Attached files
file | filename |
---|---|
EX-3.1 - Predictive Oncology Inc. | v199262_ex3-1.htm |
EX-3.2 - Predictive Oncology Inc. | v199262_ex3-2.htm |
EX-32.1 - Predictive Oncology Inc. | v199262_ex32-1.htm |
EX-31.1 - Predictive Oncology Inc. | v199262_ex31-1.htm |
EX-31.2 - Predictive Oncology Inc. | v199262_ex31-2.htm |
FORM
10-Q
(Mark
One)
x QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2010
or
¨ TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _________________________ to
Commission
File Number: Registration Statement No.
333-155299
BioDrain Medical,
Inc.
(Exact
name of registrant as specified in its charter)
Minnesota
|
33-1007393
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
2060 Centre Pointe Blvd., Suite
7,
|
Mendota Heights, MN
55120
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
651-389-4800
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes ¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, anon-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.
Large
accelerated filer ¨
|
Accelerated filer ¨
|
Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ Yes
x
No
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. As of November 12, 2010, the
registrant had 13,573,719 shares of common stock, par value $.01 per share,
outstanding.
BIODRAIN
MEDICAL, INC.
TABLE OF
CONTENTS
Page
No.
|
|||
PART
I. FINANCIAL INFORMATION
|
|||
Item
1. Condensed Financial Statements
|
3
|
||
Condensed Balance Sheets September 30, 2010 and December 31,
2009
|
3
|
||
|
|||
Condensed Statements of Operations for three-month and nine-month periods
ended September 30, 2010 and September 30, 2009
|
4
|
||
Statement of Stockholders’ Deficit from Inception to September 30, 2010 |
5
|
||
Condensed Statements of Cash Flows for the nine-month periods ended
September 30, 2010 and September 30, 2009
|
6
|
||
Notes to Condensed Financial Statements
|
7
|
||
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
16
|
||
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
21
|
||
Item
4. Controls and Procedures
|
21
|
||
PART
II. OTHER INFORMATION
|
|||
Item
1. Legal Proceedings
|
22
|
||
Item
1A. Risk Factors
|
22
|
||
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
23
|
||
Item
3. Defaults Upon Senior Securities
|
23
|
||
Item
4. [Removed and Reserved]
|
23
|
||
Item
5. Other Information
|
23
|
||
Item
6. Exhibits
|
23
|
||
Signatures
|
24
|
||
Exhibit
Index
|
25
|
||
|
|||
|
2
PART 1.
FINANCIAL INFORMATION
Item 1.
Condensed Financial Statements
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
CONDENSED
BALANCE SHEETS
(Unaudited)
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$ | 20,434 | $ | 16,632 | ||||
Accounts
receivable
|
- | 15,737 | ||||||
Prepaid
expense and other assets
|
10,494 | 3,801 | ||||||
Restricted
cash in escrow (See Note 4)
|
- | 103,333 | ||||||
Total
Current Assets
|
30,928 | 139,503 | ||||||
Fixed
assets, net
|
7,438 | 9,260 | ||||||
Intangibles,
net
|
141,532 | 141,532 | ||||||
Total
Assets
|
$ | 179,899 | $ | 290,295 | ||||
LIABILITIES AND SHAREHOLDERS'
DEFICIT
|
||||||||
Current
Liabilities:
|
||||||||
Current
portion of long term debt (See Note 8)
|
$ | 13,925 | $ | 13,620 | ||||
Current
portion of convertible debt
|
50,000 | 50,000 | ||||||
Accounts
payable
|
1,128,367 | 814,137 | ||||||
Shares
due investors under registration payment arrangement
|
- | 355,124 | ||||||
Accrued
expenses
|
384,325 | 201,490 | ||||||
Convertible
debenture
|
- | 10,000 | ||||||
Total
Current Liabilites
|
1,576,617 | 1,444,371 | ||||||
Long
term debt and convertible debt, net of discounts of $123,628 and $44,873
(See Note 7 and 8)
|
518,371 | 116,108 | ||||||
Liability
for equity-linked financial instruments (See Note 10)
|
134,943 | 1,071,847 | ||||||
Stockholders
Deficit:
|
||||||||
Common
stock, $.01 par value, 80,000,000 authorized, 13,573,719 and 11,383,211
outstanding
|
135,737 | 113,831 | ||||||
Additional
paid-in capital
|
4,799,777 | 3,573,506 | ||||||
Deficit
accumulated during development stage
|
(6,985,548 | ) | (6,029,368 | ) | ||||
Total
Shareholder' Deficit
|
(2,050,034 | ) | (2,342,031 | ) | ||||
Total
Liabilities and Shareholders' Deficit
|
$ | 179,899 | $ | 290,295 |
See Notes
to Condensed Financial Statements
3
BIODRAIN
MEDICAL, INC.
|
(A
DEVELOPMENT STAGE COMPANY)
|
CONDENSED
STATEMENTS OF OPERATIONS
|
(Unaudited)
|
Period
From
|
||||||||||||||||||||
April
23, 2002
|
||||||||||||||||||||
(Inception)
|
||||||||||||||||||||
Three Months Ended
September,
|
Nine Months Ended
September,
|
To September 30,
|
||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
||||||||||||||||
Revenue
|
$ | - |
-
|
$ | 288 | $ | 15,737 | $ | 16,025 | |||||||||||
Cost
of goods sold
|
- |
-
|
140 | 7,450 | 7,140 | |||||||||||||||
Gross
margin
|
- | - | 148 | 8,287 | 8,885 | |||||||||||||||
General
and administrative expense
|
381,053 | 521,532 | 1,531,669 | 1,393,072 | 5,560,096 | |||||||||||||||
Operations
expense
|
55,649 | 156,523 | 165,308 | 351,449 | 1,066,182 | |||||||||||||||
Sales
and marketing expense
|
36,415 | 136,220 | 177,065 | 344,723 | 633,241 | |||||||||||||||
Interest
expense
|
33,873 | 24,689 | 107,580 | 64,009 | 397,220 | |||||||||||||||
Loss
(gain) on valuation of equity-linked financial instruments
|
(348,880 | ) | (65,949 | ) | (1,025,294 | ) | 370,474 | (662,306 | ) | |||||||||||
Total
expense
|
158,110 | 773,015 | 956,328 | 2,523,727 | 6,994,433 | |||||||||||||||
Net
income (loss) available to common shareholders
|
$ | (158,110 | ) | $ | (773,015 | ) | $ | (956,180 | ) | $ | (2,515,440 | ) | $ | (6,985,548 | ) | |||||
Loss
per common share basic and diluted
|
$ | (0.01 | ) | $ | (0.08 | ) | $ | (0.08 | ) | $ | (0.28 | ) | $ | (2.12 | ) | |||||
Weighted
average shares used in computation, basic and diluted
|
13,159,639 | 9,634,828 | 12,428,401 | 8,903,119 | 3,287,557 |
See Notes
to Condensed Financial Statements
4
BIODRAIN
MEDICAL, INC.
|
(A
DEVELOPMENT STAGE COMPANY)
|
STATEMENT
OF STOCKHOLDERS' DEFICIT
|
PERIOD
FROM APRIL 23, 2002 (INCEPTION)
|
TO
SEPTEMBER 30, 2010
|
Shares
|
Amount
|
Paid
in Capital
|
Deficit
|
Total
|
||||||||||||||||
Issuance
of common stock 9/1/02, $.0167 (1)
|
598,549 | $ | 5,985 | $ | 4,015 | $ | - | $ | 10,000 | |||||||||||
- | ||||||||||||||||||||
Issuance
of common 10/23/02, $1.67/share
|
2,993 | 30 | 4,970 | 5,000 | ||||||||||||||||
Net
loss
|
(51,057 | ) | (51,057 | ) | ||||||||||||||||
Balance
12/31/02
|
601,542 | $ | 6,015 | $ | 8,985 | $ | (51,057 | ) | $ | (36,057 | ) | |||||||||
Issuance
of common 2/12/03, $.0167 (2)
|
23,942 | 239 | 161 | 400 | ||||||||||||||||
Issuance
of common 6/11&12,$1.67 (3)
|
21,548 | 216 | 34,784 | 35,000 | ||||||||||||||||
Net
Loss
|
(90,461 | ) | (90,461 | ) | ||||||||||||||||
Balance
12/31/03
|
647,032 | $ | 6,470 | $ | 43,930 | $ | (141,518 | ) | $ | (91,118 | ) | |||||||||
Issuance
of common 5/25/04, $.0167 (4)
|
6,567 | 66 | 44 | 110 | ||||||||||||||||
Net
Loss
|
(90,353 | ) | (90,353 | ) | ||||||||||||||||
Balance
12/31/04
|
653,599 | $ | 6,536 | $ | 43,974 | $ | (231,871 | ) | $ | (181,361 | ) | |||||||||
Issuance
of common 12/14/05, $.0167 (5)
|
14,964 | 150 | 100 | 250 | ||||||||||||||||
Vested
stock options and warrants
|
2,793 | 2,793 | ||||||||||||||||||
Net
Loss
|
(123,852 | ) | (123,852 | ) | ||||||||||||||||
Balance
12/31/05
|
668,563 | $ | 6,686 | $ | 46,867 | $ | (355,723 | ) | $ | (302,170 | ) | |||||||||
Issuance
of common 5/16 & 8/8, $.0167 (6)
|
86,869 | 869 | 582 | 1,451 | ||||||||||||||||
Issuance
of common 10/19 & 23, $.0167 (7)
|
38,906 | 389 | 261 | 650 | ||||||||||||||||
Issuance
of common 12/01, $1.67 (8)
|
28,739 | 287 | 44,523 | 44,810 | ||||||||||||||||
Vested
stock options and warrants
|
13,644 | 13,644 | ||||||||||||||||||
Net
Loss
|
(273,026 | ) | (273,026 | ) | ||||||||||||||||
Balance
12/31/06
|
823,077 | $ | 8,231 | $ | 105,877 | $ | (628,749 | ) | $ | (514,641 | ) | |||||||||
Issuance
of common 1/30/07 @ 1.67 (9)
|
599 | 6 | 994 | 1,000 | ||||||||||||||||
Value
of equity instruments issued with debt
|
132,938 | 132,938 | ||||||||||||||||||
Capital
contributions resulting from waivers of debt
|
346,714 | 346,714 | ||||||||||||||||||
Vested
stock options and warrants
|
73,907 | 73,907 | ||||||||||||||||||
Net
loss
|
(752,415 | ) | (752,415 | ) | ||||||||||||||||
Balance
12/31/07
|
823,676 | $ | 8,237 | $ | 660,430 | $ | (1,381,164 | ) | $ | (712,497 | ) | |||||||||
Issuance
of common 6/11 to 9/30, $.35 (10)
|
4,552,862 | 45,528 | 1,547,974 | 1,593,502 | ||||||||||||||||
Shares
issued to finders, agents
|
2,012,690 | 20,127 | (20,127 | ) | - | |||||||||||||||
Shares
issued to pay direct legal fees
|
285,714 | 2,857 | (2,857 | ) | ||||||||||||||||
Issuance
of common due to antidilution provisions
|
205,899 | 2,059 | (2,059 | ) | - | |||||||||||||||
Shares
issued to pay investor relations services 6/23/08,
$.35
|
250,000 | 2,500 | 85,000 | 87,500 | ||||||||||||||||
Vested
stock options and warrants
|
354,994 | 354,994 | ||||||||||||||||||
