As filed
with the U.S. Securities and Exchange Commission on
February 10, 2010
Registration
No. 333-163046
U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 2
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
XStream Systems, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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3844
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201180466
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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10305 102nd Terrace
Suite 101
Sebastian, FL 32958
Tel:
(772) 646-6201
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
James J. Lowrey
Chairman and Chief Executive
Officer
XStream Systems, Inc.
10305 102nd Terrace
Suite 101
Sebastian, FL 32958
Tel:
(772) 646-6201
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
Bruce C.
Rosetto, Esq.
Rebecca G.
DiStefano, Esq.
Greenberg Traurig,
P.A.
5100 Town Center
Circle
Suite 400
Boca Raton, FL 33486
Tel:
(561) 955-7600;
Fax:
(561) 367-6254
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering
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Aggregate
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Registration
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Securities to be Registered
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Registered
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Price per Unit(1)
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Offering Price(1)
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Fee
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Common Stock, $0.0001 par value
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2,500,000 Shares
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$15.00 per Share
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$37,500,000
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$2,092.50
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Convertible Debentures
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$5,000,000 in principal amount of Debentures
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$1,000 per Debenture
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$5,000,000
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$334.80
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Series B Warrants
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8,095,635 Warrants
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$3.00 per Warrant
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$24,286,905
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$1,731.66
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Series C Warrants
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1,829,980 Warrants
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$3.00 per Warrant
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$5,489,940
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$391.43
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Series D Warrants
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2,817,070 Warrants
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$3.00 per Warrant
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$8,451,210
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$602.57
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(1)
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Estimated in accordance with
Rule 457 solely for the purpose of calculating the
registration fee.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities, and it is not soliciting offers to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
FEBRUARY 10, 2010
PROSPECTUS
2,500,000 Shares
of Common Stock
$5.0 million in 5% Subordinated
Debentures Convertible Into Shares Of Common Stock
12,742,685 Warrants
We are offering 2,500,000 shares of our common stock and
$5,000,000 in principal amount of 5% subordinated
convertible debentures convertible into shares of our common
stock. Selling securityholders are offering an aggregate of
12,742,685 warrants. We will not receive any proceeds from the
sale of warrants by the selling securityholders. This is our
initial public offering and no public market currently exists
for our securities.
We anticipate that the public offering price will be
$ per share of common stock.
We will pay interest on the debentures annually commencing
18 months from the sale of a debenture holders
respective debenture and thereafter on December 15 of each year.
The interest rate on the debentures is 5% per year. We may elect
to pay interest in cash, or in the form of shares of our common
stock. The debentures initially are convertible by holders
into shares
of our common stock for each $1,000 principal amount of
debentures (equivalent to an initial conversion price of
$ per share based on the issue
price of the debentures) as described in this prospectus.
The debentures will mature
on ,
2020, unless earlier redeemed, repurchased or converted. We may
redeem for cash some or all of the debentures at any time on or
after ,
2015 at a price equal to 100% of the principal amount of the
debentures to be redeemed plus any accrued and unpaid interest
to the redemption date. The debentures are our subordinated,
unsecured obligations and rank junior to our other senior
indebtedness.
We are not using an underwriter for our offering of securities.
We are conducting this offering as a self-underwriting on a best
efforts basis through our officers and directors, and therefore,
we will pay no underwriting fees or commissions. There is no
minimum amount of securities that need to be sold in the
offering. We have no arrangement to place the proceeds from this
offering in an escrow, trust or similar account. The offering
price for our securities will be fixed throughout the offering
period. The offering will expire three months from the effective
date of this registration statement unless extended by our board
of directors for an additional three month period.
We have applied for the listing of our common stock and warrants
on the NASDAQ Capital Market. We do not currently satisfy the
eligibility criteria for listing our securities on NASDAQ and if
we are not accepted for listing on NASDAQ at the offering, we
will seek to trade our common stock and warrants on the
over-the-counter
bulletin board.
These are speculative securities and involve a high degree of
risk and substantial dilution. You should not invest in our
securities unless you can afford to lose your entire investment.
Please see Risk Factors beginning on page 10 of
this prospectus.
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Proceeds, Before
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Price to
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Expenses, to
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Public
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XStream Systems
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Per Share
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$
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$
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Per Debenture
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$
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$
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Total
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$
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$
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus
is ,
2010
You should rely only on the information contained in this
prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations
and prospects may have changed since that date.
TABLE OF
CONTENTS
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. You should read the entire prospectus
carefully. All references to we, us, the
company and XStream Systems mean XStream
Systems, Inc. Unless otherwise indicated, all information
contained in this prospectus assumes that no outstanding stock
options or warrants will be exercised. This prospectus contains
forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under
Risk Factors and elsewhere in this prospectus.
References in this prospectus to the securities to
be sold in the offering mean shares of common stock and
convertible debentures.
Our
Company
We are a direct seller of our countertop
XT250tm
Material Identification System
(XT250tm).
Our customers place sales orders by calling one of our internal
sales representatives via our toll-free phone number. We also
sell indirectly through contracted authorized sales agents. We
have sold seven
XT250tm
systems to date.
We design and develop material authentication and detection
solutions that allow molecular screening (i.e. molecular
structure analysis on hidden materials). The technology we
utilize is licensed from Rutgers, The State University of New
Jersey. The technology has the ability to penetrate through
virtually any material (glass, wood, and metal), extract a
molecular structure fingerprint of the materials inside, and
then our automated software can authenticate or detect materials
of interest.
We purchased an exclusive worldwide license with Rutgers for its
patented technology which combines penetrating X-rays, forensic
analysis, and automated software algorithms enabling the rapid
identification and detection of materials of interest.
The licensed technology enables forensic analysis to take place
where it is needed, by anyone who needs to authenticate or
detect materials. Forensic analysis had previously been
performed in laboratories by trained technical personnel,
required significant time, and was often destructive to the test
sample itself. We have created algorithms to eliminate the need
for highly trained personnel, leveraged X-rays for
non-destructive testing, and scaled power levels to provide
rapid answers. We have commenced a research program at the Weill
Cornell Medical College to determine if the technology may be
used to detect prostate cancer. The installation of our
XT250tm
system for research on prostate cancer is scheduled to occur
during the second quarter of 2010 pending the Medical
Colleges Internal Review Board (IRB) approval on the
research protocols.
We have scaled the technology down to a countertop
XT250tm
which combines the ability to perform material analysis outside
of the laboratory by non-technical personnel, such as warehouse
workers, and to rapidly authenticate pharmaceutical inventories,
even when sealed in their original packaging.
We intend to provide our product offerings to businesses and
government agencies internationally. Our future success will be
driven primarily by our ability to attract new customers,
develop sustainable revenues and to continue to develop our
product suite. Our current target customers are seeking
detection solutions for counterfeit pharmaceuticals as well as
validation of their pharmaceutical inventory.
Our revenue model currently consists of:
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direct sales of our
XT250tm
systems to customers;
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three-way revenue sharing arrangements between us,
pharmaceutical manufacturers/distributors/chain retailers, and a
return goods processing center, with payments to us based on a
pay-per-scan
service fee on returns, recalls and suspected diverted
products;
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PILOT programs whereby manufacturers will host our system for
use on a trial basis, providing our host manufacturer with an
option to purchase the system following PILOT testing; and
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contracts with government agencies to perform research
and/or
development for products applicable to agency specific purposes.
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1
We have had direct sales of our
XT250tm
systems to six customers and one sale of a system generated from
the PILOT program. We generated revenues of $101,606.70 during
2005, $107,567.50 during 2006 and $150,000 during 2008 from our
contract with the government agency Transportation Security
Administration (TSA). The TSA agreement has terminated, and we
do not currently have contracts with other government agencies.
To date, we have not yet generated revenues from a three-way
revenue sharing arrangement.
Our
Industry
We believe we are well positioned to take advantage of
anticipated growth within an emerging authentication and
detection industry. Our industrys growth globally is
expected to be driven by:
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the increase in counterfeiting and adulteration in the drug and
pharmaceutical industry;
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indicators of growing corporate demand for counterfeit drug
detection solutions;
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the proliferation of pharmaceutical product sales from Internet
sources;
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indications of demand for diagnostic detection solutions in the
medical industry;
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terrorist activities around the globe;
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indications of demand for quality control in the cosmetics
industry;
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industry indicators for demand in raw ore, mineral, and metal
detection;
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indications of demand for quality control in the cement
industry; and
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indications of demand for quality control in the veterinarian
industry.
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Our
Growth Strategy
Our objective is to become the leading provider of material
authentication and detection solutions. Key elements of our
growth strategy include:
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scale the technology, in terms of speed and test volume size, to
produce products that meet varying customer applications,
including real-time testing, as well as large volume screening;
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expand our recognition and branding in our industry in detection
of counterfeit and adulterated drugs and pharmaceuticals;
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pursue new customers and territories we are
aggressively targeting potential customers, primarily through
our direct sales force and believe that there are substantial
market opportunities for our solutions in the Americas, Asia,
Africa, and Europe;
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enter into revenue sharing arrangements with pharmaceutical
manufacturer partners and outsourcing service centers who we
anticipate will compensate us with a percentage of revenue on
returned products in exchange for use of the
XT250tm
system;
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strategic PILOT programs whereby third parties host our
XT250tm
system;
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enhance our product offering we intend to further
develop our
XT250tm
platforms capabilities and features;
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expand our product offering we intend to develop
other products to meet customer demands beyond the
XT250tm
platform;
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expand our target markets we intend to leverage our
products by offering them to new markets; and
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build and leverage awareness of the XStream molecular screening
brand.
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2
Our
Strategic Partners
We are partnering with a number of recognized companies and
intend to develop applications for our molecular screening
technology in connection with these relationships. Our initial
target market has been the pharmaceutical distribution market,
including major pharmaceutical manufacturers, drug distributors
and automated drug dispensing logistics (assembly line
efficiencies) companies. Some of these teaming relationships
include the following:
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Pfizer, a leading pharmaceutical manufacturer, is hosting our
XT250tm
system, under a PILOT program arrangement.
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AmerisourceBergen Corporation, a pharmaceutical wholesale
distributor is piloting our
XT250tm
system in two separate locations, under a PILOT program
arrangement.
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Swisslog Healthcare Solutions, a global provider of integrated
logistics solutions for warehouses, distribution centers and
hospitals has executed a Letter of Intent with us to jointly
collaborate and investigate the development of customized
screening solutions.
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Eastman Kodak, a corporation utilizing technology to combine
imaging and information, has agreed in a Letter of Intent to
explore with us strategic opportunities for joint design,
development, cross-licensing, and co-marketing of security
solutions.
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We will attempt to leverage the respective strengths and
leadership positions of our strategic partners in the healthcare
industry to gain a competitive foothold in our industry. We are
negotiating strategic partnerships with other pharmaceutical
distributors, manufacturers and logistic companies. We are
directing our strategic joint venture efforts to produce
applications which we anticipate will combine non-destructive
penetrating capability with forensic analysis. To date, we have
not generated revenues from the relationships with our strategic
partners listed above.
We have used PILOT programs to test the validity of the
technology, the effectiveness of the system, market needs,
processes and procedures and the development of systems. The
PILOT programs have occurred in several different pharmaceutical
markets, academic settings and in one U.S. government
setting and generally have a duration of two months to one year.
One of our PILOT program relationships with a specialty
pharmaceutical distribution company resulted in an
XT250tm
sale.
Corporate
Information
We were organized as a corporation under the laws of the State
of Delaware in May 2004, and commenced operations in our current
line of business at that time. Our principal executive offices
are located at 10305 102nd Terrace, Suite 101,
Sebastian, FL 32958, and our telephone number is +1(772)
646-6200. We
maintain a corporate website at www.securepharmachain.net, and
an electronic brochure of our
XT250tm
product offering can be downloaded at
http://xstreamsystems.net/XT250SpecSheet-200807.pdf.
Neither the contents of our website nor our brochure are part of
this prospectus and should not be relied upon with respect to
this offering.
3
The
Offering Common Stock and Debentures
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Common stock offered |
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2,500,000 shares of common stock |
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Proposed NASDAQ Stock Market Symbol for the common stock |
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XTRM |
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5% subordinated convertible debentures offered |
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$5,000,000 aggregate principal amount of 5% subordinated
convertible debentures
due ,
2020. |
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The debentures that are being offered will not be governed by an
indenture and will not be subject to the investor protection
provisions of the Trust Indenture Act of 1939. |
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Maturity Date |
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2020, unless earlier redeemed, repurchased or converted. |
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Ranking |
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The debentures are our subordinated, unsecured obligations and
rank junior to all of our other senior indebtedness. |
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Senior Indebtedness means the principal of, and
premium, if any, and interest on, all indebtedness of ours,
existing prior to the date of issuance of the debentures, to
banks, trust companies, insurance companies, debenture holders
and similar lenders and any deferrals, renewals, extensions, or
guarantees thereof, and to all other indebtedness of ours
including without limitation professional fees and expenses of
our initial public offering, trade payables, outstanding
indebtedness to Kimball Electronics, Inc. and Rutgers
University; provided, however that senior indebtedness does not
include indebtedness to any of our affiliates. |
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As of the date of this prospectus, our senior indebtedness is
approximately $4,394,274. |
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Interest Rate |
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The debentures bear interest at an annual rate of 5% per year. |
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Interest Payment Dates |
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We will pay interest on the debentures annually commencing
18 months from the sale of a debenture holders
respective debenture and thereafter on December 15 of each year.
We may elect to pay interest in cash, or in the form of shares
of common stock. Upon notice to the holder, we may elect to
defer the payment of unpaid interest until a subsequent interest
payment date. |
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Conversion Rights |
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Holders of the debentures will have the right to convert each of
their debentures into shares of our common stock prior to the
stated maturity under any of the following circumstances: |
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(i) on or
after ,
2011, upon 30 days prior written notice to us;
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(ii) debentures called for redemption may be
surrendered for conversion until the close of business on the
business day immediately preceding the redemption date;
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(iii) upon the occurrence of specified
corporate transactions, including if we are a party to specified
consolidations, mergers or transfers of all or substantially all
of our properties and assets, as described in Description
of Debentures Conversion Rights.
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The debentures are mandatorily convertible, at our option, upon
notice mailed to the holders not less than 30 days prior to
an interest payment date. |
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For each $1,000 of debentures surrendered for conversion, a
holder initially will
receive shares
of our common stock. This represents an initial conversion price
of $ per share of our common stock
based on the issue price of the debentures. |
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Debentures called for redemption may be surrendered for
conversion until the close of business on the business day
immediately prior to the redemption date. The ability to
surrender debentures for conversion will expire at the close of
business
on ,
2020, unless the debentures previously have been redeemed or
purchased. |
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Redemption of the Debentures at Our Option |
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On or after , 2015, we may redeem
for cash all or any portion of the debentures, upon not less
than 30 nor more than 60 days notice by mail to holders of
the debentures. We will pay a purchase price equal to 100% of
the principal amount of the debentures to be redeemed plus any
accrued and unpaid interest to the redemption date. For more
information about redemption of the debentures at our option,
see Description of Debentures Redemption of
the Debentures at Our Option. |
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Events of Default under the Debentures |
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The following are events of default with respect to the
debentures: |
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(i) our default in the payment of the principal
amount plus accrued and unpaid interest on any debenture when it
becomes due and payable at its maturity, upon redemption, or
following a Change of Control (as defined in the debenture) when
the same becomes due and payable, or otherwise;
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(ii) our failure for ten business days to
deliver shares of our common stock upon an appropriate election
by holders of debentures to convert those debentures into shares
of our common stock;
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(iii) our failure to comply in any material
respect with any of our covenants or agreements contained in the
debentures;
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(iv) our failure to provide timely notice of a
Change of Control;
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(v) certain events involving our bankruptcy,
insolvency or reorganization.
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For more information about the events of default, see
Description of Debentures Events of
Default. |
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U.S. Federal Income Tax Considerations |
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Interest on a debenture will generally be taxable to each U.S.
holder as ordinary income at the time it is paid or accrued in
accordance with the holders usual method of accounting for
tax purposes. A holder will generally recognize gain or loss
upon the sale, exchange, redemption or other disposition of a
debenture equal to the difference between the amount realized
upon the sale, exchange, redemption or other disposition and the
holders adjusted tax basis in the debenture. A
holders tax basis in a debenture will generally be equal
to the amount the holder paid for the debenture. The amount
realized does not include any amount attributable to accrued
interest, which amount would be taxable as interest (to the
extent not previously included in a holders |
5
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income). If a holder receives solely cash in exchange for its
debentures upon conversion, gain or loss generally will be
determined in the same manner as if the holder disposed of the
debenture in a taxable disposition. A holder will generally not
recognize any income, gain or loss upon conversion of a
debenture into common stock except to the extent that the common
stock is considered attributable to accrued interest not
previously included in taxable income (which is taxable as
ordinary income) or with respect to cash received in lieu of a
fractional share of common stock. Distributions, if any, made on
the common stock generally will be included in income as
ordinary dividend income to the extent of our current and
accumulated earnings and profits. Upon the sale, taxable
exchange or other taxable disposition of our common stock, a
holder generally will recognize capital gain or loss equal to
the difference between (i) the amount of cash and the fair
market value of any property received upon such taxable
disposition, and (ii) the holders adjusted tax basis
in the common stock. |
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HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE TAX
TREATMENT OF THE DEBENTURES AND WHETHER A PURCHASE OF THE
DEBENTURES IS ADVISABLE IN LIGHT OF THE HOLDERS PARTICULAR
TAX SITUATIONS. |
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Warrants offered by the selling |
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12,742,685 warrants, consisting of the following: |
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securityholders |
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8,095,635 Series B warrants |
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1,829,980 Series C warrants |
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2,817,070 Series D warrants |
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Proposed NASDAQ Stock Market symbols for the warrants |
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XTRMB Series B warrants
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XTRMC Series C warrants
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XTRMD Series D warrants |
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Common stock outstanding prior to this offering |
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2,792,404 shares(1) |
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Common stock to be outstanding after this offering |
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8,803,042 shares(1) |
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Self-Underwriting |
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We are not using an underwriter for our offering of securities.
We are conducting this offering as a self-underwriting on a best
efforts basis through our officers and directors, and therefore,
we will pay no underwriting fees or commissions. We have no
arrangement to place the proceeds from this offering in an
escrow, trust or similar account. The offering price for our
securities will be fixed throughout the offering period. |
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Termination of the Offering |
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The offering will expire three months from the effective date of
this registration statement unless extended for an additional
three month period by our board of directors. |
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Use of proceeds |
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We will use the proceeds for repayment of our senior
indebtedness, working capital and general corporate purposes
including amounts required to pay for salaries, professional
fees, public reporting costs, office-related expenses and other
corporate expenses, including interest and overhead. We plan to
use a portion of the net proceeds of this offering to finance
research and product development as a part of our |
6
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growth strategy. This is a best efforts offering with no
minimum number of securities required to be sold. Therefore, we
cannot assure potential investors we will raise sufficient
proceeds to repay our indebtedness or for any of the other
stated purposes. |
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Selling securityholders are offering an aggregate of 12,742,685
warrants. We will not receive any proceeds from the sale of
warrants by the selling securityholders. |
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No minimum offering |
|
We are not required to sell any specific number or dollar amount
of securities but will attempt to sell all of the securities
offered. Investors in this offering may elect to purchase shares
of common stock or convertible debentures or a combination of
common stock and debentures. The funds received in the offering
will not be held in an escrow account. Therefore, the offering
proceeds will be immediately available for use by us. We do not
have to wait until a minimum number of securities have been sold
to keep the proceeds from any sales. |
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Proposed Listing |
|
We have applied for the listing of our common stock and warrants
on the NASDAQ Capital Market. We do not currently satisfy the
eligibility criteria for listing our common stock and warrants
on NASDAQ and can provide no assurances that our securities will
be accepted for listing on NASDAQ at the offering or following
the offering. If our securities are not accepted for listing on
NASDAQ we will seek to trade our common stock and warrants on
the
over-the-counter
bulletin board. Our debentures will not be listed on an exchange
or other trading facility. |
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Ownership after this offering |
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Our executive officers and directors will beneficially own
approximately 36.5% of our outstanding common stock after the
completion of this offering. |
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(1) |
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Based on 2,792,404 shares outstanding on
February , 2010, and assuming the conversion of
shares of our Series A, B, C, and D preferred stock into
3,510,638 shares of our common stock on the effective date
of the registration statement for this offering, the number of
shares to be outstanding after this offering excludes the
following: |
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2,105,757 shares of common stock reserved for issuance upon
the exercise of outstanding stock options under our Amended and
Restated 2004 Stock Option Plan and 2009 Long Term Incentive
Compensation Plan,
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13,078,685 shares of common stock reserved for issuance
upon the exercise of outstanding warrants (for which cash would
need to be remitted to us for exercise) at a weighted average
exercise price of $2.99 and 5,125,150 shares of which are
held by officers and directors and their affiliates,
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3,846,269 additional shares of common stock reserved for
issuance under the 2009 Long Term Incentive Compensation Plan.
|
7
Risk
Factors
This offering and our business is subject to numerous risks, as
discussed more fully in the section entitled Risk
Factors immediately following this prospectus summary.
Some of the risks include without limitation:
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our history of annual net losses which may continue and which
may negatively affect our ability to achieve our business
objectives, and the going concern qualification in our 2008
audit;
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|
|
|
we are currently a defendant in a lawsuit with the manufacturer
of the
XT250tm
system, Kimball Electronics, Inc. in connection with funds we
currently owe to its parent corporation, Kimball International,
Inc., under a promissory note and, on February 8, 2010
Kimball entered an Agreed Judgment against us for $3,200,000;
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we do not own the patented technology which we utilize in
connection with our
XT250tm
system which patent rights are licensed from Rutgers and
furthermore, we are currently in default under our agreement
with Rutgers; if we are unable to maintain this license, our
operations and financial condition will be negatively affected;
|
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|
we have identified a material weakness in our internal controls
over financial reporting;
|
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there is no minimum amount required to be raised in this
offering, and if we cannot generate sufficient funds from this
offering, we may be unable to execute our business strategy;
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an active trading market for our securities may not develop on
the NASDAQ Capital Market or any other trading market or
facility, and we expect that our stock price will be volatile
and could decline following this offering, resulting in a
substantial loss in your investment; and
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we do not currently satisfy the eligibility criteria for listing
our common stock and warrants on NASDAQ and can provide no
assurances that our securities will be accepted for listing on
NASDAQ concurrently with the offering or following the offering
or that if we are listed we will continue to meet the continued
listing standards.
|
See additional Risk Factors beginning on
page 10 and the other information included in this
prospectus for a discussion of factors you should carefully
consider before deciding to invest in our securities.
8
Summary
Financial Data
The summary financial data below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements and the related notes included elsewhere in
this prospectus.
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Year Ended December 31,
|
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Nine Months Ended September 30,
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2007
|
|
2008
|
|
2008
|
|
2009
|
|
|
|
|
|
|
(Unaudited)
|
|
Statement of Operations Data:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Revenue
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$
|
135,000
|
|
|
$
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439,000
|
|
|
$
|
260,000
|
|
|
$
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271,520
|
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Gross profit (loss)
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|
|
(22,508
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)
|
|
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309,964
|
|
|
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200,156
|
|
|
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127,989
|
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Total general and administrative expenses(1)
|
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3,572,558
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|
|
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2,401,414
|
|
|
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1,919,495
|
|
|
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1,762,151
|
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Loss from operations
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|
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(5,495,963
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)
|
|
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(2,726,981
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)
|
|
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(2,217,078
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)
|
|
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(2,074,565
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)
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Net (loss) available to common stockholders
|
|
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(6,019,497
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)
|
|
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(7,183,298
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)
|
|
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(6,472,536
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)
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|
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(2,685,657
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)
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Net (loss) per share:
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|
|
|
|
|
|
|
|
|
|
|
|
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Basic and diluted
|
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$
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(3.55
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)
|
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$
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(4.22
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)
|
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$
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(3.80
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)
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$
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(1.54
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)
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Weighted average number of shares outstanding:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and diluted
|
|
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1,694,596
|
|
|
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1,702,156
|
|
|
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1,702,156
|
|
|
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1,732,632
|
|
|
|
|
|
|
|
|
As of
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|
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September 30, 2009
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|
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Actual
|
|
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(Unaudited)
|
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Balance Sheet Data:
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Cash and cash equivalents
|
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$
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21,659
|
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Working capital (deficiency)
|
|
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(3,790,689
|
)
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Total assets
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|
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638,571
|
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Total liabilities
|
|
|
4,429,260
|
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Total stockholders deficit
|
|
|
(14,708,603
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)
|
|
|
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(1) |
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Total general and administrative expenses, represents total
operating expenses less research and development. |
9
RISK
FACTORS
A purchase of our securities involves a high degree of risk.
You should consider carefully the following risk factors, in
addition to the other information contained in this prospectus
and the documents incorporated by reference into this
prospectus, before purchasing any securities in this
offering.
Risks
Related to Our Business
We
have a history of annual net losses which may continue and which
may negatively affect our ability to achieve our business
objectives, and we received a going concern qualification in our
2008 audit.
For the year ended December 31, 2008, we had revenue of
$439,000 and a net loss of $(2,860,254). At December 31,
2008, we had a stockholders deficit of $(11,852,015), as
compared with $(5,659,153) from December 31, 2007. Our
stockholders deficit was $(14,708,603) as of the nine
months ended September 30, 2009. For the nine months ended
September 30, 2009, we had revenue of $271,520, compared to
revenue of $260,000 for the comparable period in 2008. We had a
net loss of $(1,328,476) for the nine months ended
September 30, 2009, compared to a net loss of $(2,304,710)
for the comparable 2008 period. Our independent auditors, in
their report dated September 16, 2009 for the related audit
of our financial statements for the years ended
December 31, 2008 and December 31, 2007, expressed
doubt about our ability to continue as a going concern. There
can be no assurance that our future operations will result in
net income. Our failure to increase our revenues or improve our
gross margins will harm our business. We may not be able to
sustain or increase profitability on a quarterly or annual basis
in the future. If our revenues grow more slowly than we
anticipate, our gross margins fail to improve, or our operating
expenses exceed our expectations, our operating results will
suffer. The prices we charge for our
XT250tm
system may decrease, which would potentially reduce our
revenues. If we are unable to sell our solutions at acceptable
prices relative to our costs, or if we fail to develop and
introduce on a timely basis new products from which we can
derive additional revenues, our financial results will suffer.
We
currently are experiencing uncertain economic conditions, which
makes it difficult to estimate growth in our markets and, as a
result, future income and expenditures.
Current conditions in the domestic and global economies are
extremely uncertain. As a result, it is difficult to estimate
the level of growth for the economy as a whole. It is even more
difficult to estimate growth in various parts of the economy,
including some of the markets in which we participate. Because
all components of our budgeting and forecasting are dependent
upon estimates of growth in the markets we serve, the prevailing
economic uncertainty renders estimates of future income and
expenditures even more difficult than usual. As a result, we may
make significant investments and expenditures but never realize
the anticipated benefits, which could affect adversely our
results of operations. The future direction of the overall
domestic and global economies will have a significant impact on
our overall performance.
Our
resources may not be sufficient to manage our expected growth;
failure to properly manage our potential growth would be
detrimental to our business.
We may fail to adequately manage our anticipated future growth.
Any growth in our operations will place a significant strain on
our administrative, financial and operational resources, and
increase demands on our management and on our operational and
administrative systems, controls and other resources. We cannot
assure you that our existing personnel, systems, procedures or
controls will be adequate to support our operations in the
future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As
part of this growth, we may have to implement new operational
and financial systems, procedures and controls to expand, train
and manage our employee base, and maintain close coordination
among our technical, accounting, finance, marketing, and sales
staff. We cannot guarantee that we will be able to do so, or
that if we are able to do so, we will be able to effectively
integrate them into our existing staff and systems. If we are
unable to manage growth effectively, such as if our sales and
marketing efforts exceed our capacity to manufacture our
XT250tm
systems or if new employees are unable to achieve performance
levels, our business, operating results and financial condition
could be materially and adversely affected.
10
We are
currently a defendant in a lawsuit with the manufacturer of the
XT250tm
system, Kimball Electronics, Inc. in connection with funds we
currently owe to its parent corporation, Kimball International,
Inc., under a promissory note and, on February 8, 2010
Kimball entered an Agreed Judgment against us for $3,200,000.
We face significant risk relating to a lawsuit in which we are
the defendant with the manufacturer of the
XT250tm,
Kimball International, Inc. and Kimball Electronics, Inc.
(Kimball). There is significant uncertainty whether
we will reach a compromise with Kimball to continue to
manufacture our
XT250tm units.
During September 2008 Kimball filed suit against us including a
claim alleging we defaulted on a $2,000,000 loan provided by
Kimball in favor of us, breach of a reserve capacity agreement
and breach of a supplier agreement. We asserted counterclaims
against Kimball for conversion, breach of contract and tortious
interference with business relationship. On June 30, 2009,
the District Court granted partial judgment in favor of Kimball
in the amount of $2,000,000 against us. On December 23,
2009, we and Kimball entered into a settlement agreement (the
Agreement). In connection with the Agreement we
provided to Kimball an executed Agreed Judgment in favor of
Kimball in the amount of $3,200,000 (the Agreed
Judgment). We agreed to make payments to Kimball via wire
transfer or certified funds as follows: (i) one
(1) payment of $600,000 to be made on or before
December 31, 2009; and (ii) one (1) final payment
of $2,600,000 to be made on or before January 31, 2010. On
or about the date of the Agreement, we provided to Kimball an
executed Stipulation of Dismissal of our counterclaims against
Kimball, with prejudice. Upon remittance of the final payment,
we will take ownership of any remaining inventory, as well as
any machinery, equipment, designs and tooling developed or
purchased with the proceeds of the term loan at Kimballs
plant in Jasper, Indiana. Kimball agreed to retain possession of
the machinery, equipment, designs and tooling developed or
purchased with the proceeds of the term loan as well as the
inventory. After we make the initial $600,000 payment to
Kimball, the parties agreed to commence discussions to develop
terms under which Kimball will continue manufacturing the
Companys product and have agreed to negotiate in good
faith thereafter. On December 29, 2009, we made the initial
payment of $600,000 to Kimball under the Agreement. Because we
failed to make the $2,600,000 payment to Kimball according to
the terms of the Agreement, Kimball entered the Agreed Judgment
against us in the amount of $3,200,000. On February 10,
2010, Kimball filed a motion for proceedings supplemental to
collect the remaining $2.6 million balance due on the
$3.2 million judgment. We anticipate that a portion of the
proceeds of the offering will be utilized to discharge the
Agreed Judgment. We also anticipate that our results of
operations will be adversely affected and we will be required to
identify a new manufacturer of our
XT250tm
unit. It is probable that we will be required to seek a new
manufacturer of our product we anticipate significant
manufacturing and timing delays in the production of our
products. Although we believe that other manufacturers may be
able to acquire the expertise to assemble and produce the
hardware a significant investment in parts and scientific labor
would likely be required on the part of the manufacturer and us
to engage in a new manufacturing relationship. Since it appears
unlikely that Kimball will voluntarily release the inventory to
us, we will be required to replace these parts and components in
the manufacture of our units. These additional capital
expenditures to purchase parts and manufacture new units will
additionally adversely affect our results of operations and
financial performance.
We may
be unable to satisfy our obligations to make interest payments
on our
debentures.
If we continue to experience cash flow and liquidity
constraints, we may be unable to meet our interest payment
obligations under the debentures. Potential investors purchasing
our debentures should be aware that our manufacturer, Kimball,
has entered an Agreed Judgment against us in the amount of
$3,200,000 which judgment was approved by the court on
February 8, 2010. Additionally, as of November 2009, we are
currently in arrears with respect to payment of $307,000 to
Rutgers University under our licensing agreement, which equals
the minimum annual royalty payment due under the agreement and
accrued interest. We anticipate repayment of Kimball and Rutgers
from the proceeds of the offering. Further, we are currently in
default with respect to repayment of our two outstanding
debentures totaling an aggregate principal amount of $250,000.
We have not amended the terms of the debentures to reach an
agreement of forbearance with the holders and have verbally
agreed to repay the holders from the proceeds of the offering.
If we are unable to repay all of these outstanding obligations
from the proceeds of the offering, these obligations which are
our senior indebtedness and rank senior to our obligations under
the debentures will limit our ability to make interest payments
under the debentures. Our failure to make interest payments
would result in an event of default under the debentures. The
investors remedy for an event of default under the
debentures which is continuing uncured for a period of
180 days is to provide notice to us declaring the principal
amount plus accrued and unpaid interest, if any, on that
investors securities to be immediately due and
11
payable. Upon such a declaration, such accelerated amount will
be due and payable immediately. If our revenues do not increase
significantly in the near future, we expect that we would
require additional financing from third parties to fund any such
interest repayments, and we cannot assure you that we would be
able to obtain additional financing on acceptable terms or at
all.
We
will be required to utilize the proceeds of the offering to
satisfy an Agreed Judgment with Kimball in the amount of
$3,200,000, and for lack of remaining proceeds we may be unable
to successfully implement our business plan and will continue to
experience significant liquidity difficulties.
A portion of the proceeds of this offering will be used to repay
amounts in accordance with an Agreed Judgment in the aggregate
amount of $3,200,000 pursuant to the Agreement executed with
Kimball on December 23, 2009 in the case Kimball
International, Inc., et al v. XStream Systems,
Inc. In the event that we do not raise the maximum proceeds
in this offering, there may be limited or no remaining proceeds
to be used for the development of new products, potential
strategic acquisitions and for general working capital purposes
including the payment of accrued and future salaries. Under
these circumstances, in order to substantially grow our
business, we will likely require additional funding. There can
be no assurance that we will be able to raise any additionally
needed funds on acceptable terms or at all. The procurement of
any such additional financing may result in the dilution of your
ownership interest in us. Furthermore, our prospects must be
considered in light of the risks, expenses and difficulties
frequently encountered by companies engaged in the development
of a new business. Some of the specific risks associated with
our business include our:
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need to manage our expanding operations;
|
|
|
|
continuing need to raise additional capital; and
|
|
|
|
dependence upon and need to hire key personnel.
|
To address these risks, we must, among other things, respond to
our competitors, attract, retain and motivate qualified
personnel, and market and sell our detection systems to
companies seeking quality control. We cannot guarantee that we
will be successful in addressing any or all of these risks and
the other risks described herein, or that we will generate
significant revenues or achieve or sustain significant
profitability. The failure to address one or more of these risks
and successfully implement our strategy could have a material
adverse effect on our financial condition or results of
operations.
We
have identified a material weakness in our internal controls
over financial reporting.
During the preparation of our financial statements, we
identified control deficiencies that have been classified as
material weaknesses in our internal controls over financial
reporting. A material weakness is a control deficiency that
results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis by employees in
the normal course of their assigned functions. The control
deficiencies identified include inadequate segregation of duties
over financial reporting as well as improper reporting of
certain financial instruments, income taxes and share-based
compensation which resulted in restatement of the prior
financial statements. The identification of these material
weaknesses may cause investors to lose confidence in us and our
stock may be negatively affected.
To address the control deficiencies, we plan to hire additional
accounting staff in order to implement an appropriate level of
segregation of duties. In addition, we plan to hire additional
qualified financial reporting personnel and engage outside
consultants to assist in accurate financial reporting to ensure
our financial statements are in accordance with generally
accepted accounting principles.
The standards that must be met for management to assess the
internal control over financial reporting are relatively new and
complex, and require significant documentation, testing and
possible remediation to meet the detailed standards. We may
encounter problems or delays in completing the activities
necessary to make future assessments of our internal control
over financial reporting and completing the implementation of
any necessary improvements. Future assessments may require us to
incur substantial costs and may require a significant amount of
time and attention of management, which could seriously harm our
business, financial condition and results of
12
operations. If we are unable to assess our internal control over
financial reporting as effective in the future, investors may
lose confidence in us and our stock may be negatively affected.
Our
purchasers of debentures will not have the protections afforded
of the Trust Indenture Act of 1939.
The debentures are being offered under an exemption from the
provisions of the Trust Indenture Act of 1939 which statute
applies to debt securities such as bonds, debentures, and notes
that are offered for public sale. Even though our debentures may
be registered under the Securities Act, they may not be
typically offered for sale to the public unless a formal
agreement between the issuer of bonds and the bondholder, known
as the trust indenture, conforms to the standards of the
Trust Indenture Act. Because of the relatively small size
of the debenture offering, the debentures will not be offered
pursuant to an indenture and subject to the enforcement of a
trustee. If we have an event of default under the debentures we
will not have an indenture trustee in place to act as a
representative of the debenture holders to help enforce your
rights.
We may
not be able to make interest payments and maintain compliance
with the covenants under the debentures
Under the terms of the debentures, failure to make timely
interest or principal redemption payments, commencement of
bankruptcy against us, failure of our common stock to be
eligible for quotation on or quoted for trading on a principal
market as defined, and a change in control of us as defined,
among others, constitute events of default. We cannot assure you
that we will be able to maintain compliance with these
covenants. Failure to maintain compliance could have a material
adverse impact on our financial position, results of operations
and cash flow. The remedies of our debenture holders in the
event of default will entail that debenture holder asserting its
rights on behalf of itself.
If we
do not successfully develop new detection products and
solutions, our business may be harmed.
Our business and operating results may be harmed if we fail to
expand our products (either through internal product or
capability development initiatives or through partnerships and
acquisitions) beyond our current
XT250tm
system in such a way that achieves market acceptance or that
generates significant revenue and gross profits to offset our
operating and other costs. We may not successfully identify,
develop and market new product and service opportunities in a
timely manner. If we introduce new products and services, they
may not attain broad market acceptance or contribute
meaningfully to our revenue or profitability. Competitive or
technological developments may require us to make substantial,
unanticipated investments in new products and technologies or in
new strategic partnerships, and we may not have sufficient
resources to make these investments. Because the markets for our
solutions are subject to rapid change, we may need to expand
and/or
evolve our product and service offerings quickly. Delays and
cost overruns could affect our ability to respond to
technological changes, evolving industry standards, competitive
developments or customer requirements and harm our business and
operating results.
We do
not own the technology which we utilize in connection with our
XT250tm
system which patent rights are licensed from Rutgers University.
We are currently in default under our agreement with Rutgers and
if we are unable to maintain this license, our operations and
financial condition we anticipate will be negatively affected.
We do not own all of the software, other technologies and
content used in our products and services. We license the
technology utilized in connection with our
XT250tm
system from Rutgers, The State University of New Jersey
(Rutgers) pursuant to an exclusive license agreement
for the patent rights to registered patent U.S. Patent
No. 6,118,850 and U.S. Patent application Serial
No. 60/352,952 (WO 03/065077). A disagreement between
Rutgers and the Company could have a very negative effect on our
ability to operate our business effectively. In addition, we
could learn that the technologies we have licensed from Rutgers
do not perform as purported, are not effective, or are not the
property of Rutgers, or some similar problem with the license
any of which would have an immediate and negative effect on our
business. The technology is licensed under the agreement from
the effective date of December 13, 2004 and remains in
effect in each country of the world until the later of
(i) expiration in a country of the
last-to-expire
of issued patents within the Rutgers patent rights licensed
under the agreement, or (ii) 15 years from the first
commercial sale of the licensed that country. As of November
2009, we are currently in
13
arrears with respect to payment of $307,000, which equals the
minimum annual royalty payment due under the agreement and
accrued interest. The licensing agreement provides that if
either party breaches or fails to perform any provision of the
agreement, the other party may give written notice of the
default to the breaching party. The agreement further provides
if we fail to cure the default within sixty days of receipt of
the notice of default, Rutgers has the right to terminate the
agreement and the license by sending a notice of termination to
us. The agreement will automatically terminate on the effective
date of the notice of termination. Representatives of the
Company have recently met with Rutgers to discuss the licensing
agreement between the university and the Company. The parties
have mutually agreed and acknowledged verbally that the Company
will require capital financing to repay Rutgers amounts due
under the licensing agreement and that the agreement requires
restructuring in connection with royalty fees owed in the
future. The parties have verbally agreed to postpone
restructuring of the license agreement until subsequent to the
public offering. We believe that we and Rutgers are both are
using good faith efforts to maintain the business relationship
and restructure the parties contractual obligations going
forward. The loss of, or our inability to maintain, this license
could result in our inability to sell our products including the
XT250tm
systems without liability exposure including claims of
infringement from other parties.
If we
do not adequately protect our intellectual property rights, we
may experience a loss of revenue and our operations may be
materially harmed.
We have not received registered patents or copyrights on any of
the software or technology we have developed and are relying on
the patented technology owned by Rutgers which we license to
produce the
XT250tm
units. We additionally rely upon confidentiality agreements
signed by our employees, consultants and third parties, and
trade secret laws of general applicability, to safeguard our
software and technology. We cannot assure you that we can
adequately protect our intellectual property or successfully
prosecute potential infringement of our intellectual property
rights. Also, we cannot assure you that others will not assert
rights in, or ownership of, trademarks and other proprietary
rights of ours or that we will be able to successfully resolve
these types of conflicts to our satisfaction. Our failure to
protect our intellectual property rights may result in a loss of
revenue and could materially harm our operations and financial
condition.
Our
lengthy sales cycle may increase our exposure to customer
cancellations and other risks.
Our product sales cycle has been and is expected to continue to
be lengthy and variable. We generally expect the need to educate
our potential customers about the use and benefits of the
XT250tm
system, which can require the investment of significant time and
resources. This lengthy sales cycle creates risks related to
customer decisions to cancel or change product plans, which
could result in the loss of anticipated sales. We may incur
significant research and development, selling and general and
administrative expenses as part of this process before it
generates the related revenues from any such customer.
We may
not be able to secure all rights to our intellectual property;
our rights may be subject to claims of infringement by others,
and other issues affecting production.
We are relying on a combination of our patent licensing rights,
as well as employee and third party non-disclosure agreements to
protect intellectual property rights pertaining to our products
and technologies. There can be no assurance, however, that these
measures will provide meaningful protection of the technology,
trade secrets, know-how, or other intellectual property in the
event of any unauthorized use, misappropriation, or disclosure.
There can also be no assurance that others will not
independently develop similar technologies or duplicate any
technology we develop or have developed without violating our
intellectual property rights. In addition, there can be no
assurance our intellectual property rights will be held to be
valid, will not be successfully challenged or will otherwise be
of value.
Our patent applications which may be submitted in the future may
be subject to a charging and retaining lien held by our counsel
that prepare and file such applications. Failure to repay
outstanding debts to such counsel could prevent us from fully
commercially exploiting the technology. In addition to
developing and seeking patent and other intellectual property
protection for the technology, we do not currently, but may in
the future, rely on licenses from third parties for material
components of the technology embodied in our products. A dispute
with a licensor of
14
such products, or claims for infringement against the licensor
by third parties with respect to the technology licensed to us,
could materially adversely affect our business.
Any of our future patent applications may not be approved or may
be successfully challenged by others or invalidated through
administrative processes or litigation. If our applications are
not approved, we may not be able to enter into arrangements to
allow us to continue to use our technology on commercially
reasonable terms.
While we do not believe that our licensed technology infringes
on any existing patents or intellectual property rights of third
parties, there can be no assurance that such infringement has
not occurred or will not occur. The costs of defending an
intellectual property claim could be substantial and could
adversely affect our business, even if we were ultimately
successful in defending any such claims. If our licensed
technology were found to infringe the rights of a third party,
we would be required to pay significant damages or license fees
or cease production, any of which could have a material adverse
effect on our business.
We
depend on the patent we license from Rutgers and other means to
protect our intellectual property which may not be
adequate.
The law of patents and trade secrets is constantly evolving and
often involves complex legal and factual questions. The coverage
under the Rutgers patent and any additional coverage we may seek
in our patent applications can either be denied or significantly
reduced before or after a patent is issued. Consequently, we
cannot be sure that any particular patent we apply for will be
issued, that the scope of the patent protection will exclude our
competitors, that interference proceedings regarding any of our
patent applications will not be filed, or that a patent will
provide any other competitive advantage to us. In addition, we
cannot be sure that the patented technology we license from
Rutgers will be held valid if challenged or that others will not
claim rights in or ownership of the patents and other
proprietary rights held by us.
Because patent applications may be secret until patents are
filed with the USPTO and the publication of discoveries in the
scientific or patent literature lags behind actual discoveries,
we cannot be certain if our patent application was the first
application filed covering a particular invention. If another
partys rights to an invention are superior to ours, we may
not be able to obtain a license to use that partys
invention on commercially reasonable terms, if at all. In
addition, our competitors, many of which have greater resources
than we do, could seek to apply for and obtain patents that will
prevent, limit or interfere with our ability to make use of our
inventions either in the U.S. or in international markets.
Further, the laws of some foreign countries do not always
protect intellectual property rights to the same extent as do
the laws of the U.S. Litigation or regulatory proceedings
in the U.S. or foreign countries also may be necessary to
enforce our patent or other intellectual property rights or to
determine the scope and validity of our competitors
proprietary rights. These proceedings can be costly, result in
product development delays, and divert our managements
attention from our business.
We may also rely upon unpatented proprietary technology, and we
cannot assure you that others will not independently develop
substantially equivalent technology or otherwise gain access to
or disclose our proprietary technology. We may not be able to
meaningfully protect our rights in this proprietary technology,
which would reduce our ability to compete in the market.
Although
we have confidentiality agreements in place with our employees,
these agreements may not adequately prevent disclosure of
proprietary information.
Our policy is to execute confidentiality agreements with our
employees and consultants upon the commencement of their
employment or consulting arrangement with us. These agreements
generally require that all confidential information developed by
an individual or to which the individual is exposed during the
course of his or her relationship with us must be kept
confidential even after the individual has left our employment.
These agreements also generally provide that inventions
conceived by the individual in the course of rendering services
to us shall be our exclusive property. We cannot be sure that
these agreements will provide meaningful protection of our
proprietary and other confidential information. In addition, in
some situations, these agreements may conflict with, or be
subject to, the rights of third parties with whom our employees
or consultants have prior employment or consulting
relationships. We may be forced to engage in costly and
time-consuming litigation to determine the
15
scope of and to enforce our proprietary rights. Even if
successful, any litigation could divert our managements
attention from our business.
We
have been subject to informal questioning and an informal
inquiry from federal and state regulatory agencies recently
related to an unidentified investigation and you should be aware
that if we become a target or defendant in an investigation,
litigation or other governmental proceeding our business
prospects may potentially be adversely affected.
On August 6, 2009, the Company was unexpectedly visited by
special agents from the Office of Criminal Investigations of the
federal Food and Drug Administration (FDA) and the
Florida Department of Law Enforcement who informed our
management that there was an investigation being conducted into
two of our customers. The agents proceeded to ask a series of
general question based on which our management believes that the
investigation involves the diversion of drugs. The agents made
an inquiry as to the capabilities of the Companys
XT250tm
machine and whether it can be used to aid in diverting drugs.
Our management explained that its equipment cannot be used in
such a fashion as to aid in the diversion of drugs and that the
Company has at no time had any part in the diversion of drugs.
Diversion of drugs most frequently occurs when a patient
receives a legitimate prescription for an actual or feigned
illness and sells the procured drugs on the black market. The
black market may then distribute or divert the prescription
drugs, which are likely not counterfeit drugs, into the legal
supply chain. Our system as currently designed does not detect
that these were diverted (or not diverted) drugs but rather is
used to detect whether molecular structures of drugs are valid.
At this time, we have no reasonable basis to believe that we are
a target of the investigation against our customers and will
fully cooperate with the investigation. To date, we have not
received any formal or informal written correspondence from
either regulatory agency relating to the investigation nor are
we a party to any legal
and/or
regulatory proceeding related to this matter.
We
will need to operate without infringing the proprietary rights
of others.
We cannot be certain that U.S. or foreign patents or patent
applications of other companies do not exist or will not be
issued that would materially and adversely affect our ability to
commercialize our products. We may be sued for infringing or
misappropriating the patent or other intellectual property
rights of others. Intellectual property litigation is costly
and, even if we prevail, the cost of this litigation could
negatively affect our business. If we do not prevail in
litigation, in addition to any damages we might have to pay, we
could be required to stop the infringing activity or obtain a
license requiring us to make royalty payments. Any license we
are required to obtain may not be available to us on
commercially acceptable terms, if at all. In addition, any
license we are required to obtain may be non-exclusive, and
therefore our competitors may have access to the same technology
licensed to us. If we fail to obtain a required license or are
unable to design around another companys patent, we may be
unable to make use of some of our technologies or distribute our
products.
We may
be liable for use of information we provide to third party
customers.
Incorrect information that results from the use of our systems
could cause the end-user either to take an action or fail to
take an action which could have a detrimental effect, and we
could be liable for the damages resulting from the incorrect
information. While we maintain product liability insurance
coverage in an amount that we currently believe is sufficient
for our business, we cannot assure you that this coverage will
prove to be adequate or will continue to be available on
acceptable terms, if at all. A claim brought against us
regarding injuries related to the use of our system that is
uninsured or under-insured could materially harm our business,
financial condition, results of operations and prospects in the
future. A claim could also result in negative publicity.
Our
failure to comply with certain local, state and federal
government regulations could negatively affect our operating
results and future prospects.
Certain computer applications, software and systems, such as
ours, involving the detection of explosives, the identification
of narcotics and the use of X-ray technologies are subject to
regulation by numerous local, state and federal governments,
including the Department of Defense, the Drug Enforcement
Agency, and various other law enforcement agencies. As such, our
products and operations are subject to various local, state and
federal
16
regulations and oversight. Compliance with such current and
future regulations could have a material, adverse effect on our
business, results of operations, financial conditions and
prospects in the future.
Our
failure to comply with federal Food and Drug Administration
regulations could negatively affect our operating
results.
The FDA is responsible for, among other things, assuring the
safety and effectiveness of medical devices. Certain computer
applications, software and systems are considered medical
devices, and therefore subject to regulation by the FDA. We do
not believe that our system currently is subject to FDA
oversight. Nevertheless, if the FDA were to determine that our
system is subject to FDA jurisdiction, or in the event we expand
our product line into medical diagnostics, we may become subject
to FDA jurisdiction, as such compliance with FDA requirements
could have a material, adverse effect on our business, results
of operations, financial conditions and prospects in the future.
Product
liability claims may exceed our insurance
coverage.
The manufacture and sale of our products carries the risk of
product liability claims. Any error, no matter how unlikely, may
cost lives and significant property damage. While we intend to
maintain a prudent level of product liability insurance and
errors and omissions coverage, there can be no assurance that
our coverage limits will be adequate to protect us from any
liabilities we might incur in connection with the sale of our
products or that we will be able to maintain this level of
coverage in the future. Because we plan to market and sell
anti-terrorism technology to the U.S. government, however,
damages paid resulting from lawsuits related to these activities
may be limited or otherwise covered under the federal Support
Anti-Terrorism by Fostering Effective Technologies (SAFETY) Act
of 2002, a part of the Homeland Security Act of 2002.
In addition, in order to maintain our competitive position, we
will likely need to maintain a steady pace of new products and
updates or enhancements of our existing product, the
XT250tm
system. Accordingly, we may require increased product liability
coverage as additional products and updates come to the market
place. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful product
liability claim or series of such claims in excess of our
insurance coverage could have a materially adverse effect on our
business.
We
depend on certain key executive officers and the loss of such
key employees could materially adversely affect our
business.
We are dependent on our executive officers, the loss of any one
of whom could have an adverse effect on our business if we could
not promptly secure a replacement with equivalent expertise and
experience. We will rely on the management expertise and
experience of, among others, Mr. Brian T. Mayo, our
president and chief technology officer. We have a key-man
insurance policy for Mr. Mayo in the amount of $2,000,000.
While we believe that our management possesses the necessary
experience to successfully manage our operations, there can be
no guarantee that they will perform adequately or that our
operations will be successful. In addition, our future success
may depend in large part upon our ability to attract and retain
additional highly skilled managerial and other personnel. We may
not be successful in hiring or retaining the personnel we need
and this could adversely affect our business.
Risks
Related to Our Securities and this Offering
There
is no minimum amount required to be raised in this offering and
the funds received by us will not be held in an escrow account
and will be available for our use upon receipt.
There is no minimum amount of securities that need to be sold in
this offering for us to access the funds. The funds received in
the offering will not be held in an escrow account. Therefore,
the offering proceeds will be immediately available for use by
us and we do not have to wait until a minimum number of
securities have been sold to keep the proceeds from any sales.
We cannot assure you that subscriptions for the entire offering
will be obtained. We have the right to terminate the offering of
the securities at any time, regardless of the number of
securities we have sold since there is no minimum subscription
requirement. Furthermore, the investors will not be refunded
their
17
investments in the event that the offering is terminated. Our
ability to meet our financial obligations and cash needs, and to
achieve our objectives, could be adversely affected if the
entire offering of securities is not fully subscribed for.
An
active trading market for the debentures will not
develop.
We cannot assure you that an active trading market for the
debentures will develop or as to the liquidity or sustainability
of any such market, the ability of holders to sell their
debentures or the price at which holders of the debentures may
be able to sell their debentures. If an active market for the
debentures fails to develop or be sustained, the trading prices
of the debentures could be affected adversely. Future trading
prices of the debentures also will depend on many other factors,
including prevailing interest rates, the market for similar
securities, the price of our common stock and our performance.
The debentures are not listed on any securities exchange and we
do not intend to apply for listing of the debentures on any
securities exchange or trading market.
State
Blue Sky laws may limit resale of the shares of common
stock.
The holders of our shares of common stock and persons who desire
to purchase them in any trading market that might develop in the
future should be aware that there may be significant state law
restrictions upon the ability of investors to resell our shares.
Accordingly, if we are not successful in having our securities
listed on the NASDAQ Capital Market, investors should consider
any secondary market for our securities to be a limited one
including a trading market on the over the counter bulletin
board (OTCBB). If the securities are traded on the
OTCBB we intend to seek coverage and publication of information
regarding the Company in an accepted publication which permits a
manual exemption. This manual exemption permits a
security to be distributed in a particular state without being
registered if the company issuing the security has a listing for
that security in a securities manual recognized by the state.
