Registration
Statement No. 333-155299
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1 TO FORM S-1/A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
BIODRAIN
MEDICAL, INC.
(Exact
name of registrant as specified in its charter)
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Minnesota
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3842
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33-1007393
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(State
or other jurisdiction
of
incorporation or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
No.)
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2060
Centre Pointe Boulevard, Suite 7
Mendota
Heights, Minnesota 55120
(651)
389-4800
(Address,
Including Zip Code and Telephone Number,
Including
Area Code, of Registrant’s Principal Executive Offices)
__________________________
Kevin
R. Davidson
Chief
Executive Officer
2060
Centre Pointe Boulevard, Suite 7
Mendota
Heights, Minnesota 55120
(651)
389-4800
(Name,
Address, Including Zip Code and Telephone Number,
Including
Area Code, of Agent for Service)
Copy
to:
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Ryan
Hong, Esq.
Melissa
Mallah, Esq.
RICHARDSON
& PATEL LLP
10900
Wilshire Boulevard, 5th Floor
Los
Angeles, California 90024
Telephone:
(310) 208-1182
Facsimile:
(310) 208-1154
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Approximate date of proposed sale to
the public: From time to time after the effective date of this Registration
Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o |
| Non-accelerated filer (Do not check if a smaller reporting company) o | Smaller reporting company x |
CALCULATION
OF REGISTRATION FEE
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Title
of each class of
securities
to be registered
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Amount
to be
Registered
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Proposed
maximum
offering
price
per
share
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Proposed
maximum
aggregate
offering
price
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Amount
of
registration
fee
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||||||||||||
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Common
stock, $0.01 par value (1)
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7,101,267
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N/A
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$
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2,485,443
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$
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97.68
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||||||||||
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Common
stock underlying warrants to purchase common stock (2)
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4,689,290
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$
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.46
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$
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2,157,074
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$
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84.77
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|||||||||
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Common
stock underlying convertible debentures (1)
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620,096
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N/A
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$
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217,034
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$
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8.53
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||||||||||
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Common
stock underlying warrants (3)
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620,096
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$
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.35
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$
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217,034
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$
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8.53
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|||||||||
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TOTAL
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13,030,749
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N/A
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$
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5,076,585
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$
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199.51
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||||||||||
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(1)
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Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(o) under the Securities Act of 1933, as amended. As a result,
only the title of class of securities to be registered, the proposed
maximum aggregate offering price and the amount of registration fee need
to appear in this Calculation of Registration Fee
table.
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(2)
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Calculated
in accordance with Rule 457 (g) under the Securities Act on the basis of
an exercise price of $.46 per share.
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(3)
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Calculated
in accordance with Rule 457 (g) under the Securities Act on the basis of
an exercise price of $.35 per
share.
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THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
Subject
to Completion, dated January 12, 2009
PRELIMINARY
PROSPECTUS
BioDrain
Medical, Inc.
13,030,749
Shares of Common Stock
$0.01 par
value
This
prospectus covers the resale by selling shareholders named on page 70 of up to
13,030,749 shares of common stock which include:
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•
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7,101,267
shares of common stock;
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•
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5,309,386
shares of common stock underlying common stock purchase warrants, which
includes 4,689,290 and 620,096 shares of common stock underlying warrants
issued in conjunction with an October 2008 financing and bridge loans we
undertook in July 2007, respectively; and
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•
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620,096
shares of common stock underlying the convertible
notes.
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There
is no current trading market for our securities and this offering is not being
underwritten. These securities will be offered for sale by the selling
shareholders identified in this prospectus in accordance with the methods and
terms described in the section of this prospectus titled “Plan of Distribution.”
The selling shareholders will sell the securities at a specified fixed price per
share, which we estimate to be between $.35 to $.46 per share, until our shares
are quoted on the OTC Bulletin Board and thereafter at prevailing market prices
or privately negotiated prices. We intend to seek and obtain quotation of our
common stock for trading on the OTC Bulletin Board. We intend to
cause a market maker to submit an application for quotation to the OTC Bulletin
Board before January 31, 2009. Westminster Securities Corporation has
agreed to submit an application to the OTC Bulletin Board on our
behalf. We intend to thereafter apply for trading on either the
NASDAQ market or the NYSE Alternext U.S. LLC (formerly American Stock Exchange)
at such time that we meet the requirements for listing on those exchanges. We do
not currently meet the criteria for listing on either of the NASDAQ market or
the NYSE Alternext U.S. LLC. because our share price does not meet the minimum
price requirements and our current market capitalization would be insufficient
for such markets.
AN
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK
FACTORS” BEGINNING AT PAGE 3. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
You
should rely only on the information contained in this prospectus to make your
investment decision. We have not authorized anyone to provide you with different
information. This prospectus may be used only where it is legal to sell these
securities. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front page of this
prospectus.
The
following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus carefully.
The
date of this prospectus is January 12, 2009
Table
of Contents
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Page
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Prospectus
Summary
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1
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Risk
Factors
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3
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Special Note Regarding
Forward-Looking Statements
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14
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Use of
Proceeds
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15
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Determination of Offering
Price
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16
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Market Price of Dividends on
the Registrant’s Common Equity and Related Stockholder
Matters
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17
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Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
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21
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Description of
Business
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35
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Legal
Proceedings
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57
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Description of
Property
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57
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Directors, Executive Officers,
Promoters and Control Persons
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58
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Executive
Compensation
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62
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Corporate
Governance
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68
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Certain Relationships and
Related Transactions
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69
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Selling Security
Holders
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70
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Plan of
Distribution
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74
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Security Ownership of Certain
Beneficial Owners and Management
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76
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Description of
Securities
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78
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Disclosure of Commission
Position on Indemnification for Securities Act
Liabilities
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81
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Where You Can Find More
Information
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85
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Experts
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86
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Legal Matters and Interests of
Named Experts
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86
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Financial
Information
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87
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Exhibits
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II-7
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Signatures
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II-10
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Neither
we nor the selling shareholders have authorized anyone to provide you with
information different from that contained in this prospectus. These securities
may be sold only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the effective
date of this offering, regardless of the time of delivery of this prospectus or
of any sale of the securities. You must not consider that the delivery of this
prospectus or any sale of the securities covered by this prospectus implies that
there has been no change in our affairs since the effective date of this
offering or that the information contained in this prospectus is current or
complete as of any time after the effective date of this offering.
Neither
we nor the selling shareholders are making an offer to sell the securities in
any jurisdiction where the offer or sale is not permitted. No action is being
taken in any jurisdiction outside the United States to permit a public offering
of our securities or the possession or distribution of this prospectus in any
such jurisdiction. Persons who come into possession of this prospectus in
jurisdictions outside of the United States are required to inform themselves
about and to observe any restrictions as to this offering and the distribution
of this prospectus applicable in that jurisdiction.
Prospectus
Summary
This summary highlights material
information contained elsewhere in this prospectus. It is not complete and does
not contain all of the information that you should consider before investing in
our common stock. You should read the entire prospectus carefully, including the
section titled “Risk Factors” and our consolidated financial statements and the
related notes. In this prospectus, we refer to BioDrain Medical, Inc. as
“BioDrain,” “our company,” “we,” “us” and “our.”
Our
Company
BioDrain
is an early-stage company developing a patented and patent-pending medical
device designed to provide medical facilities with effective, efficient and
affordable means to safely dispose of potentially contaminated fluids generated
in the operating room and other similar medical locations in a manner that
protects hospital workers from exposure to such fluids, reduces costs to the
hospital, and is environmentally conscious. We are currently preparing and
planning to file a 510(k) submission with the U.S. Food and Drug Administration
(the “FDA”) with respect to our products, the fluid management system (“FMS”),
but have not yet requested or received FDA regulatory clearance to market or
sell our products.
BioDrain
was incorporated in Minnesota on April 23, 2002. We are the registered owner of
a pending U.S. patent application for our current FMS. We plan to distribute our
products to medical facilities where bodily and irrigation fluids produced
during surgical procedures must be contained, measured, documented and disposed
of with minimal exposure potential to the healthcare workers who handle them.
Our goal is to create products that dramatically decrease staff exposure without
significant changes to established operative procedures, historically a major
stumbling block to innovation and product introduction. In addition to
simplifying the handling of these fluids, our technologies will provide cost
savings to facilities over the aggregate costs incurred today using their
current methods of collection, neutralization and disposal. Initially, our
products will be sold through independent distributors and manufacturers
representatives in the United States and Europe.
Risks
Related to Our Business
Our
business is subject to a number of risks, which you should be aware of before
making an investment decision. These risks are discussed more fully in the
section of this prospectus titled “Risk Factors.”
The
Offering
The
shares issued and outstanding prior to this offering consist of 8,180,832 shares
of common stock and do not include:
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•
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5,866,578
shares of common stock issuable upon the exercise of warrants having a
range of exercise prices from $.02 to $3.76 per share (comprised of
5,309,386 shares of common stock underlying the warrants we are
registering pursuant to this registration statement; 157,191 shares of
common stock reserved for issuance upon the exercise of outstanding
warrants granted to certain investors; and 400,000 shares of common stock
reserved for issuance upon the exercise of outstanding warrants granted in
connection with an intellectual property purchase agreement and consulting
agreements with third parties);
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outstanding
options to purchase 1,131,174 shares of our common
stock;
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975,405
shares of common stock reserved for issuance under our 2008 Equity
Incentive Plan;
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620,096
shares of common stock issued in conjunction with a bridge loan we
undertook in July 2007; and
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297,142
shares subject to issuance upon conversion of certain
notes.
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1
We
are registering 13,030,749 shares for sale by the selling shareholders
identified in the section of this prospectus titled “Selling Security Holders.”
The shares included in the table identifying the selling shareholders consist
of:
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7,101,267
shares of common stock;
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•
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5,309,386
shares of common stock underlying common stock purchase warrants, which
includes 620,096 shares of common stock underlying warrants issued in
conjunction with a bridge loan we undertook in July 2007;
and
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•
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620,096
shares of common stock underlying the convertible
notes.
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After
this offering, assuming the exercise of all warrants and options with underlying
shares which are covered by this prospectus, we would have 15,798,680 shares of
common stock outstanding, which does not include the 975,405 shares of common
stock reserved for issuance under our 2008 Equity Incentive
Plan.
BioDrain
Medical, Inc. will not receive any of the proceeds from the sale of these
shares. However, we may receive up to $2,374,107 upon the exercise of warrants.
If some or all of the warrants are exercised, the money we receive will be used
for general corporate purposes, including working capital requirements. We will
pay all expenses incurred in connection with the offering described in this
prospectus, with the exception of the brokerage expenses, fees, discounts and
commissions which will all be paid by the selling shareholders. Information
regarding our common stock, warrants and convertible notes is included in the
section of this prospectus entitled “Description of Securities.”
Corporate
Information
Our
corporate offices are located at 2060 Centre Pointe Boulevard, Suite 7, Mendota
Heights, Minnesota 55120. Our telephone number is (651) 389-4800 and our website
address is www.biodrainmedical.com.
Information contained on our website shall not be deemed to be part of this
prospectus.
Reverse
Stock Split
On
June 6, 2008, our board of directors approved a 1-for-1.2545 reverse stock split
of our common stock, which resulted in the authorized number of our common stock
of 20,000,000 to be proportionately divided by 1.2545 to 15,942,607. Pursuant to
Section 302A.402 of the Minnesota Business Corporations Act, since the reverse
stock split did not adversely affect the rights or preferences of the holders of
our outstanding common stock and did not result in the percentage of authorized
shares of any class or series of our stock that remains unissued after the
reverse stock split exceeding the percentage of authorized shares of that class
or series that were unissued before the reverse stock split, no shareholder
approval was required.
On
October 20, 2008, our board of directors approved a subsequent 1-for-1.33176963
reverse stock split. As a result, the authorized number of our common stock of
15,942,607 was proportionately divided by 1.33177 to 11,970,994. On October 20,
2008, our board of directors also approved a resolution to increase the number
of authorized shares of our common stock from 11,970,994 to 40,000,000 and such
action was approved by the Company’s shareholders holding a majority of the
shares entitled to vote thereon at a special meeting of shareholders held on
December 3, 2008.
Unless
otherwise indicated, all discussions included in this prospectus relating to the
outstanding shares of our common stock, including common stock to be issued upon
exercise of outstanding warrants, refer to post-second reverse stock split
shares.
2
You
should carefully consider the risks described below before making an investment
decision. Our business could be harmed by any of these risks. The trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment. In assessing these risks, you should also refer
to the other information contained in this prospectus, including our financial
statements and related notes.
Risks
Related to Our Business
Our
limited operating history makes evaluation of our business
difficult.
We
were formed on April 23, 2002 and to date have not generated any revenue. Our
ability to implement a successful business plan remains unproven and no
assurance can be given that we will ever generate sufficient revenues to sustain
our business. We have a limited operating history which makes it difficult to
evaluate our performance. You must consider our prospects in light of these
risks, expenses, technical obstacles, difficulties, market penetration rate and
delays frequently encountered in connection with the development of new
businesses. These factors include uncertainty whether we will be able
to:
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Raise
capital;
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Develop
and implement our business plan in a timely and effective
manner;
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Be
successful in uncertain markets;
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Respond
effectively to competitive pressures;
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Successfully
address intellectual property issues of others;
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Protect
and expand our intellectual property rights; and
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Continue
to develop and upgrade our
products.
