the
shipment of a prototype system per the terms of a product development agreement with Esaote, which
is also a stockholder. The agreement provides for the shipment of five systems in total for a cash
price of $300,000 for the first system, $200,000 for the second system, and $100,000 for the
remaining three systems. In accordance with United States generally accepted accounting
principles, the Company recognizes $120,000 of research revenue upon the shipment, acceptance and
installation of each system. As of December 31, 2008, the Company had deferred $180,000 of the
$300,000 cash receipt in connection with the shipment of its first pre-production scanner. The
second system was shipped in June 2009; however, installation had not been completed and therefore
the Company has not recognized revenue related to this system as of June 30, 2009. Subsequent to
June 30, 2009, $200,000 was received in connection with the shipment of this second pre-production
system. In accordance with the contract, the customer agreed to be billed upon delivery, which
occurred on June 26, 2009. As a result, the Company recorded the $200,000 in accounts receivable
and deferred revenue as of June 30, 2009, because installation had not yet occurred.
In accordance with the agreement, the first two systems shipped were pre-production scanners
and are to be used for research and clinical trials. The remaining three systems are to be
production scanners meeting regulatory specifications for approved sale in Europe.
Operating Expenses
The Company classifies its operating expenses between direct grant expenses, research and
development expenses, and selling, general and administrative expenses.
Direct grant expenses consist primarily of personnel and personnel-related costs for employees
and contractors engaged on projects specified within the scope allowed by specific federal grants,
as well as the cost of direct equipment and materials.
Research and development expenses consist primarily of personnel and personnel-related costs
for employees and contractors engaged in the development of the WBU technology, as well as indirect
costs supporting these activities, including allocated depreciation and amortization of property
and equipment and allocated rent for research facilities.
Selling, general and administrative expenses consist primarily of personnel and
personnel-related costs for employees and contractors engaged in business development, regulatory,
executive, finance, accounting, human resources, information technology, marketing and legal roles.
These costs also include general corporate costs such as rent for the corporate offices,
insurance, depreciation on information technology equipment, and stock-based compensation expenses
that are not allocated to research and development and direct grant expenses.
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Income Taxes
The Company has significant deferred income tax assets resulting primarily from net operating
loss carry-forwards and tax credit carry-forwards. These deferred income tax assets may reduce
taxable income in future periods, if any. A valuation allowance is required when it is more likely
than not that all or a portion of the deferred income tax asset will not be realized. The Company
has recorded a 100% valuation allowance against the net deferred income tax assets because there is
significant uncertainty as to the ability of the Company to generate sufficient profits to realize
these net deferred income tax assets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Use of Estimates
In preparing the financial statements in accordance with United States generally accepted
accounting principles, management makes estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Companys revenues are sourced from federal research grants and private and government
research contracts. The Company recognizes revenues when services have been provided and invoiced
to the government or other research partners. The FDA has not yet approved the WBU
system for commercial sale; therefore, the Company has not yet generated revenues from
product sales.
Inventory
Inventory is stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method. Inventory consists of raw materials and work in process. As
appropriate, provisions are made to reduce inventories to their net realizable value. The cost of
inventories that potentially may not sell prior to expiration or are deemed to have no commercial
value have been written-off when identified. Net inventories have been valued at zero as of June
30, 2009 and as of December 31, 2008 and December 31, 2007.
Patent Costs
Since entering the development stage, legal costs incurred to register and defend patents have
been expensed as incurred due to the uncertainty surrounding future cash flows and future benefits
to be realized from those patents.
Stock-based Compensation
The Company calculates the estimated value of its stock options on the grant date. The
Company measures the compensation cost of employee stock options based on the calculated value
instead of the fair value because it is not practical to estimate the volatility of the share
price. The Company does not maintain an internal market for its shares. The calculated value
method requires that the volatility assumption used in an option-pricing model be based on
historical volatility of an appropriate industry sector index.
The Company uses the Black-Scholes option-pricing model to estimate the calculated value of
its share-based payments. The volatility assumption used in the Black-Scholes option-pricing model
is based on the volatility of the Dow Jones Small Cap Medical Equipment Index. The Company
calculated the historical volatility of that index using the daily closing total returns for that
index for a period of time equal to the expected term of the options immediately prior to the grant
date. The Company uses historical data to estimate option exercise and employee termination
patterns. The expected term of the options granted represents the period of time that the options
granted are expected to be outstanding. The risk free rate for the periods within the contractual
life of the option is based on the United States treasury securities constant maturity rate that
corresponds to the expected term in effect at the time of grant.
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RESULTS OF OPERATIONS
Six Months Ended June 30, 2009 Compared to June 30, 2008
Government Grant Revenues
For the | For the | |||||||||||
Six Months | Six Months | |||||||||||
Ended | Ended | |||||||||||
June 30, 2009 | June 30, 2008 | % Change | ||||||||||
Government grant revenues |
$ | 631,799 | $ | 286,146 | 121 | % |
Government grant revenue increased $345,653, or approximately 121%, for the six months ended
June 30, 2009, as compared to the same period in 2008. This increase in revenue is the result of
increased expenditures incurred on the second phase of the Companys Inverse Scatter Breast Scan
grant (SBIR grant), as well as expenditures incurred on the Ultrasound Quantitative Backscatter &
Inverse Scattering grant (QUB grant) and the Thermoacoustic and Inverse Scattering Breast Cancer
Scanner grant (Thermoacoustic grant). All of the current grants are nearing the end of the awarded
amount and the proposed scope of the work. Grant revenues are expected to decline with the primary
emphasis shifting to the subcontract work of completing the clinical studies under our largest
Small Business Innovative Research Award.
Operating Expenses
For the | For the | |||||||||||
Six Months | Six Months | |||||||||||
Ended | Ended | |||||||||||
June 30, 2009 | June 30, 2008 | % Change | ||||||||||
Operating expenses: |
||||||||||||
Direct grant expenses |
$ | 377,388 | $ | 331,328 | 14 | % | ||||||
Research and development expenses |
663,538 | 1,007,422 | -34 | % | ||||||||
Selling, general and administrative expenses |
465,082 | 783,299 | -41 | % |
Direct grant expenses increased $46,060, or approximately 14%, for the six months ended June
30, 2009, as compared to the same period in 2008. This increase is primarily the result of
increased expenditures on the SBIR grant, as well as expenditures incurred in connection with the
QUB and Thermoacoustic grants.
Research and development expenses decreased $343,884, or approximately 34%, for the six months
ended June 30, 2009, as compared to the same period in 2008. This decrease is primarily the result
of a decrease in available cash resources in 2009, which required the Company to reduce personnel
and other expenses until additional capital becomes available.
Selling, general and administrative expenses decreased $318,217, or approximately 41%, for the
six months ended June 30, 2009, as compared to the same period in 2008. This decrease is primarily
the result of a decrease in available cash resources in 2009, which required the Company to reduce
personnel and other expenses until additional capital becomes available. General and administrative
expenses are expected to increase substantially as a result of current employees returning to full
time status and an increase in hiring related to the requirements of operating a public company.
Selling expenses are also expected to increase as the Company ramps up for the sales forecasted to
begin in late 2010.
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Other Income and Expenses
For the | For the | |||||||||||
Six Months | Six Months | |||||||||||
Ended | Ended | |||||||||||
June 30, 2009 | June 30, 2008 | % Change | ||||||||||
Interest income |
$ | 1,079 | $ | 13,052 | - 92 | % | ||||||
Interest expense |
(110 | ) | (672 | ) | - 84 | % | ||||||
Gain on sale of property and equipment |
| 3,156 | -100 | % |
Interest income decreased $11,973, or approximately 92%, for the six months ended June 30,
2009, as compared to the same period in 2008, primarily as a result of lower interest-bearing cash
and cash equivalent balances in 2009.
The net loss for the six months ended June 30, 2009 was $873,240 compared to a loss of
$1,820,367 for the same period in 2008. The decrease in the net loss is primarily due to the
Company reducing expenses not directly tied to federal research grants in 2009. During 2010 and
2011, the net losses are expected to increase as the Company increases expenditures related to
completing the commercialization of products, ramping up sales and marketing efforts and increased
personnel levels.
Year Ended December 31, 2008 Compared to December 31, 2007
Revenues
For the | For the | |||||||||||
Year Ended | Year Ended | |||||||||||
December 31, 2008 | December 31, 2007 | % Change | ||||||||||
Government grant revenues |
$ | 653,061 | $ | 1,314,505 | -50 | % | ||||||
Related party research revenues |
120,000 | | N/A |
Government grant revenues decreased $661,444, or approximately 50%, for the year ended
December 31, 2008, as compared to the year ended December 31, 2007. This decrease in revenue is
the result of decreased expenditures incurred on the SBIR grant. Government grant revenues
increased in the first half of 2009 as the Company ramped up the final product and clinical design
and implementation of the clinical efforts. These revenues are expected to decrease substantially
in the second half of 2009 and expenses will shift from TechniScan personnel to subcontractor fees
related to the implementation of the clinical testing program.
Related party research revenues of $120,000 were recognized in 2008 in connection with the
shipment of a prototype system per the terms of a product development agreement with Esaote, which
entity is also a stockholder. Related party research revenues of $120,000 are expected to be
recognized in the third quarter of 2009, and another $360,000 of the research revenues are expected
to be recognized when the final three production systems are delivered and installed. Subsequent
to the deliveries under the existing contract, we do not anticipate further sales of research and
prototype equipment. Future sales are anticipated to be for production systems sold. The Company
anticipates commercial sales beginning in early 2011. Sales will be dependent on the outcome of
clinical trials now underway in Freiburg, Germany.
Operating Expenses
For the | For the | |||||||||||
Year Ended | Year Ended | |||||||||||
December 31, | December 31, | |||||||||||
2008 | 2007 | % Change | ||||||||||
Operating expenses |
||||||||||||
Direct grant expenses |
$ | 518,150 | $ | 581,670 | -11 | % | ||||||
Research and development expense |
2,803,584 | 1,120,240 | 150 | % | ||||||||
selling, general and administrative expense |
1,715,048 | 1,431,746 | 20 | % |
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Direct grant expenses decreased $63,520, or approximately 11%, for the year ended December 31,
2008, as compared to the year ended December 31, 2007. This decrease is primarily the result of
decreased direct expenditures on the SBIR grant in 2008.
Research and development expenses increased $1,683,344, or approximately 150%, for the year
ended December 31, 2008, as compared to the year ended December 31, 2007. This increase is due in
large part to a significant redesign of core components for the WBU system in 2008.
Selling, general and administrative expenses increased $283,302, or approximately 20%, for the
year ended December 31, 2008, as compared to the year ended December 31, 2007. This increase is
primarily the result of increased personnel, consultant and travel costs associated with obtaining
additional financing and preparing the WBU system for FDA approval. These expenses are
expected to decrease substantially as expenses shift from Company personnel to subcontractor fees
related to the implementation of the clinical testing program.
Other Income and Expenses
For the | For the | |||||||||||
Year Ended | Year Ended | |||||||||||
December 31, 2008 | December 31, 2007 | % Change | ||||||||||
Interest income |
$ | 18,399 | $ | 19,700 | -7 | % | ||||||
Interest expense |
(757 | ) | (1,279 | ) | -41 | % | ||||||
Gain on sale of property and equipment |
2,461 | | N/A |
The net loss for the year ended December 31, 2008 was $4,243,618 compared to a loss of
$1,800,730 for the year ended December 31, 2007. The increase in the net loss is due to primarily
to significant increases in research and development expenses and general and administrative
expenses in 2008.
Results of Operations for the Development Stage
Since the inception of the Companys development stage (January 1, 2002) through June 30,
2009, the Company has generated $2,816,172 of revenues from government grants and has experienced
cumulative a net loss of $22,235,311. Selling, general and administrative expenses were
$11,286,158, research and development expenses were $11,863,524, and direct grant expenses were
$1,630,195 for the development stage period. All research and development costs are expensed as
they are incurred, which include, but are not limited to, personnel, prototype materials, lab
supplies, consulting and research-related overhead.
Liquidity and Capital Resources
For the | For the | |||||||
Six Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2009 | June 30, 2008 | |||||||
Interest cash used in operating activities |
$ | (748,380 | ) | $ | (1,661,299 | ) | ||
Net cash provided by investing activities |
| 176,324 | ||||||
Net cash provided by financing activities |
557,586 | 2,956,165 |
For the | For the | |||||||
Year Ended | Year Ended | |||||||
December 31, 2008 | December 31, 2007 | |||||||
Net cash used in operating activities |
$ | (3,018,026 | ) | $ | (1,701,568 | ) | ||
Net cash provided by (used in) investing activities |
159,451 | (216,983 | ) | |||||
Net cash provided by financing activities |
2,914,553 | 1,660,495 |
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Operating Activities
The Company used cash in operating activities of $748,380 for the six months ended June 30,
2009, as compared to using $1,661,299 for the same period in 2008. The Company used cash in
operating activities of $3,018,026 for the year ended December 31, 2008, as compared to $1,701,568
for the year ended December 31, 2007. The Company continues to use significant amounts of cash as
it moves its product development efforts forward. The Company has used cash in operating
activities of $20,031,664 since the inception of the development stage (January 1, 2002) through
June 30, 2009.
Investing Activities
The Company generated no cash from investing activities for the six months ended June 30,
2009, but generated $176,324 for the same period in 2008 due to cash proceeds from the sale of
investments of $213,112 and cash proceeds from the sale of equipment of $4,000, offset in part by
purchases of equipment of $40,788.
The Company generated cash from investing activities of $159,451 for the year ended December
31, 2008, consisting of cash proceeds from the sale of investments amounting to $213,112 offset in
part by purchases of equipment of $53,661. In comparison, the Company used $216,983 of cash for
the year ended December 31, 2007 in connection with investing activities, consisting of $213,112
for the purchase of investments and $3,871 for the purchase of equipment.
The Company has used cash in investing activities of $399,791 since the inception of the
development stage (January 1, 2002) through June 30, 2009.
Financing Activities
The Company generated cash from financing activities of $557,586 for the six months ended June
30, 2009, as compared to $2,956,165 for the same period in 2008, primarily from the issuance of
preferred stock, net of issuance costs. The Company generated cash from financing activities in
the amount of $2,914,553 for the year ended December 31, 2008, as compared to $1,660,495 for the
year ended December 31, 2007, primarily from the issuance of preferred stock in 2008 and 2007 and
proceeds from the issuance of convertible notes payable in 2007.
The Company plans to obtain additional funding from Phoenix Capital Partners that was
negotiated in connection with the Merger. The Company expects to continue to seek additional
funding to meet its working capital requirements through collaborative arrangements and securities,
research grants, and/or bank borrowings. There can be no assurance, however, that additional funds
will be available from any of the foregoing or other sources on favorable terms, if at all.
The Companys future capital requirements will depend on many factors, including cash flow
from operating activities, technology developments, and the Companys ability to develop and market
the WBU system and other new products successfully. The Company anticipates that its existing
capital resources, together with the proceeds from future equity offerings, debt financing and
anticipated revenues will be adequate to satisfy the Companys anticipated operating expenses and
capital requirements. However, because of the Companys accumulated deficit, rate of cash used in
operating activities, negative working capital and other factors, substantial doubt exists about
the Companys ability to continue as a going concern.
New Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business Combinations, and SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No.51. SFAS No. 141R will change how business acquisitions are accounted for and
will impact financial statements both on the acquisition date and in subsequent periods. SFAS No.
160 will change the accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity. SFAS No. 141R and SFAS No. 160
are effective for the Company for its year ended December 31, 2009. Early adoption is not
permitted. The adoption of SFAS No. 141R and SFAS No. 160 are not expected to have a material
impact on the Companys financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes guidelines for measuring fair value and expands disclosures regarding fair value
measurements. SFAS No. 157 does not require any new fair
29
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value measurements but rather eliminates inconsistencies in guidance found in various prior
accounting pronouncements. SFAS No. 157 is effective for years beginning after November 15, 2007.
However, in February 2008, the FASB issued FSP FAS 157-b (the FSP), which delays the effective date
of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). This FSP partially defers the effective date of SFAS No. 157 to years beginning after
November 15, 2008, and interim periods within those years for items within the scope of this FSP.
Effective for fiscal 2008, the Company adopted SFAS No. 157 except as it applies to those
nonfinancial assets and nonfinancial liabilities as noted in FSP FAS 157-b. The adoption of SFAS
No. 157 did not have a material impact on the Companys financial statements.
In July 2006, the FASB issued Financial Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position
is required to meet before being recognized in the financial statements. It also provides guidance
on derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. FIN 48 is effective for years beginning after December 15, 2007; however, in
December 2008, the FASB published FSP No. FIN 48-3 (FSP FIN 48-3), Effective Date of FASB
Interpretation No. 48 for Certain Nonpublic Enterprises, which is an amendment to FIN 48, deferring
the effective date of FIN 48 until fiscal 2009 for the Company. The cumulative effects, if any, of
applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the
period of adoption. However, the Company does not expect this to have a material effect on the
Companys financial position, results of operations or liquidity.
Additionally, in May 2007, the FASB published FSP No. FIN 48-1 (FSP FIN 48-1), Definition of
Settlement in FASB Interpretation No. 48. FSP FIN 48-1 is an amendment to FIN 48. It clarifies how
an enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. The Company is required to comply with FIN 48-1
effective as of the completion of the Merger on October 9, 2009. The actual impact of the adoption
of FIN 48 and FSP FIN 48-1 on the Companys results of operations and financial condition will
depend on facts and circumstances that exist on the date of adoption. The Company is currently
calculating the impact of the adoption of FIN 48 and FSP FIN 48-1, but does not expect it to have a
material impact on the financial statements.