Capital
contributions resulting from waivers of debt
|
129,684 | 129,684 | ||||||||||||||||||
Net
loss
|
(1,762,628 | ) | (1,762,628 | ) | ||||||||||||||||
Balance
12/31/08
|
8,130,841 | $ | 81,308 | $ | 2,753,039 | $ | (3,143,792 | ) | $ | (309,445 | ) | |||||||||
Cumulative
effect of adoption of EITF 07-5
|
(486,564 | ) | 6,654 | (479,910 | ) | |||||||||||||||
Vested
stock options and warrants
|
111,835 | 111,835 | ||||||||||||||||||
Shares
issued 3/20/09 to pay for fund raising
|
125,000 | 1,250 | (1,250 | ) | - | |||||||||||||||
Shares
issued under PMM in April 2009, $.50
|
700,000 | 7,000 | 343,000 | 350,000 | ||||||||||||||||
Shares
issued under PPM in May 2009, $.50
|
220,000 | 2,200 | 107,800 | 110,000 | ||||||||||||||||
Shares
issued under PPM in June 2009, $.50
|
50,000 | 500 | 24,500 | 25,000 | ||||||||||||||||
Shares
issued under PPM in August 2009, $.50
|
80,000 | 800 | 39,200 | 40,000 | ||||||||||||||||
Shares
issued under PPM in September 2009, $.50
|
150,000 | 1,500 | 73,500 | 75,000 | ||||||||||||||||
Shares
issued to directors, management and consultant in August 2009,
$.50
|
797,810 | 7,978 | 390,927 | 398,905 | ||||||||||||||||
Shares
issued to finder in September 2009, $.50
|
100,000 | 1,000 | 49,000 | 50,000 | ||||||||||||||||
Capital
contributions resulting from waivers of debt
|
84,600 | 84,600 | ||||||||||||||||||
Value
of equity-linked financial instruments issued in connection with
PPMs
|
(222,296 | ) | (222,296 | ) | ||||||||||||||||
Value
of equity instruments issued with debt
|
30,150 | 30,150 | ||||||||||||||||||
Shares
issued to consultant for fund raising
|
30,000 | 300 | (300 | ) | - | |||||||||||||||
Shares
issued under PPM in November 2009, $.50
|
50,000 | 500 | 24,500 | 25,000 | ||||||||||||||||
Shares
issued upon conversion of debt and interest, $.27
|
935,446 | 9,354 | 247,100 | 256,454 | ||||||||||||||||
Shares
issued upon conversion of shareholder note, $.35
|
14,024 | 140 | 4,766 | 4,906 | ||||||||||||||||
Net
Loss
|
$ | (2,892,230 | ) | (2,892,230 | ) | |||||||||||||||
Balance
12/31/09
|
11,383,121 | 113,830 | 3,573,507 | (6,029,368 | ) | (2,342,030 | ) | |||||||||||||
Shares
issued in March 2010 under PPM, $.50
|
174,550 | 1,746 | $ | 85,529 | $ | 87,275 | ||||||||||||||
Shares
issed to consultants for IR and consulting, $.50
|
374,090 | 3,741 | $ | 183,304 | $ | 187,045 | ||||||||||||||
Vested
stock options and warrants
|
$ | 11,382 | $ | 11,382 | ||||||||||||||||
Value
of equity instruments issued for consulting services
|
$ | 354,602 | $ | 354,602 | ||||||||||||||||
Value
of equity-linked financial instruments issued
|
||||||||||||||||||||
in
connection with PPM in first quarter
|
$ | (25,553 | ) | $ | (25,553 | ) | ||||||||||||||
Shares
issued in April 2010 under PPM, $.50
|
180,000 | 1,800 | $ | 88,200 | $ | 90,000 | ||||||||||||||
Shares
issed in May 2010 to consultant, $.50
|
12,850 | 129 | $ | 6,296 | $ | 6,425 | ||||||||||||||
Shares
issued in May 2010 to 2008 investors as a penalty
|
||||||||||||||||||||
for
late registration of 4,552,862 shares, $.50
|
710,248 | 7,102 | $ | 348,022 | $ | 355,124 | ||||||||||||||
Value
of equity instruments issued with debt in second quarter
|
$ | 96,613 | $ | 96,613 | ||||||||||||||||
Value
of equity-linked financial instruments issued
|
||||||||||||||||||||
in
connection with PPM in second quarter
|
$ | (31,332 | ) | $ | (31,332 | ) | ||||||||||||||
Value
of equity-linked financial instruments issued
|
||||||||||||||||||||
in
connection with PPM in third quarter
|
$ | (31,506 | ) | $ | (31,506 | ) | ||||||||||||||
Value
of equity instruments issued with debt in third quarter
|
$ | 15,553 | $ | 15,553 | ||||||||||||||||
Shares
issued in September 2010 under PPM, $.10
|
250,000 | 2,500 | $ | 22,500 | $ | 25,000 | ||||||||||||||
Shares
issued to consultants in third quarter at $.22 per share
|
488,860 | 4,889 | $ | 102,660 | $ | 107,549 | ||||||||||||||
Net
Loss
|
$ | (956,180 | ) | $ | (956,180 | ) | ||||||||||||||
Balance
9/30/2010
|
13,573,719 | 135,737 | $ | 4,799,777 | $ | (6,985,548 | ) | $ | (2,050,034 | ) |
(1)
Founders shares, 1,000,000 pre-split
(2)
23,492 (40,000 pre-split) shares valued at $.0167 per share as compensation for
loan guarantees by management
(3)
Investment including 670 shares issued as a 10% finders fee
(4) For
payment of patent legal fees
(5)
Compensation for loan guarantees by management
(6) For
vendor contractual consideration
(7)
Employment agreements
(8)
Investment
(9)
Conversion of convertible notes by management
See Notes
to Condensed Financial Statements
5
BIODRAIN
MEDICAL, INC.
|
(A
DEVELOPMENT STAGE COMPANY)
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
April
23,
|
||||||||||||
2002
|
||||||||||||
Nine Months
|
(Inception)
|
|||||||||||
Ended
September 30,
|
To
September 30,
|
|||||||||||
2010
|
2009
|
2010
|
||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||
Cash
flow from operating activities:
|
||||||||||||
Net
loss
|
$ | (956,180 | ) | $ | (2,515,440 | ) | $ | (6,985,548 | ) | |||
Adjustments
to reconcile net loss to
|
||||||||||||
net
cash used in operating activities:
|
||||||||||||
Depreciation
|
1,822 | 2,434 | 5,783 | |||||||||
Vested
stock options and warrants
|
11,382 | 150,544 | 568,535 | |||||||||
Equity
instruments issued for management and consulting
|
655,621 | 398,905 | 1,192,026 | |||||||||
Stock
based registration payments
|
- | 355,124 | 355,124 | |||||||||
Conversion
of accrued liabilites to capital
|
- | 84,600 | 560,998 | |||||||||
Amortization
of debt discount
|
33,411 | 6,538 | 151,627 | |||||||||
(Gain)Loss
on valuation of equity-linked instruments
|
(1,025,294 | ) | 370,474 | (662,306 | ) | |||||||
Changes
in assets and liabilities:
|
||||||||||||
Accounts
receivable
|
15,737 | (15,737 | ) | - | ||||||||
Prepaid
expense and other
|
(6,692 | ) | (2,895 | ) | (10,493 | ) | ||||||
Notes
payable to shareholders
|
- | - | (14,957 | ) | ||||||||
Accounts
payable
|
314,228 | 188,916 | 1,128,366 | |||||||||
Accrued
expenses
|
182,835 | (8,980 | ) | 384,326 | ||||||||
Net
cash used in operating activities:
|
(773,129 | ) | (985,517 | ) | (3,326,519 | ) | ||||||
Cash
flow from investing activities:
|
||||||||||||
Purchase
of fixed assets
|
- | - | (12,258 | ) | ||||||||
Purchase
of intangibles
|
- | - | (142,495 | ) | ||||||||
Net
cash used in investing activities
|
- | - | (154,753 | ) | ||||||||
Cash
flow from financing activities:
|
||||||||||||
Proceeds
from long term and convertible debt
|
582,000 | - | 1,021,505 | |||||||||
Principal
payments on long term debt and convertible debt
|
(110,677 | ) | (10,124 | ) | (126,607 | ) | ||||||
Restricted
cash in escrow
|
103,333 | - | ||||||||||
Accrued
interest converted to stock
|
- | - | 87,360 | |||||||||
Issuance
of common stock
|
202,275 | 600,000 | 2,519,448 | |||||||||
Net
cash provided by financing activities
|
776,931 | 589,876 | 3,501,706 | |||||||||
Net
increase (decrease) in cash
|
3,802 | (395,641 | ) | 20,434 | ||||||||
Cash
at beginning of period
|
16,632 | 463,838 | - | |||||||||
Cash
at end of period
|
$ | 20,434 | $ | 68,197 | $ | 20,434 |
See Notes
to Condensed Financial Statements
6
BIODRAIN
MEDICAL, INC.
|
(A
DEVELOPMENT STAGE COMPANY)
|
NOTES
TO CONDENSED FINANCIAL STATEMENTS
|
(Amounts
presented at and for the three months and nine months ended September 30,
2010 and
|
September
30, 2009 are unaudited)
|
NOTE 1 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations and Continuance
of Operations
BioDrain
Medical, Inc. (the "Company") was incorporated under the laws of the State of
Minnesota in 2002. The Company is developing an environmentally safe system for
the collection and disposal of infectious fluids that result from surgical
procedures and post-operative care.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered recurring losses from
operations and has a shareholders’ deficit. These factors raise substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Management
hired an investment banker in February 2010 to raise an additional $3-$5 million
in new equity. The banker has been unable to raise the expected $500,000 by
September 30, 2010, but the Company has raised approximately $202,000 in equity
and $582,000 in convertible debt in 2010 and is planning to close on a larger
round within the next 30 days. Although the Company's ability to raise this new
capital is in substantial doubt it received $725,000 through private placements
of equity and convertible debt in 2009, and the Company's April 1, 2009 510(k)
clearance from the FDA to authorize the Company to market and sell its FMS
products is being received very positively. If the Company is successful in
raising at least $3 million in new equity, it will have sufficient capital to
operate its business and execute its business plan for at least the next 12
months. If the Company raises the additional capital by issuing additional
equity securities, its shareholders could experience substantial
dilution.