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Because
we are a development stage company and not profitable and expect to incur
additional losses, we will require additional financing to sustain our
operations and without it we will not be able to continue
operations.
We
incurred a net loss of approximately $159,900 and $273,000, respectively for the
fiscal years ended December 31, 2007 and 2006 and $928,995 and $302,100 for the
nine months ended September 30, 2008 and 2007, respectively. These amounts
include a significant amount of employee accrued payroll and consulting fees
from a member of our board of directors. That amount was reduced by $346,700 at
December 31, 2007 and consulting fees were no longer accrued in 2008. We are
currently negotiating with the individuals involved to compensate them for the
remaining portion of the accrual. However, there is no guarantee that these
negotiations will be successful. We have never earned a profit and we anticipate
that we will continue to incur losses for at least the next 12 months. We
continue to operate on a negative cash flow basis. We have not yet generated
revenues and are still developing our planned principal operations. These
factors raise substantial doubt about our ability to continue as a going
concern. We believe that we will need to raise at least an aggregate of $3
million from future offerings in order to have sufficient financial resources to
fund our operations for the next 12 months because we are running a cash flow
deficit. Although we will not receive any proceeds from the sale of the shares
offered in this offering, we may receive up to $2,374,107 upon exercise of
warrants, the underlying shares of which are included in the registration
statement of which this prospectus is a part. If received, such funds will be
used for general corporate purposes, including working capital requirements.
However, shareholders are not obligated, and we are not currently planning on
any exercising of the warrants. Accordingly, we will rely on pursuing
alternative sources to obtain the entire amount of funding needed to fund our
operations for the next 12 months. We may need additional funds to continue our
operations, and such additional funds may not be available when
required.
To
date, we have financed our operations through the sale of stock and certain
borrowings. From 2002 to 2006 we received approximately $110,000 in debt
financing of which approximately $38,000 remains outstanding as of the date of
this prospectus and $99,400 in equity financing. In March 2007 we secured a
$100,000 convertible note from two private investors. In July and August 2007 we
secured a convertible bridge loan of $170,000. By October 30, 2008, we closed a
private placement financing of our common stock and warrants, through which we
raised approximately $1.582 million to date with net proceeds of approximately
$1.238 million. Approximately $331,000 will be allocated to outstanding legal
fees ($75,000), finder fees ($86,000), and investor relations fees ($170,000
over the next two years).
3
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 perceived performance and market conditions. Our
inability to raise additional working capital at all or to raise it in a timely
manner would negatively impact our ability to fund our operations, to generate
revenues, and to otherwise execute our business plan, leading to the reduction
or suspension of our operations and ultimately forcing us to go out of business.
Should this occur, the value of any investment in our securities could be
adversely affected, and an investor could lose a portion of or even lose their
entire investment.
Although
we have been able to fund our current working capital requirements, principally
through debt and equity financing, there is no assurance that we will be able to
do so in the future.
We
are an early-stage company with a limited operating history of no
revenues.
Since
our formation in 2002, we have engaged in the formulation of a business strategy
and the design and development of technologically advanced products. We have not
generated any revenues to date. Our ability to implement a successful business
plan remains unproven and no assurance can be given that we will ever generate
sufficient revenues to sustain our business.
Our
business is dependent upon proprietary intellectual property rights, which if we
were unable to protect, could have a material adverse effect on our
business.
We
currently own and may in the future own or license additional patent rights or
trade secrets in the U.S., Europe, Asia, Canada and elsewhere in the world that
cover certain of our products. We rely on patent laws, and other intellectual
property laws, nondisclosure and other contractual provisions and technical
measures to protect our products and intangible assets. These intellectual
property rights are important to our ongoing operations and no assurance can be
given that any measure we implement will be sufficient to protect our
intellectual property rights. We may lose the protection afforded by these
rights through patent expirations, legal challenges or governmental action. If
we cannot protect our rights, we may lose our competitive advantage or our
competitive advantage could be lost if these patents were found to be invalid in
the jurisdictions in which we sell or plan to sell our products. The loss of our
intellectual property rights could have a material adverse effect on our
business.
If
we become subject to intellectual property actions, this could hinder our
ability to deliver our products and services and our business could be
negatively impacted.
We
may be subject to legal or regulatory actions alleging intellectual property
infringement or similar claims against us. Companies may apply for or be awarded
patents or have other intellectual property rights covering aspects of our
technologies or businesses. Moreover, if it is determined that our products
infringe on the intellectual property rights of third parties, we may be
prevented from marketing our products. While we are currently not subject to any
material intellectual property litigation, any future litigation alleging
intellectual property infringement by us could be costly, particularly in light
of our limited resources. Similarly, if we determine that third parties are
infringing on our patents or other intellectual property rights, our limited
resources may prevent us from litigating or otherwise taking actions to enforce
our rights. Any such litigation or inability to enforce our rights could require
us to change our business practices, could potentially hinder or prevent our
ability to deliver our products and services, and could result in a negative
impact to our business. Expansion of our business via product line enhancements
or new product lines to drive increased growth in current or new markets may be
inhibited by the intellectual property rights of our competitors and/or
suppliers. Our inability to successfully mitigate those factors may
significantly reduce our market opportunity and subsequent
growth.
4
Our
business would be materially and adversely affected if we were obligated to pay
royalties under a patent purchase agreement.
Our
revenues would be materially adversely affected if our intellectual property
were found to infringe the intellectual property rights of others. Two
individuals, Jay D. Nord and Jeffrey K. Drogue, filed a provisional patent
application disclosing a particular embodiment for a medical waste fluid
collection system (the “Nord/Drogue Embodiment”). We engaged the services of
Marshall C. Ryan to further develop the medical waste fluid collection system
for commercialization. Mr. Ryan conceived of an alternative embodiment for the
medical waste fluid collection system (the “Ryan Embodiment”). An international
(PCT) patent application was subsequently filed claiming priority to the earlier
filed provisional application of Nord and Drogue and disclosing and claiming
both the Nord/Drogue Embodiment and the Ryan Embodiment. The national stage
applications were filed in the U.S., Europe and Canada based on the PCT
application. During the national stage prosecutions, the European and U.S.
patent offices each rejected the patent claims covering the Nord/Drogue
Embodiment as being unpatentable over the prior art. The Canadian patent office
has not yet examined the Canadian national stage application. The claims were
amended in both the U.S. and European applications to claim only the subject
matter of the Ryan Embodiment and Mr. Ryan was added as a named inventor. As
required under U.S. law, we removed Nord and Drogue as named inventors from the
U.S. application because they were no longer inventors to the subject matter of
the remaining patent claims. A U.S. patent was granted to us on December 30,
2008 (U.S. Patent No. 7,469,727). A European patent was granted to us on April
4, 2007 (Patent No. EP1539580) (collectively, “the Patents”).
We
entered into a patent purchase agreement in September 2002 with Nord and Drogue
prior to engaging Mr. Ryan. Under the patent purchase agreement, certain
royalties were to be paid to Nord and Drogue upon issuance of a U.S. patent.
However, upon learning that the Nord/Drogue Embodiment was unpatentable, we
notified Mr. Nord that the patent purchase agreement we had entered into with
Nord and Drogue was no longer valid. Nord and Drogue could pursue legal action
against us purportedly for breach of contract and may sue for damages and
ownership interest in the patents. Although our management believes that we
would prevail in such lawsuit, there is no assurance that we will. We believe
that Nord and Drogue have no valid claims of inventorship or ownership of the
Patents. Even if Mr. Nord or Mr. Drogue were to assert such a claim, we believe
that, independent of our dealings with them, we obtained rights to the Patents
from Mr. Ryan, who even if found not to be the sole inventor of the subject
matter of the claims of the Patents, is at least a joint inventor. As a joint
inventor, Mr. Ryan would have co-ownership of the Patents and would have the
power to transfer to us his undivided co-ownership interest in the
Patents.
We
face intense competition, including competition from companies with
significantly greater resources than ours, and if we are unable to compete
effectively with these companies, our market share may decline and our business
could be harmed.
Our
industry is highly competitive with numerous competitors from well-established
manufacturers to innovative start-ups. A number of our competitors have
significantly greater financial, technological, engineering, manufacturing,
marketing and distribution resources than we do. Their greater capabilities in
these areas may enable them to compete more effectively on the basis of price
and production and more quickly develop new products and technologies. The total
market for surgical suction canisters can be estimated at approximately
$120,000,000 with a compound annual growth rate of 5% according to a
publicly-available research report by Frost & Sullivan in 2003, which is
available through the internet at Frost & Sullivan’s website, www.frost.com,
and which we did not pay for nor obtain consent to use . Cardinal Health, Inc.,
a $90 billion plus medical manufacturer and distributor, is the leading supplier
of surgical canisters, tubing and suction products. Another one of our
competitors is Stryker Instruments, a wholly-owned subsidiary of Stryker
Corporation, which is a publicly-traded company with revenues of approximately
$5 billion.
Although
the BioDrain FMS is directly connected to the sanitary sewer helping to reduce
potential exposure to infectious fluids, it is possible that installation of the
system will cause inconvenience and lost productivity as the operating rooms in
which they are installed will need to be temporarily shut down. In
addition, remodel work may be necessary in preparation for, or as a result of,
an installation. In some cases, the costs to rework plumbing lines to
accommodate for our system may outweigh the expected savings and/or lengthen the
expected return on investment time.
5
Competition
from companies with significantly greater resources than ours may be able to
reverse engineer our products and/or circumvent our intellectual property
position. Such action, should it prove successful, would greatly reduce our
competitive advantage in the marketplace.
We
believe that our ability to compete successfully depends on a number of factors,
including our innovative and advanced research and development capabilities,
strength of our intellectual property rights, sales and distribution channels
and advanced manufacturing capabilities. We plan to employ these and other
elements as we develop our products and technologies, but there are many other
factors beyond our control. We may not be able to compete successfully in the
future, and increased competition may result in price reductions, reduced profit
margins, loss of market share and an inability to generate cash flows that are
sufficient to maintain or expand our development and marketing of new products,
which could adversely impact the trading price of our common
shares.
Our
products require FDA approval and our business will be subject to intense
governmental regulation and scrutiny, both in the U.S. and abroad.
We
are currently preparing and planning to file a 510(k) submission with the U.S.
Food and Drug Administration (the “FDA”) with respect to a product
classification as a Class II non-exempt device. However, there is no assurance
that we will succeed in obtaining FDA approval.
The
potential production and marketing of some of our products and our ongoing
research and development, any pre-clinical testing and clinical trial activities
are subject to extensive regulation and review by FDA and other governmental
authorities both in the United States and abroad. In addition to testing and
approval procedures, extensive regulations also govern marketing, manufacturing,
distribution, labeling, and record keeping. If we do not comply with applicable
regulatory requirements, violations could result in warning letters,
non-approvals, suspensions of regulatory approvals, civil penalties and criminal
fines, product seizures and recalls, operating restrictions, injunctions, and
criminal prosecution.
Delays
in or rejection of FDA or other government entity approval of our new products
may adversely affect our business or even force us to shut down. Such delays or
rejection may be encountered due to, among other reasons, government or
regulatory backlog, lack of efficacy during clinical trials, unforeseen safety
issues, slower-than-expected rate of hospital recruitment for clinical trials,
varying interpretations of data generated by clinical trials, or changes in
regulatory policy during the period of product development in the United States
and abroad. In the United States, there has been a continuing trend of more
stringent FDA oversight in product clearance and enforcement activities, causing
medical products manufacturers to experience longer approval cycles, more
uncertainty, greater risk, and higher expenses. Even if regulatory approval of a
product is granted, this approval may entail limitations on uses for which a
previously approved product may be labeled and promoted. It is possible, for
example, that we may not receive FDA approval to market already approved
products for broader or different applications or to market updated products
that represent extensions of our basic technology.
Periodically,
legislative or regulatory proposals are introduced that could alter the review
and approval process relating to medical products. It is possible that the FDA
will issue additional regulations further restricting the sale of our present or
proposed products. Any change in legislation or regulations that govern the
review and approval process relating to our current and future products could
make it more difficult and costly to obtain approval for new products, or to
produce, market, and distribute existing products.
If
we do not succeed in obtaining FDA approval by August 2009, the
majority-in-interest investors through our October 2008 offering have the right
to cause us to restructure our business.
In
July 2007, we entered into a restructuring agreement whereby in the event that
we fail to obtain FDA approval by the end of August 2009, the
majority-in-interest of investors (“the Investors”) through our October 2008
offering would have the right to cause the Company to make the following
restructuring changes:
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1.
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All
Company assets will be distributed to a wholly-owned subsidiary
(“Privco”). Privco will have the identical number of common shares
outstanding as the Company. The Investors will have the same percentage
ownership of Privco that they had in the Company and will maintain their
shares of Company common stock.
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6
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2.
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BioDrain’s
original shareholders (the “Founders”) will cancel all Company stock held
by the Founders only and the Founders will no longer own any Company
equity. Ownership of shares of the Company’s common stock by the Investors
would not be affected.
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3.
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In
consideration of such cancellation, the Founders will receive Privco stock
and options so that the Founders have the same percentage ownership of
Privco that it had in the Company. The Company will retain the rest of
Privco equity.
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4.