In June 2008, the FASB issued EITF 07-5, Determining whether an Instrument (or Embedded
Feature) is Indexed to an Entitys Own Stock. EITF 07-5 is effective for financial statements
issued for years beginning after December 15, 2008, and interim periods within those years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the Companys own stock
and (b) classified in stockholders equity in the balance sheet would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to an issuers own
stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. The Company
is calculating the impact of the adoption of EITF 07-5 on its financial statements.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on its financial position, changes in financial
position, revenues or expenses, results of operations, liquidity, or capital resources.
Contractual Obligations and Commitments
The Company leases approximately 16,000 square feet of office and manufacturing space in Salt
Lake City, Utah. The lease expires in May 2018. The future operating lease obligations as of
December 31, 2008 are as follows:
Year Ending December 31, | ||||||||
2009 | $ | 256,304 | ||||||
2010 | 291,225 | |||||||
2011 | 297,050 | |||||||
2012 | 302,991 | |||||||
2013 | 309,051 | |||||||
Thereafter | 1,439,508 |
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ITEM 3. PROPERTIES.
Our
principal office is located at 3216 South Highland Drive, Salt Lake City, Utah 84106,
consisting of approximately 16,000 square feet, which we rent at a current cost of $24,029 per
month. On April 11, 2008, we entered into a ten year lease for this principal office space; the
term of the lease commenced on June 1, 2008. The rent for the premises was $18,689 per month
beginning on September 1, 2008 and continued at such cost until June 1, 2009. The months of June,
July and August 2008 were provided rent-free. On July 1, 2009, the rent increased to the
current cost of $24,029 per month. For a 24 month period, we will continue to pay the current cost
per month for rent. At the expiration of the 24 month period, the rent will increase by 2% and
will continue to increase by 2% on the expiration of each 12 month period.
We sublease approximately 200 square feet of our principal office space to a third-party on a
month to month basis, for $300 per month.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Directors and Executive Officers
We refer you to the section titled Explanatory Note Regarding Disclosures about Directors and
Executive Officers of this Current Report on Form 8-K with respect to the beneficial ownership of
the sole director and executive officer of the Company prior to the completion of the Merger.
The following tables set forth information with respect to the beneficial ownership of our
outstanding common stock as of October 9, 2009, following the completion of the Merger, by (1) each
nominee for director, (2) each named executive officer identified in the Summary Compensation Table
below, (3) all nominees for director and nominees for executive officers as a group, and (4) each
stockholder identified as beneficially owning greater than 5% of our outstanding shares of common
stock. Beneficial ownership means sole or shared voting power or investment power with respect to
a security. We have been informed that all shares shown are held of record with sole voting and
investment power, except as otherwise indicated. To our knowledge, none of the shares reported
below are pledged as security.
For purposes of the following tables, a person is deemed to be the beneficial owner of
securities that can be acquired by that person within 60 days from October 9, 2009 upon exercise of
options, warrants and/or other convertible or exercisable securities. Each beneficial owners
percentage ownership is determined by assuming that options, warrants and other convertible or
exercisable securities that are held by that person (but not those held by any other person) and
that are convertible or exercisable within the 60-day period have been exercised. The percentage of
outstanding common shares has been calculated based upon 83,824,535 shares of common stock
outstanding on October 9, 2009. Unless otherwise indicated, the address of each of the individuals
and entity listed below is c/o TechniScan, Inc., 3216 South Highland Drive, Salt Lake City, Utah
84106.
Shares of Common Stock | ||||||||
Beneficially Owned | ||||||||
Name of | Amount and Nature of | |||||||
Beneficial
Owner |
Beneficial Ownership | Percent of Class | ||||||
Directors and Officers |
||||||||
David C. Robinson |
3,934,742 | (2) | 4.52 | % | ||||
Barry K. Hanover |
2,921,216 | (3) | 3.37 | % | ||||
Kenneth G. Hungerford II |
3,557,898 | (4) | 4.24 | % | ||||
Richard J. Stanley |
8,366,288 | (5) | 9.98 | % | ||||
Gerald A. Richardson |
67,000 | * | ||||||
Cheryl D. Cook |
235,004 | (6) | * | |||||
All directors and executive officers as a group (6 persons) |
19,082,148 | 21.24 | % |
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Shares of Common Stock | ||||||||
Beneficially Owned | ||||||||
Amount and Nature of | Percent of | |||||||
Beneficial Ownership | Class | |||||||
5% or More Stockholders |
||||||||
Esaote S.p.A (1) |
8,500,002 | 10.14 | % | |||||
Steven A. Johnson, Ph.D. |
4,255,598 | (7) | 5.03 | % |
* | Indicates ownership of less than 1% | |
(1) | Esaotes address is Via Siffredi, 58 16153, Genova, Italy. | |
(2) | Includes 766,464 shares of common stock held by Mr. Robinson and his wife as joint tenancy with right of survivorship, as to which Mr. Robinson may be deemed to share beneficial ownership, and options to purchase 3,168,278 shares of common stock. | |
(3) | Includes options to purchase 2,865,600 shares of common stock. | |
(4) | All common stock is held by Green & Gold Capital Holdings, LLC, of which Mr. Hungerford is a member and manager, and as such may be deemed to share voting and investment power with respect to these shares. Mr. Hungerford disclaims beneficial ownership of all shares held by Green & Gold Capital Holdings, LLC except to the extent of his pecuniary interest therein. | |
(5) | Includes 899,000 shares of common stock held by members of Mr. Stanleys family and 5,943,184 shares of common stock held by Mr. Stanley and his wife and/or family as joint tenancy with right of survivorship. Mr. Stanley may be deemed to share beneficial ownership of the shares held by members of Mr. Stanleys family. Mr. Stanley disclaims beneficial ownership of such shares. | |
(6) | All common stock is held by Ms. Cook and her husband as joint tenancy with right of survivorship, and as such may be deemed to share voting and investment power with respect to these shares. | |
(7) | Includes options to purchase 706,000 shares of common stock held by Dr. Johnson. |
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
We refer you to the section titled Explanatory Note Regarding Disclosures about Directors and
Executive Officers of this Current Report on Form 8-K with respect to biographical information
about the sole director and executive officer of the Company prior to the completion of the
Merger.
The following table sets forth information, as of October 9, 2009, concerning the Board of
Directors and executive officers of the Company following the completion of the Merger.
Name | Age | Position | ||
David C. Robinson |
48 | Chief Executive Officer, Chief Financial Officer, Director | ||
Barry K. Hanover |
54 | Chief Operating Officer | ||
Kenneth G. Hungerford II |
63 | Chairman of the Board, Director | ||
Richard J. Stanley |
67 | Director | ||
Gerald A. Richardson |
77 | Director | ||
Cheryl D. Cook |
61 | Director |
Business Experience of Directors and Executive Officers During the Past Five Years
David C. Robinson has served as the President and Chief Executive Officer and as director of
TechniScan Utah since July 2001. In 2003, Mr. Robinson also served as Chief Executive Officer of
SafeScan, until SafeScans dissolution in 2004. From September 1998 to January 2002, Mr. Robinson served
as the President and Chief Executive Officer of PhatPipe, which Mr. Robinson founded in 1998, a
provider of affordable broadband technology and services to owners of industrial real estate. From
1995 to July 2001, Mr. Robinson provided strategic consulting services for government and private
industry including AMB Property Corporation, The Oz Entertainment
Company, and the United States General
Services Administration. From 1987 to 1995, Mr. Robinson served as Chief Operating Officer for MEC
Analytical Systems, Inc., a private consulting firm. From 1984 to 1987, Mr. Robinson was a
consulting integration
engineer with Litton Electronic Systems Group Defense Division. Mr. Robinson received a Bachelor
of Arts degree in 1984 in Business from the University of Utah.
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Barry K. Hanover has served as Chief Operating Officer of TechniScan Utah since February 2002.
From December 1992 to September 1996, Mr. Hanover served as the Vice-President of Engineering and
from September of 1996 until November 1999 served as the Executive Vice President and Chief
Technical Officer of OEC Medical Systems, Inc., a provider of high performance digital
intraoperative/interventional x-ray imaging systems. Upon OECs acquisition by GE Medical Systems
in November 1999 until March 2001, Mr. Hanover served as GE OECs Vice-President of Surgery and
Chief Technologist. From 1983 to 1992, Mr. Hanover was Vice-President of Technical Development and
a member of the board of directors of Sarcos, Incorporated, a developer of products including drug
delivery and robotic systems. From 1990 to 1992, Mr. Hanover served as General Manager of Animate
Systems, Inc, a division of Sarcos, Inc. From June 1992 until October 1992, Mr. Hanover was
President of Hanover Engineering Services, LC, an engineering consulting firm with an emphasis on
the solution of multidisciplinary design problems. Mr. Hanover received a Bachelor of Science
degree in Mechanical Engineering in 1977 from Tufts University and a Masters of Engineering in
Mechanical Engineering in 1985 from the University of Utah. Mr. Hanover is listed as an inventor
on 20 U.S. Patents in the fields of drug delivery systems, dialysis systems and x-ray imaging
apparatus.
Kenneth G. Hungerford II has served as director of TechniScan Utah since February 2007 and has
served as Chairman of the Board since June 2009. Mr. Hungerford has been Chairman of ADAC
Automotive, Inc., a privately held automotive supplier, since January 1986 and served as Chief
Executive Officer from January 1996 until March 2007. ADAC is a member of the VAST LLC, a global
supplier of automotive parts with operations in China, Brazil, Japan, and Korea. Mr. Hungerford is
a member of the board of directors of VAST and serves as a member of its strategic planning
committee. Mr. Hungerford was a founding director of Edge Industries, a privately held, capital
equipment manufacturer that provides specialized cutting, metering, and dispensing systems for the
urethane industry; Lomak Petroleum, which was merged into Range Resources, a publicly traded oil
and gas company engaged in the acquisition and development of gas resources; Applied Image
Technology, a development stage, software company that provided computer based parts manuals and
was merged into MRO, Inc., a publicly traded software company which was subsequently acquired by
IBM; Brillance Audiobooks, a publisher of audiobooks which was recently acquired by Amazon; and
WXMI Broadcasting, an independent, local television station in Grand Rapids, MI, that became the
local FOX network affiliate, and was subsequently sold to COX Broadcasting. Additionally, Mr.
Hungerford is currently on the board of trustees of St. Marys Health Care in Grand Rapids,
Michigan, which is a member organization in the Trinity Health Network. Mr. Hungerford received a
Bachelor of Business Administration degree from the University of Notre Dame in 1968 and has been
registered as a Certified Public Accountant in the State of Michigan since 1970.
Richard J. Stanley has served as a director of TechniScan Utah since December 2002. Mr. Stanley
has been an Associate Professor of chemistry at Wagner College since 1991 and was a chemical
engineer for Procter & Gamble Manufacturing from 1968 to 1990. Mr. Stanley is currently a director
of Mendis International. Mr. Stanley has been a part owner of a professional baseball franchise in
the Eastern League of Professional Development for 30 years. Mr. Stanley has served as the team
President, Secretary and Treasurer and a director of the Eastern League for more than 20 years and
has been responsible for building stadiums in various cities in the United States and Canada. Mr.
Stanley has served as Vice Chairman and Chairman over the years since 1990 for SCORE. Mr. Stanley
received a Bachelor of Science in Chemical Engineering from New York University, a Masters Degree
in Chemical Engineering from City University of New York, and a Masters in Business Administration
from New York University.
Gerald A. Richardson has served as a director of TechniScan Utah since January 2008. Mr. Richardson
previously served as a director of TechniScan Utah from October 2001 until August 2002. Mr.
Richardson is the founder, managing partner and Chief Executive Officer of The Anson Group, a
consulting firm which serves developers, manufacturers and marketers of pharmaceuticals, medical
devices and diagnostic products. From 1986 to 1993, Mr. Richardson was the President and Chief
Executive Officer of Biosound, Inc., a medical imaging company specializing in high performance
ultrasound systems where he organized a buyout and resale of the company to the Esaote Group. From
1980 to 1983, Mr. Richardson was the President and Chief Executive Officer of VingMed, Inc., a
cardiac ultrasound development and distribution company focused in Scandinavia that was acquired by
GE Medical. In 1975 Mr. Richardson also helped found Irex Medical Systems, a developer of phased
array cardiac imaging and quantitative Doppler flow measurement systems that later sold to
Technicare Ultrasound, a unit of Johnson and Johnson. From 1972 to 1975, Mr. Richardson served as
the President of EDR Instruments, Inc., a contract engineering company that developed industrial
sensor and diagnostic cardiology instrumentation. Mr. Richardson received a Bachelor of Science
degree from Kenyon College and a Master of Science from Temple University.
Cheryl D. Cook has served as a director of TechniScan Utah since August 2005. Ms. Cook founded in
1996, and is the owner of, C2 Financial, LLC, a financial consulting firm. Ms. Cook has been the
financial advisor to the Idaho State Treasurer since 1987. From 2000 to 2004, Ms. Cook was Senior
Vice President and Senior Relationship Manager at Key Bank. From 1990 to 1994, Ms. Cook was First
Vice President and Manager for Dain Bosworth and Ehrlich Bober and Co. From 1997 to 2000, Ms. Cook
was the
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Managing Director of the Salt Lake International Airport. Prior to this position, Ms. Cook
was the Chief Financial Director for the Salt Lake International Airport. From 1994 to 1997, Ms.
Cook was a government securities advisor for former Soviet Union countries, primarily with Ukraine
and Latvia, as a United States Treasury contract employee. Ms. Cook is currently a board member and
Chairman of the audit committee for the Community Development Corporation of Utah and a board
member for the University of Utah Board of Visitors. From 2006 to 2009, Ms. Cook was a board
member of Merrill Lynch Bank USA; from 2001 to 2008, Ms. Cook was a board member of the Salt Lake
Valley Health Department; and from 2002 to 2004 Ms. Cook was a board member of the Utah Bankers
Association. Ms. Cook received her Bachelor of Science degree from the University of Utah, College
of Business.
Key Employees
John C. Klock, M.D. has served as the Chief Medical Officer of TechniScan Utah since June 2009.
Prior to serving as the Chief Medical Officer, Dr. Klock served as a director of the Company from
February 2007 until June 2009. Dr. Klock received his medical degree from Tulane University, and
completed his medical training at the University of California - San Francisco and Massachusetts
General Hospital. Dr, Klock is a board-certified Internist and Hematologist-Oncologist who
practiced medicine and did research at the University of California San Francisco from 1970 to
1982. Since 1982, Dr, Klock has been involved in the start-up of five medical companies. While at
these companies Dr. Klock helped to develop and bring to market: (1) a novel cancer treatment, (2)
the first rapid AIDS test, (3) comprehensive tests for detecting metabolic diseases of children and
(4) several drugs for treating genetic diseases of children. Dr. Klock continues to introduce
novel concepts into medical practice and is on the boards of several medical genetics and software
companies. Dr. Klock has authored over 70 peer-reviewed medical and scientific publications and is
listed as an inventor on 8 United States patents. Presently, through Holistica Hawaii Preventive Medicine,
Dr. Klock is applying modern medical technologies for disease prediction and health screening, and
developing individualized programs for persons interested in maintaining optimal health through
prevention.
Arrangements of Certain Directors
The Company is aware of the following arrangements or understandings between certain directors
and other persons, pursuant to which such directors were selected as a director.
In 2006, Mr. Hungerford was the lead investor of a group that purchased shares of TechniScan
Utahs stock pursuant to a private placement offering of Series D Preferred Stock. Pursuant to the
term sheet for such purpose, which set forth the agreement between Mr. Hungerford, together with
certain other investors, and TechniScan Utah, Mr. Hungerford was appointed as a director of
TechniScan Utah. Upon closing of the Merger, the right to select a director by such investors was
terminated.
Pursuant to a private placement offering of Series E Preferred Stock, TechniScan Utah and, as
a group, 68 purchasers of the Series E Preferred Stock, entered into a Voting Agreement relating to
the election of directors of TechniScan Utah. Pursuant to the Voting Agreement, the holders of
Series E Preferred Stock were entitled to elect two directors of TechniScan Utah (Series E
Directors). Esaote was one of the 68 purchasers, and pursuant to the Voting Agreement, Esaote was
entitled to select one of the Series E Directors. The Voting Agreement survived the closing of the
Merger, and now provides the holders of 15,579,938 shares of our common stock the right to elect
two Series E Directors to our Board of Directors. Mr. Richardson was selected to serve as the
Esaote appointed director on the Board of Directors of TechniScan Utah, and as the Esaote appointed
Series E Director on our Board of Directors. The other Series E Director has not yet been
nominated or elected to our Board of Directors.
Relationship among Directors and Executive Officers
There are no family relationships between or among our executive officers and directors.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics, which is provided on our website at
www.techniscanmedicalsystems.com.
ITEM 6. EXECUTIVE COMPENSATION.
We refer you to the section titled Explanatory Note Regarding Disclosures about Directors and
Executive Officers of this Current Report on Form 8-K with respect to the compensation of the sole
director and executive officer of the Company prior to the completion of the Merger.
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Summary Compensation Table
The following table sets forth certain information concerning the compensation for services
rendered in all capacities to the Company for the fiscal years ended December 31, 2008 and 2007 of
the Companys chief executive officer (principal executive officer) and the most highly compensated
executive officer of the Company other than the chief executive officer, who are referred to in
this section as the named executive officers.
Summary Compensation Table
Option | All other | |||||||||||||||||||||||
Salary | Bonus | awards (1) | compensation | |||||||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($) | Total ($) | ||||||||||||||||||
David C. Robinson, |
2008 | $ | 211,260 | $ | 500 | $ | 2,898 | $ | 4,715 | $ | 219,373 | |||||||||||||
President |
2007 | $ | 202,517 | $ | 500 | $ | 1,244 | $ | 4,500 | $ | 208,761 | |||||||||||||
Chief Executive Officer |
||||||||||||||||||||||||
Barry K. Hanover, |
2008 | $ | 160,384 | $ | 500 | $ | 2,605 | $ | 4,675 | $ | 168,164 | |||||||||||||
Chief Operating Officer |
2007 | $ | 147,068 | $ | 500 | $ | 1,244 | $ | 4,500 | $ | 153,312 |
(1) | Amounts reported represent the compensation cost recognized by TechniScan Utah for financial statement reporting purposes in accordance with SFAS No. 123R utilizing the assumptions discussed in Note 2 and Note 8 to our financial statements for the years ended December 31, 2008 and 2007, giving effect to estimated forfeitures. Estimated forfeitures are nominal amounts. |
The following table sets forth certain information concerning the outstanding equity awards
held by our named executive officers as of December 31, 2008.