Recent
Accounting Developments
Issued in
January 2010, ASU Update 2010-06, Fair Value Measures and Disclosures, provides
amendments to Topic 820 that will provide more robust disclosures about (1) the
different classes of assets and liabilities measured at fair value, (2) the
valuation techniques and inputs used, (3) the activity in level 3 fair value
measurements, and (4) the transfers between levels 1, 2, and 3. ASC Update
2010-06 is effective for fiscal years beginning after December 15, 2010. The
Company does not expect adoption of ASU Update 2010-06 to have a material effect
to its financial statements or its disclosures.
Issued in
October 2009, ASU Update 2009-13, Revenue Recognition Topic 605 -
Multiple-Deliverable Revenue Arrangements provides guidance for separating
consideration in multiple-deliverable arrangements. ASC Number 2009-13 is
effective for fiscal years beginning on or after June 15, 2010. The Company does
not expect adoption of ASU Update 2009-13 to have a material effect on its
financial statements.
Effective
February 2010, the Company adopted ASU Update 20 10-09, Subsequent Events, which
provides amendments to Topic 855 removing the requirement for SEC filers to
disclose the date through which an entity has evaluated subsequent events. The
adoption of ASU Update 20 10-09 did not have a significant impact on the
Company's disclosures.
Valuation of Intangible Assets
We review
identifiable intangible assets for impairment in accordance with SFAS No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), whenever events or changes
in circumstances indicate the carrying amount may not be recoverable. Our
intangible assets are currently solely the costs of obtaining trademarks and
patents. Events or changes in circumstances that indicate the carrying amount
may not be recoverable include, but are not limited to, a significant change in
the medical device marketplace and a significant adverse change in the business
climate in which we operate. If such events or changes in circumstances are
present, the undiscounted cash flows method is used to determine whether the
intangible asset is impaired. Cash flows would include the estimated terminal
value of the asset and exclude any interest charges. If the carrying value of
the asset exceeds the undiscounted cash flows over the estimated remaining life
of the asset, the asset is considered impaired, and the impairment is measured
by reducing the carrying value of the asset to its fair value using the
discounted cash flows method. The discount rate utilized is based on
management's best estimate of the related risks and return at the time the
impairment assessment is made.
Our
accounting estimates and assumptions bear various risks of change, including the
length of the current recession facing the United States, the expansion of the
slowdown in consumer spending in the U.S. medical markets despite the early
expressed opinions of financial experts that the medical market would not be as
affected as other markets and failure to gain acceptance in the medical
market.
7
The
Company reviewed all other significant newly issued accounting pronouncements
and determined they are either not applicable to its business or that no
material effect is expected on its financial position and results of
operations.
Accounting
Policies and Estimates
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Presentation
of Taxes Collected from Customers
Sales
taxes are imposed on the Company’s sales to nonexempt customers. The Company
collects the taxes from customers and remits the entire amounts to the
governmental authorities. The Company’s accounting policy is to exclude the
taxes collected and remitted from revenues and expenses.
Shipping
and Handling
Shipping
and handling charges billed to customers are recorded as revenue. Shipping and
handling costs are recorded within cost of goods sold on the statement of
operations.
Advertising
Advertising
costs are expensed as incurred. There were no advertising expenses in the three
months ended September 30, 2010 and September 30, 2009 and zero and $1,600 in
the nine months ended September 30, 2010 and 2009, respectively.
Research
and Development
Research
and development costs are charged to operations as incurred. Research and
development costs were $10,000 and $34,000 in the three months and nine months
ended September 30, 2010, respectively, and zero and $30,000 in the three months
and nine months ended September 30, 2009, respectively.
Revenue
Recognition
The
Company recognizes revenue in accordance with the SEC’s Staff Accounting
Bulletin No. 101, Revenue
Recognition in Financial Statements, as amended by Staff Accounting
Bulletin No. 104 (together, SAB 101), and ASC 605 Revenue
Recognition.
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectability is probable.
Delivery is considered to have occurred upon either shipment of the product or
arrival at its destination based on the shipping terms of the transaction. The
Company standard terms specify that shipment is FOB BioDrain and the Company
will, therefore recognize revenue upon shipment in most cases. This revenue
recognition policy applies to shipments of the FMS units as well as shipments of
cleaning solution kits. When these conditions are satisfied, the Company
recognizes gross product revenue, which is the price it charges generally to its
customers for a particular product. Under the Company’s standard terms and
conditions there is no provision for installation or acceptance of the product
to take place prior to the obligation of the customer. The customer’s right of
return is limited only to the Company’s standard warranty whereby the Company
replaces or repairs, at its option, and it would be very rare that the unit or
significant quantities of cleaning solution kits may be returned. Additionally,
since the Company buys both the FMS units and cleaning solution kits from
“turnkey” suppliers the Company would have the right to replacements from the
suppliers if this situation should occur.
Receivables
Receivables
are reported at the amount the Company expects to collect on balances
outstanding at fiscal year end. The Company has determined there will be no
losses on balances outstanding at the nine months ended September 30,
2010.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets. Estimated
useful asset life by classification is as follows:
Years
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||
Computers
and office equipment
|
3
|
|
Furniture
and fixtures
|
|
8
|
8
Upon
retirement or sale, the cost and related accumulated depreciation are removed
from the balance sheet and the resulting gain or loss is reflected in
operations. Maintenance and repairs are charged to operations as
incurred.
Intangible
Assets
Intangible
assets consist of patent costs. These assets are not subject to amortization
until the property patented is in production. The assets are reviewed for
impairment annually, and impairment losses, if any, are charged to operations
when identified. No impairment losses have been identified by
management.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740- Income Taxes(“ASC 740”).
Under ASC 740, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and net operating loss and credit carry forwards using enacted tax
rates in effect for the year in which the differences are expected to impact
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. In June 2006, the
FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”), which became effective for the Company beginning January 1, 2007.
FIN 48, now included within ASC 740, addresses how tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under ASC 740, the tax benefit from an uncertain tax position can be
recognized only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. The Company has identified no income tax uncertainties.
Patents
and Intellectual Property
The
Company, in June 2008, completed and executed an agreement to secure exclusive
ownership of the patent from an inventor, Marshall Ryan. Mr. Ryan received a
combination of cash and warrants, and he will receive a 4% royalty on FMS (the
Product) sales for the life of the patent. At the signing of the agreement, Mr.
Ryan received $75,000 in exchange for the exclusive assignment of the patent. In
addition, on June 30, 2009, Mr. Ryan, through his Mid-State Stainless, Inc.
entity, was entitled to receive $100,000 as payment (currently recorded as an
account payable with the Company) for past research and development activities.
Should Mr. Ryan be utilized in the future for additional product development
activities, he will be compensated at a rate of ninety five dollars ($95.00) per
hour.
Mr. Ryan
also received a warrant, with immediate vesting, to purchase 150,000 shares of
the Company's common stock at a price of $.35 per share. The warrant has a term
of five years, ending on June 30, 2013 and is assigned a value of $28,060 using
a Black-Scholes formula and this amount was expensed as consulting expense in
2008 using a 5-year expected life, a 3.73% risk free interest rate, an expected
59% volatility and a zero dividend rate. Should there be a change in control of
the Company (defined as greater than 50% of the Company’s outstanding stock or
substantially all of its assets being transferred to one independent person or
entity), Mr. Ryan will be owed a total of $2 million to be paid out over the
life of the patent if the change in control occurs within 12 months of the first
sale of the product; or $1 million to be paid out over the life of the patent if
the change in control occurs between 12 and 24 months of the first sale of the
product; or $500,000 to be paid out over the life of the patent if the change in
control occurs between 24 and 36 months of the first sale of the product. There
will be no additional payment if a change in control occurs more than 36 months
after the first sale of the product.
Subsequent
Events
The
Company has evaluated any subsequent events through the date of this filing. The
Company does not believe there are subsequent events that require
disclosure.
Interim
Financial Statements
The
Company has prepared the unaudited interim financial statements and related
unaudited financial information in the footnotes in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) and the
rules and regulations of the Securities and Exchange Commission (“SEC”) for
interim financial statements. These interim financial statements reflect all
adjustments consisting of normal recurring accruals, which, in the opinion of
management, are necessary to present fairly the Company’s financial position,
the results of its operations and its cash flows for the interim periods. These
interim financial statements should be read in conjunction with the annual
financial statements and the notes thereto contained in the Form 10-K filed with
the SEC on March 31, 2010. The nature of the Company’s business is such that the
results of any interim period may not be indicative of the results to be
expected for the entire year.
9
NOTE
2 – DEVELOPMENT STAGE
OPERATIONS
|
The
Company was formed April 23, 2002. Since inception to September 30, 2010,
13,573,719 shares of common stock have been issued between par value and $1.67.
Operations since incorporation have been devoted to raising capital, obtaining
financing, development of the Company’s product, and administrative
services.
NOTE
3 – STOCKHOLDERS’ DEFICIT, STOCK OPTIONS AND WARRANTS
In
connection with the financing completed in October 2008, the Company has
effected two reverse stock splits, one on June 6, 2008 and another on October
20, 2008.
In accordance with SAB Topic 4C, all stock options and warrants and their
related exercise prices are stated at their post-reverse stock split
values.