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All
Company stock options will be cancelled and replaced with Privco stock
options.
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5.
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The
Company will have new directors and officers selected by
Investors.
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6.
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In
the event of a reverse merger or other similar transaction with a new
operating business, the Company will either spin-off the remaining Privco
equity to the remaining Company shareholders or liquidate the Privco
securities and distribute any net proceeds to the Company
shareholders.
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These
potential restructuring changes were put in place in the October 2008 financing,
which commenced in July 2007, to reduce the risk of not obtaining FDA
approval for those Investors involved in that financing. We were able
to attract more investors for that financing by providing the Investors with the
restructuring agreement, which provides them with additional potential value
(ownership of a public entity) should we not achieve FDA approval by the end of
August 2009. The potential impact on our business could be to cause our
operations to cease. The financial statements of the Company would
show no value; rather all assets would be in Privco, the new entity. Operations
could be continued from Privco, however, the Investors would have the option to
liquidate our assets and distribute the proceeds to our shareholders if a
reverse merger or similar transaction took place.
While
the Investors from the funding completed in October 2008 would stand to benefit,
as they would have ownership in both the remaining public entity and the newly
created Privco, such restructuring changes could present numerous risks to our
Founders and potential investors, including but not limited to, adverse effects
on our results of operations from restructuring charges and merger-related costs
as well as costs related to termination or replacement of employees. In
addition, the loss of our officers and other key members of our management team
could cause in a delay in the implementation of our business plan and no
assurances can be given that the new management selected would have the same
level of skill, experience and performance as our current
management.
Our
product may never be commercially viable or producible to satisfy
demand.
The
BioDrain FMS is currently a fourth-generation prototype. We have contracted with
a contract manufacturing entity who is working with us to finalize and improve
the product design. These improvements are expected to make the product
attractive to the target market; however, other unknown or unforeseen market
requirements may appear. There is no assurance that such a product can be
produced in sufficient volume to satisfy projected sales volumes.
If
our product is not accepted by our potential customers, it is unlikely that we
will ever become profitable.
The
medical industry has historically used a variety of technologies for fluid waste
management. Compared to these conventional technologies, our technology is
relatively new, and the number of companies using our technology is limited. The
commercial success of our product will depend upon the widespread adoption of
our technology as a preferred method by hospitals and surgical centers. In order
to be successful, our product must meet the technical and cost requirements for
these facilities. Market acceptance will depend on many factors,
including:
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•
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the
willingness and ability of customers to adopt new
technologies;
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•
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our
ability to convince prospective strategic partners and customers that our
technology is an attractive alternative to conventional methods used by
the medical industry;
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7
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•
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our
ability to select and execute agreements with effective distributors and
manufacturers representatives to market and sell our product;
and
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•
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our
ability to assure customer use of the BioDrain proprietary cleaning
fluid.
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Because
of these and other factors, our product may not gain market acceptance or become
the industry standard for the health care industry. The failure of such
companies to purchase our products would have a material adverse effect on our
business, results of operations and financial condition.
We are dependent for our success on
a few key executive officers. Our inability to retain those officers would
impede our business plan and growth strategies, which would have a negative
impact on our business and the value of an investment.
Our
success depends on the skills, experience and performance of key members of our
management team. We are heavily dependent on the continued services of Lawrence
Gadbaw, our Chairman, Kevin Davidson, our Chief Executive Officer, Gerald Rice,
our Chief Financial Officer, and Chad Ruwe, our Executive Vice President of
Operations. We have entered into employment agreements with all of the members
of our senior management team and we plan to expand the relatively small number
of executives. Were we to lose one or more of these key executive officers, we
would be forced to expend significant time and money in the pursuit of a
replacement, which could result in both a delay in the implementation of our
business plan and the diversion of limited working capital. We can give you no
assurance that we can find satisfactory replacements for these key executive
officers at all, or on terms that are not unduly expensive or burdensome to our
company. Although we intend to issue stock options or other equity-based
compensation to attract and retain employees, such incentives may not be
sufficient to attract and retain key personnel.
We are dependent for our success on
our ability to attract and retain technical personnel, sales and marketing
personnel and other skilled management.
Our
success depends to a significant degree upon our ability to attract, retain and
motivate highly skilled and qualified personnel. Failure to attract and retain
necessary technical personnel, sales and marketing personnel and skilled
management could adversely affect our business. If we fail to attract, train and
retain sufficient numbers of these highly qualified people, our prospects,
business, financial condition and results of operations will be materially and
adversely affected.
The relative lack of public company
experience of our management team may put us at a competitive
disadvantage.
Our
management team has limited public company experience, which could impair our
ability to comply with legal and regulatory requirements such as those imposed
by the Sarbanes-Oxley Act of 2002. The individuals who now constitute our senior
management have had limited responsibility for managing a publicly traded
company. Such responsibilities include complying with federal securities laws
and making required disclosures on a timely basis. Our senior management may not
be able to implement and effect programs and policies in an effective and timely
manner that adequately responds to such increased legal, regulatory compliance
and reporting requirements. Our failure to do so could lead to the imposition of
fines and penalties and result in the deterioration of our
business.
New
rules, including those contained in and issued under the Sarbanes-Oxley Act of
2002, may make it difficult for us to retain or attract qualified officers and
directors, which could adversely affect the management of our business and our
ability to obtain or retain listing of our common stock.
We
may be unable to attract and retain qualified officers, directors and members of
board committees required to provide for our effective management as a result of
the recent and currently proposed changes in the rules and regulations which
govern publicly held companies, including, but not limited to, certifications
from executive officers and requirements for financial experts on the board of
directors. The perceived increased personal risk associated with these recent
changes may deter qualified individuals from accepting these roles. The
enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a
series of new rules and regulations and the strengthening of existing rules and
regulations by the Securities and Exchange Commission (the “SEC”). Further,
certain of these recent and proposed changes heighten the requirements for board
or committee membership, particularly with respect to an individual’s
independence from the Company and level of experience in finance and accounting
matters. We may have difficulty attracting and retaining directors with the
requisite qualifications. If we are unable to attract and retain qualified
officers and directors, the management of our business could be adversely
affected.
8
Our
internal controls over financial reporting may not be effective, and our
independent auditors may not be able to certify as to their effectiveness, which
could have a significant and adverse effect on our business.
If
we become a publicly traded company as intended, we will be subject to various
regulatory requirements, including the Sarbanes-Oxley Act of 2002. We, like all
other public companies, would then incur additional expenses and, to a lesser
extent, diversion of our management’s time, in our efforts to comply with
Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal controls over
financial reporting.
Since
we are a small developing company with a small management team, we have not yet
evaluated our internal controls over financial reporting in order to allow
management to report on, and our independent auditors to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which we
collectively refer to as “Section 404”. We will be required to include our
Section 404 management’s assessment of internal control over financial reporting
beginning with our first annual report filed after we become publicly
registered, and pursuant to recent SEC rules, we will be required to include our
independent auditor’s attestation on management’s report on internal control
over financial reporting beginning with our first annual report for the fiscal
year ending on or after December 15, 2009.
We
intend to comply with the Section 404 management assessment of internal control
over financial reporting beginning with our first annual report filed after we
become publicly registered. However, our lack of familiarity with Section 404
may unduly divert management’s time and resources in executing the business
plan. If, in the future, management identifies one or more material weaknesses,
or our external auditors are unable to attest that our management’s report is
fairly stated or to express an opinion on the effectiveness of our internal
controls, this could result in a loss of investor confidence in our financial
reports, have an adverse effect on our stock price and/or subject us to
sanctions or investigation by regulatory authorities.
Risks
Related to Our Securities
There
is currently no public trading market for our common stock and we cannot assure
you that an active public trading market for our common stock will develop or be
sustained. Even if a market develops, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
There
is currently no public trading market for our common stock and no such market
may ever develop. While we intend to seek and obtain quotation of our common
stock for trading on the OTC Bulletin Board during the first quarter of 2009,
there is no assurance that our application will be approved. An application for
quotation on the OTC Bulletin Board must be submitted by one or more market
makers who agree to sponsor the security and who demonstrate compliance with SEC
Rule 15c2-11 before initiating a quote in a security on the OTC Bulletin Board.
In order for a security to be eligible for quotation by a market maker on the
OTC Bulletin Board, the security must be registered with the SEC and the company
must be current in its required filings with the SEC. There are no listing
requirements for the OTC Bulletin Board and accordingly no financial or minimum
bid price requirements. We intend to cause a market maker to submit an
application for quotation to the OTC Bulletin Board before January 31, 2009.
Westminster Securities Corporation has agreed to submit an application to the
OTC Bulletin Board on our behalf.
9
Even
if our application for quotation is approved, the number of persons interested
in purchasing our common stock at or near ask prices at any given time may be
relatively small or nonexistent. This situation may be attributable to a number
of factors, including the fact that we are a small company that is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk averse and may
be reluctant to follow a relatively unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, assuming that our common stock is accepted for
quotation, there may be periods of several days or more when trading activity in
our shares is minimal or non existent, as compared to a seasoned issuer which
has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot assure you
that an active public trading market for our common stock will develop or be
sustained.
We
do not have a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934 and we do not intend to register a class of our
securities on a national securities exchange before this registration statement
is effective. As a result, certain information and protections provided to
investors of companies that have a class of securities registered pursuant to
Section 12 of the Exchange Act may not be available to you.
Prior
to this offering, we did not have a class of equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”) and we do not intend to register a class of our securities on a
national securities exchange before this registration statement is effective. We
do, however, have an obligation under Section 15(d) of the Exchange Act to file
with the SEC, in accordance with such rules and regulations as the SEC may
prescribe as necessary or appropriate in the public interest or for the
protection of investors, such supplementary and periodic information, documents,
and reports as would be required of a company with a class of securities
registered pursuant to Section 12 of the Exchange Act. This duty to file such
information, documents, and reports will be automatically suspended as soon as
we register a class of our securities pursuant to Section 12 of the Exchange Act
(or if, at the beginning of the next fiscal year after our registration becomes
effective, our securities are held by less than 300 shareholders) and therefore
we will no longer be required to provide you with such information. Although we
may voluntarily provide ongoing disclosures regarding our business and financial
results, there is no guarantee that we will do so.
Due
to the fact that we do not have a class of securities registered pursuant to
Section 12 of the Exchange Act, we are not currently required to abide by the
proxy rules of the Exchange Act, which require certain companies registered
under Section 12 of the Exchange Act to provide to its stockholders a written
information statement containing information relating to annual and other
meetings of stockholders, including voting rights and matters to be voted upon.
Therefore, our stockholders will not receive such information until we are
registered pursuant to Section 12 of the Exchange Act, if ever, unless we decide
to voluntarily provide such information.
In
addition, Section 26 of the Exchange Act is inapplicable to us as a non-Section
12 reporting company and therefore our investors are not protected by the rule
that provides that inaction by the SEC or the Board of Governors of the Federal
Reserve System, in the administration of the Exchange Act, shall not mean that
such authority has in any way passed upon the merits of, or given approval to,
any security or transaction under the Exchange Act. The rule also provides that
inaction by such authority with regard to any statement or report filed or
examined by it shall not be deemed a finding that such statement or report is
true or accurate and that it is not false or misleading. Therefore, although we
do not intend to make such representations, we are not bound by the rule that
makes it unlawful for companies registered under Section 26 of the Exchange Act
to make, or cause to be made, to any prospective purchaser or seller of a
security, any representation that any such inaction by any such authority is to
be construed as true, accurate or not false or misleading. As a result, our
investors are not as protected from such false representations as are investors
in companies that are registered under Section 12 of the Exchange
Act.
Limitations
on director and officer liability and indemnification of our officers and
directors by us may discourage shareholders from bringing suit against a
director.
Our
articles of incorporation and bylaws provide, with certain exceptions as
permitted by governing state law, that a director or officer shall not be
personally liable to us or our shareholders for breach of fiduciary duty as a
director, except for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law, or unlawful payments of dividends. These
provisions may discourage shareholders from bringing suit against a director for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by shareholders on our behalf against a director. In addition, our
articles of incorporation and bylaws may provide for mandatory indemnification
of directors and officers to the fullest extent permitted by governing state
law.
10
We
do not expect to pay dividends for the foreseeable future, and we may never pay
dividends.
We
currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. Our payment of any future dividends will be at the
discretion of our board of directors after taking into account various factors,
including but not limited to, our financial condition, operating results, cash
needs, growth plans and the terms of any credit agreements that we may be a
party to at the time. In addition, our ability to pay dividends on our common
stock may be limited by state law. Accordingly, investors must rely on sales of
their common stock after price appreciation, which may never occur, as the only
way to realize their investment.
If
our common stock is accepted for quotation on the OTC Bulletin Board, it may be
thinly traded, so you may be unable to sell at or near ask prices or at all if
you need to sell your shares to raise money or otherwise desire to liquidate
your shares.
If
our common stock is accepted for quotation on the OTC Bulletin Board, it may be
thinly traded on the OTC Bulletin Board, meaning there has been a low volume of
buyers and sellers of the shares. Through this registration statement, we are
essentially going public without the typical initial public offering procedures
which usually include a large selling group of broker-dealers who may provide
market support after going public. Thus, we will be required to undertake
efforts to develop market recognition for us and support for our shares of
common stock in the public market. The price and volume for our common stock
that will develop cannot be assured. The number of persons interested in
purchasing our common stock at or near ask prices at any given time may be
relatively small or non-existent. This situation may be attributable to a number
of factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned
and viable. As a consequence, there may be periods of several days, weeks or
months when trading activity in our shares is minimal or non-existent, as
compared to a seasoned issuer which has a large and steady volume of trading
activity that will generally support continuous sales without an adverse effect
on share price.