Outstanding Equity Awards at Fiscal Year-End
Option awards | ||||||||||||||||
Number of securities | ||||||||||||||||
Number of securities | underlying | |||||||||||||||
underlying | unexercised | Option | ||||||||||||||
unexercised options | options | exercise price | Option | |||||||||||||
Name | (#) exercisable | (#) unexercisable (1) | ($) | expiration date | ||||||||||||
David C. Robinson (2) |
168,139 | 0 | .35 | 11/1/11 | ||||||||||||
28,000 | 0 | 1.00 | 2/10/14 | |||||||||||||
56,000 | 0 | .70 | 2/10/14 | |||||||||||||
84,000 | 0 | 1.00 | 3/31/14 | |||||||||||||
84,000 | 0 | 1.00 | 6/30/14 | |||||||||||||
80,500 | 3,500 | 1.00 | 2/3/15 | |||||||||||||
26,250 | 3,750 | 1.00 | 6/15/15 | |||||||||||||
43,750 | 56,250 | .69 | 3/1/17 | |||||||||||||
0 | 150,000 | .90 | 3/11/18 | |||||||||||||
0 | 100,000 | .90 | 5/1/18 |
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Option awards | ||||||||||||||||
Number of securities | ||||||||||||||||
Number of securities | underlying | |||||||||||||||
underlying | unexercised | Option | ||||||||||||||
unexercised options | options | exercise price | Option | |||||||||||||
Name | (#) exercisable | (#) unexercisable (1) | ($) | expiration date | ||||||||||||
Barry K. Hanover (3) |
80,000 | 0 | .35 | 2/11/12 | ||||||||||||
120,000 | 0 | .35 | 2/11/12 | |||||||||||||
48,000 | 0 | .53 | 1/2/13 | |||||||||||||
16,000 | 0 | 1.00 | 2/10/14 | |||||||||||||
44,800 | 0 | .70 | 2/10/14 | |||||||||||||
48,000 | 0 | 1.00 | 3/31/14 | |||||||||||||
48,000 | 0 | 1.00 | 6/30/14 | |||||||||||||
46,000 | 2,000 | 1.00 | 2/3/15 | |||||||||||||
26,250 | 3,750 | 1.00 | 6/15/15 | |||||||||||||
43,750 | 56,250 | .69 | 3/1/17 | |||||||||||||
0 | 100,000 | .90 | 3/11/18 | |||||||||||||
0 | 100,000 | .90 | 5/1/18 |
(1) | The unexercisable option awards granted were to vest as follows: one-fourth of the shares vest one year after the date of grant and thereafter, in thirty six equal monthly installments. Upon the effectiveness of the Merger however, all options immediately vested. | |
(2) | The grant date of the options awarded to Mr. Robinson were as follows: November 1, 2001; February 10, 2004; February 10, 2004; March 31, 2004; June 30, 2004; February 3, 2005; June 15, 2005; March 1, 2007; March 11, 2008; and May 1, 2008, respectively. | |
(3) | The grant date of the options awarded to Mr. Hanover were as follows: February 11, 2002; February 11, 2002; January 3, 2003; February 10, 2004; February 10, 2004; March 31, 2004; June 30, 2004; February 3, 2005; June 15, 2005; March 1, 2007; March 11, 2008; and May 1, 2008, respectively. |
Director Compensation
To date, the only compensation paid to directors of TechniScan Utah has been in the form of
warrants. The warrants granted to directors in 2008 vested in four equal quarterly installments,
except for one warrant to purchase 20,000 shares of common stock granted to Gary Barbour, which
vested upon the date of issue.
The following table sets forth certain information concerning the compensation for services
rendered in all capacities to TechniScan Utah for the fiscal year ended December 31, 2008 of
TechniScan Utahs directors. David C. Robinson served as a director for TechniScan Utah during the
fiscal year ended December 31, 2008 and did not receive any compensation for his service as a
director. All compensation paid to Mr. Robinson is reflected in the Executive Compensation tables.
Director Compensation
All other compensation (1) | ||||
Name | ($) | |||
Kenneth G. Hungerford II (4) |
$ | 205 | ||
Theodore H.
Stanley, M.D. (3) |
$ | 205 | ||
Richard J. Stanley |
$ | 205 | ||
Gerald A. Richardson |
$ | 205 | ||
Cheryl D. Cook |
$ | 411 | ||
John Klock. M.D. (3) |
$ | 205 | ||
Gary Barbour (3) (5) |
$ | 560 | ||
Steven A.
Johnson, PhD. (3) |
$ | 1,171 | (2) |
(1) | Compensation paid to directors of TechniScan Utah, and reflected in this Director Compensation table were in the form of warrants. Amounts reported represent the compensation cost recognized by TechniScan Utah for financial statement reporting purposes in accordance with SFAS No. 123R utilizing the assumptions discussed in Note 2 and Note 8 to our financial statements for the years ended December 31, 2008 and 2007, giving effect to estimated forfeitures. Estimated forfeitures are nominal amounts. |
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(2) | Dr. Johnson served as a director in fiscal year ended December 31, 2008, and did not receive any compensation for his services as a director of TechniScan Utah. Dr. Johnson received stock option grants as payment for services as Chief Scientist. | |
(3) | Dr. Stanley, Dr. Klock Mr. Barbour and Dr. Johnson resigned as directors of TechniScan Utah prior to the Merger and are not directors of the Company. | |
(4) | Warrants were issued to Mr. Hungerford in the name of Green & Gold Capital Holdings, LLC | |
(5) | Warrants were issued to Mr. Barbour in the name of Upstill Industries, Ltd. | |
(6) | The aggregate number of outstanding shares held by each director in the table above as of December 31, 2008 was as follows: Mr. Hungerford held outstanding warrants to purchase 20,000 shares, which were issued in the name of Green & Gold Capital Holdings, LLC; Dr. Stanley held outstanding warrants to purchase 164,431 shares; Mr. Stanley held outstanding warrants to purchase 23,721 shares; Mr. Richardson held outstanding warrants to purchase 35,000 shares; Ms. Cook held outstanding warrants to purchase 60,000 shares; Dr. Klock held outstanding warrants to purchase 20,000 shares; Mr. Barbour held outstanding warrants to purchase 60,000 shares, which were issued in the name of Upstill Industries, Ltd.; and Dr. Johnson held outstanding options to purchase 353,000 shares and outstanding warrants to purchase 154,865 shares. |
Compensation of Named Executive Officers after the Merger
Commencing October 9, 2009, the closing date of the Merger, the annual compensation for our
executive officers is as follows:
Name and Principal Position | Salary | |||
David C. Robinson, Chief Executive Officer, Chief Financial
Officer |
$ | 260,000 | ||
Barry K. Hanover, Chief Operating Officer |
$ | 195,000 |
Employee Stock Option Plan
Prior to 1998, TechniScan Utah adopted a Salary Reduction Simplified Employee Pension Plan
(SAR-SEP). The SAR-SEP allowed the Board of Directors to determine the amount of employer
matching contributions at the beginning of each year. The Board of Directors adopted a
contribution formula specifying that such discretionary employer matching contributions would equal
100% of the participating employees contribution to the SAR-SEP up to a maximum discretionary
employee contribution of 3% of a participating employees compensation, as defined by the SAR-SEP.
All persons who had completed at least six months service and satisfy other requirements, as set
forth in the SAR-SEP, were eligible to participate in the SAR-SEP.
Effective as of July 2001, the Board of Directors suspended discretionary employer matching
contributions to its employees who chose to participate in the SAR-SEP. The Board of Directors is
not expected to authorize employer matching contributions in any amount until the Company is
generating product revenues.
On June 12, 2001, TechniScan Utah adopted a Employee Stock Option Plan (the Plan), for
officers, employees, directors and consultants. The Plan was subsequently amended pursuant to four
separate amendments. The Plan was assumed by the Company upon the closing of the Merger. The Plan
authorizes the granting of stock options (Plan Options) to purchase shares of our common stock
equal to 18% of the total shares of common stock outstanding. As of October 9, 2009, options to
purchase 12,284,778 shares of common stock have been issued under the Plan, and 2,803,639 shares
remain available for new grants under the Plan.
Offer of Employment
Barry K. Hanover
Barry Hanover was appointed Chief Operating Officer of TechniScan Utah in February 2002 and
commenced serving in this position on February 11, 2002. In connection with Mr. Hanovers
appointment, TechniScan Utah and Mr. Hanover entered into an employment offer letter dated February
4, 2002 (the Offer Letter). Upon closing of the Merger, Mr. Hanover was appointed as Chief
Operating Officer of the Company.
The Offer Letter provides for an at-will employment relationship and also provides that Mr.
Hanover would receive the following compensation and benefits: (1) monthly compensation of $12,500;
(2) a non-qualified stock option grant to purchase 200,000 shares of TechniScan Utahs stock,
granted forty-five days after Mr. Hanovers commencement date, at a strike price determined by the
Board of Directors of TechniScan Utah; and (3) an incentive stock option grant to purchase a
minimum of 300,000 shares of TechniScan Utahs stock (an increase above 300,000 was at the
discretion of the Board of Directors or the Chief Executive
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Officer), within 30 days after the
closure of a then existing offering of TechniScan Utahs stock, which grant was scheduled to vest
as follows, subject to TechniScan Utahs Employee Stock option Plan: 25% one year after the date
of the Offer Letter and the remaining balance in equal monthly installments for 36 months
thereafter; or all unvested options to vest immediately upon Change in Control as defined in the
Letter Offer. The Offer Letter also outlines other generally available benefits.
Subsequent to the Offer Letter, Mr. Hanovers salary and compensation has been increased,
based in part upon performance reviews. Mr. Hanovers compensation for fiscal years ended December
31, 2007 and 2008 are reflected in the Executive Compensation tables and his salary prior to
closing of the Merger is reflected in the table in the section titled Compensation of Named
Executive Officers After the Merger.
Corporate Governance
The Companys common stock is quoted on the Over-the-Counter Bulletin Board, or the OTC
Bulletin Board. We have a compensation committee and an audit committee. The Company is not
required to have, and does not have, a nominating/governance committee. We have adopted a
Whistleblower Policy, which is provided on our website at www.techniscanmedicalsystems.com.
Compensation Committee Interlocks and Insider Participation
During
fiscal year ended December 31, 2008, Kenneth G. Hungerford,
Theodore H. Stanley, M.D. and Gary
Barbour comprised TechniScan Utahs compensation committee. All individuals serving as the
compensation committee were directors of the Board of Directors of TechniScan Utah. The Company is
continuing to maintain a compensation committee after closing of the Merger.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
We refer you to the section titled Explanatory Note Regarding Disclosures about Directors and
Executive Officers of this Current Report on Form 8-K with respect to certain relationships and
related transactions of the sole director and executive officer of the Company prior to the
completion of the Merger.
Transactions with Related Persons
Consulting Agreement
TechniScan Utah entered into a General Consulting Agreement with The Anson Group, dated May 1,
2006. Gerald A. Richardson, who has served as a director of TechniScan Utah since January 2008,
and previously served as a director of TechniScan Utah from October 2001 until August 2002, is the
founder, managing partner and Chief Executive Officer of Anson Group. Anson Group serves
developers, manufacturers and marketers of pharmaceuticals, medical devices and diagnostic
problems. Pursuant to the terms of the General Consulting Agreement, Anson Groups
responsibilities were to be described pursuant to various Project Assignments that would become
part of the General Consulting Agreement, including assisting TechniScan Utah with submission of
its 510(k) application for FDA approval. Payment for services rendered as well as the term of the
General Consulting Agreement are pursuant to the Project Assignments, however, either party may
terminate the agreement upon 30 days prior written notice or upon breach of the agreement and
failure to cure such breach within a 30 day period.
TechniScan Utah paid Anson Group the following for services rendered under the General
Consulting Agreement: $17,499 in 2006, $509 in 2007, $30,642 in 2008 and $18,162 to date in 2009.
Lease
Prior
to entering into a lease for our principal office located at 3216
South Highland Drive,
Salt Lake City, Utah 84106, SafeScan and 1011 LLC entered into a Lease Agreement for the property
located at 1011 East Murray-Holladay Road, Salt Lake City, Utah, dated September 1, 2003. Pursuant
to the Second Addendum to Lease Agreement for 1011 Murray-Holladay Road, entered into in December
2004, the Lease Agreement was modified such that the parties to the Lease Agreement were TechniScan
Utah and 1011 LLC. Gary Barbour, a director of TechniScan Utah from 2001 until his resignation in
2009 was a member of 1011 LLC. Payments made to 1011 LLC, pursuant to that Lease Agreement, in
fiscal year ended December 31, 2006, 2007 and 2008 were $259,804, $182,847, $50,000, respectively,
which included the issuance of 73,000 shares of TechniScan Utahs Series D Preferred Stock on
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March
31, 2006 to Upstill Industries, Ltd., an entity controlled by Mr. Barbour, in exchange for a rent
owed during the fiscal year ended December 31, 2006 in the amount of $55,202.
Convertible Notes
From July 2005 through September 2005, TechniScan Utah issued Convertible Subordinated
Promissory Notes (2005 Subordinated Notes) in the aggregate principal amount of $975,000 as
follows: $700,000 to Richard Stanley, a director of the Company; $100,000 to Stephen Blum, a former
director of TechniScan Utah; $100,000 to Upstill Industries, Ltd., an entity controlled by Gary
Barbour, a former director of TechniScan Utah; $25,000 to the Stanley Research Foundation, an
entity controlled by Theodore H. Stanley, M.D., a former director of TechniScan Utah; and $50,000 to
David Stone, a former director of TechniScan Utah. The 2005 Subordinated Notes accrued interest at
a rate of 8% per annum and included an automatic conversion feature to convert into common stock of
TechniScan Utah. On December 31, 2006, TechniScan Utah converted all of the principal and accrued
interest owed under the 2005 Subordinated Notes in the aggregate amount of $1,116,037 into
1,488,049 shares of TechniScan Utah Series D Preferred Stock at a rate of $0.75 per share.
From November 2007 through January 2008, TechniScan Utah issued Convertible Subordinated
Promissory Notes (Subordinated Notes) in the aggregate principal amount of $510,000 as follows:
$25,000 to the Stanley Research Foundation, an entity controlled by
Theodore H. Stanley, M.D. a former
director of TechniScan Utah; $25,000 to Mary Ann O. Stanley Family Trust, an affiliate of Dr.
Stanley; $25,000 to Dr. Stanley and Susan Stanley, joint tenancy with right of
survivorship; $162,500 to Richard J. Stanley, a director of the Company;
$50,000 to John C. Klock, M.D., a
former director of TechniScan Utah, and Cynthia Klock, tenants in common; $162,500 to Green & Gold
Capital Holdings, LLC, an entity controlled by Kenneth G. Hungerford II, a director and Chairman of
the Board of the Company; $50,000 to Upstill Industries, Ltd., an entity controlled by Gary
Barbour, a former director of TechniScan Utah; and $10,000 to Cheryl
D. Cook, a director of the
Company and Robert Cook, joint tenancy with right of survivorship.
The Subordinated Notes were
non-interest bearing and included an automatic conversion feature to
convert into common stock of TechniScan Utah. In February 2008, TechniScan Utah converted all of the principal owed under
the Subordinated Notes into 566,669 shares of Series E Preferred Stock at a rate of $0.90 per
share.
Esaote
TechniScan Utah and Esaote entered into a Series E Stock Purchase Agreement on February 11,
2008 and a Letter of Undertakings on Possible Amendment Agreement, dated October 28, 2008, in
connection with TechniScan Utahs offering of Series E Preferred Stock. Pursuant to the Stock
Purchase Agreement, Esaote agreed to purchase up to 10,000,000 shares of the Series E Preferred
Stock at a price of $0.90 per share and warrants to purchase up to 1,500,000 shares of TechniScan
Utahs common stock, at an exercise price of $0.75 per share. Esaotes purchase of Series E
Preferred Stock was to take place in three separate closings, and at the initial closing, Esaote
purchased 3,333,334 shares of TechniScan Utah Series E Preferred Stock and warrants to purchase 500,000 shares
of common stock, for $3,000,000. $2,000,000 of the purchase price was paid in cash and $1,000,000
was paid in the form of an account credit under the Original Equipment Manufacturing Agreement and
Engineering Support Agreement between TechniScan Utah and Esaote. Pursuant to the Stock Purchase
Agreement, Esaote was entitled to certain other benefits, including redemption rights for one year
following each closing, as applicable, and a right of first refusal and co-sale. These additional
rights have been terminated prior to the Merger and are no longer in effect.
In
connection with the Distribution Agreement the European Market
Development Agreement that we entered into with Esaote, the Company
expects to deliver five WBU systems to Esaote for clinical testing
and distribution in the European market. The
Company has delivered two prototype systems and Esaote has paid
TechniScan Utah an aggregate of $500,000 to date.
Professional Services Agreement
We entered into a Professional Services Agreement with PCOF Partners, dated October 9, 2009,
for a one-year term. Pursuant to the Professional Services Agreement, PCOF Partners will serve as
a non-exclusive consultant and advisor to the Company. As compensation for its services, we issued
PCOF Partners 1,000,000 shares of our common stock.
Other Transactions
On February 1, 2006, TechniScan Utah issued 15,000 shares of its common stock and 8,666 shares
of its Series D Preferred Stock to Stephen Blum, a former director of TechniScan Utah, in exchange
for services valued at $21,500.