The
Company has an equity incentive plan, which allows issuance of incentive and
non-qualified stock options to employees, directors and consultants of the
Company, where permitted under the plan. The exercise price for each stock
option is determined by the board of directors. Vesting requirements are
determined by the board of directors when granted and currently range from
immediate to three years. Options under this plan have terms ranging from three
to ten years.
Accounting
for share-based payment
Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)) which replaced SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and superseded Accounting Principles Board (APB)
Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), all now
codified under ASC 718- Compensation-Stock
Compensation (“ASC 718). Under ASC 718 stock-based employee compensation
cost is recognized using the fair value based method for all new awards granted
after January 1, 2006 and unvested awards outstanding at January 1, 2006.
Compensation costs for unvested stock options and non-vested awards that were
outstanding at January 1, 2006, are being recognized over the requisite service
period based on the grant-date fair value of those options and awards as
previously calculated under SFAS 123 for pro forma disclosures, using a
straight-line method. We elected the modified-prospective method under which
prior periods are not retroactively restated.
ASC 718
requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model or other acceptable means. The
Company uses the Black-Scholes option valuation model which requires the input
of significant assumptions including an estimate of the average period of time
employees will retain vested stock options before exercising them, the estimated
volatility of th Company's common stock price over the expected term, the number
of options that will ultimately be forfeited before completing vesting
requirements, the expected dividend rate and the risk-free interest rate.
Changes in the assumptions can materially affect the estimate of fair value of
stock-based compensation and, consequently, the related expense recognized. The
assumptions the Company uses in calculating the fair value of stock-based
payment awards represent the Company's best estimates, which involve inherent
uncertainties and the application of management's judgment. As a result, if
factors change and the Company uses different assumptions, the Company's
equity-based compensation expense could be materially different in the
future.
Since the
Company's common stock has no significant public trading history, and the
Company has experienced no option exercises in its history, the Company
is required to take an alternative approach to estimating future
volatility and estimated life and the future results could vary significantly
from the Company's
estimates. The Company compiled historical volatilities over a period of 2-7
years of 15 small-cap medical companies traded on major exchanges and 10
mid-range medical companies on the OTC Bulletin Board and combined the results
using a weighted average approach. In the case of ordinary options to employees
the Company determined the expected life to be the midpoint between the vesting
term and the legal term. In the case of options or warrants granted to
non-employees the Company estimated the life to be the legal term unless there
was a compelling reason to make it shorter.
When an
option or warrant is granted in place of cash compensation for services the
Company deems the value of the service rendered to be the value of the option or
warrant. In most cases, however, an option or warrant is granted in addition to
other forms of compensation and its separate value is difficult to determine
without utilizing an option pricing model. For that reason the Company also uses
the Black-Scholes-Merton option-pricing model to value options and warrants
granted to non-employees, which requires the input of significant assumptions
including an estimate of the average period the investors or consultants will
retain vested stock options and warrants before exercising them, the estimated
volatility of the Company's common stock price over the expected term, the
number of options and warrants that will ultimately be forfeited before
completing vesting requirements, the expected dividend rate and the risk-free
interest rate. Changes in the assumptions can materially affect the estimate of
fair value of stock-based consulting and/or compensation and, consequently, the
related expense recognized.
Since the
Company has limited trading history in its stock and no first-hand experience
with how its investors and consultants have acted in similar circumstances, the
assumptions the Company uses in calculating the fair value of stock-based
payment awards represent its best estimates, which involve inherent
uncertainties and the application of management's judgment. As a result, if
factors change and the Company uses different assumptions,
the Company's equity-based consulting and interest expense could be materially
different in the future.
10
Valuation
and accounting for options and
warrants
|
The
Company determines the grant date fair value of options and warrants using a
Black-Scholes-Merton option valuation model based upon assumptions regarding
risk-free interest rate, expected dividend rate, volatility and estimated term.
For grants during 2008, the Company used a 2.0 to 4.5% risk-free interest rate,
0% dividend rate, 53-66% volatility and estimated term of 2.5 to 7.5 years.
Values computed using these assumptions ranged from $.102 per share to $.336 per
share. Warrants or options awarded for services rendered are expensed over the
period of service (normally the vesting period) as compensation expense for
employees or an appropriate consulting expense category for awards to
consultants and directors. Warrants granted in connection with a common equity
financing are included in shareholders’ equity, provided that there is no
re-pricing provision that requires they be treated as a liability (See Note 10)
and warrants granted in connection with a debt financing are treated as a debt
discount and amortized using the interest method as interest expense over the
term of the debt. Warrants issued in connection with the $100,000 convertible
debt that closed March 1, 2007 created a debt discount of $40,242 that is
being amortized as additional interest over its 5-year term.
Warrants
issued in connection with the $170,000 in convertible “bridge” debt
that closed in July 2007 created a calculated debt discount of $92,700 that
was fully expensed over its loan term that matured April 30, 2008. The Company
issued $100,000 in convertible debt in October 2009 and issued a warrant, in
connection with the debt, for 200,000 shares of common stock at $.65 per share.
The Company determined that the warrant had an initial value of $30,150 that was
treated as a debt discount and is being amortized as additional interest expense
over the 24-month term of the note. The Company also issued $200,000 in
convertible debt in June 2010 and issued a warrant, in connection with the debt,
to purchase 1,111,112 shares at $.46 per share.
The
Company determined that the value of the June 2010 warrant is $96,613.This value
is treated as a debt discount and amortized as additional interest expense over
the 22-month term of the note. The Company also issued $32,000 in convertible
debt in September, 2010 and issued a warrant to purchase 320,000 shares at $.46
per share. The Company determined that this warrant has a value of $15,553
that was treated as a debt discount and amortized as additional interest expense
over the 18 month term of the note.
The
following summarizes transactions for stock options and warrants for the periods
indicated:
Stock
Options (1)
|
Warrants
(1)
|
|||||||||||||||
Number
of
Shares
|
Average
Exercise
Price
|
Number
of
Shares
|
Average
Exercise
Price
|
|||||||||||||
Outstanding
at December 31, 2005
|
17,956 | $ | 1.67 | 20,950 | $ | 2.62 | ||||||||||
Issued
|
23,942 | 1.67 | 71,826 | 0.85 | ||||||||||||
Outstanding
at December 31, 2006
|
41,898 | $ | 1.67 | 92,776 | $ | 1.25 | ||||||||||
Issued
|
5,984 | 1.67 | 28,502 | 0.35 | ||||||||||||
Outstanding
at December 31, 2007
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47,882 | $ | 1.67 | 121,278 | $ | 1.04 | ||||||||||
Issued
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1,243,292 | 0.20 | 5,075,204 | 0.45 | ||||||||||||
Expired
|
(11,971 | ) | 3.76 | |||||||||||||
Outstanding
at December 31, 2008
|
1,291,174 | $ | 0.26 | 5,184,511 | 0.45 | |||||||||||
Issued
|
205,000 | 0.37 | 2,188,302 | 0.65 | ||||||||||||
Outstanding
at December 31, 2009
|
1,496,174 | 0.27 | 7,372,813 | 0.49 | ||||||||||||
Issued
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150,000 | 0.50 | 3,035,662 | 0.38 | ||||||||||||
Expired
|
(17,956 | ) | 1.67 | (8,979 | ) | 1.67 | ||||||||||
Outstanding
at September 30, 2010
|
1,628,218 | 0.28 | 10,399,496 | 0.46 |
(1)
Adjusted for the reverse stock splits in total at June 6, 2008 and October 20,
2008. There were no options or warrants exercised in the periods.
11
At
September 30, 2010, options to purchase 1,078,218 shares of common stock were
fully vested and exercisable with a weighted average exercise price of $.28 and
a weighted average remaining term of 4.7 years. There were also warrants to
purchase 10,399,496 shares of common stock that were fully vested and
exercisable. Stock-based compensation recognized in the nine months ended
September 30, 2010 and 2009 were $667,000 and $549,000, respectively. The
following summarizes the status of options and warrants outstanding at September
30, 2010.
Range
of Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Life
|
||||||
Options
|
||||||||
$0.01
|
543,292 | 7.68 | ||||||
$0.35
|
875,000 | 2.87 | ||||||
$0.50
|
180,000 | 8.14 | ||||||
$1.67
|
29,926 | 1.27 | ||||||
Total
|
1,628,218 | |||||||
Warrants
|
||||||||
$0.02
|
71,826 | 3.70 | ||||||
$0.10
|
800,000 | 2.42 | ||||||
$0.17
|
250,000 | 4.94 | ||||||
$0.35
|
798,597 | 2.18 | ||||||
$0.46
|
6,403,610 | 1.29 | ||||||
$0.65
|
2,039,550 | 1.93 | ||||||
$1.67
|
35,913 | 1.20 | ||||||
Total
|
10,399,496 |
Stock
options and warrants expire on various dates from June 2011 to February
2020.
Under
the terms of the Company's agreement with investors in the October 2008
financing, 1,920,000 shares of common stock were the maximum number of shares
allocated to the Company's existing shareholders at the time of the offering
(also referred to as the original shareholders or the "Founders"). Since the
total of the Company's fully-diluted shares of common stock was greater than
1,920,000 shares, in order for the Company to proceed with the offering, the
board of directors approved a reverse stock split of 1-for-1.2545. After this
split was approved, additional options and warrants were identified, requiring a
second reverse stock split in order to reach the 1,920,000 shares. The second
reverse stock split on the reduced 1-for-1.2545 balance was determined to be
1-for 1.33176963. Taken together, if only one reverse stock were performed, the
number would have been a reverse stock split of 1-for 1.670705.
On June
6, 2008, the board of directors approved the first reverse stock split. The
authorized number of common stock of 20,000,000 shares was proportionately
divided by 1.2545 to 15,942,607.
On
October 20, 2008, the board of directors (i) approved the second reverse stock
split pursuant to which the authorized number of shares of common stock of
15,942,607 was proportionately divided by 1.33177 to 11,970,994 shares and (ii)
approved a resolution to increase the number of authorized shares of the
Company's common stock from 11,970,994 to 40,000,000, which was approved by the
Company’s shareholders holding a majority of the shares entitled to vote thereon
at a special meeting of shareholders held on December 3, 2008.