However, it is not enough for the security to be listed in a
recognized manual. The listing entry must contain (i) the
names of issuers, officers, and directors, (ii) an
issuers balance sheet, and (iii) a profit and loss
statement for either the fiscal year preceding the balance sheet
or for the most recent fiscal year of operations. Furthermore,
the manual exemption is a non issuer exemption restricted to
secondary trading transactions, making it unavailable for
issuers selling newly-issued securities. Most of the accepted
manuals are those published in Standard and Poors,
Moodys Investor Service, Fitchs Investment Service,
and Bests Insurance Reports, and many states expressly
recognize these manuals. A smaller number of states declare that
they recognize securities manuals but do not specify
the recognized manuals. The following states do not have any
provisions and therefore do not expressly recognize the manual
exemption: Alabama, Georgia, Illinois, Kentucky, Louisiana,
Montana, South Dakota, Tennessee, Vermont and Wisconsin.
An
active trading market for our securities may not develop and we
expect that our stock price will be volatile and could decline
following this offering, resulting in a substantial loss in your
investment.
Prior to this offering, there has not been a public market for
our securities. An active trading market for our securities may
never develop or if it develops it may not be sustained, which
could affect your ability to sell your securities and could
depress the market price of your securities. In addition, the
initial public offering price of the securities has been
determined by the board of directors and management and may bear
no relationship to the price at which the securities will trade
upon completion of this offering. The offering price does not
necessarily indicate the current value of the securities offered
hereby and should not be regarded as an indicator of any future
market performance or value thereof.
In addition, the stock market can be highly volatile. As a
result, the market price of our securities can be similarly
volatile, and investors in our securities may experience a
decrease in the value of their securities, including decreases
unrelated to our operating performance or prospects. The market
price of our securities after the offering will likely vary from
the initial offering price and is likely to be highly
unpredictable and subject to wide fluctuations in response to
various factors, many of which are beyond our control. These
factors include:
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variations in our operating results;
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changes in the general economy and in the local economies in
which we operate;
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the departure of any of our key executive officers and directors;
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the level and quality of securities analysts coverage for
our securities;
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announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
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changes in the federal, state, and local laws and regulations to
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future sales of our securities.
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You
will experience immediate and substantial dilution when you
purchase securities in this offering.
Upon the closing of this offering, investors will incur
immediate and substantial dilution in the per share net tangible
book value of their shares of common stock. At
September 30, 2009, after giving pro forma effect to our
receipt of the net proceeds of this offering, we would have had
a pro forma net tangible book value of
$ per share. Net tangible book
value is the amount of our total assets minus intangible assets
and liabilities. This represents a gain in our net tangible book
value of $ per share for the
benefit of our current stockholders, and dilution of
$ ,
or % of the public offering price,
for investors in this offering. Investors in this offering will
be subject to increased dilution upon the exercise of existing
outstanding stock options and warrants. These stock options and
warrants, for which cash would need to be remitted to us for
exercise, represent an additional 15,055,959 shares of
common stock that could be issued in the future. However, each
of our warrantholders has agreed not to exercise the warrants
for three years subsequent to the effective date of the
registration statement in this offering.
Shares
of stock issuable pursuant to our stock options, warrants, and
convertible preferred stock may adversely affect the market
price of our common stock.
As of February 8, 2010, we have outstanding under our 2004
Stock Option Plan, stock options to purchase an aggregate of
2,105,757 shares of common stock at a weighted average
exercise price of $2.08 per share and outstanding warrants to
purchase 13,078,685 shares of common stock (for which cash
would need to be remitted for us to exercise) at a weighted
average exercise price of $2.99 per share. In addition, as of
February 8, 2010, we have outstanding shares of preferred
stock as follows: Series A preferred stock
962,101 shares convertible at $3.80 per share;
Series B preferred stock 1,619,127 at $3.00 per
share; and Series C preferred stock 365,996 at
$3.00 per share; and Series D preferred stock
563,414 at $3.00 per share, all of which are immediately
convertible into shares of our common stock on a
one-for-one
basis on the effective date of this registration statement. In
addition, 1,153,731 share based incentive grants are
outstanding and 3,846,269 shares of our common stock are
reserved for issuance under our 2009 Long Term Incentive
Compensation Plan. The exercise of the stock options, preferred
stock and warrants and the sales of stock issuable pursuant to
them, would further reduce a stockholders percentage
voting and ownership interest. However, each of our
warrantholders has agreed not to exercise the warrants for three
years subsequent to the closing of this offering.
The stock options, warrants, and preferred stock are likely to
be exercised when our common stock is trading at a price that is
higher than the exercise price of these options and warrants,
and we would be able to obtain a higher price for our common
stock than we will receive under such options and warrants. The
exercise, or potential exercise, of these options and warrants
could adversely affect the market price of our common stock and
adversely affect the terms on which we could obtain additional
financing.
The
large number of shares eligible for future sale may adversely
affect the market price of our common stock.
The sale, or availability for sale, of a substantial number of
shares of common stock in the public market could materially
adversely affect the market price of our common stock and could
impair our ability to raise additional capital through the sale
of our equity securities. At the completion of this offering,
assuming the sale of 2,500,000 shares of common stock,
there will be approximately 8,803,042 shares of common
stock issued and outstanding. Of these shares, approximately
2,500,000 will be freely transferable, and approximately
6,303,042 shares will be eligible for resale under
Rule 144 following the expiration of our
lock-up
agreements
19
on the one year anniversary of the effective date of this
registration statement, subject to exceptions for holders of
2,500 shares or less who have six-month
lock-up
agreements with us. Our executive officers and directors
beneficially own 3,431,490 shares, which would be eligible
for resale following expiration of the
lock-ups,
subject to the volume and manner of sale limitations of
Rule 144 of the Securities Act of 1933, as amended (the
Securities Act). Upon the conversion of our
outstanding preferred stock into shares of common stock an
additional 2,846,305 shares will be restricted
shares, as that term is defined in Rule 144, and will
be eligible for sale under the provisions of Rule 144
following expiration of the
lock-ups.
For additional information, see Shares Eligible for
Future Sale.
We
have provisions in our certificate of incorporation that
substantially eliminate the personal liability of members of our
board of directors for violations of their fiduciary duty of
care as a director and that allow us to indemnify our officers
and directors.
Certain provisions in our certificate of incorporation could
make it very difficult for you to bring any legal actions
against our directors for such violations or could require us to
pay any amounts incurred by our directors in any such actions.
Pursuant to our certificate of incorporation and amended and
restated by-laws, members of our board of directors will have no
liability for violations of their fiduciary duty of care as a
director, except in limited circumstances. This means that you
may be unable to prevail in a legal action against our directors
even if you believe they have breached their fiduciary duty of
care. In addition, our certificate of incorporation and amended
and restated by-laws allows us to indemnify our directors from
and against any and all expenses or liabilities arising from or
in connection with their serving in such capacities with us.
This means that if you were able to enforce an action against
our directors or officers, in all likelihood we would be
required to pay any expenses they incurred in defending the
lawsuit and any judgment or settlement they otherwise would be
required to pay.
Our
officers and directors have significant voting power and may
take actions that may not be in the best interests of other
stockholders.
Our executive officers and directors currently beneficially own
or control 68.7% of our outstanding common stock. Upon the
completion of this offering, our executive officers and
directors will beneficially own or control approximately 36.1%
of our outstanding common stock. If these stockholders act
together, they will be able to exert significant control over
our management and affairs requiring stockholder approval,
including approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or
preventing a change in control and might adversely affect the
market price of our common stock. As a result, these
stockholders could together control all matters presented to our
stockholders for approval, including election and removal of our
directors and change of control transactions. The interests of
these stockholders may not always coincide with the interests of
the other holders of our common stock.
We are
restricted from paying dividends under the terms of our
preferred stock designations and you should not buy our stock if
you expect dividends.
We currently intend to retain our future earnings to support
operations and to finance expansion and, therefore, we do not
anticipate paying any cash dividends on our capital stock in the
foreseeable future. Furthermore, the terms of our preferred
stock agreements restrict the payment of dividends and provide
that except for the ratable payment of dividends on the
Series A, B, C and D preferred stock, we may not directly
or indirectly declare or pay any cash or property dividends or
make any cash or property distributions upon any of its capital
stock or other equity securities. You should not buy our stock
if you are expecting to receive cash dividends.
As a
public company we will incur additional cost and face increased
demands on our management and key employees.
We have never operated as a public company. As a public company,
we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as rules implemented by the
Securities and Exchange Commission, or SEC, and the exchange
where we propose to trade our securities, impose various
requirements on public companies. Our management and other
personnel will devote substantial amounts of time to these
requirements. We expect these requirements to significantly
increase
20
our legal and financial compliance costs and to make some
activities more time-consuming and costly. In addition, we will
incur additional costs associated with our public company
reporting requirements. These rules and regulations also make it
more difficult and more expensive for us to obtain director and
officer liability insurance. We cannot predict or estimate the
amount of additional costs we may incur or the timing of such
costs. If our profitability is harmed by these additional costs,
it could have a negative effect on the trading price of our
common stock.
We
will retain broad discretion in using the net proceeds from this
offering and may spend a substantial portion in ways with which
you do not agree.
Our management will retain broad discretion to allocate the net
proceeds of this offering. The net proceeds may be applied in
ways with which you and other investors in the offering may not
agree, or which do not increase the value of your investment. We
anticipate that we will use the remainder of the net proceeds
for working capital and other general corporate purposes, which
may include the acquisition of other businesses, products or
technologies. In the event that we are unable to meet the terms
of the settlement agreement we intend to use a portion of our
net proceeds from this offering to repay the outstanding balance
under our existing debt instruments, which was $2,697,515 as of
September 30, 2009. We have not allocated these remaining
net proceeds for any specific purposes. Our management might not
be able to yield a significant return, if any, on any investment
of these net proceeds.
We do
not know whether a market will develop for our common stock or
what the market price of our common stock will be and as a
result it may be difficult for you to sell your shares of our
common stock.
Before this offering, there was no public trading market for our
common stock. If a market for our common stock does not develop
or is not sustained, it may be difficult for you to sell your
shares of common stock at an attractive price or at all. We
cannot predict the prices at which our common stock will trade.
The initial public offering price for our common stock was
determined by the board of directors and management and may not
bear any relationship to the market price at which the common
stock will trade after this offering or to any other established
criteria regarding our value. It is possible that in one or more
future periods our results of operations may be below the
expectations of public market analysts and investors and, as a
result of these and other factors, the price of our common stock
may fall.
If
securities analysts do not publish research or reports about our
business or if they publish negative evaluations of our stock,
the price of our stock could decline.
The trading market for our common stock will rely in part on the
research and reports that industry or financial analysts publish
about us or our business. We do not currently have and may never
obtain research coverage by industry or financial analysts. If
no or few analysts commence coverage of us, the trading price of
our stock would likely decrease. Even if we do obtain analyst
coverage, if one or more of the analysts covering our business
downgrade their evaluations of our stock, the price of our stock
could decline. If one or more of these analysts cease to cover
our stock, we could lose visibility in the market for our stock,
which in turn could cause our stock price to decline.
You
will experience immediate and substantial dilution in your
investment.
The offering price of the common stock is substantially higher
than the net tangible book value per share of our common stock,
which on a pro forma basis was $
as of December 31, 2008. As a result, you will experience
immediate and substantial dilution in pro forma net tangible
book value when you buy shares of common stock in this offering.
This means that you will pay a higher price per share than the
amount of our total assets, minus our total liabilities, divided
by the number of outstanding shares. Holders of our common stock
will experience further dilution if options or other rights to
purchase our common stock that are outstanding or that we may
issue in the future are exercised or converted, or if we issue
additional shares of our common stock, at prices lower than our
net tangible book value at such time.
21
Provisions
in our organizational documents and in the Delaware General
Corporation Law may prevent takeover attempts that could be
beneficial to our stockholders.
Provisions in our certificate of incorporation and amended and
restated by-laws, both of which will be effective upon the
closing of this offering, and 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 our certificate of
incorporation or amended and restated by-laws or 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. Our board of directors has the authority to issue
up to 6,000,000 shares of preferred stock in one or more
series and to fix the powers, preferences and rights of each
series without stockholder approval. The ability to issue
preferred stock could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain
control of our company, or otherwise could adversely affect the
market price of our common stock. Further, 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.
We may
not be able to maintain our anticipated listing on the NASDAQ,
which may limit the ability of purchasers in this offering to
resell their common stock in the secondary market.
Although we have applied to list our common stock and warrants
on NASDAQ, we might not meet the criteria for initial listing on
NASDAQ, and then following such initial listing, continued
listing in the future. A company having a security listed on
NASDAQ must make all required filings on a timely basis with the
Securities and Exchange Commission. If we are unable to meet the
qualitative and quantitative continued listing criteria of the
NASDAQ and became delisted, quotations for trading of our
securities could be conducted in the
Over-the-Counter
Bulletin Board, or the Pink Sheets, LLC (if we are not
current in our reporting obligations with the SEC). In such
case, an investor would likely find it more difficult to dispose
of our securities or to obtain accurate market quotations for
it. If our securities were delisted from the NASDAQ, they could
become subject to the Securities and Exchange Commissions
penny stock rules, which impose sales practice
requirements on broker-dealers that sell securities to persons
other than established customers and accredited
investors. Application of this rule could make
broker-dealers unable or unwilling to sell our securities and
limit the ability of purchasers in this offering to resell their
securities in the secondary market.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this prospectus are forward-looking
statements, as well as historical information. Although we
believe that the expectations reflected in these forward-looking
statements are reasonable, we cannot assure you that the
expectations reflected in these forward-looking statements will
prove to be correct. Our actual results could differ materially
from those anticipated in forward-looking statements as a result
of certain factors, including matters described in the section
titled Risk Factors. Forward-looking statements
include those that use forward-looking terminology, such as the
words anticipate, believe,
estimate, expect, intend,
may, project, plan,
will, shall, should and
similar expressions, including when used in the negative.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these
statements involve risks and uncertainties and no assurance can
be given that actual results will be consistent with these
forward-looking statements. Actual results may be materially
different than those described herein. Important factors that
could cause our actual results, performance or achievements to
differ from these forward-looking statements include the factors
described in the Risk Factors section and elsewhere
in this prospectus.
All forward-looking statements attributable to us are expressly
qualified in their entirety by these and other factors. We
undertake no obligation to update or revise these
forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to
reflect the occurrence of unanticipated events or otherwise,
except to the extent required by federal securities laws.
22
USE OF
PROCEEDS
We are conducting this offering as a self-underwriting on a best
efforts basis. If we sell the maximum securities offered, we
estimate the net proceeds to us from the sale of the securities
in this offering will be approximately
$ , based on an assumed public
offering price of $ per share and
including the proceeds of the sale of $5,000,000 in debentures,
after deducting our estimated offering expenses.
There is no minimum amount of securities that need to be sold in
the offering, and we may receive far less in proceeds than what
is stated in the table below. We intend to use the net proceeds
from this offering for the following purposes and in the
following order of priority:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
Percentage of
|
|
Purpose
|
|
Amount
|
|
|
Net Proceeds
|
|
|
Repayment of senior indebtedness
|
|
$
|
4,394,274
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
Working capital and general corporate purposes
|
|
$
|
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
Funding of research and development
|
|
$
|
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
We intend to use approximately $4,394,274 of the proceeds to
discharge our senior indebtedness. We plan to use the remainder
of the net proceeds of this offering to finance working capital
and general corporate purposes include amounts required to pay
for salaries, professional fees, public reporting costs,
office-related expenses and other corporate expenses, including
interest and overhead. We anticipate using the remaining
proceeds for research and product development as a part of our
growth strategy. We will not receive any proceeds from the sale
of warrants by the selling securityholders.
We have indicated the order of priority in the table above for
use of the proceeds of this offering. If substantially less than
the maximum proceeds are obtained, we anticipate we will apply
the payment of all the proceeds to the working capital and
general corporate purposes. Pending these uses, we intend to
invest most of the net proceeds from this offering in
short-term, investment-grade, interest-bearing securities.
DETERMINATION
OF OFFERING PRICE
The initial public offering price of shares of our common stock
and conversion price for the debentures was determined by our
board of directors and management. Among the factors considered
in determining the initial public offering price and conversion
price were our future prospects and those of our industry in
general, and certain other financial and operating information
in recent periods, and other financial and operating information
of companies engaged in activities similar to ours. We cannot
assure you, however, that the prices at which the shares will
sell in the public market after this offering will not be lower
than the initial public offering price or debenture conversion
price or that an active trading market in our common stock will
develop and continue after this offering.
DIVIDEND
POLICY
We have never paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain any future earnings to
fund the development and growth of our business. Furthermore,
the terms of our preferred stock agreements restrict the payment
of dividends and provide that except for the ratable payment of
dividends on the Series A, B, C and D preferred stock, we
may not directly or indirectly declare or pay any cash or
property dividends or make any cash or property distributions
upon any of our capital stock or other equity securities. You
should not buy our stock if you are expecting to receive cash
dividends.
23
CAPITALIZATION
The following table summarizes our short-term debt and
capitalization as of September 30, 2009, (a) on an
actual basis, and (b) on a pro forma basis after giving
effect to the conversion of all outstanding shares of our
Series A, B, C, and D preferred stock into
3,510,638 shares of our common stock which will occur
automatically on the effective date of the registration
statement for this offering.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
Pro Forma Basis
|
|
|
|
|
|
|
After Giving Effect
|
|
|
|
|
|
|
to Conversion of
|
|
|
|
Actual
|
|
|
all Preferred Stock
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Short-term debt
|
|
$
|
2,697,515
|
|
|
|
2,697,515
|
|
Series A Preferred stock, $.0001 par value, 7%
cumulative dividend, 962,101 shares authorized, issued and
outstanding
|
|
|
4,345,558
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 7%
cumulative dividend, 1,800,000 shares authorized and
1,619,127 issued and outstanding
|
|
|
5,447,444
|
|
|
|
|
|
Series C Preferred stock, $.0001 par value, 7%
cumulative dividend, 1,350,000 shares authorized, 365,996
issued and outstanding
|
|
|
1,124,912
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common Stock, $0.0001 par value: authorized
30,000,000 shares; issued and outstanding
1,767,156 shares, actual; issued and outstanding, pro forma
as adjusted for this offering, shares(1)
|
|
|
177
|
|
|
|
472
|
|
Additional paid in capital
|
|
|
1,493,875
|
|
|
|
12,411,494
|
|
Accumulated deficit
|
|
|
(16,202,655
|
)
|
|
|
(16,202,655
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(14,708,603
|
)
|
|
|
(3,790,689
|
)
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
(1,093,174
|
)
|
|
$
|
(1,093,174
|
)
|
|
|
|
|
|
|
|
|
|
24
PRICE
RANGE OF COMMON STOCK
Our common stock is not currently traded on any market or
exchange. We have applied to list our common stock and warrants
on the NASDAQ Capital Market. We do not currently satisfy the
eligibility criteria for listing our common stock on NASDAQ and
can provide no assurances that our securities will be accepted
for listing on NASDAQ at the offering or following the offering.
If our securities are not accepted for listing on NASDAQ we will
seek to trade our common stock and warrants on the
over-the-counter
bulletin board. Furthermore, if our securities are accepted for
listing on NASDAQ, there can be no assurance that we will
continue to satisfy such eligibility criteria to be listed on
NASDAQ.
As of February 8, 2010, we had 108 stockholders of record
of our common stock.
DILUTION
Purchasers of securities in this offering will be diluted to the
extent of the difference between the public offering price per
share and the net tangible book value per share of our common
stock immediately after this offering. Net tangible book value
dilution per share represents the difference between the amount
per share paid by purchasers of common stock in this offering
and the net tangible book value per share of common stock
immediately after completion of this offering.
Our net tangible book value (deficit) as of September 30,
2009, was $(4,101,288) or $(2.32) per share of common stock. Net
tangible book value (deficit) per share as of a specified date
is determined by dividing our tangible book value (deficit)
(total tangible assets less total liabilities) by the number of
outstanding shares of common stock at such date. After giving
effect to our sale of the 2,500,000 shares of common stock
and convertible debentures offered by this prospectus (based
upon an assumed public offering price of
$ per share and $1,000 per
debenture, after deducting our estimated offering expenses), our
pro forma net tangible book value as of September 30, 2009,
would have been $ , or
$ per share of common stock. This
represents an immediate increase in pro forma net tangible book
value to existing stockholders of
$ per share, and an immediate
dilution to new investors of $ per
share, or % of the public offering
price of the shares and % of the
convertible debentures offered in this offering. The following
table illustrates the per share dilution:
|
|
|
|
|
|
|
|
|
Assumed public offering price per share
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Assumed public offering price per debenture
|
|
|
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Net tangible book value (deficit) per share as of
September 30, 2009
|
|
$
|
(2.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in pro forma net tangible book value (deficit) per
share attributable to new investors in this offering
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of
September 30, 2009 after this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value dilution per share to new
investors in this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows as of February 8, 2010, the
difference between the number of shares of common stock
purchased from us (and including shares of preferred stock)
which will convert into common stock on the effective date of
this registration statement, the total consideration paid to us
and the average price paid per share by existing stockholders
who are officers, directors or affiliated persons and by new
investors purchasing common stock in this offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
per Share
|
|
|
Existing stockholders who are our officers, directors or
affiliated persons
|
|
|
3,209,669
|
|
|
|
|
%
|
|
$
|
5,907,233
|
|
|
|
|
%
|
|
$
|
1.84
|
|
New investors
|
|
|
2,500,000
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
25
Investors in this offering will be subject to increased dilution
upon the exercise of outstanding stock options and warrants.
However, each of our Series B, C and D warrantholders has
agreed not to exercise these warrants until the three year
anniversary of the effective date of this registration
statement. As of February 8, 2010, these stock options and
warrants represent an additional 15,030,711 shares that
could be issued (for which cash would need to be remitted to us
for exercise) in the future, of which 2,105,757 are outstanding
options with a weighted average exercise price of $2.08 and
13,078,685 are outstanding warrants with a weighted average
exercise price of $2.99. Of our outstanding options and
warrants, 1,190,537 options and 5,125,150 warrants are held by
our officers, directors and their affiliates.
26
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including those set forth under Risk
Factors and elsewhere in this prospectus. The following
discussion should be read in conjunction with our financial
statements and related notes thereto included elsewhere in this
prospectus.
Overview
We design and develop material authentication and detection
solutions that allow molecular structure analysis on hidden
materials. Our license of patented technology owned by Rutgers
University combines penetrating X-rays, forensic analysis, and
automated software algorithms that allow non-technical personnel
to rapidly validate products even when sealed within their
original packaging. The initial focus for our product, the
XT250tm
Material Identification System, has been molecular screening to
protect the distribution supply chain from counterfeits,
adulterations, and contamination of pharmaceuticals.
The technology we license from Rutgers allows inventory that is
packaged and sealed to be non-intrusively verified. Deviations,
that may be harmful to the public, are detected by our
XT250tm
system and removed from the supply chain. We believe our company
has raised the level of awareness of the dangers of counterfeits
via our advertising, speaking engagements, websites, and
internet blog activities. We have educated our potential
customers on our product offerings and worked with them to
develop processes to better protect their inventories.
Management has succeeded in developing strategic partnerships in
key market segments. PILOT programs with major pharmaceutical
manufacturers have allowed us to program the
XT250tm
system for their specific needs. PILOT programs with major
distributors helped us to develop processes and procedures to
maximize value for all of our customers. PILOT programs with
major returns logistics companies provided exposure and insight
into the dispensing segment of the pharmaceutical market,
resulting in enhanced capabilities of the
XT250tm
that were developed. Each of the PILOT programs provided XStream
Systems with an opportunity to further validate the technology
and demonstrate value for a particular market segment.
XT250tm
units were discounted to early adopters, who agreed to PILOT
programs, to provide an additional incentive for the customer.
As the PILOT programs complete, management expects to return to
significantly reduced discounts off the retail purchase price
for future sales of
XT250tm
systems.
Our PILOT programs have occurred in several different
pharmaceutical markets, a U.S. government entity and in
several university research settings as follows:
|
|
|
|
|
Two programs were conducted in national pharmaceutical
distributors one for a duration of one year and one
program is continuing into its fifth month.
|
|
|
|
One program has been conducted with an international
pharmaceutical manufacturer currently continuing into its fifth
month.
|
|
|
|
One program was conducted in a national pharmaceutical reverse
logistics company which lasted for approximately six months.
|
|
|
|
One program was conducted with a U.S. government entity for
three months.
|
|
|
|
Two programs were conducted in university research settings,
each of which lasted for approximately six months.
|
|
|
|
One program was conducted in a specialty pharmaceutical
distribution company for two months, which resulted in an
XT250tm
unit sale.
|
To date, we have sold one
XT250tmunit
resulting from a PILOT program. We believe the PILOT programs
with our pharmaceutical distributors have been successful in
proving the technology, increasing the development of the system
and detecting multiple counterfeit or fraudulent medications.
Additionally, we believe our PILOT program
27
conducted with universities was successful in testing the
validity of the technology and in its efficacy in forensic and
defense related academic research.
The energy dispersive X-ray diffraction (EDXRD) technology
licensed by the Company was developed and tested by Rutgers for
detection of hidden explosives, under the guidance of the
Federal Aviation Administration (and Transportation Security
Laboratory/TSL). TSL also performed testing of the EDXRD
technology for explosives detection. A university performed a
PILOT program, which enabled them to analyze newly developed
nanotechnology materials. The PILOT program was successful in
providing researchers molecular level information, but their
need was short lived and a lack of capital budget did not allow
them to purchase the XT250 unit. A second university PILOT
program was to determine whether the XT250 could be used for the
detection of illicit drugs. The PILOT program showed a wide
variation of formulations for street drugs, and therefore no
standard molecular fingerprints could be effectively developed
for the XT250. A PILOT XT250 was performed at a local South
Florida county sheriffs office for the detection of
illicit drugs. While detection of crack cocaine was highly
successful, other drugs could not be properly tested due to lack
of standards for street drugs. The PILOT program at Pfizer was
to determine if the XT250 could be effectively deployed in a
Returns area, where pharmaceuticals are returned
from hospitals, pharmacies, and clinics. These returns may be
expired drugs, partially opened bottles, or overstock items,
each being returned for cash credits. This is a suspected avenue
for counterfeits to enter the legitimate supply chain. The XT250
was effective in detecting fraudulent drugs (clearly evident
replacements) and counterfeit drugs, which looked like the valid
medicine, but were not. The Pfizer PILOT was a stepping stone to
further refine the Companys business model. The PILOT
program at a pharmaceutical distribution services company was to
determine if the XT250 could be used for screening returned
pharmaceutical products. The XT250 was very successful in
detecting counterfeit drugs, but the company stopped using the
system after a period of months as this company found the XT250
did not meet its business needs. We believe that this PILOT
program was ultimately valuable in the Company further
developing and refining its business plan.
Management believes that our Secure Pharma Network (SPN) may
provide significant growth opportunities. SPN is a software
product that allows customers to access via the Internet all of
their systems purchased from XStream Systems. Customers may
remotely manage their systems, downloading new material
fingerprints or software updates, uploading results, and
operating their systems remotely. Detailed reports can be
generated, as well as customized and aggregated reporting across
multiple systems. The ability to collect test results from
multiple systems from our customers, process that data, and
provide meaningful information across the industry provides
significant value to our customers, which management believes
can produce revenue in the future. We believe that integrating
SPN into our customers inventory management systems
provides additional value to our customers. Since SPN is
software based, revenues we anticipate to generate from SPN in
the future are expected to increase our profit margins. To date,
no revenues have been earned from SPN.
The
XT250tm
system can be programmed for different materials. In addition to
the pharmaceutical distribution market that is already
established, management hopes to target other markets with the
XT250tm
system. Some industries that perform visual inspections today,
like customs inspections and cosmetics distribution, could
enhance their verification process with the
XT250tm
system. Field related industries that rely upon sending samples
to forensic laboratories, such as mining and cement industries,
could analyze samples themselves with the
XT250tm
system. These are just some of the large markets that provide
opportunity for our
XT250tm
system to verify, detect or identify materials. In markets where
the
XT250tm
system may not meet the needs for the particular application,
the technology is scalable in terms of speed, portability, and
test sample size so that future products may be developed to
meet those needs.
Our initial net sales consist of
XT250tm
units sold to equipment distributors at a significant discount
off the retail purchase price as well as direct retail sales to
pharmaceutical distributors and manufacturers. We have sold one
unit at the retail price of $179,000 and we are currently
offering the
XT250tm
at discounts below this retail price.
Sales to equipment distributors represented 100% and
approximately 38% of our net sales during 2007 and 2008,
respectively, with the remaining sales in 2008 directly to
pharmaceutical distributors. Gross profit consists of net sales
less product, packaging and freight, field service, warranty,
and financing costs. Selling and advertising costs consist of
sales person expenses, advertising and marketing expenses, as
well as royalty fees. Research and development expenses consist
primarily of engineering personnel expenses, engineering
consulting and prototype
28
expenditures. General and administrative expenses include
administrative salaries and payroll related expenses,
stock-based compensation expenses, depreciation, rent and
general overhead expenses.
The management team reviews our performance on a regular basis
using a variety of financial and non-financial metrics. These
metrics include, but are not limited to, net sales, gross
margin, sales and marketing expenses, personnel costs, accounts
receivable and accounts payable aging, liquidity and cash
resources. Management compares actual results against goals and
budgets to take appropriate actions in order to improve
performance.
At September 30, 2009, we had 12 employees in our
operations, 2 of whom were sales and business development
executives. Most of our staff is employed at our corporate
headquarters in Sebastian, Florida.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
generally accepted accounting principles in the U.S. These
accounting principles require management to make use of certain
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reported
periods. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
could differ from those estimates, and revisions to estimates
are included from the period in which the actual amounts become
known.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in our preparation
of our consolidated financial statements, and therefore should
be read in conjunction with our summary of significant
accounting policies (see Note 2 of our Notes to
Consolidated Financial Statements). Our critical accounting
policies are as follows:
Revenue
Recognition
The Companys
XT250tm
systems include software embedded in the tangible product that
is essential to its functionality. The software does not require
significant production, modification or customization.
Revenue from the sale of our
XT250tm
systems is recognized when all of the following criteria have
been met:
a. persuasive evidence of an arrangement exists,
b. delivery has occurred,
c. the vendors fee is fixed or determinable, and
d. collectibility is probable.
While we engage in strategic pilot programs with pharmaceutical
manufacturers and distributors, revenue is not recognized until
the unit is sold, delivered, installed and accepted, and
collection of the sales price is probable.
We have two pricing models including wholesale pricing for
distributors who are authorized sales agents and retail pricing
to third party end-users.
Prior to installation, deposits are ordinarily required from
customers before manufacturing commences. These amounts are
recorded as customer deposits in current liabilities on the
accompanying balance sheets.
There are no post-installation obligations other than warranty
of the equipment for one year after installation. Warranty
expense is estimated based on historical results and is accrued
at the time the revenue is recognized.
We anticipate generating revenues from three-way revenue sharing
arrangements whereby a returns goods processing center will host
XT250tm
systems, scan pharmaceuticals for third party manufacturers,
distributors
and/or
retail chains, and charge a fee per scan. We would retain
ownership of the systems and share in the revenue
29
generated. Revenue would be recognized under this model when
evidence of an arrangement exists, the services have been
rendered and the collectability of the revenue is probable.
We also anticipate generating revenues from the sale of our
Secure Pharma Network (SPN) software. The sale of SPN would be
commensurate with the sale of one or more
XT250tm
units as a separate and optional purchase of an annual software
license. If the customer chooses to purchase SPN, revenue from
the license would be recognized ratably over the term of the
license in accordance with FASB guidance.
Inventories
We state inventories at the lower of cost, determined using the
average cost method, or net realizable value. We review
inventory for excess quantities and obsolescence based on our
best estimates of future demand, product lifecycle status and
product development plans. We use historical information along
with these future estimates to reserve for obsolete and
potentially obsolete inventory.
Share-based
Payments
We record all stock-based awards, including employee stock
option grants, at fair value as of the grant date and recognize
these awards as expenses in our statement of operations over the
vesting period of the award in accordance with FASB issued
guidance on share based payments.
We estimate the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model. The weighted
average assumptions utilized for our valuation analysis, for the
years ended December 31, 2007 and 2008 and the six months
ended September 30, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Year Ended December 31,
|
|
Ended September 30,
|
|
|
2007
|
|
2008
|
|
2008
|
|
2009
|
|
Risk-free interest rate
|
|
3.96% - 5.19%
|
|
1.55% - 3.34%
|
|
2.49% - 3.34%
|
|
1.36% - 2.56%
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Expected volatility
|
|
53.89% - 70.74%
|
|
51.69% - 62.58%
|
|
51.69% - 58.67%
|
|
44.76% - 65.20%
|
Expected life in years
|
|
5 - 7
|
|
5 - 7
|
|
5 - 7
|
|
5 - 7
|
Service period in years
|
|
0 - 4
|
|
0 - 4
|
|
0 - 4
|
|
0 - 4
|
Weighted average fair value of options granted
|
|
$1.21
|
|
$0.16
|
|
$0.14
|
|
$0.38
|
The risk-free interest rate is derived from the Daily
U.S. Treasury Yield Curve Rate in effect as of the
valuation date of each grant. The dividend yield of zero is
based on the fact that our present intention is not to pay cash
dividends. Since our common stock is not traded on any public
market, we have used the historical volatility of select
comparable publicly traded companies over a period equivalent to
the Expected Term, which is the expected time from grant date
until exercise. For purposes of identifying otherwise similar
entities, we selected young, small (in revenues and size),
high-tech public companies for comparison purposes. While
volatility in the Companys stock price may create some
change to our expenses, as a result, it is likely to be
relatively small, since our Company is already highly volatile.
The stock price used in the Black-Scholes pricing model is
determined by our board of directors based on the most recent
sale of our securities to third party investors.
Intangible
Assets
Intangible assets are accounted for at cost and are amortized
over the estimated useful life of the asset on a straight-line
basis, which is generally three to 15 years. In 2005, we
purchased a license from a university for the exclusive right to
produce and sell products which utilize the universitys
patented X-ray defraction technology. In exchange for this
license, the university was issued 73,500 shares of our
common stock and we agreed to pay royalty
30
fees during the term of the agreement. The initial license fee
is stated at cost and amortized using the straight-line method
over 15 years beginning in the year it was acquired.
Income
Taxes
We account for income taxes in accordance with FASB guidance,
relating to accounting for income taxes in determining our
effective tax rate, provision for tax expense, deferred tax
assets and liabilities and the related valuation allowance. Our
provision for income taxes is determined using the asset and
liability method, which involves significant judgments and
estimates. Under this method, deferred income tax assets and
liabilities are calculated based upon the temporary differences
between the financial statement and income tax bases of assets
and liabilities using the combined federal and state effective
tax rates that are applicable to us in a given year.
The deferred income tax assets are recorded net of a valuation
allowance when, based on the weight of available evidence; we
believe it is more likely than not that some portion or all of
the recorded deferred tax assets will not be realized in future
periods. For the years ended December 31, 2007 and 2008 and
the nine months ended September 30, 2008 and 2009, we have
recorded a valuation allowance against the full amount of our
net deferred tax asset, because in our opinion, it is more
likely than not that these deferred tax assets will not be
realized through future taxable earnings or implementation of
tax planning strategies. A change in our estimate of future
taxable income may require a change to the valuation allowance.
The Company adopted the FASB issued guidance surrounding
uncertain tax positions on January 1, 2007. As a result of
the implementation, the Company determined that no material
adjustment was required; there were no unrecognized tax
benefits, and accordingly no associated penalties and interest
were required to be accrued as of December 31, 2008 or
2007. At September 30, 2009 there has been no material
change in unrecognized tax benefits or associated interest and
penalties.
Contingent
Liabilities and Off-Balance Sheet Arrangements
We are contingently liable for certain payments related to sales
of our
XT250tm
units. We signed recourse agreements whereby we guarantee the
payment of the unamortized principle balance of certain capital
lease agreements in the event the customer defaults on the
payments for the units. As of December 31, 2008 and
September 30, 2009, the unamortized principle balance of
these leases was approximately $135,000 and $0, respectively.
Other than these arrangements, we do not have any off-balance
sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results in
operations, liquidity, capital expenditures or capital resources
that is material to investors.
Results
of Operations
Results
of Operations for the Years Ended December 31, 2008 and
2007
The following table summarizes certain selected items from the
statement of operations for the year ended December 31,
2008 compared to the year ended December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2007
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
Revenues
|
|
$
|
135,000
|
|
|
$
|
439,000
|
|
|
$
|
304,000
|
|
|
|
225
|
%
|
Cost of Sales
|
|
|
157,508
|
|
|
|
129,036
|
|
|
|
(28,472
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
(22,508
|
)
|
|
$
|
309,964
|
|
|
$
|
332,472
|
|
|
|
(1477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss) Percentage of Revenue
|
|
|
(17
|
)%
|
|
|
71
|
%
|
|
|
|
|
|
|
87
|
%
|
31
Comparison
of Year Ended December 31, 2008 to Year Ended
December 31, 2007
Revenues
Revenues for the year ended December 31, 2008 amounted to
$439,000 as compared to revenues of $135,000 for the year ended
December 31, 2007, an increase of $304,000 or 225%. This
increase is primarily due to additional revenue of $150,000
during 2008 from a contract with the Transportation Security
Administration for the production of explosive simulants to be
used in testing commercial X-ray equipment and due to fact that
one unit was sold at or near wholesale pricing in 2008.
Cost
of Sales
Cost of sales for the year ended December 31, 2008 totaled
$129,036 as compared to $157,508 for the year ended
December 31, 2007, a decrease of $28,472 or 18%. This
decrease is due primarily to efficiencies gained in performing
the alignment, calibration and tooling process (ACT) which is
required at the time of sale. In addition, in 2008, we
eliminated a financing program to distributors which allowed
12 months deferred payments and resulted in significant
financing charges to us.
Gross
Profit
Gross profit for the year ended December 31, 2008 amounted
to $309,964 as compared to a gross loss of $22,508 for the
period ended December 31, 2007, an increase of $332,472.
Overall gross profit as a percentage of revenue increased to 71%
for the year ended December 31, 2008 from (17%) during the
year ended December 31, 2007. The increase in gross profit
is due to the aforementioned increase in sales prices and
decrease in cost of sales as well as additional revenues from a
contract modification with the Transportation Security
Administration for the production of explosive simulants which
had no costs associated with it in 2008. Revenues from the TSA
contract and the cost of performing the contract were recognized
in previous years. While the Company believed all requirements
had been completed in the years the revenue and costs were
recognized, the TSA indicated, that in their opinion, certain
requirements had not been met. As a result, in 2006 the Company
wrote off a portion of the revenues previously recognized. In
2008, the Company was able to renegotiate the contract terms to
exclude the specific requirements which were not achievable. The
revenue was originally recorded and recognized in 2005 when the
work was performed. In 2006, the Company wrote-off the disputed
amount as a reversal of the income during 2005 due to the fact
that the criteria for recognition had not been met in that
period. Subsequently, in 2008, as a result of the contract
modification, the criteria for recognition were met and
accordingly the income was properly recorded in that period. The
TSA decommissioned a portion of the contract and remitted the
agreed upon balance of $150,000.
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2007
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and advertising expenses
|
|
$
|
1,248,146
|
|
|
$
|
913,238
|
|
|
$
|
(334,907
|
)
|
|
|
(27
|
)%
|
Research and development expenses
|
|
|
1,900,897
|
|
|
|
635,531
|
|
|
|
(1,265,366
|
)
|
|
|
(67
|
)
|
Stock-based compensation expenses
|
|
|
424,462
|
|
|
|
235,323
|
|
|
|
(189,139
|
)
|
|
|
(45
|
)
|
Other general and administrative expenses
|
|
|
1,899,950
|
|
|
|
1,252,853
|
|
|
|
(647,097
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,473,455
|
|
|
|
3,036,945
|
|
|
|
(2,436,510
|
)
|
|
|
(45
|
)
|
Loss from operations
|
|
|
(5,495,963
|
)
|
|
|
(2,726,981
|
)
|
|
|
(2,768,982
|
)
|
|
|
(50
|
)
|
OTHER INCOME AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(363,887
|
)
|
|
|
(159,429
|
)
|
|
|
(204,458
|
)
|
|
|
(56
|
)
|
Interest income
|
|
|
52,360
|
|
|
|
26,156
|
|
|
|
26,204
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(5,807,490
|
)
|
|
$
|
(2,860,254
|
)
|
|
$
|
(2,947,236
|
)
|
|
|
(51
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Comparison
of Year Ended December 31, 2008 to the Year Ended
December 31, 2007
Selling
and advertising expenses
Selling and advertising expenses for the year ended
December 31, 2008 totaled $913,238 as compared to
$1,248,146 for the year ended December 31, 2007, a decrease
of $334,907 or 27%. This decrease is due primarily to changes
implemented in 2008 whereby full-time sales and marketing
headcount was reduced and outside consultants with
pharmaceutical industry experience were retained on a commission
basis.
Research
and development expenses
Research and development expenses for the year ended
December 31, 2008 amounted to $635,531 as compared to
$1,900,897 for the year ended December 31, 2007, a decrease
of $1,265,366 or 67%. This decrease is due primarily to
reductions in engineering headcount and prototype costs in 2008
as the engineering team transitioned the
XT250tm
Material Identification System from development stage to
production stage in late 2007.
Stock-based
compensation
Stock-based compensation for the year ended December 31,
2008 totaled $235,323 as compared to $424,462 for the period
ended December 31, 2007, a decrease of $189,139 or 45%.
This decrease is due principally to aforementioned headcount
reductions in sales and engineering as well as headcount
reductions in general and administrative staff.
General
and administrative expenses
General and administrative expenses for the year ended
December 31, 2008 amounted to $1,252,853 as compared to
$1,899,950 for the year ended December 31, 2007, a decrease
of $647,097 or 34%. This decrease is due predominately to
reductions in headcount in 2008 as the company transitioned the
XT250tm
Material Identification System from development stage to
production stage in late 2007.
Results
of Operations for the Nine Months Ended September 30, 2009
and 2008
The following table summarizes certain selected items from the
statement of operations for the nine month period ended
September 30, 2009 compared to the nine month period ended
September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Increase/(Decrease)
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
260,000
|
|
|
$
|
271,520
|
|
|
$
|
11,520
|
|
|
|
5
|
%
|
Cost of Sales
|
|
|
59,844
|
|
|
|
143,531
|
|
|
|
83,687
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$
|
200,156
|
|
|
$
|
127,989
|
|
|
$
|
(72,167
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Percentage of Revenue
|
|
|
77
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
(30
|
)%
|
Comparison
of Nine Months Ended September 30, 2009 to Nine Months
Ended September 30, 2008
Revenues
Revenues for the nine months ended September 30, 2009
amounted to $271,520 as compared to $260,000 for the nine months
ended September 30, 2008, an increase of $11,520 or 5%.
This increase is due to an additional sale of our
XT250tm
product during this period in 2009. Specifically, we sold one
unit during the nine months ended September 30, 2008 and
two units during the same period in 2009. In addition to the
unit sold in 2008, the Company recognized additional revenues of
$150,000 from a contract with the Transportation Security
Administration for the production of explosive simulants to be
used in testing commercial X-ray equipment.
33
Cost
of Sales
Cost of sales for the nine months ended September 30, 2009
totaled $143,531 as compared to $59,844 for the nine months
ended September 30, 2008, an increase of $83,687 or 140%.
This increase is due primarily to the sale of an additional
XT250tm
unit in the nine month period ended September 30, 2009 as
compared to the same period in 2008. In addition, one unit sold
during 2009, was sold by an outside sales and marketing firm
which earned a commission on the sale. All other sales in 2009
and 2008 were sold by salaried employees of the Company and
accordingly, no commission was paid.
Gross
Profit
Gross profit for the nine months ended September 30, 2009
amounted to $127,989 as compared $200,156 for the nine months
ended September 30, 2008, a decrease of $72,167 or 36%.
Overall gross profit as a percentage of revenue decreased to 47%
for the nine month period ended September 30, 2009 from 77%
during the nine month period ended September 30, 2008. This
decrease in gross profit is due to the aforementioned additional
revenue in 2008 from a contract with the Transportation Security
Administration offset by the gross profit from an additional
unit sale.
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Increase/(Decrease)
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and advertising expenses
|
|
$
|
719,602
|
|
|
$
|
707,679
|
|
|
$
|
(11,923
|
)
|
|
|
(2
|
)%
|
Research and development expenses
|
|
|
497,739
|
|
|
|
440,403
|
|
|
|
(57,336
|
)
|
|
|
(12
|
)
|
Stock-based compensation expenses
|
|
|
177,331
|
|
|
|
229,907
|
|
|
|
52,576
|
|
|
|
30
|
|
Other general and administrative expenses
|
|
|
1,022,562
|
|
|
|
824,565
|
|
|
|
(197,997
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,417,234
|
|
|
|
2,202,554
|
|
|
|
(214,680
|
)
|
|
|
(9
|
)
|
Loss from operations
|
|
|
(2,217,078
|
)
|
|
|
(2,074,565
|
)
|
|
|
142,513
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME AND (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(103,836
|
)
|
|
|
(159,015
|
)
|
|
|
(55,179
|
)
|
|
|
(53
|
)
|
Interest income
|
|
|
16,204
|
|
|
|
513
|
|
|
|
(15,691
|
)
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant income
|
|
|
|
|
|
|
904,591
|
|
|
|
904,591
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(2,304,710
|
)
|
|
$
|
(1,328,476
|
)
|
|
$
|
976,234
|
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and advertising expenses
Selling and advertising expenses for the nine months ended
September 30, 2009 amounted to $707,679 as compared to
$719,602 for the nine months ended September 30, 2008, a
decrease of $11,923 or 2%. This decrease is due primarily to
changes implemented in third quarter 2008 whereby full-time
sales and marketing headcount was reduced and outside
consultants with pharmaceutical industry experience were
retained on a commission basis. These savings were offset by
increased royalty fees of $375,000 in the nine month period
ended September 30, 2009 as compared to $225,000 during the
same period in 2008.
Research
and development expenses
Research and development expenses for the nine month period
ended September 30, 2009 totaled $440,403 as compared to
$497,739 for the nine month period ended September 30,
2008, a decrease of $57,336 or 12%. This decrease is due
primarily to reductions in engineering headcount and related
costs implemented as cost saving measures.
34
Stock-based
compensation
Stock-based compensation for the nine months ended
September 30, 2009 totaled $229,907 as compared to $177,331
for the nine months ended September 30, 2008, an increase
of $52,576 or 30%. This increase is due principally to stock
options granted to employees in January 2009 as retention
bonuses which vest over twelve months.
Other
General and administrative expenses
Other general and administrative expenses for the nine month
period ended September 30, 2009 amounted to $824,565 as
compared to $1,022,562 for the nine month period ended
September 30, 2008, a decrease of $197,997 or 19%. This
decrease is due predominately to reductions in headcount and
related costs implemented in late 2008 as cost saving measures.
Liquidity
and Capital Resources
We incurred a net loss of $1,328,476 including $229,907 of
stock-based compensation expense, for the nine months ended
September 30, 2009. Our accumulated deficit since inception
amounted to $16,202,655 as of September 30, 2009, including
$1,345,395 of cumulative stock-based compensation expense.
Our primary source of liquidity since inception has been cash
generated from private equity and convertible debt transactions
totaling approximately $15,400,000, net of offering costs,
through February , 2010. Our primary operating
cash requirements include the payment of salaries, employee
benefits and other personnel-related costs, as well as costs of
our sales and marketing efforts and our office facilities. We
had cash of $21,659 as of September 30, 2009 and have
generated additional cash from private equity transactions since
this date in the amount of $1,690,242 which is being used to
fund current operations. We believe our existing cash on hand,
the net proceeds from this offering, and cash generated from
operating activities will be sufficient to service our existing
debt, finance internal growth, and invest in research and
development of the technology. If we do not complete the initial
public offering to which this prospectus relates or raise the
maximum amount of funds contemplated in this prospectus, we
cannot provide assurances that we will be able to find
alternative financing on terms favorable to us or at all.
We were unable to comply with the final payment terms of our
settlement agreement with Kimball, and Kimball entered the
Agreed Judgment against us in the United States District Court
of the Southern District of Indiana on February 8, 2010 in
the amount of $3,200,000. If we are unable to discharge the
Agreed Judgment, Kimball could take action to execute on the
judgment to seize assets from our accounts. On February 10,
2010, Kimball filed a motion for proceedings supplemental to
collect the remaining $2.6 million balance due on the
$3.2 million judgment. As a result of the filing of the
Agreed Judgment, we anticipate that we will be required to
identify a new manufacturer for our
XT250tm
unit and will be required to purchase new inventory to
manufacture our units.
We are currently in arrears with respect to payments required
under our licensing agreement with Rutgers University totaling
$307,000 as of November 2009. The loss of, or our inability to
maintain, this license could result in our inability to sell our
products including the
XT250tm
systems without liability exposure including claims of
infringement from other parties. The licensing agreement
provides that if either party breaches or fails to perform any
provision of the agreement, the other party may give written
notice of the default to the breaching party. Representatives of
the Company have recently met with Rutgers to discuss the
licensing agreement between Rutgers and the Company. The parties
have mutually agreed and acknowledged verbally that the Company
will require capital financing to repay Rutgers amounts due
under the licensing agreement and that the agreement requires
restructuring in connection with royalty fees owed in the
future. The parties have verbally agreed to postpone
restructuring of the license agreement until completion of the
public offering. We believe that we and Rutgers are both using
good faith efforts to maintain the business relationship and
restructure the parties contractual obligations going
forward.
In addition, we are currently in default with respect to
$250,000 in principal amount of debentures with respect to two
of our debenture holders. The debentures matured on
December 31, 2009. We have not amended the terms of the
debentures to provide for extended maturity dates for these
instruments. We have verbally agreed with the holders that we
will repay the principal and accrued interest due under the
debentures from the proceeds of the offering.
35
If the proceeds of the offering are insufficient to repay our
obligations under the Agreed Judgment, the Rutgers licensing
agreement and the debentures, we will be required to seek
additional debt financing from a lender or equity financing in a
private placement offering. We have not identified bridge
financing investors at this time and we are uncertain whether we
may be able to achieve the financing needed on terms favorable
to us or at all.
Mr. Brian T. Mayo delivered a demand letter to our
management, dated November 16, 2009, alleging the
Companys breach of his executive employment agreement.
Mr. Mayo claims in the demand letter his base salary was
reduced in breach of his executive employment agreement from
$255,000 per year to approximately $63,750. Mr. Mayo
requested restoration of his salary to $255,000 per year and
payment of his base salary since the date his salary was
reduced. Mr. Mayos base salary was temporarily
reduced to $63,750 from its previous $127,500 level during the
fourth quarter of 2009 in connection with salary reductions
implemented for certain executive officers and key employees.
Previously during 2006, Mr. Mayos salary was reduced
from a base salary agreed to in his executive employment of
$255,000 to $127,500. The Company has accrued for the difference
of Mr. Mayos $255,000 salary level and the salary
reduction to $63,750. At present the accrual through
December 31, 2008 is approximately $375,000. As of the date
of this registration statement, a litigation proceeding has not
been filed with respect to this matter. Mr. Mayos
salary reduction was related to general salary reductions
affecting four key employees of the Company which reductions
were implemented to address budgeting and cash flow concerns. As
of January 1, 2010, Mr. Mayos annual base salary
has been restored to $127, 500 and we paid Mr. Mayo a cash
payment of $14,711.58 on January 14, 2010, which included
all deferred amounts since the reduction of Mr. Mayos
salary in October 2009. The Company and Mr. Mayo have
verbally agreed that Mr. Mayo will be paid all additional
deferred amounts under Mr. Mayos agreement following
completion of the offering. No written release of the demand
letter claims has been executed by the parties at this time.
We did not have material commitments for capital expenditures as
of the end of the latest fiscal period ended September 30,
2009. If we are unable to reach a new agreement with Kimball for
supply and manufacturing of the
XT250tm
systems in the near future, we will be required to incur capital
expenditures for inventory to build new machines.
Recent
Securities Offerings
On various dates from December 14, 2006 through
February 14, 2007, we issued convertible promissory notes
in the principal amount of $325,000, payable on demand at any
time on or after February 28, 2007. In accordance with the
terms of the notes, on March 14, 2007, all of the principal
and interest due on the notes was converted into
87,094 shares of Series A Redeemable Convertible
Preferred Stock, $.0001 par value per share (the
Series A Preferred Stock).
On various dates from August 31, 2005 to March 14,
2006, we sold debentures in the aggregate principal amount of
$1,525,000 to accredited investors. In connection with such
sale, each investor received a ten-year warrant to purchase
5,000 shares of common stock at a price of $2.34 per share
for each $25,000 in principal amount of debentures. As a result,
we issued warrants to purchase an aggregate of
305,000 shares of common stock. On December 21, 2007,
a portion of these debentures in the principal amount of
$1,000,000 and the related accumulated interest on that date,
was exchanged for 336,248 shares of Series B
Redeemable Convertible Preferred Stock, $.0001 par value
per share (Series B Preferred Stock).
On various dates from September 14, 2007 through
December 4, 2007, we sold convertible debentures in the
aggregate principal amount of $886,000 to accredited investors.
On December 21, 2007, all of the principal and interest due
on the debentures was converted into 298,116 shares of
Series B Preferred Stock.
In connection with a secured, revolving, demand promissory note
dated November 16, 2006, we issued the holder of the note a
warrant to purchase an aggregate of 21,000 shares of common
stock at an exercise price of $3.80 per share on
January 25, 2008.
By stock purchase agreement dated March 14, 2007, as
amended from time to time, we sold an aggregate of
962,101 shares of Series A Preferred Stock to
accredited investors. Of those shares, 87,094 were issued in
exchange for convertible promissory notes in the principal
amount of $325,000 and the related accrued interest. The
remaining 875,007 share of Series A Preferred Stock
were issued at a purchase price of $3.80 per share, resulting in
$3,325,000 of gross proceeds.
36
On various dates from December 2007 through June 2008, we sold
an aggregate of 1,585,795 shares of Series B Preferred
Stock to accredited investors. The shares of Series B
Preferred Stock were issued at a purchase price of $3.00 per
share, resulting in $4,757,385 of gross proceeds. In addition,
during this time period, we issued 33,332 shares of
Series B Preferred Stock to the interim chief executive
officer as compensation for services performed. Each investor
received for each share of Series B Preferred Stock
purchased, one ten-year warrant to purchase five shares of our
common stock at an exercise price of $3.00 per share.