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A number of TechniScan Utahs current and former officers and directors and certain entities
controlled by them have invested in TechniScan Utahs private offerings of its equity securities
during the last three fiscal years. The interest of such related persons,
however, arose solely from the ownership of the particular class of equity securities of
TechniScan Utah and all holders of such classes of equity securities of TechniScan Utah received
the same benefit on a pro rata basis.
Independent Directors
We believe a majority of the new members of the Companys Board of Directors (who took office
upon closing of the Merger) will be independent from management. Those individuals who we believe
will be independent directors are Kenneth G. Hungerford II, Richard J. Stanley, Gerald A.
Richardson and Cheryl D. Cook. The Companys Board of Directors will determine the independence of
the members of the Board of Directors from time to time in reference to the listing standards
adopted by NASDAQ, the independence standards set forth in Sarbanes-Oxley and the rules and
regulations promulgated by the SEC under applicable law. In particular, the Company has an audit
committee that will periodically evaluate and report to the Board of Directors on the independence
of each member of the Board of Directors.
The Companys independent directors will hold formal meetings, separate from management, at
least annually in executive session without the presence of non-independent directors and
management.
The Company does not have a formal policy regarding attendance by our directors at annual
stockholders meetings, although we encourage their attendance and anticipate most of our directors
will attend these meetings.
ITEM 8. LEGAL PROCEEDINGS.
We are not currently involved in any legal proceedings and we are not aware of any pending or
potential legal actions required to be disclosed by Item 103 of Regulation S-K.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Trades of our common stock are conducted on the OTC Bulletin Board under the symbol CLLO.OB,
which we expect to change in connection with the name change. There has been no active trading in
our shares.
We issued 76,824,535 shares of our common stock pursuant to the Merger and, accordingly, there
are currently 83,824,535 shares of common stock outstanding.
As of the close of business on October 9, 2009, as a result of the completion of the Merger,
there were approximately 350 holders of record of our common stock.
We have no plans to declare cash dividends on our common stock in the future and have not
declared any thus far during fiscal year 2009 or during the last completed fiscal year. Although
we currently are not restricted from declaring cash dividends on our common stock by contract, we
may obtain debt financing which may impose these restrictions on us.
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Equity
Compensation Plan
The following table provides information as of December 31, 2008 with respect to employee
compensation plans under which our equity securities are authorized for issuance.
Equity Compensation Plan Information
Number of securities | ||||||||||||
Number of securities | remaining available | |||||||||||
to be issued upon | Weightedaverage | for future | ||||||||||
exercise of | exercise price of | issuance under equity | ||||||||||
outstanding | outstanding | compensation plans | ||||||||||
options, | options, | (excluding securities | ||||||||||
warrants and | warrants and | reflected | ||||||||||
Plan Category | rights | rights | in column (a)) | |||||||||
Equity compensation
plans approved by
security holders |
4,371,639 | (1) | $ | 0.79 | 865,010 | (1) | ||||||
Equity compensation
plans not approved by
security holders: |
||||||||||||
Stock Options Agreements |
0 | N/A | 0 | |||||||||
Warrants |
2,565,287 | (2) | $ | 0.25 | (2) | 0 | ||||||
Total |
6,936,926 | $ | 0.59 | 865,010 |
(1) | Consists of options issued by TechniScan Utah under its 2001 Employee Stock Option Plan and remaining available for future issuance under the 2001 Employee Stock Option Plan. | |
(2) | All outstanding warrants were converted into common stock of TechniScan Utah prior to the Merger in connection with the Conversion. |
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The disclosure set forth under Item 3.02 of the Current Report on Form SB-2/A filed by
Castillo Nevada on June 27, 2007 is incorporated by reference into this Item 10.
During the period from October 2006 through September 2009, TechniScan Utah issued warrants to
purchase 546,667 shares of common stock to directors on its Board of Directors for director
compensation.
During the period from October 18, 2006 through May 8, 2007, TechniScan Utah issued 8,525,570
shares of Series D Preferred Stock to 65 accredited investors through a private placement
transaction under Rule 506 of Regulation D promulgated under the Securities Act. In connection
with this private offering, TechniScan Utah issued warrants to purchase 636,796 shares of common
stock. The shares of Series D Preferred Stock were sold at $0.75 per share and the warrants had an
exercise price of $1.00 per share. 2,157,630 of the shares of Series D Preferred Stock were issued
pursuant to the conversion of the convertible subordinated promissory notes previously outstanding.
3,256,931 of the shares of Series D Preferred Stock were issued pursuant to a right to convert
shares of common stock purchased in a previous offering for $1.50 per share into Series D Preferred
Stock. TechniScan Utah received $2,333,259 in cash as a result of this private offering. There
were no commissions paid in connection with this transaction.
During February 11, 2008 through September 15, 2009, TechniScan Utah issued 6,491,641 Shares
of Series E Preferred stock to 30 accredited investors through a private placement transaction
under Rule 506 of Regulation D promulgated under the Securities Act. The shares of Series E
Preferred Stock were sold at $0.90 per share. 566,669 of the shares of Series E Preferred Stock
were issued pursuant to the conversion of the convertible subordinated promissory notes previously
outstanding. TechniScan Utah received an aggregate of $5,044,805 in cash in three closings of this
private offering. There were no commissions paid in connection with this transaction.
Pursuant to the first closing of the Series E Preferred Stock private offering, TechniScan
Utah issued warrants to purchase 500,000 shares of our common stock, at a price of $0.75 per share
to one accredited investor. Pursuant to the second closing of the Series E Preferred Stock private
offering, TechniScan Utah issued warrants to purchase 593,854 shares of our common stock to 19
holders of Series E Preferred Stock at a price of $0.75 per share. Pursuant to the third closing
of the Series E Preferred Stock private offering, TechniScan Utah issued warrants to purchase
948,612 shares of common stock to 14 holders of Series E Preferred Stock at a price of $0.75 per
share.
On October 23, 2008 TechniScan Utah issued an aggregate of warrants to purchase 16,000 shares
of common stock to two consultants, for services rendered.
On December 11, 2008, TechniScan Utah issued warrants to purchase 8,000 shares of common stock
to one consultant, for services rendered.
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During the period from September 9, 2009 through October 8, 2009, TechniScan Utah issued
1,373,753 shares of common stock to 19 accredited investors through a private placement transaction
under Rule 506 of Regulation D promulgated under the Securities Act. The shares of common stock
were sold at $0.75 per share. TechniScan Utah received $1,030,315 in cash as a result of this
private offering. There were no commissions paid in connection with this transaction.
On
October 9, 2009, we issued an aggregate of 76,824,535 shares of our common stock, par value
$.001 per share to the shareholders of TechniScan Utah in connection with the Merger and we also
issued options to purchase 12,284,778 shares of common stock in connection with the Merger. All
shares of our common stock and options to purchase common stock issued pursuant to the Merger were
in exchange for all issued and outstanding shares of common stock and options to purchase shares of
common stock of TechniScan Utah. The shares of our common stock and options to purchase common
stock were issued pursuant to the exemption provided by Section 4(2) of the Securities Act for
transactions by an issuer not involving a public offering and/or Rule 506 of Regulation D
promulgated under the Securities Act. See Description of Securities.
On
October 9, 2009, we issued 1,000,000 shares of our common stock
to a consultant as
compensation for services pursuant to a professional services agreement.
Equity
Compensation Plan
From March 2007 until September 2009, TechniScan Utah granted Non-Qualified Stock Option
awards and Incentive Stock Option awards covering an aggregate of 3,536,750 shares of common stock,
pursuant to our Plan, that remained outstanding as of September 30, 2009. The exercise price for
each option is as follows: options granted in March 2007 were $0.69 per share; options granted in
March 2008 were $0.75 per share and $0.90 per share; options granted in May 2008 were $0.90 per
share; options granted in July 2008, June 2009, August 2009 and September 2009 were $0.75 per
share. Each option vests ten years from the date of issuance or three months from termination of
employment. Each of the stock option awards were made in reliance upon the exemption from the
registration provisions of the Securities Act set forth in Rule 701 in that the securities were
offered and sold either pursuant to written compensatory benefit plans or contracts relating to
compensation.
ITEM 11. DESCRIPTION OF REGISTRANTS SECURITIES.
Common Stock
Under our Certificate of Incorporation, we are authorized to issue 150,000,000 shares of
common stock, $0.001 par value.
As of October 9, 2009, as a result of the completion of the Merger, there are 83,824,535
shares of common stock outstanding and 12,284,778 outstanding options to purchase our common stock.
The shares are held of record by approximately 350 stockholders.
Holders of our common stock are entitled to one vote per share on all matters to be voted upon
by the stockholders. Holders of our common stock are entitled to receive their proportionate share
of dividends, if any, declared from time to time by the Board of Directors out of funds legally
available for that purpose.
In the event of our liquidation, dissolution or winding up, holders of the Companys common
stock are entitled to their proportionate share of all assets remaining after payment of debt or
other liabilities of the Company. Our common stock has no preemptive or conversion rights or other
subscription rights. No redemption or sinking fund provisions apply to our common stock.
Dividend Policy
We have not declared or paid any cash dividends on shares of our common stock. We currently
intend to retain earnings, if any, to fund the development and growth 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 our financial condition, operating results, cash needs and growth plans.
Transfer Agent and Registrar
Our transfer agent and registrar is Island Stock Transfer. Our transfer agent is located at
100 Second Avenue South, Suite 300N, St. Petersburg, Florida 33701 and its telephone number is
(727) 289-0010.
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Shares Eligible for Future Sale
There is a very minimal public market for our common stock. We cannot predict how liquid the
market for our common stock might become. Our common stock will likely be thinly traded compared to
larger, more widely known companies.
Trades of our common stock are conducted on the OTC Bulletin Board. Should our common stock
be suspended from the OTC Bulletin Board, the trading price of our common stock could suffer, the
trading market for our common stock may be less liquid and our common stock price may be subject to
increased volatility.
As of the closing of the Merger, 6,000,000 shares of our common stock may be sold without
restriction under the Securities Act, however, 3,000,000 of those shares are subject to lock up
agreements for up to 180 days after the closing of the Merger. Approximately 78,000,000 of our
issued and outstanding shares of common stock, and approximately 12,000,000 shares of common stock
issuable upon exercise of outstanding options, are not eligible for resale under the Securities Act
without restriction, for a period of at least one year following the filing of this Current Report
on Form 8-K.
If our stockholders whose shares become eligible for resale do sell, or indicate an intention
to sell, substantial amounts of our common stock in the public market after the legal and
contractual restrictions on resale discussed in this filing lapse, the trading price of our common
stock could decline.
Anti-takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
Delaware Law
Pursuant to Section 203 of the Delaware General Corporation Law, or the business combination
statute, we are prohibited, as a public company, from engaging in a business combination with an
interested stockholder (defined as any person who acquires 15% or more of our common stock) for a
three-year period following the date that such person became an interested stockholder, unless, (a)
prior to the date the person became a interested stockholder, our Board of Directors approved
either the business combination or the transaction which resulted in the stockholder becoming an
interested stockholder; or (b) upon consummation of the transaction that resulted in the persons
becoming an interested stockholder, that person on owned 85% of our voting stock, excluding certain
shares owned by corporate insiders and shares issued after the transaction commenced; or (c) at or
subsequent to such time the business combination is approved by our Board of Directors and
authorized by the affirmative vote of holders of 66% of our outstanding voting stock that is not
owned by the interested stockholder. Section 203 defines business combinations to include the
following: any merger or consolidation involving the corporation and the interested stockholder;
any sale transfer, pledge or other disposition of 10% or more of the assets of the corporation
involving the interested stockholder; subject to certain exceptions,
any transaction that results; n
the issuance or transfer by the corporation of any stock of the corporation to the interested
stockholder; any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation beneficially owned by
the interested stockholder; or the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledge or other financial benefits provided by or through the
corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially
owning 15% or more of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by any of these entities or persons. A Delaware
corporation may opt out of this provision either with an express provision in its original
certificate of incorporation or in an amendment to its certificate of incorporation or bylaws
approved by its stockholders. However, we have not opted out, and do not currently intend to opt
out, of this provision. The statute could prohibit or delay mergers or other takeover, or change
in control attempts and, accordingly, may discourage attempts to acquire us.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify
directors and officers as well as other employees and individuals against expenses including
attorneys fees, judgments, fines and amounts paid in settlement in connection with various
actions, suits or proceedings, whether civil, criminal, administrative or investigative other than
an action by or in the right of the corporation, a derivative action, if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in the case of
derivative actions, except that indemnification
43
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only extends to expenses including attorneys fees
incurred in connection with the defense or settlement of such actions, and the statute requires
court approval before there can be any indemnification where the person seeking indemnification has
been found liable to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporations certificate of incorporation, bylaws,
agreement, a vote of stockholders or disinterested directors or otherwise.
Section 102 of the Delaware General Corporation Law permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
| any breach of the directors duty of loyalty to the corporation or its stockholders; | ||
| acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; | ||
| payments of unlawful dividends or unlawful stock repurchases or redemptions; or | ||
| any transaction from which the director derived an improper personal benefit. |
Our Certificate of Incorporation provides that we will indemnify and hold harmless, to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from
time to time, each person that such section grants us the power to indemnify.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The disclosure set forth under Item 9.01(a) and (b) to this Current Report on Form 8-K is
incorporated into this item by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There are no changes in and disagreements with accountants on accounting and financial
disclosures required to be disclosed by Item 304 of
Regulation S-K.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
The disclosure set forth under Item 9.01 to this Current Report on Form 8-K is incorporated
into this item by reference.
ITEM 3.02. UNREGISTERED SALES OF EQUITY SECURITIES.
Recent Sales of Unregistered Securities by the Company
The disclosure set forth in the penultimate paragraph under Item 10 in the Form 10 disclosures
contained in Item 2.01 of this Current Report on Form 8-K, regarding shares issued pursuant to the
Merger, is incorporated by reference into this Item 3.02
ITEM 5.01. CHANGES IN CONTROL OF REGISTRANT.
As a result of the Merger described in Item 2.01 to this Current Report on Form 8-K, including
the Form 10 disclosures, the stockholders of Castillo prior to the Merger own approximately 7% of
the now-outstanding voting securities of the Company and approximately 6% of the Company on a fully
diluted basis (consisting of 83,824,535 shares of common stock and options to purchase 12,284,778
shares of common stock). The former shareholders of TechniScan Utah own approximately 92% of the
issued and outstanding common stock of the Company and approximately 93% of the Company on a fully diluted basis.
The disclosure set forth under Item 2.01 of this Current Report on Form 8-K, including the
Form 10 disclosures, is incorporated into this item by reference.
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Other than the transactions and agreements disclosed in this Form 8-K, we know of no other
arrangements, which may result in a change in control.
ITEM 5.02. DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF
CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.
The disclosure set forth under Item 2.01 of this Current Report on Form 8-K, including the
Form 10 disclosures, is incorporated into this item by reference.
Stock Option Grants
The disclosure set forth under Item 6 of the Form 10 disclosures contained in Item 2.01 of
this Current Report on Form 8-K is incorporated into this item by reference.
ITEM 5.03. AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS.
Name Change
Following the consummation of the Merger, we changed our name from Castillo, Inc. to
TechniScan, Inc. In connection with the name change, we also expect to change the stock symbol
for our common stock, which is quoted on the OTC Bulletin Board. The name change was effected
through the filing of a Certificate of Ownership and Merger with the Delaware Secretary of State on
October 9, 2009, pursuant to Section 253(b) of the Delaware General Corporation Law.
ITEM 5.06. CHANGE IN SHELL COMPANY STATUS.
The disclosure set forth under Item 2.01 to this Current Report on Form 8-K is incorporated
into this item by reference. As a result of the completion of the Merger, we believe we are no
longer a shell company, as that term is defined in Rule 12(b)-2 of the Exchange Act.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
The financial statements required to be included in this Current Report on Form 8-K appear at
the end of the Form 8-K beginning on page F-1.
(b) Pro Forma Financial Information
The
pro forma financial information required to be included in this
Current Report on Form 8-K appears at the end of
the Form 8-K beginning on page F-33.