We
cannot give you any assurance that a broader or more active public trading
market for our common stock will develop or be sustained, or that current
trading levels will be sustained or not diminish. In addition to trading on the
OTC Bulletin Board, our intention is to apply for trading on either the NASDAQ
Capital Market or the NYSE Alternext U.S. LLC (formerly American Stock Exchange)
at such time that we meet the requirements for listing on those exchanges. We
currently do not meet the objective listing criteria for listing on those
exchanges and there can be no assurance as to when we will qualify for either of
these exchanges or that we will ever qualify for these
exchanges.
In
order for us to be eligible to trade on the NASDAQ Capital Market, we would need
1 million publicly held shares (which is defined as total shares outstanding
less shares held by officers, directors or beneficial owners of 10% or more), a
bid price of $4, 300 shareholders, 3 market makers, compliance with NASDAQ’s
corporate governance rules, and either (1) $5 million in stockholders’ equity,
$15 million market value of publicly held shares and a 2-year operating history;
(2) $4 million in stockholders’ equity, $15 million market value of publicly
held shares and $50 million market value of securities listed on NASDAQ or
another national securities exchange; or (3) $4 million in stockholders’ equity,
$5 million market value of publicly held shares and $750,000 net income from
continuing operations in the latest fiscal year or in 2 of the last 3 fiscal
years. In order for us to be eligible to trade on the NYSE Alternext U.S. LLC,
which is a market for small and midsized companies, we would need either (1)
$750,000 of pre-tax income, $3 million market value of public float, a minimum
price of $3 and $4 million in shareholders’ equity; (2) $15 million market value
of public float, a minimum price of $3, 2 years operating history and $4 million
in shareholders’ equity; (3) $50 million market capitalization, $15 million
market value of public float, a minimum price of $2 and $4 million in
shareholders’ equity; or (4) $75 million market capitalization, $20 million
market value of public float and a minimum price of $3; all in addition to
either 800 shareholders with 500,000 public float (shares); 400 shareholders
with 1,000,000 public float (shares); or 400 shareholders with 500,000 public
float (shares) with a daily trading volume of 2,000 shares during the 6-months
prior to listing. We would also need to meet the corporate governance and
independent director and audit committee standards of the NYSE Alternext U.S.
LLC.
11
If
our common stock is accepted for quotation on the OTC Bulletin Board, while we
are trading on the OTC Bulletin Board, the trading volume we develop may be
limited by the fact that many major institutional investment funds, including
mutual funds, as well as individual investors follow a policy of not investing
in OTC Bulletin Board stocks and certain major brokerage firms restrict their
brokers from recommending OTC Bulletin Board stocks because they are considered
speculative, volatile and thinly traded.
The
application of the “penny stock” rules to our common stock could limit the
trading and liquidity of the common stock, adversely affect the market price of
our common stock and increase your transaction costs to sell those
shares.
If
our common stock is accepted for quotation on the OTC Bulletin Board, as long as
the trading price of our common stock is below $5 per share, the open-market
trading of our common stock will be subject to the “penny stock” rules, unless
we otherwise qualify for an exemption from the “penny stock” definition. The
“penny stock” rules impose additional sales practice requirements on certain
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). These
regulations, if they apply, require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the associated risks. Under these regulations, certain brokers who
recommend such securities to persons other than established customers or certain
accredited investors must make a special written suitability determination
regarding such a purchaser and receive such purchaser’s written agreement to a
transaction prior to sale. These regulations may have the effect of limiting the
trading activity of our common stock, reducing the liquidity of an investment in
our common stock and increasing the transaction costs for sales and purchases of
our common stock as compared to other securities.
The
OTC Bulletin Board is a quotation system, not an issuer listing service, market
or exchange. Therefore, buying and selling stock on the OTC Bulletin Board is
not as efficient as buying and selling stock through an exchange.
The
OTC Bulletin Board is a regulated quotation service that displays real-time
quotes, last sale prices and volume limitations in over-the-counter securities.
Because trades and quotations on the OTC Bulletin Board involve a manual
process, the market information for such securities cannot be guaranteed. In
addition, quote information, or even firm quotes, may not be available. The
manual execution process may delay order processing and intervening price
fluctuations may result in the failure of a limit order to execute or the
execution of a market order at a significantly different price. Execution of
trades, execution reporting and the delivery of legal trade confirmation may be
delayed significantly. Consequently, one may not be able to sell shares of our
common stock at the optimum trading prices.
When
fewer shares of a security are being traded on the OTC Bulletin Board,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Lower trading volumes in a security may
result in a lower likelihood of an individual’s orders being executed, and
current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry.
Orders
for OTC Bulletin Board securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at the
optimum trading prices.
12
The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a bid
price for securities bought and sold through the OTC Bulletin Board. Due to the
foregoing, demand for securities that are traded through the OTC Bulletin Board
may be decreased or eliminated.
Shares
eligible for future sale may adversely affect the market.
From
time to time, certain of our shareholders may be eligible to sell all or some of
their shares of common stock pursuant to Rule 144, promulgated under the
Securities Act of 1933, as amended, subject to certain limitations. In general,
pursuant to Rule 144 as in effect as of the date of this prospectus, a
shareholder (or shareholders whose shares are aggregated) who has satisfied the
applicable holding period and is not deemed to have been one of our affiliates
at the time of sale, or at any time during the three months preceding a sale,
may sell their shares of common stock. Any substantial sale, or cumulative
sales, of our common stock pursuant to Rule 144 or pursuant to any resale
prospectus may have a material adverse effect on the market price of our
securities.
We
expect volatility in the price of our common stock, which may subject us to
securities litigation.
If
established, the market for our common stock may be characterized by significant
price volatility when compared to seasoned issuers, and we expect that our share
price will be more volatile than a seasoned issuer for the indefinite future. In
the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
13
Special
Note Regarding Forward-Looking Statements
This
prospectus, including the sections titled “Prospectus Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Description of Business,” contains forward-looking
statements.
Forward-looking
statements include, but are not limited to, statements about:
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•
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our
ability to raise capital when we need it;
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•
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our
ability to market and distribute or sell our product and associated
cleaning fluid; and
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•
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our
ability to protect our intellectual property and operate our business
without infringing upon the intellectual property rights of
others.
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These
statements relate to future events or our future financial performance, and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
risks and other factors include those listed under “Risk Factors” and elsewhere
in this prospectus. In some cases, you can identify forward-looking statements
by terminology such as “may,” “could” “expects,” “intends,” “plans,”
“anticipates,” “believes,” “potential,” “continue” or the negative of these
terms or other comparable terminology. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. We do not
intend to update any of the forward-looking statements after the date of this
prospectus or to conform these statements to actual results. Neither the Private
Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act
of 1933, as amended, provides any protection for statements made in this
prospectus.
14
We
will not receive any proceeds from the sale of the shares by the selling
shareholders. All proceeds from the sale of the shares offered hereby will be
for the account of the selling shareholders, as described below in the sections
entitled “Selling Security Holders” and “Plan of Distribution.” However, we may
receive up to $2,374,107 upon exercise of warrants, the underlying shares of
which are included in the registration statement of which this prospectus is a
part. If received, such funds will be used for general corporate purposes,
including working capital requirements. With the exception of any brokerage fees
and commissions which are the obligation of the selling shareholders, we are
responsible for the fees, costs and expenses of this offering which are
estimated to be approximately $225,000, inclusive of our legal and accounting
fees, printing costs and filing and other miscellaneous fees and
expenses.
15
There
has been no public market for our common stock prior to this offering and there
will be no public market until our common stock is approved for quotation on the
OTC Bulletin Board. The offering price has been arbitrarily determined and does
not bear any relationship to our assets, results of operations, or book value,
or to any other generally accepted criteria of valuation.
We
cannot assure you that an active or orderly trading market will develop for our
common stock or that our common stock will trade in the public markets
subsequent to this offering at or above the offering price.
16
At
this time, our common shares are not traded on any public markets. We currently
have 8,180,832 shares of common stock issued and outstanding. We have 88
shareholders of record of our common stock.
We
also have outstanding warrants to purchase 5,866,578 shares of our common stock,
which include (i) 5,309,386 shares of common stock underlying the warrants we
are registering pursuant to this registration statement; (ii) 157,191 shares of
common stock reserved for issuance upon the exercise of outstanding warrants
granted to certain investors; and (iii) 400,000 shares of common stock reserved
for issuance upon the exercise of outstanding warrants granted in connection
with an intellectual property purchase agreement and consulting agreements with
third parties. We also have outstanding options to purchase 1,131,374 shares of
our common stock, which include 300,000 shares of common stock reserved for
issuance upon the exercise of outstanding options granted pursuant to employment
agreements with an officer and an employee of the Company.
After
this offering, assuming exercise of all the warrants, we will have 15,798,680
shares of common stock outstanding, which does not include 975,405 shares of
common stock reserved for issuance under our 2008 Equity Incentive Plan and
297,142 shares underlying certain convertible notes, but which does include
outstanding notes that may be converted into 620,096 shares of our common stock
which were issued in conjunction with a bridge loan we undertook in July 2007.
Of the amount outstanding, 950,995 shares could be sold pursuant to Rule 144
under the Securities Act of 1933, as amended (assuming compliance with the
requirements of Rule 144).
Dividends
We
have never paid dividends and do not currently intend to pay any dividends on
our common stock in the foreseeable future. Instead, we anticipate that any
future earnings will be retained for the development of our business. Any future
determination relating to dividend policy will be made at the discretion of our
board of directors and will depend on a number of factors, including, but not
limited to, our financial condition, operating results, cash needs, growth
plans, the terms of any credit agreements that we may be a party to at the time
and the Minnesota Business Corporations Act, which provides that dividends are
only payable out of surplus or current net profits.
Securities
Authorized for Issuance under Equity Compensation Plans
On
October 20, 2008, our board of directors approved the BioDrain Medical, Inc.
2008 Equity Incentive Plan (the “Plan”) to promote the success of the Company by
providing incentives to our directors, officers, employees and contractors by
linking their personal interests to the long-term financial success of the
Company, and to promote growth in shareholder value. The Plan is subject to the
approval of our shareholders, and if it is not so approved on or before 12
months after the date of adoption of the Plan by our board of directors, it
shall not come into effect and any options granted pursuant to the Plan will be
deemed cancelled. Awards may be granted only to a person who on the date of the
grant is a director, officer, employee or contractor of the Company (or a parent
or subsidiary of the Company), subject to certain restrictions set forth in the
Plan. Awards granted under the Plan shall be evidenced by an award agreement and
shall consist of:
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(i)
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incentive
stock options, as defined in Section 422 of the Internal Revenue Code of
1986 (the “Code”);
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(ii)
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nonqualified
stock options, defined as any option granted under the Plan other than an
incentive stock option;
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(iii)
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stock
appreciation rights (“SARs”), defined as an award granted under the Plan
that is exercisable either in lieu of options, in addition to options,
independent of options or in any combination thereof, which, upon
exercise, entitles the holder to receive payment of an amount determined
by multiplying (a) the difference between the fair market value of a share
on the date of exercise and the exercise price established by the
administrator of the Plan on the date of grant by (b) the number of shares
with respect to which the SAR is exercised, the payment of which will be
made in cash or stock; or
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(iv)
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restricted
stock, defined as stock granted under the Plan that is subject to
restrictions on sale, transfer, pledge, or
assignment.
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17
The
Plan is administered by a committee whose members are appointed by our board of
directors (the Plan is administered by our board of directors during such times
as no committee is appointed or during such times as the board of directors is
acting in lieu of the committee). At any time that our securities are listed on
a national securities exchange or quoted on Nasdaq National Market System
(“Nasdaq NMS”), the committee shall consist of not less than three independent
directors, as determined by applicable securities and tax laws. The committee
has the authority to (i) construe and interpret the Plan; (ii) to establish,
amend or waive rules for its administration; (iii) to accelerate the vesting of
any options or SARs; (iv) to amend the terms and conditions of any outstanding
option, SAR or restricted stock award (provided that the committee shall not
replace or regrant options or SARs with an exercise price that is less than the
original exercise price or change the exercise price to a lower price than the
original exercise price without prior shareholder approval); (v) to choose
grantees of Plan awards; (vi) to impose conditions on the exercisability terms
of the awards granted under the Plan; (vii) to determine the number of shares
subject to options granted; and (viii) to make all other determinations
necessary or advisable for the administration of the Plan.
Subject
to adjustment, the aggregate number of shares that may be delivered under the
Plan will not exceed 975,405 shares. No options or stock awards have been issued
under the Plan to date. If any award granted under the Plan terminates, expires
or lapses, any stock subject to such award shall be available for future grant
under the Plan, provided, however, that if any outstanding shares are changed
into or exchanged for a different number or kind of shares or other security in
another company by reason of reorganization, merger, consolidation,
recapitalization, stock split, reverse stock split, combination of shares or
stock dividends, an appropriate adjustment will be made in the number and kind
of shares as to which awards may be granted and as to which outstanding options
and SARs then unexercised shall be exercisable, such that the proportionate
interest of the grantee will be maintained. Such adjustment will be made without
change in the total price applicable to the unexercised portion of such awards
and with a corresponding adjustment in the exercise price per
share.
