Attached files
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
SPRING CREEK HEALTHCARE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
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Nevada
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98-0496750
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(State of other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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4400 Route 9 South, Suite 1000
Freehold, NJ
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07728
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(Address of Principal Executive Offices)
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(Zip Code)
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(Registrant's Telephone Number, including Area Code) (646)961-4459
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of each exchange on which registered
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None
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None
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Securities registered pursuant to Section 12(g) of the Act:
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Common stock, $.001 par value
(Title of class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligation under those Sections.
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. Yes [X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K (229.405 of this chapter) is not contained herein and will not be contained, to the best of registrants knowledge, in definitive proxy or other information incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of the last business day of the registrants most recently completed second fiscal quarter.
$17,135,000
The number of shares of the Registrant’s Common Stock, $0.001 par value, outstanding as of April 11, 2011 was 36,493,893 shares.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
None.
1
EXPLANATORY NOTE
For the year ended December 31, 2010, Spring Creek Healthcare Systems, Inc. (formerly Spring Creek Capital Corp.) was obligated to include in its Form 10-K (the “10-K”) the predecessor auditor’s report which covered the cumulative data for the period from inception (May 11, 2006) to December 31, 2008. As a result of comments received from the staff of the Securities and Exchange Commission (“SEC”), we are filing this amendment to file the report along all the information reported by Item 8 of Form 10-K, all as previously filed.
This Form 10-K/A2 continues to speak as of the date of the original Form 10-K and other than as specifically reflected in this Form 10-K/A2 does not reflect events occurring after the filing of the original Form 10-K or modify or update any related disclosures
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are submitted in a separate section of this report, beginning on Page F-1.
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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(1)
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Financial Statements
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The financial statements required by item 15 are submitted in a separate section of this report, beginning Page F-1, incorporated herein and made a part hereof.
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(2)
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Financial Statement Schedules
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Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto.
SIGNATURES
In accordance with Section 13 or 15 (d) 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.
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SPRING CREEK HEALTHCARE SYSTEMS, INC.
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Dated: February 21, 2012
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/s/ Kelly T. Hickel
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Kelly T. Hickel
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Chief Executive Officer and Director
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Dated: February 21, 2012
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/s/ Jan E. Chason
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Jan E. Chason
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Chief Financial Officer and Director
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Dated: February 21, 2012
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/s/ Robert Hanfling
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Robert Hanfling
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Director
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Dated: February 21, 2012
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/s/ Richard Rifenburgh
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Richard Rifenburgh
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Director
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4
SPRING CREEK HEALTHCARE SYSTEMS, INC
.(A Development Stage Company)
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Reports of Independent Registered Public Accounting Firm
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F-2
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Consolidated Balance Sheets as of December 31, 2010 and 2009
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F-4
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Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009 and From Inception
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F-5
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Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended December 31, 2010 and 2009 and From Inception
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F-6
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Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009 and From Inception
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F-7
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Consolidated Notes to Financial Statements
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F-8
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F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Spring Creek Healthcare Systems, Inc.
(A Development Stage Company):
We have audited the accompanying consolidated balance sheets of Spring Creek Healthcare Systems, Inc. (a Development Stage Company) as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for the years then ended and for the period from inception (May 11, 2006) to December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of Spring Creek Healthcare Systems, Inc. for the periods from inception (May 11, 2006) to December 31, 2008. Those statements were audited by other auditors whose report has been furnished to us and our opinion, in so far as it relates to amounts for the period of inception to December 31, 2008 included in the cumulative totals, is based solely upon the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spring Creek Healthcare Systems, Inc. as of December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is in the development stage, has incurred losses from operations since its inception and has a net stockholders’ deficiency. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Rosenberg Rich Baker Berman & Co.
Somerset, New Jersey
April 15, 2011
F-2
REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Spring Creek Capital Corp.