On various dates from March 2009 through August 2009, we sold an
aggregate of 365,996 shares of Series C Redeemable
Convertible Preferred Stock, $.0001 par value per share
(the Series C Preferred Stock) to accredited
investors. The shares of Series C Preferred Stock were
issued at a purchase price of $3.00 per share, resulting in
$1,097,988 of gross proceeds. In addition, each investor
received for each share of Series C Preferred Stock
purchased, one ten-year warrant to purchase five shares of our
common stock at an exercise price of $3.00 per share.
During October 2009, we sold an aggregate of 563,414 shares
of Series D Redeemable Convertible Preferred Stock,
$.0001 par value per share (the Series D
Preferred Stock) to accredited investors. The shares of
Series D Preferred Stock were sold at a price of $3.00 per
share, resulting in $1,690,242 of gross proceeds. In addition,
each investor received for each share of Series D Preferred
Stock purchased, one ten-year warrant to purchase five shares of
our common stock at an exercise price of $3.00 per share.
These securities were sold pursuant to the exemption from
registration requirements provided by Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder.
Impact of
Inflation
We believe that inflation has not had a material impact on our
results of operations for the years ended December 31, 2007
and 2008 or the nine months ended September 30, 2008 and
2009. We cannot assure you that future inflation will not have
an adverse impact on our operating results and financial
condition.
Recently-Issued
Accounting Standards
In June 2008, the FASB issued guidance in determining whether an
instrument (or an embedded feature) is indexed to an
Entitys Own Stock. This guidance provides that an entity
should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
It also clarifies on the impact of foreign currency denominated
strike prices and market based employee stock option valuation
instruments on the evaluation. The guidance is effective for
fiscal years beginning after December 15, 2008. As of
January 1, 2009, the adoption of this guidance resulted in
a reclassification of the fair value of certain outstanding
warrants from stockholders equity to liability. The fair
value of the warrants was determined by using the Black-Scholes
option pricing model. The initial value of the warrants at
adoption was approximately $403,649. Additionally, the Company
notes that upon adoption of guidance, the warrants will be
marked to market at each reporting period. For the nine month
period ended September 30, 2009, the Company recorded
income from the change in fair value of the warrants of $904,591
for the decrease in the fair value related to the warrants. (See
Note 3, Fair Value Measurements, for additional
disclosures.)
In October 2009, the FASB issued guidance on Certain Revenue
Arrangements that include Software Elements. The amendments in
the update clarify the applicability of the FASB guidance on
Software Revenue Recognition that affect vendors that sell
tangible products in an arrangement containing software that is
more than incidental to the tangible product being sold, and
clarifies what guidance should be used in allocating and
measuring revenue. The update excludes tangible products
containing software and non-software components that function
together to deliver the tangible products essential
functionality from FASB guidance on Software Revenue
Recognition. The guidance is effective prospectively for fiscal
years beginning on or after June 15, 2010. This guidance
does not impact our current financial statements and is not
expected to have an impact on the Companys financial
position, results of operations and cash flows.
Quantitative
and Qualitative Disclosures about Market Risk
This disclosure is not required for smaller reporting companies.
37
BUSINESS
Company
Overview
XStream Systems, Inc. designs and develops material
authentication and detection solutions that allow molecular
structure analysis on hidden materials. The patented technology
which we license exclusively from Rutgers, The State University
of New Jersey (Rutgers) combines penetrating x-rays,
forensic analysis, and automated software algorithms that allow
non-technical personnel to rapidly validate products even when
sealed within their original packaging.
We are a direct seller of hardware and software products and
services. Our
XT250tm
unit is based upon Energy Dispersive X-Ray Diffraction
technlolgy (EDXRD), which combines the penetrating power of
X-rays with forensic analysis of materials tested. Our customers
may use our unit to identify the molecular composition and
authenticity of products and materials tested with the unit. In
pharmaceutical products, EDXRD technology allows our system to
collect the molecular fingerprint of the medicine inside without
ever breaking any seals or opening the packaging. The molecular
fingerprint is compared against the standard for the medicine,
and deviations such as contamination, dosage changes,
counterfeiting, or adulterations can be discovered. We have
licensed from Rutgers the worldwide exclusive rights for all
applications of this patented technology. The
XT250tm
product is currently our primary source of revenue.
Our customers place sales orders by calling one of our internal
sales representatives via our toll-free phone number. We also
sell indirectly through contracted authorized sales agents.
History
of the Business
XStream Systems, Inc. was formed as a Delaware corporation in
May, 2004. We first generated revenue through a contract in 2005
with the Transportation Security Administration, an agency under
the Department of Homeland Security under which we created
recipes and provided samples of Simulants for explosive testing.
We launched our website and developed our first material
detection prototype system in 2006. Significant changes to the
product design were incorporated and our first
XT250tm
Material Identification System
(XT250tm)
shipped in 2007. Some PILOT programs for the
XT250tm
were held at Pfizer, McKesson, Massachusetts Institute of
Technology, Pharmaceutical Dimensions, AmerisourceBergen, Henry
Lee Institute of Forensic Science at University of New Haven, RX
Reverse Distributors, and Stericycle. In 2006, we entered into
Distributor Agreements and in 2008 we entered into sales
agreements with our first authorized sales agents and field
service representatives (Remetronix and Compass Engineering) to
sell and service our products. In 2008, we focused exclusively
on the pharmaceutical industry, hired an experienced sales force
from that industry, and added Eastern Applied Research as an
additional authorized sales agent and field service
representative. We introduced our first network product, Secure
Pharma Network (SPN), which is described more fully in this
section, in 2008 to provide a truly integrated system wide
solution.
Industry
Background
According to IMS Health, Inc., pharmaceutical sales grew to
$773.0 billion in
20081,
and sales in the U.S. reached
$291.0 billion,2
while
non-U.S. sales
reached
$482.0 billion.3
Although precise and detailed data on counterfeit
pharmaceuticals is difficult to obtain, estimates range from 1%
of sales in developed countries such as
1 Source:
IMS Health Market Prognosis, March 2009. Total Unaudited and
Audited Global Pharmaceutical Market by Region
http://www.imshealth.com/deployedfiles/imshealth/Global/Content/StaticFile/Top_Line_Data/Global_Pharm_Mar-ket_by_Region.pdf
accessed 6/10/09.
2 Source:
IMS National Sales
Perspectivestm
2008 U.S. Sales and Prescription Information. Top Therapeutic
Classes by U.S. Sales.
http://www.imshealth.com/deployedfiles/imshealth/Global/Content/StaticFile/Top_Line_Data/2008_TopTherapy_Classes_
by_U.S._Sales.pdf.
3 Figure
derived from subtracting U.S. market from total global market.
Source: IMS Health Market Prognosis, March 2009. Total Unaudited
and Audited Global Pharmaceutical Market by Region.&
Source: IMS National Sales
Perspectivestm.
2008 U.S. Sales and Prescription Information.
38
the U.S. to over 10% in developing countries, depending on
the geographic
area.4
Overall, counterfeit pharmaceuticals were estimated to exceed
$40.0 billion in 2005, and the Center for Medicines in the
Public Interest projects worldwide counterfeits to increase to
over $75.0 billion by
2010.5
Our initial market focus has been on the pharmaceutical
distribution industry. Until recently the pharmaceutical
industry has focused a significant amount of its attention on
good manufacturing practices
(GMP).6
Various federal, state, and local government agencies have
regulated the manufacturing process of pharmaceuticals as well.
While there has been focus on the manufacturing side, we believe
there remain opportunities for illegal and dangerous activities,
such as counterfeiting, diversions, adulterations, and dosage
substitutions.
Industry efforts to combat counterfeiting pharmaceuticals
include the use of scales to weigh products, visual inspections,
documentation of transfers, use of forensic laboratories, and
tagging products. We believe that each of these methods has
limited success. State legislation, in form of pedigree laws,
has been adopted in a number of states; yet, the amount of
counterfeiting continues to
increase.7
Forensic laboratories have the analytical capabilities to verify
pharmaceuticals, but take a significant amount of time to
provide test
results.8
The high volumes shipped through pharmaceutical distribution
points require rapid testing. Forensic testing at laboratories
also requires destructive testing, where the product is removed
from its packaging and the contents are destroyed while being
tested. Combating counterfeiting of pharmaceuticals has become a
major initiative for some manufacturing companies. These
companies each have dedicated personnel and departments to try
and eliminate counterfeits. When harm comes from counterfeits,
not only are manufacturing companies affected, but distribution
companies
4 World
Health Organization. Counterfeit Medicine Fact Sheet revised
November 2006.
http://www.who.int/medicines/services/counterfeit/impact/ImpactF_S/en/index.html
Last accessed 6/10/09.
5 Center
for Medicines in the Public Interest. 21st Century Healthcare
Terrorism: The Perils of International Drug Counterfeiting.
September 20, 2005 by Peter Pitts, page 3.
6 Food
and Drug Administration (FDA). Facts About Current Good
Manufacturing Practices (cGMPs), last updated July 10,
2009.
http://www.fda.gov/Drugs/DevelopmentApprovalProcess/Manufacturing/ucm169105.htm;
FDA Recall Firm Press Release Barr Laboratories,
Inc., Issues a Voluntary Nationwide Recall of Dextroamphetamine
/Amphetamine 20mg Tablets, Lot Number 311756, August 13,
2009.
http://www.fda.gov/Safety/Recalls/ucm177321.htm;
FDA Recall Firm Press Release Hi-Tech
Pharmaceuticals, Inc., Issues Nationwide Recall of All Lots of
Stamina-Rx Dietary Supplement Products, June 15, 2009.
http://www.fda.gov/Safety/Recalls/ucm167139.htm;
FDA Recall Firm Press Release AS Medications
Solution LLC Announces a Nationwide Recall of All Lots of
Digoxin Tablets 0.25mg Due to Size Variability, May 11,
2009.
http://www.fda.gov/Safety/Recalls/ArchiveRecalls/ucm150734.htm.
7 The
American Counsel on Science and Health Presents, Counterfeit
Drugs: Coming to a Pharmacy Near You, January 2009; CSO Security
and Risk, Case Study, Drug Busters: Tracking Down
Counterfeiters, November 1, 2005.
http://www.csoonline.com/article/220663/Drug_Busters_Tracking_Down_Counterfeiters
8 United
States Pharmacopeia (USP) establishes standards for
manufacturing testing using analytical procedures. These tests
are reactive (created in relation to a specific problem observed
with a particular element) rather than a proactive screening
overall). Recent increase in substandard drugs due to
adulterated raw materials has prompted several updates to
specific test of a material to include testing for that specific
adulteration. In 2009 alone, USP has updated or in the process
of updating the following guidelines: USP Propylene Glycol
Identification Test, Heparin Sodium Monograph
Testing, and USP Sorbitol Solution identification
test. USP Propylene Glycol Identification Test
United States Pharmacopeia (USP) Draft of Propylene Glycol
Proposed Method for Informal Public Comment due August 14,
2009. FDA requested USP revise the monograph Since diethylene
glycol and ethylene glycol are considered unacceptable toxic
substances and Propylene Glycol has been identified as a
material which is at risk for diethylene glycol or ethylene
glycol adulteration. Testing time is around 4 to 10 minute per
test plus the preparation time . Heparin Sodium Monograph
Testing United States Pharmacopeia (USP) , Pharmacopeial
Forum, Vol. 35(5) [Sept.-Oct. 2009], INTERIM REVISION
ANNOUNCEMENT for Heparin Sodium. U.S. scientists proposed new
standards for testing the blood-thinner heparin after hundreds
of deaths last year were linked to tainted Chinese ingredients.
The tests require destruction of the sample, multiple samples
and or tests, and some require either multiple tests of the
sample (Nuclear Magnetic Resonance Spectrum method) or multiple
test samples at different dilutions (ANTI-FACTOR Xa TO
ANTI-FACTOR IIa RATIO Anti-factor Xa activity pH 8.4 buffer
method which requires 5 solutions dilutions) and
lengthy testing times (CHROMATOGRAPHIC IDENTITY
Method which requires hours of testing). USP
Sorbitol Solution Identification Test United States
Pharmacopeia (USP), Sorbitol Solution Proposed Method for
Informal Public Comment. Informal comments are due on
August 14, 2009. Because of the serious hazards associated
with the use of diethylene glycol-contaminated materials, and in
response to recommendations set forth by the FDA in
communication with USP dated January 12, 2009, USP is
proposing to revise the USP Sorbitol Solution identification
test. Test uses gas chromatography procedure. Sample preparation
time would be 12 mins and testing time would be 2-5
mins. may be held liable and some litigation has moved in that
direction. Therefore, we believe the entire pharmaceutical
supply chain has significant risk of negative consequences that
could result from counterfeiting of pharmaceuticals.
39
Key
Target Markets
Within the pharmaceutical distribution market, management
believes we can most effectively add value to our customers when
serving pharmaceutical distributors, re-packagers, mail order
companies, government agencies, and return logistics companies.
We believe there are a multitude of sites worldwide that could
potentially utilize our technology. To date, we have focused on
the U.S. segments of the market. Europe, Middle East,
Africa, and Southeast Asia are the primary expansion areas
outside the U.S. that management anticipates would be most
effectively served by our products and services.
Beyond the pharmaceutical markets, we believe there is
significant potential for our licensed technology and products.
Both private entities, including cruise lines, transportation
centers, and amusement parks, as well as government agencies,
including the military, are concerned with explosive and nuclear
threats. In the medical field, it is desirable to detect
conditions such as cancer and osteoporosis as early as possible.
The veterinarian market could potentially utilize the technology
to monitor compound manufacturing products. In the mining
industry field, operations could use the technology to detect
metals, minerals, and other materials of interest. The chemical
processing market has a wide variety of material inspection
needs that could be met with the technology. The cosmetics
market has health risks from fraudulent products that could be
addressed by our solutions.
Business
Strategy
Our business strategy is to become the primary source for
technology, products, and services for applications requiring
material analysis of hidden objects. Managements intention
is to brand XStream Systems as the leading industry expert in
molecular screening, providing trusted solutions in counterfeit
detection, explosive detection, and material verification and
identification. We believe our experience and innovative
technology should allow us to solve some of the industries
most demanding problems.
We utilize a multi-pronged strategy to provide wide market
exposure and capture early adaptors. We have a direct sales
force, with extensive pharmaceutical experience, concentrating
on early adaptors, market development, and large enterprise
prospects. Meanwhile authorized sales representatives promote
sales to smaller local customers.
We believe technology spending will need to increase throughout
the pharmaceutical distribution chain to block the increasing
threat of counterfeits. We believe no single competitor is
effectively meeting the counterfeit challenge. Management
believes it is imperative to verify the contents inside the
package to truly authenticate the product.
Growth
Strategy
We plan to grow organically and externally through the pursuit
of strategic partnerships. We have and continue to provide PILOT
programs with larger corporations, which over time could develop
into significant growth opportunities as these corporations
expand the PILOT program into other locations within their
organization. We also signed group purchasing and marketing
agreements with several major pharmaceutical purchasing
organizations, including National Coalition of Pharmaceutical
Distributors (NCPD), Armada Health Care, and PDM Healthcare.
These agreements provide access to potential customers, market
exposure for us on their web sites, and speaking opportunities
at conferences. See section below entitled Strategic
Partners.
While past efforts have focused on the U.S. domestic
markets, the
non-U.S. markets
represent a large growth opportunity for XStream Systems. We
anticipate using some of the funds raised through this public
offering to pursue
non-U.S. opportunities.
Management believes that increased marketing efforts, including
advertising, publications, speaking opportunities, and attending
conferences are critical for growth. We also believe that
increased networking through association membership and
participation is critical for our growth. We believe that these
increased marketing activities will lead to new customers for
our products and services.
40
Management believes that our SPN may provide significant growth
opportunities. The ability to collect test results from multiple
customers, process that data, and provide meaningful information
across the industry provides significant value to our customers.
We believe that integrating SPN into our customers
inventory management systems provides additional value to our
customers. Since SPN is software based, revenues we anticipate
to generate from SPN in the future are expected to increase our
profit margins.
Management believes that expansion into markets beyond the
pharmaceutical industry should open new opportunities for
XStream Systems. We hope to scale the technology we license and
develop products that meet the varying needs of our customers.
We expect to develop marketing processes and recruit marketing
professionals with pertinent industry expertise to maximize
customer value.
Strategic
Partners
We are partnering with a number of recognized companies and
intend to develop applications for our molecular screening
technology in connection with these relationships. Our initial
target market has been the pharmaceutical distribution market,
including major pharmaceutical manufacturers, drug distributors
and automated drug dispensing logistics (assembly line
efficiencies) companies. Some of these teaming relationships
include the following:
|
|
|
|
|
Pfizer, a leading pharmaceutical manufacturer, is hosting our
XT250tm
system, under a PILOT program arrangement.
|
|
|
|
AmerisourceBergen Corporation, a pharmaceutical wholesale
distributor is piloting our
XT250tm
systems in two separate locations, under a PILOT program
arrangement.
|
|
|
|
Swisslog Healthcare Solutions, a global provider of integrated
logistics solutions for warehouses, distribution centers and
hospitals has executed a Letter of Intent with us to jointly
collaborate and investigate the development of customized
screening solutions.
|
|
|
|
Eastman Kodak, a corporation utilizing technology to combine
imaging and information, has agreed in a Letter of Intent to
explore with us strategic opportunities for joint design,
development, cross-licensing, and co-marketing of security
solutions.
|
We will attempt to leverage the respective strengths and
leadership positions of our strategic partners in the healthcare
industry to gain a competitive foothold in our industry. We are
negotiating strategic partnerships with other pharmaceutical
distributors, manufacturers and logistic companies. We are
directing our strategic joint venture efforts to produce
applications which require a combination of non-destructive
penetrating capability with forensic analysis.
Sales and
Marketing
In 2008 we created a new sales and marketing organization
specializing in pharmaceutical distribution. We believe that our
pharmaceutical based website (www.securepharmachain.com),
anti-counterfeiting blog (www.securepharmachain.blogspot.com)
and professional networking at major pharmaceutical events have
raised the level of awareness throughout the industry.
Additionally, we believe that we are viewed as an industry
innovator in addressing pharmaceutical counterfeiting and have
received free publicity via television, major publications, and
on-line articles.
Within the pharmaceutical distribution market, there are a
number of submarkets that XStream Systems is targeting. We
market to pharmaceutical manufacturers, including brand,
generic, and contract manufacturers. We also market our products
and services to pharmaceutical distributors, including large
international wholesalers, regional wholesalers, secondary
distributors, specialty distributors, and reverse logistics
companies. There is a wide range of pharmaceutical dispensers to
which we market as well, including mail order pharmacies,
central fill pharmacies, buying group cooperatives, and
warehousing groups. There are government regulatory agencies,
such as the Food and Drug Administration, Department of Homeland
Security, and international ministries of health to which we
also market. Our Company is also engaging various non-government
organizations, such as the Family Health International.
41
Our
Technology, Products and Solutions
We offer material identification solutions to our customers
through our
XT250tm
product. Utilizing technology we license from Rutgers, network
expertise, material science experience, and software knowledge
base, management believes the XT250 product offers unique
end-to-end
solutions to companies of all sizes. Our XT250 unit is
based upon Energy Dispersive X-Ray Diffraction technology
(EDXRD), which combines the penetrating power of X-rays with
forensic analysis of materials tested. Our customers may use our
unit to identify the molecular composition and authenticity of
products and materials tested with the unit.
With the addition of our automated software, any person, even
non-technical personnel, can rapidly and easily identify,
authenticate, and detect hidden materials. EDXRD penetrates
through all pharmaceutical packaging, including plastics, glass,
cardboard, and even aluminum foils. In pharmaceutical products,
EDXRD technology allows our system to collect the molecular
fingerprint of the medicine inside without ever breaking any
seals or opening the packaging. The molecular fingerprint is
compared against the standard for the medicine, and deviations
such as contamination, dosage changes, counterfeiting, or
adulterations can be discovered. For Homeland Security
applications, EDXRD technology can penetrate through any luggage
and detects threats, not with visual based techniques as used
today, but by their unique molecular fingerprints.
We have licensed from Rutgers the worldwide exclusive rights for
all applications of this patented technology. The
XT250tm
product is currently our primary source of revenue.
Manufacturing end users may use the
XT250tm
as a high speed, laboratory grade testing device to test the
quality of raw materials or end of production goods without
sending samples to laboratories and expediting production.
Distribution end users may utilize the
XT250tm
unit to non-destructively verify and authenticate their
inventories within their
unit-of-sale
packaging, in real time and
on-site,
ensuring quality and protecting the users supply chain partners
from fraudulent transactions, adulteration and counterfeiting.
End users of products may utilize the
XT250tm
unit to verify the quality, safety, efficacy and accuracy of
products by screening products prior to the administration to
consumers and patients, protecting them from medication errors,
adulterated or fraudulent materials or substandard or degraded
products.
Under our contract with the Transportation Security
Administation (TSA), we conducted a periodic test of equipment
to ensure that the equipment could detect explosives properly.
Prior to this, TSA used actual explosives to determine if
explosive detection equipment was functional. Our method, called
Simulants, required our research to determine
recipes of materials that would closely simulate explosive
materials safely. We created recipes and provided samples of
Simulants for 11 explosives under the contract with TSA. The TSA
contract has terminated. We do not anticipate at this time
additional revenues based on our prior relationship with TSA.
Management believes that our SPN may provide significant growth
opportunities. SPN is a software product that allows customers
to access via the Internet their
XT250tm
system purchased from XStream Systems. Customers may remotely
manage the system, downloading new material fingerprints or
software updates, uploading results, and operating the system
remotely. Detailed reports can be generated, as well as
customized and aggregated reporting across multiple systems. The
ability to collect test results from multiple
XT250tm
units purchased by our customers, process that data, and provide
meaningful information across the industry provides significant
value to our customers, which management believes can produce
revenue in the future. We believe that integrating SPN into our
customers inventory management systems provides additional
value to our customers. To date, we have not generated revenue
from SPN.
The technology we license from Rutgers can scale to meet
additional customer needs. Our goal is to develop a wide range
of products that operate rapidly to match customer demand, as
well as scale to test any sample size to meet customer
requirements. Management also hopes to develop products that
scale down that are smaller, more portable, and more cost
effective. Customer requirements will drive the directions that
our future products take.
Manufacturing
Our hardware products are manufactured by a U.S. contract
manufacturer. This allows us to scale as our demands change. It
also allows us to leverage the purchasing power of a larger
organization. We place orders for hardware products with our
contract manufacturer and those products are shipped directly to
our customer sites. We
42
are currently a defendant in a lawsuit with our manufacturer.
For more information, see Legal Proceedings and
Risk Factors We are currently a defendant in a
lawsuit with the manufacturer of the
XT250tm
system, Kimball Electronics, Inc.
Our company provides all software products and services. The
operating system and library of materials are provided for each
system. Customers can contract for customized configurations,
which are developed by us.
Field
Service
Hardware and software support services are by provided by
contracted field service companies. Each authorized field
service company is trained and certified by our Company. Each of
our customers has a designated field service representative that
provides support services. Our Company also provides an
escalation process to support those field service companies.
Customers
Our current customer base consists primarily of pharmaceutical
distribution companies. These companies purchase pharmaceutical
products from a variety of sources, and wish to authenticate
their inventories to protect the public and their reputation. We
have also sold systems to equipment distributors, who then
resell the equipment as authorized sales agents on our behalf.
One
XT250tm
sales transaction with one customer during the year ended
December 31, 2008 accounted for more than 10% of our 2008
revenues. Two
XT250tm
sales transactions with two customers during the period ended
September 30, 2009 accounted for more than 10% of our 2009
revenues. [Our customers purchasing units to date have included
Altec Medical, Med-Health Pharmaceutical Products, Eastern
Applied Research, Compass Engineering, Remetronix, RX Reverse
Distributor, and Cumberland Distribution. Each of these
customers have accounted for more than 10% of our sales during
the respective year the sale was made.]
Our target customers range in size from small, privately owned
distributorships with estimated revenues of less than
$50,000,000 to large multinational distribution corporations
with estimated revenues of more than $10.0 billion.
Management believes these organizations have a need for a
material identification and authentication system in order to
protect their brands in the marketplace and reduce risk and
potential litigation should they distribute a counterfeit
product.
A number of organizations set up PILOT programs before they
commit to purchasing a larger volume of our products. We have
generated one sale of an
XT250tm
system as a result of the PILOT program. Some of our PILOT
programs have been designed to test the capabilities of the
technology, data collection, materal recognition software engine
generation, process improvement, throughput, and
concept/industry viability. In most cases, PILOT program
feedback proved the technology was viable, could verify
materials and allowed for system enhancements. Some negative
feedback for the system was the initial pricing and cost of the
unit and limitation of the testing output of a single system
(i.e., number of samples that can be tested per hour/shift).
Some of our PILOT participants found that the system did not fit
their business needs or criteria. We believe that the PILOT
program process has been valuable in assisting us in further
refining our revenue model.
All our shipments to date have been to sites within the
U.S. Management believes that shipments outside the
U.S. will represent a significant portion of sales in the
future. We believe
non-U.S. shipments
should begin in the first half of 2010.
Research
and Development
We spent $1,900,897 and $635,531 in research and development
during the fiscal years ended 2007 and 2008, respectively. This
included hardware and software development and enhancements of
the
XT250tm
and SPN products. These funds also were used in the development
of a molecular library generation laboratory. Multiple companies
contributed pharmaceutical products to this facility to aid in
the research and development of molecular fingerprints.
43
Competition
We operate in an unusually competitive market. In many cases,
our customers have non-technical personnel operating in a
warehouse environment. Counterfeit detection is sometimes
performed by weighing the product with a simple scale. Other
times counterfeit detection is done by track and trace methods,
which tracks the transfers of the drugs, and on rare occasions
by visual inspection. Our research has shown that some
counterfeit drugs have weighed the same as valid drugs, some
even come with falsified tracking documents, and many have
passed visual inspection. Track and trace methods, which include
pedigree laws, radio frequency inventory devices, bar codes, and
taggants, have been deployed for a number of years and in some
case legislated for pharmaceuticals. We face a competitive
environment of selling into end users and either competing
against for capital expense or in integrating with solutions for
limited supply chain security budgets. As it relates to material
screening, the
XT250tm
competes against laboratory testing services such as Angular
Dispersive X-Ray Diffraction (ADXRD) and other laboratory grade
equipment and
on-site
testing processes technologies such as Raman, Spectroscopy and
Near Infrared Technologies (NIR). If there is a reason to
suspect a drug is counterfeit, the sample may be shipped to a
forensic laboratory for analysis. Highly trained personnel
typically open and destructively test the suspect drug with one
or more analytical instruments.
Our
XT250tm
unit relies on Energy Dispersive X-Ray Diffraction (EDXRD)
technology. ADXRD and EDXRD, both use a specific X-ray
wavelength, and rotates that X-ray source through many different
angles to analyze materials. EDXRD, which is rarely used in
industry, but is the core of the Companys solutions, uses
the entire X-ray range of wavelengths, and only one specific
angle to analyze materials. ADXRD technology utilizes low energy
X-rays, which means ADXRD does not penetrate very well compared
to EDXRD. Penetration of the
X-rays is
critical for the Companys applications.
Raman, Spectroscopy, and Near Infrared (NIR) technologies are
competitor technologies which are not very penetrating and
cannot penetrate a thin piece of paper, for example. Because the
Raman, Spectroscopy, and Near Infrared (NIR) energies are
absorbed they can affect materials, like drugs. We believe this
is a negative effect of our competitor technologies.
In terms of limitations of the EDXRD technology utilized by us,
this technology requires shielding of X-rays from humans. Other
technologies such as Raman, Spectroscopy and NIR technology, do
not require shielding because they do not penetrate. EDXRD
technology is not suited for gases, which do not have a
crystalline structure, while some of the competitive
technologies, like RAMAN, Spectroscopy, and NIR, may be suitable
for gases.
We are not aware of true competitors as it relates to the EDXRD
technology we license from Rutgers which allows for the real
time,
on-site
molecular screening of materials and the authentication of
products inside a
unit-of-sale
packaging without destruction or degradation of the tested
material however there is market competition as it relates to
other technologies for material screening and
anti-counterfeiting that prospective end users would utilize.
Some of the companies that have employed these technologies
include Siemens, Centice, Ahura and Valimed. These technologies
either are limited to laboratories or do not utilize the
penetration of EDXRD and are limited to visual inspection of the
material and destroy the testing sample. Because these solutions
require access to the materials, it limits their deployment to
either the manufacturing or the product dispensing process and
makes them inferior within a comprehensive supply chain setting.
As it relates to anti-counterfeiting technologies, the
XT250tm
can in some cases compete against, end user budgets; RFID,
Material Serialization, Pedigree, Marker or what is known as
Track and Trace solutions. Some of the companies that market
these solutions include Axway, SupplyScape and Aegate. These
technologies basically are inventory management technologies
that track products by overt or covert markers or transactional
recording of the packaging on products. These technologies are
very specific to a process and require all members of the supply
chain to participate. There is usually high infrastructure, set
up and ongoing supply costs to each member of the supply chain
to remain effective. Track and Trace solutions are primarily
inventory management tools that do not assure material safety or
fraudulent acts from occurring.
44
Regulation
In addition to federal, state, and local laws applicable to all
corporations and employers in general, each state has its own
requirements and registration process for X-ray equipment. Our
organization is also governed by Food and Drug Administration,
Drug Enforcement Agency, Environmental Protection Agency, and
Department of Homeland Security regulations for handling and
disposing of special materials. Our facility received a facility
security clearance from the Department of Defense. Our Company
possesses Drug Enforcement Agency Researcher licenses for
Schedule I-V
drugs. Our Company has received exemption letters for drug
research purposes from the Florida Department of Health. In
addition, each country also has its own requirements for our
type of equipment, which our Company must abide by in order to
ship into those countries.
The Federal Communications Commission (FCC), Underwriters
Laboratories (UL), and Canadian Standards Association (CSA) have
certified that the
XT250tm
product meets safety, health, environmental, and radiated
emissions requirements. The costs for these certifications were
included in the research and development spending for 2007 and
2008. Management believes that the
XT250tm
will be required to pass Restriction of Hazardous Substances
(RoHS) directives required by the European community before the
XT250tm
is allowed to ship into those countries.
To date we have not incurred any costs associated with disposal
of any hazardous materials. We continue to make efforts to
recycle all hazardous materials and management hopes to continue
this in the future. When and if disposal of hazardous materials
is necessary, management anticipates that disposal companies
specializing in the materials will be hired.
Employees
As of February 8, 2010, we had [11] full-time
employees, eight of which are located at our Sebastian, Florida
corporate office. [DENNIS_ARE YOU A FULL TIME EMPLOYEE?] Two
employees in our sales and marketing department are located
outside of Florida. We have five employees in management and
five employees are in our operations and engineering
departments. None of our employees is covered by a collective
bargaining agreement. We believe we have a good relationship
with our employees.
Property
Our operations are currently located at 10305
102nd Terrace, Suite 101, Sebastian, Florida 32958. We
lease real property at this location, which is part of an
industrial park, Liberty Office Park. Our lease commenced in
2007 and expires in 2012. We lease approximately
8,000 square feet, and currently utilize approximately
5,000 square feet. We share a 40,000 square foot
facility with two other companies. We believe our current office
space provides more than adequate space for our offices,
engineering development area, demonstration area, and Drug
Enforcement Agency secured laboratory. We believe our current
8,000 square feet is adequate for our current needs and
provides expansion room for engineering to develop the next
generation of systems. The adjacent 10,000 square feet will
allow for long term expansion if we need additional engineering
and operations space. We expect total rent expense to be
approximately $107,000 under office leases for 2009.
Intellectual
Property
XStream Systems has worldwide, exclusive licensing rights to
U.S. Patent #6118850 (granted Sept. 12, 2000),
Analysis Methods for Energy Dispersive X-Ray Diffraction
Patterns pursuant to a licensing agreement with Rutgers.
Under the terms of the License Agreement, the minimum royalty
payment for 2008 of $300,000 became due January 31, 2009.
In addition, certain other payments became payable in 2009 under
the License Agreement. We were unable to pay the required
minimum royalty and have requested a modification to the License
Agreement. While Rutgers has the right to terminate the License
Agreement after certain notifications and cure periods have
expired, Rutgers has indicated an interest in modifying the
License Agreement and continuing the licensing arrangement.
Final terms of the contract modifications are under review by
Rutgers and will be presented to the
45
Companys Board of Directors for approval. The total amount
due under the License Agreement as of September 30, 2009
was approximately $302,000.
We conduct business with trademarks of our XStream Systems logo,
XT250tm
Material Identification System,
SECUREPHARMACHAINtm,
and Beyond
Pedigreetm.
At this time, we have not applied for registration of these
marks. Dr. William Mayo, the brother of our president
Mr. Brian Mayo is one of the inventors of the patent.
Dr. Mayo retired from a teaching position at Rutgers
University in 2009.
Legal
Proceedings
Other than as set forth below, we are not a party to any pending
legal proceeding nor is our property the subject of a pending
legal proceeding that is not in the ordinary course of business
or otherwise material to the financial condition of our business.
On or about September 16, 2008, Kimball International, Inc.
and Kimball Electronics, Inc. (Kimball) filed suit
against us in U.S. District Court in Evansville, Indiana.
Kimball filed three claims against us including a claim alleging
we defaulted on a $2,000,000 loan provided by Kimball in favor
of the Company, breach of a reserve capacity agreement and
breach of a supplier agreement. We asserted counterclaims
against Kimball for conversion, breach of contract and tortious
interference with business relationship. On June 30, 2009,
the District Court granted partial judgment in favor of Kimball
in the amount of $2,000,000 against us. On December 23,
2009, we and Kimball entered into a settlement agreement (the
Agreement). In connection with the Agreement we
provided to Kimball an executed Agreed Judgment in favor of
Kimball in the amount of $3,200,000 (the Agreed
Judgment). We agreed to make payments to Kimball via wire
transfer or certified funds as follows: (i) one
(1) payment of $600,000 to be made on or before
December 31, 2009; and (ii) one (1) final payment
of $2,600,000 to be made on or before January 31, 2010. On
or about the date of the Agreement, we provided to Kimball an
executed Stipulation of Dismissal of our counterclaims against
Kimball, with prejudice. Upon remittance of the final payment,
we will take ownership of any remaining inventory, as well as
any machinery, equipment, designs and tooling developed or
purchased with the proceeds of the term loan at Kimballs
plant in Jasper, Indiana. Kimball agreed to retain possession of
the machinery, equipment, designs and tooling developed or
purchased with the proceeds of the term loan as well as the
inventory. After we make the initial $600,000 payment to
Kimball, the parties agreed to commence discussions to develop
terms under which Kimball will continue manufacturing the
Companys product and have agreed to negotiate in good
faith thereafter. In the event we timely remit payments as set
forth in the Agreement, Kimball is required to destroy the
Agreed Judgment and the parties will file in the action the
Stipulation of Dismissal, with prejudice, of Kimballs
claims. On December 29, 2009, the Company made the initial
payment of $600,000 to Kimball under the Agreement. We were
unable to comply with the final payment terms of the Agreement,
and Kimball entered the Agreed Judgment against us in the United
States District Court of the Southern District of Indiana on
February 2, 2010 in the amount of $3,200,000. If we are
unable to discharge the Agreed Judgment, Kimball could take
action to execute on the judgment at any time to seize assets
from our accounts. As a result of the filing of the Agreed
Judgment, we anticipate that our results of operations could be
adversely affected and we will be required to identify a new
manufacturer for our
XT250tm
unit.
46
MANAGEMENT
Directors
and Executive Officers
The following table sets forth the names and ages of our
directors and executive officers, and their positions with us,
as of February , 2010:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
James J. Lowrey(1)
|
|
|
70
|
|
|
Chairman of the Board and Chief Executive Officer
|
Joseph J. Melone(4)
|
|
|
78
|
|
|
Vice Chairman
|
Brian T. Mayo
|
|
|
52
|
|
|
President and Chief Technology Officer
|
Ash K. Chawla(7)
|
|
|
53
|
|
|
Director
|
Anthony Chidoni(1)(2)(3)(8)
|
|
|
57
|
|
|
Director, Secretary, Chief Operating Officer
|
Dennis H. Ferro(1)(5)
|
|
|
64
|
|
|
Director
|
Simon Irish(5)
|
|
|
40
|
|
|
Director
|
Robert E. Kennedy(2)(3)
|
|
|
67
|
|
|
Director
|
John R. (Reg) Murphy
|
|
|
75
|
|
|
Director
|
Philip A. Odeen(2)
|
|
|
73
|
|
|
Director
|
Dr. E. Darracott Vaughan, Jr.(6)
|
|
|
70
|
|
|
Director
|
Dr. Stuart L. Weinstein(6)
|
|
|
62
|
|
|
Director
|
Dennis K. Cummings
|
|
|
54
|
|
|
Chief Financial Officer
|
Alan Clock
|
|
|
46
|
|
|
Senior Vice President, Sales and Marketing
|
|
|
|
(1) |
|
Member of our finance committee |
|
(2) |
|
Member of our audit committee |
|
(3) |
|
Member of our compensation committee |
|
(4) |
|
Member of our nominating and corporate governance committee |
|
(5) |
|
Member of our investor relations committee |
|
(6) |
|
Member of our medical advisory committee |
|
(7) |
|
Member of our global business development committee |
|
(8) |
|
Member of our executive committee |
The principal occupations for the past five years (and, in some
instances, for prior years) of each of our directors and
executive officers are as follows:
James
J. Lowrey, Chairman of the Board and Chief Executive
Officer
Mr. James J. Lowrey has served as chairman of the
board of directors and chief executive officer since August
2009. Mr. Lowrey served as the co-chairman of the board
from March 2009 through August 2009 and as chairman of the
finance committee from March 2009 to October 2009. He has been a
significant investor in XStream since 2007. From 1964 to 1978,
Mr. Lowrey was employed with Salomon Brothers in New York,
New York where he served as the
partner-in-charge
of banking, sales and trading of government and corporate tax
exempt securities, and as a general partner at the time of his
retirement in October 1978. During March 1979 he formed James J.
Lowrey & Company, Inc. a financial advisory firm to
corporations, governments and governmental entities. In 1980,
Mr. Lowrey initiated the independent power industry through
his formation of Catalyst Energy (Catalyst).
Mr. Lowrey was instrumental in leading Catalyst through a
number of purchases of developing projects and non-nuclear
energy companies and served Catalyst as its chairman of the
board and its chief executive officer. Catalyst became a public
company in 1984, was listed on the New York Stock Exchange and
later taken private in 1988. Mr. Lowrey retired again in
1989. In 1993 he co-founded Navarro Lowrey, Inc. a Palm Beach
County, Florida based real estate development firm dealing in
real estate in Colorado, Texas and Florida. The firm is managed
by
47
Mr. Frank Navarro and Ms. Jessica Lee Lowrey,
Mr. Lowreys daughter. Ms. Lowrey earned her
J.D./LL.M. and M.B.A. degrees from New York University and
Columbia University, respectively.
Joseph
J. Melone, Vice-Chairman
Mr. Joseph J. Melone has served on our board of
directors since August 2009 and as our vice-chairman since
October 2009. Mr. Melone has served as the chairman of our
nominating and corporate governance committee since October
2009. He is the former president and chief executive officer of
Equitable Companies, (now part of the AXA Group) and served in
those positions from February 1996 to September 1997.
Additionally, he served as chairman and chief executive officer
of its principal insurance subsidiary, The Equitable Life
Assurance Society of the United States from September 1992 to
July 1997. Mr. Melone joined The Equitable Life Assurance
Society of the United States in November, 1990 as president and
chief operating officer and served in those positions until
September 1992. Prior to that, he had been president of The
Prudential Insurance Company of America from March 1984 to
November 1990. Upon the formation of The Equitable Companies in
1992, Mr. Melone was elected president and chief operating
officer and served in those positions until February 1996. Also,
from September 1992 to July 1997, he served as chief executive
officer of Equitable Life, and two years later he was elected
chairman. In February 1996, Mr. Melone was named chief
executive officer of The Equitable Companies and served in that
position until July 1997. Mr. Melone co-authored the book
Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation
Approaches (Pension Planning) which is currently in its
10th edition of publication. He is a former Huebner
Foundation Fellow and was an Associate Professor of Insurance at
The Wharton School of the University of Pennsylvania. He also
served as Research Director at The American College before
joining The Prudential. He is a Chartered Life Underwriter (CLU)
and Chartered Financial Consultant (ChFC) from The American
College, as well as Chartered Property and Casualty Underwriter
(CPCU) from the American Institute of Chartered Property and
Liability Underwriters.
Ash K.
Chawla, Director
Mr. Ash Chawla has served on our board of directors
since August 2009. Mr. Chawla has served as the chairman of
our global business development committee since October 2009.
Mr. Chawla has served as the founder and chief executive
officer of PDM Healthcare, from 1991 to the present. PDM
Healthcare is a resource management company providing group
purchasing, supply chain management and delivery, business and
clinical consulting, and educational services to healthcare
facilities in the U.S. Under his leadership, PDM Healthcare
has maintained its position as a major buying groups/supply
chain management in the U.S. PDM Healthcare currently has
business trading relationships with over multiple
pharmaceutical, medical surgical supply, and ancillary product
manufacturers that are listed in Fortune 1000. Additionally,
from January 2004 to the present he has served as the chairman
and chief executive officer of Avani International, which
specializes in business development, product launches and
marketing, consulting, distribution, and global conferencing for
the bio-technology, life sciences, pharmaceutical, medical
device, and cosmetic markets. Avani is instrumental in creating
relations and distribution channels between manufacturers abroad
with customers in the U.S. as well as introducing products
from the U.S. to international markets, including India.
Anthony
Chidoni, Director, Chief Operating Officer, and
Secretary
Mr. Anthony Chidoni has served on our board of
directors since April 2009. He commenced service as a member of
our audit committee, as chairman of our compensation committee
and as our corporate secretary in August 2009 and as our chief
operating officer in October 2009. In addition, since October
2009, he has served as chairman of our executive committee and
as a member of our finance committee. Mr. Chidoni has been
the principal and owner of Lorelle Capital, a private hedge
fund, since January 2004. From January 1990 to January 2004, he
was the Managing Director of Private Client Business in the Los
Angeles office of investment bank Credit Suisse First Boston,
and its predecessor Donaldson Lufkin & Jenrette, where
he had served in various positions for 21 years.
Mr. Chidoni has served as a director of the public company
Guess?, Inc. since November 2002 for which he also currently
serves as the chairman of the audit committee.
48
Dennis
H. Ferro, Director
Mr. Dennis H. Ferro has served on our board of
directors since August 2009 and as chairman of our finance
committee and co-chairman of our investor relations committee in
October 2009. Mr. Ferro was president and chief executive
officer of Evergreen Investment Management Company from
September 2003 through December 2008. Mr. Ferro joined
Evergreen Investments as its chief investment officer in 1999.
Mr. Ferro has also served as a director of New York
Marine & General Insurance Company and as chairman of
their finance committee from March 2009 to the present. From
1999 through 2003 he also served as their chief investment
officer. From 1994 through 1999, Mr. Ferro was executive
vice president of Zurich Investment Management Ltd and head of
international equity investments based in London. In 1995,
Mr. Ferro was named as one of the top 100 mutual fund
portfolio managers by Barrons magazine. From 1991 through
1994, he was senior managing director of CIGNA International
Investments and also served as chief investment officer for all
non-U.S. investments.
From 1988 through 1991, he served as the managing director for
Asia for CIGNA Corporation based in Tokyo, Japan. From 1985
through 1988, Mr. Ferro served as president and managing
director of Japan Bankers Trust Company Ltd based in Tokyo,
Japan. From 1978 to 1985, he served as a founding director,
president and chief investment officer for Bankers
Trust Company of Florida. From 1970 to 1978, he served as
vice president and portfolio manager of Bankers
Trust Company based in New York.
Simon
Irish, Director
Mr. Simon Irish has served on our board of directors
since August 2009 and as a co-chairman of our investor relations
committee in October 2009. Mr. Irish is the former head of
Man Global Strategies (MGS) in North America, an
investment division of Man Group PLC where he provided services
from October 2002 through January 2009. Man Group PLC is an
investment business headquartered in the United Kingdom. At MGS,
Mr. Irish established and grew a strategic investment
program in hedge funds, which he operated for over six years.
From October 2001 through October 2002, he held the position of
director of U.S. business with FRM (Research) LLC, New York
and held the position of senior vice president of FRM London
from September 1999 through September 2001. From October 1995
through April 1999, Mr. Irish was a vice president of
Credit Suisse Financial Products in London where he served as a
quantitative analyst and as a trader in their Equity Derivatives
Structuring and Trading Group.
Robert
E. Kennedy, Director
Mr. Robert E. Kennedy has served on our board of
directors since April 2007 and as a member of the Companys
audit committee since May 2007. In addition, Mr. Kennedy
has served as the co-chairman of our audit committee since
October 2009. Mr. Kennedy is a retired advertising industry
executive with 33 years of experience. At the time of his
retirement, Mr. Kennedy was the president and chief
operating officer of Saatchi and Saatchi Advertising worldwide.
Mr. Kennedy directed all of the companys
communications operations, notably the advertising subsidiaries
and marketing services groups. Mr. Kennedy was also a
member of Saatchi and Saatchi, Incs board of directors.
Mr. Kennedy joined Dancer-Fitzgerald-Sample in 1961 and
spent most of his career in agency finances. He served as
controller and became chief financial officer in 1980. When
Saatchi and Saatchi and DFS merged in 1987, Mr. Kennedy
became its vice-chairman and chief financial officer.
Mr. Kennedy served on numerous industry committees during
his working career. In retirement he has been active in
community organizations, most notably the VNA/Hospice of Vero
Beach, the Environmental Learning Center of Vero Beach and
Habitat for Humanity.
John
R. (Reg) Murphy, Director
Mr. John R. (Reg) Murphy has served on our board of
directors since November 2009. Mr. Murphy is Vice Chairman
of National Geographic Society, a position he has held since
March 1998. From May 1996 until March 1998, Mr. Murphy was
President and Chief Executive Officer of National Geographic
Society. He is a trustee of Mercer University, a trustee and
Chairman of the Board of the PNC Mutual Funds and Chairman of
the Board of the PNC Alternative Fund. He currently serves as
chairman of the Audit Committee of the Omnicom Group.
Mr. Murphy is also a past president of the U.S. Golf
Association. Mr. Murphy served as political editor and then
Editor of The Atlanta Constitution in
1960-75, and
later joined The San Francisco Examiner as Publisher and
Editor
49
in 1975-81.
Mr. Murphy joined The Baltimore Sun as Publisher and Chief
Executive Officer and served in these positions from
1981-88 and
later served as chairman from 1988 through 1991. Mr. Murphy
has authored or co-authored a number of books including
Uncommon Sense, The Accomplishments of Griffin
Bell; The Southern Strategy; and The Greatest
Game. He has been awarded honorary doctorates by several
universities, including Mercer, Utah State, Towson State and
Loyola College, among others.
Philip
A. Odeen, Director
Mr. Philip A. Odeen has served on our board of
directors since July 2008. He commenced service as the chairman
of our audit committee during August 2009. Mr. Odeen served
as the chairman of AES Corporation since January 2008 and
as non-executive chairman of Convergys Corporation since
December 2007. He served as chairman of AVAYA from October 2006
to October 2007. He was chairman and acting chief executive
officer of the Reynolds and Reynolds Company from July 2004 to
February 2005 at which time he became non-executive chairman
serving in that role until October 2006. He was also named chief
executive officer of QinetiQ North America in October 2005
serving until June 2006. Previously, he had served as
non-employee chairman and a director of TRW Inc. from February
2002 until December 2002. From 1998 to 2002 he held various
leadership positions at TRW. Mr. Odeen joined TRW in 1997
when it acquired BDM International, Inc. where he had served as
president, chief executive officer and director since 1992.
Previously, Mr. Odeen was vice chairman, Management
Consulting Services at Coopers & Lybrand after serving
13 years as managing partner of the firms public
sector practice. Mr. Odeen served as a director of Northrop
Grumman from May 2003 and May 2008. Mr. Odeen was appointed
a member of the Defense Business Board (DBB) in 2008.
Dr. E.
Darracott Vaughan, Jr., Director
Dr. E. Darracott Vaughan, Jr. has served on our
board of directors since August 2009 and as co-chairman of our
medical advisory committee in October 2009. Dr. Vaughan is
a physician and surgeon specializing in urology. Since 2001, he
has served as the James J. Colt Professor, Chairman Emeritus
Weill Cornell University Medical Center in the Department of
Urology. From 1993 through 2001, Dr. Vaughan served as the
James J. Colt Professor of Urology, Chairman, at Cornell
University Medical Center. He was the executive vice dean and
senior associate dean for Clinical Affairs until 2009. He now
holds the position of Emeritus Professor in the Department of
Urology. Dr. Vaughan was president of the American
Urological Association in 2001. Dr. Vaughan is the
recipient of numerous academic awards and honors which includes
most recently the 2008 John Coleman Award, Department of Urology
Weill Cornell University Medical Center. Dr. Vaughans
research interests include obstructive uropathy, prostaglandins,
renal hemodynamics, benign prostatic hyperplasia, hypertension
and adrenal disorders. Dr. Vaughan has authored and
co-authored over 350 publications in the field of renal and
urological medicine.
Stuart
L. Weinstein, M.D., Director
Dr. Stuart L. Weinstein, has served on our board of
directors since August 2009 and as co-chairman of our medical
advisory committee in October 2009. Dr. Weinstein is the
Ignacio V. Ponseti Chair and Professor of Orthopedic Surgery at
The University of Iowa. He served as the president of the
American Orthopaedic Association from 1997 to 1998; the American
Board of Orthopaedic Surgery from
2000-2001
and The American Academy of Orthpaedic Surgeons from
2005-2006.
He is a National Institutes of Health funded researcher. He has
published more than 180 scientific articles in peer review
journals on a wide variety of pediatric orthopaedic conditions.
His research work has focused on spinal deformity in children,
childrens hip and foot problems, and the natural history
and long-term outcome of pediatric musculoskeletal conditions.
He has edited three major textbooks including The Pediatric
Spine: Principles and Practice; Lovell and Winters
Pediatric Orthopaedics and Tureks
Orthopaedics. He has served as an Associate
Editor and a member of the Board of Trustees of the Journal of
Bone and Joint Surgery. Dr. Weinstein currently serves as
chairman of doctors for Medical Liability Reform (DMLR), a
Washington, DC based advocacy group, and chairman of the
American Association of Orthopaedic Surgeons Political Action
Committee. After interning in Internal Medicine at The
University of California San Francisco, he returned to the
University of Iowa for a residency in Orthopaedic Surgery. In
1976 he joined the faculty of the Department of Orthopaedic
Surgery at The University of Iowa.
50
Executive
Management
The following individuals serve as our executive officers.
Brian
T. Mayo, President and Chief Technology Officer
Mr. Brian T. Mayo founded the Company in 2004. He is
currently our president. Since July 2009, Mr. Mayo has also
served as our chief technology officer. He has served as our
chief executive officer from May 2004 to October 2007, as
president from October 2007 to the present, and as our chief
executive officer again from July 2008 to July 2009.
Mr. Mayo was chairman of the board of directors from May
2004 to October 2007 and served as our director until November
2009. Mr. Mayo has 30 years experience in the
electronics industry. Mr. Mayo was instrumental in several
startup ventures including: Ardent Communications, which
pioneered voice over the Internet and where he was the director
of engineering from January 1997 to August 1997; and Ingenuity
Designs, a company specializing in airport security solutions
where he was founder, president and chief executive officer from
September 2001 to May 2004. During his career, he enjoyed
technical and management success at the following companies:
Cisco Systems, where he was the director of engineering from
August 1997 to September 2001; Nortel Networks (formerly Bay
Networks) where he was the engineering director from July 1995
to January 1997; Ungermann-Bass Networks, where he was a
corporate consulting engineer from May 1993 to July 1995;
Digital Equipment Corporation, where he was the engineering
manager from July 1987 to May 1993; Gould-Modicon, where he was
program manager from April 1985 to July 1987; Teradyne, where he
was hardware engineer from September 1978 to December 1980 and
operations manager from December 1980 to April 1985; and Texas
Instruments, where he was hardware engineer June 1977 to
September 1977. Mr. Mayo has had involvement in the
development of the communications industrys first data
network switch. Mr. Mayo has authored and co-authored a
number of patents.
Dennis
K. Cummings, Chief Financial Officer
Mr. Dennis K. Cummings joined the Company as the
chief financial officer in February 2010. He is a Certified
Public Accountant and the principal and owner of
Cummings & Associates, a private accounting practice
he founded in February 1992. He has over 30 years
experience in all aspects of management, financial reporting and
controls for both publicly and privately held companies.
Mr. Cummings began his professional career in private
business prior to serving ten years with the public accounting
firm of KPMG Peat Marwick in New York. Mr. Cummings is an
EMT-I and currently serves as Director of Emergency Medical
Services Post 53 for the town of Darien, Connecticut
Alan
Clock, Senior Vice President, Sales and Marketing
Mr. Alan Clock joined us in 2007. He currently
serves as our senior vice president of sales and marketing.
Mr. Clock has 23 years experience in the healthcare
and pharmaceuticals industry. Mr. Clock has held senior
level sales positions at: Active Health Management, an early
pioneer in evidenced based disease management programs where he
was senior vice president of sales from July 2006 to August
2007; nuvado, LLC, a pharmaceutical software and consulting
company where he was executive vice president of business
development and sales from July 2005 to July 2006; and
AmerisourceBergen, one of the worlds largest
pharmaceutical services companies where he was the corporate
vice president of alternate care from November 1998 to July
2005. During his career, he enjoyed sales, business development
and management success at the following companies: McKesson,
where he was the vice president of national accounts from
October 1995 to November 1998 and Cardinal Health (formerly
Whitmire Distribution/Amfac Healthcare) where he served and was
promoted through a variety of local, regional and national sales
positions, eventually becoming corporate director of Hospital
Services from May 1987 to October 1995. Mr. Clock was
instrumental in the creation, development and success of the
pharmaceutical distribution and service industrys first
alternate care vertical.
Other Key
Employees
The following individuals are our key employees.