In
the event of a change of control of the Company (as defined in the Plan), any
award granted under the Plan, to the extent not already terminated, shall become
vested and immediately exercisable, and any period of restriction on restricted
stock shall terminate, provided, however, that the period during which any
option or SAR is exercisable shall not be limited or shortened. If an option or
SAR provides for exercisability during a period of time after a triggering event
and the initial exercisability is accelerated by means of a change in control,
the expiration of the option or SAR shall be delayed until after the period
provided for has ended and the option or SAR shall remain exercisable for the
balance of the period initially contemplated by the grant. In addition, if the
Company is then subject to the provisions of Section 280G of the Code and if the
acceleration or vesting or payment pursuant to a change in control could be
deemed a parachute payment, as defined in the Code, then the payments to the
grantee shall be reduced to an amount as will result in no portion of such
payments being subject to the excise tax imposed by Section 4999 of the
Code.
Fair
market value, for the purposes of the Plan, means the price per share of the
Company’s common stock determined as follows: (i) if the security is listed on
one or more national securities exchanges or quoted on the Nasdaq NMS, the
reported last sales price on such exchange on the date in question (or if not
traded on such date, the reported last sales price on the first day prior
thereto on which the security was traded); or (ii) if the security is not listed
on a national securities exchange and not quoted on Nasdaq NMS but is quoted on
the Nasdaq Small Cap System or otherwise traded in the over-the-counter market,
the mean of the highest and lowest bid prices for such security on the date in
question (or if there are no such bid prices on such date, the mean of the
highest and lowest bid prices on the most recent day prior thereto on which such
prices existed, not to exceed 10 days prior to the date in question); or (iii)
if neither (i) or (ii) is applicable, by any means determined fair and
reasonable by the committee.
Options
Only
employees are eligible to receive incentive stock options. Directors and
consultants who are not also employees are not eligible to receive incentive
stock options and instead are entitled to receive nonqualified stock options.
Subject to this restriction and other terms and conditions of the Plan, options
may be granted by the committee with such number of underlying shares, such
vesting terms and such exercise times and prices with such restrictions as the
committee shall determine. The aggregate fair market value (determined at the
time the option is granted) of the stock with respect to which incentive stock
options are exercisable for the first time by a grantee during any calendar year
shall not exceed $100,000. To the extent that the aggregate fair market value of
the stock with respect to which such incentive stock options are exercisable for
the first time exceeds $100,000, the excess options will be treated as
nonqualified stock options.
18
If
a vesting schedule is not specified by the committee at the time an option is
granted, such option shall vest, with respect to 25% of the options on the first
anniversary date of the grant, and, with respect to 2.083% of the options,
beginning on 30 days immediately following the first anniversary of the date of
grant and continuing on the same day of each month for the next 35 months
thereafter (in each case, rounding up to the nearest whole share). The price at
which an option may be exercised shall be determined by the committee but may
not be less than the fair market value of the stock on the date the option is
granted, provided, however, that the exercise price of an incentive stock option
granted to an employee who, on the date of execution of the option agreement
owns more than 10% of the total combined voting power of all series of stock
then outstanding (“10% Shareholder”), shall be at least 110% of the fair market
value of a share on the date the option agreement is signed. No option may be
exercised after 10 years from the date on which the option was granted (or on
the date preceding the 10th
anniversary in the case of an incentive stock option) and unless specified by
the committee at the time of grant, each option shall expire at the close of
business on the 10th
anniversary of the date of grant, provided, however, that in the case of an
incentive stock option held by a 10% Shareholder, such option shall expire at
the close of business on the date preceding the 5th
anniversary of the date of grant.
An
option may be exercised at such times and with such rights as provided in the
applicable option agreement. An option shall be deemed exercised immediately
prior to the close of business on the date the Company is in receipt of the
original option agreement, written notice of intent to exercise the option, and
payment for the number of shares being acquired upon exercise. There shall be no
exercise at any one time for fewer than 100 shares or all of the remaining
shares then purchasable by the person exercising the option.
In
the case of death or disability of a director, officer, employee or contractor,
any of such individual’s outstanding options, which were not vested and
exercisable on the date of death or the date the committee determines that the
individual incurred a disability, shall immediately become 100% vested, and all
outstanding options shall be exercisable at any time prior to the sooner of the
expiration date of the options or 12 months following the date of death or
disability. In the case of termination for “cause” (defined as (i) willful
breach of any agreement entered into with the Company; (ii) misappropriation of
the Company’s property, fraud, embezzlement, breach of fiduciary duty, or other
acts of dishonesty against the Company; or (iii) conviction of any felony or
crime involving moral turpitude), all of the grantee’s outstanding options,
whether or not then vested, shall be immediately forfeited back to the Company.
In the case of termination for any reason other than death, disability or cause,
(i) with respect to outstanding nonqualified options which were then vested and
exercisable, such options shall be exercisable at any time prior to the sooner
of the expiration date of such options or 12 months following the date of
termination and (ii) with respect to outstanding incentive stock options which
were then vested and exercisable shall be exercisable at any time prior to the
sooner of the expiration date of such options or 3 months following the date of
termination, provided, however, that in the event of the individual’s death
during such 3-month period and prior to the expiration date of the options, such
options then vested and unexercised may be exercised within 12 months following
the date of termination by the individual’s beneficiary or in accordance with
the laws of descent and distribution. Any options not then vested and
exercisable shall be forfeited back to the Company.
Incentive
stock options are transferable only by will or pursuant to the laws of descent
and distribution. Nonqualified stock options are transferable to a grantee’s
family member or family trust by a bona fide gift or pursuant to a domestic
relations order, by will or pursuant to the laws of descent and distribution, or
as otherwise permitted pursuant to the rules and regulations of the SEC. No
other transfers, assignments, pledges, or dispositions of any options, or the
rights or privileges conferred thereby, are permitted by the Plan and options
are only exercisable, during the grantee’s lifetime, by the grantee or his
guardian or legal representative.
Stock
Appreciation Rights
The
committee shall have the sole discretion, subject to the requirements of the
Plan, to determine the actual number of shares subject to SARs granted, to
specify the period of time over which vesting shall occur and to provide for the
acceleration of vesting upon the attainment of certain goals, provided, however
that the exercise of a SAR shall not be less than the fair market value of a
share of the Company’s stock on the date of grant. Unless specified by the
committee at the time the SAR is granted, SARs shall have the same vesting
schedule as options. The term of a SAR granted under the Plan shall be
determined by the committee, but shall not exceed 10 years and if not specified
by the committee at the time of grant, each SAR shall expire at the close of
business on the date preceding the 10th
anniversary of the date of grant.
19
SARs
granted in lieu of options may be exercised for all or part of the shares
subject to the related option upon the surrender of the related options
representing the right to purchase an equivalent number of shares. The SAR may
be exercised only with respect to the shares for which its related option is
then exercisable. SARs granted in addition to options shall be deemed to be
exercised upon the exercise of the related options. SARs granted independently
of options may be exercised upon whatever terms and conditions the committee
imposes.
SARs
have the same termination consequences as nonqualified stock options, no SAR
granted under the Plan may be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated, and all SARs granted shall be exercisable during a
grantee’s lifetime only by such grantee.
Restricted
Stock
The
committee may grant shares of restricted stock under the Plan to such grantees,
in such amounts, with such purchase price and under such other conditions or
restrictions as the committee may determine. Each restricted stock grant shall
be evidenced by a restricted stock agreement that must specify the period of
time over which the shares of restricted stock shall vest (the period of
restriction) and the number of shares of restricted stock granted. The committee
may also provide for the acceleration of the lapse of a period of restriction
upon the attainment of certain goals. Restricted stock shall at all times be
valued at its fair market value without regard to restrictions. If not specified
by the committee, the period of restriction shall elapse in accordance with the
same vesting schedule as options and SARs.
The
committee may legend the restricted stock certificates with such restrictions as
it determines, provided that each certificate must bear a legend stating that
the sale or other transfer of the shares of restricted stock is subject to the
BioDrain Medical, Inc. 2008 Equity Incentive Plan and the related restricted
stock agreement. Shares of restricted stock shall become freely transferable by
the grantee after the last day of the period of restriction and once released
from restrictions, the grantee shall be entitled to have the legend removed.
Under no other conditions may the restricted stock granted be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated until the termination
of the period of restriction.
During
the period of restriction, grantees holding shares of restricted stock may
exercise full voting rights with respect to those shares and shall be entitled
to receive all dividends and distributions paid with respect to those shares. In
the case of termination of a grantee due to death or disability during a period
of restriction, any remaining period of the period of restriction applicable to
the restricted stock shall automatically terminate and unless the committee
imposed additional restrictions on the shares, the shares shall thereafter be
free of restrictions and be fully transferable. In the case of termination of a
grantee other than by death or disability during a period of restriction, all
shares of restricted stock still subject to restrictions as of the date of the
termination shall automatically be forfeited and returned to the Company and any
amounts paid by the grantee to the Company for the purchase of such shares shall
be returned to the grantee, subject to any modifications or waivers as the
committee deems appropriate.
Other
Securities For Issuance Upon Certain Contingencies
Please
refer to the Management’s Discussion and Analysis of Financial Condition and
Result of Operations Section on page 32 for a discussion of other securities for
issuance upon certain contingencies.
20
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those statements included elsewhere in this prospectus. In addition to the
historical consolidated financial information, the following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under “Risk Factors” and elsewhere in this
prospectus.
Overview
Our
Company was incorporated in Minnesota in April 2002. We are an early-stage
development company developing an environmentally conscious system for the
collection and disposal of infectious fluids that result from surgical
procedures and post-operative care. We have had no sales to date. Since our
inception in 2002, we have invested significant resources into research and
development and in preparing for approval from TUV SUD America, Inc., a
Nationally Recognized Testing Laboratory and the FDA. We believe that our
success depends upon converting the traditional process of collecting and
disposing of infectious fluids from the operating rooms of medical facilities to
our wall-hung Fluid Management System (“FMS”) and use of our proprietary
cleaning fluid.
Since
inception, we have been unprofitable. We incurred net losses of approximately
$159,900 for the fiscal year ended 2007 and $273,000 for the fiscal year ended
2006. As of September 30, 2008, we had an accumulated deficit of $1,717,667. As
a company in the early stage of development, our limited history of operations
makes prediction of future operating results difficult. We believe that period
to period comparisons of our operating results should not be relied on as
predictive of our future results.
We
are an early-stage development stage company focused on finalizing our
production and obtaining final FDA approval to sell our product to the medical
facilities market. Our innovative FMS in the operating room will be sold through
experienced, independent medical distributors and manufacturers representatives
that will enhance acceptability in the marketplace.
Since
we do not expect to generate sufficient revenues in 2009 to fund our capital
requirements, our capital needs for the next 12 months are expected to be at
approximately $3 million, even though we plan to use outside third party
contract manufacturers to produce the FMS and outside distributors to inventory
and sell the FMS. Our future cash requirements and the adequacy of available
funds will depend on our ability to complete our regulatory work (i.e. FDA
approvals) in a timely manner so that we can generate cash flow to be
self-sufficient. We do expect that we will require additional funding to finance
operating expenses and to enter the international marketplace.
As
of September 30, 2008, we have funded our operations through a bank loan of
$41,400, an equity investment of $68,000 from the Wisconsin Rural Enterprise
Fund (“WREF”) and $30,000 in early equity investment from several individuals.
WREF had also previously held debt in the form of three loans of $18,000,
$12,500 and $25,000. In December 2006, WREF converted two of the loans totaling
$37,500 into 43,000 shares of common stock that were issued in December 2006. In
August 2006, we secured a $10,000 convertible loan from one of our vendors. In
February 2007, we raised $4,000 in officer and director loans and in March 2007,
we secured a $100,000 convertible note from two private investors. In July and
August 2007, we secured a convertible bridge loan of $170,000. In June 2008, we
paid off the remaining $18,000 loan from WREF and have raised a net of
$1,238,000 to date through our October 2008 financing.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based on our audited and unaudited financial statements. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses for
each period. As we are an early-stage development company, we have generated no
revenues to date.
21
Accrued
liabilities are based on amounts computed from operations; for example it
contains approximately $84,000 of unpaid consulting fees. Accrued interest is
computed from outstanding loans at agreement interest
rates. Compensation expense is based on estimates of stock option and
warrants valuation at issue amounts. Most of the warrant issue
valuation is priced at $.46 per share, the price which investors in the October
2008 funding were granted. The major assumption in these valuations
was that we believed that these initial valuations were going to improve by
completing regulatory approvals such as with TUV SUD America, Inc. and the FDA
and that they would add value to the initial investment valuation, as we were
advised by regulatory consultants whom we trust that such approvals were
forthcoming and had a high probabilities of success.
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, failure to successfully obtain approvals of
electrical safety testing and from the FDA, and failure to gain acceptance in
the medical market.
Results
of Operations
Nine
Months Ended September 30, 2008 and 2007
Revenue. None.
General and Administrative.
General and administrative expense consists of, management salaries,
professional fees, consulting fees, travel expense, administrative fees and
general office expenses.