We have audited the accompanying balance sheets of Spring Creek Capital Corp. (a development stage company) as of December 31, 2008, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year then ended and for the period from inception, May 11, 2006, to December 31, 2008. Spring Creek Capital Corp.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit perform of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Spring Creek Capital Corp. as of December 31, 2008, and the results of its operations and its cash flows for the year then ended and for the period from inception, May 11, 2006, to December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the financial statements, the company has incurred a net loss of $126,500 since inception, has not generated any revenues and has no assets. Those conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Berman Hopkins Wright & LaHam, CPAs and Associates, LLP
Winter Park, Florida
March 24, 2009
F-3
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
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December 31,
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||||||||
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2010
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2009
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ASSETS
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||||||||
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CURRENT ASSETS
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||||||||
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Cash
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$
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1,083
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$
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4,187
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||||
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Prepaid expenses
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4,301
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12,515
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||||||
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Total current assets
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5,384
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16,702
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||||||
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Available for sale securities
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60,000
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-
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||||||
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Intangibles
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352,157
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-
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||||||
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Investment in and advances to affiliated companies
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39,945
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|||||||
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TOTAL ASSETS
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$
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417,541
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$
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56,647
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||||
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CURRENT LIABILITIES
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||||||||
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Accounts payable and accrued expenses
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$
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308,952
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$
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119,013
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||||
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Notes payable - related party - net of discount of $ 2,622 and $128,937
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581,132
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203,232
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||||||
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Notes payable
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40,500
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-
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||||||
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Total current liabilities
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930,584
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322,245
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||||||
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Liability for unissued shares
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81,858
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-
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STOCKHOLDERS' EQUITY/(DEFICIENCY)
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Common stock, par value $.001 per share; 75,000,000
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shares authorized and 36,240,714 (2010) and 33,730,000
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(2009) issued and outstanding
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36,241
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33,730
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Additional paid-in capital
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4,734,275
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2,088,307
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Deferred compensation
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-
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(9,340
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)
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Accumulated deficit during the development stage
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(5,065,417
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)
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(2,378,295
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)
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Accumulated other comprehensive loss
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(300,000
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)
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-
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|||||
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Total stockholders' (deficiency)
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(594,901
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)
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(265,598
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)
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||||
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY/(DEFICIENCY)
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$
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417,541
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$
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56,647
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||||
See notes to consolidated financial statements
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
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From inception
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||||||||||||
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Year Ended
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(May 11, 2006)
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|||||||||||
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December 31,
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to December
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|||||||||||
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2010
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2009
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31, 2009
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||||||||||
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Expenses
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||||||||||||
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General and administrative
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$
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2,726,114
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$
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414,838
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$
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3,267,452
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||||||
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Interest
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63,399
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19,197
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82,596
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|||||||||
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Amortization of debt discount
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161,379
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102,600
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263,979
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|||||||||
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Finance costs
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101,844
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1,723,000
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1,824,844
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|||||||||
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Total expenses
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3,052,736
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2,259,635
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5,438,871