(c) Shell Company Transactions
See (a) and (b) above
(d) Exhibits
Exhibit | ||
No. | Description | |
2.1
|
Agreement and Plan of Merger, by and between TechniScan, Inc., Castillo, Inc., TechniScan Acquisition, Inc., and Emilia Ochoa, dated October 9, 2009 |
45
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Exhibit | ||
No. | Description | |
2.2
|
Agreement and Plan of Merger by and between Castillo, Inc., a Delaware corporation and Castillo, Inc., a Nevada corporation, dated September 4, 2009 | |
2.3
|
Plan of Merger by and among TechniScan, Inc. and TechniScan Acquisition, Inc., dated October 9, 2009 | |
2.4
|
Plan of Merger by and among Castillo, Inc. and TechniScan, Inc., dated October 9, 2009 | |
3.1
|
Certificate of Incorporation, filed with the Secretary of State of the State of Delaware | |
3.2
|
Bylaws | |
3.3
|
Certificate of Merger of Castillo, Inc., a Nevada corporation with and into Castillo, Inc., a Delaware corporation, filed with the State of Delaware on October 8, 2009 | |
3.4
|
Certificate of Ownership and Merger of TechniScan, Inc., with and into Castillo, Inc., filed with the State of Delaware on October 9, 2009 | |
9.1
|
Voting Agreement by and among TechniScan, Inc. and the Series E Preferred Stock holders dated February 11, 2008* | |
10.1
|
Office Building Lease by and between Shupe Investments, LTD, as landlord, and TechniScan Inc., as tenant, for lease of premises located at 3216 South Highland Drive, Salt Lake City, Utah, dated April 11, 2008* | |
10.2
|
Lease Agreement by and between 1011 LLC, as landlord, and SafeScan Medical Systems, LLC, as tenant, for lease of premises located at 1011 East Murray-Holladay Road, Salt Lake City Utah, dated September 1, 2003* | |
10.3
|
2001 Employee Stock Option Plan, as amended | |
10.4
|
Employment Offer Letter with Barry K. Hanover, dated February 4, 2002 | |
10.5
|
Form of Confidentiality, Inventions Assignment and Non-Competition Agreement between TechniScan, Inc. and employees of TechniScan, Inc.* | |
10.6
|
Form of Lock-Up Agreement | |
10.7
|
General Consulting Agreement by and between TechniScan Medical Systems, Inc. and The Anson Group, dated May 1, 2006* | |
10.8
|
Client Confidentiality & Non-Disclosure Agreement by and between TechniScan Medical Systems, Inc. and The Anson Group, dated may 3, 2006 | |
10.9
|
Original Equipment Manufacturing Agreement and Engineering Support Agreement by and between TechniScan, Inc. and Esaote, S.p.A., dated February 11, 2008* |
46
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Exhibit | ||
No. | Description | |
10.10
|
Distribution Agreement by and between TechniScan, Inc. and Esaote, S.p.A., dated February 11, 2008* | |
10.11
|
European Market Development Agreement, between Esaote, S.p.A., and TechniScan Inc., dated October 28, 2008* | |
10.12
|
Series E Preferred Stock Purchase Agreement by and Between TechniScan, Inc. and Esaote, S.p.A., dated February 11, 2008* | |
10.13
|
Letter of Understandings on Possible Amendment Agreement, between Esaote, S.p.A. and TechniScan, Inc., dated October 28, 2009 | |
10.14
|
Amendment and Restatement of The License Agreement Between University of Utah Research Foundation and TechniScan, Inc., Successor-in-Interest to Dr. Steven A. Johnson Dated August 28, 1984, dated January 10, 2002* | |
10.15
|
Professional Services Agreement, by and between TechniScan, Inc. and PCOF Partners, dated October 9, 2009 | |
17.1
|
Resignation Letter from Emilia Ochoa, dated October 9, 2009 |
* | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission. |
47
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
TECHNISCAN, INC. | ||||||
Date: October 16, 2009 |
||||||
BY: | /s/ David C. Robinson | |||||
Name: | David C. Robinson | |||||
Title: | Chief Executive Officer |
48
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INDEX TO FINANCIAL STATEMENTS
F-1 | ||||
Audited
Financial Statements of TechniScan, Inc. |
||||
F-2 | ||||
F-4 | ||||
F-5 | ||||
F-8 | ||||
F-10 | ||||
Interim Financial Statements of TechniScan, Inc. |
||||
F-22 | ||||
F-24 | ||||
F-25 | ||||
F-27 | ||||
Pro Forma
Financial Information |
||||
F-33 | ||||
F-34 | ||||
F-36 | ||||
F-38 |
49
Table of Contents
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
TechniScan, Inc.
TechniScan, Inc.
We have audited the accompanying balance sheets of TechniScan, Inc.
(the Company) as of December 31, 2008 and 2007, and the related statements of operations, stockholders equity (deficit),
and cash flows for each of two years in the period ended December 31, 2008 and for the period from January 1, 2002
(date of inception of development stage) through December 31, 2008. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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. We were not engaged to perform an
audit of the Companys internal control over financial reporting. Our audit 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 Companys 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. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audit provides 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 TechniScan, Inc. as of December 31,
2008 and 2007, and the results of its operations and its cash flows for each of the two years in the period ended December 31,
2008, and for the period from January 1, 2002 (date of inception of development stage) through December 31, 2008 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 reflected in the financial statements and as discussed in Note 1 to
the financial statements, the Company has incurred significant losses and negative cash flows from operating activities since inception, and is dependent on additional financing in order to continue its operations. These conditions, among others,
raise substantial
doubt about the Companys ability to continue as a going concern. Managements plans regarding those matters are also discussed in Note 1. The accompanying financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Tanner LC
Salt Lake City, Utah
October 9, 2009
Salt Lake City, Utah
October 9, 2009
F-1
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
December 31, | December 31, | |||||||
2008 | 2007 | |||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 269,192 | $ | 213,214 | ||||
Short-term investments |
| 213,112 | ||||||
Grants receivable |
| 83,345 | ||||||
Prepaids |
152,467 | 17,224 | ||||||
TOTAL CURRENT ASSETS |
421,659 | 526,895 | ||||||
PROPERTY AND EQUIPMENT, NET |
85,608 | 73,526 | ||||||
DEPOSITS |
28,153 | 2,500 | ||||||
TOTAL ASSETS |
$ | 535,420 | $ | 602,921 | ||||
The accompanying notes are an integral part of these financial statements.
F-2
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2008 AND 2007
December 31, | December 31, | |||||||
2008 | 2007 | |||||||
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 174,746 | $ | 198,270 | ||||
Accrued compensation payable |
119,094 | 130,383 | ||||||
Convertible note payable |
| 500,000 | ||||||
Customer deposits |
180,000 | | ||||||
TOTAL CURRENT LIABILITIES |
473,840 | 828,653 | ||||||
DEFERRED RENT |
98,546 | | ||||||
TOTAL LIABILITIES |
572,386 | 828,653 | ||||||
COMMITMENTS AND CONTINGENCIES (Notes 6 and 9) |
||||||||
STOCKHOLDERS DEFICIT |
||||||||
Series D Convertible Preferred stock - $.001
par value: 8,525,570 and 60,000,000 shares
authorized, respectively;
8,525,570 shares issued and outstanding |
8,526 | 8,526 | ||||||
Series E Convertible Preferred stock - $.001
par value: 20,000,000 and 0 shares authorized,
respectively;
4,949,175 and 0 shares issued and
outstanding, respectively |
4,949 | | ||||||
Common stock - $.001 par value: 57,416,837 and
100,000,000 shares authorized, respectively;
17,064,360 and 15,617,752
shares issued and outstanding, respectively |
17,064 | 15,618 | ||||||
Additional paid-in capital |
21,683,959 | 17,257,970 | ||||||
Deficit accumulated prior to development stage |
(389,393 | ) | (389,393 | ) | ||||
Deficit accumulated in the development stage |
(21,362,071 | ) | (17,118,453 | ) | ||||
TOTAL STOCKHOLDERS DEFICIT |
(36,966 | ) | (225,732 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS
DEFICIT |
$ | 535,420 | $ | 602,921 | ||||
The accompanying notes are an integral part of these financial statements.
F-3
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE)
THROUGH DECEMBER 31, 2008
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE)
THROUGH DECEMBER 31, 2008
For the | ||||||||||||
Period From | ||||||||||||
For the | For the | January 1, 2002 | ||||||||||
Year Ended | Year Ended | Through | ||||||||||
December 31, 2008 | December 31, 2007 | December 31, 2008 | ||||||||||
Government grant revenues |
$ | 653,061 | $ | 1,314,505 | $ | 2,184,373 | ||||||
Related party research revenues |
120,000 | | 120,000 | |||||||||
Total revenue |
773,061 | 1,314,505 | 2,304,373 | |||||||||
Operating expenses: |
||||||||||||
Direct grant expense |
518,150 | 581,670 | 1,252,807 | |||||||||
Research and development expense |
2,803,584 | 1,120,240 | 11,199,986 | |||||||||
Selling, general and adminsistrative expense |
1,715,048 | 1,431,746 | 10,821,076 | |||||||||
Total operating expenses |
5,036,782 | 3,133,656 | 23,273,869 | |||||||||
Loss from operations |
(4,263,721 | ) | (1,819,151 | ) | (20,969,496 | ) | ||||||
Interest income |
18,399 | 19,700 | 54,465 | |||||||||
Interest expense |
(757 | ) | (1,279 | ) | (449,501 | ) | ||||||
Gain on sale of property and equipment |
2,461 | | 2,461 | |||||||||
Loss before income taxes |
(4,243,618 | ) | (1,800,730 | ) | (21,362,071 | ) | ||||||
Income taxes |
| | | |||||||||
Net loss |
$ | (4,243,618 | ) | $ | (1,800,730 | ) | $ | (21,362,071 | ) | |||
Net loss per common share (basic and diluted) |
$ | (0.26 | ) | $ | (0.11 | ) | ||||||
Weighted average number of common shares
outstanding (basic and diluted) |
16,103,979 | 15,738,739 | ||||||||||
The accompanying notes are an integral part of these financial statements.
F-4
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) - (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE)
THROUGH DECEMBER 31, 2008
THROUGH DECEMBER 31, 2008
Additional | ||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, as of January 1, 2002 |
1,865,428 | $ | 1,865 | 8,058,488 | $ | 8,059 | $ | 547,616 | $ | (389,393 | ) | $ | 168,147 | |||||||||||||||
Issuance of Series A preferred stock
(at $0.20 per share) |
| | 1,600,000 | 1,600 | 318,400 | | 320,000 | |||||||||||||||||||||
Issuance of Series B preferred stock
(at $0.30 per share) |
| | 5,968,335 | 5,968 | 1,784,532 | | 1,790,500 | |||||||||||||||||||||
Issuance of common stock
for services (at $0.25 per share) |
142,857 | 143 | | | 34,857 | | 35,000 | |||||||||||||||||||||
Stock-based compensation |
| | | | 37,143 | | 37,143 | |||||||||||||||||||||
Net loss |
| | | | | (1,625,040 | ) | (1,625,040 | ) | |||||||||||||||||||
Balance, as of December 31, 2002 |
2,008,285 | 2,008 | 15,626,823 | 15,627 | 2,722,548 | (2,014,433 | ) | 725,750 | ||||||||||||||||||||
Issuance of common stock
(at $1.00 and $1.50 per share) |
470,568 | 471 | | | 525,098 | | 525,569 | |||||||||||||||||||||
Stock-based compensation |
| | | | 56,369 | | 56,369 | |||||||||||||||||||||
Net loss |
| | | | | (1,838,611 | ) | (1,838,611 | ) | |||||||||||||||||||
Balance, as of December 31, 2003 |
2,478,853 | 2,479 | 15,626,823 | 15,627 | 3,304,015 | (3,853,044 | ) | (530,923 | ) | |||||||||||||||||||
Issuance of common stock
(at $1.00 per share) |
4,688,001 | 4,688 | | | 4,683,312 | | 4,688,000 | |||||||||||||||||||||
Conversion of note payable and
accrued interest to common stock
(at $1.00 per share) |
493,607 | 494 | | | 493,113 | | 493,607 | |||||||||||||||||||||
Stock-based compensation |
| | | | 50,136 | | 50,136 | |||||||||||||||||||||
Net loss |
| | | | | (3,157,701 | ) | (3,157,701 | ) | |||||||||||||||||||
Balance, as of December 31, 2004 |
7,660,461 | $ | 7,661 | 15,626,823 | $ | 15,627 | $ | 8,530,576 | $ | (7,010,745 | ) | $ | 1,543,119 |
The accompanying notes are an integral part of these financial statements.
F-5
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) - (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE)
THROUGH DECEMBER 31, 2008
THROUGH DECEMBER 31, 2008
Additional | ||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, as of December 31, 2004 |
7,660,461 | $ | 7,661 | 15,626,823 | $ | 15,627 | $ | 8,530,576 | $ | (7,010,745 | ) | $ | 1,543,119 | |||||||||||||||
Conversion of preferred stock to
common stock (at $0.50 and
$0.75 per share) |
6,250,738 | 6,250 | (15,626,823 | ) | (15,627 | ) | 9,377 | | | |||||||||||||||||||
Issuance of common stock
(at $1.00 and $1.50 per share) |
2,187,999 | 2,188 | | | 2,592,312 | | 2,594,500 | |||||||||||||||||||||
Issuance of common stock upon
exercise of stock options
(at $0.42 per share) |
104,800 | 105 | | | 43,855 | | 43,960 | |||||||||||||||||||||
Stock-based compensation |
| | | | 20,700 | | 20,700 | |||||||||||||||||||||
Proceeds from debt allocated to
common stock warrants and
beneficial conversion feature |
| | | | 213,334 | | 213,334 | |||||||||||||||||||||
Common stock warrants issued to
non-employees |
| | | | 15,893 | | 15,893 | |||||||||||||||||||||
Net loss |
| | | | | (4,986,234 | ) | (4,986,234 | ) | |||||||||||||||||||
Balance, as of December 31, 2005 |
16,203,998 | 16,204 | | | 11,426,047 | (11,996,979 | ) | (554,728 | ) | |||||||||||||||||||
Issuance of common stock,
net of issuance costs of $25,489
(at $0.40, $1.00 and $1.50 per share) |
1,215,466 | 1,215 | | | 1,211,496 | | 1,212,711 | |||||||||||||||||||||
Issuance of Series D preferred stock,
net of issuance costs of $38,024
(at $0.75 per share) |
| | 1,540,682 | 1,541 | 1,115,948 | | 1,117,489 | |||||||||||||||||||||
Issuance of common stock upon
exercise of stock options
(at $0.67 per share) |
9,917 | 10 | | | 6,611 | | 6,621 | |||||||||||||||||||||
Stock-based compensation |
| | | | 53,600 | | 53,600 | |||||||||||||||||||||
Re-pricing of common stock warrants
issued to non-employees |
| | | | 70,695 | | 70,695 | |||||||||||||||||||||
Re-pricing of common stock warrants
issued to employees |
| | | | 537,545 | | 537,545 | |||||||||||||||||||||
Conversion of note payable and accrued
interest to Series D preferred stock
(at $0.75 per share) |
| | 2,157,630 | 2,157 | 1,616,067 | | 1,618,224 | |||||||||||||||||||||
Net loss |
| | | | | (3,710,137 | ) | (3,710,137 | ) | |||||||||||||||||||
Balance, as of December 31, 2006 |
17,429,381 | $ | 17,429 | 3,698,312 | $ | 3,698 | $ | 16,038,009 | $ | (15,707,116 | ) | $ | 352,020 |
The accompanying notes are an integral part of these financial statements.
F-6
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) - (CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE)
THROUGH DECEMBER 31, 2008
THROUGH DECEMBER 31, 2008
Additional | ||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, as of December 31, 2006 |
17,429,381 | $ | 17,429 | 3,698,312 | $ | 3,698 | $ | 16,038,009 | $ | (15,707,116 | ) | $ | 352,020 | |||||||||||||||
Issuance of Series D preferred stock,
net of issuance costs of $27,343
(at $0.75 per share) |
| | 1,570,327 | 1,570 | 1,148,833 | | 1,150,403 | |||||||||||||||||||||
Conversion of common stock to
Series D preferred stock
(at $0.75 per share) |
(2,013,465 | ) | (2,013 | ) | 3,256,931 | 3,258 | (1,245 | ) | | | ||||||||||||||||||
Issuance of common stock upon
exercise of stock warrants
(at $0.05 per share) |
201,836 | 202 | | | 9,890 | | 10,092 | |||||||||||||||||||||
Stock-based compensation |
| | | | 62,483 | | 62,483 | |||||||||||||||||||||
Net loss |
| | | | | (1,800,730 | ) | (1,800,730 | ) | |||||||||||||||||||
Balance, as of December 31, 2007 |
15,617,752 | 15,618 | 8,525,570 | 8,526 | 17,257,970 | (17,507,846 | ) | (225,732 | ) | |||||||||||||||||||
Issuance of Series E preferred stock
for cash, net of issuance costs of
$112,034
(at $0.90 per share) |
| | 3,282,506 | 3,282 | 2,838,939 | | 2,842,221 | |||||||||||||||||||||
Issuance of Series E preferred stock
for future services
(at $0.90 per share) |
| | 1,111,111 | 1,111 | 998,889 | | 1,000,000 | |||||||||||||||||||||
Conversion of notes payable to
Series E preferred stock
(at $0.90 per share) |
| | 555,558 | 556 | 499,444 | | 500,000 | |||||||||||||||||||||
Issuance of common stock upon
exercise of stock warrants
(at $0.05 per share) |
1,446,608 | 1,446 | | | 70,886 | | 72,332 | |||||||||||||||||||||
Stock-based compensation |
| | | | 17,831 | | 17,831 | |||||||||||||||||||||
Net loss |
| | | | | (4,243,618 | ) | (4,243,618 | ) | |||||||||||||||||||
Balance, as of December 31, 2008 |
17,064,360 | $ | 17,064 | 13,474,745 | $ | 13,475 | $ | 21,683,959 | $ | (21,751,464 | ) | $ | (36,966 | ) | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-7
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH DECEMBER 31, 2008
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH DECEMBER 31, 2008
For the | ||||||||||||
Period From | ||||||||||||
For the | For the | January 1, 2002 | ||||||||||
Year Ended | Year Ended | Through | ||||||||||
December 31, 2008 | December 31, 2007 | December 31, 2008 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net loss |
$ | (4,243,618 | ) | $ | (1,800,730 | ) | $ | (21,362,071 | ) | |||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||||||
Depreciation and amortization of property and equipment |
44,040 | 72,736 | 420,458 | |||||||||
Impairment of intangible assets |
| | 14,179 | |||||||||
Gain on sale of property and equipment |
(2,461 | ) | | (2,391 | ) | |||||||
Non-cash interest expense |
| | 383,610 | |||||||||
Stock-based compensation expense |
17,831 | 62,483 | 886,696 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Decrease in accounts receivable |
| | 267 | |||||||||
(Increase) decrease in government
grant receivables |
83,345 | (83,345 | ) | | ||||||||
Decrease in inventory |
| | 61,649 | |||||||||
(Increase) decrease in prepaids |
864,757 | (17,224 | ) | 819,379 | ||||||||
Increase in other non-current assets |
(25,653 | ) | | | ||||||||
Increase (decrease) in accounts payable |
(23,524 | ) | 47,356 | 110,064 | ||||||||
Increase (decrease) in accrued compensation |
(11,289 | ) | 17,156 | 106,330 | ||||||||
Increase in customer deposits |
180,000 | | 180,000 | |||||||||
Increase in deferred rent liability |
98,546 | | 98,546 | |||||||||
NET CASH USED IN OPERATING ACTIVITIES |
(3,018,026 | ) | (1,701,568 | ) | (18,283,284 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||
Proceeds from sale of (purchase of) investments |
213,112 | (213,112 | ) | | ||||||||
Proceeds from sale of property and equpment |
| | 4,000 | |||||||||
Purchase of property and equipment |
(53,661 | ) | (3,871 | ) | (403,791 | ) | ||||||
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES |
159,451 | (216,983 | ) | (399,791 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||
Principal payments on debt |
| | (79,292 | ) | ||||||||
Proceeds from exercise of stock options and warrants and
from issuance of stock, net of issuance costs |
2,914,553 | 1,160,495 | 16,486,385 | |||||||||
Proceeds from issuance of convertible notes and loans |
| 500,000 | 2,400,000 | |||||||||
NET CASH PROVIDED BY
FINANCING ACTIVITIES |
2,914,553 | 1,660,495 | 18,807,093 | |||||||||
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS |
55,978 | (258,056 | ) | 124,018 | ||||||||
The accompanying notes are an integral part of these financial statements.