51
Patricia
Ann Earl, Vice President of Business Development
Mrs. Patricia Ann Earl has served as our executive
strategic consultant and vice president of business development
since May 2008. Mrs. Earl is a long time pharmaceutical
industry veteran and has been actively involved in the
pharmaceutical wholesale distribution industry since joining
AmerisourceBergen Corporation (Bergen), one of the
nations largest pharmaceutical services companies serving
the U.S., Canada and selected global markets in 1986. She held a
variety of executive management positions at Bergen including
vice president general manager from February 1998 to December
2000 and corporate vice president of strategic development from
January 2001 to May 2005. While at Bergen, she directed the
strategic and marketing initiatives for U.S. health
systems, the largest Pharmacy Benefit Management (PBM)
organizations, and alternate care providers. She played a
significant role in the acquisition, strategic positioning, and
implementation of the companys pharmacy technologies,
packaging and service offerings that enhanced medication safety
in the pharmaceutical supply chain. Mrs. Earl was one of
the founding members and was elected the co-chairman of the
first Healthcare Distribution Management Association
(HDMA) Collaborative Commerce Committee that
promoted the advancement of collaborative
e-commerce
business solutions between the nations largest
pharmaceutical distributors and manufacturers. HDMA is the
national association representing primary, full-service
healthcare distributors and is the vital link in the healthcare
system, working to provide value, remove costs and develop
innovative solutions. During her tenure, the technological
solutions investigated by the group and recommended to the
industry included various bar code track and trace technologies,
radio-frequency identification devices (RFID) in cooperation
with the MIT Auto-ID center, and
e-pedigree
solutions that met the requirements of Prescription Drug
Marketing Act of 1987. From May 2005 until March 2008, she was
vice president institutional marketing at H.D. Smith. Prior to
her career in pharmaceutical distribution, Mrs. Earl had a
successful career as an owner/principal, member of board of
directors and served as chief operating officer from April 1978
to December 1986 for TP Communications, a privately-held
corporation that acquired several broadcast radio stations.
Subsequently those stations were acquired by Clear Channel
Broadcasting Network. As a board member and corporate officer,
she provided executive leadership, management oversight, and
strategic direction to the sales, operations and financial
functional areas.
Paul
J. Micciche, Vice President of Engineering
Mr. Paul J. Micciche has served in the position of
vice-president of engineering from November 2004 to the present.
Mr. Micciche has over 24 years of experience in the
high technology industry. Prior to his position at XStream
Systems he was principal member of Technical Staff at Lucent
Technologies from June 2000 through October 2004 where he
managed development teams in the architecture, design,
development and deployment of high throughput multi-service IP
edge router platforms. At Ascend Communications, from 1999 to
2000, Mr. Micciche served as technical manager where he
oversaw the architecture, design and development teams for high
performance central processing units, internet physical layer
cards and high speed backplanes. Ascend Communications was
acquired by Lucent Technologies for $22.0 billion in 1999.
From 1996 to 1999, Mr. Micciche served as an engineering
manager for BayNetworks Inc. and was responsible for the
architecture and design for data compression cards, FPGA control
units and overall Ethernet router systems. BayNetworks was
acquired by Nortel Networks in 1998 for over $9.0 billion.
As a Senior Engineering at UB Networks from 1993 to 1996,
Mr. Micciche was part of the development team that
architected and designed several products including one of the
industrys first Ethernet concentration platforms, ATM
Universal Network Interfaces and desk top switch products. Prior
to these roles, Mr. Micciche worked for Draper Laboratories
from 1985 to 1993 on U.S. Navy related defense programs and
held a secret security clearance.
Advisory
Board
Our advisory board offers counsel to our management on an
informal basis concerning development of new technology, and
strategic planning and partnering. We do not have contractual
relationships with the members of our advisory board. Each
member of our advisory board is eligible to receive an annual
grant of 2,500 share-based incentive awards for advisory
service.
52
Dr. Mohammed
Abuelkhair. Dr. Abuelkhair is the head of
the pharma/medicine and medical products regulation section
health authority in Abu Dhabi and the head of the drug and
medical product department for the general authority of health
services for the Emirates of Abu Dhabi.
Mark S. Butler. Mr. Butler is the former
executive vice president, chief administrative officer and
general counsel to the public company Indevus Pharmaceuticals,
Inc. which was acquired in March 2009 by Endo Pharmaceuticals,
Inc.
Dr. Ronald B. Gaeta. Dr. Gaeta is a
veterinarian and a partner in Patterson Veterinary MRI an equine
exclusive imaging center located in Patterson, New York and an
owner of Dunbarton Equine, a three doctor equine exclusive sport
horse medicine practice located in Brookfield, Connecticut.
Dr. Gaeta serves as the equine consultant to the Bronx Zoo.
Dr. William Hamilton. Dr. Hamilton
is an orthopedic surgeon specializing in the foot and ankle
related medical conditions of athletes and performing artists
including ballet dancers. He has served as a clinical professor
of orthopedic surgery at the College of Physicians &
Surgeons, at Columbia University from July 1995 to the present.
Dr. James D. Henry. Dr. Henry is a
urologic surgeon and has served as the Chief of Urologic Surgery
at Good Samaritan Hospital and Saint Marys Hospital in
West Palm Beach, Florida. Dr. Henry is a co-founder of
Jupiter Hospital in Jupiter, Florida.
John R. Kennedy. Mr. Kennedy is the
former president and chief executive officer of Federal Paper
Board Company, Inc. He was employed with Federal Paper Board
Company from 1952 in various management positions until his
retirement in April 1996. Mr. Kennedy is past chairman of
Georgetown University and is currently chairman emeritus. As
past chairman for The East Hampton Healthcare Foundation, Inc.,
Mr. Kennedy now serves as one of its trustees. He is also
vice chairman of the Indian River Memorial Hospital Foundation
and a board member of the Riverside Theater.
Frank Navarro. Mr. Navarro is the
managing principal of Navarro Lowrey, Inc., an owner, developer
and manager of commercial real estate founded in 1993.
Mr. Navarro leads the companys business ventures
while also developing and executing new business strategies such
as the creation and development of
EcoPlex®,
the Companys trademarked, sustainability brand. He began
his career as an architect, spending 10 years leading
projects and advising clients in Florida, Virginia and Colorado
then went on to earn his MBA in Finance and Real Estate Finance
from Columbia University. Upon graduation, Mr. Navarro
co-founded Navarro Lowrey, Inc. along with Mr. James J.
Lowrey Mr. Navarro is a LEED Accredited
Professional.
Board of
Directors and Corporate Governance
Our board of directors is responsible for establishing broad
corporate policies and for overseeing our overall management. In
addition to considering various matters which require board
approval, the board provides advice and counsel to, and
ultimately monitors the performance of, our senior management.
We established an Audit Committee and Compensation Committee in
January 2005. In March 2009, we established a Finance Committee.
In October 2009, we established a Nominating and Corporate
Governance Committee. The charters for the Audit Committee,
Compensation Committee and Nominating and Corporate Governance
Committee are available at our website, www.xstreamsystems.com.
We believe Messrs. Kennedy, Odeen, Chawla, Ferro, Irish,
Vaughan, and Weinstein are independent members of our board of
directors, under NASDAQs independence standards. The
audit, compensation and nominating and corporate governance
committees are composed of at least one of these independent
members. In accordance with NASDAQ phase-in rules for initial
public offerings we anticipate that within one year of our
expected listing on NASDAQ, each of the directors on the
committees will be determined by the board to be
independent.
The board, its committees and our management strive to perform
and fulfill their respective duties and obligations in a
responsible and ethical manner. We have adopted a Code of Ethics
for Senior Financial Officers that applies to our Chief
Executive Officer, President, and Chief Financial Officer, as
well as a Chief Accounting Officer and Controller if we employ
persons in these positions in the future. In addition, we have
adopted a Code of Conduct
53
generally applicable to all of our employees. Upon request, we
will provide to any person without charge a copy of our Code of
Ethics or Code of Conduct. Any such request should be made to
Dennis K. Cummings, Chief Financial Officer, XStream Systems,
Inc., 10305 102nd Terrace, Suite 101, Sebastian, FL
32958.
Committees
of the Board
Audit Committee. The board has an Audit
Committee comprised of three directors, Messrs. Philip A.
Odeen (Co-Chairman), Anthony Chidoni and Robert E. Kennedy
(Co-Chairman). Each member of the Audit Committee is independent
as defined under NASDAQs listing standards, other than
Mr. Chidoni. The board of directors has determined that
Mr. Kennedy and Mr. Chidoni each qualify as an
audit committee financial expert. The Audit
Committee functions pursuant to a written charter, under which
the committee has such powers as may be assigned to it by the
board from time to time. The Audit Committee was established in
January 2005. The Audit Committee is currently charged with,
among other things:
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discuss with management and our independent public accountants
our annual audited financial statements, quarterly financial
statements, earnings press releases, and financial information
and earnings guidance provided to analysts and rating agencies,
if any;
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discuss with management and our independent public accountants
our major financial risk exposures, the guidelines and policies
by which risk assessment and management is undertaken, and the
steps management has taken to monitor and control risk exposure;
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appoint, retain, compensate, evaluate, and terminate our
independent public accountants for the purpose of preparing or
issuing an audit report or performing other audit, review, or
attest services for us and oversight of such work;
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pre-approve, or adopt procedures to pre-approve, all audit,
audit related, tax, and other services permitted by law or
applicable SEC regulations (including fee and cost ranges) to be
performed by our independent public accountants;
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review, at least annually, the qualifications, performance, and
independence of our independent public accountants, including to
ensure the rotation of the lead audit partner at least every
five years;
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reviewing the integrity of our financial reporting process with
our independent auditors and with our management and internal
auditor, if any;
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review the effect of regulatory and accounting initiatives, as
well as off-balance sheet structures, on our financial
statements;
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review with our independent auditors any audit problems or
difficulties encountered and managements response thereto;
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discuss the scope of the annual audit and review the form of the
opinion the independent auditor proposes to issue;
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establish procedures for the receipt, retention, and treatment
of complaints received by us regarding accounting, internal
accounting controls, or auditing matters and the confidential,
anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters;
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review and approve all related party transactions and review and
make recommendations to the board of directors, or approve, any
contracts or other transactions with our current or former
executive officers, including consulting arrangements,
employment agreements,
change-in-control
agreements, termination arrangements, and loans to employees
made or guaranteed by us; and
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review and reassess the adequacy of the Audit Committee Charter
on an annual basis and recommend any changes to the board of
directors.
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Compensation Committee. The board has a
Compensation Committee comprised of two directors,
Messrs. Anthony Chidoni (Chairman) and Robert E. Kennedy.
Mr. Kennedy is independent as defined under NASDAQs
listing standards. The Compensation Committee functions pursuant
to a written charter, under which
54
the committee has such powers as may be assigned to it by the
board from time to time. The Compensation Committee was
established in January 2005. The Compensation Committee is
currently charged with, among other things, assisting the board
in:
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review and recommend for approval by the independent directors
of the board of directors, the total compensation package of the
chief executive officer and other members of senior management
and key employees for the upcoming year, at least on an annual
basis;
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discuss performance evaluation of the chief executive officer
and recommend approval by the independent board of directors of
bonus compensation and develop performance goals for the chief
executive officer and other members of senior management for
purposes of determining bonus compensation;
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review market data to assess our competitive position for all
components of compensation for the chief executive officer and
senior management to ensure we are competitive with comparable
public companies;
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administer any plan, recommend to the board of directors the
adoption of any amendments to a plan or modifying or canceling
any existing grants under such plans; and review the sufficiency
of the shares available for grant under the plans;
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review and recommend director compensation, including cash
payments, equity awards and other benefits;
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retain consultants of its selection to advise it with respect to
our salary and incentive compensation and benefits programs, and
approve the consultants fees and other retention terms;
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review and reassess the adequacy of the Compensation Committee
Charter annually and recommend any proposed changes to the board
of directors for approval; and
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perform such other functions as necessary and appropriate under
law, the rules of NASDAQ (or other exchange or interdealer
electronic quotation service which rules may be applicable to
us), our amended and restated certificate of incorporation or
amended and restated by-laws and the resolutions and other
directives of the board of directors.
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In general, the Compensation Committee formulates and recommends
compensation policies for board approval, oversees and
implements these board-approved policies, and keeps the board
apprised of its activities on a regular basis. In addition, the
Compensation Committee develops criteria to assist the
boards assessment of the Chief Executive Officers
leadership of our Company.
Nominating and Corporate Governance
Committee. The board has a Nominating and
Corporate Governance Committee comprised of two directors,
Messrs. Robert E. Kennedy (Chairman) and Mr. James J.
Lowrey. Mr. Kennedy is independent as defined under
NASDAQs listing standards. The Nominating and Corporate
Governance Committee functions pursuant to a written charter,
under which the committee has such powers as may be assigned to
it by the board from time to time. The Nominating and Corporate
Governance Committee was established in October 2009. The
Nominating and Corporate Governance Committee is currently
charged with, among other things, assisting the board in:
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selecting or recommending to the board for selection, the
individuals to stand for election as directors at the annual
meeting of stockholders;
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overseeing the selection and composition of committees of the
board and, as applicable, oversee management continuity planning
processes;
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identifying individuals believed to be qualified as candidates
to serve on the board and select, or recommend that the board
select, the candidates for all directorships to be filled by the
board or by the stockholders at an annual or special meeting;
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reviewing and making recommendations to the full board, or
determine, whether members of the board should stand for
re-election and consider matters relating to the retirement of
board members, including term limits or age caps;
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55
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if applicable, in the case of a director nominated to fill a
vacancy on the board due to an increase in the size of the
board, recommend to the board the class of directors in which
the director-nominee should serve;
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conducting all necessary and appropriate inquiries into the
backgrounds and qualifications of possible candidates;
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considering questions of independence and possible conflicts of
interest of members of the board and executive officers;
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reviewing and making recommendations, as the committee deems
appropriate, regarding the composition and size of the board in
order to ensure the board has the requisite expertise and its
membership consists of persons with sufficiently diverse and
independent backgrounds; and
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overseeing the evaluation, at least annually, and as
circumstances otherwise dictate, of the board and management.
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Finance Committee. The board has a Finance
Committee comprised of Messrs. Dennis H. Ferro (Chairman)
and James J. Lowrey. The Finance Committee does not have a
written charter. The Finance Committee was established in March
2009. This committee is currently charged with, among other
things, assisting the board in:
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formulation of policies relating to the our cash flow, cash
management and working capital, stockholder dividends and
distributions, share repurchases and investments;
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adjustments to our capital structure;
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capital and debt issuances;
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financial strategies;
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working capital and cash flow management;
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policies for managing interest rate and investment risk;
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the financial aspects of insurance and risk management;
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tax planning and compliance;
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proposed mergers, acquisitions, divestitures and strategic
investments; and
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other transactions or financial issues that management desires
to have reviewed by the Finance Committee.
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Additionally, the finance committee reports periodically to the
full board on our insurance and risk management programs.
The board of directors has additional standing committees
including the executive committee, the investor relations
committee, the medical advisory committee and the global
business development committee.
Director
Compensation for the Year Ended December 31, 2009
All directors are entitled to receive compensation for their
services. In February 2008, a resolution was passed by the
Compensation Committee granting directors the following annual
compensation package:
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Grant of stock options to purchase 7,500 shares of our
common stock pursuant to our Amended and Restated 2004 Stock
Option Plan; and
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Grant of stock options to purchase 1,875 shares of our
common stock for committee service.
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In addition, in October 2009, the board of directors determined
that the chairs of each of the board committees would receive
stock options to purchase 2,500 shares of our common stock
for their service.
56
The following table summarizes the compensation of each member
of our board of directors for their service in 2009.
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Option
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Awards
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Total
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Name(1)
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Year
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($)(2)
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($)
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Joseph J. Melone(3)
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2009
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$
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2,930
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$
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2,930
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Anthony Chidoni(4)
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2009
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$
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2,930
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$
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2,930
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Robert E. Kennedy(5)
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2009
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$
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2,930
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$
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2,930
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Phillip A. Odeen(6)
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2009
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$
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2,930
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$
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2,930
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Ash K. Chawla(7)
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2009
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$
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2,930
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$
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2,930
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Simon Irish(8)
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2009
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$
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2,930
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$
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2,930
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Dennis H. Ferro(9)
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2009
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$
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2,930
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$
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2,930
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Dr. E. Darracott Vaughan, Jr.(10)
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2009
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$
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2,930
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$
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2,930
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Dr. Stuart Weinstein(11)
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2009
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$
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2,930
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$
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2,930
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John R. (Reg) Murphy(12)
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2009
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$
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2,198
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$
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2,198
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Thomas W. Cook, Former Director (13)
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2009
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$
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2,930
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$
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2,930
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Walter Lovejoy, Former Director (14)
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2009
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$
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2,198
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$
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2,198
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(1) |
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Brian T. Mayo, our president and chief technology officer, is a
named executive officer and did not receive any compensation
during the fiscal year ended December 31, 2009 for serving
on our board of directors. Mr. James J. Lowrey, our
chairman and chief executive officer is a named executive
officer and received an option to purchase 10,000 shares of
common stock at an exercise price of $0.69 per share for serving
on our board of directors during the fiscal year ended
December 31, 2009. The value of Mr. Lowreys
option award is fully reflected in the 2009 Summary Compensation
Table appearing elsewhere in this prospectus and is therefore
not included in this table. As of December 31, 2009,
Mr. Lowrey did not individually hold any option awards,
however, he had transferred all of his option awards in the
aggregate amount of 423,316 to the James J. Lowrey 2009
Irrevocable Trust. |
|
|
|
(2) |
|
The determination of value of option awards is based upon the
Black-Scholes Option pricing model the details and assumptions
of which are set out in our financial statements included in
this prospectus. The amount reported above is the dollar amount
recognized for financial statement reporting purposes with
respect to the fiscal year in accordance with FASB ASC Topic 718. |
|
|
|
(3) |
|
As of December 31, 2009, Mr. Melone held an aggregate
of 10,000 option awards. |
|
|
|
(4) |
|
As of December 31, 2009, Mr. Chidoni held an aggregate
of 10,000 option awards. |
|
|
|
(5) |
|
As of December 31, 2009, Mr. Kennedy held an aggregate
of 23,500 option awards. |
|
|
|
(6) |
|
As of December 31, 2009, Mr. Odeen held an aggregate
of 13,280 option awards. |
|
|
|
(7) |
|
As of December 31, 2009, Mr. Chawla held an aggregate
of 10,000 option awards. |
|
|
|
(8) |
|
As of December 31, 2009, Mr. Irish held an aggregate
of 10,000 option awards. |
|
|
|
(9) |
|
As of December 31, 2009, Mr. Ferro held an aggregate
of 10,000 option awards. |
|
|
|
(10) |
|
As of December 31, 2009, Dr. Vaughan held an aggregate
of 10,000 option awards. |
|
|
|
(11) |
|
As of December 31, 2009, Dr. Weinstein held an
aggregate of 10,000 option awards. |
|
|
|
(12) |
|
As of December 31, 2008, Mr. Murphy held an aggregate
of 7,500 option awards. |
|
|
|
(13) |
|
As of December 31, 2009, Mr. Cook held an aggregate of
24,250 option awards. Mr. Cook resigned from the board of
directors on August 14, 2009. |
|
|
|
(14) |
|
As of December 31, 2009, Mr. Lovejoy held an aggregate
of 18,180 option awards. Mr. Lovejoy resigned from the
board of directors on August 14, 2009. |
57
Executive
Compensation
Compensation
Discussion and Analysis
Compensation Philosophy and Design: Our compensation philosophy
is to provide our executive officers listed in the summary
compensation table with compensation packages that attract,
retain, reward and motivate them. Therefore, our board of
directors and our compensation committee generally construct
compensation packages that take into account those of executive
officers with similar positions in comparable companies, linking
the performance of the Company and individual performance and
designed to align the interests of the executive officers with
those of our stockholders. Our compensation philosophy is also
designed to reinforce a sense of ownership in the Company,
urgency with respect to meeting deadlines and overall
entrepreneurial spirit and to link rewards to measurable
corporate performance metrics.
While the board of directors and compensation committee seek to
provide compensation packages that are competitive within our
markets and the technology industry, in general, it does not
utilize an established peer group in our industry and does not
set compensation levels based on any predetermined benchmarks
for total compensation or any individual element of
compensation. The compensation committee reviews our performance
on a regular basis using a variety of financial and
non-financial metrics. These metrics include, but are not
limited to, net sales, gross margin, sales and marketing
expenses, personnel costs, accounts receivable and accounts
payable aging, liquidity and cash resources. Management compares
actual results against goals and budgets to take appropriate
actions in order to improve performance.
Certain compensation adjustments are made pursuant to each
executive officers employment terms established at the
time he or she is hired. Executive officer Brian T. Mayo is the
only named executive officer with whom we have an employment
agreement. We established the salary levels included in the
employment agreements by surveying companies within the
technology industry including current compensation data based
upon organization size, industry and geographic location.
The terms of such employment agreements are described in the
Employment Agreements section below.
Elements of Compensation: Our compensation packages for
executive officers consist of cash salaries, long-term incentive
awards in the form of stock option and restricted stock grants.
Salary: Base salaries are set initially upon
hire based predominantly on available market data and are
adjusted based on market trends, our overall performance,
individual contributions to our performance, and our available
cash to a lesser extent. We also take into consideration the
scope of our officers respective responsibilities. In
reviewing base salaries, we also consider several other factors,
including cost of living increases, and levels of responsibility.
Long-term Incentives: Executive officers may
be granted stock options and other awards to purchase our common
stock under our 2004 Plan and 2009 Plan, typically with time
vesting requirements, as a way to align the interests of the
executive officers with those of our stockholders. We believe
that our long-term performance is aided by a culture that
encourages superior performance by our executive officers, and
that equity awards encourage and will appropriately reward such
superior performance.
58
The following table sets forth information concerning the annual
and long-term compensation of our Chief Executive Officer and
the other named executive officers, for services as executive
officers for the last two fiscal years.
2009
Summary Compensation Table
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
|
|
Fiscal
|
|
|
Salary
|
|
|
Award(s)
|
|
|
Award(s)
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)(10)
|
|
|
($)(10)
|
|
|
($)
|
|
|
($)
|
|
|
James J. Lowrey(1)(2)(3)
|
|
|
2009
|
|
|
|
|
|
|
$
|
690,000
|
(2)
|
|
$
|
2,930
|
(3)
|
|
|
|
|
|
$
|
692,930
|
|
Chairman of the Board and
Chief Executive Officer
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian T. Mayo(4)(5)
|
|
|
2009
|
|
|
$
|
127,070
|
|
|
|
|
|
|
$
|
26,606
|
(4)
|
|
$
|
120
|
(9)
|
|
$
|
153,796
|
|
President and Chief
Technology Officer
|
|
|
2008
|
|
|
$
|
221,546
|
|
|
|
|
|
|
$
|
32,354
|
(5)
|
|
$
|
120
|
(9)
|
|
$
|
254,020
|
|
Dennis K. Cummings(6)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan D. Clock(7)(8)
|
|
|
2009
|
|
|
$
|
155,680
|
|
|
|
|
|
|
$
|
34,141
|
(7)
|
|
$
|
120
|
(9)
|
|
$
|
189,941
|
|
Senior Vice President of
Sales and Marketing
|
|
|
2008
|
|
|
$
|
168,009
|
|
|
|
|
|
|
$
|
2,071
|
(8)
|
|
$
|
120
|
(9)
|
|
$
|
170,200
|
|
|
|
|
(1) |
|
Mr. Lowrey was appointed chief executive officer in August
2009 and did not receive any compensation as our executive
officer during the fiscal year ended December 31, 2008. |
|
|
|
(2) |
|
Includes a stock grant on August 14, 2009 of
1,000,000 shares of common stock, for his services as chief
executive officer of the Company. |
|
|
|
(3) |
|
Includes an incentive stock option granted on December 31,
2009 for 10,000 shares of common stock at an exercise price
of $0.69 per share, which were awarded to Mr. Lowrey for
his services on the board of directors of the Company. |
|
|
|
(4) |
|
Includes an incentive stock option granted on January 15,
2009 for 41,000 shares of common stock at an exercise price
of $0.69 per share, as a merit award in exchange for services
rendered; an incentive stock option granted on March 31,
2009 for 11,769 shares of common stock at an exercise price
of $0.69 per share, as compensation in exchange for a portion of
his salary of $29,423; an incentive stock option granted on
June 30, 2009 for 11,769 shares of common stock at an
exercise price of $0.69 per share, as compensation in exchange
for a portion of his salary of $29,423; an incentive stock
option granted on September 30, 2009 for 13,731 shares
of common stock at an exercise price of $0.69 per share, as
compensation in exchange for a portion of his salary of $34,327;
and an incentive stock option granted on December 31, 2009
for 13,731 shares of common stock at an exercise price of
$0.69 per share, as compensation in exchange for a portion of
his salary of $34,327. |
|
|
|
(5) |
|
Includes an incentive stock option granted on February 7,
2008 for 3,500 shares of common stock at an exercise price
of $0.69 per share, as a merit award in exchange for services
rendered; an incentive stock option granted on March 12,
2008 for 45,115 shares of common stock at an exercise price
of $0.69 per share, as compensation in exchange for a portion of
his salary of $112,789; an incentive stock option granted on
March 31, 2008 for 13,730 shares of common stock at an
exercise price of $0.69 per share, as compensation in exchange
for a portion of his salary of $34,327; and an incentive stock
option granted on June 30, 2008 for 7,846 shares of
common stock, on September 30, 2008 for 17,653 shares
of common stock, and on December 31, 2008 for
11,769 shares of common stock, all at an exercise price of
$0.69 per share, as compensation in exchange for a portion of
his salary in the aggregate amount of $93,173. |
|
|
|
(6) |
|
Mr. Cummings was appointed chief financial officer in
January 2010 and did not receive any compensation as our
executive officer during the fiscal years ended
December 31, 2008 and December 31, 2009. |
|
|
|
(7) |
|
Includes an incentive stock option granted on January 15,
2009 for 122,000 shares of common stock at an exercise
price of $0.69 per share in connection with his employment with
us as Senior Vice President of Sales and Marketing. |
59
|
|
|
(8) |
|
Includes an incentive stock option granted on October 8,
2007 for 16,000 shares of common stock at an exercise price
of $3.80 per share in connection with his employment with us as
Senior Vice President of Sales and Marketing. |
|
|
|
(9) |
|
This amount includes a premium payment of $120 for a life
insurance policy with payable benefits of $25,000. |
|
|
|
(10) |
|
The amounts in this column reflect the amounts we recorded in
accordance with FASB ASC Topic 718 as stock-based compensation
in our financial statements for the applicable year in
connection with options we granted in that year and in prior
years, adjusted to disregard the effects of any estimate of
forfeitures related to service-based vesting but assuming,
instead, that the executive will perform the requisite service
for the award to vest in full. The assumptions we used in
valuing options are described under the caption
Stock-Based Compensation in Note 7 to our
financial statements included in this prospectus. |
Employment
and Severance Agreements
We have entered into the agreements set forth below with the
following executive officer, Mr. Brian T. Mayo and key
employee Mr. Paul J. Micciche.
Brian T.
Mayo Employment Agreement
We entered into an employment agreement with Mr. Mayo on
November 1, 2006 whereby Mr. Mayo agreed to serve as
our president and chief executive officer. The agreement terms
provide for automatic annual renewal. Under the terms of the
agreement Mr. Mayos base annual salary is $255,000,
and he is entitled to receive an annual performance bonus in
accordance with our annual bonus program. The base salary is
reviewed each year by the board and it may in its discretion
elect to increase the base salary at any time. Subject to
certain conditions, Mr. Mayo is entitled to receive certain
benefits under the agreement including health insurance,
disability insurance, life insurance and paid vacation of not
less than four weeks per year. The terms of the agreement
additionally provide that we will maintain a directors and
officers liability insurance policy covering Mr. Mayo
in an amount of no less than $1,000,000. If Mr. Mayos
employment is terminated by us without cause or by Mr. Mayo
for good reason, Mr. Mayo will be entitled to receive a
severance payment equal to all of the base salary, annual bonus,
stock options, business expenses and benefits which are due,
have accrued, or will otherwise become due or accrue through the
end of the term of the agreement, or six months, whichever is
the greater amount of time. If Mr. Mayos employment
is terminated by Mr. Mayo without good reason,
Mr. Mayo will be entitled to receive a severance payment of
all base salary, annual bonus (if already awarded), stock
options, business expenses and benefits which are due and
accrued through the date of termination. If Mr. Mayos
employment is terminated by us for cause, Mr. Mayo will be
entitled to receive a severance payment of all base salary,
annual bonus (if already awarded), stock options, business
expenses and benefits which are due and accrued through the
effective date of termination. For purposes of the agreement,
cause is defined as Mr. Mayos conviction of a felony
or of any crime involving moral turpitude,
and/or being
found guilty or otherwise pleading guilty to willful gross
neglect or willful gross misconduct in performing his duties. If
Mr. Mayos employment is terminated by Mr. Mayo
by reason of Mr. Mayos death, his estate shall be
entitled to receive all base salary, annual bonus (if already
awarded), stock options, business expenses and benefits which
are due and accrued through the date of death.
In the event of Mr. Mayos termination upon a change
of control as defined in the agreement, subject to certain
conditions, he will be entitled to receive all base salary,
annual bonus (if already awarded), stock options, business
expenses and benefits which are due or otherwise become due or
accrue for a period of six months. Prior to the effective date
of the change of control, 25% of the stock options granted to
Mr. Mayo will vest and be exercisable by Mr. Mayo for
a period of one year following the effective date of termination
of his employment.
The agreement provides that Mr. Mayo is not permitted
during the term and for 12 months after the effective date
of the expiration or termination of the term of the agreement,
to solicit any employees, agents and other business contacts of
ours to terminate or modify their relationship with or compete
against us or conduct business activities in competition with us.
The agreement provides that the results of Mr. Mayos
employment under the agreement, including any works of
authorship resulting from the performance of his duties during
his employment with us and any works in progress are
works-made-for-hire for the benefit of us and we are the sole
owner of the work.
60
During October 2009, we entered into a verbal agreement with
Mr. Mayo to temporarily reduce his salary to approximately
$63,750 in connection with salary reductions implemented for
certain executive officers and key employees of the Company.
Mr. Mayo delivered a demand letter to our management, dated
November 16, 2009, alleging our breach of his executive
employment agreement. Mr. Mayo claims in the demand letter
his base salary was reduced in violation of his executive
employment agreement from $255,000 per year to approximately
$63,750. Mr. Mayo requested restoration of his salary to
$255,000 per year and payment of his base salary since the date
his salary was reduced. Mr. Mayos salary reduction
was related to general salary reductions affecting four key
employees of the Company which reductions were implemented to
address budgeting and cash flow concerns. As of January 1,
2010, Mr. Mayos annual base salary has been restored
to $127,500 and we paid Mr. Mayo a cash payment of
$14,711.58 on January 14, 2010, which included all deferred
amounts since the reduction of Mr. Mayos salary in
October 2009. The Company and Mr. Mayo have verbally agreed
that Mr. Mayo will be paid all additional deferred amounts
under Mr. Mayos agreement following completion of the
offering. No written release of the demand letter claims has
been executed by the parties at this time.
Paul J.
Micciche Employment Agreement
We entered into an employment agreement with Mr. Micciche
on November 1, 2006 whereby Mr. Micciche agreed to
serve as our vice president of engineering. The agreement terms
provide for automatic annual renewal. Under the terms of the
agreement Mr. Micciches base annual salary is
currently $125,640, and he is entitled to receive an annual
performance bonus in accordance with our annual bonus program.
The base salary is reviewed each year by the board and it may in
its discretion elect to increase the base salary at any time.
Subject to certain conditions, Mr. Micciche is entitled to
receive certain benefits under the agreement including health
insurance, disability insurance, life insurance and paid
vacation of not less than four weeks per year. If
Mr. Micciches employment is terminated by us without
cause or by Mr. Micciche for good reason, Mr. Micciche
will be entitled to receive a severance payment equal to all of
the base salary, annual bonus, stock options, business expenses
and benefits which are due, have accrued, or will otherwise
become due or accrue through the end of the term of the
agreement, or six months, whichever is the greater amount of
time. If Mr. Micciches employment is terminated by
Mr. Micciche without good reason, he will be
entitled to receive a severance payment of all base salary,
annual bonus (if already awarded), stock options, business
expenses and benefits which are due and accrued through the date
of termination. If Mr. Micciches employment is
terminated by us for cause, Mr. Micciche will be entitled
to receive a severance payment of all base salary, annual bonus
(if already awarded), stock options, business expenses and
benefits which are due and accrued through the effective date of
termination. If Mr. Micciches employment is
terminated by Mr. Micciche by reason of
Mr. Micciches death, his estate shall be entitled to
receive all base salary, annual bonus (if already awarded),
stock options, business expenses and benefits which are due and
accrued through the date of death.
In the event of Mr. Micciches termination upon a
change of control as defined in the agreement and subject to
certain conditions, he will be entitled to receive all base
salary, annual bonus (if already awarded), stock options,
business expenses and benefits which are due or otherwise become
due or accrue for a period of six months. Prior to the effective
date of the change of control, 25% of the stock options granted
to Mr. Micciche will vest and be exercisable by
Mr. Micciche for a period of one year following the
effective date of termination of his employment.
The agreement provides that Mr. Micciche is not permitted
during the term and for 12 months after the effective date
of the expiration or termination of the term of the agreement,
to solicit any employees, agents and other business contacts of
ours to terminate or modify their relationship with or compete
against us or conduct business activities in competition with us.
The agreement provides that the results of
Mr. Micciches employment under the agreement,
including any works of authorship resulting from the performance
of his duties during his employment with us and any works in
progress are works-made-for-hire for the benefit of us and we
are the sole owner of the work.
61
Outstanding
Equity Awards at 2009 Fiscal Year End
The following table lists all outstanding equity awards held by
our named executive officers as of December 31, 2009.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Unexercised
|
|
|
Exercise
|
|
|
Option
|
|
Name
|
|
Exercisable(1)
|
|
|
Unearned Options(1)
|
|
|
Price Option
|
|
|
Expiration Date
|
|
|
James J. Lowrey
|
|
|
26,316
|
|
|
|
0
|
|
|
$
|
3.80
|
|
|
|
7/14/2016
|
|
|
|
|
45,000
|
|
|
|
0
|
|
|
$
|
3.80
|
|
|
|
5/1/2017
|
|
|
|
|
342,000
|
|
|
|
0
|
|
|
$
|
3.00
|
|
|
|
8/14/2018
|
|
|
|
|
0
|
|
|
|
10,000
|
(2)
|
|
$
|
0.69
|
|
|
|
12/31/2019
|
|
Brian T. Mayo
|
|
|
350
|
|
|
|
0
|
|
|
$
|
2.57
|
|
|
|
4/26/2010
|
|
|
|
|
1
|
|
|
|
0
|
|
|
$
|
2.57
|
|
|
|
3/3/2011
|
|
|
|
|
18,824
|
|
|
|
0
|
|
|
$
|
2.34
|
|
|
|
4/22/2016
|
|
|
|
|
6,093
|
|
|
|
1,407
|
|
|
$
|
2.57
|
|
|
|
9/7/2011
|
|
|
|
|
18,859
|
|
|
|
0
|
|
|
$
|
3.80
|
|
|
|
1/30/2017
|
|
|
|
|
2
|
|
|
|
0
|
|
|
$
|
4.18
|
|
|
|
3/3/2012
|
|
|
|
|
3,333
|
|
|
|
1,667
|
|
|
$
|
4.18
|
|
|
|
4/3/2012
|
|
|
|
|
18,912
|
|
|
|
0
|
|
|
$
|
4.18
|
|
|
|
6/7/2012
|
|
|
|
|
21,088
|
|
|
|
0
|
|
|
$
|
4.18
|
|
|
|
6/7/2012
|
|
|
|
|
1,000
|
|
|
|
0
|
|
|
$
|
4.18
|
|
|
|
6/13/2012
|
|
|
|
|
1,604
|
|
|
|
1,896
|
|
|
$
|
0.69
|
|
|
|
2/7/2018
|
|
|
|
|
45,115
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
3/12/2018
|
|
|
|
|
13,730
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
3/31/2018
|
|
|
|
|
7,846
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
6/30/2018
|
|
|
|
|
17,653
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
9/30/2018
|
|
|
|
|
11,769
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
12/31/2018
|
|
|
|
|
20,500
|
|
|
|
20,500
|
(3)
|
|
$
|
0.69
|
|
|
|
1/15/2019
|
|
|
|
|
11,769
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
3/31/2019
|
|
|
|
|
11,769
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
6/30/2019
|
|
|
|
|
13,731
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
9/30/2019
|
|
|
|
|
13,731
|
|
|
|
0
|
|
|
$
|
0.69
|
|
|
|
12/31/2019
|
|
Alan D. Clock
|
|
|
8,666
|
|
|
|
7,334
|
|
|
$
|
3.80
|
|
|
|
10/7/2017
|
|
|
|
|
61,000
|
|
|
|
61,000
|
(4)
|
|
$
|
0.69
|
|
|
|
1/15/2019
|
|
|
|
|
(1) |
|
Except as noted above, all un-exercisable options vest in the
following manner: 25% on the first anniversary of the grant date
and monthly thereafter at the rate of 1/36 per month on the
monthly anniversary of the grant date for a period of three
years. |
|
|
|
(2) |
|
10,000 options vest on December 31, 2010. |
|
|
|
(3) |
|
20,500 options vest on January 15, 2010. |
|
|
|
(4) |
|
61,000 options vest on January 15, 2010. |
2004
Stock Option Plan
On May 27, 2004, our board of directors and sole
stockholder as of that date adopted a stock option plan (the
2004 Stock Option Plan). Pursuant to this plan,
which expires on May 27, 2014, incentive stock options or
non-
62
qualified options to purchase an aggregate of
2,600,000 shares of common stock may be issued, as
adjusted. The plan may be administered by our board of directors
or by a committee to which administration of the plan, or part
of the plan, may be delegated by our board of directors. Options
granted under this plan are not generally transferable by the
optionee except by the optionees will or by the laws of
descent and distribution or to optionees Immediate Family
(as defined hereafter) or a trust for the benefit of
optionees Immediate Family. Immediate Family
as used in the 2004 Stock Option Plan means spouse, lineal
descendant or antecedent, father, mother, brother or sister. In
such case, the transferee or other recipient will receive and
hold the option so transferred subject to the provisions of the
2004 Stock Option Plan and the respective optionees option
agreement, except that the permitted transferee of the option
will not be subject to the requirement of the original optionee
to provide services to us. All options granted under the 2004
Stock Option Plan become exercisable at such times and in such
installments (which may be cumulative) as the committee shall
provide in the terms of each individual option agreement. All
vested options and options that have become exercisable from
time to time may be exercised in whole or in part in accordance
with the terms of the applicable option agreement; provided,
however, that the committee shall be authorized to require that
any partial exercise be with respect to a minimum number of
shares of common stock. Subject to the provision for permitted
transferees of the options, to the extent that options are
vested, they must be exercised within a maximum of three months
of the end of the optionees status as an employee,
director or consultant, or within a maximum of 12 months
after such optionees termination or by death or
disability, but in no event later than the expiration of the
option term. The exercise price of all stock options granted
under the plan will be determined by our board of directors or
designated committee. No options may be granted under the 2004
Stock Option Plan after March 1, 2014, but options granted
on or before that date may be exercised according to the terms
of their respective option agreements and shall continue to be
governed by and interpreted consistent with the terms of the
2004 Stock Option Plan. To date, we have 1,952,026 options
outstanding under the Plan.
The following grants to executive officers under the Plan were
outstanding on February 8, 2010: James J.
Lowrey 413,316 grants at a weighted exercise price
of $3.14; Brian Mayo 269, 418 grants at a weighted
exercise price of $1.67; and Alan Clock 138,000
grants at a weighted average exercise price of $1.05.
2009 Long
Term Incentive Compensation Plan
On August 14, 2009, our board of directors adopted a stock
incentive plan (the 2009 Incentive Compensation Plan
or 2009 Plan). Pursuant to this plan, incentive
stock options, non-qualified options, restricted stock awards,
deferred stock awards, bonus stock and awards in lieu of
obligations, dividends equivalents, performance awards and other
stock based awards to purchase an aggregate of
5,000,000 shares of common stock may be issued, as
adjusted. The 2009 Plan will be administered by a committee
designated by the board of directors to administer the 2009 Plan
except to the extent that our board of directors elects to
administer the plan, in which case the 2009 Plan shall be
administered by only those members of the board of directors who
are independent members of the board.
The 2009 Incentive Compensation Plan became effective upon the
approval by the board of directors and by our stockholders
eligible to vote in the election of directors, by a vote
sufficient to meet the requirements of Code Sections 162(m)
(if applicable) and 422,
Rule 16b-3
under the Exchange Act of 1934, as amended (Exchange
Act) (if applicable), applicable requirements under the
rules of any stock exchange or automated quotation system on
which the shares may be listed or quoted, and other laws,
regulations, and obligations of the Company applicable to the
plan, and the subsequent approval by any other securityholders
of the Company which may be required to approve the plan. The
2009 Incentive Compensation Plan will terminate at the earliest
of (i) such time as no shares remain available for issuance
under the plan, (ii) termination of the plan by the board
of directors, or (iii) the tenth anniversary of the
Stockholder Approval Date. Awards outstanding upon expiration of
the 2009 Plan shall remain in effect until they have been
exercised or terminated, or have expired.
No award or other right or interest granted under the 2009 Plan
may be pledged, hypothecated or otherwise encumbered or subject
to any lien, obligation or liability of such participant to any
party, or assigned or transferred by such participant otherwise
than by will or the laws of descent and distribution or to a
beneficiary upon the death of a participant, and such awards or
rights that may be exercisable shall be exercised during the
lifetime of the participant only by the participant or his or
her guardian or legal representative, except that awards and
other rights may be transferred to one or more beneficiaries or
other transferees during the lifetime of the participant, and
may be exercised by such transferees in accordance with the
terms of the award, but only if and to the extent such
63
transfers are permitted by the committee pursuant to the express
terms of an award agreement (subject to any terms and conditions
which the committee may impose thereon). A beneficiary,
transferee, or other person claiming any rights under the 2009
Plan from or through any participant will be subject to all
terms and conditions of the 2009 Plan and any award agreement
applicable to such participant, except as otherwise determined
by the committee, and to any additional terms and conditions
deemed necessary or appropriate by the committee.
The exercise price per share purchasable under an option granted
under the 2009 Plan will be determined by the committee,
provided that an exercise price may not be less than 100% of the
fair market value of a share on the date of grant of the option
and shall not, in any event, be less than the par value of a
share on the date of grant of the option. The committee may
impose on any award or the exercise thereof, at the date of
grant or thereafter, additional terms and conditions, not
inconsistent with the provisions of the 2009 Plan, as the
committee may determine, including terms requiring forfeiture of
awards in the event of termination of the participants
continuous service and terms permitting a participant to make
elections relating to his or her award.
To date, there are 1,153,731 incentive awards outstanding under
the 2009 Plan. On October 29, 2009, the board approved the
issuance to our chairman and chief executive officer, James J.
Lowrey, of 1,000,000 shares of vested common stock at a
fair value of $0.69 per share for services rendered to the
Company.
PRINCIPAL
STOCKHOLDERS
The following table sets forth information regarding the number
of shares of our common stock beneficially owned on
February 8, 2010, and as adjusted to reflect the sale of
the shares of common stock offered by this prospectus, by:
|
|
|
|
|
each of our executive officers,
|
|
|
|
each of our directors,
|
|
|
|
all of our directors and executive officers as a group, and
|
|
|
|
each person who is known by us to beneficially own 5% or more of
our common stock.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power
with respect to securities. Shares of our common stock which may
be acquired upon conversion of preferred stock or exercise of
stock options or warrants which are currently exercisable or
convertible or which become exercisable or convertible within
60 days after the date indicated in the table are deemed
beneficially owned by the optionees or warrant holders. Subject
to any applicable community property laws, the persons or
entities named in the table below have sole voting and
investment power with respect to all shares indicated as
beneficially owned by them.
64
Unless otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to the number
of shares indicated as beneficially owned by them. Unless
otherwise indicated, the address of the beneficial owner is
c/o XStream
Systems, Inc., 10305 102nd Terrace, Suite 101,
Sebastian, FL 32958.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Percentage of Shares
|
|
|
|
Shares
|
|
|
Beneficially Owned(1)
|
|
|
|
Beneficially
|
|
|
Before this
|
|
|
After this
|
|
Name and Address of Beneficial Owner
|
|
Owned
|
|
|
Offering (%)
|
|
|
Offering (%)
|
|
|
Principal Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mayo Family Revocable Trust(2)
|
|
|
371,531
|
|
|
|
12.9
|
%
|
|
|
4.5
|
%
|
Dr. William E. Mayo(3)
|
|
|
496,000
|
|
|
|
17.7
|
%
|
|
|
6.0
|
%
|
James J. Lowrey 2009 Irrevocable Trust(4)
|
|
|
413,316
|
|
|
|
12.9
|
%
|
|
|
4.7
|
%
|
HLG, LLC(5)
|
|
|
259,914
|
|
|
|
8.5
|
%
|
|
|
3.1
|
%
|
Thomas W. Cook(6)
|
|
|
217,873
|
|
|
|
7.4
|
%
|
|
|
2.6
|
%
|
Management:
|
|
|
|
|
|
|
|
|
|
|
|
|
James J. Lowrey(7)
|
|
|
1,813,160
|
|
|
|
50.3
|
%
|
|
|
21.8
|
%
|
Joseph J. Melone(8)
|
|
|
91,227
|
|
|
|
3.2
|
%
|
|
|
1.1
|
%
|
Anthony Chidoni(9)
|
|
|
138,331
|
|
|
|
4.7
|
%
|
|
|
1.7
|
%
|
Robert E. Kennedy(10)
|
|
|
70,132
|
|
|
|
2.4
|
%
|
|
|
*
|
|
Brian T. Mayo(11)
|
|
|
738,582
|
|
|
|
23.2
|
%
|
|
|
8.5
|
%
|
Phillip A. Odeen(12)
|
|
|
49,771
|
|
|
|
1.8
|
%
|
|
|
*
|
|
Ash K. Chawla(13)
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Simon Irish(14)
|
|
|
100,000
|
|
|
|
3.5
|
%
|
|
|
1.2
|
%
|
Dennis H. Ferro(15)
|
|
|
16,666
|
|
|
|
*
|
|
|
|
*
|
|
Dr. E. Darracott Vaughan, Jr.(16)
|
|
|
10,000
|
|
|
|
*
|
|
|
|
*
|
|
Dr. Stuart Weinstein(17)
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
John R. (Reg) Murphy(18)
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Dennis Cummings(19)
|
|
|
29,824
|
|
|
|
1.1
|
%
|
|
|
*
|
|
Alan Clock(20)
|
|
|
131,999
|
|
|
|
4.5
|
%
|
|
|
1.6
|
%
|
All directors and executive officers as a group (14 persons)
|
|
|
3,189,692
|
|
|
|
68.7
|
%
|
|
|
36.1
|
%
|
|
|
|
* |
|
Represents less than 1% of outstanding common stock or voting
power. |
|
|
|
(1) |
|
Applicable percentage ownership is based on
2,792,404 shares of common stock outstanding as of
February 8, 2010. The shares of Series A preferred stock,
Series B preferred stock, Series C preferred stock and
Series D preferred stock are all convertible on the
effective date of the registration statement into shares of
common stock on a
one-for-one
basis. |
|
|
|
(2) |
|
The securities are also included in the beneficial ownership
calculation for Mr. Brian T. Mayo. Mr. Mayo and his
spouse are each trustees of the trust and each may exercise
voting and dispositive power over the securities held in the
trust. Includes 46,782 shares of Series B preferred
stock; 8,333 shares of Series C preferred stock;
warrants to purchase 40,000 shares of common stock at an
exercise price of $2.34 per share; and 276,416 shares of
common stock. Excludes warrants to purchase 275,575 shares
of common stock at an exercise price of $3.00 per share, which
are not exercisable within 60 days of February 8, 2010. |
|
|
|
(3) |
|
Includes 100,000 shares of common stock owned by William E.
Mayo, as Trustee of The Mayo Childrens 2000 Irrevocable
Trust dated July 13, 2000; 195,000 shares of common
stock and options to purchase 5,000 shares of common stock
at an exercise price of $0.11 per share, which are exercisable
within 60 days of February 8, 2010. Includes the
following securities owned by Dr. Mayos spouse:
195,000 shares of common stock and options to purchase
1,000 shares of common stock at an exercise price of $0.10
per share, which are exercisable within 60 days of
February 8, 2010. Dr. William E. Mayo is the brother
of our president and chief |
65
|
|
|
|
|
technical officer, Mr. Brian T. Mayo. Brian Mayo disclaims
beneficial ownership of the shares and options owned by
Dr. Mayo and his spouse. |
|
|
|
(4) |
|
Includes options to purchase 413,316 shares of common stock
at exercise prices ranging from $3.00 to $3.80 per share, which
are exercisable within 60 days of February 8, 2010.
Excludes options to purchase 10,000 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of February 8, 2010.
Mr. Lowreys three daughters Jessica Lee Lowrey, Tracy
Lowrey Lenehan and Whitney Lowrey Gaeta have the right to
exercise shared voting and dispositive power with respect to the
securities in trust for Mr. Lowreys grandchildren.
Mr. Lowrey disclaims beneficial ownership of the securities
held in the trust. |
|
|
|
(5) |
|
Includes 87,711 shares of Series A preferred stock;
66,660 shares of Series B preferred stock;
49,993 shares of Series C preferred stock; and
55,550 shares of Series D preferred stock.
Mr. Lowrey is the manager of the limited liability company
and has the sole right to exercise voting and dispositive power
with respect to the securities. |
|
|
|
(6) |
|
Includes 13,450 shares of Series A preferred stock;
100,519 shares of Series B preferred stock; warrants
to purchase 10,000 shares of common stock at an exercise
price of $2.34 per share, which are exercisable within
60 days of February 8, 2010; options to purchase
14,250 shares of common stock at exercise prices ranging
from $0.69 to $3.80 per share, which are exercisable within
60 days of February 8, 2010; and 79,654 shares of
common stock. Excludes warrants to purchase 502,595 shares
of common stock at an exercise price of $3.00 per share and
options to purchase 10,000 shares of common stock at an
exercise price of $0.69 per share, which are not exercisable
within 60 days of February 8, 2010. |
|
|
|
(7) |
|
Includes the following securities owned by James J. Lowrey, JTW
Partners, and HLG, LLC: 131,580, 43,869, and 87,711 shares
of Series A preferred stock, respectively; 100,001, 33,340, and
66,660 shares of Series B preferred stock,
respectively; 75,000, 25,006 and 49,993 shares of
Series C preferred stock, respectively; and 100,000, 33,340
and 66,660 shares of Series D preferred stock,
respectively. Includes 1,000,000 shares of common stock
owned by James J. Lowrey directly. Excludes warrants owned by
Lowrey Family Investments, LLC to purchase 2,750,000 shares
of common stock at an exercise price of $3.00 per share, which
are not exercisable within 60 days of February 8,
2010. Excludes options to purchase 413,316 shares of common
stock at exercise prices ranging from $3.00 to $3.80 per share,
which are exercisable within 60 days of February 8,
2010, as well as options to purchase 10,000 shares of
common stock at an exercise price of $0.69 per share, which are
not exercisable within 60 days of February 8, 2010,
because these options are owned by the James J. Lowrey 2009
Irrevocable Trust and Mr. Lowrey is not deemed to be the
beneficial owner of such options in accordance with
Rule 13d-3(d)(1)
of the Securities Exchange Act of 1934, as amended. |
|
|
|
(8) |
|
Includes 32,895 shares of Series A preferred stock and
58,332 shares of Series B preferred stock. Excludes
warrants to purchase 291,660 shares of common stock at an
exercise price of $3.00 per share and options to purchase
10,000 shares of common stock at an exercise price of $0.69
per share, which are not exercisable within 60 days of
February 8, 2010. |
|
|
|
(9) |
|
Includes 99,999 shares of Series B preferred stock;
24,999 shares of Series C preferred stock; and
13,333 shares of Series D preferred stock. Excludes
warrants to purchase 691,655 shares of common stock at an
exercise price of $3.00 per share and options to purchase
10,000 shares of common stock at an exercise price of $0.69
per share, which are not exercisable within 60 days of
February 8, 2010. |
|
|
|
(10) |
|
Includes 6,579 shares of Series A preferred stock;
33,387 shares of Series B preferred stock;
8,333 shares of Series C preferred stock;
8,333 shares of Series D preferred stock; and options
to purchase 13,500 shares of common stock at exercise
prices ranging from $0.69 to $3.80 per share, which are
exercisable within 60 days of February 8, 2010.
Excludes warrants to purchase 250,265 shares of common
stock at an exercise price of $3.00 per share and options to
purchase 10,000 shares of common stock at an exercise price
of $0.69 per share, which are not exercisable within
60 days of February 8, 2010. |
|
|
|
(11) |
|
Includes the following securities owned by The Mayo Family
Revocable Trust: 46,782 shares of Series B preferred
stock; 8,333 shares of Series C preferred stock;
warrants to purchase 40,000 shares of common stock at an
exercise price of $2.34 per share; and 276,416 shares of
common stock. Excludes warrants to purchase 275,575 shares
of common stock at an exercise price of $3.00 per share, which
are not exercisable within 60 days of February 8,
2010. Includes the following securities owned by Mr. Mayo:
warrants to purchase |
66
|
|
|
|
|
21,000 shares of common stock at an exercise price of
$3.80 per share, which are exercisable within 60 days of
February 8, 2010; options to purchase 279,511 shares
of common stock at exercise prices ranging from $0.69 to $4.18
per share, which are exercisable within 60 days of
February 8, 2010; and 65,000 shares of common stock.
Also includes options to purchase 1,540 shares of common
stock at exercise prices ranging from $0.10 to $3.80 per share,
which are owned by Mr. Mayos spouse and are
exercisable within 60 days of February 8, 2010.