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Other income – principally gain on sale of equity investment in 2010
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(365,614)
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(7,840
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)
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(373,454
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)
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|||||||
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Net loss
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$
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(2,687,122)
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$
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(2,251,795
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)
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$
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(5,065,417
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)
|
||||
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Loss per share - basic and diluted
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$
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(0.08)
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$
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(0.07
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)
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|||||||
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Weighted average shares outstanding
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34,758,526
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33,656,099
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||||||||||
See notes to consolidated financial statements
F-5
SPRING CREEK HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY COMPANIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
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Deficit
|
||||||||||||||||||||||||
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Accumulated
|
||||||||||||||||||||||||
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Additional
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During
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Total
|
||||||||||||||||||||||
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Common Stock
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Paid -in
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Deferred
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Development
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Stockholders'
|
||||||||||||||||||||
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Shares
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Amount
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Capital
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Compensation
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Stage
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Equity
|
|||||||||||||||||||
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Shares issued to founders at $.01 per share
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30,000,000
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$
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30,000
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-
|
-
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-
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$
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30,000
|
||||||||||||||||
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Net loss
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-
|
-
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-
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-
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$
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(30,000
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)
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(30,000
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)
|
|||||||||||||||
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Balance - December 31, 2006
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30,000,000
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30,000
|
-
|
-
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(30,000
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)
|
-
|
|||||||||||||||||
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Net loss
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-
|
-
|
-
|
-
|
(23,655
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)
|
(23,655
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)
|
||||||||||||||||
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Balance - December 31, 2007
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30,000,000
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30,000
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-
|
-
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(53,655
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)
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(23,655
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)
|
||||||||||||||||
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Shares issued at $.033 per share
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2,880,000
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2,880
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$
|
93,120
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-
|
-
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96,000
|
|||||||||||||||||
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Net loss
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-
|
-
|
-
|
-
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(72,845
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)
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(72,845
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)
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||||||||||||||||
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Balance - December 31, 2008
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32,880,000
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32,880
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93,120
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-
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(126,500
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)
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(500
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)
|
||||||||||||||||
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Shares issued in settlement of payables
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850,000
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850
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27,200
|
-
|
-
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28,050
|
||||||||||||||||||
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Warrants issued inconnection with:
|
||||||||||||||||||||||||
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Consulting fees
|
-
|
-
|
13,450
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$
|
(13,450
|
)
|
-
|
-
|
||||||||||||||||
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Finance Costs
|
1,723,000
|
1,723,000
|
||||||||||||||||||||||
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Indebtedness
|
231,537
|
231,537
|
||||||||||||||||||||||
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Amortization of deferred compensation
|
-
|
4,110
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4,110
|
|||||||||||||||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
(2,251,795
|
)
|
(2,251,795
|
)
|
||||||||||||||||
|
Balance - December 31, 2009
|
33,730,000
|
$
|
33,730
|
$
|
2,088,307
|
$
|
(9,340
|
)
|
$
|
(2,378,295
|
)
|
$
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(265,598
|
)
|
||||||||||
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Common stock issued in connection with:
|
||||||||||||||||||||||||
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Exercise of warrants
|
500,000
|
500
|
4,500
|
5,000
|
||||||||||||||||||||
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Indebtedness
|
785,714
|
786
|
221,643
|
222,429
|
||||||||||||||||||||
|
Services – Board
|
250,000
|
250
|
132,250
|
132,500
|
||||||||||||||||||||
|
Services –other
|
675,000
|
675
|
384,025
|
384,700
|
||||||||||||||||||||
|
Acquisition of intangibles
|
300,000
|
300
|
269,700
|
270,000
|
||||||||||||||||||||
|
Issuance of options
Board and officers
|
1,245,313
|
1,245,313
|
||||||||||||||||||||||
|
Consulting fees
|
388,537
|
388,537
|
||||||||||||||||||||||
|
Amortization of deferred compensation
|
9,340
|
9,340
|
||||||||||||||||||||||
|
Net loss
|
(2,687,122
|
)
|
(2,687,122
|
)
|
||||||||||||||||||||
|
Unrealized loss on investments available for sale
|
(300,000
|
)
|
||||||||||||||||||||||
|
Total comprehensive loss
|
(2,687,122
|
)
|
||||||||||||||||||||||
|
Balance – December 31, 2010
|
36,240,714
|
$
|
36,241
|
$
|
4,734,275
|
$
|
-
|
$
|
(5,065,417
|
)
|
$
|
(594,901
|
)
|
|||||||||||
See notes to consolidated financial statements
F-6
SPRING CREEK HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY COMPANIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
From inception
|
||||||||||||
|
(May 11, 2006)
|
||||||||||||
|
Year Ended December 31,
|
to December
|
|||||||||||
|
2010
|
2009
|
31, 2010 | ||||||||||
|
Cash Flows Used in Operating Activities
|
||||||||||||
|
Net Loss
|
$ | (2,687,122 | ) | $ | (2,251,795 | ) | $ | (5,065,417 | ) | |||
|
Adjustments to reconcile net loss to net cash
|
||||||||||||
|
used in operating activities:
|
||||||||||||
|
Amortization of debt discount
|
161,379 | 102,600 | 263,979 | |||||||||
|
Equity in losses of unconsolidated subsidiaries
|
34,989 | 34,989 | ||||||||||
|
Gain on exchange of minority interest in BioCube, Inc.