General
and administrative expense increased from $126,300 for the nine months ended
September 30, 2007 to $826,400 for the nine months ended September 30, 2008.
General and administrative expense increased primarily due to an increase in
compensation expense of $210,400, an increase in professional service fees of
$194,000 and an increase in salaries of $300,000. The increase in compensation
expense resulted from accounting for stock option awards using the calculated
value method. Professional fees increased due to expenses related to the
preparation and filing of our Form S-1 registration statement. Salaries
increased as a result of paying full annual salary rates in 2008 from 75% salary
rates in 2007. We anticipate that general and administrative expense will
increase in absolute dollars as we incur increased costs associated with a
growing company, of adding personnel and proceeding from the development phase
to the operating phase, and operating as a public company.
Research and Development.
Research and development expense consists primarily of costs relating to the
development of the FMS.
Research
and development costs increased from $400 for the nine months ended September
30, 2007 to $91,400 for the nine months ended September 30, 2008. The increase
was a result of an accumulation of unbilled work from 2003 through 2007. Such
work consisted of material and labor charges for building and testing various
improvements in our FMS unit, including pumps, sensors, and cover. Mid-State
Stainless, Inc., the company who performed the product development work and
owned by Marshall Ryan, notified the Company in late 2007 that the amount for
all development costs totaled $100,000 and would be billed to us as a lump sum
in 2008. The amount has not yet been paid and remains in accounts payable as of
the date of this registration statement. We expect our development expense to
increase a moderate amount in future periods as we finalize our product for
market.
Interest expense. Interest
expense decreased from $18,800 for the nine months ended September 30, 2007 to
$11,100 for the nine months ended September 30, 2008 primarily due to $37,000 of
debt retirement for common stock to WREF in December 2007.
Years
Ended December 31, 2007 and 2006
Revenue. None
General and Administrative.
General and administrative expense consists of, management salaries,
professional fees, consulting fees, travel expense, administrative fees and
general office expenses.
22
General
and administrative expense decreased from $191,700 in 2006 to $125,300 in 2007.
General and administrative expense decreased primarily due to an elimination of
accrued payroll expenses of $346,700 and a reduction in salaries. This also
explains the decrease in general and administrative expense from $153,900 as of
June 30, 2007 to $125,300 as of December 31, 2007. Compensation for the
individuals involved in the transaction was agreed to be paid when we reached a
total of $3 million in funding. In APB 26, we are shown three options in
accounting for early extinguishment of debt, two of which involve amortization
over the life of an old or new issue. Since no issue is involved, the
third option, a recognition to income or expense is the likely choice. It is not
a capital contribution because there is consideration in the form of cash
($115,000) and stock options (240,000 shares of common stock at $.35 per share).
The difference between the debt reduction and the new considerations should not
be the basis for a difference recognition to profit and loss due to the
variability potential for the stock price and the uncertainty of a second
financing specified as a requirement for the consideration to be paid.
Therefore, the transaction is an immediate reduction in an
expense.
Actual
salaries in 2007 were $170,200 greater than in 2006 due to the addition of an
executive member in October 2006. Professional fees were up by $68,700 from the
legal and accounting fees incurred in preparing our 2008 Private Placement
Memorandum and there was an increase of $38,000 in consulting fees for human
resources work.
Research and Development.
Research and development costs decreased by $99,000 due to an accrual in
2006 of $100,000 in unbilled product development by our product development
vendor for all unbilled development fees since inception. The vendor
subsequently billed us $100,000 for such fees in 2008.
Interest expense. Interest
expense increased from $6,100 in 2006 to $33,200 in 2007 due to the increase in
borrowing of $260,300.
Liquidity
and Capital Resources
As
of September 30, 2008, we had a cash balance of $744,900. Since our inception,
we have incurred significant losses and as of September 30, 2008 we had an
accumulated deficit of $1,717,700. We have not achieved profitability and
anticipate that we will continue to incur net losses for the foreseeable future.
We expect that our research and development and general and administrative
expenses will increase, and as a result we will need to generate significant
revenue to achieve profitability.
The
table below summarizes our currently known capital requirements and amounts
needed to satisfy our outstanding obligations.
|
Capital
Requirements
|
||||||||
|
Expense
Item
|
Amount
|
Total
|
||||||
|
Accrued
payroll expense as of September 30, 2008
|
$ | $ | 240,000 | |||||
|
Inception
through November 2007
|
115,000 | |||||||
|
December
2007 through April 2008
|
121,000 | |||||||
|
FDA
and electrical safety testing approval expenses
|
222,000 | |||||||
|
Expected
expenses in connection with our current offering
|
225,200 | |||||||
|
SEC
registration fee
|
200 | |||||||
|
Printing
fees
|
30,000 | |||||||
|
Legal
fees and expenses
|
80,000 | |||||||
|
Accounting
fees and expenses
|
60,000 | |||||||
|
Miscellaneous
|
55,000 | |||||||
|
Financing
fees owed in connection with our current offering (1)
|
0 | |||||||
|
Outstanding
debt payments to:
|
450,000 | |||||||
|
Carl
and Roy Moore
|
100,000 | |||||||
|
Marshall
C. Ryan
|
100,000 | |||||||
|
Richardson
& Patel LLP
|
100,000 | |||||||
|
Larkin
Hoffman
|
100,000 | |||||||
|
Andcor
Companies, Inc.
|
50,000 | |||||||
|
Other
operating expenses
|
1,200,000 | |||||||
|
Market
expansion to Europe and Pacific Rim
|
500,000 | |||||||
|
Personnel
additions
|
200,000 | |||||||
|
Miscellaneous
|
100,000 | |||||||
|
Total
|
$ | 3,137,200 | ||||||
|
(1)
|
All
fees were withheld by the broker of our current
offering.
|
23
There
is no certainty that access to needed capital will be successful and depends in
part on our ability to continue as a going concern, which could also make
funding more expensive. We have not relied on the exercise of
outstanding warrants for providing additional funding.
To
date, our operations have been funded through a bank loan in the amount of
$41,400, seed loans totaling $10,000 and equity investments totaling $1,337,100.
As of September 30, 2008, we had accounts payable of $284,600 and accrued
liabilities of $277,100, $169,700 of which are for accrued payroll from December
2007 to present.
Nine
Months Ended September 30, 2008 and 2007
Net
cash used by operating activities was $787,100 for the nine months ended
September 30, 2008 as compared with net cash used of $235,400 for the nine
months ended September 30, 2007. The increase was due primarily to a greater net
loss of $626,900, an increase in accrued payroll expenses of $49,000, an
increase in escrow cash of $163,300, and an increase in vested options of
$193,900. Net cash used by investing activities was $29,900 for the nine months
ended September 30, 2008 as compared with $43,500 for the nine months ended
September 30, 2007. The difference was due to the larger legal expense in
intellectual property of $22,200 that was partially offset by the purchase of
office furniture in 2008 amounting to $8,700. Net cash provided by financing
activities was $1,557,700 for the nine months ended September 30, 2008 and
$295,600 for the nine months ended September 30, 2007. The difference was due to
the receipt of initial investment capital from the funding that commenced prior
to June 2008 and was completed as of October 2008.
Years
Ended December 31, 2007 and 2006
Net
cash used by operating activities was $224,100 for 2007 as compared with net
cash used of $14,200 for 2006. The increase was due primarily to a net loss
decrease of $113,000 and an increase in accounts payable of $80,300 in 2007,
offset by a decrease in accrued expenses, primarily accrued payroll, of $385,200
and a debt write off of $11,000.
24
Cash
flows used in investing activities was $46,100 for 2007 as compared to cash used
in investing activities of $29,700 for 2006. Both amounts represented
investments in intellectual property.
Net
cash provided by financing activities was $273,400 for 2007 as compared to net
cash used by financing activities of $19,200 for 2006. The increase was
primarily due to an increase to proceeds on long-term debt of $264,000 from two
loans of $100,000 and $170,000, respectively.
Based
on our current operating plan we believe that we have sufficient cash, cash
equivalents and short-term investment balances to last approximately through the
end of the first and second quarters of 2009, during which time a secondary
financing is anticipated of approximately $3 million. While holders of our
warrants could exercise and provide cash to us during that time frame, we are
not counting on that in our fund raising efforts. Our efforts
regarding our next round of financing have already commenced, and while the
current investment market has not been desirable and our early-stage position
increases risks to investors, we are confident that we will have the ability to
raise approximately $3 million during this time period.
The
funds remaining from our October 2008 offering will allow us to complete all
necessary electrical safety testing of our product and to fund all expenses
associated with achieving FDA approval. We are confident that our existing funds
will also be sufficient to pay for all expenses associated with this and any
previous financings undertaken by the Company.
Items
such as accrued payroll and certain convertible loan debts, totaling $270,000,
would be difficult to fully satisfy with the proceeds of the past financings. We
have been in contact with the holders of these convertible
notes. These holders, while technically able to request payments,
have an understanding of our early-stage position and have been willing to work
with us regarding the satisfaction of their convertible debts, which could be
satisfied either from conversion to our common stock or through repayment of the
debt from funds raised in future financings. Any formal payment
demand by these convertible note holders prior to our securing additional
financing would create a liquidity issue for the Company.
Accrued
payroll expense items are due to management and board members. All individuals
are aware of the liquidity position of the Company and all individuals have
agreed to not be reimbursed until such time as the Company obtains at least
another $3 million of additional financing, with the exception of Lawrence
Gadbaw, our Chairman, who is currently receiving $2,000 per month toward payment
of his accrued salary liability. These payments commenced in October 2008, and
the beginning balance, which is being reduced by $2,000 per month, was $46,000
prior to the first payment in October.
We
believe that we have sufficient funds to satisfy reporting obligation under the
Exchange Act at least through the first half of 2009. We will need additional
funds to continue to satisfy such obligations beyond that time
period.
The
Company’s management and board members have extensive contacts in the capital
markets sector and fund raising efforts for the next financing have already
commenced. While there is risk in this process, and the Company is early stage
and pre-revenue, we believe that the progress we have made and the opportunities
ahead of us will allow us to be successful in raising additional
funds.
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.
25
In
order to secure the next round of financing, we have commenced communications
with investment banks regarding completion of a secondary offering, to be
completed once we are effectively trading on the OTC Bulletin Board. We have
also communicated with potential individual, corporate and venture capital
investors regarding another financing. Further, existing shareholders from the
financing completed October 2008 have expressed an interest in additional
investments into the Company.
While
the current economic turmoil does have an impact on the overall funding
environment, we are confident that our opportunity will be positively received
by potential investors. Our product provides safety and efficiency benefits to
hospitals. Additionally, our product development is now complete, so there will
be nominal, if any, additional expenses incurred for the development of our
product. 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 usage of funds will be utilized to launch our product into
the market. With the funds already available to fund our expenses associated
with FDA approval, and with the product development complete, future funds 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, if at all. Furthermore, any equity financing may result in
dilution to existing shareholders and any debt financing may include restrictive
covenants.
Commitments
and Contingencies
Effective
September 30, 2008, we had notes payable to several individuals and entities,
including a bank loan of $41,400; $10,000 due to one of our vendors in
connection with a convertible loan; $4,000 of officer and director loans;
$100,000 due to two private investors in connection with a convertible note; and
$170,000 of a bridge loan.
The
Company has a convertible debenture with Andcor Companies, Inc. (“Andcor”) of
$10,000 at 10.25% that matured in 2007 and is now overdue. The debenture is
convertible to shares of the Company’s common stock at $0.90 per share or the
price per share at which the next equity financing agreement is completed. The
convertible debenture has not yet been paid, and it is currently past due. The
Company has had conversations with Andcor who understands our potential
liquidity issues. While Andcor could demand payment on this note at
any time, they have expressed an interest in working with us to wait until
additional funds are secured by the Company. Further, Andcor has left
open the possibility of converting the note into shares of the Company’s common
stock, which would require no cash outlay by the Company at this
time.
Our
contractual obligations consisted of the following at September 30,
2008.
|
Payment
Due by Period as of September 30
|
||||||||||||||||||||
| Total | Less than 1 Year |
1-3
Years
|
4-5
Years
|
After
5 Years
|
||||||||||||||||
|
Long
Term Debt
|
$ | 129,559 | $ | 11,800 | $ | 29,559 | $ | 100,000 | — | |||||||||||
|
Operating
Leases
|
— | — | — | — | — | |||||||||||||||
|
Capital
Leases
|
— | — | — | — | — | |||||||||||||||
|
Total
Contractual Cash Obligations
|
$ | 129,559 | $ | 11,800 | $ | 29,559 | $ | 100,000 | — | |||||||||||
26
A
break down of total long term debt as of September 30 is as
follows:
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Notes
payable to several individuals due April 2008 including 8% fixed interest
and is now overdue. The notes are convertible into 620,096 shares of the
Company’s common stock and automatically convert at the effective date of
this registration statement.
|
$ | 170,000 | $ | — | ||||
|
Note
payable to bank in monthly installments of $1,275/including variable
interest at 2% above the prevailing prime rate (7.00% at June 30, 2008) to
August 2011 when the remaining balance is payable. The note is personally
guaranteed by executives of the Company.
|
41,359 | 49,901 | ||||||
|
Note
payable to NWBDC in interest only payments at 8% to December 2008 when the
remaining balance is payable. The note is personally guaranteed by
executives of the Company.
|
— | 18,000 | ||||||
|
Notes
payable to two individuals in interest only payments at 12% to March 2012
when the remaining balance is payable. The notes are convertible into
285,715 shares of stock in the Company at $.35 per
share.
|
100,000 | 100,000 | ||||||
|
Notes
payable to four shareholders of the Company that are overdue. The notes
are convertible into 11,429 shares of stock in the Company at $.35 per
share.
|
4,000 | 4,000 | ||||||
|
Total
|
315,359 | 181,901 | ||||||
|
Less
amount due within one year
|
185,800 | 39,900 | ||||||
|
Long-Term
Debt
|
$ | 129,559 | $ | 142,001 | ||||
Cash
payments for interest were $2,718 on September 30, 2008 and $3,964 in 2007.