Excludes options to purchase 3,638 shares of common stock
at exercise prices ranging from $0.69 to $4.18, which are not
exercisable within 60 days of February 8, 2010. |
|
|
|
(12) |
|
Includes 13,158 shares of Series A preferred stock;
33,333 shares of Series B preferred stock; and options
to purchase 3,280 shares of common stock at an exercise
price of $0.69 per share, which are exercisable within
60 days of February 8, 2010. Excludes warrants to
purchase 166,665 shares of common stock at an exercise
price of $3.00 per share and options to purchase
10,000 shares of common stock at an exercise price of $0.69
per share, which are not exercisable within 60 days of
February 8, 2010. |
|
|
|
(13) |
|
Excludes options to purchase 10,000 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of February 8, 2010. |
|
|
|
(14) |
|
Includes 100,000 shares of Series D preferred stock.
Excludes warrants to purchase 500,000 shares of common
stock at an exercise price of $3.00 per share and options to
purchase 10,000 shares of common stock at an exercise price
of $0.69 per share, which are not exercisable within
60 days of February 8, 2010. |
|
|
|
(15) |
|
Includes 16,666 shares of Series D preferred stock.
Excludes warrants to purchase 83,330 shares of common stock
at an exercise price of $3.00 per share and options to purchase
10,000 shares of common stock at an exercise price of $0.69
per share, which are not exercisable within 60 days of
February 8, 2010. |
|
|
|
(16) |
|
Includes 10,000 shares of Series D preferred stock.
Excludes warrants to purchase 50,000 shares of common stock
at an exercise price of $3.00 per share and options to purchase
10,000 shares of common stock at an exercise price of $0.69
per share which are not exercisable within 60 days of
February 8, 2010. |
|
|
|
(17) |
|
Excludes options to purchase 10,000 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of February 8, 2010. |
|
|
|
(18) |
|
Excludes options to purchase 7,500 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of February 8, 2010. |
|
|
|
(19) |
|
Includes 13,158 shares of Series A preferred stock and
16,666 shares of Series B preferred stock, which are
exercisable within 60 days of February 8, 2010.
Excludes warrants to purchase 83,330 shares of common stock
at an exercise price of $3.00 per share, which are not
exercisable within 60 days of February 8, 2010. |
|
|
|
(20) |
|
Includes options to purchase 131,999 shares of common stock
at exercise prices ranging from $0.69 to $3.80 per share, which
are exercisable within 60 days of February 8, 2010.
Excludes options to purchase 6,001 shares of common stock
at an exercise price of $3.80 per share, which are not
exercisable within 60 days of February 8, 2010. |
SELLING
SECURITYHOLDERS
The selling securityholders may from time to time offer and sell
pursuant to this prospectus any or all of the warrants set forth
below in the column entitled Warrants Being Offered
Pursuant to This Prospectus. When we refer to the selling
securityholders in this prospectus, we mean those persons or
entities listed in the table below, as well as the permitted
transferees, pledgees, donees, assignees, successors and others
who later come to hold any of the selling securityholders
interests other than through a public sale.
The table below sets forth the name of each selling
securityholder and the number of warrants that each selling
securityholder may offer pursuant to this prospectus. Except as
noted below, with respect to the selling securityholders, the
table below is based on our securityholder registry through
February 8, 2010. Except as noted below, none of the
selling securityholders has, or within the past three years has
had, any material relationship with us or any of our affiliates.
Based on the information provided to us by the selling
securityholders, assuming that the selling securityholders sell
all of the warrants beneficially owned by them that have been
registered by us and do not acquire any additional warrants,
each selling securityholder will not beneficially own any
warrants that have been registered by
67
us other than the warrants appearing in the column entitled
Warrants Beneficially Owned After This Offering. We
cannot advise you as to whether the selling securityholders will
in fact sell any or all of such warrants. In addition, the
selling securityholders may have sold, transferred or otherwise
disposed of, or may sell, transfer or otherwise dispose of, at
any time and from time to time, the warrants after the date on
which each selling securityholder actually provided the
information set forth in the table below. The number of warrants
included in the table below are the aggregate number of
Series B, Series C and Series D warrants held by
each selling securityholder. The rights of the holders of the
Series B, Series C and Series D warrants are
substantially identical except for the expiration dates, which
are December 19, 2017, March 6, 2019 and
August 27, 2019, respectively. The table below does not
include any other securities, including other warrants, that may
be held by the selling securityholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants Being
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficially
|
|
|
Offered Pursuant to
|
|
|
|
|
|
Percentage
|
|
|
|
Owned
|
|
|
This Prospectus
|
|
|
Warrants
|
|
|
Beneficially Owned
|
|
|
|
Before This
|
|
|
(Maximum Number
|
|
|
Beneficially Owned
|
|
|
Before
|
|
|
After
|
|
Name of Selling Securityholder
|
|
Offering
|
|
|
That May be Sold)
|
|
|
After This Offering
|
|
|
Offering
|
|
|
Offering
|
|
|
Alan Austin Living Trust
|
|
|
666,665
|
|
|
|
666,665
|
|
|
|
|
|
|
|
5.2
|
%
|
|
|
|
|
James Bennett
|
|
|
83,330
|
|
|
|
83,330
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Judith M. Bracken
|
|
|
84,060
|
|
|
|
84,060
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Robert W. Bracken
|
|
|
84,060
|
|
|
|
84,060
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Mark Butler
|
|
|
83,750
|
|
|
|
83,750
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Arthur Calcagnini
|
|
|
124,995
|
|
|
|
124,995
|
|
|
|
|
|
|
|
1.0
|
%
|
|
|
|
|
Michael E. Catanzaro Jr.
|
|
|
41,665
|
|
|
|
41,665
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Anthony Chidoni**
|
|
|
691,655
|
|
|
|
691,655
|
|
|
|
|
|
|
|
5.4
|
%
|
|
|
|
|
Thomas W. Cook***
|
|
|
502,595
|
|
|
|
502,595
|
|
|
|
|
|
|
|
3.9
|
%
|
|
|
|
|
Joseph Cornacchia
|
|
|
241,660
|
|
|
|
241,660
|
|
|
|
|
|
|
|
1.9
|
%
|
|
|
|
|
James Coyne
|
|
|
161,665
|
|
|
|
161,665
|
|
|
|
|
|
|
|
1.3
|
%
|
|
|
|
|
Dennis Cummings**
|
|
|
83,330
|
|
|
|
83,330
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
John M. Dalton
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Jane Delaire
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Carole Delaire
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Kathryn M. Dircks and Randy Joel Dircks Living Trust
|
|
|
42,030
|
|
|
|
42,030
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
John Edison
|
|
|
83,330
|
|
|
|
83,330
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Richard Fava
|
|
|
83,330
|
|
|
|
83,330
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Feldman Partners
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Dennis H. Ferro**
|
|
|
83,330
|
|
|
|
83,330
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Robert M. Gibb
|
|
|
84,060
|
|
|
|
84,060
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Robert Girling
|
|
|
524,995
|
|
|
|
524,995
|
|
|
|
|
|
|
|
4.1
|
%
|
|
|
|
|
Entrust IRA Administration, Inc. FBO Jack Gruber IRA 0226360TR
|
|
|
336,255
|
|
|
|
336,255
|
|
|
|
|
|
|
|
2.6
|
%
|
|
|
|
|
Michael W. Haley Trustee, Michael Winder Haley Revocable
Trust U/A dated December 1, 2006
|
|
|
430,000
|
|
|
|
430,000
|
|
|
|
|
|
|
|
3.4
|
%
|
|
|
|
|
Michael W. Haley Revocable Trust
|
|
|
166,665
|
|
|
|
166,665
|
|
|
|
|
|
|
|
1.3
|
%
|
|
|
|
|
William G. Hamilton
|
|
|
83,330
|
|
|
|
83,330
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Samuel B. Hayes III, Revocable Trust
|
|
|
294,245
|
|
|
|
294,245
|
|
|
|
|
|
|
|
2.3
|
%
|
|
|
|
|
Mallie Ireland
|
|
|
168,125
|
|
|
|
168,125
|
|
|
|
|
|
|
|
1.3
|
%
|
|
|
|
|
Simon Irish**
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
3.9
|
%
|
|
|
|
|
William Jennings
|
|
|
166,665
|
|
|
|
166,665
|
|
|
|
|
|
|
|
1.3
|
%
|
|
|
|
|
The Sanford Katz & Irma Katz Revocable Trust dated
August 9, 2006
|
|
|
41,665
|
|
|
|
41,665
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Robert Kennedy**
|
|
|
250,265
|
|
|
|
250,265
|
|
|
|
|
|
|
|
2.0
|
%
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants Being
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficially
|
|
|
Offered Pursuant to
|
|
|
|
|
|
Percentage
|
|
|
|
Owned
|
|
|
This Prospectus
|
|
|
Warrants
|
|
|
Beneficially Owned
|
|
|
|
Before This
|
|
|
(Maximum Number
|
|
|
Beneficially Owned
|
|
|
Before
|
|
|
After
|
|
Name of Selling Securityholder
|
|
Offering
|
|
|
That May be Sold)
|
|
|
After This Offering
|
|
|
Offering
|
|
|
Offering
|
|
|
Steven P. Kleopoulous
|
|
|
41,800
|
|
|
|
41,800
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Survivor Trust of the Lightfoot Revocable Trust 2/22/83
|
|
|
42,030
|
|
|
|
42,030
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Frank J. Lincoln, Jr.
|
|
|
168,125
|
|
|
|
168,125
|
|
|
|
|
|
|
|
1.3
|
%
|
|
|
|
|
Lovejoy Family Limited Partnership***
|
|
|
626,925
|
|
|
|
626,925
|
|
|
|
|
|
|
|
4.9
|
%
|
|
|
|
|
Lowery Family Investments LLC**
|
|
|
2,750,000
|
|
|
|
2,750,000
|
|
|
|
|
|
|
|
21.6
|
%
|
|
|
|
|
Mayo Family Revocable Trust**
|
|
|
275,575
|
|
|
|
275,575
|
|
|
|
|
|
|
|
2.2
|
%
|
|
|
|
|
Arthur McInerney
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Joseph Melone**
|
|
|
291,660
|
|
|
|
291,660
|
|
|
|
|
|
|
|
2.3
|
%
|
|
|
|
|
Linda Nelson
|
|
|
60,895
|
|
|
|
60,895
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Phillip Odeen**
|
|
|
166,665
|
|
|
|
166,665
|
|
|
|
|
|
|
|
1.3
|
%
|
|
|
|
|
Triantafillos Parlapanides
|
|
|
42,035
|
|
|
|
42,035
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Debra Pipines
|
|
|
166,665
|
|
|
|
166,665
|
|
|
|
|
|
|
|
1.3
|
%
|
|
|
|
|
Robert Poden
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Robert A. Prindiville 2006 Personal Trust
|
|
|
252,185
|
|
|
|
252,185
|
|
|
|
|
|
|
|
2.0
|
%
|
|
|
|
|
C.B. Rogers, Jr.
|
|
|
210,015
|
|
|
|
210,015
|
|
|
|
|
|
|
|
1.6
|
%
|
|
|
|
|
William Scully
|
|
|
670,405
|
|
|
|
670,405
|
|
|
|
|
|
|
|
5.3
|
%
|
|
|
|
|
Earl Segerdahl
|
|
|
158,330
|
|
|
|
158,330
|
|
|
|
|
|
|
|
1.2
|
%
|
|
|
|
|
Sheridan Investments Group LLC***
|
|
|
83,330
|
|
|
|
83,330
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Geoffrey Stringer***
|
|
|
41,665
|
|
|
|
41,665
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Geoffrey and Joanne Stringer***
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
E. Darracott Vaughan Jr., MD**
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Caitlin Fitzsimmons
|
|
|
72,915
|
|
|
|
72,915
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
James Oliver Wight
|
|
|
72,915
|
|
|
|
72,915
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
Sarah Wight OConnell
|
|
|
72,915
|
|
|
|
72,915
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
William N. Wight Jr.
|
|
|
72,915
|
|
|
|
72,915
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
* |
|
Less than one (1%) percent. |
|
|
|
** |
|
Individual listed is one of our officers, directors or
affiliates. |
|
|
|
*** |
|
Individual listed is a former officer or director, or an
affiliate of a former officer or director of the Company. |
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We engage a significant stockholder, Dr. William Mayo,
under a consulting agreement to serve as chairman of our
scientific advisory board. Dr. Mayo is also the brother of
Brian T. Mayo, our president and chief technical officer. This
agreement provides for an hourly fee for work performed under
the agreement as well as 25,000 options, which vest over a
period of four years. We have paid Dr. Mayo approximately
$3,800 under the contract from the time period beginning October
2004 and ending June 2009.
We periodically engage H&M Analytical Services, Inc.
(H&M) to provide material analysis services and
execution of the
2005/2006
Department of Homeland Security Simulants contract. H&M is
owned by Dr. William Mayo, shareholder and brother or Brian
T. Mayo, and Walter Helfrecht, shareholder and
brother-in-law
of Brian T. Mayo. The total amount paid to H&M under this
arrangement was approximately $69,000.
69
We engaged a consulting firm Catalyst Capital Investment, LLC
(Catalyst), by written consulting agreement, dated
May 1, 2007, to perform certain exclusive consulting
services related to our capital structure, budgeting and
financial planning. In addition, we had consulting agreements to
provide introductions to potential new customers and suppliers
with Catalyst, each agreement dated May 31, 2006 (the
Prospective Customer Agreement and the
Prospective Supplier Agreement). Mr. James J.
Lowrey, our chief executive officer is a member of the
consulting firm. A former director of the Company is also a
managing member of Catalyst. As compensation to the consulting
firm for services rendered under these consulting agreements, we
issued fully vested options to purchase 180,000 shares of
our common stock exercisable for a ten-year period at an
exercise price of $3.80 per share. Effective August 14,
2008, the agreement was supplemented and amended to cancel
90,000 of the vested options granted under the original
agreement and issue fully vested options to purchase
578,000 shares of our common stock exercisable for a
ten-year period at an exercise price of $3.00 per share. During
July, 2009, we and Catalyst agreed to terminate the Catalyst
Consulting agreement dated May 1, 2007, the Prospective
Customer Agreement and the Prospective Supplier Agreement.
On November 16, 2006, we executed a secured revolving
demand promissory note in principal amount not to exceed
$400,000 in favor of Mr. Brian T. Mayo. The note was
amended in February 2007 to increase the amount not to exceed
$450.000. Under the terms of the note, Mr. Mayo agreed to
make revolving loans to the Company from time to time with 9%
interest accruing from the date the amount of the borrowing is
received from the lender. All outstanding amounts of $465,938.77
including principal and interest were repaid under the note in
March 2007.
On March 12, 2009, we entered into a marketing agreement
with Avani International (Avani) which is owned by
Mr. Ash Chawla, a member of our board of directors. The
marketing agreement seeks to engage Mr. Chawla to market
our
XT250tm
product in exchange for commissions at 15% of the actual
purchase price of any
XT250tm
system sold by Avani. As of February 8, 2010, we have paid
Avani $13,878 under this arrangement.
On October 7, 2009, Mr. James J. Lowrey loaned us
$39,660 for general operating expenses. We executed a promissory
note in principal amount of $39,660, bearing interest at 5% per
year, in favor of Mr. Lowrey. All outstanding amounts of
$39,763 including principal and interest were repaid to
Mr. Lowrey under the note in October 2009.
On October 29, 2009, the board approved the issuance to our
chairman and chief executive officer, James J. Lowrey, of
1,000,000 shares of common stock for services rendered to
the Company. The shares were issued under the 2009 Long Term
Incentive Compensation Plan.
During the years ended December 31, 2007 and 2008 and the
subsequent period through February 8, 2010, Mr. Lowrey
purchased the following securities in an exempt private
placement transaction for aggregate cash consideration of
$2,650,000 as follows: 263,160 shares of Series A
convertible preferred stock for cash consideration of
$1,000,000; 200,001 shares of Series B convertible
preferred stock and 1,000,005 Series B warrants, each
warrant exercisable for five shares of common stock for cash
consideration of $600,003; 149,999 shares of Series C
convertible preferred stock and 749,995 Series C warrants,
each warrant exercisable for five shares of common stock for
cash consideration of $449,997; and 200,000 shares of
Series D convertible preferred stock and 1,000,000
Series D warrants, each warrant exercisable for five shares
of common stock, for cash consideration of $600,000.
During the year ended December 31, 2008 and the subsequent
period through February 8, 2010, our director and chief
operating officer Mr. Anthony Chidoni purchased the
following securities in an exempt private placement transaction
for aggregate cash consideration of $414,993 as follows:
99,999 shares of Series B convertible preferred stock
and 499,995 Series B warrants, each warrant exercisable for
five shares of common stock for cash consideration of $299,997;
24,999 shares of Series C convertible preferred stock
and 124,995 Series C warrants, each warrant exercisable for
five shares of common stock for cash consideration of $74,997;
and 13,333 shares of Series D convertible preferred
stock and 66,665 Series D warrants, each warrant
exercisable for five shares of common stock, for cash
consideration of $39,999.
During 2009, our director Mr. Simon Irish purchased the
following securities for aggregate cash consideration of
$300,000 as follows: 100,000 shares of Series D
convertible preferred stock and 500,000 Series D warrants,
each warrant exercisable for five shares of common stock.
70
During 2009, our director Dr. E. Darracott Vaughan
purchased the following securities in an exempt private
placement transaction for aggregate cash consideration of
$30,000 as follows: 10,000 shares of Series D
convertible preferred stock and 50,000 Series D warrants,
each warrant exercisable for five shares of common stock.
During 2009, our director Mr. Dennis Ferro purchased the
following securities in an exempt private placement transaction
for aggregate cash consideration of $49,998 as follows:
16,666 shares of Series D convertible preferred stock
and 83,330 Series D warrants, each warrant exercisable for
five shares of common stock.
During the years ended December 31, 2007 and 2008 and the
subsequent period through February 8, 2010, our director
Mr. Joseph Melone purchased the following securities in an
exempt private placement transaction for aggregate cash
consideration of $299,996 as follows: 32,895 shares of
Series A convertible preferred stock for $125,000 in cash
consideration; 58,332 shares of Series B convertible
preferred stock and 291,660 Series B warrants, each warrant
exercisable for five shares of common stock, for cash
consideration of $174,996.
During the years ended December 31, 2007 and 2008 and the
subsequent period through February 8, 2010, our director
Mr. Robert Kennedy purchased the following securities in an
exempt private placement transaction for aggregate cash
consideration of $175,159 as follows: 6,579 shares of
Series A convertible preferred stock for $25,000 in cash
consideration; 33,387 shares of Series B convertible
preferred stock and 166,935 Series B warrants, each warrant
exercisable for five shares of common stock, for cash
consideration of $100,161; 8,333 shares of Series C
convertible preferred stock and 41,665 Series C warrants,
each warrant exercisable for five shares of common stock, for
cash consideration of $24,999; and 8,333 shares of
Series D convertible preferred stock and 41,665
Series D warrants, each warrant exercisable for five shares
of common stock, for cash consideration of $24,999.
During the years ended December 31, 2007 and 2008, our
director Mr. Philip Odeen purchased the following
securities in an exempt private placement transaction for
aggregate cash consideration of $99,999 as follows:
13,158 shares of Series A convertible preferred stock
for $50,000 in cash consideration; 33,333 shares of
Series B convertible preferred stock and 166,665
Series B warrants, each warrant exercisable for five shares
of common stock, for cash consideration of $99,999.
During the year ended December 31, 2007, Mr. Lowrey
purchased a demand promissory note in the principal amount of
$50,000 and debentures for $150,000 and our director
Mr. Robert Kennedy purchased a demand promissory note in
the principal amount of $50,000. Outstanding amounts repaid to
Mr. Lowrey under the promissory note was $50,074 including
and principal and interest and was repaid on March 14,
2007. Mr. Lowreys $150,000 debentures was converted
into Series B Units on December 21, 2007. The amount
converted included $1,067 of interest. Mr. Kennedy
converted the demand promissory note in the principal amount of
$50,000 and $183 of interest into Series B Units on
December 21, 2007.
Board of
Directors
Our preferred stock investors have the right to appoint three of
our directors while shares of our preferred stock are
outstanding. Upon the conversion of outstanding shares of our
preferred stock into common stock on the effective date of this
registration statement, the preferred stock investors
right to appoint board members will terminate. We anticipate
each of the preferred stock appointees will remain on our board
following this offering.
Stock and
Stock Options Granted to and Employment Arrangements with
Directors and Executive Officers
For more information regarding the grant of stock options to
directors and executive officers and employment arrangements
with our executive officers, please see Director
Compensation for the Year Ended December 31, 2008 and
Executive Compensation.
In October 2009, a resolution was passed by the Compensation
Committee providing for the following annual compensation
package to members of the board of directors:
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chairpersons of a committee will receive a share-based incentive
grant to purchase 2,500 shares of our common stock pursuant
to our 2009 Long Term Incentive Compensation Plan; and
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board members will receive a share-based incentive award to
purchase 7,500 shares of our common stock for full board
service.
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Indemnification
Agreements
We have entered into indemnification agreements with each of our
current directors. These agreements require us to indemnify
these individuals to the fullest extent permitted under Delaware
law against liabilities that may arise by reason of their
service to us, and to advance expenses incurred as a result of
any proceeding against them as to which they could be
indemnified. We also intend to enter into indemnification
agreements with our future directors and executive officers.
Procedures
for Related Party Transactions
Under our code of conduct, our employees, officers and directors
are discouraged from entering into any transaction that may
cause a conflict of interest for us. In addition, they must
report any potential conflict of interest, including related
party transactions, to their managers or our general counsel who
then reviews and summarizes the proposed transaction for our
audit committee. Pursuant to its charter, our audit committee
must then approve any related-party transactions, including
those transactions involving our directors. In approving or
rejecting such proposed transactions, the audit committee
considers the relevant facts and circumstances available and
deemed relevant to the audit committee, including the material
terms of the transactions, risks, benefits, costs, availability
of other comparable services or products and, if applicable, the
impact on a directors independence. Our audit committee
will approve only those transactions that, in light of known
circumstances, are in, or are not inconsistent with, our best
interests, as our audit committee determines in the good faith
exercise of its discretion. A copy of our code of conduct
generally applicable to all employees, our code of ethics for
senior financial officers, and audit committee charter may be
found at our corporate website, www.xstreamsystems.com, upon the
completion of this offering.
DESCRIPTION
OF DEBENTURES
The following summary does not purport to be complete, and is
subject to, and is qualified in its entirety by reference to,
all of the provisions of the debentures. We urge you to read the
form of the debentures which is filed as an exhibit to the
registration statement of which this prospectus forms a part.
General
The debentures are subordinated, unsecured obligations of ours
and are limited to an aggregate principal amount of $5,000,000.
The debentures will mature
on ,
2020. The debentures rank junior to our senior indebtedness.
Senior Indebtedness means the principal of, and
premium, if any, and interest on, all indebtedness of ours,
existing prior to the date of issuance of the debentures, to
banks, trust companies, insurance companies, debenture holders
and similar lenders and any deferrals, renewals, extensions, or
guarantees thereof, and to all other indebtedness of ours
including without limitation professional fees and expenses of
our initial public offering, trade payables, outstanding
indebtedness to Kimball Electronics, Inc. and Rutgers
University; provided, however that senior indebtedness does not
include indebtedness to any of our affiliates.
As of the date of this prospectus, our senior indebtedness is
approximately $4,394,274.
The debentures will be offered at a price to investors of $1,000
per debenture. The debentures were issued only in denominations
of $1,000 principal amount and multiples of $1,000 principal
amount. The debentures accrue interest at a rate of 5% per year
from ,
2010 or from the most recent interest payment date to which
interest has been paid or duly provided, payable annually in
arrears annually commencing 18 months from the sale of a
debenture holders respective debenture. Thereafter
interest will be payable in arrears on December 15 of each year.
At the time interest is payable, we, in our sole discretion, may
elect to pay interest in cash, or in the form of shares of our
common stock. At any time during the term of the debenture prior
to the stated maturity or the date on which the debenture is
converted into shares of common stock, upon notice mailed to the
holder not less than 30 days prior to an interest payment
date, we may elect to defer the payment of unpaid interest until
a subsequent
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interest payment date, or the earlier of the stated maturity or
the date on which the debenture converts into shares of common
stock.
Interest will be paid to the person in whose name a debenture is
registered at the close of business on December 1,
immediately preceding the relevant interest payment date.
Interest on the debentures will be computed on the basis of a
360-day year
comprised of twelve
30-day
months. At the time interest is payable, we may elect to pay
interest in cash or in the form of shares of common stock.
Notwithstanding anything to the contrary, at any time during the
term of the debenture prior to the stated maturity or the date
on which the security is converted into shares of common stock,
upon notice mailed to the holders not less than 30 days
prior to an interest payment date, we may elect to defer the
payment of unpaid interest until the subsequent interest payment
date.
You have the option to convert your debentures into shares of
our common stock under the circumstances set forth under
Conversion Rights in this section. The initial
conversion rate is shares of our common stock per debenture,
which is equivalent to an initial conversion price of
$ per share of our common stock.
The conversion rate is subject to adjustment if certain events
occur. Upon conversion, you will receive only shares of our
common stock. You will not receive any cash payment for interest
accrued to the conversion date other than in the limited
circumstances described under Conversion Rights in
this section.
If any interest payment date, maturity date, or redemption date
of a debenture falls on a day that is not a business day, the
required payment of principal and interest will be made on the
next succeeding business day as if made on the date that the
payment was due and no interest will accrue on that payment for
the period from and after the interest payment date, maturity
date, or redemption date, as the case may be, to the date of
that payment on the next succeeding business day. The term
business day means, with respect to any debenture,
any day other than a Saturday, Sunday or day on which banking
institutions in the City of New York are authorized or required
by law, regulation or executive order to close.
Interest on a debenture will generally be taxable to each holder
as ordinary income at the time it is paid or accrued in
accordance with the holders usual method of accounting for
tax purposes. A holder will generally recognize gain or loss
upon the sale, exchange, redemption or other disposition of a
debenture equal to the difference between the amount realized
upon the sale, exchange, redemption or other disposition and the
holders adjusted tax basis in the debenture. A
holders tax basis in a debenture will generally be equal
to the amount the holder paid for the debenture. The amount
realized does not include any amount attributable to accrued
interest, which amount would be taxable as interest (to the
extent not previously included in a holders income). If a
holder receives solely cash in exchange for its debentures upon
conversion, gain or loss generally will be determined in the
same manner as if the holder disposed of the debenture in a
taxable disposition. A holder, generally will not recognize any
income, gain or loss upon conversion of a debenture into common
stock except to the extent that the common stock is considered
attributable to accrued interest not previously included in
taxable income (which is taxable as ordinary income) or with
respect to cash received in lieu of a fractional share of common
stock. Distributions, if any, made on the common stock generally
will be included in income as ordinary dividend income to the
extent of our current and accumulated earnings and profits. Upon
the sale, taxable exchange or other taxable disposition of our
common stock, a holder generally will recognize capital gain or
loss equal to the difference between (i) the amount of cash
and the fair market value of any property received upon such
taxable disposition, and (ii) the holders adjusted
tax basis in the common stock.
HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE TAX
TREATMENT OF THE DEBENTURES AND WHETHER A PURCHASE OF THE
DEBENTURES IS ADVISABLE IN LIGHT OF THE HOLDERS PARTICULAR
TAX SITUATIONS.
Redemption
of the Debentures at Our Option
No sinking fund is provided for the debentures. Prior
to ,
2015, the debentures will not be redeemable. On or
after ,
2015, we may redeem for cash all or part of the debentures at
any time, upon not less than 30 nor more than 60 days
notice by mail to holders of the debentures, for a price equal
to 100% of the principal amount of the debentures to be redeemed
plus any accrued and unpaid interest to the redemption date.
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Conversion
Rights
Subject to the conditions described below, holders may convert
each of their debentures into shares of our common stock
initially at a conversion rate
of shares
of our common stock per $1,000 principal amount of debentures
(equivalent to an initial conversion price of
$ per share of our common stock
based on the issue price of the debentures). The conversion rate
and the equivalent conversion price in effect at any given time
are referred to as the applicable conversion rate
and the applicable conversion price, respectively,
and will be subject to adjustment as described below. A holder
may convert a portion of such holders debentures so long
as the debentures converted are an integral multiple of $1,000
principal amount.
Holders may surrender their debentures for conversion into
shares of our common stock prior to stated maturity under the
following circumstances:
Conversion
Upon 30 Days Prior Written Notice to Us
A holder may surrender its debentures, in whole or in part, for
conversion into shares of our common stock, on or after 2011,
upon 30 days prior written notice to us.
Conversion
Upon Redemption
A holder may surrender for conversion any debenture called for
redemption at any time prior to the close of business on the
business day immediately preceding the redemption date, even if
it is not otherwise convertible at such time, unless we default
in making the payment due on the redemption date, in which case
the conversion right shall terminate at the close of business on
the date such default is cured and such payment is made.
Conversion
Upon Specified Corporate Transactions
If we are a party to a consolidation, merger, or sale or
transfer of all or substantially all our properties and assets
pursuant to which shares of our common stock would be converted
into cash, securities or other property, a holder may surrender
debentures for conversion at any time from and after the date
that is 15 days prior to the date that we announce as the
anticipated effective date of the transaction until 15 days
after the actual effective date of such transaction. If we are a
party to a consolidation or merger pursuant to which shares of
our common stock are converted into cash, securities or other
property, then at the effective time of the transaction, the
right to convert a debenture into shares of our common stock
will be changed into a right to convert, without the consent of
any holders of the debentures, such debenture into the kind and
amount of cash, securities or other property that the holder
would have received if the holder had converted its debentures
immediately prior to the transaction. This assumes that a holder
of debentures would not have exercised any rights of election as
to the consideration receivable in connection with such
transaction.
If a holder wishes to exercise its conversion right, such holder
must (i) deliver an irrevocable conversion notice, together
with the certificated security (if the debentures are in
certificated form) and the appropriate endorsements and transfer
documents, to the conversion agent who will, on the
holders behalf, convert the debentures into shares of our
common stock and (ii) pay any applicable transfer or
similar taxes. Holders may obtain copies of the required form of
the conversion notice from the conversion agent or the trustee.
If we are party to a consolidation, merger or sale or transfer
of all or substantially all our properties and assets pursuant
to which the shares of our common stock would be converted into
cash, securities or other property, then at the effective time
of the transaction, the right to convert a debenture into common
stock will be changed into a right to convert, without the
consent of any holders of debentures, such debenture into the
kind and amount of cash, securities or other property that the
holder would have received if the holder had converted the
holders debentures immediately prior to the transaction.
This assumes that a holder of debentures would not have
exercised any rights of election as to the consideration
receivable in connection with the transaction.
Mandatory
Conversion At Our Option Upon 30 Days Notice to
Holder
The debentures are mandatorily convertible, at our option, into
shares of our common stock upon notice mailed to the holder not
less than 30 days prior to each interest payment date.
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Ranking
The debentures are our subordinated, unsecured obligations and
rank junior to our senior indebtedness. Subordinate means that,
in the event of any default in the payment of Senior
Indebtedness (after giving effect to cure
provisions, if any), if there has occurred an event of default
with respect to any Senior Indebtedness permitting the holders
to accelerate the maturity, or if any judicial proceeding is
pending with respect to any such default, or in the event of any
liquidation, insolvency, bankruptcy, reorganization, or similar
proceedings relating to us, all sums payable on Senior
Indebtedness will be paid in full, with interest, if any, before
payment is made upon the indebtedness evidenced by the
debenture, and, in such event, any subsequent payment or
distribution of any character which is made with respect to this
debenture will be paid over to the holders of Senior
Indebtedness for application pro rata to the payment on that
indebtedness, unless and until the Senior Indebtedness has been
paid and satisfied in full. Senior Indebtedness
means the principal of, and premium, if any, and interest on,
all indebtedness of ours, existing prior to the date of issuance
of the debentures, to banks, trust companies, insurance
companies, debenture holders and similar lenders and any
deferrals, renewals, extensions, or guarantees thereof, and to
all other indebtedness of ours including without limitation
professional fees and expenses of our initial public offering,
trade payables, outstanding indebtedness to Kimball Electronics,
Inc. and Rutgers University; provided, however that senior
indebtedness does not include indebtedness to any of our
affiliates.
As of the date of this prospectus, our senior indebtedness is
approximately $4,394,274.
Events of
Default
The following are events of default with respect to the
debentures:
(1) our default in the payment of the principal amount plus
accrued and unpaid interest on any debenture when it becomes due
and payable at its maturity, upon redemption, or following a
Change of Control (as defined in the debenture) when the same
becomes due and payable, or otherwise;
(2) our failure for ten business days to deliver shares of
our common stock upon an appropriate election by holders of
debentures to convert those debentures into shares of our common
stock;
(3) our failure to comply in any material respect with any
of our covenants or agreements contained in the debentures;
(4) our failure to provide timely notice of a Change of
Control;
(5) certain events involving our bankruptcy, insolvency or
reorganization.
Remedies
If an Event of Default occurs and is continuing uncured for a
period of 180 days, a holder of debentures may by notice to
the Company declare the principal amount plus accrued and unpaid
interest, if any, on all the Securities to be immediately due
and payable. Upon such a declaration, such accelerated amount
will be due and payable immediately.
Calculations
in Respect of Debentures
We will be responsible for making all calculations called for
under the debentures. These calculations include determinations
of the sale prices of shares of our common stock, the rate of
interest payable on the debentures and the applicable conversion
rate of the debentures. We will make all these calculations in
good faith and, absent manifest error, our calculations will be
final and binding on holders of the debentures. We will provide
a schedule of our calculations to the conversion agent, and the
conversion agent will be entitled to rely upon the accuracy of
our calculations without independent verification.
Governing
Law
The debentures will be governed by, and construed in accordance
with, the laws of the State of Florida.
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Transfer
Agent
We will serve as transfer agent and registrar for the debentures.
DESCRIPTION
OF CAPITAL STOCK
General
Our authorized capital stock as of February 8, 2010
consists of 60,000,000 shares of common stock,
$.0001 par value per share, and 6,000,000 shares of
preferred stock, par value $.0001 per share. The preferred stock
authorized may be issued from time to time in one or more series
with the rights, preferences and designations for each such
series of preferred stock to be determined by the Companys
board of directors. As of February 8, 2010, there were
issued and outstanding:
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2,792,404 shares of common stock,
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stock options to purchase 2,105,757 shares of common stock
at an average weighted price of $2.08 per share,
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warrants to purchase 336,000 shares of common stock in
connection with our debentures (for which cash would need to be
remitted to us for exercise), at an average exercise price of
$2.48 per share,
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962,101 shares of Series A Redeemable Convertible
Preferred Stock,
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1,619,127 shares of Series B Redeemable Convertible
Preferred Stock,
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365,996 shares of Series C Redeemable Convertible
Preferred Stock,
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563,414 shares of Series D Redeemable Convertible
Preferred Stock,
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Series B and Series C warrants to purchase
9,925,615 shares of common stock (for which cash would need
to be remitted to us for exercise), at an average exercise price
of $3.00 per share, and
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Series D warrants to purchase 2,817,070 shares of
common stock (for which cash would need to be remitted to us for
exercise), at an average exercise price of $3.00 per share.
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The following summary of the material provisions of our common
stock, certificate of incorporation and by-laws is qualified by
reference to the provisions of our certificate of incorporation
and by-laws incorporated by reference as exhibits to the
registration statement of which this prospectus is a part.
Common
Stock
Holders of common stock are entitled to one vote for each share
held of record on each matter submitted to a vote of
stockholders. There is no cumulative voting for election of
directors. Accordingly, the holders of a majority of our
outstanding shares of common stock entitled to vote in any
election of directors can elect all of the directors standing
for election, if they should so choose. Holders of common stock
are entitled to receive dividends ratably when, as, and if
declared by the board of directors out of funds legally
available therefor and, upon our liquidation, dissolution or
winding up are entitled to share ratably in all assets remaining
after payment of liabilities. Holders of common stock have no
preemptive rights and have no rights to convert their common
stock into any other securities. There are no redemption or
sinking fund provisions applicable to our common stock. The
outstanding shares of common stock are, and the shares of common
stock being sold in this offering will be, when issued, validly
authorized and issued, fully paid and nonassessable.
Series A
Redeemable Convertible Preferred Stock
General. We have designated
962,101 shares as our Series A Redeemable Convertible
Preferred Stock, of which, as of February 8, 2010, there
were 962,101 shares issued and outstanding.
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Series B
Redeemable Convertible Preferred Stock
General. We have designated
1,800,000 shares as our Series B Redeemable
Convertible Preferred Stock, of which, as of February 8,
2010, there were 1,619,127 shares issued and outstanding.
Series C
Redeemable Convertible Preferred Stock
General. We have designated
1,350,000 shares as our Series C Redeemable
Convertible Preferred Stock, of which, as of February 8,
2010, there were 365,996 shares issued and outstanding.
Series D
Redeemable Convertible Preferred Stock
General. We have designated
700,000 shares as our Series D Redeemable Convertible
Preferred Stock, of which, as of February 8, 2010, there
were 563,414 shares issued and outstanding.
Rights
and Preferences of the Series A, B, C and D Preferred
Stock
The rights and preferences of the holders of Series A,
Series B, Series C and Series D Preferred Stock
are substantially identical except as set forth below. Except
where the reference may indicate otherwise, the Series A,
B, C and D are referred to collectively as our Preferred
Stock or the Pari Passu Preferred. Shares of
our Preferred Stock will convert to shares of common stock on a
one-for-one
basis on the effective date of this registration statement.
Dividends. The holders of the Preferred Stock
are entitled to receive dividends as follows: when and as
declared by the board of directors, and to the fullest extent
permitted under the General Corporation Law of the State of
Delaware, we will pay preferential dividends on each issued and
outstanding share of the Preferred Stock; provided however, that
no dividend will be declared on a series of preferred stock
unless a pro rata amount (based upon relative liquidation value)
is declared on each of the other series of pari passu preferred.
Subject to certain provisions, dividends on each issued and
outstanding share of the Preferred Stock will be cumulative and
accrue on a daily basis at a rate of 5% per annum of the
Preferred Stock liquidation value thereof (with such accrued and
unpaid dividends compounding on each annual anniversary of the
Preferred Stock original issuance date) from and including the
Preferred Stock original issuance date to and including the
first to occur of (i) the date on which the Preferred Stock
liquidation value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with our liquidation, (ii) the date on which such share is
converted into shares of common stock hereunder or
(iii) the date on which such share is otherwise acquired by
the Company. Such dividends will accrue whether or not they been
declared and whether or not there are profits, surplus or other
funds of the Company legally available for the payment of
dividends, and such dividends will be cumulative such that all
accrued and unpaid dividends will be fully paid or declared with
funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Preferred Stock junior securities.
Voting Rights Generally. The holders of the
Preferred Stock will be entitled to notice of all meetings of
stockholders in accordance with our Amended and Restated
By-laws, and except as otherwise provided or required by
applicable law, the holders of the Preferred Stock will be
entitled to vote on all matters submitted to the stockholders
for a vote, voting as a single class with the common stock and
other securities that vote with the common stock with the holder
of Preferred Stock entitled to one vote for each share of common
stock issuable upon conversion of the Preferred Stock held as of
the record date for such vote or, if no record date is
specified, as of the date of such vote.
Actions requiring the consent of the holders of the Preferred
Stock. So long as any shares of a respective
series of Preferred Stock are outstanding, without the approval
of at least a majority of the shares of that respective series
of Preferred Stock then outstanding, we are not permitted to
file any resolution of the board with the Delaware Secretary of
State that contains any provisions, or take any other action,
that would amend the terms of the series of preferred stock in
question, increase the number of authorized preferred stock in
that respective series, approve a reverse stock split or
adversely affect or otherwise impair the rights or the relative
preferences or priorities of the holders of the Preferred Stock
under its respective Certificate of Designation or the Amended
and Restated By-laws.
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Actions requiring the consent of the holders of the
Series A, Series B, Series C and Series D
Preferred Stock and the holders of common stock issued or
issuable upon conversion of the Preferred Stock.
So long as any shares of Pari Passu Preferred are outstanding,
we are not permitted to take any of the following actions
without the approval of the holders of at least a majority of
the shares of all of the Pari Passu Preferred, voting as a
single class on a common equivalent basis, then outstanding:
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amend our Certificate of Designation or the Amended and Restated
By-laws;
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except for permitted issuances, authorize, issue or enter into
any agreement providing for the issuance (contingent or
otherwise) of any capital stock or other equity securities of
the Company ranking pari passu or senior to the Preferred Stock
(or any securities convertible into or exchangeable for any
capital stock or other equity securities of the Company ranking
pari passu or senior to the Preferred Stock);
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except for the ratable payment of dividends on the Pari Passu
Preferred, directly or indirectly declare or pay any cash or
property dividends or make any cash or property distributions
upon any of its capital stock or other equity securities;
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directly or indirectly redeem, purchase or otherwise acquire any
of the Companys capital stock or other equity securities
(including, without limitation, options) other than (i) the
Pari Passu Preferred pursuant to the terms of the respective
Certificate of Designation, (ii) repurchases of the
Companys securities from employees upon termination of an
employees employment with the Company pursuant to terms
approved by the Board, (iii) certain repurchases of options
outstanding as of March 14, 2007, and (iv) pursuant to
the terms of the Shareholders Agreement;
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merge or consolidate with any person or entity (other than a
wholly owned subsidiary) or take any action which results in a
change in ownership as defined in the applicable Preferred Stock
instrument;
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sell, license, lease or otherwise transfer all or substantially
all of its assets to any person or entity (other than to a
wholly owned subsidiary of the Company) in any transaction or
series of related transactions;
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liquidate, dissolve or effect a recapitalization, bankruptcy or
reincorporation in any form of transaction (including, without
limitation, any reincorporation into a limited liability
company, a partnership or any other non-corporate entity that is
treated as a partnership for federal income tax purposes);
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make any loans or advances to, guarantees for the benefit of, or
investments in, any person or entity (other than a wholly owned
subsidiary established under the laws of a jurisdiction of the
U.S. or any of its territorial possessions), except for
(i) reasonable advances to employees in the ordinary course
of business consistent with past practice and (ii) advances
to newly-hired employees in order to cover such employees
relocation expenses;
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except as provided in the current budget or incurred in
connection with a public offering, including the issuance of
debt securities in a public offering, create, incur, assume or
suffer to exist any indebtedness;
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create, incur, assume or suffer to exist any liens other than
(i) permitted liens and (ii) liens incurred in
connection with the incurrence of indebtedness not prohibited by
the preceding clause above;
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acquire any interest in any company or business (whether by a
purchase of assets, purchase of stock, merger or otherwise), or
enter into any joint venture, in either case, that is material
to the business of the Company and its subsidiaries, taken as a
whole (each, an Acquisition), other than
Acquisitions the aggregate value of which (after taking into
account the assumption of any indebtedness or other liabilities
in connection therewith) do not exceed $300,000 in any
12 month period, measured after giving effect to any
purchase price adjustments relating thereto;
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become subject to (including, without limitation, by way of
amendment to or modification of) any agreement or instrument
that by its terms would (under any circumstances) restrict our
right to perform the provisions of the Preferred Stock
transactions documents and the Companys Certificates of
Designation or the Amended and Restated By-laws;
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except as provided in the current budget, make or commit to make
capital expenditures for any fiscal year;
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except as required under the Preferred Stock transaction
documents, increase the size of the board to a number greater
than 11;
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enter into or become a party to any license, agreement or other
arrangement after March 14, 2007 with respect to
intellectual property rights licensed to, or owned or developed
by us except that the foregoing shall not prevent us from
entering into, or becoming a party to, any such license,
agreement or other arrangement that (i) has a term of one
year or less, (ii) is non-exclusive and would be customary
in connection with the sale of our products or services,
(iii) relates to off the shelf software
licenses to us by a third party or (iv) is approved by a
majority of the board (including at least one of the investor
appointed directors); or
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change the primary line of business of the Company from
materials identification, verification and analysis, and any
related field, or enter into any material new line of business.
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Liquidation Rights. Upon any liquidation,
fundamental change, change in ownership, dissolution or winding
up of the Company (whether voluntary or involuntary) (each, a
Significant Event) each holder of Preferred Stock
may be entitled to receive, prior and in preference to any
distribution or payment made upon any Preferred Stock junior
securities, an amount equal to (i) the aggregate Preferred
Stock liquidation value of all shares of Preferred Stock held by
such holder plus (ii) all accrued and unpaid dividends on
such shares of Preferred Stock. If, upon any Significant Event,
our assets to be distributed among the holders of the Pari Passu
Preferred are insufficient to permit payment to such holders of
the aggregate amount to which they are entitled to be paid under
the applicable provisions of the Preferred Stock certificates of
designation and the equivalent provisions of the other series of
Pari Passu Preferred, then the entire assets available to be
distributed to the stockholders shall be distributed pro rata
among such holders of the Pari Passu Preferred based upon the
aggregate liquidation value (plus all accrued and unpaid
dividends) of the shares of Pari Passu Preferred held by each
such holder. After payment to the holders of the Preferred Stock
of the amounts set forth in above, the entire remaining assets
and funds of the Company legally available for distribution, if
any, shall be distributed pro rata among the holders of the
common stock and the holders of the Pari Passu Preferred (on a
common equivalent basis). The liquidation values of the
Series A preferred, Series B preferred, the
Series C preferred and the Series D preferred are
$3.80 per share, $3.00 per share, $3.00 per share and $3.00 per
share, respectively.
Redemption. At any time on or after
March 14, 2012, upon the request of the holders of at least
a majority of the then outstanding shares of each series of
Preferred Stock, each of the holders of the then outstanding
preferred shares shall have the right (a
Redemption Right) to require the Company to
redeem all or any of their shares of preferred stock at a price
per share equal to the Preferred Stock liquidation value plus a
rate of return on such amount (after taking into account all
dividends paid by the Company under certain provisions of the
certificates of designation equal to 7% per annum, compounded
annually. Any holder of the Preferred Stock may exercise his,
her or its Redemption Right by delivering to the Company a
redemption notice on or after March 14, 2012, provided that
holders of at least a majority of the then outstanding shares of
Pari Passu Preferred have requested a redemption pursuant to the
provisions of the respective series of Preferred Stock
certificate of designation and the equivalent provisions of the
other series of Pari Passu Preferred. Within ten days after the
date of a redemption notice delivered by any holder of Preferred
Stock, we are required to notify all other holders of Pari Passu
Preferred that the Redemption Right has been exercised, and
each other holder of Pari Passu Preferred shall have the right,
exercisable by written notice delivered to us within
30 days after receipt of such notice from us, to request
that all or a portion of such other holders shares of Pari
Passu Preferred be redeemed on the redemption date together with
the shares of Preferred Stock of the holder who delivered the
redemption notice. We will be obligated to redeem the total
number of shares of Preferred Stock requested to be redeemed on
the redemption date. For each share of Preferred Stock which is
to be redeemed on a particular redemption date, we will be
obligated on the date specified for redemption thereof in the
written notice with respect thereto, to pay to the holder
thereof (upon surrender by such holder at our principal office
of the certificate representing such share) such amount
specified in the applicable provision of the certificate of
designation in immediately available funds. If the funds of the
Company legally available for redemption of Preferred Stock on
any redemption date are insufficient to redeem the total number
of shares of that respective series of Preferred Stock and all
other shares of Pari Passu Preferred to be redeemed on such
date: (i) those funds which are legally available shall be
used to redeem the maximum possible number of shares of Pari
Passu Preferred ratably among the holders of such shares to be
redeemed based upon the aggregate amount to which they are
entitled to be paid and the equivalent provisions of the other
series of Pari Passu Preferred; and (ii) with
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respect to those shares of Pari Passu Preferred requested to be
redeemed but for which funds are not legally available (the
Non-Funded Shares), we are entitled to issue and
deliver to each holder of Non-Funded Shares a promissory note
(each a Redemption Note). Each
Redemption Note will be payable one year from date of
issuance and will bear interest at the rate of 8% per annum,
compounded quarterly, and shall have an aggregate principal
amount per Non-Funded Share equal to the liquidation value of
that series of Preferred Stock plus a rate of return on such
amount (after taking into account all dividends paid by the
Company) equal to 7% per annum, compounded annually. A
Redemption Note may be prepaid by us at any time without
penalty. The issuance of Redemption Notes will be made
without charge to the holders of the Non-Funded Shares receiving
such Redemption Notes for any issuance tax in respect
thereof or other cost incurred by us in connection with the
issuance thereof, and we will pay the fees and expenses of each
holder of Non-Funded Shares in connection with the issuance of
Redemption Notes, including reasonable attorneys fees
and expense. Subject to the terms of any then existing senior
debt or credit facility, the terms and documentation relating to
each Redemption Note will provide that the debt obligation
evidenced thereby will at all times be pari passu with the most
senior debt or credit facility of our outstanding at any time
during the term of the Redemption Note.
Conversion Rights. At any time and from time
to time, a holder of Preferred Stock will have the right to
convert all or any portion of its shares of Preferred Stock into
the number of shares of common stock computed by dividing
(i) the aggregate liquidation value of the shares of that
respective series of preferred stock to be converted by
(ii) the conversion price of that series of Preferred Stock
then in effect.
All shares of Preferred Stock automatically convert into common
stock upon (A) the affirmative written consent of the
holders of at least a majority of the outstanding shares of Pari
Passu Preferred or (B) any offering by us of debt or equity
securities to the public pursuant to an effective registration
statement under the Securities Act of 1933, as then in effect,
or any comparable statement under any similar federal statute
then in force.
If any fractional interest in a share of common stock would be
delivered upon any conversion of the Preferred Stock, the
Company, in lieu of delivering the fractional share therefor,
may pay an amount to the holder thereof equal to the fair market
value per share of common stock as of the date of conversion as
determined in good faith by the board of directors, including a
majority of the directors appointed by the investor group,
multiplied by such fractional interest; provided, however, that
in the case of a public offering the fair market value per share
of common stock shall be the gross price per share of common
stock in such public offering. The determination as to whether
or not to make any cash payment in lieu of the issuance of
fractional shares shall be based upon the total number of shares
of Series A preferred stock being converted at any one time
by the holder thereof, not upon each share of Series A
preferred stock being converted.
Conversion Price. The conversion price is
$3.80 per share of common stock (subject to adjustment in the
event of stock splits, stock dividends, stock combinations,
recapitalizations and like occurrences) with respect to the
Series A preferred stock, and $3.00 with respect to the
Series B, Series C and Series D preferred stock.
If and whenever on or after the Preferred Stock original
issuance date we issue or sell or are deemed to have issued or
sold, any shares of our common stock for a consideration per
share less than the Preferred Stock conversion price in effect
immediately prior to the time of such issuance, then immediately
upon such issuance or sale or deemed issuance or sale the
Preferred Stock conversion price shall be reduced to the
conversion price determined by dividing (i) the sum of
(A) the product derived by multiplying the Preferred Stock
conversion price in effect immediately prior to such issuance or
sale by the number of shares of common stock deemed outstanding
immediately prior to such issuance or sale, plus (B) the
consideration, if any, received by us upon such issuance or
sale, by (ii) the number of shares of common stock deemed
outstanding immediately after such issue or sale.
Notwithstanding the foregoing, there will be no adjustment in
the Preferred Stock conversion price as a result of any issuance
or sale (or deemed issuance or sale) of:
(i) shares of common stock issued upon conversion of the
Pari Passu Preferred;
(ii) shares of common stock issued upon the exercise of
warrants;
(iii) shares of common stock issued upon the exercise of
options or other convertible securities outstanding as of the
first closing date of the Preferred Stock;
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(iv) securities issued pursuant to a board-approved
(including at least one of the investor appointed directors)
bona fide acquisition of an entity by merger, purchase of
substantially all of the assets or other reorganization;
(v) shares of common stock issued to Catalyst Capital
Investments, LLC, a Delaware limited liability company
(Catalyst) pursuant to the options granted under the
Catalyst letter agreements;
(vi) shares of common stock or other securities issued as a
dividend or distribution on, or in connection with a split of or
recapitalization of, any of the capital stock of the Company;
(vii) up to an aggregate of 800,000 shares of common
stock reserved for issuance per year pursuant to an option plan
(subject to adjustment in the event of stock splits, stock
dividends, stock combinations, recapitalizations and like
occurrences) and shares of common stock reserved for issuance
pursuant to an option plan in lieu of the repayment of certain
salary deferrals as approved by a majority of the board
(including at least one of the investor appointed directors),
which foregoing shares may be subject to options or restricted
stock awards granted under an option plan; provided that any
options that expire or terminate unexercised or any restricted
stock awards that are repurchased by the Company pursuant to the
terms of such award shall not be counted toward the maximum
number set forth in this subparagraph (vi) unless and until
such shares are subject to new restricted stock awards (or new
options) pursuant to the terms of an option plan;
(viii) shares of common stock issued or issuable (including
options to acquire such shares of common stock) to suppliers or
third party service providers in connection with the provision
of goods or services pursuant to transactions in the ordinary
course of business and approved by a majority of the board of
directors, including at least one of the investor appointed
directors;
(ix) shares of common stock issued or issuable in
connection with bona-fide sponsored research, collaboration,
technology license, development, OEM, marketing or other similar
agreements or strategic partnerships or joint ventures entered
into in the ordinary course of business and approved by a
majority of the board, including at least one of the investor
appointed directors (and by at least a majority of the
outstanding shares of Pari Passu Preferred voting as a single
class on a common equivalent basis, then outstanding, if
required under the provisions of the Series A certificate
of designation; or
(x) securities issued in connection with a public offering;
(xi) 1,000,000 incentive stock options or other share-based
award in such amount to Mr. James Lowrey, current chairman
and chief executive officer of the Company, approved at the
August 14, 2009 meeting of the board in consideration for
services rendered to the Corporation;
(xii) permitted issuances; or
(xiii) options (covering up to an aggregate of
330,000 shares of common stock) issued in substitution for
outstanding options;
provided that the aggregate number of shares of common stock
issued or issuable pursuant to clauses (viii) and
(ix) above will not exceed 350,000 (or such greater or
lesser number of shares as may be approved by a majority of the
board of directors (including at least one of the directors
appointed by the investors)) in any 12 month period.
Election of Directors. For so long as any
shares of Pari Passu Preferred remain outstanding, the holders
of the Pari Passu Preferred, voting together as a single class
on a common equivalent basis, are entitled to elect three
members of our board of directors at each meeting or pursuant to
each consent of our stockholders for the election of directors,
and to remove from office any such director and to fill any
vacancy caused by the resignation, death or removal of any such
director. Upon the conversion of outstanding shares of our
preferred stock into common stock on the effective date of this
registration statement, the preferred stock investors
right to appoint board members will terminate.