|
(365,043 | ) | (365,043 | ) | ||||||||
|
Amortization of deferred compensation
|
9,340 | 4,110 | 13,450 | |||||||||
|
Accrued interest – related party
|
71,729 | 17,697 | 89,426 | |||||||||
|
Accrued interest
|
4,800 | 1,500 | 6,300 | |||||||||
|
Services – noncash charges
|
2,232,908 | 2,232,908 | ||||||||||
|
Accrued fees from affiliates
|
(33,658 | ) | (33,658 | ) | ||||||||
|
Finance costs
|
101,629 | 1,723,000 | 1,824,844 | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Prepaid expenses
|
8,214 | (12,515 | ) | (4,301 | ) | |||||||
| 213,621 | 127,366 | 341,487 | ||||||||||
|
Net Cash Used in Operating Activities
|
(247,214 | ) | (288,037 | ) | (661,251 | ) | ||||||
|
Cash Flows Used in Investing Activities
|
||||||||||||
|
Loans to affiliated companies
|
(38,500 | ) | (39,945 | ) | (78,445 | ) | ||||||
|
Net Cash Used in Investing Activities
|
(38,500 | ) | (39,945 | ) | (78,445 | ) | ||||||
|
Cash Flows Provided By (Used In) Financing Activities
|
||||||||||||
|
Loans from related party
|
162,110 | 382,169 | 544,279 | |||||||||
|
Loans
|
130,000 | 130,000 | ||||||||||
|
Loan – repayment
|
(9,500 | ) | (9,500 | ) | ||||||||
|
Issuance of common stock
|
126,000 | |||||||||||
|
Repayment of related party loan
|
(50,000 | ) | (50,000 | ) | ||||||||
|
Net Cash Provided by Financing Activities
|
282,610 | 332,169 | 740,779 | |||||||||
|
Net Increase in Cash
|
(3,104 | ) | 4,187 | 1,083 | ||||||||
|
Cash at beginning of period
|
4,187 | - | - | |||||||||
|
Cash at end of period
|
$ | 1,083 | $ | 4,187 | $ | 1,083 | ||||||
|
Supplemental Disclosures
|
||||||||
|
Non-cash investing and financing activities
|
||||||||
|
Common stock issued in connection with
|
||||||||
|
Services
|
$ | 517,200 | 13,450 | |||||
|
Acquisition of intangibles
|
270,000 | |||||||
|
Settlement of payables
|
5,000 | $ | 28,050 | |||||
|
Issuance of options and warrants for services
|
1,633,850 | 1,723,000 | ||||||
See notes to consolidated financial statements
F-7
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Basis of Preparation
Spring Creek Healthcare Systems, Inc. (formerly Spring Creek Capital Corp.) (“Spring Creek” or the “Company”) is a healthcare company whose business plan is to distribute novel solutions for the medical, pharmaceutical and healthcare markets to resellers and consumers worldwide. Spring Creek actively pursues emerging opportunities in the healthcare industry by selecting young start-up and micro-cap companies with innovative concepts and launching their products and services utilizing the marketing distribution network of its principal subsidiary, Stratis Healthcare, Inc. (“Stratis”).
Spring Creek was a closed-end management investment company which in April 2009 elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). The Company was originally formed in May 2006 to engage in the exploration of mineral properties for copper and other metals; however, as a result of the April 2009 change in business plan to be a specialty investment company, the mining operations were discontinued. The Company conducted operations as a BDC from April 23, 2009 through December 31, 2009. During this time, Spring Creek acquired or established its initial interests in healthcare companies by acquiring equity stakes in or starting development stage companies in this industry. The Company also completed two minority equity investments in companies that it believed to be strategic to its mission.