Principal payments required during the next five years are: 2009 - $185,800;
2010 - $12,000; 2011 - $13,300; 2012 - $107,300; and 2013 - $0. The notes
payable of $10,000, $170,000, $100,000 and $4,000 have passed their due dates
and could be called by the holders, putting additional strains on our capital
requirements. The note for $170,000 contains penalties amounting to a one-time
penalty of $25,000 if this registration statement is not filed within 120 days
of August 31, 2008 and $5,000 per month until the registration statement is
declared effective by the SEC after 180 days from August 31, 2008, with the
maximum penalty of approximately $250,000 if the registration statement is not
declared effective within 180 days from August 31, 2008.
In
July 2007, we entered into a restructuring agreement whereby in the event that
we fail to obtain FDA approval by the end of August 2009, the
majority-in-interest of investors (“the Investors”) through our October 2008
offering would have the right to cause the Company to make the following
restructuring changes:
|
|
1.
|
All
Company assets will be distributed to a wholly-owned subsidiary
(“Privco”). Privco will have the identical number of common shares
outstanding as the Company. The Investors will have the
same percentage ownership of Privco that they had in the Company and will
maintain their shares of Company common
stock.
|
|
|
2.
|
BioDrain
Original Shareholders (the “Founders”) will cancel all Company stock held
by the Founders only and the Founders will no longer own any Company
equity. Ownership of shares of the Company’s common stock by the Investors
would not be affected.
|
|
|
3.
|
In
consideration of such cancellation, the Founders will receive Privco stock
and options so that the Founders have the same percentage ownership of
Privco that it had in the Company. The Company will retain the rest of
Privco equity.
|
|
|
4.
|
All
Company stock options will be cancelled and replaced with Privco stock
options.
|
|
|
5.
|
The
Company will have new directors and officers selected by
Investors.
|
|
|
6.
|
In
the event of a reverse merger or other similar transaction with a new
operating business, the Company will either spin-off the remaining Privco
equity to the remaining Company shareholders or liquidate the Privco
securities and distribute any net proceeds to the Company
shareholders.
|
These
potential restructuring changes were put in place in the October 2008 financing
to reduce the risk of not obtaining FDA approval for those Investors involved in
that financing. We were able to attract more investors for that financing by
providing the Investors with the restructuring agreement, which provides them
with additional potential value (ownership of a public entity) should we not
achieve FDA approval by the end of August 2009. The potential impact on our
business could be to cause our operations to cease. The financial statements of
the Company would show no value; rather all assets would be in Privco, the new
entity. Operations could be continued from Privco, however, the Investors would
have the option to liquidate our assets and distribute the proceeds to our
shareholders if a reverse merger or similar transaction took place. Please see
page 54 for further information regarding the Founders and the
Investors.
27
In
2007, Mr. Davidson and Mr. Rice each earned less in base salary than they were
entitled to under their employment agreements due to lack of funds by the
Company. In December 2007, upon request from our funding brokers, the Company
reduced accrued payroll liabilities by a total of $346,714 through November
2007. This total was approximated from waived compensation from Mr. Davidson in
the amount of $70,000, waived compensation from Mr. Rice in the amount of
$125,000, waived compensation from Mr. Gadbaw in the amount of $138,541 and
waived compensation from an employee who left the Company in April 2006 in the
amount of $13,369. In exchange therefor, Mr. Davidson was granted a one-time
cash bonus of $23,000 as well as options to purchase 80,000 shares of common
stock at $.35 per share and Mr. Rice was granted a one-time cash bonus of
$46,000 as well as options to purchase 160,000 shares of common stock at $.35
per share. The shares will vest and the bonuses will be paid when the Company
raises an additional $3 million of funding subsequent to the financing completed
in October 2008. Mr. Gadbaw was granted options to purchase 160,000 shares of
common stock at $.35 per share, the vesting of which is also contingent upon the
Company raising an additional $3 million and is currently receiving $2,000 per
month until a total of $46,000 of accrued salary liability is paid to him. To
date there have been no stock issuances from these option
grants.
Amortization
of 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 to
date.
Income
Tax Expense
Deferred
income taxes are recognized for the future tax consequences attributable to
differences between 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. The major temporary differences are net operating losses.
Due to historical losses on the accrual basis, the related tax assets are not
recorded in our financial statements.
Stock
Options and Warrants
Our
2008 Equity Incentive Plan allows for the issuance of both incentive and
non-qualified stock options to our employees, directors and consultants, subject
to the restrictions provided for in the plan. The exercise price for each stock
option is determined by our board of directors, or a committee designated by our
board of directors, as are the vesting requirements, which currently range from
immediate to three years. Options granted under our stock option plan have terms
varying from three to seven years.
We
were required to adopt the provisions of FASB Statement No. 123R, Share-Based Payment (SFAS
123R) effective January 1, 2006. As permitted by SFAS 123R, we account for stock
option awards using the calculated value method. We opted for early adoption of
the provisions of SFAS 123R. The provisions of SFAS 123R are applicable to stock
options awarded by us beginning in 2005 and we are required to recognize
compensation expense for options granted in 2005 and thereafter.
We
have elected to use the Black-Scholes-Merton option pricing model. The fair
value of these options was calculated using a risk-free interest rate of 3.49%
to 5.07%, an expected life of 5 years and an expected volatility and dividend
rate of 0%. Compensation recognized in our financial statements was $10,962 and
$13,644 for the years ended 2007 and 2006, respectively, and $210,389 and $8,245
for September 30, 2008 and 2007, respectively.
28
A
summary of transactions for stock options and warrants for the years ended
December 31, 2007 and 2006 and for the nine months ended September 30, 2008 is
presented below:
|
Stock
Options (1)
|
Warrants
(1)
|
|||||||||||||||
|
Number
of
Shares
|
Average
Exercise
Price
|
Number
of
Shares
|
Average
Exercise
Price
|
|||||||||||||
|
Outstanding
at December 31, 2005
|
17,956 | $ | 1.67 | 20,950 | $ | 2.62 | ||||||||||
|
Issued
|
23,942 | 1.67 | 71,826 | 0.85 | ||||||||||||
|
Outstanding
at December 31, 2006
|
41,898 | $ | 1.67 | 92,776 | $ | 1.25 | ||||||||||
|
Issued
|
5,985 | 1.67 | 28,502 | 0.35 | ||||||||||||
|
Outstanding
at December 31, 2007
|
47,882 | $ | 1.67 | 121,278 | $ | 1.04 | ||||||||||
|
Issued
|
1,083,292 | 0.17 | 4,853,772 | 0.45 | ||||||||||||
|
Outstanding
at September 30, 2008
|
1,131,174 | $ | 0.24 | 4,975,050 | 0.46 | |||||||||||
(1)
Adjusted for the reverse stock splits in total at June 6, 2008 and October 20,
2008, or 1-for-1.670705.
At
December 31, 2007, 23,942 stock options were fully vested and exercisable and
121,278 warrants were fully vested and exercisable. At September 30, 2008,
651,174 stock options were fully vested and exercisable and 4,850,050 warrants
were fully vested and exercisable.
A
summary of the status of options and warrants outstanding at December 31, 2007
and September 30, 2008 is presented below:
|
Range
of Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Life
|
|||||||
|
At
December 31, 2007:
|
|||||||||
|
Options:
|
|||||||||
|
$
|
.35
|
11,970 | 4.37 | ||||||
|
$
|
1.67
|
41,898 | 3.31 | ||||||
|
Warrants:
|
|||||||||
|
$
|
0.02
|
35,913 | 5.45 | ||||||
|
$
|
0.35
|
28,502 | 4.17 | ||||||
|
$
|
1.67
|
44,892 | 3.69 | ||||||
|
$
|
3.34
|
11,971 | 0.79 | ||||||
|
At
September 30, 2008:
|
|||||||||
|
Options:
|
|||||||||
|
$
|
.01
|
543,292 | 9.68 | ||||||
|
$
|
.35
|
540,000 | 4.61 | ||||||
|
$
|
1.67
|
47,882 | 3.15 | ||||||
|
Warrants:
|
|||||||||
|
$
|
0.02
|
71,826 | 5.70 | ||||||
|
$
|
0.35
|
178,502 | 4.01 | ||||||
|
$
|
0.46
|
4,667,859 | 2.75 | ||||||
|
$
|
1.67
|
44,892 | 2.94 | ||||||
|
$
|
3.76
|
11,971 | 0.04 | ||||||
29
Stock
options and warrants expire on various dates from October 2008 to December 2013.
In October 2007, the exercise price on the $3.34 warrants changed to $3.76 in
accordance with a common stock warrant purchase agreement.
We
determined that 1,920,000 shares of our common stock were to be allocated to our
shareholders existing at the time of the October 2008 financing (also referred
to as the original shareholders, the Founders, or the selling shareholders).
Since the total of our fully-diluted shares of common stock was greater than
1,920,000, our board of directors approved a reverse stock split of
1-for-1.2545. After this split was approved, additional options and warrants
were identified, requiring a second reverse stock split in order to reach the
1,920,000. The second reverse stock split on the reduced 1-for-1.2545
balance was determined to be 1-for-1.33176963. Taken together, if
only one reverse stock were performed, the number would have been a reverse
stock split of 1-for 1-670705.
On
June 6, 2008, our board of directors approved the first reverse stock split. The
authorized number of common stock of 20,000,000 was proportionately divided by
1.2545 to 15,942,607.
On
October 20, 2008, our board of directors approved the second reverse stock
split. The authorized number of common stock of 15,942,607 was proportionately
divided by 1.33177 to 11,970,994.
On
October 20, 2008, our board of directors also approved a resolution to increase
the number of authorized shares of our common stock from 11,970,994 to
40,000,000, which was approved by the Company’s shareholders holding a majority
of the shares entitled to vote thereon at a special meeting of shareholders held
on December 3, 2008.
The
table below reflects the effect of the reverse stock splits on our shares
outstanding.
|
Reverse
Stock Split Table
|
||||||||||||||||
|
Number
of Shares
|
Reverse
|
|||||||||||||||
|
Outstanding
|
Split
Ratio
|
|||||||||||||||
|
Before
|
After
|
|||||||||||||||
|
As
of June 30, 2008:
|
||||||||||||||||
|
-
original shareholders
|
1,351,105 |
(1)
|
1,077,007 | 1.2545 | ||||||||||||
|
-
new investors, other
|
3,720,293 | 3,720,293 | ||||||||||||||
|
Total
|
5,071,398 | 4,797,300 | ||||||||||||||
|
As
of September 30, 2008:
|
||||||||||||||||
|
-
original shareholders
|
1,077,007 | 1,077,007 | ||||||||||||||
|
-
new investors, other
|
6,997,842 | 6,997,842 | ||||||||||||||
|
Total
|
8,074,849 | 8,074,849 | ||||||||||||||
|
As
of October 20, 2008:
|
||||||||||||||||
|
-
original shareholders
|
1,077,007 | 808,704 | 1.3317696 | |||||||||||||
|
-
new investors, other
|
6,997,842 | 6,997,842 | ||||||||||||||
|
Total
|
8,074,849 | 7,806,546 | ||||||||||||||
|
As
of October 30, 2008 (closing date):
|
||||||||||||||||
|
-
original shareholders
|
808,704 | |||||||||||||||
|
-
new investors, other
|
7,372,128 | |||||||||||||||
|
Total
|
8,180,832 | |||||||||||||||
|
(1)
|
1,351,105
divided by 1.670705 equals
808,704.
|
30
Warrants
In
2005 and 2006, we granted warrants to purchase an aggregate of 17,958 shares
(options to purchase 2,993 shares each) of common stock at $1.67 per share to
Debbie Heitzman, Mary Wells Gorman and David Feroe for their services on the
Medical Advisory Board and to Karen Ventura, Nancy Kolb and Kim Shelquist for
their sales and marketing advisory services.
In
2006, we granted warrants to purchase 35,913 shares of common stock at $.02 per
share to Dr. Arnold Leonard for his services on the Medical Advisory Board. The
warrants contain an anti-dilution provision that provides that such shares would
double upon our total outstanding shares reaching 2 million. The second warrants
to purchase 35,913 shares of our common stock were granted in June 2008 upon
receiving 2 million outstanding shares of common stock through the October 2008
financing.
On
December 1, 2006, we fully repaid two of our three loans due to Wisconsin Rural
Enterprise Fund (“WREF”). As of December 2006 the total principal due was
$37,500. To pay the outstanding loan to WREF, we issued warrants to purchase
20,949 shares of common stock at $1.67 per share to WREF.