F-8
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007, AND FOR THE PERIOD
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH DECEMBER 31, 2008
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH DECEMBER 31, 2008
For the | ||||||||||||
Period From | ||||||||||||
For the | For the | January 1, 2002 | ||||||||||
Year Ended | Year Ended | Through | ||||||||||
December 31, 2008 | December 31, 2007 | December 31, 2008 | ||||||||||
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD |
$ | 213,214 | $ | 471,270 | $ | 145,174 | ||||||
CASH AND CASH EQUIVALENTS
AT END OF PERIOD |
$ | 269,192 | $ | 213,214 | $ | 269,192 | ||||||
CASH PAID DURING THE PERIOD FOR: |
||||||||||||
Interest |
$ | 110 | $ | 672 | $ | 13,584 | ||||||
NON-CASH INVESTING AND
FINANCING ACTIVITIES: |
||||||||||||
Issuance of Series E Convertible Preferred stock
for future services |
$ | 1,000,000 | $ | | $ | 1,000,000 | ||||||
Conversion of notes payable, including accrued
interest, to common or preferred stock |
$ | 500,000 | $ | | $ | 2,611,831 | ||||||
The accompanying notes are an integral part of these financial statements.
F-9
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. | ORGANIZATION AND BASIS OF PRESENTATION |
Description of Business
TechniScan, Inc. (the Company), a Utah corporation, is a specialty medical imaging company engaged in the research, development, and commercialization of innovative products
for the detection and diagnosis of breast cancer. The Company is in the development stage, as it has not generated significant revenues. The Companys commercial focus is the development of an ultrasound-based
product called the Whole Breast Ultrasound (WBU) system that is expected to provide radiologists with unique information about the bulk properties of tissue in the breast as well as clear images of the tissue structure.
TechniScan, Inc. was incorporated in 1984 for the sole purpose of performing research. The development stage began January 1, 2002 when the Company was capitalized for
the research, development, and commercialization of innovative medical imaging products for the detection and diagnosis of breast cancer.
Going Concern
Since entering the development stage, the Company has not generated revenues in excess of costs and has been dependent on government grants and equity raised from individual
investors to sustain its operations. The Whole Breast Ultrasound (WBU) product has not yet been approved by the U.S. Food and Drug Administration for commercial sale. Therefore, the Company has not generated any revenues from product sales. The
Company has
incurred losses and used cash in operating activities since entering the development stage. As of December 31, 2008, the Company had an accumulated deficit of $21,751,464, and negative working capital. These factors, among others, raise
substantial doubt about the Companys ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
There can be no assurance that the Companys planned private sales of debt and equity securities will be successful or that the Company will have the ability to
commercialize its imaging system and ultimately attain profitability. The Companys long-term viability as a going concern is dependent on three key factors:
| The Companys ability to obtain adequate sources of debt or equity funding to meet current commitments and fund the commercialization of its imaging system. | ||
| The ability of the Company to obtain regulatory approval from the U.S. Food and Drug Administration and other regulatory agencies for commercial distribution of the Whole Breast Ultrasound (WBU) system. | ||
| The ability of the Company to achieve adequate profitability and cash flows to sustain its operations. |
F-10
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are presented on the accrual basis in accordance with
U.S. generally accepted accounting principles.
Revenue Recognition
The Companys revenues are sourced from federal research grants and private and government
research contracts. The Company recognizes revenues when services have been provided and
invoiced to the government or other research partners. The U.S. Food and Drug Administration
has not yet approved the Whole Breast Ultrasound (WBU) product for
commercial sale. Therefore, the Company has not yet generated any revenues from product sales.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid
investments available for current use with an initial maturity of three months or less to be
cash equivalents. Cash equivalents consist primarily of money market funds.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk
consist principally of cash, cash equivalents, and accounts receivable. Risks associated with
cash and cash equivalents are mitigated by banking with federally insured, creditworthy
institutions; however, deposits may at times exceed federally insured limits. There were no
grants or accounts receivable as of December 31, 2008.
Inventory
Inventory is stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method. Inventory consists of raw materials and work in process.
As appropriate, provisions are made to reduce inventories to their net realizable value. The
cost of inventories that potentially may not sell prior to expiration or are deemed to have no
commercial value are written-off when identified. Inventories have no value as of December 31,
2008 and 2007.
Patent Costs
Since entering the development stage, legal costs incurred to register patents have been
expensed as incurred due to the uncertainty surrounding future cash flows and future benefits
to be realized from the patents.
F-11
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization.
Maintenance and repairs that do not extend the life or improve the asset are expensed in the
year incurred. Depreciation and amortization are provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is used for financial statement reporting purposes for all
asset classes. The cost of property and equipment is depreciated or amortized over the
following estimated useful lives:
Asset Classification | Estimated useful lives | |
Machinery, furniture and fixtures
|
3-7 years | |
Leasehold improvements
|
Lesser of 5 years or remaining leasehold period |
Stock-Based Compensation
The Company calculates the estimated value of its stock options on the grant date. The Company
measures compensation cost of employee stock options based on the calculated value instead of
the fair value because it is not practical to estimate the volatility of the share price. The
Company does not maintain an internal market for its shares. The calculated value method
requires that the volatility assumption used in an option-pricing model be based on the
historical volatility of an appropriate industry sector index.
The Company uses the Black-Scholes option-pricing model to estimate the calculated value of its
share-based payments. The volatility assumption used in the Black-Scholes option-pricing model
is based on the volatility of the Dow Jones Small Cap Medical Equipment Index. The Company
calculated the historical volatility of that index using the daily closing total returns for
that index for a period of time equal to the expected term of the options immediately prior to
the grant date. The Company uses historical data to estimate option exercise and employee
termination patterns. The expected term of the options granted represents the period of time
that options granted are expected to be outstanding. The risk free rate for periods within the
contractual life of the option is based on the U.S. treasury securities constant maturity rate
that corresponds to the expected term in effect at the time of grant.
Use of Estimates
In preparing the financial statements in accordance with U.S. generally accepted accounting
principles, management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value Measurements
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurement, establishes
a framework for measuring fair value and clarifies the definition of fair value within that
framework. The fair value of investments reflects the amounts estimated to be received in
connection with the
F-12
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Measurements (Continued)
sale of the investment in an orderly transaction between market participants at the measurement
date (exit price). SFAS No. 157 establishes a fair value hierarchy that prioritizes the use of
inputs used in valuation techniques into three levels. Level 1 inputs are quoted prices in
active markets for identical assets and liabilities. Level 2 inputs include quoted prices for
similar assets or liabilities in active markets, quoted prices for identical or similar assets
or liabilities that are not active, and inputs other than quoted prices that are observable for
the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs
for the asset or liability.
Quoted market prices have been used to determine the fair value of money market funds, which
have been classified as cash equivalents (Level 1) and investments (Level 1).
The following table provides information by level for investments that are measured at fair
value as of December 31, 2008 and 2007, as defined by SFAS No. 157.
December 31, 2008 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents |
$ | 153,534 | $ | | $ | | $ | 153,534 |
December 31, 2007 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents |
$ | 194,249 | $ | | $ | | $ | 194,249 | ||||||||
Short-term investments |
213,112 | | | 213,112 | ||||||||||||
TOTAL |
$ | 407,361 | $ | | $ | | $ | 407,361 | ||||||||
Income Taxes
The Company recognizes a liability or asset for the deferred income tax consequences of all
temporary differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible amounts in future
years when the reported amounts of the assets and liabilities are recovered or settled. These
deferred income tax assets or liabilities are measured using the enacted tax rates that will be
in effect when the differences are expected to reverse. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred income tax assets are reviewed periodically for
recoverability, and valuation allowances are provided when it is more likely than not that some
or all of the deferred income tax assets may not be realized. The Company has provided a
valuation allowance against all of its net deferred income tax assets because of its history of
net operating losses and the uncertainties regarding future operating profitability and taxable
income.
F-13
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss Per Common Share
Basic net income or loss per common share (Basic EPS) is computed by dividing net income or
loss by the weighted average number of common shares outstanding. Diluted net income or loss
per common share (Diluted EPS) is computed by dividing net income or loss by the sum of the
weighted average number of common shares outstanding and the dilutive potential common share
equivalents then outstanding. Potential common share equivalents consist of the weighted
average number of shares issuable upon the exercise of outstanding stock options and warrants
to acquire common stock, and shares issuable upon conversion of preferred stock. If these
potential common share equivalents are dilutive, the Company computes Diluted EPS using the
treasury stock method.
Due to the fact that for all periods presented the Company has incurred net losses, common
share equivalents of 36,258,805 and 30,518,296 for the years ended December 31, 2008 and 2007,
respectively, are not included in the calculation of Diluted EPS because they are
anti-dilutive.
3. PROPERTY AND EQUIPMENT
The Company periodically evaluates the carrying value of property and equipment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. If the expected future undiscounted cash flows are
less than the carrying amount of the asset, a loss is recognized for the difference between the
fair value and the carrying value of the asset.
Property and equipment consisted of the following as of:
December 31, 2008 | December 31, 2007 | |||||||
Equipment, computers and furniture |
$ | 458,056 | $ | 432,196 | ||||
Leasehold improvements |
3,591 | 13,452 | ||||||
Vehicles |
| 16,442 | ||||||
461,647 | 462,090 | |||||||
Less: accumulated depreciation and amortization |
(376,039 | ) | (388,564 | ) | ||||
Property and equipment, net |
$ | 85,608 | $ | 73,526 | ||||
F-14
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE NOTES AND LOANS
In November 2007, the Company received $500,000 in connection with the issuance of unsecured
short-term, convertible subordinated promissory notes, all of which were sourced from members
of the board of directors. These notes did not bear interest and carried an automatic
conversion feature into Series E Preferred Stock of the Company, contingent upon the successful
completion of an equity financing in an aggregate amount not less than $3,000,000 by February
15, 2008; otherwise, the notes covert into common shares at $0.90 per share. In February 2008,
the Company completed a closing for the sale of Series E Convertible Preferred Stock.
Accordingly, these notes were converted into 555,558 shares of Series E Convertible Preferred
Stock at $0.90 per share.
5. INCOME TAXES
As of December 31, 2008 and December 31, 2007, the Company had federal and state net operating
loss carryforwards of approximately $20,205,000 and $16,256,000, respectively. The net
operating loss carryforwards will expire beginning in 2020 through 2028, if not utilized. As of
December 31, 2007, the Company had a federal research and development credit carryforward of
approximately $646,000 which will fully expire in 2027, if not utilized. The research and
development credit has not yet been determined for 2008.
Utilization of the net operating losses will likely be subject to substantial annual
limitations due to the change of ownership provisions of the Internal Revenue Code and
similar state provisions. The annual limitation may result in the expiration of net operating
loss carryforwards before utilization.
As of December 31, 2008 and December 31, 2007, the Company had deferred income tax assets of
approximately $8,379,000 and $6,703,000, respectively. Realization of the deferred income tax
assets is dependent upon future taxable income, if any, the amount of which is uncertain.
Accordingly, the net deferred income tax assets have been fully offset by a valuation
allowance. The net valuation allowance increased by approximately $1,675,000 and $671,000
during the years ended December 31, 2008 and December 31, 2007, respectively. Deferred income
tax assets relate primarily to net operating loss carryforwards and tax credits.
6. COMMITMENTS AND CONTINGENCIES
The Company leases approximately 16,000 square feet of office and manufacturing space in Salt
Lake City, Utah. The lease expires in May 2018. Total lease expense was approximately $125,000
and $181,000 for the years ended December 31, 2008 and 2007, respectively. The future
operating lease obligations are as follows:
Year Ending December 31, | ||||
2009 |
$ | 256,304 | ||
2010 |
291,225 | |||
2011 |
297,050 | |||
2012 |
302,991 | |||
2013 |
309,051 | |||
Thereafter |
1,439,508 |
F-15
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
During 2007 and through May 2008, the Company operated from a building leased from a director
of the Company. Rent expense to this related party was $50,000 and $180,847 for 2008 and 2007,
respectively. In June 2008, the Company moved to new offices (see Note 6).
In 2008, the Company paid $30,642 to a Company owned by a member of the Board of Directors for
professional services.
During the year ended December 31, 2008, the Company recorded $120,000 of other research
revenues in conjunction with the shipment of a prototype system per the terms of a product
development agreement with a European ultrasound equipment manufacturer, which is also an 11%
preferred stockholder of the Company.
8. STOCKHOLDERS EQUITY (DEFICIT)
Preferred Stock
During 2006 and 2007, the Company offered the sale of Series D Convertible Preferred Stock
(Series D). During 2008, the Company offered the sale of Series E Convertible Preferred Stock
(Series E). On February 11, 2008, the Articles of Incorporation of the Company were amended
to change the number of shares of preferred stock authorized. As of December 31, 2008 and 2007,
there were 8,525,570 and 60,000,000 shares, respectively, of Series D preferred stock
authorized and 8,525,570 shares outstanding at the end of each year. As of December 31, 2008
and 2007, there were 20,000,000 and 0 shares, respectively, of Series E preferred stock
authorized and 4,949,175 and 0 shares outstanding, respectively.
Conversion Privileges
The holders of Series D and Series E have the right to convert their preferred shares, at any
time, into shares of common stock of the Company. As of December 31, 2008, the conversion rate
was 1 to 1.
Each share of Series D and Series E is automatically converted into shares of common stock,
based upon the current conversion rate, immediately upon the affirmative election of the
holders of at least 60 percent of the outstanding shares of preferred stock or at the closing
of a fully underwritten public offering under the Securities Act of 1933, as amended, in which
the price per share is at least twice the original offering price (adjusted for stock splits
and the like) and that results in gross proceeds to the Company of at least $10,000,000.
The conversion rate of Series E decreases if the Company issues or is deemed to have
issued shares of common stock without consideration or for a consideration per share less than
the applicable conversion rate then in effect, which is $0.90 as of December 31, 2008.
Voting Rights
Series D and Series E stockholders are entitled to vote all matters with the common stock
stockholders and are entitled to the number of votes equal to the number of common shares into
which their preferred shares are convertible.
F-16
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS EQUITY (DEFICIT) (CONTINUED)
Voting Rights (Continued)
Series D stockholders have the right to elect one member to the Board of Directors. Series E
stockholders have the right to elect two members to the Board of Directors with one director
being a representative of the lead investor who will also serve on the audit committee.
Liquidation Preferences
In the event of any liquidation or winding up of the Company, the holders of Series D and
Series E shall be entitled to receive in preference to the holders of all other capital stock a
per share amount equal to their original purchase price of $0.75 and $0.90 per share,
respectively ($10,848,434 and $6,394,177 as of December 31, 2008 and 2007, respectively).
Dividends
Each share of Series D and Series E is entitled to participate in dividends, including stock
dividends, as and when declared, on the same basis as a share of common stock. However, holders
of Series D and Series E shall not be entitled to receive any preferential distribution other
than the liquidation preference.
Common Stock
On February 11, 2008, the Articles of Incorporation of the Company were amended to change the
number of shares of common stock authorized. As of December 31, 2008 and 2007, there were
57,416,837 and 100,000,000 shares of common stock authorized and 17,064,360 and 15,617,752
shares outstanding, respectively.
As of December 31, 2008 and 2007, the Company had 7,801,936 and 9,323,726 shares, respectively,
of its common stock reserved for the exercise of outstanding stock options and warrants.
As of December 31, 2008 and 2007, the Company had 28,525,570 and 14,500,000 shares,
respectively, of its common stock reserved for issuance upon conversion of Series D and Series
E Preferred Stock.
Stock Options
The Company has granted options to employees under the Companys Comprehensive Management
Incentive Plan (the Plan), which was established in 2001. The Plan was amended in January 2008
to limit the number of options authorized to 18 percent of the total outstanding common and
preferred shares following the initial issuance of Series E Preferred Stock. With the initial
issuance of Series E Preferred Stock in February 2008, the number of options authorized was
5,236,649.
The Board authorized Company management to grant to eligible participants either non-qualified
stock options or incentive stock options to purchase shares of common stock. The non-qualified
stock options have been granted with an exercise price at 70% of the stock price of the most
recent private placement offering, while incentive stock options have been granted with an
exercise price equal to the stock price of the most recent private placement offering. Options
granted under the Plan vest over periods ranging from six months to four years. The options
will expire ten years from the grant date or from three to six months after termination of
employment.