In February 2010, our Board of Directors and the holders of a majority of our outstanding shares of common stock authorized management to withdraw the election to be regulated as a BDC. This decision was in part prompted by the actuality that the majority of the Company’s resources were allocated to managing the operating activities of its holdings and, in addition, management found that the Company may not have been in compliance with certain BDC provisions of the 1940 Act. On July 7, 2010, the Company filed an Information Statement with the SEC providing notice of shareholder action in lieu of a Meeting of Shareholders, taken pursuant to the written consent of certain shareholders, referred to as the consenting shareholders. Specifically, the consenting shareholders approved the withdrawal of the Company’s election to be a BDC. This action became effective on August 17, 2010 when the Company filed the applicable Notice concerning the withdrawal with the Securities and Exchange Commission. Further, in recognition of the change in its operations, the Company changed its name to Spring Creek Healthcare Systems, Inc., effective as of September 30, 2010.
As a result of the decision to withdraw the Company’s election to be treated as a BDC and become an operating company, the fundamental nature of the Company’s business changed from that of investing in a portfolio of securities with the goal of achieving gains on appreciation and dividend income, to that of being actively engaged in the ownership and management of a holding company with the goal of generating income from the operations of those businesses. The decision to withdraw the Company’s election as a BDC under the 1940 Act necessitated a significant change in the Company’s method of accounting. The Company formerly utilized the BDC financial statement presentation and that accounting utilized the value method of accounting used by investment companies, which allows BDCs to recognize income and value their investments at market value as opposed to historical cost. As an operating company, the Company was required to adopt the financial statement presentation and accounting for securities held which provides for either fair value or historical cost methods of accounting, depending on the classification of the investment and the Company’s intent with respect to the period of time it intends to hold the investment. This change in the Company’s method of accounting could impact the market value of its investments in privately held companies by eliminating the Company’s ability to report an increase in the value of its holdings as the increase occurs. As an operating company, the Company, effective December 31, 2009, consolidated its financial statements with its controlled subsidiaries, thus eliminating the portfolio company reporting benefits available to BDCs.
The Company intends to distribute and market products and technologies in the healthcare sector. Spring Creek’s principal operating subsidiary is Stratis, whose primary business is to distribute products to resellers and customers worldwide either directly, through distributors or through multi-channel resources. Stratis will utilize strategic partnerships to warehouse, provide inventory control/monitoring, and distribute new Spring Creek products on a global basis. Systems and processes will be designed to be efficient and repeatable so as to allow Spring Creek to implement cost-effective solutions for the distribution of medical products throughout its portfolio. In 2010, the Company incorporated 2 new subsidiaries that are 51%-owned by the Company to market the products obtained through licensing arrangements for an oral spray technology for delivery of over-the-counter and prescription medications, including oral insulin through the buccal mucosa, and a topical therapy treatment for open wounds such as venous statis or decubitus ulcers. In March 2011, the Company agreed to license the rights to market the ReVersital® family of microdermabrasion products and all of its proprietary line extensions. Once the Company begins its commercialization of these rights, the Company will terminate the development stage presentation for its consolidated financial statements.
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business. The Company since its formation has not generated any significant revenues. The Company has not as yet attained a level of operations which allows it to meet its current overhead and may not attain profitable operations within its first few business operating cycles, nor is there any assurance that such an operating level can ever be achieved. The Company is dependent upon obtaining additional financing adequate to fund its operations. While the Company has funded its initial operations with private placements and secured loans from a related party, there can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company. The Company’s ability to continue as a going concern is also dependent on many events outside of its direct control, including, among other things, improvement in the economic climate. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
F-8
Note 2. Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as of the dates and for the fiscal years indicated. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets, as well as in the healthcare industry and any other parameters used in determining these estimates, could cause actual results to differ.
Concentration of Credit Risk
The Company may place its cash with various financial institutions and, at times, cash held in depository accounts at such institutions may exceed the Federal Deposit Insurance Corporation insured limit.
Equity and Cost Method Investments in Portfolio Companies
The Company uses the equity method of accounting for its investments in entities in which it has significant influence; generally, this represents an ownership interest of between 20% and 50%. The Company uses the cost method of accounting for investments in equity securities in which it has a less than 20% equity interest and virtually no influence over the investee's operations.