Stock,
Stock Options and Warrants Granted by the Company
The
following table is the listing of stock options and warrants as of September 30,
2010 by year of grant:
Stock
Options:
Year |
Shares
|
Price
|
||||||
2006
|
23,942 | 1.67 | ||||||
2007
|
5,984 | 1.67 | ||||||
2008
|
1,243,292 | .01-.35 | ||||||
2009
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205,000 | .35-.50 | ||||||
2010
|
150,000 | .50 | ||||||
Total
|
1,628,218 | $ | .01-$1.67 |
12
Warrants:
Year
|
Shares
|
Price
|
||||||
2006
|
71,826 | .02-1.67 | ||||||
2007
|
28,502 | .35 | ||||||
2008
|
5,075,204 | .02-.46 | ||||||
2009
|
2,188,302 | .35-.65 | ||||||
2010
|
3,035,662 | .10-.65 | ||||||
Total
|
10,399,496 | $ | .02-$1.67 |
NOTE
4 - RESTRICTED CASH IN ESCROW
Under
the terms of the escrow agreement established in connection with the
October 2008 financing, certain amounts were to be withheld to pay legal,
accounting and placement agent fees as well as to pay for investor relations
activities that commenced upon receiving an effective registration of the
Company’s stock and an initial quotation on the OTC Bulletin
Board.
During
the fourth quarter of 2009, $60,000 was released to pay for investor relations
activities. Additionally, $103,333 has been released in 2010 to pay for
investor relations and accounting expenses. There is no balance in the escrow
account as of September 30, 2010.
NOTE
5 - LOSS PER SHARE
The
following table presents the shares used in the basic and diluted loss per
common share computations:
From
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||||||||||||||||||||
Three
Months Ended
|
Nine
Months Ended
|
April
23, 2002
|
||||||||||||||||||
September
30,
|
September
30,
|
(Inception)
To
|
||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
September
30, 2010
|
||||||||||||||||
Numerator
|
||||||||||||||||||||
Net
Loss available in basic and diluted calculation
|
$ | (158,110 | ) | $ | (773,015 | ) | $ | (956,180 | ) | $ | (2,515,440 | ) | $ | (6,985,548 | ) | |||||
Denominator
|
||||||||||||||||||||
Weighted
average common shares oustanding-basic
|
13,159,639 | 9,634,828 | 12,428,401 | 8,903,119 | 3,287,557 | |||||||||||||||
Effect
of dilutive stock options and warrants (1)
|
- | - | - | - | - | |||||||||||||||
Weighted
average common shares outstanding-diluted
|
13,159,639 | 9,634,828 | 12,428,401 | 8,903,119 | 3,287,557 | |||||||||||||||
Loss
per common share-basic and diluted
|
$ | (0.01 | ) | $ | (0.08 | ) | $ | (0.08 | ) | $ | (0.28 | ) | $ | (2.12 | ) |
|
(1)
The number of shares underlying options and warrants outstanding as of
September 30, 2010 and September 30, 2009 are 12,027,714 and 8,595,958,
respectively. The effect of the shares that would be issued upon exercise
of such options and warrants has been excluded from the calculation of
diluted loss per share because those shares are
anti-dilutive.
|
NOTE
6 – INCOME TAXES
The
provision for income taxes consists of an amount for taxes currently payable and
a provision for tax consequences deferred to future periods. Deferred income
taxes are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
There is
no income tax provision in the accompanying statement of operations due to the
cumulative operating losses that indicate a 100% valuation allowance for the
deferred tax assets and state income taxes is appropriate.
Federal
and state income tax return operating loss carryovers, as of December 31, 2009,
were approximately $5,415,000 and will begin to expire between 2017 and
2019.
The
valuation allowance has been recorded due to the uncertainty of realization of
the benefits associated with the net operating losses. Future events and changes
in circumstances could cause this valuation allowance to change.
The
components of deferred income taxes at September 30, 2010 and December 31, 2009
are as follows:
September
30,
2010
|
December
31,
2009
|
|||||||
(Unaudited)
|
||||||||
Deferred
Tax Asset:
|
||||||||
Net
Operating Loss
|
$ | 1,500,000 | $ | 1,278,000 | ||||
Total
Deferred Tax Asset
|
1,500,000 | 1,278,000 | ||||||
Less
Valuation Allowance
|
1,500,000 | 1,278,000 | ||||||
Net
Deferred Income Taxes
|
$ | — | $ | — |
13
NOTE
7- CONVERTIBLE DEBENTURE
The
Company issued a convertible debenture to Andcor Companies, Inc.
(“Andcor”) with principal of $10,000 and interest at 10.25% that
originally matured in 2007. The debenture is convertible into shares of the
Company’s common stock at the lower of $0.90 per share or the price per share at
which the next equity financing agreement is completed, and is now re-set to
$.35 per share. The convertible debenture has not yet been paid, but the
maturity of the note was extended, in May 2010, to March 31, 2012.
NOTE 8 – LONG-TERM DEBT
Long-term
debt is as follows:
September
30,
2010
|
December
31,
2009
|
|||||||
Note
payable to bank in monthly installments of $1,275/including variable
interest at 2% above the prevailing prime rate (3.25% at September 30,
2010) to August 2011 when the remaining balance is payable. The note is
personally guaranteed by former executives of the Company.
|
13,925 | 24,601 | ||||||
Notes
payable to two individuals, net of discounts of $11,402 and $17,438 with
interest only payments at 12% to March 2012 when the remaining balance is
payable. The notes are convertible into 285,715 shares of common stock in
the Company at $.35 per share.
|
88,598 | 82,562 | ||||||
Note
payable issued on October 26, 2009 to the parents of one the Company's
officers, net of a discount of $16,128 and $27,435 discount, with interest
at 8% to March 31, 2012 and convertible into shares of common stock at
$.50 per share.
|
83,871 | 72,565 | ||||||
Notes
payable issued to two individuals in January, 2010. The notes bear
interest at 8%, mature March 31, 2012 and are convertible into shares of
common stock, at 50% of the weighted average closing bid price over any
10-consecutive days of trading.
|
100,000 | - | ||||||
Note
payable issued on June 12, 2010 to the parents of one of the Company's
officers, net of a discount of $80,803. The note bears interest at 12% to
March 31, 2012, and is convertible into common stock at $.18 per
share.
|
119,197 | - | ||||||
Note
payable issued on August 2, 2010 to and institutional
investor. The note bears interest at 8%, matures May 4, 2011
and is convertible into common stock at 50% of the average of the three
lowest closing prices in any 10 day trading period.
|
50,000 | - | ||||||
Note
payable issued on September 16, 2010 to an institutional
investor. The note bears interest at 10%, matures March 15,
2012 and is convertible into common stock at $.18 per
share.
|
100,000 | - | ||||||
Note
payable issued on September 21, 2010 to the parents of one of our
officers, net of a discount of $15,294. The note bears interest
at 12%, matures March 30, 2012 and is convertible into common stock at
$.18 per shares
|
16,706 | - | ||||||
Total
|
572,296 | 179,728 | ||||||
Less
amount due within one year
|
63,925 | 63,620 | ||||||
Long-Term
Debt
|
$ | 508,371 | $ | 116,108 |
Cash
payments for interest were $1,351 for the nine months ended September 30, 2009
and $799 for the nine months ended September 30, 2010.
Principal
payments required during the 12-month periods ended September 30:
|
||||
2011
|
$ | 63,925 | ||
2012
|
$ | 642,000 | ||
2013
|
$ | 0 |
NOTE
9 – RENT OBLIGATION
The
Company leases its principal office under a non-cancelable lease that extends
five years. In addition to rent, the Company pays real estate taxes and repairs
and maintenance on the leased property.
The
Company’s rent obligation for the years 2010 to 2014 is as follows:
2010
|
$ | 29,000 | ||
2011
|
$ | 30,000 | ||
2012
|
$ | 30,000 | ||
2013
|
$ | 26,000 | ||
2014
|
$ | 0 |
14
NOTE
10 – LIABILITY FOR EQUITY-LINKED FINANCIAL INSTRUMENTS
The
Company adopted ASC 815- Derivatives and Hedging (“ASC
815”) on January 1, 2009. ASC 815 mandates a two-step process for evaluating
whether an equity-linked financial instrument or embedded feature is indexed to
the entity's own stock. It is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, which was the
Company's first quarter of 2009. Most of the warrants issued by the Company
contain a strike price adjustment feature, which upon adoption of ASC 815,
changed the classification (from equity to liability) and the related accounting
for warrants with a $479,910 estimated fair value of as of January 1, 2009. An
adjustment was made to remove $486,564 from paid-in capital (the cumulative
values of the warrants on their grant dates), a positive adjustment of $6,654
was made to accumulated deficit, representing the gain on valuation from the
grant date to January 1, 2009, and booked $479,910 as a liability.
The
January 1, 2009 valuation was computed using the Black-Scholes valuation model
based upon a 2.5-year expected term, an expected volatility of 63%, an exercise
price of $.46 per share, a stock price of $.35, a zero dividend rate and a 1.37%
risk free interest rate. Subsequent to January 1, 2009 these warrants were
revalued at the end of each quarter and a gain or loss was recorded based upon
their increase or decrease in value during the quarter. Likewise, new warrants
that were issued during 2009 and 2010 were valued, using the Black-Scholes
valuation model on their date of grant and an entry was made to reduce paid-in
capital and increase the liability for equity-linked financial instruments.
These warrants were also re-valued at the end of each quarter based upon their
expected life, the stock price, the exercise price, assumed dividend rate,
expected volatility and risk free interest rate. A significant reduction in the
liability was realized in 2010 primarily due to a reduction from $.50 to $.22
per share in the underlying share price.