Series B
and Series C Warrants
In connection with the Series B and Series C preferred
stock financing, we entered into Series B and Series C
warrant agreements on December 19, 2007 and March 6,
2009, respectively, as amended from time to time, with
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certain investors agreeing to issue and deliver warrant
certificates evidencing warrants to purchase an aggregate of
9,000,000 and 6,750,000 shares of common stock at the per
share exercise price of $3.00. The Series B Warrants and
Series C Warrants expire on December 19, 2017 and
March 6, 2019, respectively. Each Series is subject to a
three year lock-up period beginning on the effective date of
this registration statement and ending on the third anniversary
of the effective date. During the lock-up period the Warrants
may not be exercised for shares of common stock. As of
February 8, 2010, 9,925,615 Series B and Series C
warrants are outstanding.
If and whenever on or after the original issue date we issue or
sell or are deemed to have issued or sold any shares of its
common stock for a consideration per share less than the
exercise price of the Series B or Series C warrant
agreement in effect immediately prior to the time of such
issuance, then immediately upon such issuance or sale or deemed
issuance or sale the exercise price shall be reduced to the
exercise price determined by dividing (i) the sum of
(A) the product derived by multiplying the exercise price
in effect immediately prior to such issuance or sale by the
number of shares of common stock deemed outstanding immediately
prior to such issuance or sale, plus (B) the consideration,
if any, received by us upon such issuance or sale, by
(ii) the number of shares of common stock deemed
outstanding immediately after such issue or sale.
Notwithstanding the foregoing, there is not required to be an
adjustment in the exercise price of the Series B or
Series C warrants as a result of any issuance or sale (or
deemed issuance or sale) of:
(i) shares of common stock issued upon conversion of the
Preferred Stock;
(ii) shares of common stock issued upon the exercise of the
Series B Warrants or the Series C Warrants;
(iii) shares of common stock issued upon the exercise of
options or other convertible securities outstanding as of
March 14, 2007;
(iv) securities issued pursuant to a board-approved
(including at least one of the directors appointed by the
investors) bona fide acquisition of an entity by merger,
purchase of substantially all of the assets or other
reorganization;
(v) shares of common stock issued to Catalyst Capital
company pursuant to the options granted under the Catalyst
Letter Agreements;
(vi) shares of common stock or other securities issued as a
dividend or distribution on, or in connection with a split of or
recapitalization of, any of the capital stock of the Company;
(vii) up to an aggregate of 800,000 shares of common
stock reserved for issuance per year pursuant to an option plan
(subject to adjustment in the event of stock splits, stock
dividends, stock combinations, recapitalizations and like
occurrences) and shares of common stock reserved for issuance
pursuant to an option plan in lieu of the repayment of certain
salary deferrals as approved by a majority of the board of
director (including at least one of the investor appointed
directors), which foregoing shares may be subject to options or
restricted stock awards granted under an option plan; provided
that any options that expire or terminate unexercised or any
restricted stock awards that are repurchased by the Company
pursuant to the terms of such award shall not be counted toward
the maximum number set forth in this subparagraph
(vii) unless and until such shares are subject to new
restricted stock awards (or new options) pursuant to the terms
of an option plan;
(viii) shares of common stock issued or issuable (including
options to acquire such shares of common stock) to suppliers or
third party service providers in connection with the provision
of goods or services pursuant to transactions in the ordinary
course of business and approved by a majority of the board of
directors, including at least one of the investor appointed
directors;
(ix) shares of common stock issued or issuable in
connection with bona-fide sponsored research, collaboration,
technology license, development, OEM, marketing or other similar
agreements or strategic partnerships or joint ventures entered
into in the ordinary course of business and approved by a
majority of the board of directors, including at least one of
the investor appointed directors (and by at least a majority of
the shares of Preferred Stock voting as a single class on a
common equivalent basis, then outstanding, if required pursuant
to the Preferred Stock Certificates of Designation);
(x) securities issued in connection with a Public Offering;
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(xi) 1,000,000 incentive stock options or other share-based
award in such amount to Mr. James Lowrey, current chairman
and chief executive officer of the Company, approved at the
August 14, 2009 meeting of the board in consideration for
services rendered to the Company;
(xii) permitted issuances; or
(xiii) options (covering up to an aggregate of
330,000 shares of common stock) issued in substitution for
outstanding options.
provided that the aggregate number of shares of common stock
issued or issuable pursuant to clauses (viii) and
(ix) above shall not exceed 350,000 (or such greater or
lesser number of shares as may be approved by a majority of the
board of directors (including at least one of the
investor-appointed directors) in any 12 month period.
As of February 8, 2010, 9,925,615 Series B and
Series C warrants are outstanding. The Series B and
Series C warrants are exercisable commencing on the
expiration of the Restriction Period, or the time period
beginning on the effective date of this registration statement
and ending on the date that is three years after the effective
date.
Series D
Warrants
In connection with the Series D preferred stock financing,
we entered into Series D warrant agreements on various
dates during October 2009, with certain investors agreeing to
issue and deliver warrant certificates evidencing warrants to
purchase an aggregate of 2,817,070 shares of common stock
at the per share exercise price of $3.00.
The Series D warrants expire on August 27, 2019. The
warrants are subject to a three year lock-up period beginning on
the effective date of this registration statement and ending on
the third anniversary of the effective date. During the lock-up
period the warrants may not be exercised for shares of common
stock.
If and whenever on or after the original issue date we issue or
sell or are deemed to have issued or sold any shares of our
common stock for a consideration per share less than the
exercise price of the Series D warrant agreement in effect
immediately prior to the time of such issuance, then immediately
upon such issuance or sale or deemed issuance or sale the
exercise price shall be reduced to the exercise price determined
by dividing (i) the sum of (A) the product derived by
multiplying the exercise price in effect immediately prior to
such issuance or sale by the number of shares of common stock
deemed outstanding immediately prior to such issuance or sale,
plus (B) the consideration, if any, received by the Company
upon such issuance or sale, by (ii) the number of shares of
common stock deemed outstanding immediately after such issue or
sale. Notwithstanding the foregoing, there is not required to be
an adjustment in the exercise price of the Series D
warrants as a result of any issuance or sale (or deemed issuance
or sale) of:
(i) shares of common stock issued upon conversion of the
Preferred Stock;
(ii) shares of common stock issued upon the exercise of the
Series D Warrants;
(iii) shares of common stock issued upon the exercise of
options or other convertible securities outstanding as of
March 14, 2007;
(iv) securities issued pursuant to a board-approved
(including at least one of the directors appointed by the
investors) bona fide acquisition of an entity by merger,
purchase of substantially all of the assets or other
reorganization;
(v) shares of common stock issued to Catalyst company
pursuant to the options granted under the Catalyst Letter
Agreements;
(vi) shares of common stock or other securities issued as a
dividend or distribution on, or in connection with a split of or
recapitalization of, any of the capital stock of the Company;
(vii) up to an aggregate of 800,000 shares of common
stock reserved for issuance per year pursuant to an option plan
(subject to adjustment in the event of stock splits, stock
dividends, stock combinations, recapitalizations and like
occurrences) and shares of common stock reserved for issuance
pursuant to an option plan in lieu of the repayment of certain
salary deferrals as approved by a majority of the board of
director (including
83
at least one of the investor appointed directors), which
foregoing shares may be subject to options or restricted stock
awards granted under an option plan; provided that any options
that expire or terminate unexercised or any restricted stock
awards that are repurchased by the Company pursuant to the terms
of such award shall not be counted toward the maximum number set
forth in this subparagraph (vii) unless and until such
shares are subject to new restricted stock awards (or new
options) pursuant to the terms of an option plan;
(viii) shares of common stock issued or issuable (including
options to acquire such shares of common stock) to suppliers or
third party service providers in connection with the provision
of goods or services pursuant to transactions in the ordinary
course of business and approved by a majority of the board of
directors, including at least one of the investor appointed
directors;
(ix) shares of common stock issued or issuable in
connection with bona-fide sponsored research, collaboration,
technology license, development, OEM, marketing or other similar
agreements or strategic partnerships or joint ventures entered
into in the ordinary course of business and approved by a
majority of the board of directors, including at least one of
the investor appointed directors (and by at least a majority of
the shares of Preferred Stock voting as a single class on a
common equivalent basis, then outstanding, if required pursuant
to the Preferred Stock Certificates of Designation);
(x) securities issued in connection with a public offering;
(xi) 1,000,000 incentive stock options or other share-based
award in such amount to Mr. James Lowrey, current chairman
and chief executive officer of the Company, approved at the
August 14, 2009 meeting of the board in consideration for
services rendered to the Company;
(xii) permitted issuances; or
(xiii) options (covering up to an aggregate of
330,000 shares of common stock) issued in substitution for
outstanding options.
provided that the aggregate number of shares of common stock
issued or issuable pursuant to clauses (viii) and
(ix) above shall not exceed 350,000 (or such greater or
lesser number of shares as may be approved by a majority of the
board of directors (including at least one of the
investor-appointed directors) in any 12 month period.
As of February 8, 2010, 2,817,070 Series D warrants
are outstanding. The Series D warrants are exercisable
commencing on the expiration of the restriction period, or the
time period beginning on the effective date of this registration
statement and ending on the date that is three years after the
effective date.
Registration
Rights
According to the terms of a Registration Rights Agreement, dated
March 14, 2007, as amended from time to time (the
Registration Rights Agreement), our holders of
Series A, Series B, Series C and Series D
preferred shares, the Series B Warrants, Series C and
Series D Warrants are entitled to demand, piggyback, and
Form S-3
registration rights. The stockholders who are a party to the
Registration Rights Agreement, from time to time (the
Securityholders) will hold an aggregate of
3,510,638 shares of our common stock upon completion of
this offering and the conversion of all existing series of our
preferred stock and exercise of warrants into shares of our
common stock that are subject to the registration rights under
that Registration Rights Agreement.
Demand
Registration Rights
At any time following the earlier of the fifth anniversary of
the date of the agreement and six months after the Company has
completed its initial public offering of common stock pursuant
to a registration statement declared effective under the
Securities Act, the holders holding at least 30% of the
registrable securities have the right, under our Registration
Rights Agreement, to require that we register all or a portion
of their registrable securities (provided that the aggregate
offering price of the registrable securities to be registered is
at least $30,000,000) on
Form S-1
or any similar long-form registration or, if available, holders
holding at least 50% of the registrable securities may, request
registration under the Securities Act of all or a portion of
their registrable securities on
Form S-3
or any similar short form registration. The underwriters of any
underwritten offering have the right to limit the number of
shares to be included in a registration statement filed in
response to the exercise of these demand
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registration rights. We must pay all expenses, except for
underwriters discounts and commissions, incurred in
connection with these demand registration rights.
Piggyback
Registration Rights
If we register any securities for public sale after this
offering, our Securityholders have piggyback registration rights
under our Registration Rights Agreement and the right to include
their shares in the registration, subject to specified
exceptions. The underwriters of any underwritten offering have
the right to limit the number of shares registered by these
holders. We must pay all expenses, except for underwriters
discounts and commissions, incurred in connection with these
piggyback registration rights.
Form S-3
Registration Right
Our Securityholders have the right, under our Registration
Rights Agreement, to require that we register all or a portion
of their shares of common stock on
Form S-3
if we are eligible to file a registration statement on that form
provided that the aggregate offering price of the registrable
securities to be registered is at least $1,000,000 for each
registration and the Company will not be required to cause more
than three such short-form registrations to become effective in
any 12 month period. The other stockholders who are a party
to the Registration Rights Agreement may also include their
shares in any such registration. We must pay all registration
expenses, as defined in the agreement, for all registrations on
Form S-3
which are demand registrations under the terms of
the agreement.
Investor
Rights Agreement with Rutgers University
Pursuant to a registration rights agreement with Rutgers, The
State University of New Jersey (Rutgers), dated
December 13, 2004, if we propose to register any shares of
our common stock, excluding (i) an initial public offering
of the common stock resulting in net proceeds to us of at least
$10,000,000, (ii) a registration on
Form S-8
or S-4 or
any successor or similar form which includes substantially the
same information as would be required to be included in a
registration statement covering the sale of the common stock, or
(iii) a registration statement related to common stock
issuable upon exercise of employee stock options or with any
employee benefit or similar plan of ours) Rutgers will have the
right to include their shares in the registration, subject to
specified exceptions. If the piggyback registration involves an
underwritten public offering of the common stock, the number of
shares requested to be included in such an underwriting by
Rutgers may be reduced if and to the extent that the managing
underwriter is of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by
the Company or the holders of securities exercising demand
registration rights.
Securityholders
Agreement
Our investors under each of the Series A, B, C and D
preferred stock (together, the Preferred Stock
Investors) have agreed to abide by certain agreements
providing rights and restrictions related to our securities
pursuant to a Securityholders Agreement (the
Stockholders Agreement) originally executed on
March 14, 2007, as amended from time to time, and most
recently amended on November 9, 2009 (the Second
Amended And Restated Securityholders Agreement). The
Second Amended and Restated Securityholders Agreement will
terminate, and all rights and obligations under the agreement
will terminate on the effective date of this registration
statement, except for the holdback provisions described below,
drag-along obligations and other certain provisions more
particularly described in our First Amendment to the Second
Amended and Restated Securityholders Agreement with our
securityholders, included as an exhibit to this registration
statement.
Restrictions
on transfer
The Second Amended And Restated Securityholders Agreement
provides no Securityholder is permitted to transfer any of
Securityholders securities except (i) in accordance
with the terms and conditions of the agreement or (ii) to
any permitted transferee. The agreement provides neither
Messrs. Brian Mayo, William Mayo and Walter Helfrecht are
permitted to transfer any of management Securityholders
securities other than to a permitted transferee until
March 14, 2012.
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Each Securityholder agrees not to, directly or indirectly,
transfer any of such Securityholders Securities (as
defined in the Securityholders Agreement) to any person
whose activities, products or services directly compete with the
activities, products or services of the Company as reasonably
determined in good faith by the board as of the date of such
proposed transfer; provided that the foregoing limitation shall
not apply to transfers registered under the Securities Act or
Rule 144 promulgated thereunder. We may impose stop
transfer instructions with its transfer agent in order to
enforce the foregoing limitation.
Holdback
Each Securityholder has agreed not to effect any public sale or
distribution (including sales pursuant to Rule 144
promulgated under the Securities Act (as such rule may be
amended from time to time)) of common stock, or to lend, offer,
pledge, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any common stock, or enter
into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences associated
with ownership of the common stock, during the period beginning
on the effective date of the registration statement relating to
the initial public offering and ending on the following dates:
(i) for holders of an aggregate of 2,500 or greater shares
of common stock and preferred stock (on an as-converted basis),
the date that is one (1) year after the public offering
effective date; and
(ii) for holders of less than an aggregate of
2,500 shares of common stock and preferred stock (on an
as-converted basis), the date that is 180 days after the
public offering effective date.
Each Securityholder has agreed to execute a standard
lock-up
agreement reflecting the foregoing. In order to enforce the
foregoing, we may impose stop-transfer instructions with respect
to the securities of each Securityholder until the end of such
period.
Right
Of First Refusal And Co-Sale Right
Each Preferred Stock Investor has agreed to provide
(i) each Preferred Stockholder and (ii) the Company a
right of first refusal (a Right of First Refusal) to
purchase any or all Securities which such Securityholder (the
Selling Securityholder) may, from time to time,
propose to transfer (other than with respect to a transfer to a
permitted transferee).
Voting
Agreement
The Preferred Stock Investors have agreed to vote all of its
shares of Preferred Stock and Common Stock and any other voting
Securities of the Company over which such Securityholder has
voting control and to take all other necessary or desirable
actions within its control (whether in its capacity as a
stockholder, director, member of a committee of the board or
otherwise, and including, without limitation, attendance at
meetings in person or by proxy for purposes of obtaining a
quorum and execution of written consents in lieu of meetings),
and the Company will take all necessary or desirable actions
within its control (including, without limitation, calling
special board and stockholder meetings), so that:
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the authorized number of directors on the board will be
established at, and remain during the term of this Agreement
fixed at, 11 directors, except for any increases in the
size of the board provided for upon the occurrence of certain
events set forth in the Certificate of Incorporation;
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for so long as any shares of Preferred Stock or Conversion
Common Shares remain outstanding, three persons nominated by the
holders of a majority of shares of common stock (on a
fully-diluted basis) held by the Preferred Stock Investors will
be elected to the board;
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if any investor appointed director ceases to serve as a member
of the board during his or her term of office, whether due to
such directors death, resignation or removal then the
resulting vacancy shall be filled by a representative designated
by the holders of a majority of shares of Preferred Stock and
Conversion Common Shares held by the Preferred Stock
Investors; and
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no investor appointed director will be removed from the board
without the written consent of the holders of a majority of
shares of Preferred Stock and Conversion Common Shares (voting
on a common stock equivalent basis) held by the Preferred
Stockholders.
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Miscellaneous
Registration Rights
We granted our former consultant Catalyst piggyback registration
rights in connection with the shares underlying option received
by Catalyst or its assigns under the consulting agreement with
Catalyst dated May 31, 2007. The registration rights
agreement provides if we determine to register any of our common
stock other than a registration relating solely to employee
benefit plans or s registration on
Form S-4
relating solely to a Rule 145 transaction, we will promptly
give Catalyst written notice thereof and Catalyst will have the
right to include its shares in the registration statement and
sell its shares of common stock in the offering at no additional
cost to Catalyst. The registration rights are subject to
limitation or elimination if a representative of the
underwriters of an offering advises us in writing that marketing
factors require a limitation or elimination on the number of
shares to be included in the registration statement.
Market
Information
Neither our common stock nor warrants are presently quoted or
traded on an exchange. We have applied for the listing of our
common stock and warrants on the NASDAQ Capital Market. We do
not currently satisfy the eligibility criteria for listing our
securities on NASDAQ and can provide no assurances that our
securities will be accepted for listing on NASDAQ at the
offering or following the offering. If our securities are not
accepted for listing on NASDAQ we will seek to trade our
securities on the
over-the-counter
bulletin board. Furthermore, if our securities are accepted for
listing on NASDAQ, there can be no assurance that we will
continue to satisfy such eligibility criteria to be listed on
NASDAQ.
Transfer
Agent
We have engaged BNY Mellon Shareholder Services as our transfer
agent and registrar for our common stock. We anticipate engaging
Mellon to serve as transfer agent for the warrants.
Anti-Takeover
Law, Limitations of Liability and Indemnification
Delaware Anti-Takeover Law. We are subject to
the provisions of Section 203 of the Delaware General
Corporation Law concerning corporate takeovers. This section
prevents many Delaware corporations from engaging in a business
combination with any interested stockholder, under specified
circumstances. For these purposes, a business combination
includes a merger or sale of more than 10% of our assets, and an
interested stockholder includes a stockholder who owns 15% or
more of our outstanding voting stock, as well as affiliates and
associates of these persons. Under these provisions, this type
of business combination is prohibited for three years following
the date that the stockholder became an interested stockholder
unless:
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the transaction in which the stockholder became an interested
stockholder is approved by the board of directors prior to the
date the interested stockholder attained that status;
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upon consummation of the transaction that resulted in the
stockholders becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of
the corporation outstanding at the time the transaction was
commenced, excluding those shares owned by persons who are
directors and also officers; or
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on or subsequent to that date, the business combination is
approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not
owned by the interested stockholder.
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This statute could prohibit or delay mergers or other takeover
or change in control attempts and, accordingly, may discourage
attempts to acquire us.
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Limited Liability and Indemnification. Our
certificate of incorporation and amended and restated by-laws
eliminate the personal liability of our directors for monetary
damages arising from a breach of their fiduciary duty as
directors to the fullest extent permitted by Delaware law. This
limitation does not affect the availability of equitable
remedies, such as injunctive relief or rescission. Our
certificate of incorporation requires us to indemnify our
directors and officers to the fullest extent permitted by
Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law.
Under Delaware law, we may indemnify our directors or officers
or other persons who were, are or are threatened to be made a
named defendant or respondent in a proceeding because the person
is or was our director, officer, employee or agent, if we
determine that the person:
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conducted himself or herself in good faith;
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reasonably believed, in the case of conduct in his or her
official capacity as our director or officer, that his or her
conduct was in our best interests, and, in all other cases, that
his or her conduct was at least not opposed to our best
interests; and
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in the case of any criminal proceeding, had no reasonable cause
to believe that his or her conduct was unlawful.
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These persons may be indemnified against expenses, including
attorneys fees, judgments, fines, including excise taxes, and
amounts paid in settlement, actually and reasonably incurred, by
the person in connection with the proceeding. If the person is
found liable to the corporation, no indemnification shall be
made unless the court in which the action was brought determines
that the person is fairly and reasonably entitled to indemnity
in an amount that the court will establish.
Insofar as indemnification for liabilities under the Securities
Act may be permitted to directors, officers or persons
controlling us pursuant to the above provisions, we have been
informed that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
88
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following constitutes the opinion of Greenberg Traurig,
P.A., our special tax counsel, as to the material
U.S. federal income tax consequences of the ownership of
the debentures and the shares of common stock into which the
debentures may be converted, as of the date of this prospectus.
The opinion is also submitted as Exhibit 8 to this
registration statement. This opinion deals only with a debenture
or share of common stock held as a capital asset (generally,
property held for investment). This opinion is based upon the
provisions of the Internal Revenue Code of 1986 (the
Code), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities
may be subject to different interpretations or may be changed,
perhaps retroactively, so as to result in U.S. federal
income tax consequences different from those discussed below.
This opinion does not address all aspects of U.S. federal
income taxes and does not deal with all tax consequences that
may be relevant to holders in light of their particular
circumstances. This opinion does not deal with special
situations, such as:
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tax consequences to holders who may be subject to special tax
treatment, such as dealers in securities or currencies,
financial institutions, regulated investment companies, real
estate investment trusts, tax-exempt entities, insurance
companies, or traders in securities that elect to use a
mark-to-market
method of accounting for their securities;
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tax consequences to persons holding debentures as a part of a
hedging, integrated, conversion or constructive sale
transaction, a straddle or other risk reduction transaction;
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tax consequences to U.S. holders (as defined below) of
debentures or shares of common stock whose functional
currency is not the U.S. dollar;
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tax consequences to investors in partnerships and other
pass-through entities;
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alternative minimum tax consequences, if any;
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tax consequences to expatriates and certain former
U.S. citizens or long-term residents of the U.S.;
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estate or gift tax consequences; and
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any state, local or foreign tax consequences.
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If you are considering the purchase of debentures or common
stock, you should consult your tax advisor concerning the
U.S. federal income tax consequences to you in light of
your particular situation as well as any consequences arising
under the laws of any other taxing jurisdiction.
As used herein, the term U.S. holder means a
beneficial owner of debentures or shares of common stock that
is, for U.S. federal income tax purposes:
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an individual citizen or resident of the U.S.;
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a corporation (or any other entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the U.S., any state thereof or the District
of Columbia;
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an estate the income of which is subject to U.S. federal
income taxation regardless of its source; or
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a trust, if it (i) is subject to the primary supervision of
a court within the U.S. and one or more U.S. persons
have the authority to control all substantial decisions of the
trust or (ii) has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a
U.S. person.
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A
non-U.S. holder
is a beneficial owner of debentures or shares of common stock
(other than a partnership) that is not a U.S. holder. If a
partnership (including any entity classified as a partnership
for U.S. federal income tax purposes) holds the debentures
or common stock, the tax treatment of a partner generally will
depend upon the status of the partner and the activities of the
partnership. If you are a partnership or a partner in a
partnership holding the debentures or common stock, you should
consult your own tax advisors.
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Consequences
to U.S. holders
Original
Issue Discount
The amount of original issue discount (OID), if any,
on a debt instrument is equal to the excess of its stated
redemption price at maturity over its issue price, subject
to a statutorily defined de minimis exception. The stated
redemption price at maturity of a debt instrument is the
sum of its principal amount plus all other payments required
thereunder, other than payments of qualified stated
interest. For this purpose, qualified stated
interest generally means stated interest that is
unconditionally payable in cash or in property at least annually
at a single fixed rate during the entire term of the debt
instrument. As provided above, we may elect to defer the payment
of unpaid interest on a debenture until a subsequent interest
payment date or the earlier of the stated maturity or the date
on which the debenture converts into shares of common stock. As
a result, none of the interest with respect to a debenture will
be treated as qualified stated interest. Instead,
all of the interest payable with respect to the debenture will
be treated as OID.
If a debt instrument provides the issuer with an unconditional
option that, if exercised, would allow the issuer to make
payments on the debt instrument under an alternative payment
schedule, the yield and maturity of such debt instrument for
purposes of calculating OID are determined by assuming that the
issuer exercises or does not exercise the option in a manner
that minimizes the yield on the debt instrument. If we exercise
our option to defer the payment of interest, then the yield to
maturity of the debentures would be no less than the yield to
maturity if we do not exercise this option. Accordingly, for
purposes of calculating OID, we will assume that we will not
exercise our option to defer the payment of interest on the
debentures. If we subsequently exercise our option to defer the
payment of interest, then OID would be calculated for the
remainder of the debenture term based upon an adjusted issue
price as of the date we defer the payment of interest. As a
result of such deferral, you would include OID in income in
advance of the receipt of cash, regardless of your method of
accounting.
Market
Discount
If you purchase a debenture for an amount that is less than its
issue price, subject to a de minimis exception, you will
be treated as having purchased the debenture at a market
discount. In such case, you will be required to treat any
payment on, or any gain realized on the sale, exchange or other
disposition of, the debenture as ordinary income to the extent
of the lesser of (i) the amount of such payment or realized
gain or (ii) the market discount accrued on the debenture
while held by you and not previously included in income; you
also may be required to defer the deduction of all or a portion
of any interest paid or accrued on indebtedness incurred or
maintained to purchase or carry the debenture. Alternatively,
you may elect (with respect to the debenture and all your other
market discount obligations) to include market discount in
income currently as it accrues. Market discount is considered to
accrue ratably during the period from the date of acquisition to
the maturity date of the debenture, unless you elect to accrue
market discount on the basis of a constant interest rate.
Amounts includible in income as market discount are generally
treated as ordinary interest income.
Amortizable
Bond Premium
If you purchase a debenture for an amount in excess of its
principal amount, you will be treated as having purchased the
debenture with amortizable bond premium equal in
amount to such excess. You may elect (with respect to the
debenture and all your other obligations with amortizable bond
premium) to amortize such premium using a constant yield method
over the remaining term of the debenture and may offset interest
income otherwise required to be included in respect of the
debenture during any taxable year by the amortized amount of
such excess for the taxable year. An election to amortize bond
premium applies to all taxable debt obligations then owned and
thereafter acquired by the holder and may be revoked only with
the consent of the Internal Revenue Service. If you do not elect
to amortize bond premium, that premium will decrease the gain or
increase the loss you would otherwise recognize on the
disposition of the debenture.
Constant
Yield Method
In lieu of accounting for market discount and amortizable bond
premium separately, you may elect to include in income all
interest that accrues on the debenture (including market
discount and adjusted for amortizable bond
90
premium) using a constant yield method under which the debenture
would be treated as if issued on your purchase date for an
amount equal to your adjusted basis in the debenture immediately
after your purchase of the debenture. Such an election will
simplify the computation and reporting of income from a
debenture and will effectively permit you to report income using
the accrual method and a constant yield.
Sale,
exchange, redemption or other disposition of
debentures
Except as provided below under Exchange of debentures into
cash or common stock and cash, you will generally
recognize gain or loss upon the sale, exchange, redemption or
other disposition of a debenture equal to the difference between
the amount realized upon the sale, exchange, redemption or other
disposition and your adjusted tax basis in the debenture. Your
tax basis in a debenture will generally be equal to the amount
you paid for the debenture, increased by any market discount
included in gross income with respect to the debenture and
decreased by any amortizable bond premium and any payments
received on the debenture other than qualified stated interest.
For these purposes, the amount realized does not include any
amount attributable to accrued interest, which amount would be
taxable as interest (to the extent not previously included in
your income) as described under Payment of interest
above. Any gain you recognize on a taxable disposition of the
debenture generally will be capital gain, except to the extent
that there is accrued market discount on the debenture that has
not previously been included in your income, which will be
treated as ordinary income as described under Market
Discount, above. Any capital gain or loss will be
long-term capital gain or loss if you have held the debenture
for more than one year. Long-term capital gains of non-corporate
holders currently are subject to reduced rates of taxation. Your
ability to deduct capital losses may be limited.
Exchange
of debentures into cash or common stock and cash
If you receive solely cash in exchange for your debentures upon
conversion, your gain or loss generally will be determined in
the same manner as if you disposed of the debenture in a taxable
disposition (as described above under Sale, exchange,
redemption or other disposition of debentures).
Conversion
of debentures
You will generally not recognize any income, gain or loss upon
conversion of a debenture into common stock except to the extent
that the common stock is considered attributable to accrued
interest not previously included in your taxable income (which
is taxable as ordinary income) or with respect to cash received
in lieu of a fractional share of common stock. Your tax basis in
the common stock received on conversion of a debenture will be
the same as your adjusted tax basis in the debenture at the time
of conversion (reduced by any basis allocable to a fractional
share interest), and the holding period of the common stock will
include the holding period of the converted debenture. However,
your tax basis in shares of the common stock considered
attributable to any accrued interest generally will equal the
amount of the accrued interest included in income, and the
holding period for such common stock will begin on the date of
conversion. An adjustment of the conversion ratio of the
debentures, in some circumstances, could be treated as a
constructive distribution, as discussed below.
Constructive
distributions
The conversion rate of the debentures will be adjusted in
certain circumstances. Under Section 305(c) of the Code,
adjustments (or failures to make adjustments) may in some
circumstances result in a deemed distribution to holders of
debentures (or our common stock). Adjustments to the conversion
rate made pursuant to a bona fide reasonable adjustment formula
that has the effect of preventing the dilution of the interest
of the holders of the debentures, however, will generally not be
considered to result in a deemed distribution to you. Certain of
the possible conversion rate adjustments provided in the
debentures (including, without limitation, adjustments in
respect of taxable dividends to holders of our common stock)
will not qualify as being pursuant to a bona fide reasonable
adjustment formula. If such adjustments are made, you will be
deemed to have received a distribution even though you have not
received any cash or property as a result of such adjustments.
Any deemed distributions will be taxable as a dividend, return
of capital, or capital gain in the manner described below under
Dividends. It is not clear whether a constructive
dividend deemed paid to you would be eligible for the
preferential rates of
91
U.S. federal income tax applicable in respect of certain
dividends received. It is also unclear whether corporate holders
would be entitled to claim the dividends received deduction with
respect to any such constructive dividends.
Dividends
Distributions, if any, made on our common stock generally will
be included in income as ordinary dividend income to the extent
of our current and accumulated earnings and profits. However,
with respect to individuals, for taxable years beginning before
January 1, 2011, such dividends are generally taxed at the
lower applicable long-term capital gains rates provided certain
holding period requirements are satisfied. Distributions in
excess of our current and accumulated earnings and profits will
be treated as a return of capital to the extent of your adjusted
tax basis in the common stock and thereafter as capital gain
from the sale or exchange of such common stock. Dividends
received by a corporation may be eligible for a dividends
received deduction, subject to applicable limitations.
Sale,
exchange, redemption or other taxable disposition of common
stock
Upon the sale, taxable exchange or other taxable disposition of
our common stock, you generally will recognize capital gain or
loss equal to the difference between (i) the amount of cash
and the fair market value of any property received upon such
taxable disposition and (ii) your adjusted tax basis in the
common stock. Such capital gain or loss will be long-term
capital gain or loss if your holding period in the common stock
is more than one year at the time of the taxable disposition.
Long-term capital gains recognized by non-corporate holders
generally are subject to a reduced rate of U.S. federal
income tax. The deductibility of capital losses is subject to
limitations.
Information
reporting and backup withholding
Information reporting requirements generally will apply to
payments of interest on the debentures and dividends on shares
of common stock and to the proceeds of a sale of a debenture or
share of common stock paid to you, unless you are an exempt
recipient, such as a corporation. Backup withholding will apply
to those payments if you fail to provide your taxpayer
identification number or otherwise fail to comply with
applicable requirements to establish an exemption. Any amounts
withheld under the backup withholding rules will be allowed as a
refund or a credit against your U.S. federal income tax
liability provided the required information is furnished timely
to the Internal Revenue Service.
Consequences
to non-U.S.
holders
Payments
of interest
The 30% U.S. federal withholding tax will not be applied to
any payment to you of interest provided that:
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interest paid on the debenture is not effectively connected with
your conduct of a trade or business in the U.S.;
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you do not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock that are
entitled to vote within the meaning of section 871(h)(3) of the
Code;
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you are not a controlled foreign corporation that is related to
us (actually or constructively) through stock ownership;
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(i) you provide your name and address, and certify, under
penalties of perjury, that you are not a U.S. person (which
certification may be made on an Internal Revenue Service Form
W-8BEN (or
other applicable form)), or (ii) you hold your debentures
through certain foreign intermediaries or certain foreign
partnerships, and you and they satisfy the certification
requirements of applicable U.S. Treasury
regulations; and
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you are not a bank whose receipt of interest on the debentures
is described in Section 881(c)(3)(A).
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Special
certification rules apply to
non-U.S.
holders that are pass-through entities
If you cannot satisfy the requirements described above, payments
of interest will be subject to the 30% U.S. federal
withholding tax, unless you provide us with a properly executed
(i) Internal Revenue Service
Form W-8BEN
(or other applicable form) claiming an exemption from or
reduction in withholding under an applicable income tax treaty
or (ii) Internal Revenue Service
Form W-8ECI
(or other applicable form) stating that interest paid on the
debentures is not subject to withholding tax because it is
effectively connected with your conduct of a trade or business
in the U.S. If you are engaged in a trade or business in
the U.S. and interest on the debentures is effectively
connected with the conduct of that trade or business and, if
required by an applicable income tax treaty, is attributable to
a U.S. permanent establishment, then (although you will be
exempt from the 30% withholding tax provided the certification
requirements discussed above are satisfied) you will generally
be subject to U.S. federal income tax on that interest on a
net income basis in the same manner as if you were a
U.S. holder. In addition, if you are a foreign corporation,
you may be subject to a branch profits tax equal to 30% (or
lesser rate under an applicable income tax treaty) of your
earnings and profits for the taxable year, subject to
adjustments, that are effectively connected with your conduct of
a trade or business in the U.S.
Dividends
and constructive distributions
Any dividends paid to you with respect to the shares of common
stock (and any deemed dividends resulting from certain
adjustments, or failure to make adjustments, to the conversion
rate, see Consequences to U.S. holders
Constructive distributions above) will be subject to
withholding tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. In the case of any
deemed dividend, it is possible that the U.S. federal tax
on this dividend would be withheld from interest, shares of your
common stock or sales proceeds subsequently paid or credited to
you. However, dividends that are effectively connected with the
conduct of a trade or business within the U.S. and, where a
tax treaty applies, are attributable to a U.S. permanent
establishment, are not subject to the withholding tax, but
instead are subject to U.S. federal income tax on a net
income basis at applicable graduated individual or corporate
rates. Certain certification requirements and disclosure
requirements must be complied with in order for effectively
connected income to be exempt from withholding. Any such
effectively connected income received by a foreign corporation
may, under certain circumstances, be subject to an additional
branch profits tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
A
non-U.S. holder
who wishes to claim the benefit of an applicable treaty rate is
required to satisfy applicable certification and other
requirements. If you are eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty, you
may obtain a refund of any excess amounts withheld by timely
filing an appropriate claim for refund with the Internal Revenue
Service.
Sale,
exchange, redemption, conversion or other disposition of
debentures or shares of common stock
Gain on the sale, exchange, redemption or other taxable
disposition of a debenture (as well as upon the conversion of a
debenture into cash or into a combination of cash and stock) or
common stock generally will not be subject to U.S. federal
income tax unless:
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that gain is effectively connected with your conduct of a trade
or business in the U.S. (and, if required by an applicable
income tax treaty, is attributable to a U.S. permanent
establishment); or
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you are an individual who is present in the U.S. for
183 days or more in the taxable year of that disposition,
and certain other conditions are met.
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If you are described in the first bullet point above, you will
be subject to tax on the net gain derived from the sale,
exchange, redemption, conversion or other taxable disposition
under regular graduated U.S. federal income tax rates. If
you are a foreign corporation that falls under the first bullet
point above, you may be subject to the branch profits tax equal
to 30% of your effectively connected earnings and profits, or at
such lower rate as may be specified by an applicable income tax
treaty.
If you are described in the second bullet point above, you will
be subject to a flat 30% tax on the gain derived from the sale,
exchange, redemption, conversion or other taxable disposition,
which may be offset by U.S. source capital losses, even
though you are not considered a resident of the U.S.
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Any stock which you receive on the sale, exchange, redemption,
conversion or other disposition of a debenture which is
attributable to accrued interest will be subject to
U.S. federal income tax in accordance with the rules for
taxation of interest described above under Consequences to
non-U.S. holders
Payments of interest.
Information
reporting and backup withholding
Generally, we must report annually to the Internal Revenue
Service and to you the amount of interest and dividends paid to
you and the amount of tax, if any, withheld with respect to
those payments. Copies of the information returns reporting such
interest, dividends and withholding may also be made available
to the tax authorities in the country in which you reside under
the provisions of an applicable income tax treaty.
In general, you will not be subject to backup withholding with
respect to payments of interest or dividends that we make to
you, provided the statement described above in the last bullet
point under Consequences to
non-U.S. holders
Payments of interest has been received (and we do not have
actual knowledge or reason to know that you are a
U.S. person, as defined under the Code, that is not an
exempt recipient).
In addition, you will be subject to information reporting and,
depending on the circumstances, backup withholding with respect
to payments of the proceeds of the sale of a debenture or share
of common stock within the U.S. or conducted through
certain
U.S.-related
financial intermediaries, unless the statement described above
has been received (and we do not have actual knowledge or reason
to know that you are a U.S. person, as defined under the
Code, that is not an exempt recipient) or you otherwise
establish an exemption.
Any amounts withheld under the backup withholding rules will be
allowed as a refund or a credit against your U.S. federal
income tax liability, provided the required information is
furnished timely to the Internal Revenue Service.
SHARES ELIGIBLE
FOR FUTURE SALE
The sale, or availability for sale, of a substantial number of
shares of common stock in the public market subsequent to this
offering pursuant to Rule 144 of the Securities Act or
otherwise could materially adversely affect the market price of
our common stock and could impair our ability to raise
additional capital through the sale of equity securities or debt
financing. Upon completion of this offering, there will be
approximately 8,803,042 shares of common stock issued and
outstanding. Of these shares, 2,500,000 would be freely
transferable immediately. Our executive officers and directors
beneficially own 3,546,117 shares, which would be eligible
for resale subject to the volume and manner of sale limitations
of Rule 144 of the Securities Act. Upon the conversion of
our outstanding preferred stock into shares of common stock, an
additional 2,846,305 shares are restricted
securities, as that term is defined in Rule 144, and
will be eligible for sale under the provision of Rule 144
following expiration of the
lock-ups.
Stock options to purchase an aggregate of 1,952,026 shares
of common stock were outstanding under our Amended and Restated
2004 Stock Option Plan as of February 8, 2010. Warrants to
purchase an aggregate of 13,078,685 shares of common stock
(for which cash would need to be remitted to us for exercise)
were outstanding as of February 8, 2010.
The shares of common stock outstanding that are deemed to be
restricted securities (as that term is defined under
Rule 144) or that are owned by our affiliates may only
be sold pursuant to an effective registration statement under
the Securities Act, in compliance with the exemption provisions
of Rule 144 or pursuant to another exemption under the
Securities Act. Restricted shares and shares of common stock
held by our affiliates that are not restricted will
be eligible for sale, under Rule 144, subject to certain
volume and manner of sale limitations prescribed by
Rule 144. In general, under Rule 144 as currently in
effect, a person (or persons whose shares are required to be
aggregated), including a person who may be deemed an
affiliate of the company, who has beneficially owned
restricted securities for at least six months may sell, within
any three-month period, a number of shares that does not exceed
the greater of: (i) 1% of the then outstanding shares of
common stock or (ii) the average weekly trading volume of
the common stock during the four calendar weeks preceding the
date on which notice of such sale was filed under Rule 144.
Sales of shares held by our affiliates that are not
restricted are subject to such volume limitations,
but are not subject to the holding period requirement. Sales
under Rule 144 are also subject to certain
94
requirements as to the manner of sale, notice and availability
of current public information about our company. A person who is
not deemed to have been an affiliate of our company at any time
during the 90 days preceding a sale by such person, and who
has beneficially owned the restricted shares for at least six
months, is entitled to sell such shares under Rule 144
without regard to any of the restrictions described above.
Following this offering, we cannot predict the effect, if any,
that the availability for sale of shares held by our current
stockholders will have on the market price from time to time.
Nevertheless, sales by our current stockholders of a substantial
number of shares of common stock in the public market could
materially and adversely affect the market price for our common
stock. In addition, the availability for sale of a substantial
number of shares of our common stock acquired through the
exercise of outstanding stock options or warrants could
materially adversely affect the market price of our common stock.
PLAN OF
DISTRIBUTION
We are offering up to 2,500,000 shares of common stock and
up to $5,000,000 in principal amount of debentures on a
self-underwritten best efforts basis. We are
registering resale of the warrants on behalf of the selling
securityholders.
Common
Stock and Debentures
The initial public offering price of shares of our common stock
and conversion price for the debentures was determined by our
board of directors and management. Among the factors considered
in determining the initial public offering price were our future
prospects and those of our industry in general, and certain
other financial and operating information in recent periods, and
other financial and operating information of companies engaged
in activities similar to ours. We cannot assure you, however,
that the prices at which the shares will sell in the public
market after this offering will not be lower than the initial
public offering price or debenture conversion price or that an
active trading market in our common stock will develop and
continue after this offering. The offering price for our
securities will be fixed throughout the offering period. The
offering will expire three months from the effective date of
this registration statement unless extended for an additional
three month period by our board of directors.
We intend to use the proceeds of this offering, net of offering
expenses, to finance possible acquisitions of, or investments
in, competitive businesses, products and technologies as a part
of our growth strategy, to repay certain outstanding debt,
including certain outstanding amounts due under a settlement
agreement, and for working capital and general corporate
purposes.
We are not required to sell any specific number or dollar amount
of securities but will attempt to sell all of the securities
offered.
Investors in this offering may elect to purchase shares of
common stock or debentures or a combination of common stock and
debentures.
There is currently no public or other trading market in the
U.S. for our shares of common stock, and we cannot give any
assurance to you that the securities offered by this prospectus
will have a market value, or that they can be resold for at
least the offered price if and when an active secondary market
might develop, or that a public market for our shares will be
sustained even if one is ultimately developed.
Our securities will be sold on our behalf by our officers and
directors. Our two executive officers James J. Lowrey and
Anthony Chidoni will offer the Companys securities. In
addition, each of the following directors of the Company will
offer the Companys securities: Joseph J. Melone, Simon
Irish, Ash Chawla, Dr. Stuart Weinstein, Dr. E.
Darracott Vaughan, Philip Odeen, Robert Kennedy, John R. Murphy,
and Dennis Ferro. Potential investors include, but are not
limited to, friends, family members and business acquaintances
of our officers and directors. The intended methods of
communication include, without limitation, telephone calls and
personal contacts. In their efforts, our officers and directors
will not use any mass advertising methods such as the Internet
or print media. Our officers and directors (including any of
their affiliates) will not receive any commissions or proceeds
from the offering for selling the shares on our behalf. We have
not engaged the services of any broker/dealer to assist us in
selling the shares.
95
They will not register as a broker/dealer under Section 15
of the Exchange Act in reliance upon
Rule 3a4-1.
Rule 3a4-1
sets forth those conditions under which a person associated with
an issuer may participate in the offering of the issuers
securities and not be deemed to be a broker/dealer.
The conditions are that:
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the person is not statutorily disqualified, as that term is
defined in Section 3(a)(39) of the Exchange Act, at the
time of his participation;
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|
the person is not compensated in connection with his
participation by the payment of commissions or other
remuneration based either directly or indirectly on transactions
in securities;
|
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|
the person is not at the time of their participation, an
associated person of a broker/dealer; and
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the person meets the conditions of paragraph (a)(4)(ii) of
Rule 3a4-1
of the Exchange Act, in that he (i) primarily performs, or
is intended primarily to perform at the end of the offering,
substantial duties for or on behalf of the issuer otherwise than
in connection with transactions in securities, (ii) is not
a broker or dealer, or an associated person of a broker or
dealer, within the preceding 12 months, and (iii) does
not participate in selling and offering of securities for any
issuer more than once every 12 months other than in
reliance on paragraphs (a)(4)(i) or (a)(4)(iii).
|
Substantially all of our directors, executive officers and
stockholders have either entered into or agreed to enter into
lock-up
agreements with us. Under those
lock-up
agreements, subject to exceptions, those holders of such stock
may not, directly or indirectly, offer, sell, contract to sell,
pledge or otherwise dispose of or hedge any common stock or
securities convertible into or exchangeable for shares of common
stock, or publicly announce to do any of the foregoing, without
our prior written consent, for a period of one year, from the
date of this prospectus. This consent may be given at any time
without public notice. Alternatively, minority stockholders
holding less than 2,500 shares of our common stock are
subject to
lock-up
periods of 180 days under agreements with us.
Resale of
Warrants
We are registering our Series B, C and D warrants on behalf
of the selling securityholders. As used in this prospectus,
selling securityholders includes the pledgees,
donees, transferees or others who may later hold the selling
securityholders interests. We will pay the costs and fees
of registering the warrants, but the selling securityholders
will pay any brokerage commissions, discounts or other expenses
relating to the sale of the warrants, including attorneys
fees.
The securityholders and any of their pledgees, assignees and
successors-in-interest
may, from time to time, sell any or all of their shares of
warrants on any stock exchange, market or trading facility on
which the warrants are traded or in private transactions. These
sales may be at fixed or negotiated prices. The securityholders
may use any one or more of the following methods when selling
warrants:
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|
|
ordinary brokerage transactions and transactions in which the
broker dealer solicits purchasers;
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|
|
|
|
block trades in which the broker-dealer will attempt to sell the
shares as agent but may position;
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|
|
resell a portion of the block as principal to facilitate the
transaction;
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|
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|
purchases by a broker-dealer as principal and resale by the
broker dealer for its account;
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|
an exchange distribution in accordance with the rules of the
applicable exchange;
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|
privately negotiated transactions;
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|
|
|
settlement of short sales;
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|
|
broker-dealers may agree with the shareholders to sell a
specified number of such shares at a stipulated price per share;
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a combination of any such methods of sale; and
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any other method permitted pursuant to applicable law.
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96
The securityholders may also sell warrants under Rule 144
under the Securities Act, if available, rather than under this
prospectus.
Broker-dealers engaged by the securityholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may
receive commissions or discounts from the securityholders (or,
if any broker-dealer acts as agent for the purchaser of shares,
from the purchaser) in amounts to be negotiated. The
securityholders do not expect these commissions and discounts to
exceed what is customary in the types of transactions involved.
The securityholders may from time to time pledge or grant a
security interest in some or all of the securities owned by them
and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell
the warrants from time to time under this prospectus, or under
an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act, amending the
list of securityholders to include the pledgee, transferee or
other successors in interest as securityholders under this
prospectus.
The securityholders and any broker-dealers or agents that are
involved in selling the warrants may be deemed to be
underwriters within the meaning of the Securities
Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the
Securities Act.
To our knowledge, the selling securityholders have not entered
into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their
securities. Under the rules and regulations of the FINRA, any
such broker-dealer may not receive discounts, concessions or
commissions in excess of 8% in connection with the sale of any
securities being registered hereunder.
We will pay all fees and expenses incident to the registration
of the shares and indemnify the securityholders against certain
losses, claims, damages and liabilities, including liabilities
under the Securities Act. The selling securityholders will be
subject to the prospectus delivery requirements of the
Securities Act. The selling securityholders have been informed
prior to the effective date of this registration statement that
the anti-manipulative provisions of Regulation M
promulgated under the Securities Exchange Act of 1934 may
apply to their sales in the market.
LEGAL
MATTERS
Greenberg Traurig, P.A., Boca Raton, Florida, will pass upon the
validity of the securities offered by this prospectus as our
counsel.
EXPERTS
The financial statements for the years ended December 31,
2007 and December 31, 2008 included in this prospectus have
been audited by McGladrey & Pullen, LLP, independent
registered public accountants, to the extent and for the periods
set forth in its report appearing elsewhere herein and are
included in reliance upon such report given upon the authority
of that firm as experts in auditing and accounting.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1,
including exhibits, under the Securities Act with respect to the
common stock and debentures to be sold in this offering. This
prospectus, which constitutes a part of the registration
statement, does not contain all of the information in the
registration statement or the exhibits. Statements made in this
prospectus regarding the contents of any contract, agreement or
other document are only summaries. With respect to each
contract, agreement or other document filed as an exhibit to the
registration statement, we refer you to the exhibit for a more
complete description of the matter involved.
We are not currently subject to the informational requirements
of the Securities Exchange Act of 1934. As a result of the
offering of the shares of our common stock and debentures, we
will become subject to the informational requirements of the
Exchange Act and, in accordance therewith, will file reports and
other information with the SEC.
97
You may read and copy all or any portion of the registration
statement or any reports, statements or other information in the
files at the public reference room of the SEC located at
100 F Street, N.E., Washington, D.C. 20549.
You can request copies of these documents upon payment of a
duplicating fee by writing to the SEC. You may call the SEC at
1-800-SEC-0330
for further information on the operation of its public reference
room. Our filings, including the registration statement, will
also be available to you on the web site maintained by the SEC
at http://www.sec.gov.
We intend to furnish our stockholders with annual reports
containing financial statements audited by our independent
auditors, and to make available to our stockholders quarterly
reports for the first three quarters of each year containing
unaudited interim financial statements.
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Section 145 of the Delaware General Corporation Law, as
amended, authorizes us to indemnify any director or officer
under certain prescribed circumstances and subject to certain
limitations against certain costs and expenses, including
attorneys fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which a person is
a party by reason of being one of our directors or officers if
it is determined that such person acted in accordance with the
applicable standard of conduct set forth in such statutory
provisions. Our certificate of incorporation contains provisions
relating to the indemnification of director and officers and our
Amended and Restated By-Laws extend such indemnities to the full
extent permitted by Delaware law. We may also purchase and
maintain insurance for the benefit of any director or officer,
which may cover claims for which we could not indemnify such
persons.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC,
such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
There are not and have not been any disagreements between us and
our accountants on any matter of accounting principles,
practices or financial statement disclosure during our two most
recent fiscal years and subsequent interim period.
98
XSTREAM
SYSTEMS, INC.
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Page
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Audited Financial Statements:
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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|
Unaudited Financial Statements:
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F-25
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F-26
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F-27
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F-28
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F-29
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F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
XStream Systems, Inc.
We have audited the accompanying balance sheets of XStream
Systems, Inc. as of December 31, 2008 and 2007, and the
related statements of operations, stockholders deficit,
and cash flows for each of the two years in the period ended
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 audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of XStream Systems, 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, in
conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations, has a
working capital deficiency, negative cash flows from operations
and its total liabilities exceed its total assets. This raises
substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to these
matters are also described in Note 1. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
As described in Note 13 to the financial statements, the
2007 and prior financial statements have been restated for
errors in the application of accounting principles related to
redeemable preferred stock, income taxes, stock-based
compensation and warrants.
/s/ McGladrey &
Pullen, LLP
Orlando, Florida
September 16, 2009
McGladrey & Pullen, LLP is a member firm of RSM
International,
an affiliation of separate and independent accounting legal
entities.
F-2
XStream
Systems, Inc.
December 31,
2008 and 2007
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2008
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2007
|
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ASSETS
|
Current Assets
|
|
|
|
|
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|
Cash and cash equivalents
|
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$
|
120,478
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|
|
$
|
1,784,452
|
|
Inventory
|
|
|
175,721
|
|
|
|
221,895
|
|
Prepaid expenses
|
|
|
31,802
|
|
|
|
18,673
|
|
|
|
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|
|
|
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|
|
Total current assets
|
|
|
328,001
|
|
|
|
2,025,020
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|
Property and equipment, net
|
|
|
282,616
|
|
|
|
407,083
|
|
Intangible assets, net
|
|
|
126,095
|
|
|
|
137,561
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|
Deposits
|
|
|
18,919
|
|
|
|
18,919
|
|
|
|
|
|
|
|
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|
Total assets
|
|
$
|
755,631
|
|
|
$
|
2,588,583
|
|
|
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|
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|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current Liabilities
|
|
|
|
|
|
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|
|
Accounts payable
|
|
$
|
366,853
|
|
|
$
|
419,611
|
|
Accrued compensation
|
|
|
253,871
|
|
|
|
324,306
|
|
Accrued expenses
|
|
|
72,041
|
|
|
|
55,567
|
|
Customer deposits
|
|
|
10,000
|
|
|
|
10,000
|
|
Notes payable stockholders
|
|
|
89,185
|
|
|
|
354,448
|
|
Current portion of notes payable, net of discount
|
|
|
2,507,500
|
|
|
|
2,181,944
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,299,450
|
|
|
|
3,345,876
|
|
Notes Payable, net of current portion
|
|
|
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,299,450
|
|
|
|
3,595,876
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 7.0% and
5.0% cumulative dividend, 962,101 shares authorized, issued
and outstanding
|
|
|
4,130,897
|
|
|
|
3,860,683
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 7.0% and
5.0% cumulative dividend, 1,800,000 shares authorized and
1,619,127 and 1,281,019 shares issued and outstanding 2008
and 2007, respectively, net of preferred stock subscription
receivable of $0 and $100,000, respectively
|
|
|
5,177,299
|
|
|
|
791,177
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred stock, $.0001 par value, 7.0% and
5.0% cumulative dividend, 1,350,000 shares authorized, none
issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, 30,000,000 shares
authorized, 1,702,156 shares issued and outstanding
|
|
|
170
|
|
|
|
170
|
|
Additional paid-in capital
|
|
|
3,021,994
|
|
|
|
6,354,602
|
|
Accumulated deficit
|
|
|
(14,874,179
|
)
|
|
|
(12,013,925
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(11,852,015
|
)
|
|
|
(5,659,153
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
755,631
|
|
|
$
|
2,588,583
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-3
XStream
Systems, Inc.