Application of the cost method requires the Company to periodically review its investments in order to determine whether to maintain the current carrying value or to write off some or all of the investment. While the Company uses some objective measurements in its review, the review process involves a number of judgments on the part of the Company's management. These judgments include assessments of the likelihood of the investments to obtain additional financing, to achieve future milestones, make sales and to compete effectively in its markets. In making these judgments, the Company must also attempt to anticipate trends in the industries as well as in the general economy. There can be no guarantee that the Company will be accurate in its assessments and judgments. To the extent that the Company is not correct in its conclusion, it may decide to write down all or part of the investment.
Securities Held for Sale
The company's investments in marketable equity securities are held for an indefinite period and thus are classified as available for sale. Unrealized holding gains or losses on such securities are charged to or credited to other comprehensive income.
Income Taxes
The Company accounts for income taxes using a method that requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company’s assets and liabilities (commonly known as the asset and liability method). In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are ‘‘more-likely-than-not’’ of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as an expense in the applicable year. The Company does not have a liability for any unrecognized tax benefits. Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.
As of December 31, 2010, the Company has approximately $5.1million of net operating loss carry-forwards available to affect future taxable income and has established a valuation allowance equal to the tax benefit of the net operating loss carry- forwards and temporary differences as realization of the asset is not assured.
Revenue Recognition
Upon initiation of active operations, the Company will recognize revenues when persuasive evidence of an arrangement exists, product has been delivered or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue will be recognized net of estimated sales returns and allowances.
F-9
Per Share Information
Basic earnings per share are calculated using the weighted average number of common shares outstanding for the period presented. Diluted loss per share is the same as basic loss per share, as the effect of potentially dilutive securities (options and warrants to acquire 3,950,000 and 2,470,000 shares of common stock, respectively) are anti-dilutive, and has no impact on the consolidated results of operations presented.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
During the fiscal first quarter of 2010, the Company adopted the FASB standard related to variable interest entities.
During the fiscal first quarter of 2010, the Company adopted the new accounting guidance on fair value measurements and disclosures. This guidance requires the Company to disclose the amount of significant transfers between Level 1 and Level 2 inputs and the reasons for these transfers as well as the reasons for any transfers in or out of Level 3 of the fair value hierarchy. In addition, the guidance clarifies certain existing disclosure requirements.
The adoption of each of the above standards did not have a material impact on the Company’s results of operations, cash flows or financial position.
Recently Issued Accounting Standards,
Not Adopted as of December 31, 2010
During the fiscal first quarter of 2010 the Company adopted the Financial Accounting Standards Board (FASB) guidance and amendments related to the accounting for multiple-deliverable revenue arrangements. These new rules amend the existing guidance for separating consideration in multiple-deliverable arrangements and establish a selling price hierarchy for determining the selling price of a deliverable.
During the fiscal second quarter of 2010 the FASB issued an accounting standard update related to revenue recognition under the milestone method. The objective of the accounting standard update is to provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. This guidance was effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.
The adoption of these standards is not expected to have a material impact on the Company’s results of operations, cash flows or financial position .
Note 3. Available for Sale Securities
On July 12, 2010, the Company exchanged its minority interest in BioCube, Inc. ("BioCube") for 2 million shares of common stock of Alliance Network Communications, Inc. ("Alliance") in connection with a transaction in which BioCube became a wholly-owned subsidiary of Alliance. Alliance subsequently changed its name to BioCube, Inc. The Company accounted for its investment in Alliance in accordance with FASB ASC Topic 320 - Investments and accordingly classified the investment as available for sale and recorded the investment at its fair value as of the acquisition date ($360,000), which resulted in a gain of $365,000. Adjustments to the carrying value for subsequent changes in fair value are recorded as unrealized gains or losses in other comprehensive income in the consolidated statement of stockholders’ deficiency. As a result of the decrease in the fair value during the period subsequent to July 12, 2010 through December 31, 2010, the Company recorded an unrealized loss of $300,000.