F-17
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS EQUITY (DEFICIT) (CONTINUED)
Stock Options (Continued)
As of December 31, 2008 and 2007, there was $43,979 and $33,758, respectively, of total
unrecognized compensation cost related to non-vested share-based compensation arrangements
granted under the Plan. The total fair value of shares vested during the years ended December
31, 2008 and 2007 was $15,483 and $0, respectively. A summary of stock option activity and
related information is presented below:
Year ended December 31, 2008 | ||||||||||||||||
Weighted average | Average remaining | Aggregate | ||||||||||||||
Options | exercise price | contractual term (years) | intrinsic value | |||||||||||||
Outstanding - beginning of period |
3,450,639 | $ | 0.77 | |||||||||||||
Granted |
980,000 | 0.89 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(59,000 | ) | 0.87 | |||||||||||||
Outstanding - end of period |
4,371,639 | 0.79 | 6.36 | $ | 415,731 | |||||||||||
Exercisable - end of period |
2,996,691 | 0.77 | 5.22 | 390,461 | ||||||||||||
Year ended December 31, 2007 | ||||||||||||||||
Weighted average | Average remaining | Aggregate | ||||||||||||||
Options | exercise price | contractual term (years) | intrinsic value | |||||||||||||
Outstanding - beginning of period |
2,675,952 | $ | 0.79 | |||||||||||||
Granted |
788,000 | 0.69 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(13,313 | ) | 1.35 | |||||||||||||
Outstanding - end of period |
3,450,639 | 0.77 | 6.59 | $ | 416,231 | |||||||||||
Exercisable - end of period |
2,444,695 | 0.76 | 5.75 | 371,021 | ||||||||||||
The following assumptions were used to estimate the fair value of options granted in 2008:
Expected volatility |
20.19%-20.50% | |||
Expected dividends |
0.00% | |||
Expected term |
9 years | |||
Risk free rate |
3.46%-3.95% |
Stock Warrants
The Company has granted warrants to purchase common stock to directors, employees, consultants,
clinical advisors, and investors. The warrants granted to directors and clinical advisors vest
over the period of one year in connection with quarterly meetings and will expire in ten years.
All other warrants are fully vested on the grant date and will expire in the range of four to
ten years.
From January 2002 to December 2008, the Company granted 1,061,072 warrants to purchase common
stock to employees and board members. These warrants were granted with exercise prices ranging
from $0.05 to $1.50 per share.
F-18
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS EQUITY (DEFICIT) (CONTINUED)
Stock Warrants (Continued)
From January 2002 to December 2008, the Company granted 244,350 warrants to purchase common
stock to consultants, clinical advisors and an investor. These warrants were granted with
exercise prices ranging from $0.75 to $1.00 per share.
On January 31, 2002, in conjunction with an offering of Series A Convertible Preferred Stock,
the Company granted 40,000 warrants to purchase Series A Convertible Preferred Stock with an
exercise price of $0.50 per share to an investor. On January 31, 2005, these warrants were
converted to warrants to purchase common stock.
During the period from October 2003 through February 2005, in conjunction with a private
placement of common stock, the Company granted 1,515,750 warrants to purchase common stock with
an exercise price of $1.00 per share to investors.
On June 9, 2006, the Companys board of directors approved the reduction of the exercise price
to $0.40 per share for all outstanding warrants. The total incremental compensation cost
resulting from this modification amounted to $159,156 in 2006.
From October 18, 2006 through May 8, 2007, in conjunction with an offering of Series D
Convertible Preferred Stock, the Company granted 636,796 warrants to purchase common stock with
an exercise price of $0.05 per share to investors.
On December 31, 2006, in conjunction with the conversion of convertible notes issued in July
and September 2005 to investors, the Company granted 215,763 warrants to purchase common stock
with an exercise price of $0.05 per share.
In conjunction with the acceptance of the term sheet for an offering of Series D Convertible
Preferred Stock on December 31, 2006, the board of directors approved the reduction of the
exercise price to $0.05 per share for all outstanding warrants to purchase common stock. The
total incremental compensation cost resulting from this modification amounted to $449,084 in
2006.
During 2007, warrant holders exercised their rights to purchase 201,836 shares of common stock
at $0.05 per share for net proceeds to the Company of $10,092.
In 2008 and 2007, 224,000 and 140,000 warrants were issued to members of the board of directors
and consultants resulting in stock-based compensation of $2,344 and $50,489, respectively.
In February 2008, in conjunction with the purchase of Series E Convertible Preferred Stock, the
Company granted 500,000 warrants to the lead investor to purchase common stock with an exercise
price of $0.75 per share.
During 2008, warrant holders exercised their rights to purchase 1,446,608 shares of common
stock at $0.05 per share for net proceeds to the Company of $72,331.
F-19
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS EQUITY (DEFICIT) (CONTINUED)
Stock Warrants (Continued)
A summary of warrant activity and related information is presented below:
Year ended December 31, 2008 | Year ended December 31, 2007 | |||||||||||||||
Weighted average | Weighted average | |||||||||||||||
Warrants | exercise price | Warrants | exercise price | |||||||||||||
Outstanding - beginning of period |
3,287,895 | $ | 0.05 | 2,865,804 | $ | 0.05 | ||||||||||
Granted |
724,000 | 0.75 | 623,927 | 0.05 | ||||||||||||
Exercised |
(1,446,608 | ) | 0.05 | (201,836 | ) | 0.05 | ||||||||||
Outstanding - end of period |
2,565,287 | 0.25 | 3,287,895 | 0.05 | ||||||||||||
Exercisable - end of period |
2,565,287 | 0.25 | 3,287,895 | 0.05 | ||||||||||||
Stock-based compensation expense totaled $17,831 and $62,483 for the years ended December 31,
2008 and 2007, respectively, and is included in selling, general and administrative expense in
the accompanying statement of operations.
9. SUBSEQUENT EVENTS
Subsequent to December 31, 2008, the board of directors approved a modification to the terms of
the Series E Preferred Stock offering, extending the second closing to March 31, 2009 and the
third closing to December 31, 2009. The new terms also provided for the issuance of warrants
to purchase common stock at $0.75 per share to each investor that participates in the second
closing in an amount equal to the number of shares of Series E Preferred Stock purchased in the
second closing. Additionally, the new terms provided rights to investors that participate in
the second and third closings to convert their investment to any new securities offered prior
to December 31, 2009.
Subsequent to December 31, 2008, a second closing of the Series E Preferred Stock offering was
completed, providing the Company with proceeds of $534,468 for the issuance of 593,854 shares
of Series E Preferred Stock and 593,854 warrants to purchase common stock at $0.75 per share.
The Company completed a merger on October 9, 2009 with Castillo, Inc. Castillo, Inc.s shares
are quoted on the OTC Bulletin Board. This transaction is expected to be accounted for as a
reverse acquisition.
F-20
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (CONTINUED)
Subsequent to December 31, 2008, the third closing of the Series E Preferred Stock offering was
completed, with funds being received on September 15, 2009. The Company incentivized its
Series E Preferred Stock investors by offering the same warrant terms as those offered in
connection with the second closing in that each investor meeting the minimum investment
criteria received warrants to purchase common shares in the number of shares equal to those
purchased in connection with the third closing at an exercise price of $0.75 per share. The
Series E Preferred Stock third closing was completed with a total investment of $853,751 for
948,613 shares of the Companys Series E Preferred Stock, which includes the additional
investment of $72,240 for 80,267 shares of Series E Preferred Stock which was allowed under the
terms of the Second Amendment to the Series E Preferred Stock Subscription Agreement. Warrants
to purchase 868,346 shares of the Companys common stock were issued at the completion of the
third closing.
Subsequent to December 31, 2008, the Company issued a private placement memorandum in
connection with an offering of up to 5,000,000 shares of the Companys common stock at $0.75
per share. As of October 9, 2009, the Company had raised $1,047,810 through this offering
process.
F-21
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF JUNE 30, 2009 AND DECEMBER 31, 2008
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 78,398 | $ | 269,192 | ||||
Accounts receivable |
200,000 | | ||||||
Prepaid expenses |
136,508 | 152,467 | ||||||
TOTAL CURRENT ASSETS |
414,906 | 421,659 | ||||||
PROPERTY AND EQUIPMENT, NET |
65,411 | 85,608 | ||||||
DEPOSITS |
28,153 | 28,153 | ||||||
TOTAL ASSETS |
$ | 508,470 | $ | 535,420 | ||||
See accompanying notes to condensed financial statements.
F-22
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEETS (UNAUDITED) (CONTINUED)
AS OF JUNE 30, 2009 AND DECEMBER 31, 2008
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 187,832 | $ | 174,746 | ||||
Accrued compensation payable |
142,531 | 119,094 | ||||||
Customer deposits |
380,000 | 180,000 | ||||||
TOTAL CURRENT LIABILITIES |
710,363 | 473,840 | ||||||
DEFERRED RENT |
139,330 | 98,546 | ||||||
TOTAL LIABILITIES |
849,693 | 572,386 | ||||||
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
|
||||||||
STOCKHOLDERS DEFICIT |
||||||||
Series D
Convertible Preferred Stock - $.001 par value:
8,525,570 shares authorized, issued and outstanding |
8,526 | 8,526 | ||||||
Series E
Convertible Preferred stock - $.001 par value:
20,000,000 shares authorized; 5,543,029
and 4,949,175 shares issued and outstanding, respectively |
5,543 | 4,949 | ||||||
Common Stock
- $.001 par value: 57,416,837 shares
authorized; 17,526,736 and 17,064,360
shares issued and outstanding, respectively |
17,527 | 17,064 | ||||||
Additional paid-in capital |
22,251,885 | 21,683,959 | ||||||
Deficit accumulated prior to the development stage |
(389,393 | ) | (389,393 | ) | ||||
Deficit accumulated during the development stage |
(22,235,311 | ) | (21,362,071 | ) | ||||
TOTAL STOCKHOLDERS DEFICIT |
(341,223 | ) | (36,966 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS
DEFICIT |
$ | 508,470 | $ | 535,420 | ||||
See accompanying notes to condensed financial statements.
F-23
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008, FOR THE PERIOD
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH JUNE 30, 2009
For the | ||||||||||||
For the | For the | Period From | ||||||||||
Six Months | Six Months | January 1, 2002 | ||||||||||
Ended | Ended | Through | ||||||||||
June 30, 2009 | June 30, 2008 | June 30, 2009 | ||||||||||
Government grant revenues |
$ | 631,799 | $ | 286,146 | $ | 2,816,172 | ||||||
Other research revenues |
| | 120,000 | |||||||||
Total revenues |
631,799 | 286,146 | 2,936,172 | |||||||||
Operating expenses: |
||||||||||||
Direct grant expenses |
377,388 | 331,328 | 1,630,195 | |||||||||
Research and development expenses |
663,538 | 1,007,422 | 11,863,524 | |||||||||
Selling, general and adminsistrative expenses |
465,082 | 783,299 | 11,286,158 | |||||||||
Total operating expenses |
1,506,008 | 2,122,049 | 24,779,877 | |||||||||
Loss from operations |
(874,209 | ) | (1,835,903 | ) | (21,843,705 | ) | ||||||
Interest income |
1,079 | 13,052 | 55,544 | |||||||||
Interest expense |
(110 | ) | (672 | ) | (449,611 | ) | ||||||
Gain on sale of property and equipment |
| 3,156 | 2,461 | |||||||||
Loss before income taxes |
(873,240 | ) | (1,820,367 | ) | (22,235,311 | ) | ||||||
Income taxes |
| | | |||||||||
Net loss |
$ | (873,240 | ) | $ | (1,820,367 | ) | $ | (22,235,311 | ) | |||
Loss per common share (basic and diluted) |
$ | (0.05 | ) | $ | (0.12 | ) | ||||||
Weighted average number of common shares
(basic and diluted) |
17,473,543 | 15,716,046 | ||||||||||
See accompanying notes to condensed financial statements.
F-24
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008, AND FOR THE PERIOD
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH JUNE 30, 2009
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH JUNE 30, 2009
For the | ||||||||||||
For the | For the | Period From | ||||||||||
Six Months | Six Months | January 1, 2002 | ||||||||||
Ended | Ended | Through | ||||||||||
June 30, 2009 | June 30, 2008 | June 30, 2009 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net loss |
$ | (873,240 | ) | $ | (1,820,367 | ) | $ | (22,235,311 | ) | |||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||||||
Depreciation and amortization of property and equipment |
20,197 | 21,442 | 440,655 | |||||||||
Impairment of intangible assets |
| | 14,179 | |||||||||
Gain on sale of property and equipment |
| (3,156 | ) | (2,461 | ) | |||||||
Non-cash interest expense |
| 10,000 | 383,610 | |||||||||
Stock-based compensation expense |
11,397 | 7,582 | 898,093 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Increase in accounts receivable |
(200,000 | ) | | (199,733 | ) | |||||||
Decrease in government
grant receivables |
| 83,345 | | |||||||||
Decrease in inventory |
| | 61,649 | |||||||||
(Increase) decrease in prepaid expenses |
15,959 | 138,579 | (164,662 | ) | ||||||||
Increase in other non-current assets |
| (25,653 | ) | | ||||||||
Increase (decrease) in accounts payable |
13,086 | (103,153 | ) | 123,150 | ||||||||
Increase in accrued compensation |
23,437 | 5,325 | 129,837 | |||||||||
Increase in customer deposits |
200,000 | | 380,000 | |||||||||
Increase in deferred rent liability |
40,784 | 24,757 | 139,330 | |||||||||
NET CASH USED IN OPERATING ACTIVITIES |
(748,380 | ) | (1,661,299 | ) | (20,031,664 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||
Proceeds from investments |
| 213,112 | | |||||||||
Proceeds from sale of property and equipment |
| 4,000 | 4,000 | |||||||||
Purchase of property and equipment |
| (40,788 | ) | (403,791 | ) | |||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
| 176,324 | (399,791 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||
Principal payments on debt |
| | (79,292 | ) | ||||||||
Proceeds from exercise of stock options and warrants and
from issuance of stock, net of issuance costs |
557,586 | 2,956,165 | 18,043,971 | |||||||||
Proceeds from issuance of convertible notes |
| | 2,400,000 | |||||||||
NET CASH PROVIDED BY
FINANCING ACTIVITIES |
557,586 | 2,956,165 | 20,364,679 | |||||||||
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |
(190,794 | ) | 1,471,190 | (66,776 | ) |
See accompanying notes to condensed financial statements.
F-25
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008, AND FOR THE PERIOD
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH JUNE 30, 2009
FROM JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH JUNE 30, 2009
For the | ||||||||||||
For the | For the | Period From | ||||||||||
Six Months | Six Months | January 1, 2002 | ||||||||||
Ended | Ended | Through | ||||||||||
June 30, 2009 | June 30, 2008 | June 30, 2009 | ||||||||||
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD |
$ | 269,192 | $ | 213,214 | $ | 145,174 | ||||||
CASH AND CASH EQUIVALENTS
AT END OF PERIOD |
$ | 78,398 | $ | 1,684,404 | $ | 78,398 | ||||||
CASH PAID DURING THE PERIOD FOR INTEREST |
$ | 110 | $ | 672 | $ | 13,694 | ||||||
NON-CASH INVESTING AND
FINANCING ACTIVITIES: |
||||||||||||
Issuance of Series E Convertible Preferred
Stock for future services |
$ | | $ | 1,000,000 | $ | 1,000,000 | ||||||
Conversion of notes payable, including accrued
interest, to common or preferred stock |
$ | | $ | 500,000 | $ | 2,611,831 | ||||||
See accompanying notes to condensed financial statements.