Years
Ended December 31, 2008 and 2007
|
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2008
|
|
|
2007
|
|
|
Revenues
|
|
$
|
439,000
|
|
|
$
|
135,000
|
|
Cost of revenues
|
|
|
129,036
|
|
|
|
157,508
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
309,964
|
|
|
|
(22,508
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,401,414
|
|
|
|
3,572,558
|
|
Research and development
|
|
|
635,531
|
|
|
|
1,900,897
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,036,945
|
|
|
|
5,473,455
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,726,981
|
)
|
|
|
(5,495,963
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
26,156
|
|
|
|
52,360
|
|
Interest expense
|
|
|
(159,429
|
)
|
|
|
(363,887
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(133,273
|
)
|
|
|
(311,527
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,860,254
|
)
|
|
|
(5,807,490
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,860,254
|
)
|
|
|
(5,807,490
|
)
|
Preferred stock dividend and accretion
|
|
|
(4,323,044
|
)
|
|
|
(212,007
|
)
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(7,183,298
|
)
|
|
$
|
(6,019,497
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(4.22
|
)
|
|
$
|
(3.55
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,702,156
|
|
|
|
1,694,596
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-4
XStream
Systems, Inc.
Years
Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance (deficit) at January 1, 2007, as previously reported
|
|
$
|
170
|
|
|
$
|
2,940,832
|
|
|
$
|
(3,822,207
|
)
|
|
$
|
(881,205
|
)
|
Adjustment applicable to prior years (See Note 13)
|
|
|
|
|
|
|
238,583
|
|
|
|
(2,384,228
|
)
|
|
|
(2,145,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at January 1, 2007, as restated
|
|
|
170
|
|
|
|
3,179,415
|
|
|
|
(6,206,435
|
)
|
|
|
(3,026,850
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
424,462
|
|
|
|
|
|
|
|
424,462
|
|
Exercise of stock options
|
|
|
|
|
|
|
9,774
|
|
|
|
|
|
|
|
9,774
|
|
Salary conversion for stock options
|
|
|
|
|
|
|
245,939
|
|
|
|
|
|
|
|
245,939
|
|
Exercise of warrants
|
|
|
|
|
|
|
5,850
|
|
|
|
|
|
|
|
5,850
|
|
Warrants issued in connection with Series B Preferred Stock
|
|
|
|
|
|
|
2,959,150
|
|
|
|
|
|
|
|
2,959,150
|
|
Accretion of redemption value of preferred stock
|
|
|
|
|
|
|
(212,007
|
)
|
|
|
|
|
|
|
(212,007
|
)
|
Syndication Costs
|
|
|
|
|
|
|
(257,981
|
)
|
|
|
|
|
|
|
(257,981
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(5,807,490
|
)
|
|
|
(5,807,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2007
|
|
|
170
|
|
|
|
6,354,602
|
|
|
|
(12,013,925
|
)
|
|
|
(5,659,153
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
235,326
|
|
|
|
|
|
|
|
235,326
|
|
Warrants issued in connection with Series B Preferred Stock
|
|
|
|
|
|
|
781,029
|
|
|
|
|
|
|
|
781,029
|
|
Accretion of redemption value of preferred stock
|
|
|
|
|
|
|
(4,323,044
|
)
|
|
|
|
|
|
|
(4,323,044
|
)
|
Syndication Costs
|
|
|
|
|
|
|
(25,919
|
)
|
|
|
|
|
|
|
(25,919
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(2,860,254
|
)
|
|
|
(2,860,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2008
|
|
$
|
170
|
|
|
$
|
3,021,994
|
|
|
$
|
(14,874,179
|
)
|
|
$
|
(11,852,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-5
XStream
Systems, Inc.
Years
Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,860,254
|
)
|
|
$
|
(5,807,490
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
235,326
|
|
|
|
424,462
|
|
Depreciation and amortization
|
|
|
129,485
|
|
|
|
131,640
|
|
Amortization of discount on debentures
|
|
|
|
|
|
|
177,097
|
|
Loss on disposal of property and equipment
|
|
|
9,247
|
|
|
|
|
|
Interest added to notes payable
|
|
|
125,556
|
|
|
|
100,000
|
|
Noncash issuance of options and preferred stock in lieu of
compensation
|
|
|
115,347
|
|
|
|
235,742
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
46,174
|
|
|
|
(221,895
|
)
|
Prepaid expenses
|
|
|
(13,129
|
)
|
|
|
17,337
|
|
Deposits
|
|
|
|
|
|
|
(17,334
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(52,758
|
)
|
|
|
222,445
|
|
Accrued compensation
|
|
|
(34,603
|
)
|
|
|
(4,525
|
)
|
Accrued expenses
|
|
|
16,474
|
|
|
|
53,231
|
|
Customer deposits
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,283,135
|
)
|
|
|
(4,694,290
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,999
|
)
|
|
|
(274,450
|
)
|
Proceeds from disposal of property and equipment
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,799
|
)
|
|
|
(274,450
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from stockholder loans
|
|
|
|
|
|
|
1,356,000
|
|
Principal payments on stockholder loans
|
|
|
(301,095
|
)
|
|
|
(568,559
|
)
|
Principal payments on notes payable
|
|
|
(50,000
|
)
|
|
|
|
|
Proceeds from the issuance of common stock
|
|
|
|
|
|
|
15,624
|
|
Proceeds from the issuance of preferred stock
|
|
|
898,974
|
|
|
|
5,148,204
|
|
Proceeds from preferred stock subscription receivable
|
|
|
100,000
|
|
|
|
|
|
Payments for syndication costs
|
|
|
(25,919
|
)
|
|
|
(257,981
|
)
|
Principal payments on capital leases
|
|
|
|
|
|
|
(46,160
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
621,960
|
|
|
|
5,647,128
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,663,974
|
)
|
|
|
678,388
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
1,784,452
|
|
|
|
1,106,064
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
120,478
|
|
|
$
|
1,784,452
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
23,103
|
|
|
$
|
83,060
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
Issuance of stock in exchange for note receivable for purchase
of preferred stock
|
|
$
|
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred salary to notes payable stockholders
|
|
$
|
35,831
|
|
|
$
|
129,448
|
|
|
|
|
|
|
|
|
|
|
Exchange of debentures for preferred stock
|
|
$
|
|
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Exchange of short-term convertible notes for Series A
preferred stock
|
|
$
|
|
|
|
$
|
375,000
|
|
|
|
|
|
|
|
|
|
|
Exchange of short-term convertible notes for Series B
preferred stock
|
|
$
|
|
|
|
$
|
886,000
|
|
|
|
|
|
|
|
|
|
|
Reclassification of notes payable to notes payable to
stockholders
|
|
$
|
|
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
Issuance of options in exchange for deferred salaries
|
|
$
|
|
|
|
$
|
60,195
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-6
XStream
Systems, Inc.
|
|
Note 1.
|
Nature of
Operations and Significant Accounting Policies
|
XStream Systems, Inc. (the Company) produces next
generation X-ray systems for material identification and
detection markets. The Companys patented systems are based
on energy-dispersive X-ray diffraction (EDXRD). The
Companys products enable
on-site,
real-time material identification to the pharmaceutical markets.
The Company has its corporate and financial offices in
Sebastian, Florida. Manufacturing of the systems is completed by
the Companys contract manufacturer. The Company was
founded in 2004.
Managements plans, liquidity and
profitability: As shown in the accompanying
financial statements, the Company incurred net losses for the
years ended December 31, 2008 and 2007 of $2,860,254 and
$5,807,490, respectively, and cumulative losses since inception
of $14,874,179. The Company has consistently generated negative
cash flows from operations and as of December 31, 2008, the
Companys current liabilities exceeded its current assets
by $2,971,449. Those factors, as well as the uncertainty
regarding the ability to obtain additional working capital and
the uncertainty regarding market acceptance of the
XT250tm
product, create overall uncertainty about the Companys
ability to continue as a going concern.
Management of the Company has raised additional working capital
in 2009 through issuance of Series C Redeemable Convertible
Preferred Stock (see Note 12), and is actively seeking
additional funding for working capital. The Company does not
currently maintain a line of credit or term loan with any
commercial bank or other financial institution and has not made
any other arrangements to obtain additional financing. The
Company can provide no assurance that it will not require
additional financing. Likewise, the Company can provide no
assurance that, if additional financing is needed, it will be
available in an amount or on terms acceptable to the Company, if
at all. If the Company is unable to obtain additional funds when
they are needed or if such funds cannot be obtained on favorable
terms, the Company may be unable to execute upon its business
plan or pay its costs and expenses as they are incurred, which
could have a material adverse effect on the Companys
business, financial condition and results of operations. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
A summary of the Companys significant accounting policies
follows:
Revenue recognition: The Companys
XT250tm
systems include software embedded in the tangible product that
is essential to its functionality. The software does not require
significant production, modification or customization. Revenue
from the sale of our
XT250tm
systems is recognized when all of the following criteria have
been met:
a. persuasive evidence of an arrangement exists,
b. delivery has occurred,
c. the vendors fee is fixed or determinable, and
d. collectibility is probable.
While the Company engages in strategic pilot programs with
pharmaceutical manufacturers and distributors, revenue is not
recognized until the unit is sold, delivered, installed and
accepted, and collection of the sales price is probable.
Prior to installation, deposits are ordinarily required from
customers before manufacturing commences. These amounts are
recorded as customer deposits in current liabilities on the
accompanying balance sheets.
The Company has two pricing models including wholesale pricing
for distributors who are authorized sales agents and retail
pricing to third party end-users.
There are no post-installation obligations other than warranty
of the equipment for one year after installation. Warranty
expense is estimated based on historical results and is accrued
at the time the revenue is recognized.
F-7
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Use of estimates: The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents: For purposes
of the statements of cash flows, cash includes cash on hand and
amounts on deposit at federally-insured financial institutions.
Cash equivalents include cash in money market accounts that are
convertible to a known amount of cash.
Inventories: Inventories consist of
finished goods and are valued at lower of cost or market using
the average cost method.
Property and equipment: Property and
equipment are recorded at cost. Major additions and improvements
are capitalized, and routine expenditures for repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows:
|
|
|
|
|
|
|
Years
|
|
|
Machinery and equipment
|
|
|
3-7
|
|
Computer equipment
|
|
|
3-5
|
|
Furniture and fixtures
|
|
|
7
|
|
Website
|
|
|
3
|
|
Intangible assets: Intangible assets
consist of a license for the use of patents and are stated at
amortized cost. The license is amortized on a straight-line
basis over their estimated useful lives of fifteen years.
Product warranty: The Company offers
warranties to its customers depending on the specific product
and the terms of the customer agreement. The average length of
the warranty period is one year. The Companys warranties
require it to repair or replace defective products during the
warranty period at no cost to the customer. At the time product
revenue is recognized, the Company records a liability for
estimated costs that may be incurred under the related
warranties. The Company periodically assesses the adequacy of
its recorded warranty liability and adjusts the balance as
necessary.
Advertising costs: Advertising costs
are charged to operations when incurred. Advertising expense was
$533 and $2,018 for the years ended December 31, 2008 and
2007, respectively.
Income taxes: Deferred taxes are
provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
On January 1, 2007, the Company adopted the Financial
Accounting Standards Boards (FASB)
Interpretation Number 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
clarified the accounting for uncertainty in an enterprises
financial statements by prescribing a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 requires management to evaluate its
open tax positions that exist on the date of initial adoption in
each jurisdiction.
When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount
F-8
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in
the period during which, based on all available evidence,
management believes it is more likely than not that the position
will be sustained upon examination, including the resolution of
appeals or litigation processes, if any. Tax positions taken are
not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with
the applicable taxing authority.
Preferred stock and warrants: The
Company has issued redeemable convertible preferred stock with
detachable warrants for the purchase of common stock. The
Company reviews the conversion terms for indications requiring
bifurcation and separate accounting for the embedded conversion
feature. Generally, embedded conversion features where the
ability to physical or net-share settle the conversion option is
not within the control of the Company are bifurcated and
accounted for as derivative financial instruments. Other
convertible instruments that are not derivative financial
instruments are accounted for by recording the intrinsic value,
if any, of the embedded conversion feature as a discount from
the initial value of the instrument and accreting such discount
back to face value over the term of the instrument using the
effective interest rate method.
Detachable warrants are evaluated to determine if they are
liability instruments or equity instruments. Warrants determined
to be liability instruments are carried at fair value. For
warrants determined to be equity instruments, the issuance price
of the stock and warrants is allocated between the stock and the
warrants based on the relative fair value of those instruments
at the date of issuance. The amount allocated to the warrants is
recognized as additional paid in capital and is not adjusted
subsequent to issuance.
Redeemable preferred stock that is redeemable at the option of
the holder is not reported as permanent equity, but rather as
mezzanine equity and is initially carried at fair value at the
date of issuance. Subsequent to issuance, stock that is
redeemable currently is adjusted to its maximum redemption
amount at each balance sheet date. Stock that is not redeemable
currently is accounted for by accreting changes in the
redemption value and discounts over the period from the date of
issuance to the earliest redemption date of the security using
the interest method.
Segment reporting: The Company offers
direct sales of our
XT250tm
systems to customers, three-way revenue sharing arrangements
between us, pharmaceutical manufacturers/distributors/chain
retailers, and a return goods processing center, with payments
to us based on a
pay-per-scan
service fee on returns, recalls and suspected diverted
products; and PILOT programs whereby manufacturers will host our
system for use on a trial basis, providing our host manufacturer
with an option to purchase the system following PILOT testing.
To date, the Company has not generated revenues from a three-way
revenue sharing arrangement or a PILOT program. The Company
operates in one operating segment as no discrete financial
information other than Company-wide information is available or
utilized by the Company.
Stock-based compensation: The Company
measures and recognizes stock-based compensation expense at the
fair value of the awards. Compensation expense for awards and
related tax effects are recognized as the awards vest. The
Company uses the Black-Scholes Option Pricing Model to determine
the fair value of options issued.
Earnings per share: We compute earnings
per share in accordance with FASB Statement No. 128,
Earnings per Share. Basic earnings per share are
computed by dividing net loss by the weighted-average number of
common shares outstanding during the period. The diluted
earnings per share is computed by giving effect to all
potentially dilutive common shares, including stock options. At
December 31, 2008 and 2007, we reported net loss;
therefore, common stock equivalents were excluded in the
computation of diluted earnings per share.
Recent accounting pronouncements: In
June 2008, the FASB ratified EITF Issue
No. 07-5,
Determining Whether an Instrument (or an Embedded Feature) Is
Indexed to an Entitys Own Stock
(EITF 07-5).
EITF 07-5
provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including
evaluating the instruments contingent exercise and
settlement provisions. It also clarifies on the impact of
foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation.
EITF 07-5
is effective for fiscal years beginning
F-9
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
after December 15, 2008. The Company is currently assessing
the impact of
EITF 07-5
on its financial position and results of operations.
In May 2009, the FASB issued FASB Statement No. 165,
Subsequent Events (SFAS No. 165).
SFAS No. 165 requires an entity to recognize in the
financial statements the effects of all subsequent events that
provide additional evidence about conditions that existed at the
date of the balance sheet. For unrecognized subsequent events
that must be disclosed to keep the financial statements from
being misleading, an entity will be required to disclose the
nature of the event as well as an estimate of its financial
effect or a statement that such an estimate cannot be made. In
addition, SFAS No. 165 requires an entity to disclose
the date through which subsequent events have been evaluated.
SFAS No. 165 is effective for interim and annual
periods ending after June 15, 2009 and is to be applied
prospectively. This guidance does not impact our current
financial statements. The Companys adoption of
SFAS No. 165 is not expected to have a material impact
on the Companys financial position, results of operations
and cash flows.
In July 2009, the FASB Accounting Standards Codification
(Codification) became the single source of
authoritative generally accepted accounting principles
(GAAP) in the United States. The previously existing
GAAP hierarchy consisted of four levels of authoritative
accounting and reporting guidance (levels A through D),
including original pronouncements of the FASB, Emerging Issues
Task Force abstracts and other accounting literature. The
Codification eliminates this hierarchy and replaced the
previously existing GAAP (other than rules and interpretive
releases of the SEC) with just two levels of literature:
authoritative and nonauthoritative.
|
|
Note 2.
|
Property
and Equipment
|
At December 31, 2008 and 2007, the major classes of
property and equipment and the aggregate accumulated
depreciation consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Machinery and equipment
|
|
$
|
359,013
|
|
|
$
|
384,168
|
|
Computer equipment
|
|
|
151,449
|
|
|
|
157,655
|
|
Furniture and fixtures
|
|
|
72,035
|
|
|
|
72,035
|
|
Website
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632,497
|
|
|
|
663,858
|
|
Less accumulated depreciation
|
|
|
(349,881
|
)
|
|
|
(256,775
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
282,616
|
|
|
$
|
407,083
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2008
and 2007 was $118,019 and $115,291, respectively.
|
|
Note 3.
|
Intangible
Assets
|
At December 31, 2008 and 2007, intangible assets and their
accumulated amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
License
|
|
$
|
171,990
|
|
|
$
|
45,895
|
|
|
$
|
126,095
|
|
|
$
|
171,990
|
|
|
$
|
34,429
|
|
|
$
|
137,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2008
and 2007 was $11,466 and $16,349, respectively.
F-10
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Future amortization expense as of December 31, 2008 is as
follows:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2009
|
|
$
|
11,466
|
|
2010
|
|
|
11,466
|
|
2011
|
|
|
11,466
|
|
2012
|
|
|
11,466
|
|
2013
|
|
|
11,466
|
|
Thereafter
|
|
|
68,765
|
|
|
|
|
|
|
|
|
$
|
126,095
|
|
|
|
|
|
|
The weighted-average remaining amortization period for the
license is 11 years.
The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation of
FIN 48, the Company determined that no material adjustment
was required; there are no unrecognized tax benefits, and
accordingly no associated interest and penalties are required to
be accrued at December 31, 2008 and 2007, respectively.
The Company does not believe that there are any tax positions
for which a material change in unrecognized tax benefit or
liability is reasonably possible in the next 12 months. The
company believes that there are no unrecognized tax benefits
which, if recognized, would impact the effective tax rate.
The company has evaluated its open tax years by major
jurisdiction, and concluded that the tax years 2005 through 2008
remain open to examination by federal and state taxing
authorities.
Temporary differences between the financial statement carrying
amounts and tax basis of assets and liabilities and operating
loss carryforwards that give rise to significant portions of the
deferred tax assets and liabilities relate to the following as
of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
91,677
|
|
|
$
|
93,156
|
|
Stock compensation costs
|
|
|
223,701
|
|
|
|
189,908
|
|
Discount on debentures
|
|
|
80,328
|
|
|
|
40,851
|
|
Warranty reserve
|
|
|
13,171
|
|
|
|
7,526
|
|
Other
|
|
|
3,563
|
|
|
|
3,563
|
|
Net operating loss carryforward
|
|
|
4,903,147
|
|
|
|
3,937,302
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
5,315,587
|
|
|
|
4,272,306
|
|
Less valuation allowance
|
|
|
(5,295,473
|
)
|
|
|
(4,245,226
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
20,114
|
|
|
|
27,080
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment, principally due to differences in
depreciation
|
|
|
(20,114
|
)
|
|
|
(27,080
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-11
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
A valuation allowance is required to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is
more likely than not that some portion or all of the deferred
tax assets will not be realized. After consideration of all the
evidence, both positive and negative, management has determined
that a $5,295,473 and $4,245,226 valuation allowance at
December 31, 2008 and 2007, respectively, is necessary to
reduce the deferred tax assets to the amount that will more
likely than not be realized. The change in the valuation
allowance for the current year is $1,050,247.
Loss carryforwards for tax purposes as of December 31, 2008
have the following expiration dates:
|
|
|
|
|
Expiration Date December 31,
|
|
Amount
|
|
|
2024
|
|
$
|
425,415
|
|
2025
|
|
|
1,700,772
|
|
2026
|
|
|
2,897,580
|
|
2027
|
|
|
5,435,778
|
|
2028
|
|
|
2,568,642
|
|
|
|
|
|
|
|
|
$
|
13,028,187
|
|
|
|
|
|
|
The Companys ability to utilize these net operating losses
to offset future taxable income of the Company may be limited
under the Internal Revenue Code Section 382 Change in
Ownership Rules. Management is in the process of evaluating if a
change in ownership has occurred to limit the utilization of the
net operating losses.
The following table presents the principal reasons for the
difference between the effective tax rate and the
U.S. federal statutory income tax rate for the year ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Book Income at U.S. federal statutory income tax rate
|
|
$
|
(972,487
|
)
|
|
|
(34.00
|
)%
|
|
$
|
(1,974,547
|
)
|
|
|
(34.00
|
)%
|
State taxes, net of federal income tax effect
|
|
|
(96,296
|
)
|
|
|
(3.37
|
)
|
|
|
(205,127
|
)
|
|
|
(3.53
|
)
|
Change in valuation allowance
|
|
|
1,050,247
|
|
|
|
36.72
|
|
|
|
2,100,640
|
|
|
|
36.17
|
|
Permanent differences
|
|
|
70,538
|
|
|
|
2.47
|
|
|
|
53,244
|
|
|
|
0.92
|
|
Other, net
|
|
|
(52,002
|
)
|
|
|
(1.82
|
)
|
|
|
25,790
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
F-12
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
Note 5.
|
Notes
Payable Stockholders
|
At December 31, 2008 and 2007, notes payable
stockholders were all classified as current liabilities and
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Unsecured promissory note to a stockholder, with interest at a
rate of 8%. Monthly principal and interest of $7,228 are due
beginning on January 18, 2008, with a final maturity on
December 1, 2008. The balance was paid in full on
March 10, 2009.(i)
|
|
$
|
21,400
|
|
|
$
|
86,378
|
|
Unsecured promissory note to a stockholder, with interest at a
rate of 8%. Monthly principal and interest of $6,508 are due
beginning on June 15, 2008 with final maturity on
December 15, 2008(i)
|
|
|
43,070
|
|
|
|
43,070
|
|
Unsecured promissory note to a stockholder, with interest at a
rate of 8%. Monthly principal and interest of $3,183 are due
beginning on July 15, 2008 with final maturity on
May 15, 2009.(i)
|
|
|
24,715
|
|
|
|
|
|
Unsecured subordinated debentures to stockholders, which accrued
interest at 4% and matured December 31, 2007. Debentures
paid on January 11, 2008
|
|
|
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable stockholders
|
|
$
|
89,185
|
|
|
$
|
354,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
The Company is in default of these promissory notes as of
December 31, 2008. In connection with the default, the
interest rate increased to 12%. |
At December 31, 2008 and 2007, notes payable consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Unsecured note payable to the contract manufacturer(i).
Principal and interest, which accrues at a rate of 5%, is due at
maturity, September 5, 2008. The Company was in default on
this note as of the maturity date. See Note 12 for terms of
tentative settlement agreement
|
|
$
|
2,257,500
|
|
|
$
|
2,131,944
|
|
Unsecured subordinated debentures, which accrued interest at a
rate of 4% and matured December 31, 2007. Debentures
subsequently paid on January 11, 2008
|
|
|
|
|
|
|
50,000
|
|
Unsecured subordinated debentures, which accrue interest at a
rate of 8% and mature through December 31, 2009. The
Company was in default on interest payments as of
December 31, 2008
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
2,507,500
|
|
|
|
2,431,944
|
|
Less current portion
|
|
|
2,507,500
|
|
|
|
2,181,944
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
$
|
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
In connection with the note payable, the Company entered into a
supply agreement with its contract manufacturer. In accordance
with the agreement, the Company commits to purchase 100% of the
Companys total demand for the initial twenty-four months
of volume production. |
Debt discount: In connection with the
issuance of debentures in 2005, as described above and in
Note 5, the Company issued 330,000 warrants for the
purchase of common stock (see Note 8). The Company recorded
a
F-13
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
discount of $354,197 on the debentures as of December 31,
2005 representing the fair value of the warrants issued, which
was amortized over the term of the debentures. Amortization
expense for the years ended December 31, 2008 and 2007 was
$0 and $177,097, respectively. The amortization was recorded as
interest expense on the accompanying financial statements.
Future minimum payments of $2,507,500 on notes payable as of
December 31, 2008, are currently due or are due during the
year ending December 31, 2009.
Convertible promissory notes: During
the year ended December 31, 2007 the company issued short
term convertible promissory notes in the amount of $1,261,000
which were converted into Series A and Series B
preferred shares (and warrants) during 2007 in the amount of
$375,000 and $886,000, respectively.
|
|
Note 7.
|
Share-Based
Payments
|
In 2004, the Company adopted a Stock Incentive Plan (the
Plan). The Plan is administered by the Board of Directors
or a committee thereof and provides for options to purchase
2,600,000 shares of common stock to be granted under the
Plan to officers, directors, independent contractors and
consultants of the Company. The Plan authorized the issuance of
incentive stock options (ISOs), as defined in the
Internal Revenue Code of 1986, as amended and non-qualified
stock options (NQSOs). Consultants and directors who
are not also employees of the Company are eligible for grants of
only NQSOs. The exercise price of each ISO may not be less than
100% of the fair market value of the common stock at the time of
grant, except that in the case of a grant to an employee who
owns 10% or more of the outstanding stock of the Company, the
exercise price may not be less than 110% of the fair market
value on the date of grant. Generally, unless fully vested at
the time of grant, options shall be exercisable at 25% per year,
and shall be outstanding for ten years.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes Option Pricing Model that uses the
assumptions noted in the following table. Expected volatility is
based on the historical volatility of similar companies
stock. The risk-free rate for periods within the contractual
life of the option is based on the U.S. treasury strip
yield curve in effect at the time of grant.
The assumptions used and the weighted average fair value of
options granted are as follows for the years ended
December 31, 2008 and 2007:
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
1.55% - 3.34%
|
|
3.96% - 5.19%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
51.69% - 62.58%
|
|
53.89% - 70.74%
|
Expected life in years
|
|
5 - 7
|
|
5 - 7
|
Service period in years
|
|
0 - 4
|
|
0 - 4
|
Weighted average fair value of options granted
|
|
$0.16
|
|
$1.21
|
Compensation cost recognized on options granted in 2008 and 2007
was $235,326 and $424,462, respectively.
F-14
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
The following is an analysis of options to purchase shares of
the Companys common stock issued and outstanding as of
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at beginning of year
|
|
|
901,991
|
|
|
$
|
2.80
|
|
|
|
526,128
|
|
|
$
|
1.92
|
|
Granted
|
|
|
799,044
|
|
|
|
2.39
|
|
|
|
456,760
|
|
|
|
3.83
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(2,572
|
)
|
|
|
3.80
|
|
Forfeited
|
|
|
(161,275
|
)
|
|
|
3.01
|
|
|
|
(78,325
|
)
|
|
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at year-end
|
|
|
1,539,760
|
|
|
$
|
2.57
|
|
|
|
901,991
|
|
|
$
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at year-end
|
|
|
1,440,416
|
|
|
$
|
2.59
|
|
|
|
725,434
|
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term of outstanding options
|
|
|
|
|
|
|
8.04 years
|
|
|
|
|
|
|
|
7.71 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term of vested options
|
|
|
|
|
|
|
8.04 years
|
|
|
|
|
|
|
|
7.64 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys nonvested shares
as of December 31, 2007 and 2008 and changes during the
years ended December 31, 2007 and 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at beginning of year
|
|
|
176,557
|
|
|
$
|
1.61
|
|
|
|
210,656
|
|
|
$
|
1.15
|
|
Granted
|
|
|
799,044
|
|
|
|
0.16
|
|
|
|
456,760
|
|
|
|
1.21
|
|
Vested
|
|
|
(806,504
|
)
|
|
|
0.25
|
|
|
|
(412,534
|
)
|
|
|
0.84
|
|
Forfeited
|
|
|
(69,753
|
)
|
|
|
1.37
|
|
|
|
(78,325
|
)
|
|
|
2.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at year-end
|
|
|
99,344
|
|
|
$
|
1.16
|
|
|
|
176,557
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 and 2007, there was $242,449 and
$356,479, respectively, of total unrecognized compensation cost
related to nonvested share-based compensation arrangements
granted. That cost is expected to be recognized over a weighted
average remaining term of 3.04 years.
|
|
Note 8.
|
Preferred
Stock and Warrants
|
Series A Redeemable Convertible Preferred
Stock: On March 14, 2007, the Company
issued 962,101 shares of redeemable convertible preferred
stock. This preferred stock was designated Series A
Redeemable Convertible Preferred Stock (Series A
Preferred). The Series A Preferred has a par value of
$.0001 and has a liquidation value of $3.80 plus a rate of
return equal to 5% per annum, compounded annually, per share.
The Series A Preferred is convertible into shares of the
Companys common stock at a conversion rate of one for one
at the request of the holders of Series A Preferred. The
Series A Preferred is redeemable at any time on or after
March 14, 2012, upon the request of the holders of at least
a majority of the then outstanding shares of Series A
Preferred. Upon such request, each of the holders of the then
outstanding Series A Preferred shall have the right to
require the Company to redeem all or any of their shares of
Series A Preferred at a price per share equal to the
Series A Liquidation Value plus a rate of return on such
amount equal to 7% per annum, compounded annually. The issuance
of the Series A Preferred
F-15
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
generated net cash proceeds of $3,280,984, after transaction
fees, expenses and noncash items. The Company used the net cash
proceeds for operational purposes.
Dividends on the Series A Preferred accrue daily at 5% per
annum except upon an event of noncompliance including; failure
to make any redemption payment under the Preferred Stock
Purchase Agreement (the Agreement), a breach of any
covenant or agreement included in the Agreement, any realization
that any of the representations or warranties under the
agreement are untrue on incorrect, the Company entering into
liquidation or bankruptcy, the Company defaulting on one or more
indentures, agreements or other instruments under which
Indebtedness amounts to at least $100,000, and any judgment
rendered against the Company in excess of $500,000, after which
the dividend rate shall be increased to 7% per annum. On
September 16, 2008, the Company was in default of a loan
agreement with its contract manufacturer and as the default was
greater than $100,000 the dividend rate increased to 7% on such
date, and will continue until the default is cured. In addition,
the above noted event of noncompliance results in the
Series A Preferred being immediately redeemable upon
request of the holders of a majority of the outstanding shares
of Series A Preferred at a price per share of $3.80 per
share plus a rate of return equal to 7% per annum.
Series B Redeemable Convertible Preferred
Stock: On December 21, 2007, the Company
issued 1,264,353 shares of redeemable convertible preferred
stock and 6,321,756 warrants to purchase shares of common stock
at a strike price of $3.00 per share, which expire 10 years
after the date of issuance. This preferred stock was designated
Series B Redeemable Convertible Preferred Stock (the
Series B Preferred). The Series B
Preferred has a par value of $.0001 and has a liquidation value
of $3.00 plus a rate of return currently equal to 5% per annum,
compounded annually, per share. The Series B Preferred is
convertible into shares of the Companys common stock at a
conversion rate of one for one at the request of the holders of
Series B Preferred. The Series B Preferred is
redeemable at any time on or after March 14, 2012, upon the
request of the holders of at least a majority of the then
outstanding shares of Series B Preferred, each of the
holders of the then outstanding Series B Preferred shall
have the right to require the Company to redeem all or any of
their shares of Series B Preferred at a price per share
equal to the Series B Liquidation Value plus a rate of
return on such amount equal to 7% per annum, compounded annually.
Dividends on the Series B Preferred will accrue daily at 5%
per annum except upon an event of noncompliance, as described
above, after which the dividend rate shall be increased to 7%
per annum. On September 16, 2008, the Company was in
default of a loan agreement with its contract manufacturer and
as the default was greater than $100,000 the dividend rate
increased to 7% on such date.
In addition, the above noted event of noncompliance results in
the Series B Preferred being immediately redeemable upon
request of the holders of a majority of the outstanding shares
of Series B Preferred at a price per share of $3.00 per
share plus a rate of return equal to 7% per annum.
The Company issued additional shares of Series B Preferred
and warrants during the years ended December 31, 2008 and
2007 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
Series B
|
|
|
|
|
|
Noncash
|
|
|
|
Preferred
|
|
|
Warrants for
|
|
|
Cash
|
|
|
Conversion of
|
|
Date
|
|
Shares
|
|
|
Common Stock
|
|
|
Proceeds
|
|
|
Compensation
|
|
|
December 31, 2007
|
|
|
16,666
|
|
|
|
83,330
|
|
|
$
|
|
|
|
$
|
49,998
|
|
February 28, 2008
|
|
|
30,116
|
|
|
|
150,580
|
|
|
|
25,000
|
|
|
|
65,348
|
|
May 30, 2008
|
|
|
291,326
|
|
|
|
1,456,630
|
|
|
|
873,974
|
|
|
|
|
|
June 30, 2008
|
|
|
16,666
|
|
|
|
83,330
|
|
|
|
|
|
|
|
49,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,774
|
|
|
|
1,773,870
|
|
|
$
|
898,974
|
|
|
$
|
165,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The issuance of the Series B Preferred generated net cash
proceeds of $837,055 and $1,807,059, after transaction fees,
expenses and noncash items for the years ended December 31,
2008 and 2007, respectively. The
F-16
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Company used the net cash proceeds for operational purposes. The
Company issued Series B Preferred shares and warrants to
its interim CEO in exchange for services rendered. Compensation
to the CEO in the amount of $49,998 for each of the periods
ended December 31, 2007 and June 30, 2008 was
exchanged for shares and warrants at the same price as those
purchased for cash. The CEOs total compensation of $99,996
for the period of service was determined by the Companys
board of directors and was recorded as compensation expense in
the period earned. The Company also issued Series A
Preferred shares and warrants to its President in exchange for
deferred salary on February 28, 2008. The President
recognized as compensation $100,000 of deferred salary on that
date and exchanged the net pay amount of $65,348 to purchase
Series B Preferred Units at the same price as those
purchased for cash.
The purchase price allocated between the Series B
Redeemable Preferred Stock and the Series B warrants
(Series B Units) was determined by the board of
directors on the date of the first issuance of Series B
Units which was December 21, 2007. The Series B
Preferred was valued at $.69 per share and each warrant was
valued at $.462 per share of common stock to be issued. The
value of the warrants was determined using the Black-Scholes
Option Pricing model using the following assumptions:
|
|
|
|
|
Exercise price of warrants
|
|
$
|
3.00
|
|
Value of Common Stock
|
|
|
0.69
|
|
Risk-free interest rate
|
|
|
4.18
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
80.00
|
%
|
Weighted average expected life to maturity
|
|
|
10 years
|
|
The expected volatility utilized for the warrant valuations was
80% compared to the between 53.89% and 70.74% volatility used
for the stock options due the expected life of the warrants
being longer than the expected life of the stock options.
In connection with the issuance of warrants associated with the
Series B Preferred, in accordance with APB 14, the Company
allocated the fair value of the warrants as a discount to the
Series B Preferred in the amount of $781,029 and
$2,959,150, for the years ended December 31, 2008 and 2007,
respectively. The discount was fully amortized in 2008, due to
the event of noncompliance that resulted in the Series B
Preferred becoming immediately redeemable, as discussed above.
Under the terms of the agreements, the Series A Preferred
and Series B Preferred have no preference over one another.
At any time, holders of Preferred Stock have the right to
convert all or any portion of their shares of Preferred Stock
into shares of common stock . All shares of Preferred Stock
automatically convert into common stock upon (A) the
affirmative written consent of the holders of at least a
majority of the outstanding shares of Preferred Stock or
(B) any offering by the Company of debt or equity
securities to the public pursuant to an effective registration
statement under the Securities Act of 1933.
All outstanding shares of our Series A, B, C, and D
preferred stock will automatically convert into
3,510,638 shares of our common stock on the effective date
of the registration statement for the Companys initial
public offering.
Warrants: In connection with the
issuance of debentures in 2005 and 2007 (see Notes 5 and
6), the Company issued 330,000 warrants for the purchase of
common stock, $.0001 par value, with a strike price of
$2.34 per share, exercisable for a period of 10 years.
F-17
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
During the years ended December 31, 2008 and 2007, the
Company issued warrants to purchase approximately 1,712,000 and
6,430,000 shares of common stock. A summary of the status
of the Companys warrants related to the issuance of
debentures and preferred stock, which are classified as equity
on the balance sheet is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Beginning balance of warrants
|
|
|
6,720,095
|
|
|
|
2.97
|
|
|
|
|
|
|
|
292,500
|
|
|
|
2.34
|
|
|
|
|
|
Warrants issued
|
|
|
1,711,540
|
|
|
|
3.00
|
|
|
|
|
|
|
|
6,430,095
|
|
|
|
3.00
|
|
|
|
|
|
Warrants exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, year end
|
|
|
8,431,635
|
|
|
|
2.98
|
|
|
|
9.06
|
|
|
|
6,720,095
|
|
|
|
2.97
|
|
|
|
9.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9.
|
Commitments &
Contingency
|
Operating lease: The Company leases its
main office and engineering facility under operating leases
through February 28, 2012. Lease expense for the years
ended December 31, 2008 and 2007 is $136,836 and $114,267,
respectively, which includes expenses related to common area
maintenance. Future minimum lease payments under the operating
leases are as follows for the years ending December 31:
|
|
|
|
|
2009
|
|
$
|
115,164
|
|
2010
|
|
|
119,771
|
|
2011
|
|
|
124,562
|
|
2012
|
|
|
20,894
|
|
2013
|
|
|
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
380,391
|
|
|
|
|
|
|
Guarantees: The Company is contingently
liable for certain payments related to the sale of its
XT250 units. The Company signed recourse agreements,
whereby the Company guarantees the payment of the unamortized
principal balance of certain capital lease agreements in the
event the customer defaults on the payment for the units. As of
December 31, 2008 and 2007, the unamortized principal
balance of these leases totaled $113,825 and $135,000,
respectively. Management feels it is unlikely that the Company
will be required to satisfy any of these amounts. Additionally,
management has determined that the fair value of the guarantees
is not significant.
Royalty payments: As required under the
license agreement entered into by the Company with a university
for exclusive rights to produce and sell products which utilize
the universitys patented X-ray diffraction technology, the
Company has agreed to pay the university a minimum annual
royalty for a term of 15 years, which was the remaining
life of the patent at the inception of the agreement. Minimum
annual royalty payments under the license agreement are as
follows for the years ending December 31:
|
|
|
|
|
2009
|
|
$
|
500,000
|
|
2010
|
|
|
500,000
|
|
2011
|
|
|
500,000
|
|
2012
|
|
|
500,000
|
|
2013
|
|
|
500,000
|
|
Thereafter
|
|
|
3,000,000
|
|
|
|
|
|
|
Total minimum royalty payments
|
|
$
|
5,500,000
|
|
|
|
|
|
|
F-18
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Royalty expense for the years ended December 31, 2008 and
2007 was $300,000 and $150,000, respectively and is included in
general and administrative expenses on the accompanying
statement of operations. Under the terms of the agreement those
were the minimum payments due for the years ended
December 31, 2008 and 2007, respectively.
Product warranty: The Company estimated
its product warranty liability as of December 31, 2008 and
2007 of approximately $35,000 and $20,000, respectively, which
is included in accrued expenses.
At December 31, 2008 and 2007, the aggregate product
warranty liability consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning warranty liability
|
|
$
|
20,000
|
|
|
$
|
|
|
Reductions for payment made under warranty
|
|
|
|
|
|
|
|
|
Product warranty issued
|
|
|
15,000
|
|
|
|
20,000
|
|
Changes related to preexisting warranties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of the warranty liability
|
|
$
|
35,000
|
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at times, may exceed
federally-insured limits. Accounts are guaranteed by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000
as of December 31, 2007 and $250,000 as of
December 31, 2008. However, this financial institution is
participating in the FDICs Transaction Accounts Guarantee
Program (TAGP) through December 31, 2009,
whereby all non-interest bearing transaction accounts, including
business checking accounts, are fully guaranteed by the FDIC for
the entire amount in each account. Coverage under the TAGP is in
addition to and separate from the $250,000 of coverage available
under general deposit insurance rules. The Company has not
experienced any losses in such accounts.
The Company engages a stockholder under a consulting agreement
to serve as Chairman of the Companys Scientific Advisory
Board. This arrangement provides for an hourly fee for work
performed under the agreement as well as 25,000 options, which
vest over a period of four years. During 2008 and 2007, payments
of $200 and $300, respectively, were paid to the stockholder
under the consulting agreement.
The Company has engaged a consulting firm to perform certain
consulting services related to the Companys capital
structure, budgeting and financial planning. In addition, the
Company has consulting agreements to provide introductions to
potential new customers and suppliers. The principals of the
consulting firm are stockholders, one of whom was a board member
during 2007. Compensation expense to the consulting firm for
services rendered during 2008 and 2007 under these consulting
agreements totaled $51,442 and $195,219, respectively. In
exchange for the services rendered, the Company issued options
for 578,000 and 90,000 shares of the Companys common
stock at an exercise price of $3.00 per share with an exercise
period of 10 years, during 2008 and 2007, respectively.
|
|
Note 12.
|
Subsequent
Events
|
Subsequent to December 31, 2008, the Company issued
365,996 shares of redeemable convertible preferred stock.
This preferred stock was designated as Series C Redeemable
Convertible Preferred Stock (Series C
Preferred). The Series C Preferred has a par value of
$.0001, is of equal preference with the Series A Preferred
and Series B Preferred, and has a liquidation value of
$3.00 plus a rate of return equal to 5% per annum, compounded
annually, per share. The Series C Preferred is convertible
to common stock on a
one-for-one
basis at the request of the holders of Series C Preferred
Stock. The issuance of the Series C Preferred generated net
cash proceeds of $1,097,988, after transaction fees and
expenses. The Company used the net cash proceeds for operational
purposes.
F-19
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
The Series C Preferred is redeemable at any time on or
after March 14, 2012, upon the request of the holders of at
least a majority of the then outstanding shares of Series C
Preferred, at which time each of the holders of the then
outstanding Series C Preferred shall have the right to
require the Company to redeem all or any of their shares of
Series C Preferred at a price per share equal to the
Series C Liquidation Value plus a rate of return on such
amount equal to 5% per annum, compounded annually. Dividends on
the Series C Preferred accrue daily at 5% per annum except
upon an event of noncompliance after which the dividend rate
shall be increased to 7% per annum.
On September 16, 2008, Kimball International, Inc. and
Kimball Electronics, Inc. (Kimball) filed suit
against the Company. Kimball filed three claims against the
Company including a claim alleging the Company defaulted on a
$2,000,000 loan provided by Kimball to the Company, breach of a
reserve capacity agreement and breach of a supplier agreement.
On June 30, 2009, the District Court ordered a partial
judgment in favor of Kimball in the amount of $2,000,000 against
the Company, which was recorded in the accompanying balance
sheet as of December 31, 2008. The settlement agreement
between Kimball and the Company was never finalized and none of
the payments have been made. The parties have filed competing
motions with the Court to enforce their respective versions of
the settlement terms. Additionally, Kimballs motion
requests the court to enter a separate judgment in their favor
and against the Company in the principal sum of $3,200,000. This
amount represents the loan principal balance of $2,000,000;
accrued interest, reserve capacity fees, legal and other fees of
approximately $420,000; and inventory held by Kimball of
approximately $780,000. As of September 30, 2009, the
Company has recorded the $2,000,000 principal balance and
approximately $407,000 of accrued interest and reserve capacity
fees. The inventory is not recorded on the Companys
financial statements as title and possession of the inventory
remain with Kimball. Should the litigation be settled according
to these terms, the Company anticipates that a portion of the
proceeds of the public offering will be utilized to pay the
monies due to Kimball. The Company intends to vigorously pursue
the settlement which will include terms under which Kimball will
continue to supply
XT250tm
units and allocate a portion of the payments to be made by the
Company under the settlement agreement to the $780,000 in
XT250tm
inventory in Kimballs possession. If the Company is unable
to settle this litigation in a timely manner, the Companys
results of operations may be adversely affected.
In years prior to 2008, the Company recognized a deferred tax
asset. In accordance with FASB 109, Accounting for Income
Taxes, a valuation allowance is recorded when, based on the
weight of available evidence, it is more likely than not that
some portion or all of a deferred tax asset will not be
realized. It was determined during 2008 that, based on available
evidence in periods prior to 2008, it was more likely than not
that the deferred tax asset in those periods would not be
realized. The Company has restated the financial statements for
years prior to 2008 to recognize a valuation allowance equal to
its net deferred tax asset.
In years prior to 2008, the Company recognized stock-based
compensation expense using assumptions for the Black-Scholes
Option Pricing Model that were not properly updated at each
grant date, which was not in accordance with accounting
principles generally accepted in the United States of America
and resulted in the overstatement of stock compensation expense
and additional paid-in capital. The financial statements for
years prior to 2008 have been restated to properly recognize
compensation expense and additional paid-in capital related to
the options granted.
In years prior to 2008, the Company issued debentures with
detachable warrants, which were determined to be equity
instruments. The Company failed to recognize the value of the
warrants and the related discount on the debentures, which was
not in accordance with accounting principles generally accepted
in the United States of America. The Company has restated the
financial statements for years prior to 2008 to value the
warrants using the Black-Scholes Option Pricing Model and
amortize the related discount on the debentures over the life of
the debentures.
During 2007, the Series A Preferred and Series B
Preferred that were issued by the Company was classified as
permanent equity. In accordance with EITF Topic D-98,
Classification and Measurement of Redeemable Securities,
F-20
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
it was determined during 2008 that, because the Series A
Preferred and Series B Preferred have redemption features
that are not solely within the control of the Company, these
securities should be classified outside of permanent equity. As
such, the 2007 financial statements have been restated to
classify the Series A Preferred and Series B Preferred
as mezzanine equity.
During 2007, the Company accrued dividends on the issued and
outstanding shares of Series A Preferred and Series B
Preferred without formal board declaration. It was determined
during 2008 that, in accordance with accounting principles
generally accepted in the United States of America, the
dividends should only be accrued when declared. The 2007
financial statements have been restated to eliminate the accrual
of undeclared dividends on Series A Preferred and
Series B Preferred.
During 2007, the Company issued Series B Preferred in
exchange for a receivable in the amount of $100,000 and reported
the receivable in current assets. In accordance with accounting
principles generally accepted in the United States of America,
receivables obtained in connection with the issuance of stock
should be reported as reduction of the stock. The balance sheet
at December 31, 2007 has been restated to reclassify this
receivable as a reduction of the Series B Preferred.
The Companys financial statements for the year ended
December 31, 2007, have been adjusted for the items
discussed above in accordance with accounting principles
generally accepted in the United States of America. The portion
of the adjustments applicable to the year ended
December 31, 2006 and prior years, in the amount of
$2,145,645, has been treated as a retroactive restatement of the
December 31, 2006 stockholders deficit balance.
F-21
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
The restatements discussed above had the following effects on
the balance sheet and statements of operations,
stockholders deficit and cash flows as of and for the year
ended December 31, 2007, as compared to the amounts
previously reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,784,452
|
|
|
$
|
1,784,452
|
|
|
$
|
|
|
Inventory
|
|
|
221,895
|
|
|
|
221,895
|
|
|
|
|
|
Receivable from stockholders
|
|
|
100,000
|
|
|
|
|
|
|
|
(100,000
|
)
|
Prepaid expenses
|
|
|
18,673
|
|
|
|
18,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,125,020
|
|
|
|
2,025,020
|
|
|
|
(100,000
|
)
|
Property and equipment, net
|
|
|
407,083
|
|
|
|
407,083
|
|
|
|
|
|
Deferred tax asset
|
|
|
4,728,405
|
|
|
|
|
|
|
|
(4,728,405
|
)
|
Intangible assets, net
|
|
|
137,561
|
|
|
|
137,561
|
|
|
|
|
|
Deposits
|
|
|
18,919
|
|
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
7,416,988
|
|
|
|
2,588,583
|
|
|
|
(4,828,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
419,611
|
|
|
|
419,611
|
|
|
|
|
|
Accrued compensation
|
|
|
324,306
|
|
|
|
324,306
|
|
|
|
|
|
Accrued expenses
|
|
|
55,567
|
|
|
|
55,567
|
|
|
|
|
|
Accrued dividends
|
|
|
150,998
|
|
|
|
|
|
|
|
(150,998
|
)
|
Customer deposits
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
Notes payable stockholders
|
|
|
354,448
|
|
|
|
354,448
|
|
|
|
|
|
Current portion of notes payable, net of discount
|
|
|
2,181,944
|
|
|
|
2,181,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,496,874
|
|
|
|
3,345,876
|
|
|
|
(150,998
|
)
|
Notes Payable, net of current portion
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,746,874
|
|
|
|
3,595,876
|
|
|
|
(150,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 5.0%
cumulative dividend, 962,101 shares authorized, issued and
outstanding
|
|
|
|
|
|
|
3,860,683
|
|
|
|
3,860,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 5.0%
cumulative dividend, 1,800,000 shares authorized, and
1,281,019 shares issued and outstanding, net of preferred
stock subscription receivable of $100,000
|
|
|
|
|
|
|
791,177
|
|
|
|
791,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred stock, $.0001 par value, 5.0%
cumulative dividend, 1,350,000 shares authorized, none
issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, 30,000,000 shares
authorized, 1,702,156 shares issued and outstanding
|
|
|
170
|
|
|
|
170
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 5.0%
cumulative dividend, 962,101 shares authorized, issued and
outstanding
|
|
|
96
|
|
|
|
|
|
|
|
(96
|
)
|
Series B Preferred stock, $.0001 par value, 5.0%
cumulative dividend, 1,800,000 shares authorized, and
1,281,019 shares issued and outstanding
|
|
|
128
|
|
|
|
|
|
|
|
(128
|
)
|
Additional paid-in capital
|
|
|
11,360,132
|
|
|
|
6,354,602
|
|
|
|
(5,005,530
|
)
|
Accumulated deficit
|
|
|
(7,690,412
|
)
|
|
|
(12,013,925
|
)
|
|
|
(4,323,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
3,670,114
|
|
|
|
(5,659,153
|
)
|
|
|
(9,329,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
7,416,988
|
|
|
$
|
2,588,583
|
|
|
$
|
(4,828,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
135,000
|
|
|
$
|
135,000
|
|
|
$
|
|
|
Cost of revenues
|
|
|
157,508
|
|
|
|
157,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(22,508
|
)
|
|
|
(22,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,065,033
|
|
|
|
3,572,558
|
|
|
|
(492,475
|
)
|
Research and development
|
|
|
1,900,897
|
|
|
|
1,900,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,965,930
|
|
|
|
5,473,455
|
|
|
|
(492,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,988,438
|
)
|
|
|
(5,495,963
|
)
|
|
|
492,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
52,360
|
|
|
|
52,360
|
|
|
|
|
|
Interest expense
|
|
|
(186,790
|
)
|
|
|
(363,887
|
)
|
|
|
(177,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(134,430
|
)
|
|
|
(311,527
|
)
|
|
|
(177,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(6,122,868
|
)
|
|
|
(5,807,490
|
)
|
|
|
315,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
2,405,661
|
|
|
|
|
|
|
|
(2,405,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,717,207
|
)
|
|
$
|
(5,807,490
|
)
|
|
$
|
(2,090,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Stockholders Equity Deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
(881,205
|
)
|
|
$
|
(3,026,850
|
)
|
|
$
|
(2,145,645
|
)
|
Issuance of preferred stock and warrants
|
|
|
8,419,524
|
|
|
|
|
|
|
|
(8,419,524
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
424,462
|
|
|
|
424,462
|
|
Exercise of stock options
|
|
|
|
|
|
|
9,774
|
|
|
|
9,774
|
|
Salary conversion for stock options
|
|
|
|
|
|
|
245,939
|
|
|
|
245,939
|
|
Exercise of warrants
|
|
|
|
|
|
|
5,850
|
|
|
|
5,850
|
|
Discount on warrants issued in connection with Series B
Preferred Stock
|
|
|
|
|
|
|
2,701,169
|
|
|
|
2,701,169
|
|
Dividends
|
|
|
(150,998
|
)
|
|
|
|
|
|
|
150,998
|
|
Amortization of redemption value of preferred stock
|
|
|
|
|
|
|
(212,007
|
)
|
|
|
(212,007
|
)
|
Net loss
|
|
|
(3,717,207
|
)
|
|
|
(5,807,490
|
)
|
|
|
(2,090,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,670,114
|
|
|
$
|
(5,659,153
|
)
|
|
$
|
(9,329,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,717,207
|
)
|
|
$
|
(5,807,490
|
)
|
|
$
|
(2,090,283
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
916,935
|
|
|
|
424,462
|
|
|
|
(492,473
|
)
|
Depreciation and amortization
|
|
|
131,640
|
|
|
|
131,640
|
|
|
|
|
|
Amortization of discount on debentures
|
|
|
|
|
|
|
177,097
|
|
|
|
177,097
|
|
Interest added to notes payable
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
Noncash issuance of options and preferred stock in lieu of
compensation
|
|
|
59,772
|
|
|
|
235,742
|
|
|
|
175,970
|
|
Deferred income taxes
|
|
|
(2,405,661
|
)
|
|
|
|
|
|
|
2,405,661
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(221,895
|
)
|
|
|
(221,895
|
)
|
|
|
|
|
Prepaid expenses
|
|
|
14,924
|
|
|
|
17,337
|
|
|
|
2,413
|
|
Deposits
|
|
|
(17,334
|
)
|
|
|
(17,334
|
)
|
|
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
222,445
|
|
|
|
222,445
|
|
|
|
|
|
Accrued compensation
|
|
|
135,270
|
|
|
|
(4,525
|
)
|
|
|
(139,795
|
)
|
Accrued expenses
|
|
|
53,231
|
|
|
|
53,231
|
|
|
|
|
|
Customer deposits
|
|
|
(5,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,732,880
|
)
|
|
|
(4,694,290
|
)
|
|
|
38,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(274,450
|
)
|
|
|
(274,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(274,450
|
)
|
|
|
(274,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stockholder loans
|
|
|
1,356,000
|
|
|
|
1,356,000
|
|
|
|
|
|
Principal payments on stockholder loans
|
|
|
(460,000
|
)
|
|
|
(568,559
|
)
|
|
|
(108,559
|
)
|
Principal payments on notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock
|
|
|
15,624
|
|
|
|
15,624
|
|
|
|
|
|
Proceeds from the issuance of preferred stock
|
|
|
5,078,235
|
|
|
|
5,148,204
|
|
|
|
69,969
|
|
Proceeds from preferred stock subscription receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for syndication costs
|
|
|
(257,981
|
)
|
|
|
(257,981
|
)
|
|
|
|
|
Principal payments on capital leases
|
|
|
(46,160
|
)
|
|
|
(46,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,685,718
|
|
|
|
5,647,128
|
|
|
|
(38,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
678,388
|
|
|
|
678,388
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
1,106,064
|
|
|
|
1,106,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
1,784,452
|
|
|
$
|
1,784,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
XStream
Systems, Inc.