The
inputs to the Black-Scholes model during 2009 and 2010 were as
follows:
Stock
price
|
$ | .22 to $.50 | ||
Exercise
price
|
$ | .17 to $.65 | ||
Expected
life
|
2.00
to 6.5
|
years | ||
Expected
volatility
|
59%
to 67
|
% | ||
Assumed
dividend rate
|
- | % | ||
Risk
free interest rate
|
.710%
to 2.97
|
% |
The
original valuations, annual gain/(loss) and end of year valuations are shown
below:
Initial
Value
|
Annual
Gain
(Loss)
|
Value
at
12/31/2009
|
YTD
2010
Gain
|
Value
at
9/30/2010
|
|||||||||||||||||
January
1, 2009 Adoption
|
$ | 479,910 | $ | (390,368 | ) | $ | 870,278 | 799,779 | 70,498 | ||||||||||||
Warrants
issued in quarter ended 6/30/2009
|
169,854 | 20,847 | 149,007 | 129,312 | 19,695 | ||||||||||||||||
Warrants
issued in quarter ended 9/30/2009
|
39,743 | (738 | ) | 40,481 | 38,473 | 2,008 | |||||||||||||||
Warrants
issued in quarter ended 12/31/2009
|
12,698 | 617 | 12,081 | 10,202 | 1,879 | ||||||||||||||||
Subtotal
|
$ | 702,205 | $ | (369,642 | ) | $ | 1,071,847 | ||||||||||||||
Warrants
issued in quarter ended 3/31/2010
|
25,553 | 20,903 | 4,650 | ||||||||||||||||||
Warrants
issued in quarter ended 6/30/2010
|
31,332 | 26,393 | 4,939 | ||||||||||||||||||
Warrants
issued in quarter ended 9/30/2010
|
31,506 | 232 | 31,274 | ||||||||||||||||||
Total
|
$ | 790,506 | $ | 1,025,294 | $ | 134,943 |
NOTE
11 – RELATED PARTY
The
Company entered into agreements, in 2008, with our Chairman of the Board,
Lawrence Gadbaw, and in 2009 with board member, Peter Morawetz, to pay Mr.
Gadbaw $25,000 and Mr. Morawetz $30,000 upon the Company raising $3 million in
new equity. Mr. Gadbaw will also be paid the balance, if any, due under his
separation agreement from 2008. This amount was $46,000 upon signing the
agreement in 2008, is payable at $2,000 per month, and $2,000 remains in
accounts payable as of September 30, 2010. Mr. Morawetz will also receive a
stock option for 75,000 shares at $.35 per share and Mr. Gadbaw will receive a
stock option for 160,000 shares at $.35 per share upon the Company raising $3
million.
15
ITEM 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations Overview
Our
Company was incorporated in Minnesota in April 2002. We are an early-stage
company developing an environmentally conscientious system for the collection
and disposal of infectious fluids that result from surgical procedures and
post-operative care. We achieved our first sale in June 2009. Since our
inception in 2002, we have invested significant resources into product
development and in preparing for approval from the FDA. We believe that our
success depends upon converting the traditional process of collecting and
disposing of infectious fluids from the operating rooms of medical facilities to
our wall- mounted Fluid Management System (“FMS”) and use of our proprietary
cleaning fluid.
Since
inception, we have been unprofitable. We incurred a net loss of approximately
$2,892,000 for the fiscal year ended 2009 and a net loss of approximately
$956,000 for the nine months ended September 30, 2010 compared to a loss of
approximately $2,515,000 for the nine months ended September 30, 2009. As of
September 30, 2010, we had an accumulated deficit of approximately $6,986,000.
As a company in the early stage of development, our limited history of
operations makes prediction of future operating results difficult. We believe
that period to period comparisons of our operating results should not be relied
on as predictive of our future results.
We have
focused on finalizing our production and obtaining final FDA clearance to sell
our product to the medical facilities market. FDA final clearance was obtained
on April 1, 2009. Our innovative FMS will be sold through experienced,
independent medical distributors and manufacturers representatives who we
believe enhance acceptability of our product in the marketplace. We are
currently in the process of signing agreements with independent sales
representatives and product installation organizations and conducting training
sessions. We achieved our first billable shipment in June 2009. Since our FDA
clearance to sell our FMS product was only received on April 1, 2009, it is too
early to know with a high degree of confidence how quickly, and in what amounts,
new orders will develop.
Since we
do not expect to generate sufficient revenues in 2010 to fund our capital
requirements, our capital needs for the next 12 months are expected to be
approximately $3 million even though we plan to use outside third party contract
manufacturers to produce the FMS and independent sales representatives to sell
the FMS. Our future cash requirements and the adequacy of available funds will
depend on our ability to sell our FMS and related products now that FDA final
clearance has been obtained. We expect that we will require additional funding
to finance operating expenses and to enter the international
marketplace.
As of
September 30, 2010, we have funded our operations through a bank loan of
$41,400, an equity investment of $68,000 from the Wisconsin Rural Enterprise
Fund (“WREF”) and $30,000 in early equity investment from several individuals.
WREF had also previously held debt in the form of three loans of $18,000,
$12,500 and $25,000. In December 2006, WREF converted two of the loans totaling
$37,500 into 43,000 shares of common stock. In August 2006, we secured a $10,000
convertible loan from one of our vendors. In February 2007, we obtained $4,000
in officer and director loans, and, in March 2007, we arranged a $100,000
convertible note from two private investors. In July 2007, we obtained a
convertible bridge loan of $170,000. In June 2008, we paid off the remaining
$18,000 loan from WREF and have raised approximately $1.6 million through our
October 2008 financing. During 2009, we raised an additional $625,000 in a
private placement of 1,200,000 Units at $.50 per Unit, which Units included one
share of common stock and a warrant to purchase one share of common stock at
$.65 per share, and $100,000 in convertible debt, convertible into common stock
at $.50 per shares and a warrant to purchase 200,000 shares at $.65 per
share.
In the
first nine months of 2010, the Company raised $202,275 in equity by issuing
354,550 Units at $.50 per Unit, which Units included one share of common stock
and a warrant to purchase one share of common stock at $.65 per share and
250,000 Units at $.10 per Unit including one common share and a warrant to
purchase one common share at $.17. We borrowed $200,000 in January 2010 from an
investor and existing shareholders and $200,000 in June 2010 from the parents of
one of our officers. We borrowed $50,000 in August 2010 from an investor with
interest at 8% and a conversion price of 50% of the average of the 3 lowest
closing prices in any 10 day trading period. We borrowed $100,000 in September
2010 from an investor with interest at 10% and a conversion price of $.18 per
share and we borrowed $32,000 in September 2010 from the parents of one of
our officers with interest at 12% and a conversion price of $.10 per share,
and a
warrant to purchase 320,000 shares at $.46 per share. The January 2010 notes
bear interest at 8% and are convertible into common stock of the Company at 50%
of the average trading price of the Company’s common stock over a ten-day
trading period. We repaid $100,000 of the January 2010 notes in June 2010. The
$200,000 note in June 2010 bears interest at 12% and is convertible into common
stock at $.18 per share. We also issued a warrant, in connection with the June
2010 note, to purchase 1,111,112 shares of common stock at $.46 per
share.
16
Critical Accounting Policies and
Estimates and Recent Accounting Developments Critical Accounting Policies and
Estimates
The
discussion and analysis of our financial condition and results of operations are
based upon our audited Financial Statements, which have been prepared in
accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of our financial statements, the reported amounts of revenues and
expenses during the reporting periods presented, as well as our disclosures of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates and assumptions, including, but not limited to, fair value of
stock-based compensation, fair value of acquired intangible assets and goodwill,
useful lives of intangible assets and property and equipment, income taxes, and
contingencies and litigation.
We base
our estimates and assumptions on our historical experience and on various other
information available to us at the time that these estimates and assumptions are
made. We believe that these estimates and assumptions are reasonable under the
circumstances and form the basis for our making judgments about the carrying
values of our assets and liabilities that are not readily apparent from other
sources. Actual results and outcomes could differ from our
estimates.
Our
significant accounting policies are described in Note 1 Summary of Significant Accounting
Policies, in the Notes to Financial Statements of this Form 10-Q. We
believe that the following discussion addresses our critical accounting policies
and reflect those areas that require more significant judgments, and use of
estimates and assumptions in the preparation of our Financial
Statements.
Revenue Recognition We
recognize revenue in accordance with the SEC’s Staff Accounting Bulletin No.
101, Revenue Recognition in
Financial Statements, as amended by Staff Accounting Bulletin No. 104
(together, SAB 101), and Statement of Financial Accounting Standards No. 48,
Revenue Recognition When
Right of Return
Exists (SFAS 48).
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectability is probable.
Delivery is considered to have occurred upon either shipment of the product or
arrival at its destination based on the shipping terms of the transaction. Our
standard terms specify that shipment is FOB BioDrain and we will, therefore
recognize revenue upon shipment in most cases. This revenue recognition policy
applies to shipments of our FMS units as well as shipments of cleaning solution
kits. When these conditions are satisfied, we recognize gross product revenue,
which is the price we charge generally to our customers for a particular
product. Under our standard terms and conditions there is no provision for
installation or acceptance of the product to take place prior to the obligation
of the customer. The customer’s right of return is limited only to our standard
warranty whereby we replace or repair, at our option, and it would be very rare
that the unit or significant quantities of cleaning solution kits may be
returned. Additionally, since we buy both the FMS units and cleaning solution
kits from “turnkey” suppliers, we would have the right to replacements from the
suppliers if this situation should occur.
17
Stock-Based
Compensation. Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)) which replaced SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and superseded Accounting Principles Board (APB)
Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), all now
codified under ASC 718- Compensation-Stock
Compensation (“ASC 718). Under ASC 718 stock-based employee compensation
cost is recognized using the fair value based method for all new awards granted
after January 1, 2006 and unvested awards outstanding at January 1, 2006.
Compensation costs for unvested stock options and non-vested awards that were
outstanding at January 1, 2006, are being recognized over the requisite service
period based on the grant-date fair value of those options and awards as
previously calculated under SFAS 123 for pro forma disclosures, using a
straight-line method. We elected the modified-prospective method in under which
prior periods are not retroactively restated.
ASC 718
requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model or other acceptable means. The
Company uses the Black-Scholes option valuation model which requires the input
of significant assumptions including an estimate of the average period of time
employees will retain vested stock options before exercising them, the estimated
volatility of th Company's common stock price over the expected term, the number
of options that will ultimately be forfeited before completing vesting
requirements, the expected dividend rate and the risk-free interest rate.
Changes in the assumptions can materially affect the estimate of fair value of
stock-based compensation and, consequently, the related expense recognized. The
assumptions the Company uses in calculating the fair value of stock-based
payment awards represent the Company's best estimates, which involve inherent
uncertainties and the application of management's judgment. As a result, if
factors change and the Company uses different assumptions, the Company's
equity-based compensation expense could be materially different in the
future.
Because
we do not have significant historical trading data on our stock we relied upon
trading data from a composite of 10 medical companies traded on major exchanges
and 15 medical companies traded on the OTC Bulletin Board to help us arrive at
expectations as to volatility of our own stock when public trading commences.