Note 4. Intangibles
Intangibles as of December 31, 2010 consist of the following:
|
License for “Insect Repellent Composition Containing Essential Oils”
|
$
|
82,000
|
||
|
License for an oral spray technology for delivery of medications through the buccal mucosa
|
270,000
|
|||
|
Total
|
$
|
352,000
|
On May 21, 2010, the Company exchanged its minority interest in Eco-Blends, Inc. (“Eco-Blends”) for a fully paid, royalty-free, perpetual, transferrable license to use all of the formulations set forth in the pending application for a patent under the name “Insect Repellent Composition Containing Essential Oils”. Additionally, the Company forgave all amounts due for management fees, loans, interest and all other amounts due from Eco-Blends. As a result, the Company recorded an intangible of $82,000 by transferring the following amounts which had been previously recorded as advances and investments in Eco-Blends:
|
Advances:
|
||||
|
Loans
|
$
|
65,000
|
||
|
Management fees
|
30,000
|
|||
|
Interest
|
4,000
|
|||
|
Equity in losses
|
(17,000
|
)
|
||
|
$
|
82,000
|
|||
On April 27 and May 19, 2010, the Registrant entered into licensing agreements with McCoy Enterprise, LLC (the “licensor”), whereby the Company exclusively licensed (i) an oral spray technology for delivery of over-the-counter and prescription medications, including oral insulin through the buccal mucosa and (ii) a topical therapy treatment for open wounds such as venous statis or decubitus ulcers. The exclusive licenses include world-wide rights in perpetuity. The licensor received as consideration for each license a 49% interest in each of 2 subsidiaries of the Company, which will hold the marketing rights to any products developed utilizing each license. In addition, the licensor also is to receive 300,000 shares of the Company’s common stock in connection with the buccal mucosa license. The Company recorded the buccal mucosa license right as an Intangible valued at $270,000 based upon the fair value of the shares issued.
Note 5. Notes payable - related party
During the years ended December 31, 2010 and 2009, the Company borrowed an aggregate of $162,110 and $382,169 from LeadDog Capital LP (“LDC”) through issuances of notes payable for periods of 6 to 27 months with interest payable at 16% per year. In 2009, in connection with the issuance of notes with a face value of $280,000, the Company granted the lender warrants to purchase 1,327,500 shares of the Company’s common stock at $.001. In addition, the Company issued warrants to purchase 1,162,500 shares of the Company’s common stock at $.001 to LeadDog Capital Markets LLC (the general partner) for due diligence services. LDC and its affiliates are shareholders and warrant holders; however, the group is restricted from becoming a beneficial owner (as such term is defined under Section 13(d) and Rule 13d-3 of the Securities Exchange Act of 1934, as amended, (the “1934 Act”)), of the Company’s common stock which would be greater than 9.9% of the number of shares of common stock outstanding.
The proceeds from issuance of the promissory notes were allocated to the notes and the warrants based upon their relative fair values. This allocation resulted in allocating $48,463 to the notes and $231,537 to the warrants. The warrants issued for services were expensed as financing fees of $1,723,000 in 2009. During 2010and 2009, the Company recorded $161,000 and $103,000, respectively, as expense related to the amortization of the debt discount. The fair value of the warrants was determined using the Black-Scholes option pricing model using the following weighted-average assumptions: volatility of 116% and 141%; risk-free interest rate of 1.4% to 1.6%; expected life of 3 years and estimated dividend yield of 0%.
In August 2010, LDC and the Company agreed to extend loans with aggregate principal outstanding of $390,666, including the past due loans amounting to $78,700, until June 1, 2011 and adjusted the restriction on LDC and its affiliates concerning investment in the Company mentioned two paragraphs above from 4.9 % to 9.9% of the number of shares of common stock outstanding.