F-26
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. | ORGANIZATION AND BASIS OF PRESENTATION | |
Description of Business | ||
TechniScan, Inc. (the Company), a Utah corporation, is a specialty medical imaging company engaged in the research, development, and commercialization of innovative products for the detection and diagnosis of breast cancer. The Company is in the development stage. The Companys commercial focus is the development of an ultrasound-based product called the Whole Breast Ultrasound (WBU) system that is expected to provide radiologists with unique information about the bulk properties of tissue in the breast as well as clear images of the tissue structure. | ||
TechniScan, Inc. was incorporated in 1984 for the sole purpose of performing research. The development stage began January 1, 2002 when the Company was capitalized for the research, development, and commercialization of innovative medical imaging products for the detection and diagnosis of breast cancer. | ||
Going Concern | ||
Since entering the development stage, the Company has not generated revenues in excess of expenses and has been dependent on government grants and equity raised from individual investors to sustain its operations. The Whole Breast Ultrasound (WBU) product has not yet been approved by the U.S. Food and Drug Administration for commercial sale; therefore, the Company has not generated any revenues from product sales. The Company has incurred losses and used cash in operating activities since inception. As of June 30, 2009, the Company had an accumulated deficit of $22,624,704, and negative working capital. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. | ||
There can be no assurance that the Companys planned sales of debt and equity securities will be successful or that the Company will have the ability to commercialize its imaging system and ultimately attain profitability. The Companys long-term viability as a going concern is dependent on, among other things, the following three key factors: |
| The Companys ability to obtain adequate sources of debt or equity funding to meet current commitments and fund the commercialization of its imaging system. | ||
| The ability of the Company to obtain regulatory approval from the U.S. Food and Drug Administration for commercial distribution of the Whole Breast Ultrasound (WBU) system. | ||
| The ability of the Company to achieve adequate profitability and cash flows to sustain its operations. |
F-27
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES
TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Basis of Presentation | ||
The accompanying financial statements are presented on the accrual basis in accordance with U.S. generally accepted accounting principles. | ||
Unaudited Information | ||
The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) on a basis consistent with the Companys annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the following disclosures, when read in conjunction with the annual financial statements and the notes thereto included in this filing, are adequate to make the information presented not misleading. | ||
Revenue Recognition | ||
Revenues are generated from federal research grants and private and government research contracts. The Company recognizes revenues when services have been provided and invoiced to the federal government or other research partners. The U.S. Food and Drug Administration has not approved the Whole Breast Ultrasound (WBU) product for commercial sale; therefore, the Company has not generated any revenues from product sales. | ||
Cash and Cash Equivalents | ||
For purposes of the statements of cash flows, the Company considers all highly liquid investments available for current use with an initial maturity of three months or less to be cash equivalents. | ||
Concentration of Credit Risk | ||
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash, cash equivalents, and accounts receivable. Risks associated with cash and cash equivalents are mitigated by banking with federally insured and creditworthy institutions; however, deposits may at times exceed federally insured limits. The Companys accounts receivable as of June 30, 2009 are sourced from one customer. |
F-28
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES
TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
Use of Estimates | ||
In preparing the accompanying condensed financial statements in accordance with U.S. generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | ||
Fair Value Measurements | ||
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. The fair value of money market funds (classified as cash equivalents in the Companys balance sheets) reflects the amounts estimated to be received in connection with the sale of the money market funds in an orderly transaction between market participants at the measurement date (exit price). SFAS No. 157 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. | ||
Quoted market prices have been used to determine the fair value of money market funds, which have been classified as cash equivalents (Level 1). | ||
The following table provides information by level for investments that are measured at fair value as of June 30, 2009 and December 31, 2008, as defined by SFAS No. 157. |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents, as of June 30, 2009 |
$ | 78,398 | $ | | $ | | $ | 78,398 | ||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents, as of December 31, 2008 |
$ | 153,534 | $ | | $ | | $ | 153,534 | ||||||||
Net Loss Per Common Share | ||
Basic net income or loss per common share (Basic EPS) is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share (Diluted EPS) is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of the weighted average number of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock, and shares issuable upon conversion of preferred stock. If the potential common share equivalents are dilutive, the Company computes Diluted EPS using the treasury stock method. |
F-29
Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES
TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
Net Loss Per Common Share (Continued) | ||
Due to the fact that for all periods presented the Company has incurred net losses, common share equivalents of 37,875,459 and 35,564,533 for the six months ended June 30, 2009 and 2008, respectively, are not included in the calculation of Diluted EPS because they are anti-dilutive. | ||
3. | RELATED PARTY TRANSACTIONS | |
Through May 2008, the Company operated from a building leased from a director of the Company. Rent expense to this related party was $50,000 for the six months ended June 30, 2008. In June 2008, the Company moved to new offices. | ||
For the six months ended June 30, 2009 and 2008, the Company incurred expenses of approximately $3,622 and $13,488, respectively, to a company owned by a member of the Board of Directors for professional services. | ||
4. | STOCKHOLDERS DEFICIT | |
Preferred Stock | ||
During 2006 and 2007, the Company offered the sale of Series D Convertible Preferred Stock (Series D). During 2008 and 2009, the Company offered the sale of Series E Convertible Preferred Stock (Series E). On February 11, 2008, the Articles of Incorporation of the Company were amended to change the number of shares of preferred stock authorized. As of June 30, 2009 and December 31, 2008, there were 8,525,570 shares of Series D Preferred Stock authorized and outstanding. As of June 30, 2009 and December 31, 2008, there were 20,000,000 shares of Series E Preferred Stock authorized and 5,543,029 and 4,949,175 shares outstanding, respectively. | ||
Liquidation Preferences | ||
In the event of any liquidation or winding up of the Company, the holders of Series D and Series E shall be entitled to receive in preference to the holders of all other capital stock a per share amount equal to their original purchase price of $0.75 and $0.90 per share, respectively ($11,382,904 and $10,848,434 as of June 30, 2009 and December 31, 2008, respectively). | ||
Stock Options | ||
On June 30, 2009, the Company had a share-based compensation plan which is described below. The Company has granted options to employees under the Companys Comprehensive Management Incentive Plan (the Plan), which was established in 2001. The Plan was amended in January 2008 to limit the number of options authorized to 18 percent of the total outstanding common and preferred shares following the initial issuance of Series E Preferred Stock. With the initial issuance of Series E Preferred Stock in February 2008, the number of options authorized was 5,236,649. As of June 30, 2009, no options had been exercised subsequent to this amendment. |
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Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES
TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. | STOCKHOLDERS DEFICIT (CONTINUED) | |
Stock Options (Continued) | ||
The board of directors authorized Company management to grant to eligible participants either non-qualified stock options or incentive stock options to purchase shares of common stock. The non-qualified stock options have been granted with an exercise price at 70% of the stock price of the most recent private placement offering, while incentive stock options have been granted with an exercise price equal to the stock price of the most recent private placement offering. Options granted under the Plan vest over periods ranging from six months to four years. The options will expire ten years from the grant date or from three to six months after termination of employment. | ||
As of June 30, 2009 and December 31, 2008, there was $140,826 and $43,979, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. The total fair value of shares vested during the six month periods ended June 30, 2009 and 2008 was $9,081 and $7,582, respectively. | ||
Stock-based compensation expense totaled $11,397 and $7,582 for the six months ended June 30, 2009 and 2008, respectively, and is included in selling, general and administrative expense in the accompanying condensed financial statements. | ||
The following assumptions were used to estimate the fair value of options granted during the six months ended June 30, 2009 and 2008: |
Expected volatility Expected dividends Expected term Risk free rate |
20.19%-22.80% 0.00% 9 years 3.46%-3.95% |
Stock Warrants | ||
In January 2009, the board of directors approved a modification to the terms of the Series E Preferred Stock offering, extending the second closing to March 31, 2009 and the third closing to December 31, 2009. The new terms also provided for the issuance of warrants to purchase common stock at $0.75 per share to each investor that participates in the second closing in an amount equal to the number of shares of Series E Preferred Stock purchased in the second closing. Additionally, the new terms provided rights to investors that participate in the second and third closings to convert their investment to any new securities offered prior to December 31, 2009. | ||
On March 31, 2009, a second closing of the Series E Preferred Stock offering was completed, providing the Company with proceeds of $534,468 for the issuance of 593,854 shares of Series E Preferred Stock and 593,854 warrants to purchase common stock at $0.75 per share. |
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Table of Contents
TECHNISCAN, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES
TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. | SUBSEQUENT EVENTS | |
The Company completed a merger on October 9, 2009 with Castillo, Inc. Castillo, Inc.s shares are quoted on the OTC Bulletin Board. This transaction is expected to be accounted for as a reverse acquisition. | ||
Subsequent to June 30, 2009, the third closing of the Series E Preferred Stock offering was completed, with funds being received on September 15, 2009. The Company incentivized its Series E Preferred Stock investors by offering the same warrant terms as those offered in connection with the second closing in that each investor meeting the minimum investment criteria received warrants to purchase common shares in the number of shares equal to those purchased in connection with the third closing at an exercise price of $0.75 per share. The Series E Preferred Stock third closing was completed with a total investment of $853,751 for 948,613 shares of the Companys Series E Preferred Stock, which includes the additional investment of $72,240 for 80,267 shares of Series E Preferred Stock which was allowed under the terms of the Second Amendment to the Series E Preferred Stock Subscription Agreement. Warrants to purchase 868,346 shares of the Companys common stock were issued at the completion of the third closing. | ||
Subsequent to June 30, 2009, the Company issued a private placement memorandum in connection with an offering of up to 5,000,000 shares of the Companys common stock at $0.75 per share. As of October 9, 2009, the Company had raised $1,047,810 through this offering process. |
F-32
Table of Contents
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined balance sheet presents the historical balance sheets of
TechniScan, Inc. (TechniScan) and Castillo, Inc. (Castillo) as of June 30, 2009, and accounts for
the transaction as a recapitalization of TechniScan with the issuance of shares for the net assets
of Castillo (a reverse acquisition) based on the information and assumptions and Notes to the
Unaudited Pro Forma Condensed Combined Financial Statements, and giving effect to the transaction
as if it had occurred as of June 30, 2009. The transaction was completed on October 9, 2009.
The Castillo balance sheet information was derived from its unaudited balance sheet as of June 30,
2009 included in its quarterly report on Form 10-Q that was filed with the Securities and Exchange
Commission (SEC) on September 8, 2009. The TechniScan balance sheet information was derived from
its unaudited balance sheet as of June 30, 2009 that is included in this Form 8-K.
The unaudited pro forma condensed combined statements of operations are based on the historical
statements of operations of TechniScan and Castillo and combine the results of operations of
TechniScan and Castillo for the year ended December 31, 2008 and the six months ended June 30,
2009, giving effect to the transaction as if it occurred on January 1, 2008, and reflecting the pro
forma adjustments expected to have a continuing impact on the combined results. The historical
results of operations of Castillo were derived from Castillos unaudited statement of operations
for the six months ended June 30, 2009 included in its quarterly report on Form 10-Q that was filed
with the SEC on September 8, 2009 and the audited statement of operations for the year ended
December 31, 2008 included in its annual report on Form 10-K/A that was filed with the SEC on
September 30, 2009.
The historical results of operations of TechniScan were derived from its unaudited statement of
operations for the six months ended June 30, 2009 and its audited statement of operations for the
year ended December 31, 2008 that are included in this Form 8-K.
The unaudited pro forma condensed combined financial statements are for informational purposes
only. They do not purport to indicate the results that would have actually been obtained had the
merger been completed on the assumed date or for the periods presented, or that may be realized in
the future. Furthermore, the pro forma financial information does not reflect the impact of any
reorganization or restructuring expenses or operating efficiencies resulting from the transaction.
The unaudited pro forma condensed combined financial statements, including the notes thereto, are
qualified in their entirety by reference to, and should be read in conjunction with, the historical
financial statements referred to above.
F-33
Table of Contents
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2009
Pro Forma | Pro Forma | |||||||||||||||
TechniScan, Inc. | Castillo, Inc. | Adjustments | Combined | |||||||||||||
CURRENT ASSETS |
||||||||||||||||
Cash and cash equivalents |
$ | 78,398 | $ | 442 | $ | | $ | 78,840 | ||||||||
Accounts receivable |
200,000 | | | 200,000 | ||||||||||||
Prepaid expenses |
136,508 | 300 | | 136,808 | ||||||||||||
TOTAL CURRENT ASSETS |
414,906 | 742 | | 415,648 | ||||||||||||
PROPERTY AND EQUIPMENT, NET |
65,411 | | 65,411 | |||||||||||||
DEPOSITS |
28,153 | 2,145 | | 30,298 | ||||||||||||
TOTAL ASSETS |
$ | 508,470 | $ | 2,887 | $ | | $ | 511,357 | ||||||||
See notes to the unaudited pro forma condensed combined financial statements.
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Table of Contents
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (CONTINUED)
JUNE 30, 2009
Pro Forma | Pro Forma | |||||||||||||||
TechniScan, Inc. | Castillo, Inc. | Adjustments | Combined | |||||||||||||
CURRENT LIABILITIES |
||||||||||||||||
Accounts payable |
$ | 187,832 | $ | 8,900 | $ | | $ | 196,732 | ||||||||
Accrued compensation payable |
142,531 | | | 142,531 | ||||||||||||
Loan payable related party |
| 30,765 | | 30,765 | ||||||||||||
Customer deposits |
380,000 | | | 380,000 | ||||||||||||
TOTAL CURRENT LIABILITIES |
710,363 | 39,665 | | 750,028 | ||||||||||||
DEFERRED RENT |
139,330 | | | 139,330 | ||||||||||||
TOTAL LIABILITIES |
849,693 | 39,665 | | 889,358 | ||||||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||||||||
STOCKHOLDERS DEFICIT |
||||||||||||||||
Series D Preferred Stock $.001 par
value: 8,525,570 shares authorized, issued
and outstanding |
8,526 | | (8,526) | [A] | | |||||||||||
Series E Preferred Stock $.001 par
value:20,000,000 shares authorized; 5,543,029 shares
issued and outstanding |
5,543 | | (5,543) | [A] | | |||||||||||
Common Stock $.001 par value: 57,416,837 shares
authorized; 17,526,736 shares issued and
outstanding |
17,527 | | 17,913 | [A] | | |||||||||||
35,439 | [B] | |||||||||||||||
(70,879) | [E] | |||||||||||||||
Common Stock $.001 par value: 50,000,000 shares
authorized; 9,000,000 shares issued and
outstanding |
| 9,000 | 70,879 | [C] | 79,879 | |||||||||||
Additional paid-in capital |
22,251,885 | 18,000 | (3,844) | [A] | 22,166,824 | |||||||||||
(35,439) | [B] | |||||||||||||||
(70,879) | [C] | |||||||||||||||
(63,778) | [D] | |||||||||||||||
70,879 | [E] | |||||||||||||||
Deficit accumulated prior to the development stage |
(389,393 | ) | | (389,393 | ) | |||||||||||
Deficit accumulated during the development stage |
(22,235,311 | ) | (63,778 | ) | 63,778 | [D] | (22,235,311 | ) | ||||||||
TOTAL STOCKHOLDERS DEFICIT |
(341,223 | ) | (36,778 | ) | | (378,001 | ) | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS
DEFICIT |
$ | 508,470 | $ | 2,887 | $ | | $ | 511,357 | ||||||||
See notes to the unaudited pro forma condensed combined financial statements.
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Table of Contents
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2008
Pro Forma | Pro Forma | |||||||||||||||
TechniScan, Inc. | Castillo, Inc. | Adjustments | Combined | |||||||||||||
Government grant revenues |
$ | 653,061 | $ | | $ | | $ | 653,061 | ||||||||
Other research revenues |
120,000 | | | 120,000 | ||||||||||||
Total revenues |
773,061 | | | 773,061 | ||||||||||||
Operating expenses: |
||||||||||||||||
Direct grant expenses |
518,150 | | | 518,150 | ||||||||||||
Research and development expenses |
2,803,584 | | | 2,803,584 | ||||||||||||
Selling, general and administrative expenses |
1,715,048 | 23,833 | | 1,738,881 | ||||||||||||
Total operating expenses |
5,036,782 | 23,833 | | 5,060,615 | ||||||||||||
Loss from operations |
(4,263,721 | ) | (23,833 | ) | | (4,287,554 | ) | |||||||||
Interest income |
18,399 | | | 18,399 | ||||||||||||
Interest expense |
(757 | ) | | | (757 | ) | ||||||||||
Gain on sale of property and equipment |
2,461 | | | 2,461 | ||||||||||||
Loss before income taxes |
(4,243,618 | ) | (23,833 | ) | | (4,267,451 | ) | |||||||||
Income taxes |
| | | | ||||||||||||
Net loss |
$ | (4,243,618 | ) | $ | (23,833 | ) | $ | | $ | (4,267,451 | ) | |||||
Net loss per common share (basic and diluted) |
$ | (0.26 | ) | $ | (0.00 | ) | $ | (0.06 | ) | |||||||
Weighted average number of common shares
(basic and diluted) |
16,103,979 | 9,000,000 | 16,813,238 | [F] | 74,834,434 | |||||||||||
32,917,217 | [F] |
See notes to the unaudited pro forma condensed combined financial statements.
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Table of Contents
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2009
Pro Forma | Pro Forma | |||||||||||||||
TechniScan, Inc. | Castillo, Inc. | Adjustments | Combined | |||||||||||||
Government grant revenues |
$ | 631,799 | $ | | $ | | $ | 631,799 | ||||||||
Operating expenses: |
||||||||||||||||
Direct grant expenses |
377,388 | | | 377,388 | ||||||||||||
Research and development expenses |
663,538 | | | 663,538 | ||||||||||||
Selling, general and administrative expenses |
465,082 | 11,765 | | 476,847 | ||||||||||||
Total operating expenses |
1,506,008 | 11,765 | | 1,517,773 | ||||||||||||
Loss from operations |
(874,209 | ) | (11,765 | ) | | (885,974 | ) | |||||||||
Interest income |
1,079 | | | 1,079 | ||||||||||||
Interest expense |
(110 | ) | | | (110 | ) | ||||||||||
Loss before income taxes |
(873,240 | ) | (11,765 | ) | | (885,005 | ) | |||||||||
Income taxes |
| | | | ||||||||||||
Net loss |
$ | (873,240 | ) | $ | (11,765 | ) | $ | | $ | (885,005 | ) | |||||
Net loss per common share (basic and diluted) |
$ | (0.05 | ) | $ | (0.00 | ) | $ | (0.01 | ) | |||||||
Weighted average number of common shares
(basic and diluted) |
17,526,736 | 9,000,000 | 17,912,790 | [F] | 79,879,052 | |||||||||||
35,439,526 | [F] |
See notes to the unaudited pro forma condensed combined financial statements.
F-37
Table of Contents
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
COMBINED FINANCIAL STATEMENTS
PRO
FORMA ADJUSTMENTS
On October 9, 2009, Castillo and TechniScan entered into an Agreement and Plan of Merger wherein
Castillo acquired 100% of TechniScans capital stock through the issuance of Castillo common stock.
As a result of this transaction, TechniScan will merge with and into Castillo, the surviving
entity. After the effective date of the transaction, the former TechniScan stockholders will
own approximately 89% of the issued and outstanding common shares of Castillo. Also, at the
time of the transaction Castillo will be renamed TechniScan, Inc. The transaction will be
accounted for as a reverse acquisition.
Pro forma adjustments to the attached financial statements include the following:
[A] | To reflect the conversion of TechniScan preferred stock and common warrants to TechniScan
common stock immediately prior to the closing of the transaction between TechniScan and
Castillo. |
|
[B] | To record a 2-for-1 forward stock split of TechniScan common stock. |
|
[C] | To record the acquisition of TechniScan by Castillo through the issuance of 70,879,052
shares of Castillo common stock. The interests of the former stockholders of TechniScan in the
combined enterprise will be greater than that of the existing stockholders of Castillo and the
management of TechniScan will assume operating control of the combined enterprise.
Consequently, the acquisition will be accounted for as the recapitalization of TechniScan,
wherein TechniScan purchased the assets of Castillo and accounted for the transaction as a
reverse acquisition for accounting purposes. |
|
[D] | To eliminate the accumulated deficit of Castillo at the date of acquisition to reflect the
purchase by TechniScan for accounting purposes. |
|
[E] | To eliminate the TechniScan common stock for consolidation. |
|
[F] | To reflect the issuance of 65,834,434 shares of Castillo common stock at December 31, 2008
and 70,879,052 shares of Castillo common stock at June 30, 2009 to facilitate the acquisition
as adjusted for the weighted average calculation. |
F-38