Likewise, we have no history of option and warrant exercises, so we were
required to make a significant judgment as to expected option and warrant
exercise patterns in the future regarding employee and director options and
warrants. In the case of options and warrants issued to consultants and
investors we used the legal term of the option/warrant as the estimated term
unless there was a compelling reason to use a shorter term. The measurement date
for employee and non-employee options and warrants is the grant date of the
option or warrant. The vesting period for options that contain service
conditions is based upon management’s best estimate as to when the applicable
service condition will be achieved. Changes in the assumptions can materially
affect the estimate of fair value of stock-based compensation and, consequently,
the related expense recognized. The assumptions we use in calculating the fair
value of stock-based payment awards represent our best estimates, which involve
inherent uncertainties and the application of management's judgment. As a
result, if factors change and we use different assumptions, our equity-based
compensation expense could be materially different in the future. See Note 3,
Stock-Based Compensation, in Notes to
Financial Statements, for additional information.
When an
option or warrant is granted in place of cash compensation for services we deem
the value of the service rendered to be the value of the option or warrant. In
most cases, however, an option or warrant is granted in addition to other forms
of compensation and its separate value is difficult to determine without
utilizing an option pricing model. For that reason we also use the
Black-Scholes-Merton option-pricing model to value options and warrants granted
to non-employees, which requires the input of significant assumptions including
an estimate of the average period that investors or consultants will retain
vested stock options and warrants before exercising them, the estimated
volatility of our common stock price over the expected term, the number of
options and warrants that will ultimately be forfeited before completing vesting
requirements and the risk-free interest rate. Changes in the assumptions can
materially affect the estimate of fair value of stock-based compensation and,
consequently, the related expense recognized that. Since we have limited trading
history in our common stock and no first-hand experience with how our investors
and consultants have acted in similar circumstances, the assumptions we use in
calculating the fair value of stock-based payment awards represent our best
estimates, which involve inherent uncertainties and the application of
management's judgment. As a result, if factors change and we use different
assumptions, our equity-based consulting and interest expense could be
materially different in the future.
Since our
common stock has limited public trading history we were required to take an
alternative approach to estimating future volatility and the future results
could vary significantly from our estimates. We compiled historical volatilities
over a period of 2-7 years of 15 small-cap medical companies traded on major
exchanges and 10 mid-size medical companies on the OTC Bulletin Board and
combined the results using a weighted average approach. In the case of standard
options to employees we determined the expected life to be the midpoint between
the vesting term and the legal term. In the case of options or warrants granted
to non-employees we estimated the life to be the legal term unless there was a
compelling reason to make it shorter.
Valuation of
Intangible Assets We review identifiable intangible assets for impairment
in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. Our
intangible assets are currently solely the costs of obtaining trademarks and
patents. Events or changes in circumstances that indicate the carrying amount
may not be recoverable include, but are not limited to, a significant change in
the medical device marketplace and a significant adverse change in the business
climate in which we operate. If such events or changes in circumstances are
present, the undiscounted cash flows method is used to determine whether the
intangible asset is impaired. Cash flows would include the estimated terminal
value of the asset and exclude any interest charges. If the carrying value of
the asset exceeds the undiscounted cash flows over the estimated remaining life
of the asset, the asset is considered impaired, and the impairment is measured
by reducing the carrying value of the asset to its fair value using the
discounted cash flows method. The discount rate utilized is based on
management's best estimate of the related risks and return at the time the
impairment assessment is made.
Our
accounting estimates and assumptions bear various risks of change, including the
length of the current recession facing the United States, the expansion of the
slowdown in consumer spending in the U.S. medical markets despite the early
expressed opinions of financial experts that the medical market would not be as
affected as other markets and failure to gain acceptance in the medical
market.
18
Recent
Accounting Developments
See Note
1 - “Summary of Significant Accounting Policies” to the Condensed Financial
Statements of this Quarterly Report on Form 10-Q for a discussion of recent
accounting developments.
Results
of Operations
Three
months and nine months ended September 30, 2010 and 2009
Revenue. The Company recorded
no revenue in the three months ended September 30, 2010 and $288 in revenue in
the nine months ended September 30, 2010 compared to revenue of zero in
the three months ended September 30, 2009 and $15,737 during the nine
months ended September 30, 2009. The Company received its first order for four
FMS units and a case of cleaning solution kits from a hospital in Texas and
shipped the first FMS unit and the cleaning solution kits in June 2009. The
revenue was approximately $14,000 for the FMS unit, approximately $1,000 for the
cleaning solution kits and $750 for installation. The revenue in the first
quarter of 2010 was for disposable supplies purchased by a beta site customer.
The Company expects the revenue for FMS units to increase significantly at such
time as we obtain sufficient financing to pay our contract manufacturer to
produce and ship the product.
Cost of sales. Cost of sales
was zero in the three months ended September 30, 2010 and $140 in the nine
months ended September 30, 2010 compared to zero in the three months ended
September 30, 2009 and $7,450 in the nine months ended September 30, 2009.
The gross profit margin was approximately 50% for both the hardware and the
cleaning solution kits in the nine months ended September 30, 2010 and September
30, 2009 but should increase over time as volume purchasing discounts on both
the equipment and the cleaning solution begin to take effect.
General
and Administrative expense. General and administrative expense primarily
consists of, management salaries, professional fees, consulting fees, travel
expense, administrative fees and general office expenses.
General
and Administrative (G&A) expenses decreased to $381,000 from $522,000 in the
three months ended September 30, 2010 compared to September 30, 2009 and
increased to $1,532,000 in the nine months ended September 30, 2010 compared to
$1,393,000 in the nine months ended September 30, 2009. The decrease in the
three month period was due to a $236,000 expense for stock based compensation
recorded in the three months ended September 30, 2009 with no corresponding
expense in 2010. The decrease was offset, in part, by an increase of $50,000 in
legal fees and a $48,000 increase in consulting expense. The increase in
the nine months ended September 30, 2010 was primarily due to a $536,000
increase in stock-based consulting expense for stock and warrants issued to
consultants who were engaged to raise new funds and to increase public awareness
in our stock through an investor relations program. The Company also incurred an
increase of $149,000 in legal fees, a $38,000 increase in investor relations
expense and a $17,000 increase in corporate insurance expense, all offset in
significant part, by a $355,000 decrease in stock-based registration payments.
The Company incurred a $355,000 stock registration payment expense in the first
half of 2009 due to a delay in registration of stock issued in a 2008 financing
but did not incur a similar expense in 2010. Total G&A expenses are expected
to increase due to increased insurance premiums, investor relations expenses and
audit fees, resulting from becoming a public company, but otherwise remain
relatively constant over the next several quarters.
Operations
expense. Operations expense primarily consists of expenses related to product
development and prototyping and testing in the company’s current
stage.
Operations
expense decreased to $56,000 in the three months ended September 30, 2010
compared to $157,000 in the three months ended September 30, 2009 and decreased
to $165,000 in the nine months ended September 30, 2010 compared to $351,000 in
the nine months ended September 30, 2009. The decrease in the three-month and
nine month periods was primarily due to a $101,000 reduction in stock based
compensation expense. In the
nine-month period there was also a $20,000
reduction in product development expense and a $62,000 reduction in consulting
and testing expenses as a result of the Company obtaining FDA clearance in April
2009. Operations expense in the next several quarters is expected to increase
significantly as the Company expects to commence shipments of FMA units as soon
as we obtain sufficient financing to pay our contract manufacturer to build and
ship the units.
19
Sales
and Marketing expense. Sales and marketing expense consists of expenses required
to sell products through independent reps, attendance at trades shows, product
literature and other sales and marketing activities.
Sales and
marketing expenses decreased to $36,000 in the three months ended September 30,
2010 and $177,000 in the nine months ended September 30, 2010 from $136,000 and
$345,000 in the comparable 2009 periods, respectively. The decrease in expense
was primarily related to a $36,000 reduction in the three-month period and a
$95,000 reduction in the nine-month period, in marketing supplies expense,
travel and trade show expense. There was also a reduction in stock based
compensation expense of $64,000 and $72,000 in the three months and nine months
ended September 30, 2010, respectively, and a $19,000 decrease in salaries
during the three months ended September 30, 2010 due to the resignation of an
employee. During the last several quarters the Company has operated on a very
slim marketing budget as a result of limited funding but we expect to increase
our trade show, promotion and travel expense significantly after we receive
significant funding.
Interest
expense.
Interest
expense increased to $34,000 in the three months ended September 30, 2010
compared to $25,000 in the three months ended September 30, 2009, and increased
to $108,000 in the nine months ended September 30, 2010 compared to $64,000 in
the nine months ended September 30, 2009. The increase in interest expense in
both the three-month and nine-month periods was due to a higher level of
interest bearing debt and amortization of larger debt discounts attributable to
new convertible debt issued with warrants.
The
(Gain)/Loss on revaluation of equity-linked financial instruments swung to a
gain of $349,000 in the three months ended September 30, 2010 and $1,025,000 in
the nine months ended September 30, 2010 compared to a gain of $66,000 and a
loss of $370,000 in the three months and nine months ended September 30, 2009,
respectively. The gain in the current periods resulted from a slight reduction
in the risk-free interest rate used in the valuation model, a reduction in the
remaining life and a reduction to $.22 per share from $.50 per share in the
underlying stock price.
Liquidity
and Capital Resources
Capital Structure
We had a
cash balance of $16,632 as of December 31, 2009 and $20,434 as of September 30,
2010. Since our inception, we have incurred significant losses. As of September
30, 2010, we had an accumulated deficit of $6,986,000. We have not achieved
profitability and anticipate that we will continue to incur net losses for the
foreseeable future. We expect that our operations expense, including product
development expense, sales and marketing and general and administrative expenses
will increase, and as a result we will need to generate significant revenue to
achieve profitability.
There is
no certainty that access to needed capital will be successful. We have not
depended on the future exercise of outstanding warrants to provide additional
funding.
To date,
our operations have been funded through a bank loan and private convertible
debt in the amount of approximately $1,022,000 and equity investments
totaling approximately $2,500,000. As of September 30, 2010, we had accounts
payable of $1,128,000 and accrued liabilities of $384,000.
Cash Flows
Net cash
used in operating activities was $773,000 in the nine months ended September 30,
2010 compared to $986,000 net cash used in operating activities in the nine
months ended September 30, 2009. Although the net loss in the nine months ended
September 30, 2010 was more than $1.5 million less than in the 2009 first nine
months, the 2009 period included a non-cash loss of $370,000 on the valuation of
equity-linked securities compared to a non-cash gain of $1,025,000 in the first
nine months of 2010 which offset, in part, the use of cash from operations
resulting from the net loss. In addition, accounts payable and accrued expenses
increased by $317,000 in the nine months ended September 30, 2010 compared to
the same period in 2009 which further reduced the cash used in operating
activities.