Note 6. Note Payable
In April 2010, the Company received $80,000 in exchange for issuing a note in the principal amount of $80,000, due August 25, 2010 with interest at 10% per annum and 40,000 shares of common stock. The proceeds from issuance of the promissory note and common stock was allocated based upon their relative fair values. This allocation resulted in allocating $44,000 to the note and $36,000 to the shares. During the period that the note was to be outstanding during 2010, the Company recorded $19,000 and $17,000, respectively, as expense related to the amortization of the debt discount. In December 2010, the Company agreed to issue 465,714 shares of its common stock in order to liquate the indebtedness, including accrued interest of $5,000 and, in addition, 140,000 shares of common stock in accordance with the penalty provisions for late repayment of the note. As a result, the Company recorded a charge of $102,000 as a finance cost in 2010.
In February 2010, the Company borrowed $50,000 through the issuance of a note payable due in ninety days from the date of the loan with interest at 20%. In March 2010, the Company prepaid $9,500 and paid $5,000 to settle all interest due on the note but has not repaid the balance of the loan through April 15, 2011.
Note 7. Liability for Unissued Shares
|
Investor relations firm
|
$
|
80,300
|
||
|
Settlement – for services rendered
|
1,558
|
|||
|
$
|
81,858
|
In February 2010, the Company entered into a letter of engagement with an investor relations firm to develop and implement a financial communications program designed to increase investor awareness of the Company in the investment community. The initial term of the agreement was ninety days and may be terminated by either party upon thirty days’ notice. Pursuant to the agreement, the Company is to issue up to 660,000 shares of our common stock in monthly installments of 55,000 during the first year of the agreement unless the agreement is terminated before the completion of the first year of the contract causing the monthly installments to end as of the termination date. The Company recorded a non-cash charge of $ $253,000 during 2010for the share issuances or shares to be issued. On November 9, 2010, the Company terminated the agreement and has not issued the balance of the shares due for a portion of the period prior to termination.
Note 8. Stock Options
In May 2010, the Company granted options to purchase an aggregate of 4,600,000 shares of common stock at a $0.53 per share exercise price to directors and consultants, including options for 975,000 common shares for past services and the balance as compensation for current service as Board members. As of the time of issuance, the Company recorded non-cash compensation charges of $1.8 million as all grants were immediately vested. The options have a term of 5 years.
The fair value of option grants were estimated on the date of grant in May 2010 using the Black-Scholes option-pricing model with the following assumptions:
|
Expected volatility
|
100
|
%
|
||
|
Expected dividends
|
0
|
%
|
||
|
Expected term
|
5years
|
|||
|
Risk-free rate
|
2.36
|
%
|
||
NOTE 9: Fair Value Measurements
Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1. We value assets and liabilities included in this level using dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Recurring Fair Value Measurements
In accordance with accounting principles generally accepted in the United States, certain assets and liabilities are required to be recorded at fair value on a recurring basis. For our Company, the only assets and liabilities that are adjusted to fair value on a recurring basis values the Company investment which was classified as available for sale and valued using Level 1 inputs (see Note 3.)
Note 10. Subsequent Events
In March 2011, the Company entered into a ten-year licensing agreement with M-Solo International, Inc.,(the “licensor”), whereby the Company licensed the right to market the ReVersital® family of microdermabrasion products and all of its proprietary line extensions. The license is exclusive for the United States mass consumer market. The licensor received as consideration for the license 300,000 shares of the Company’s common stock; a 49% interest in a subsidiary of the Company which will hold the marketing rights to any products developed utilizing the license and a royalty of 5 % of net sales. The shares are to be issued pursuant to an exemption from registration under the Securities Act of 1933, as amended, as a transaction not involving a public offering.
In March 2011, the Company engaged a marketing company to as provide marketing and branding services in order to increase the distribution of the Company’s products. The agreement is for 12 months automatically renewable for 12 months and provides for monthly payments of $5,000. Additional consideration includes 500,000 shares of common stock of which half was paid on closing and the balance is due after 6 months. The Company also agreed to pay commissions on sales directly attributed to the services of the marketing company.
Subsequent to December 31, 2010, the Company borrowed an additional $13,500 from LeadDog Capital LP with interest payable at 16% per year.