September 30,
2009 and December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,659
|
|
|
$
|
120,478
|
|
Inventory
|
|
|
104,999
|
|
|
|
175,721
|
|
Prepaid expenses
|
|
|
174,161
|
|
|
|
31,802
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
300,819
|
|
|
|
328,001
|
|
Property and equipment, net
|
|
|
201,314
|
|
|
|
282,616
|
|
Intangible assets, net
|
|
|
117,519
|
|
|
|
126,095
|
|
Deposits
|
|
|
18,919
|
|
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
638,571
|
|
|
$
|
755,631
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
562,297
|
|
|
$
|
366,853
|
|
Accrued compensation
|
|
|
367,332
|
|
|
|
253,871
|
|
Accrued expenses
|
|
|
447,607
|
|
|
|
72,041
|
|
Customer deposits
|
|
|
10,000
|
|
|
|
10,000
|
|
Notes payable stockholders
|
|
|
43,705
|
|
|
|
89,185
|
|
Current portion of notes payable, net of discount
|
|
|
2,653,810
|
|
|
|
2,507,500
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,084,751
|
|
|
|
3,299,450
|
|
Warrant liability
|
|
|
344,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,429,260
|
|
|
|
3,299,450
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 7.0% and
5.0% cumulative dividend, 962,101 shares authorized, issued
and outstanding
|
|
|
4,345,558
|
|
|
|
4,130,897
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 7.0% and
5.0% cumulative dividend, 1,800,000 shares authorized and
1,619,127 shares issued and outstanding
|
|
|
5,447,444
|
|
|
|
5,177,299
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred stock, $.0001 par value, 7.0% and
5.0% cumulative dividend, 1,350,000 shares authorized and
365,996 and 0 shares issued and outstanding, respectively
|
|
|
1,124,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, 30,000,000 shares
authorized, 1,767,156 and 1,702,156 shares issued and
outstanding at September 30, 2009 and December 31,
2008, respectively
|
|
|
177
|
|
|
|
170
|
|
Additional paid-in capital
|
|
|
1,493,875
|
|
|
|
3,021,994
|
|
Accumulated deficit
|
|
|
(16,202,655
|
)
|
|
|
(14,874,179
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(14,708,603
|
)
|
|
|
(11,852,015
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
638,571
|
|
|
$
|
755,631
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-25
XStream
Systems, Inc.
Nine
Months Ended September 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
271,520
|
|
|
$
|
260,000
|
|
Cost of revenues
|
|
|
143,531
|
|
|
|
59,844
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
127,989
|
|
|
|
200,156
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
555,820
|
|
|
|
851,021
|
|
General and administrative
|
|
|
601,424
|
|
|
|
666,143
|
|
Research and development
|
|
|
440,403
|
|
|
|
497,739
|
|
Royalty fees
|
|
|
375,000
|
|
|
|
225,000
|
|
Stock compensation expense
|
|
|
229,907
|
|
|
|
177,331
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,202,554
|
|
|
|
2,417,234
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,074,565
|
)
|
|
|
(2,217,078
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
513
|
|
|
|
16,204
|
|
Interest expense
|
|
|
(159,015
|
)
|
|
|
(103,836
|
)
|
Warrant income
|
|
|
904,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
746,089
|
|
|
|
(87,632
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,328,476
|
)
|
|
|
(2,304,710
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,328,476
|
)
|
|
|
(2,304,710
|
)
|
Preferred stock dividend and accretion
|
|
|
(1,357,181
|
)
|
|
|
(4,167,826
|
)
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(2,685,657
|
)
|
|
$
|
(6,472,536
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(1.54
|
)
|
|
$
|
(3.80
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,732,632
|
|
|
|
1,702,156
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-26
XStream
Systems, Inc.
Nine
Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Balance (deficit) at December 31, 2008
|
|
$
|
170
|
|
|
$
|
3,021,994
|
|
|
$
|
(14,874,179
|
)
|
|
$
|
(11,852,015
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
229,907
|
|
|
|
|
|
|
|
229,907
|
|
Issuance of common stock
|
|
|
7
|
|
|
|
7,143
|
|
|
|
|
|
|
|
7,150
|
|
Accretion of redemption value of preferred stock and dividends
|
|
|
|
|
|
|
(1,357,181
|
)
|
|
|
|
|
|
|
(1,357,181
|
)
|
Syndication costs
|
|
|
|
|
|
|
(4,339
|
)
|
|
|
|
|
|
|
(4,339
|
)
|
Impact of initial adoption of recent accounting pronouncement
(Note 1)
|
|
|
|
|
|
|
(403,649
|
)
|
|
|
|
|
|
|
(403,649
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(1,328,476
|
)
|
|
|
(1,328,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at September 30, 2009
|
|
$
|
177
|
|
|
$
|
1,493,875
|
|
|
$
|
(16,202,655
|
)
|
|
$
|
(14,708,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-27
XStream
Systems, Inc.
Nine
Months Ended September 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,328,476
|
)
|
|
$
|
(2,304,710
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
229,907
|
|
|
|
177,331
|
|
Depreciation and amortization
|
|
|
89,878
|
|
|
|
98,283
|
|
Change in fair value of warrants
|
|
|
(904,591
|
)
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
9,247
|
|
Accrued interest on notes payable
|
|
|
146,310
|
|
|
|
80,056
|
|
Non-cash stock issuance in lieu of compensation
|
|
|
|
|
|
|
49,998
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
70,722
|
|
|
|
2,188
|
|
Prepaid expenses
|
|
|
(142,359
|
)
|
|
|
4,424
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
195,444
|
|
|
|
(381,020
|
)
|
Accrued compensation
|
|
|
113,461
|
|
|
|
(88,057
|
)
|
Accrued expenses
|
|
|
375,566
|
|
|
|
223,142
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,154,138
|
)
|
|
|
(2,129,118
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
|
(3,000
|
)
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(2,800
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Principal payments on stockholder loans
|
|
|
(45,480
|
)
|
|
|
(265,263
|
)
|
Principal payments on notes payable
|
|
|
|
|
|
|
(50,000
|
)
|
Proceeds from the issuance of common stock
|
|
|
7,150
|
|
|
|
|
|
Proceeds from the issuance of preferred stock
|
|
|
1,097,988
|
|
|
|
1,064,327
|
|
Payments for syndication costs
|
|
|
(4,339
|
)
|
|
|
(25,918
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,055,319
|
|
|
|
723,146
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(98,819
|
)
|
|
|
(1,408,772
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
120,478
|
|
|
|
1,784,452
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
21,659
|
|
|
$
|
375,680
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
9,336
|
|
|
$
|
17,235
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-28
XStream
Systems, Inc.
|
|
Note 1.
|
Nature of
Operations and Significant Accounting Policies
|
Nature of Operations: XStream Systems,
Inc. (the Company) produces next generation X-ray
systems for material identification and detection markets. The
Companys patented systems are based on energy-dispersive
X-ray
diffraction (EDXRD). The Companys products enable
on-site,
real-time material identification to the pharmaceutical markets.
The Company has its corporate and financial offices in
Sebastian, Florida. Manufacturing of the systems is completed by
the Companys contract manufacturer. The Company was
founded in 2004.
Basis of Presentation: The accompanying
unaudited financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in
the United States of America for interim financial reporting.
Accordingly, they do not include all of the information and
related footnotes that would normally be required by accounting
principles generally accepted in the United States of America
for complete financial reporting. These unaudited condensed
financial statements should be read in conjunction with the
Companys audited financial statements for the year ended
December 31, 2008.
The accompanying unaudited condensed financial statements
include all adjustments (consisting of a normal and recurring
nature) that management considers necessary for a fair statement
of financial information for the interim periods. Interim
results are not necessarily indicative of the results that may
be expected for the remainder of the year ending
December 31, 2009.
Managements Plans, Liquidity and
Profitability: As shown in the accompanying
financial statements, the Company incurred net losses for the
nine months ending September 30, 2009 and 2008 of
$1,316,666 and $2,304,710, respectively, and cumulative losses
since inception of $16,190,845. The Company has consistently
generated negative cash flows from operations and as of
September 30, 2009, the Companys current liabilities
exceeded its current assets by $3,772,122. Those factors, as
well as the uncertainty regarding the ability to obtain
additional working capital and the uncertainty regarding market
acceptance of the XT250 product, create overall uncertainty
about the Companys ability to continue as a going concern.
Management of the Company has raised additional working capital
through issuance of Series D Redeemable Convertible
Preferred Stock (see Note 7), and is actively seeking
additional funding for working capital. The Company does not
currently maintain a line of credit or term loan with any
commercial bank or other financial institution and has not made
any other arrangements to obtain additional financing. The
Company can provide no assurance that it will not require
additional financing. Likewise, the Company can provide no
assurance that if additional financing is needed that it will be
available in an amount or on terms acceptable to the Company, if
at all. If the Company is unable to obtain additional funds when
they are needed or if such funds cannot be obtained on favorable
terms, the Company may be unable to execute upon its business
plan or pay its costs and expenses as they are incurred, which
could have a material, adverse effect on the Companys
business, financial condition and results of operations. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
A summary of the Companys significant accounting policies
follows:
Revenue recognition: The Companys
XT250 systems include software embedded in the tangible product
that is essential to its functionality. The software does not
require significant production, modification or customization.
Revenue from the sale of our XT250 systems is recognized when
all of the following criteria have been met:
a. persuasive evidence of an arrangement exists,
b. delivery has occurred,
c. the vendors fee is fixed or determinable, and
d. collectibility is probable.
F-29
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
While the Company engages in strategic pilot programs with
pharmaceutical manufacturers and distributors, revenue is not
recognized until the unit is sold, delivered, installed and
accepted, and collection of the sales price is probable.
The Company has two pricing models including wholesale pricing
for distributors who are authorized sales agents and retail
pricing to third party end-users.
Prior to installation, deposits are ordinarily required from
customers before manufacturing commences. These amounts are
recorded as customer deposits in current liabilities on the
accompanying balance sheets.
There are no post-installation obligations other than warranty
of the equipment for one year after installation. Warranty
expense is estimated based on historical results and is accrued
at the time the revenue is recognized.
Fair value measurement: In September
2006, the FASB issued accounting guidance Fair Value
Measurements, which requires assets and liabilities recorded
at fair value in the balance sheets be categorized based upon
the level of judgment associated with the inputs used to measure
their fair value. (See Note 3, Fair Value
Measurements, for additional disclosures.)
Preferred stock and warrants: The
Company has issued redeemable convertible preferred stock with
detachable warrants for the purchase of common stock. The
Company reviews the conversion terms for indications requiring
bifurcation and separate accounting for the embedded conversion
feature. Generally, embedded conversion features where the
ability to physical or net-share settle the conversion option is
not within the control of the Company are bifurcated and
accounted for as derivative financial instruments. Other
convertible instruments that are not derivative financial
instruments are accounted for by recording the intrinsic value,
if any, of the embedded conversion feature as a discount from
the initial value of the instrument and accreting such discount
back to face value over the term of the instrument using the
effective interest rate method.
Detachable warrants are evaluated to determine if they are
liability instruments or equity instruments. Warrants determined
to be liability instruments are carried at fair value. For
warrants determined to be equity instruments, the issuance price
of the stock and warrants is allocated between the stock and the
warrants based on the relative fair value of those instruments
at the date of issuance. The amount allocated to the warrants is
recognized as additional paid in capital and is not adjusted
subsequent to issuance.
Redeemable preferred stock that is redeemable at the option of
the holder is not reported as permanent equity, but rather as
mezzanine equity and is initially carried at fair value at the
date of issuance. Subsequent to issuance, stock that is
redeemable currently is adjusted to its maximum redemption
amount at each balance sheet date. Stock that is not redeemable
currently is accounted for by accreting changes in the
redemption value and discounts over the period from the date of
issuance to the earliest redemption date of the security using
the interest method.
Stock-based compensation: The Company
measures and recognizes stock-based compensation expense at the
fair value of the awards. Compensation expense for awards and
related tax effects are recognized as the awards vest. The
Company uses the Black-Scholes Option Pricing Model to determine
the fair value of options issued.
Segment reporting: The Company offers
direct sales of our
XT250tm
systems to customers, three-way revenue sharing arrangements
between us, pharmaceutical manufacturers/distributors/chain
retailers, and a return goods processing center, with payments
to us based on a
pay-per-scan
service fee on returns, recalls and suspected diverted
products; and PILOT programs whereby manufacturers will host our
system for use on a trial basis, providing our host manufacturer
with an option to purchase the system following PILOT testing.
To date, the Company has not generated revenues from a three-way
revenue sharing arrangement or a PILOT program. The Company
operates in one operating segment as no discrete financial
information other than Company-wide information is available or
utilized by the Company.
Earnings per share: Basic earnings per
share are computed by dividing the net loss by the
weighted-average number of common shares outstanding during the
period. The diluted earnings per share is computed by giving
F-30
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
effect to all potentially dilutive common shares, including
stock options. For the nine months ended September 30, 2009
and 2008, we reported a net loss; therefore, common stock
equivalents were excluded in the computation of diluted earnings
per share as the effect was anti-dilutive.
Recent accounting pronouncements: In
June 2008, the FASB issued guidance in determining whether an
instrument (or an embedded feature) is indexed to an
Entitys Own Stock. This guidance provides that an entity
should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
It also clarifies on the impact of foreign currency denominated
strike prices and market based employee stock option valuation
instruments on the evaluation. The guidance is effective for
fiscal years beginning after December 15, 2008. As of
January 1, 2009, the adoption of this guidance resulted in
a reclassification of the fair value of certain outstanding
warrants from stockholders equity to liability. The fair
value of the warrants was determined by using the Black-Scholes
option pricing model. The initial value of the warrants at
adoption was approximately $403,649. Additionally, the Company
notes that upon adoption of guidance, the warrants will be
marked to market at each reporting period. For the nine month
period ended September 30, 2009, the Company recorded
income from the change in fair value of the warrants of $904,591
for the decrease in the fair value related to the warrants. (See
Note 3, Fair Value Measurements, for additional
disclosures.)
In October 2009, the FASB issued guidance on certain revenue
arrangements that include software elements. The amendments in
the update clarify the applicability of the FASB guidance on
software revenue recognition that affect vendors that sell
tangible products in an arrangement containing software that is
more than incidental to the tangible product being sold, and
clarifies what guidance should be used in allocating and
measuring revenue. The update excludes tangible products
containing software and non-software components that function
together to deliver the tangible products essential
functionality from FASB guidance on software revenue
recognition. The guidance is effective prospectively for fiscal
years beginning on or after June 15, 2010. This guidance
does not impact our current financial statements and is not
expected to have an impact on the Companys financial
position, results of operations and cash flows.
The Company adopted the FASB issued guidance surrounding
uncertain tax positions on January 1, 2007. As a result of
the implementation, the Company determined that no material
adjustment was required; there were no unrecognized tax
benefits, and accordingly no associated interest and penalties
were required to be accrued at December 31, 2008 and 2007,
respectively. At September 30, 2009 there has been no
material change in unrecognized tax benefits or associated
interest and penalties.
A valuation allowance is required to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is
more likely than not that some portion or all of the deferred
tax assets will not be realized. After consideration of all the
evidence, both positive and negative, management has determined
that a $5,696,372 and $5,295,473 valuation allowance at
September 30, 2009 and December 31, 2008,
respectively, is necessary to reduce the deferred tax assets to
the amount that will more likely than not be realized. The
change in the valuation allowance for the current period is
$400,899.
At September 30, 2009 and December 31, 2008, the
Company has available net operating loss carryforwards of
$14,865,325 and $13,030,794 respectively, which will expire in
the years
2024-2029.
The Companys ability to utilize these net operating losses
to offset future taxable income of the Company may be limited
under the Internal Revenue Code Section 382 Change in
Ownership Rules. Management is in the process of evaluating if a
change in ownership has occurred to limit the net operating
losses.
F-31
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
Note 3.
|
Fair
Value Measurements
|
The Company carries various assets and liabilities at fair value
in the Balance Sheets. The most significant assets and
liabilities are accounts payable, accrued expenses, notes
payable, warrant liability and the Companys Preferred
Stock which is classified as mezzanine equity. Fair value
represents the exchange price that would be received for an
asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
The FASB specifies a hierarchy of valuation techniques based on
whether the inputs to those valuation techniques are observable
or unobservable. In accordance with the FASB, these inputs are
summarized in the three broad levels listed below:
|
|
|
|
|
Level 1 Quoted prices in active markets
for identical securities;
|
|
|
|
Level 2 Other significant observable
inputs that are observable through corroboration with market
data (including quoted prices in active markets for similar
securities);
|
|
|
|
Level 3 Significant unobservable inputs
that reflect managements best estimate of what market
participants would use in pricing the asset or liability.
|
For certain of the Companys financial instruments
including cash and cash equivalents, accounts payable, accrued
expenses, notes payables to stockholders and current portion of
notes payable the carrying values approximate fair value due to
their short-term nature. The Company uses level 3 inputs to
determine the fair value of its warrant liability.
A summary of the analysis of the Companys warrant
liability at fair value is as follows:
|
|
|
|
|
|
|
Warrant Liability
|
|
|
Fair value of warrants, January 1, 2009 (initial
adoption)
|
|
$
|
403,649
|
|
New warrant issuances Series C Preferred
Stock
|
|
|
845,451
|
|
Change in fair market value
|
|
|
(904,591
|
)
|
|
|
|
|
|
Warrant Liability, September 30, 2009
|
|
$
|
344,509
|
|
|
|
|
|
|
The fair value of the warrants was determined by using the
Black-Scholes option pricing model. The Company identified two
public companies similar in nature. There are no public
companies of similar size that management is aware of.
Historical prices were obtained to calculate estimated
volatility for the period consistent with the expected term set
forth. The assumptions used to value the warrants on the date of
adoption and September 30, 2009 are as follows:
|
|
|
|
|
|
|
January 1,
|
|
September 30,
|
|
|
2009
|
|
2009
|
|
Exercise price of warrants
|
|
$3.00
|
|
$3.00
|
Risk-free interest rate
|
|
1.55%
|
|
2.31%
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
Expected volatility
|
|
45.34%
|
|
44.76% - 44.90%
|
Weighted average expected life to maturity
|
|
5 years
|
|
4 - 5 years
|
F-32
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
Note 4.
|
Share-Based
Payments
|
The following is an analysis of options to purchase shares of
the Companys stock issued and outstanding as of
September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at beginning of period
|
|
|
1,539,760
|
|
|
$
|
2.57
|
|
|
|
901,991
|
|
|
$
|
2.80
|
|
Granted
|
|
|
516,769
|
|
|
|
0.69
|
|
|
|
728,164
|
|
|
|
2.56
|
|
Exercised
|
|
|
(65,000
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(14,255
|
)
|
|
|
0.90
|
|
|
|
(156,025
|
)
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at period-end
|
|
|
1,977,274
|
|
|
$
|
2.17
|
|
|
|
1,474,130
|
|
|
$
|
2.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at period-end
|
|
|
1,682,374
|
|
|
$
|
2.37
|
|
|
|
1,356,673
|
|
|
$
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term of outstanding options
|
|
|
|
|
|
|
8.01 years
|
|
|
|
|
|
|
|
8.52 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term of vested options
|
|
|
|
|
|
|
7.86 years
|
|
|
|
|
|
|
|
8.20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys nonvested shares
as of September 30, 2009 and 2008 and changes during the
years ended September 30, 2009 and 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at beginning of period
|
|
|
99,344
|
|
|
$
|
1.48
|
|
|
|
176,557
|
|
|
$
|
1.77
|
|
Granted
|
|
|
516,769
|
|
|
|
0.38
|
|
|
|
728,164
|
|
|
|
0.14
|
|
Vested
|
|
|
(306,958
|
)
|
|
|
0.21
|
|
|
|
(722,761
|
)
|
|
|
0.20
|
|
Forfeited
|
|
|
(14,255
|
)
|
|
|
0.54
|
|
|
|
(64,503
|
)
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at period end
|
|
|
294,900
|
|
|
$
|
0.63
|
|
|
|
117,457
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009 and 2008, there was $178,130 and
$274,951 respectively, of total unrecognized compensation cost
related to nonvested share-based compensation arrangements
granted. That cost is expected to be recognized over a weighted
average period of 1.5 years.
|
|
Note 5.
|
Preferred
Stock and Warrants
|
Series C Redeemable Convertible Preferred
Stock: The Company issued a total of
365,996 shares designated Series C Redeemable
Preferred Stock during the nine month period ending
September 30, 2009. The Series C Redeemable
Convertible Preferred Stock has a par value of $.0001 and has a
liquidation value of $3.00 plus a rate of return equal to 5% per
annum, compounded annually, per share. The Series C
Redeemable Convertible Preferred Stock is convertible at the
request of the holders of Series C Preferred Stock. The
Series C Preferred Stock is redeemable at any time on or
after March 14, 2012, upon the request of the holders of at
least a majority of the then outstanding shares of Series C
Preferred. The holders of the then outstanding Series C
Preferred shall have the right to require the Company to redeem
all or any of their shares of Series C preferred at a price
per share equal to the Series C Liquidation Value plus a
rate of return on such amount equal to 5% per annum, compounded
annually.
F-33
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Dividends on the Series C Redeemable Convertible Preferred
Stock will accrue daily at 5% per annum except upon an event of
noncompliance, as described above, after which the dividend rate
shall be increased to 7% per annum. An event of noncompliance
occurred on September 16, 2008 as the Company was in
default of a loan agreement with its contract manufacturer and
as the default was greater than $100,000 the dividend rate was
7% upon issuance.
The issuance of the Series C Redeemable Convertible
Preferred Stock and warrants generated net cash proceeds of
$1,097,988, after transaction fees and expenses. The Company
used the net cash proceeds for operational purposes. The
purchase price allocated between the Series C Redeemable
Preferred Stock and the Series C warrants was determined by
the board of directors based on the most recent stock and
warrants issuance, which occurred on May 30, 2008. The
Preferred Series C Stock was valued at $.69 per share and
each warrant was valued at $.462 per share of common stock to be
issued, collectively the $3.00 per unit offering price. The
Board of Directors believes this price continues to represent
the fair value of the Company based on the current market
conditions in the industry.
The warrants were recorded as liabilities in accordance with the
FASB guidance issued in June 2008 regarding determining whether
an instrument (or an embedded feature) is indexed to an
Entitys Own Stock (See Note 1 Recent
Accounting Pronouncements) and are marked to market at each
reporting period.
During the nine month periods ended September 30, 2009 and
2008, the Company issued warrants to purchase approximately
1,829,980 and 1,711,540 shares of common stock,
respectively. Under the terms of the warrant agreements, the
warrants are exercisable for shares of the Companys
$.0001 par value common stock, with a strike price of $3.00
per share and are exercisable for a period of 10 years.
A summary of the status of the Companys warrants related
to the issuance of debentures and preferred stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Beginning balance of warrants
|
|
|
8,431,635
|
|
|
|
2.98
|
|
|
|
|
|
|
|
6,720,095
|
|
|
|
2.97
|
|
|
|
|
|
Warrants issued
|
|
|
1,829,980
|
|
|
|
3.00
|
|
|
|
|
|
|
|
1,711,540
|
|
|
|
3.01
|
|
|
|
|
|
Warrants exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, year end
|
|
|
10,261,615
|
|
|
|
2.98
|
|
|
|
8.38
|
|
|
|
8,431,635
|
|
|
|
2.98
|
|
|
|
9.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At any time, holders of Preferred Stock have the right to
convert all or any portion of their shares of Preferred Stock
into shares of common stock. All shares of Preferred Stock
automatically convert into common stock upon (A) the
affirmative written consent of the holders of at least a
majority of the outstanding shares of Preferred Stock or
(B) any offering by the Company of debt or equity
securities to the public pursuant to an effective registration
statement under the Securities Act of 1933.
|
|
Note 6.
|
Commitments &
Contingency
|
Operating lease: The Company leases its
main office and engineering facility under operating leases for
terms remaining from two to four years through February 28,
2012. Lease expense for the nine months ended September 30,
2009 and 2008 is $79,993 and $102,627, respectively, which
includes expenses related to common
F-34
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
area maintenance. Future minimum lease payments under the
operating leases are as follows for the years ending December 31:
|
|
|
|
|
2009
|
|
$
|
35,171
|
|
2010
|
|
|
119,771
|
|
2011
|
|
|
124,562
|
|
2012
|
|
|
20,894
|
|
2013
|
|
|
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
300,398
|
|
|
|
|
|
|
Royalty payments: As required under the
license agreement entered into by the Company with a university
for exclusive rights to produce and sell products which utilize
the universitys patented X-ray diffraction technology, the
Company has agreed to pay the university a minimum annual
royalty for a term of 15 years, which was the remaining
life of the patent at the inception of the agreement. Minimum
annual royalty payments under the license agreement are as
follows for the years ending December 31:
|
|
|
|
|
2009
|
|
$
|
500,000
|
|
2010
|
|
|
500,000
|
|
2011
|
|
|
500,000
|
|
2012
|
|
|
500,000
|
|
2013
|
|
|
500,000
|
|
Thereafter
|
|
|
3,000,000
|
|
|
|
|
|
|
Total minimum royalty payments
|
|
$
|
5,500,000
|
|
|
|
|
|
|
Royalty expense for the nine months ended September 30,
2009 and 2008 was $375,000 and $225,000, respectively. Under the
terms of the agreement those were the minimum payments due for
the nine months ended September 30, 2009 and
December 31, 2008, respectively. Accrued expense at
September 30, 2009 includes $375,000 of accrued royalties.
The Company is currently in arrears with respect to payment of
$300,000 of accrued royalty fees. The licensing agreement
provides that if either party breaches or fails to perform any
provision of the Agreement, the other party may give written
notice of the default to the breaching party. The Company has
received an offer from Rutgers University to settle the
outstanding amounts under the license agreement including
payment of an additional 3.5% of each sale of an XT
250 unit and issuance of shares of common stock in the
Company. To date, however, a forbearance agreement has not been
executed and the default under the agreement has not been cured.
The loss of, or our inability to maintain, this license could
result in our inability to sell our products including the
XT 250 systems without liability exposure. As a general
matter, we anticipate that we will continue to license
technology from third parties in the future. This technology may
not continue to be available on commercially reasonable terms,
if at all. Other than the licensed technology from Rutgers
University, we do not believe that we are substantially
dependent on any individual licensed technology. However, some
of the software that we license from third parties could be
difficult for us to replace. The loss of any of these technology
licenses could result in delays in the licenseof our products
until equivalent technology, if available, is developed or
identified, licensed and integrated.
The use of additional third-party software would require us to
negotiate license agreements with other parties, which could
result in higher royalty payments and a loss of product
differentiation, which could negatively impact our operating
results and financial condition.
F-35
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
On March 12, 2009, the Company entered into a marketing
agreement which is owned by a member of the Companys board
of directors. The marketing agreement engages them to market the
Companys
XT250tm
product in exchange for commissions at fifteen percent of the
actual purchase price of any
XT250tm
system sold by them. During the nine month period ended
September 30, 2009 payments of $13,878 were paid to the
director under the marketing agreement.
|
|
Note 8.
|
Subsequent
Events
|
Subsequent to September 30, 2009, the Company issued
563,414 shares of Series D Redeemable Convertible
Preferred Stock. The Series D Redeemable Convertible
Preferred Stock has a par value of $.0001 and has a liquidation
value of $3.00 plus a rate of return equal to 5% per annum,
compounded annually, per share. The Series D Redeemable
Convertible Preferred Stock is convertible at the request of the
holders of Series D Preferred Stock. The additional
issuance of the Series C Redeemable Convertible Preferred
Stock generated net cash proceeds of $1,690,242, after
transaction fees and expenses. The Company used the net cash
proceeds for operational purposes.
The Series D Preferred is redeemable at any time on or
after March 14, 2012, upon the request of the holders of at
least a majority of the then outstanding shares of Series D
Preferred, each of the holders of the then outstanding
Series D Preferred shall have the right to require the
Company to redeem all or any of their shares of Series D
preferred at a price per share equal to the Series D
Liquidation Value plus a rate of return on such amount equal to
7% per annum, compounded annually. Dividends on the
Series D Preferred accrue daily at 5% per annum except upon
an event of noncompliance after which the dividend rate shall be
increased to 7% per annum.
On September 16, 2008, Kimball International, Inc. and
Kimball Electronics, Inc. (Kimball) filed suit
against the Company. Kimball filed three claims against the
Company including a claim alleging the Company defaulted on a
$2,000,000 loan provided by Kimball to the Company, breach of a
reserve capacity agreement and breach of a supplier agreement.
On June 30, 2009, the District Court ordered a partial
judgment in favor of Kimball in the amount of $2,000,000 against
the Company, which was recorded in the accompanying balance
sheet as of December 31, 2008. On December 23, 2009,
the Company and Kimball entered into a settlement agreement (the
Agreement). In connection with the Agreement the
Company provided to Kimball an executed Agreed Judgment in favor
of Kimball in the amount of Three Million Two Hundred Thousand
Dollars ($3,200,000.00) (the Agreed Judgment). We
agreed to make payments to Kimball via wire transfer or
certified funds as follows: (i) one (1) payment of Six
Hundred Thousand Dollars ($600,000.00) to be made on or before
December 31, 2009; and (ii) one (1) final payment
of Two Million, Six Hundred Thousand Dollars ($2,600,000) to be
made on or before January 31, 2010. Upon remittance of the
final payment, the Company will take ownership of any remaining
inventory, as well as any machinery, equipment, designs and
tooling developed or purchased with the proceeds of the term
loan at Kimballs plant in Jasper, Indiana. After the
Company made the initial $600,000 payment to Kimball, the
parties agreed to commence discussions to develop terms under
which Kimball will continue manufacturing the Companys
product and have agreed to negotiate in good faith thereafter.
The Company intends to vigorously pursue the settlement which
will include terms under which Kimball will continue to supply
XT250tm
units and allocate a portion of the payments to be made by us
under the settlement agreement to the approximately $780,000 in
XT250tm
inventory in Kimballs possession. On February 2, 2010
Kimball filed the Agreed Judgment after the Company did not make
the payment due on January 31, 2010. On February 10,
2010, Kimball filed a motion for proceedings supplemental to
collect the remaining $2.6 million balance due on the $3.2
million judgment. The Company has requested Kimball to withdraw
the Agreed Judgment and continue discussions. If this is
unsuccessful the Companys results of operations will be
adversely affected and the Company will be required to identify
a new manufacturer of our
XT250tm
unit. There is significant uncertainty whether the Company will
reach a compromise with Kimball to continue to manufacture the
XT250tm units.
On November 6, 2009, the Companys shareholders
approved an increase in the authorized common stock by
30,000,000 shares, which the Companys board of
directors had previously approved on August 14, 2009. As a
F-36
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
result, the total number of shares of Common Stock that the
Company is authorized to issue is 60,000,000 shares, each
with a par value of $.0001 per share.
On November 6, 2009, the Companys shareholders
approved the XStream Systems, Inc. 2009 Long Term Compensation
Plan, which the Companys board of directors had previously
adopted on August 14, 2009. Pursuant to this Plan,
incentive stock options, non-qualified options, restricted stock
awards, deferred stock awards, bonus stock and awards in lieu of
obligations, dividends equivalents, performance awards and other
stock based awards to purchase an aggregate of
5,000,000 shares of common stock may be issued, as
adjusted. As of December 30, 2009, there are 1,000,000
incentive awards outstanding under the Plan.
Subsequent to September 30, 2009, the Companys
President, Mr. Brian T. Mayo delivered a demand letter to
our management, dated November 16, 2009, alleging the
Companys breach of his executive employment agreement.
Mr. Mayo claims in the demand letter that, among other
breaches regarding his position and the corporate reporting
structure, subsequent to September 30, 2009 his base salary
was reduced in breach of his executive employment agreement.
Mr. Mayo requested restoration of his salary to the amounts
set forth by his executive employment agreement and payment of
his base salary since the date his salary was reduced.
Beginning in 2006, a portion of Mr. Mayos salary was
deferred. Through September 30, 2009 the Company has
accrued the deferred portion of approximately $327,000 for the
difference between Mr. Mayos salary level, as set
forth in his executive employment agreement, and amounts paid to
him. As of December 30, 2009, a litigation proceeding has
not been filed with respect to this matter. Management of the
Company believes the claims in the demand letter are without
merit and is attempting to resolve the matter amicably with
Mr. Mayo.
Subsequent to September 30, 2009 the Company initiated the
process of going through an initial public offering. The Company
is offering 2,500,000 shares of their common stock and
5% subordinated convertible debentures convertible into
shares of our common stock. The Company is not using an
underwriter for their offering of securities.
The Company is conducting this offering as a self-underwriting
on a best efforts basis through their officers and directors.
Management has assessed subsequent events through
December 30, 2009, the date the financial statements were
available to be issued.
F-37
2,500,000 Shares of Common
Stock
$5.0 million of
5% Subordinated Convertible Debentures
12,742,685 Warrants
PROSPECTUS
Until ,
2010 ( days after the commencement of this offering), all
dealers that buy, sell or trade shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This delivery requirement is in
addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold
allotments or subscriptions.
, 2010
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
|
|
|
|
|
Registration fees
|
|
$
|
2,427.30
|
|
NASDAQ fees
|
|
$
|
5,000.00
|
|
Transfer agent fees
|
|
|
*
|
|
State taxes
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Blue sky fees
|
|
|
*
|
|
Acounting fees and expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be included by amendment |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Under the General Corporation Law of the State of Delaware, we
can indemnify our directors and officers against liabilities
they may incur in such capacities, including liabilities under
the Securities Act of 1933, as amended (the Securities
Act). Our certificate of incorporation provides that,
pursuant to Delaware law, our directors shall not be liable for
monetary damages for breach of the directors fiduciary
duty of care to us and our stockholders. This provision in the
certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such
as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the
directors duty of loyalty to us or our stockholders, for
acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for any transaction
from which the director directly or indirectly derived an
improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a
directors responsibilities under any other law, such as
the federal securities laws or state or federal environmental
laws.
Our amended and restated by-laws provide for the indemnification
of our directors and officers to the fullest extent permitted by
the Delaware General Corporation Law. We are not, however,
required to indemnify any director or officer in connection with
any (i) willful misconduct, (ii) willful neglect, or
(iii) gross negligence toward or on behalf of us in the
performance of his or her duties as a director or officer. We
are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any
director or officer in connection with that proceeding on
receipt of any undertaking by or on behalf of that director or
officer to repay those amounts if it should be determined
ultimately that he or she is not entitled to be indemnified
under our amended and restated by-laws or otherwise.
We have entered into indemnification agreements with our
directors providing that in consideration of the director
rendering valuable services to us, we agree that in the event an
indemnitee is or becomes a party to or witness or other
participant in, or is threatened to be made a party to or
witness or other participant in, a claim by reason of an
indemnifiable event, we will indemnify an indemnitee to the
fullest extent authorized by law, against any and all losses and
expenses, including all interest, assessments and other charges
paid or payable in connection with or in respect of such losses
and expenses of such claim, whether or not such claim proceeds
to judgment or is settled or otherwise is brought to a final
disposition, subject in each case, to the further provisions of
the agreement. The indemnity agreement provides certain
limitations on indemnification, including that the indemnitee
will not be indemnified and held harmless from any losses or
expenses which have been determined to constitute an excluded
claim, or that the indemnitee is indemnified by us and has
actually received payment pursuant to the certificate of
II-1
incorporation, D&O insurance or otherwise, or in connection
with any claim initiated by indemnitee unless we have joined in
or the board of directors has authorized such claim.
We have been advised that, in the opinion of the SEC, any
indemnification for liabilities arising under the Securities Act
is against public policy, as expressed in the Securities Act,
and is, therefore, unenforceable.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
XStream Systems, Inc. sold the following securities within the
past three years without registering the securities under the
Securities Act.
Sales of
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of Shares of
|
|
|
|
|
Date
|
|
Purchaser
|
|
Price
|
|
Common Stock
|
|
|
Proceeds
|
|
|
8/25/2006
|
|
A sophisticated investor which was provided access to Company
management and information
|
|
$3.80
|
|
|
13,158
|
|
|
$
|
50,000.00
|
|
9/29/2006
|
|
A sophisticated investor which was provided access to Company
management and information
|
|
$2.34
|
|
|
153
|
|
|
$
|
358.02
|
|
9/30/2006
|
|
A sophisticated investor which was provided access to Company
management and information
|
|
$3.80
|
|
|
13,158
|
|
|
$
|
50,000.00
|
|
10/11/2006
|
|
A sophisticated investor which was provided access to Company
management and information
|
|
$3.80
|
|
|
13,158
|
|
|
$
|
50,000.00
|
|
12/19/2006
|
|
An employee with access to Company management and information
|
|
$.10
|
|
|
800
|
|
|
$
|
0.00
|
|
12/20/2006
|
|
An employee with access to Company management and information
|
|
$.10
|
|
|
800
|
|
|
$
|
0.00
|
|
5/17/2007
|
|
Director of the Company
|
|
$3.80
(compensation for services performed other than
board services)
|
|
|
2,500
|
|
|
$
|
0.00
|
|
5/17/2007
|
|
An employee with access to Company management and information
|
|
$3.80
|
|
|
72
|
|
|
$
|
0.00
|
|
10/11/2007
|
|
A sophisticated investor which was provided access to Company
management and information
|
|
$2.34
(exercise of warrants)
|
|
|
2,500
|
|
|
$
|
5,850.00
|
|
5/26/2009
|
|
Director and executive officer of the Company
|
|
$.11
(exercise of option granted in 2004)
|
|
|
65,000
|
|
|
$
|
7,150.00
|
|
Sales of
Convertible Securities
On December 19, 2006, we issued a convertible promissory
note in the principal amount of $100,000, payable on demand at
any time on or after February 28, 2007. In accordance with
the terms of the note, on March 14, 2007,
II-2
all of the principal and interest due on the note was converted
into 26,867 shares of Series A Redeemable Convertible
Preferred Stock, $.0001 par value per share (the
Series A Preferred Stock).
On various dates from August 31, 2005 to March 14,
2006, we sold debentures in the aggregate principal amount of
$1,525,000 to accredited investors. In connection with such
sale, each investor received a ten-year warrant to purchase
5,000 shares of common stock at a price of $2.34 per share
for each $25,000 in principal amount of debentures. As a result,
we issued warrants to purchase an aggregate of
305,000 shares of common stock. On December 19, 2007,
in connection with an amendment to two of the debentures in the
aggregate amount of $250,000, the investors received additional
ten-year warrants to purchase an aggregate of 25,000 shares
of common stock at a price of $3.00 per share. On
December 21, 2007, an aggregate of $1,008,744 in principal
amount and accrued but unpaid interest due on certain debentures
was converted into an aggregate of 336,248 shares of
Series B Redeemable Convertible Preferred Stock,
$.0001 par value per share (the Series B
Preferred Stock).
In connection with a secured, revolving, demand promissory note
dated November 16, 2006, we issued the holder of the note a
warrant to purchase an aggregate of 21,000 shares of common
stock at an exercise price of $3.80 per share on
January 25, 2008.
On various dates from December 14, 2006 to December 4,
2007, we sold short term convertible promissory notes to
accredited investors in the aggregate principal amount of
$1,211,000. On March 14, 2007, $330,955 in principal amount
and accrued but unpaid interest due on the notes was
subsequently converted into an aggregate of 87,094 shares
of Series A Preferred Stock. On December 21, 2007,
$894,348 in principal amount and accrued but unpaid interest due
on the notes was converted into an aggregate of
298,116 shares of Series B Preferred Stock. These
securities were sold pursuant to the exemption from registration
requirements provided by Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder.
By stock purchase agreement dated March 14, 2007, as
amended from time to time, we issued an aggregate of
962,101 shares of Series A Preferred Stock to
accredited investors. The shares of Series A Preferred
Stock were issued at a purchase price of $3.80 per share,
resulting in $3,655,955 of gross proceeds, part of which
consisted of conversion of outstanding debt in the aggregate
amount of $330,955 including accrued but unpaid interest. These
securities were sold pursuant to the exemption from registration
requirements provided by Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder.
On various dates from December 2007 through June 2008, we issued
an aggregate of 1,619,127 shares of Series B Preferred
Stock to accredited investors. The shares of Series B
Preferred Stock were issued at a purchase price of $3.00 per
share, resulting in $4,857,381 of gross proceeds, part of which
consisted of the conversion of outstanding debt in the aggregate
amount of $1,903,092 including accrued but unpaid interest and
services valued at approximately $100,000. In addition, each
investor received for each share of Series B Preferred
Stock purchased, one ten-year warrant to purchase five shares of
the Companys common stock at an exercise price of $3.00
per share. These securities were sold pursuant to the exemption
from registration requirements provided by Section 4(2) of
the Securities Act and Rule 506 promulgated thereunder.
On various dates from March 2009 through August 2009, we issued
an aggregate of 365,996 shares of Series C Redeemable
Convertible Preferred Stock, $.0001 par value per share
(the Series C Preferred Stock) to accredited
investors. The shares of Series C Preferred Stock were
issued at a purchase price of $3.00 per share, resulting in
$1,097,988 of gross proceeds. In addition, each investor
received for each share of Series C Preferred Stock
purchased, one ten-year warrant to purchase five shares of the
Companys common stock at an exercise price of $3.00 per
share. These securities were sold pursuant to the exemption from
registration requirements provided by Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder.
During October 2009, we issued an aggregate of
563,414 shares of Series D Redeemable Convertible
Preferred Stock, $.0001 par value per share (the
Series D Preferred Stock) to accredited
investors. The shares of Series D Preferred Stock were
issued at a price of $3.00 per share, resulting in $1,690,242 of
gross proceeds. In addition, each investor received for each
share of Series D Preferred Stock purchased, one ten-year
warrant to purchase five shares of the Companys common
stock at an exercise price of $3.00 per share. These securities
were sold pursuant to the exemption from registration
requirements provided by Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder.
II-3
For each of the above transactions exempt from registration
requirements under Rule 506, the individuals purchasing our
securities had access to management and information concerning
the Company. For each of such sales, no advertising or general
solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of
ours or our executive officers, and transfer was restricted by
us in accordance with the requirements of the Securities Act.
Each of such persons represented to us that they were accredited
or sophisticated investors, that they were capable of analyzing
the merits and risks of their investment, and that they
understood the speculative nature of their investment.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) The exhibits listed in the following Exhibit Index
are filed as part of this registration statement.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
***3
|
.1
|
|
Certificate of Incorporation of Xstream Systems, Inc. filed with
the State of Delaware on May 27, 2004
|
|
***3
|
.2
|
|
Certificate of Amendment of Certificate of Incorporation of
Xstream Systems, Inc. filed with the State of Delaware on
January 4, 2005
|
|
***3
|
.3
|
|
Certificate of Amendment of Certificate of Incorporation of
XStream Systems filed with the State of Delaware on
December 17, 2007
|
|
***3
|
.4
|
|
Second Amended Certificate of Designation of Series A
Redeemable Convertible Preferred Stock of XStream Systems, Inc.
filed with the State of Delaware on August 24, 2009
|
|
***3
|
.5
|
|
Amended Certificate of Designation of the Series B
Redeemable Convertible Preferred Stock XStream Systems, Inc.
filed with the State of Delaware on August 24, 2009
|
|
***3
|
.6
|
|
Amended Certificate of Designation of the Series C
Redeemable Convertible Preferred Stock XStream Systems, Inc.
filed with the State of Delaware on August 24, 2009
|
|
***3
|
.7
|
|
Amended Certificate of Designation of the Series D
Redeemable Convertible Preferred Stock XStream Systems, Inc.
filed with the State of Delaware on August 24, 2009
|
|
***3
|
.8
|
|
Amended and Restated By-laws of XStream Systems, Inc. dated
March 14, 2007
|
|
***3
|
.9
|
|
First Amendment to the Second Amended Certificate of Designation
of the Series A Redeemable Convertible Preferred Stock
filed with the State of Delaware on November 9, 2009
|
|
***3
|
.10
|
|
First Amendment to the Amended Certificate of Designation of the
Series B Redeemable Convertible Preferred Stock filed with
the State of Delaware on November 9, 2009
|
|
***3
|
.11
|
|
First Amendment to the Amended Certificate of Designation of the
Series C Redeemable Convertible Preferred Stock filed with
the State of Delaware on November 9, 2009
|
|
***3
|
.12
|
|
First Amendment to the Amended Certificate of Designation of the
Series D Redeemable Convertible Preferred Stock filed with
the State of Delaware on November 9, 2009
|
|
***3
|
.13
|
|
Certificate of Amendment to the Certificate of Incorporation of
XStream Systems, Inc. filed with the State of Delaware on
November 9, 2009
|
|
***4
|
.1
|
|
Form of Unsecured Subordinated Debenture dated from time to time
between September 2005 and March 2006, by and among XStream
Systems, Inc. and the subscribers identified on the signature
pages thereto
|
|
***4
|
.2
|
|
Investor Rights Agreement among Rutgers, The State University of
New Jersey, XStream Systems, Inc., Brian Mayo, Dr. William
Mayo and Dr. William Mayo, as trustee of the Irrevocable
Trust f/b/o Zachary Mayo and Walter Helfrecht
|
|
***4
|
.3
|
|
Amended and Restated Registration Rights Agreement dated as of
August 27, 2009 by and among XStream Systems, Inc. and the
Investors named therein
|
|
***4
|
.4
|
|
Amended and Restated Series B Warrant Agreement dated
August 27, 2009 between XStream Systems, Inc. and the
holders from time to time of the Warrants created thereunder
|
|
***4
|
.5
|
|
Amended and Restated Series C Warrant Agreement dated
August 27, 2009 between XStream Systems, Inc. and the
holders from time to time of the Warrants created thereunder
|
|
***4
|
.6
|
|
Series D Warrant Agreement dated August 27, 2009
between XStream Systems, Inc. and the holders from time to time
of the Warrants created thereunder
|
II-4
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
***4
|
.7
|
|
Second Amended And Restated Securityholders Agreement,
dated as of August 27, 2009, among XStream Systems, Inc.
and each of the securityholders named therein
|
|
***4
|
.8
|
|
First Amendment to the Amended and Restated Series B
Warrant Agreement dated November 9, 2009 between XStream
Systems, Inc. and the holders from time to time of the Warrants
created thereunder
|
|
***4
|
.9
|
|
First Amendment to the Amended and Restated Series C
Warrant Agreement dated November 9, 2009 between XStream
Systems, Inc. and the holders from time to time of the Warrants
created thereunder
|
|
***4
|
.10
|
|
First Amendment to the Series D Warrant Agreement dated
November 9, 2009 between XStream Systems, Inc. and the
holders from time to time of the Warrants created thereunder
|
|
***4
|
.11
|
|
First Amendment to the Second Amended and Restated
Securityholders Agreement dated November 9, 2009
between XStream Systems, Inc. and each of the securityholders
named therein
|
|
***4
|
.12
|
|
First Amendment to the Amended and Restated Registration Rights
Agreement dated as of November 9, 2009 by and among XStream
Systems, Inc. and the Investors named therein
|
|
***4
|
.13
|
|
Specimen Common Stock Certificate
|
|
*4
|
.14
|
|
Form of 5% Subordinated Convertible Debenture
|
|
*5
|
.1
|
|
Opinion of Greenberg Traurig, P.A.
|
|
*8
|
|
|
Opinion of Greenberg Traurig, P.A. regarding tax matters
|
|
***10
|
.1.1
|
|
Amended and Restated 2004 Stock Option Incentive Plan
|
|
***10
|
.1.2
|
|
Amendment No. 1 to the Amended and Restated 2004 Stock
Option Incentive Plan
|
|
***10
|
.2
|
|
2009 Long Term Incentive Compensation Plan
|
|
***10
|
.3
|
|
Series A Preferred Stock Purchase Agreement dated as of
March 14, 2007 by and among XStream Systems, Inc. and the
Investors named therein
|
|
***10
|
.4
|
|
First Amendment dated as of December 19, 2007 to the
Series A Preferred Stock Purchase Agreement dated as of
March 14, 2007
|
|
***10
|
.5
|
|
Second Amendment to Series A Preferred Stock Purchase
Agreement, dated as of May 30, 2008 among Xstream Systems,
Inc., and the investors identified as Third Closing
Investors on
Appendix I-C
thereto
|
|
***10
|
.6
|
|
Series D Preferred Stock Purchase Agreement dated as of
August 27, 2009 by and among XStream Systems, Inc. and the
Investors named therein
|
|
***10
|
.7
|
|
Employment Agreement with Brian T. Mayo dated November 1,
2006
|
|
***10
|
.8
|
|
Employment Agreement with Paul J. Micciche, dated
November 1, 2006
|
|
***10
|
.9
|
|
Supplier Agreement between XStream Systems, Inc. and Kimball
Electronics, Inc. dated September 6, 2006
|
|
***10
|
.10
|
|
Term Loan Agreement between XStream Systems, Inc. and Kimball
International, Inc. dated September 6, 2006
|
|
***10
|
.11
|
|
Commercial Lease by and between Waldo Development, Inc. and
XStream Systems, dated March 15, 2007
|
|
***10
|
.12
|
|
Lease, by and between J.P.H. Development Corp. and Xstream
Systems, dated October 25, 2004
|
|
***10
|
.13
|
|
License Agreement between Rutgers, The State University of New
Jersey and XStream Systems, Inc., dated December 13, 2004
|
|
***10
|
.14
|
|
Consulting Agreement by and between XStream Systems, Inc. and
Dr. William Mayo, dated November 3, 2005
|
|
***10
|
.15
|
|
Unsecured Promissory Note, dated February 11, 2008,
executed by Xstream Systems, Inc. in favor of Darren Sylvia, in
the principal amount of $35,831.60
|
|
***10
|
.16
|
|
Unsecured Promissory Note, dated December 31, 2007,
executed by Xstream Systems, Inc. in favor of Vince DeTurris, in
the principal amount of $43,069.65
|
|
***10
|
.17
|
|
XT250 Pilot Program Agreement between AmerisourceBergen and
XStream Systems, Inc., dated July 18, 2009
|
|
***10
|
.18
|
|
Letter of Intent between Swisslog and XStream Systems, Inc.,
dated August 13, 2009
|
II-5
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
***10
|
.19
|
|
XT250 Pilot Program Agreement between Pfizer, Inc. and XStream
Systems, Inc., dated August 24, 2009
|
|
***10
|
.20
|
|
Letter of Intent between Eastman Kodak Company and XStream
Systems, dated September 23, 2009
|
|
***10
|
.21
|
|
Agreement between Remetronix, Inc. and XStream Systems, dated
January 9, 2008
|
|
***10
|
.22
|
|
Agreement between Compass, Engineering Inc. and XStream Systems,
dated January 9, 2008
|
|
***10
|
.23
|
|
Settlement Agreement between XStream Systems, Kimball
International, Inc. and Kimball Electronics, Inc., dated
December 23, 2009
|
|
*10
|
.24
|
|
XStream Systems, Inc. Unsecured Subordinated Debenture in favor
of John F. Hulseman, as amended
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*10
|
.25
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XStream Systems, Inc. Unsecured Subordinated Debenture in favor
of R. David Collin Trust, as amended
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*10
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.26
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Purchasing Agreement for the XT250 System by and between XStream
Systems, Inc. and Altec Medical, Inc.
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***14
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.1
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Code of Ethics for Senior Financial Officers
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***14
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.2
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Code of Conduct for Employees
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*23
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.1
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Consent of McGladrey & Pullen.
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23
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.3
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Consent of Greenberg Traurig, P.A. (included in the opinion
filed as Exhibit 5.1).
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*25
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.1
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Power of Attorney (set forth on signature page of the
Registration Statement).
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* |
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Filed herewith. |
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** |
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To be filed by amendment. |
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*** |
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Previously filed. |
(b) The financial statement schedules are either not
applicable or the required information is included in the
financial statements and footnotes related thereto.
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-6
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) Intentionally omitted.
(5) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser:
(i) Intentionally omitted.
(ii) If the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in
a document incorporated or deemed incorporated by reference into
the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
(6) That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424.
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
B. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 2 to the
registration statement to be signed on its behalf by the
undersigned, in the City of Sebastian, State of Florida, on
February 10, 2010.
XSTREAM SYSTEMS, INC.
James J. Lowrey
Chairman of the Board, and Chief Executive Officer
(principal executive officer)
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By:
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/s/ Dennis
K. Cummings
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Dennis K. Cummings
Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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/s/ James
J. Lowrey
James
J. Lowrey
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Chairman of the Board and
Chief Executive Officer
(principal executive officer)
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February 10, 2010
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/s/ Dennis
K. Cummings
Dennis
K. Cummings
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Chief Financial Officer
(principal financial officer and
principal accounting officer)
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February 10, 2010
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/s/ Anthony
Chidoni
Anthony
Chidoni
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Director
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February 10, 2010
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/s/ *
Robert
E. Kennedy
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Director
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February 10, 2010
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/s/ *
Philip
A. Odeen
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Director
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February 10, 2010
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/s/ *
Ash
K. Chawla
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Director
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February 10, 2010
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/s/ *
Simon
Irish
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Director
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February 10, 2010
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/s/ *
Dennis
H. Ferro
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Director
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February 10, 2010
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II-8
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/s/ *
Joseph
J. Melone
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Director
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February 10, 2010
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/s/
John
R. Murphy
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Director
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February , 2010
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/s/ *
Dr. E.
Darracott Vaughan, Jr.
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Director
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February 10, 2010
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/s/ *
Dr. Stuart
Weinstein
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Director
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February 10, 2010
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* |
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Executed pursuant to a
power-of-attorney
granted in the
Form S-1
registration statement filed November 12, 2009 |
Anthony Chidoni
Attorney-in-Fact
II-9