Net cash
used in investing activities was $0 in the nine months ended September 30, 2010
and 2009. There have been no investing activities since the Company invested in
new furniture and patents in 2008. The Company will likely increase its cash
used in investing activities in the next several quarters as we prepare to
support the expected growth in sales.
Net cash
provided by financing activities was $777,000 in the nine months ended September
30, 2010 compared to $590,000 in the same 2009 period. The Company expects to
show additional cash provided by financing activities in the next few
quarters.
Based on
our current operating plan we believe that we have sufficient cash, cash
equivalents and short-term investment balances to last approximately through
November 2010 after which additional financing will be needed to continue to
satisfy our obligations. While holders of our warrants could exercise and
provide cash to us during that time frame, we are not depending on that in our
fundraising efforts.
Management
hired an investment banker, in February 2010, to commence an effort to raise an
additional $3-$5 million in new equity with an interim closing by August 31,
2010. Although we did not accomplish our goal of closing the financing in August
2010 and our ability to raise this new capital is in substantial doubt we
received $725,000 during 2009 and $784,000 in the first nine months of 2010 in a
Company-managed private placement of securities, and our April 1, 2009 510(k)
clearance from the FDA to authorize us to market and sell our FMS products is
being received very positively. If the Company is successful in raising at least
$3 million in new equity we will have sufficient capital to operate our business
and execute our business plan for at least the next 12 months. If the Company
raises the additional capital by issuing additional equity securities its
shareholders could experience substantial dilution.
20
The funds
remaining from our October 2008 offering have allowed us to complete the testing
and certification of our FMS unit and to receive, on April 1, 2009, final FDA
clearance. We believe that our existing funds will also be sufficient to pay for
normal operating expenses as we await additional funding. We have doubts about
raising capital because of our early stage position and history of losses. We
also note the recent economic downturn which has made the overall market nervous
about investing.
Our
operating plan assumes that we will achieve certain levels of operating costs
and expenses, as to which there can be no assurance that we will be able to
achieve. This plan is completely dependent on our ability to raise additional
capital through future financings. In addition, if events or circumstances occur
such that we are unable to meet our operating plan as expected, we will be
required to seek additional capital, pursue other strategic opportunities, or we
will be forced to reduce the level of expenditures, which could have a material
adverse effect on our ability to achieve our intended business objectives and to
continue as a going concern. Even if we achieve our operating plan, we will be
required to seek additional financing or strategic investments.
The
current economic turmoil has a significant impact on the overall funding
environment, and we cannot assure you that our opportunity will be positively
received by potential investors. We are not planning on any significant capital
or equipment investments, and we will only have a few human resource additions
over the next 12 months. A significant amount of funds will be utilized to
launch our product into the market. With the expenses associated with FDA
clearance having already been incurred, and with the product development
primarily complete, future funds, if any, will be used primarily to launch our
product into the market.
There can
be no assurance that any additional financing will be available on acceptable
terms, or at all. Furthermore, any equity financing likely will result in
dilution to existing shareholders and any debt financing likely will include
restrictive covenants.
We expect
to continue to depend upon outside financing to sustain our operations for at
least the next 12 months. Our ability to arrange financing from third parties
will depend upon our operating performance and market conditions. Our inability
to raise additional working capital at all or to raise it in a timely manner
would negatively impact our ability to fund our operations, to generate
revenues, and to otherwise execute our business plan, leading to the reduction
or suspension of our operations and ultimately forcing us to go out of business.
Should this occur, the value of any investment in our securities could be
adversely affected, and an investor could lose a portion of or all of their
investment.
Inflation
We do not
believe that inflation has had a material impact on our business and operating
results during the periods presented.
Off-Balance Sheet
Arrangements
We have
not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of
Regulation S-K.
Information
Regarding Forward-Looking Statements
This Form
10-Q contains “forward-looking statements” that indicate certain risks and
uncertainties related to the Company, many of which are beyond the Company’s
control. The Company’s actual results could differ materially and adversely from
those anticipated in such forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this report. Important
factors that may cause actual results to differ from projections
include:
· Adverse
economic conditions;
· Inability
to raise sufficient additional capital to operate our business;
· Unexpected
costs and operating deficits, and lower than expected sales and revenues, if
any;
· Adverse
results of any legal proceedings;
· The
volatility of our operating results and financial condition;
· Inability
to attract or retain qualified senior management personnel, including sales and
marketing personnel; and
· Other
specific risks that may be alluded to in this report.
All
statements, other than statements of historical facts, included in this report
regarding the Company’s growth strategy, future operations, financial position,
estimated revenue or losses, projected costs, prospects and plans and objectives
of management are forward-looking statements. When used in this report, the
words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,”
“project,” “plan” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as of the date
of this report. The Company does not undertake any obligation to update any
forward-looking statements or other information contained herein. Potential
investors should not place undue reliance on these forward-looking statements.
Although the Company believes that its plans, intentions and expectations
reflected in or suggested by the forward-looking statements in this report are
reasonable, the Company cannot assure potential investors that these plans,
intentions or
expectations
will be achieved. The Company discloses important factors that could cause the
Company’s actual results to differ materially from its expectations in the “Risk
Factors” section of the Post-Effective Amendment No. 1 to our Registration
Statement on Form S-1 filed with Securities and Exchange Commission on May 5,
2010 and elsewhere in this report. These cautionary statements qualify all
forward-looking statements attributable to the Company or persons acting on its
behalf.
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk
Not
required.
ITEM
4. Control and Procedures
Disclosure
Controls
Our
management, including our President, Chief Executive Officer and Chief Financial
Officer (referred to as the “Certifying Officer”), evaluated the effectiveness
of our disclosure controls and procedures pursuant to Rule 13a-15 under the
Exchange Act as of the end of the period covered by this Report on Form 10-Q.
Based on that evaluation, the Certifying Officer concluded that, as of the end
of the period covered by this quarterly report, our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective,
in all material respects, to ensure that information we are required to disclose
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our President, Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
Changes
in Internal Controls
There
were no changes in our internal controls over financial reporting during the
third quarter of fiscal year 2010 that may have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
21
PART II. OTHER INFORMATION
ITEM 1. Legal
Proceedings
In April
2009 Gerald Rice, a former officer of the Company made a formal demand for
payment of past wages and threatened to sue the company for in excess of
$100,000 if we did not meet his demand. Settlement discussions commenced but the
parties were unable to reach an agreement. Thereafter, Mr. Rice filed a lawsuit
in Minnesota state court, Dakota County alleging claims for breach of contract
and unpaid wages. The Company and Mr. Rice signed a settlement agreement and
general release dated July 22, 2010, whereby the Company will pay Mr. Rice
$130,000 over a period of several months with monthly amounts dependent on our
success in raising a minimum of $500,000. An initial payment of $15,000 was paid
by our insurance company on July 22, 2010. We are not a party to any other
pending legal proceedings that, if decided adversely to us, would have a
material adverse effect upon our business, results of operations or financial
condition and are not aware of any threatened or contemplated proceeding by any
governmental authority against our company. To our knowledge, we are not a party
to any pending civil or criminal action or investigation.
ITEM
1A. Risk Factors
Not
required.
22
ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds
In July 2010 the Company issued 238,860 shares of common stock,
with a value of $.22 per share, to 5 consultants in exchange for fund raising,
financial consulting and investor relations services.
In August
2010, the Company issued a $50,000 Convertible Promissory Note to an
investor. The note bears interest at 8%, matures in May 2011, and is
convertible into common stock at 50% of the average of the three lowest closing
prices in any 10 day trading period.
In
September 2010, the Company issued a $100,000 Convertible Promissory Note to an
investor. The note bears interest at 10%, matures in March 2012 and
is convertible into common stock at $.18 per share.
In
September 2010, the Company issued a $32,000 Convertible Debenture to the
parents of one of our officers. The note bears interest at 12%,
matures in March 2012 and is convertible into common stock at $.10 per
share. The Company also issued a warrant to purchase 320,000 shares
at $.46 per share, amended the noted dated in June 2010 to reduce the conversion
price from $.25 to $.18 per share and issued a new warrant to purchase 1,111,112
shares at $.46 per share to replace the initial warrant for 800,000 shares at
$.46 per share.
In
September 2010, the Company issued 250,000 common shares with a value of $.22
per share, to an investment banker as partial compensation for their fund
raising activities.
In
September 2010, the Company issued 250,000 common shares to an investor in
connection with his $25,000 investment in the Company. The Company
also issued a warrant to purchase 250,000 common shares at $.17 per
share.
Unless
otherwise specified above, the Company believes that all of the above
transactions were transactions not involving any public offering within the
meaning of Section 4(2) of the Securities Act, since (a) each of the
transactions involved the offering of such securities to a substantially limited
number of persons; (b) each person took the securities as an investment for
his/her/its own account and not with a view to distribution; (c) each person had
access to information equivalent to that which would be included in a
registration statement on the applicable form under the Securities Act; and (d)
each person had knowledge and experience in business and financial matters to
understand the merits and risk of the investment; therefore no registration
statement needed to be in effect prior to such issuances.
ITEM
3. Defaults Upon Senior Securities
None.
ITEM
4. [Removed and Reserved]
ITEM
5. Other Information
None.
ITEM
6. Exhibits
See the
attached exhibit index.
23
SIGNATURES:
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
BIODRAIN
MEDICAL, INC.
|
||
Date:
November 12, 2010
|
By:
|
/s/
Kevin R. Davidson
|
President,
Chief Executive Officer and
Chief
Financial Officer
|
||
(Principal
Executive Officer and
|
||
Principal
Financial and Accounting
Officer)
|
24
EXHIBIT
INDEX
BIODRAIN
MEDICAL, INC.
Form
10-Q
The
quarterly and nine-month period ended September 30, 2010
Exhibit No.
|
Description
|
|
3.1*
|
Articles of Incorporation, as amended. | |
3.2*
|
Bylaws, As Amended. | |
31.1*
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2*
|
Certification
of Principal Financial and Accounting Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
32.1*
|
|
Certification
of Principal Executive Officer and Principal Financial and Accounting
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
* Filed
herewith.
25