In
August 2008, we issued a warrant to purchase 50,000 shares of common stock at
$.46 per share to Thomas Bachinski, a regulatory consultant, for his past
services.
In
2006, we issued warrants to purchase 5,985 shares of common stock at $1.67 per
share to Andcor Companies, Inc. as part of a convertible loan
agreement.
In
2007, we granted warrants to purchase up to 28,502 shares of common stock at
$.46 per share to Roy Moore and Carl Moore as part of a convertible loan
agreement with them. There were no special terms contained in the warrant other
than that the two individuals would pay a per share price equal to that of the
October 2008 financing when exercising their warrants.
On
February 29, 2008,we entered into a consulting agreement with Jeremy Roll for
referral services for the Company’s funding that was completed on August 31,
2008. Under the agreement, in addition to a cash referral fee, Mr. Roll was
entitled to receive warrants to purchase common stock at $.35 per share equal to
10% of his gross proceeds of the funds raised for the Company. As a result, in
July 7, 2008 Mr. Roll received warrants to purchase 11,429 shares of common
stock.
We
issued warrants to purchase an aggregate of 4,552,862 units to investors in
connection with the October 2008 financing, which was comprised of one share of
common stock for $.35 per share and one warrant to purchase one share of common
stock for $.46 per share.
Stock
and Stock Options
On
August 22, 2005, we issued options to purchase 17,957 shares of our common stock
at $1.67 per share to a member of our board of directors, Thomas McGoldrick, for
his services as a director. The options were grantable annually at 10,000 per
year starting in 2008. On August 22, 2006, we issued options to purchase 5,986
shares of common stock at $.46 per share to Mr. McGoldrick in connection with a
stock option agreement with him.
On
December 14, 2005, we issued 7,482 shares of common stock to officers Lawrence
Gadbaw and Gerald Rice for personal guarantees on Company
loans.
On
May 16, 2006, the Company issued 71,906 shares of common stock to the inventor
of our intellectual property, Marshall C. Ryan, for the development work he
performed with respect to our product.
On
August 8, 2006, we issued 14,964 shares of common stock to Andcor Companies,
Inc. in partial payment of an invoice.
31
On
October 23, 2006, we issued 8,979 shares of common stock to a former employee as
a part of his compensation package in his employment agreement.
On
November 11, 2006,we issued options to purchase 17,957 shares of common stock at
$1.67 per share to Andrew Reding, for his services as a director. The options
were grantable annually at 10,000 per year starting in 2007. On November 11,
2007, we granted options to purchase 5,986 shares of common stock at $.46 per
share to director Andrew Reding pursuant to a stock option agreement with
him.
On
December 1, 2006, we issued 3,986 shares of common stock to pay a consulting fee
to Wisconsin Business Innovation Corporation, a related firm of
WREF.
On
January 30, 2007 we fully repaid a Company loan of $1,000 due one of its former
employees by issuing him 599 shares of common stock.
On
March 10, 2008,we entered into a finder agreement with Thomas Pronesti for
referral services for the Company’s funding that was completed on August 31,
2008. This agreement also covered the following finders: Craig Kulman, Caron
Partners, LP and Bellajule Partners, LP. Under the agreement, in addition to a
cash referral fee, the finders were entitled to receive 10% of their gross
proceeds raised for us with a fair market value of the Company’s common stock,
or $.35 per share. As a result, on June 23, 2008, the group of finders received
an aggregate of 155,142 shares of common stock.
On
April 15, 2008, we entered into an investor relations agreement with Kulman IR,
LLC. Under the agreement, in addition to cash fees, Kulman was entitled to
receive 250,000 shares of our common stock. On June 23, 2008 Kulman and Cross
Street Partners, Inc. each received 125,000 shares of common
stock.
On
June 16, 2008, we entered into an employment agreement with Chad Ruwe, Executive
Vice President of Operations, pursuant to which we granted him options to
purchase 50,000 shares of common stock.
On
June 30, 2008,we entered into a consulting agreement with Namaste Financial,
Inc. for a one-year period of general business, strategic and growth advisory
services. Under the agreement, Namaste is entitled to receive 125,000 shares of
common stock and warrants to purchase 125,000 shares of common stock at $.46 per
share.
On
August 11, 2008, we entered into an employment agreement with David Dauwalter,
Director of Sales, pursuant to which we granted him options to purchase 50,000
shares of common stock.
In
2006, Kevin Davidson was granted 50,000 shares of the Company’s common stock in
connection with his entering into an employment agreement with the Company. The
grant contained an anti-dilution protection amounting to 3.81% of the
fully-diluted outstanding common stock of the Company up to the completion of
the first $1,000,000 of new funding raised, which pursuant to an option
agreement dated June 5, 2008 amending his employment agreement, Mr. Davidson
chose to receive in options to purchase 543,292 shares of common stock,
exercisable at $.01, in lieu of obtaining the shares to which he was entitled.
The options vest immediately and the term of the options is 10 years from the
date of issuance. In 2008, Mr. Davidson achieved the $1 million funding
target provided for in his employment agreement and on September 12,
2008 the Board of Directors ratified the issuance of the 543,292 options to Mr.
Davidson as a result of the milestones achieved.
Other
Securities For Issuance Upon Certain Contingencies
In
2007, three of our directors/executive officers, Lawrence Gadbaw, Gerald Rice
and Kevin Davidson, and a former employee that left the Company in April 2006,
agreed to waive an aggregate of approximately $346,700 in accrued, unpaid
salaries for their services through June 2007 and Mr. Morawetz agreed to waive
his consulting fees of $84,963 (please see description below). In December 2007,
upon request from our funding brokers, we reduced accrued payroll liabilities by
$346,714 through November 2007. This total was approximated from waived
compensation from Mr. Davidson in the amount of $70,000, waived compensation
from Mr. Rice in the amount of $125,000, waived compensation from Mr. Gadbaw in
the amount of $138,541 and waived compensation from an employee who left the
Company in April 2006 in the amount of $13,369. In exchange therefor, Mr. Gadbaw
and Mr. Rice were each granted options to purchase 160,000 shares of common
stock and Mr. Davidson was granted options to purchase 80,000 shares of common
stock, all at $.35 per share with vesting contingent upon the Company raising an
additional $3 million in financing subsequent to the October 2008 financing. To
date there have been no stock issuance from these grants. In addition, Mr. Rice
will receive one-time cash bonus of $46,000 and Mr. Davidson will receive
one-time cash bonus of $23,000 when the Company raises an additional $3 million
subsequent to the October 2008 financing and Mr. Gadbaw is currently receiving
$2,000 per month until a total of $46,000 of accrued salary liability is paid to
him.
32
In
September 2002, an oral agreement was made with director Peter Morawetz whereby
he would provide sales, marketing and general administrative support to the
Company for a fee of $1,770 per month. The Company’s expectation at the time was
that the Company would have received equity financing to fund these
payments. The Company did not receive that
funding. Pursuant to an oral agreement with Mr. Morawetz the Company
did not pay these amounts. The Company accrued these fees through August 2006
when Mr. Morawetz’s support services ended. The fees accrued totaled $84,963 but
no amount has been paid. Mr. Morawetz and the Company have discussed
reducing the fees to be paid to a lower amount and, although no agreement has
been reached, the parties have reached an oral understanding that the amount to
be paid will be less. Based on this understanding, the Company has not accrued
any expense or liability for Mr. Morawetz’s services.
On
June 16, 2008, in connection with Chad Ruwe’s employment agreement, in addition
to the grant of options to purchase 50,000 shares of common stock, we granted
Mr. Ruwe options to purchase up to 200,000 shares of our common stock contingent
upon reaching certain performance goals, the timing of which was not set. We
believe that these performance goals will be met, with respect to 100,000, in
the fourth quarter of 2008 and, with respect to the other 100,000, in the first
or second quarters of 2009.
On
August 11, 2008, in connection with David Dauwalter’s employment agreement, in
addition to the grant of options to purchase 50,000 shares of common stock, we
granted Mr. Dauwalter options to purchase up to 40,000 shares of common stock
contingent upon reaching certain performance goals, the timing of which was not
set. We believe that these goals will be met, with respect to 30,000
in the first and second quarters of 2009 and 10,000 in the third and fourth
quarters of 2009.
In
August and September 2008 we agreed to issue warrants to purchase 75,000 shares
of common stock to each of two human resource consulting firms, Andcor
Companies, Inc. and Taylor & Associates, Inc., as payment for their search
for candidates to fill the position of Vice President of Sales and Marketing for
our Company. With respect to Andcor Companies, Inc., the Company reduced a
contingency agreement with them dated July 25, 2008 from 30% of compensation of
the candidate if hired, to warrants to purchase 75,000 shares of common stock at
$.46 per share. Andcor will not earn the warrants until the candidate is hired
and remains an employee for a period of at least 1 year.
On
October 20, 2008, we entered into an agreement with Gregory Sachs, a regulatory
consultant, pursuant to which the Company granted warrants to purchase up to
50,000 shares of our common stock contingent upon reaching certain performance
goals from April 1, 2009 to June 30, 2009. Mr. Sachs is assisting the Company in
obtaining FDA 510(k) approval. The purpose of the performance goal provision is
to help to ensure a timely approval of the 510(k). Upon reaching FDA approval by
April 1, 2009, Mr. Sachs would receive warrants to purchase 50,000 shares of our
common stock; after April 1, 2009, but on or prior to May 1, 2009, he would
receive warrants to purchase 25,000 shares of our common stock; after May 1,
2009, but on or before June 30, 2009, he would receive warrants to purchase
10,000 shares of our common stock; and after June 30, 2009, he would receive no
warrants.
Litigation
From
time to time, we may become subject to legal proceedings, claims and litigation
arising in the ordinary course of business. We are not currently a party to any
material legal proceedings, nor are we aware of any other pending or threatened
litigation that would have a material adverse effect on our business, operating
results or financial condition should such litigation be resolved
unfavorably.
33
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet transactions.
Dividend
Policy
We
follow a policy of retaining earnings, if any, to finance the expansion of our
business. We have not paid, and do not expect to declare or pay, cash dividends
in the foreseeable future.
34
Overview
We
are an early-stage medical device company and our mission is to provide medical
facilities with an effective, efficient and affordable means to safely dispose
of contaminated fluids generated in the operating room and other similar medical
locations in a manner that protects hospital workers from exposure and is
environmentally friendly. We have acquired patent rights to our products and
will distribute our products to medical facilities where bodily and irrigation
fluids produced during surgical procedures must be contained, measured,
documented and disposed. Our products minimize the exposure potential to the
healthcare workers who handle such fluids. Our goal is to create products that
dramatically reduce staff exposure without significant changes to established
operative procedures, historically a major stumbling block to innovation and
product introduction. In addition to simplifying the handling of these fluids,
our technologies will provide cost savings to facilities over the aggregate
costs incurred today using their current methods of collection, neutralization
and disposal. Our products will be sold through independent distributors and
manufacturers representatives in the United States and Europe, initially, and
eventually to other areas of the world.
We
were founded as a Minnesota corporation in 2002 by Lawrence Gadbaw, who has over
40 years of experience in the medical devices field, Peter L. Morawetz, who has
extensive experience consulting with development-stage companies in the medical
and high technology field, Jay Nord and Jeffery K. Drogue. Our address is 2060
Centre Pointe Boulevard, Suite 7, Mendota Heights, Minnesota 55120. Our
telephone number is (651) 389-4800 and our website address is www.biodrainmedical.com. The website is not a part of this
registration statement.
We
do not currently file reports with the Securities and Exchange Commission (the
“SEC”). Upon the effectiveness of the registration statement of which this
prospectus forms a part, we will be subject to the information and periodic
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we intend to file periodic reports, proxy statements and other information with
the SEC.
Private
Placement Financing
From
July 2007 through October 2008, we completed a private placement financing of
our common stock and warrants to certain accredited and institutional investors
(the “Investors”). We received gross proceeds of approximately $1.6 million to
date from this private placement financing. Pursuant to securities purchase
agreements entered into with these Investors, we sold an aggregate total of
4,552,862 units at a price per unit of $0.35 and with each unit consisting of
one share of our common stock, par value $0.01 per share, and one warrant to
purchase one share of our common stock at $0.46 per share. We also
issued 547,285 shares and 136,429 warrants to consultants who provided services
in connection with the private placement.
The
issuance of our common stock and warrants in connection with the private
placement financing, including, upon exercise, the shares of our common stock
underlying the warrants, is intended to be exempt from registration under the
Securities Act of 1933, as amended, (the “Securities Act”) pursuant to Section
4(2) and such other available exemptions. As such, these issued securities may
not be offered or sold in the United States unless they are registered under the
Securities Act, or an exemption from the registration requirements of the
Securities Act is available. No registration statement covering these securities
has been filed with the SEC or with any state securities commission in respect
of the private placement financing.
In
connection with the private placement financing, we entered into a registration
rights agreement (the “Registration Rights Agreement”) with the Investors.
Pursuant to this agreement, we are required to register all the common stock and
shares underlying the warrants issued beneficially owned by the Investors to
permit the offer and re-sale from time to time of such securities. Additional
information regarding the Registration Rights Agreement is set forth below under
the section titled “Description of Securities”.
35
Industry
and Market Analysis
Infectious
and Biohazardous Waste Management
There
has long been recognition of the collective potential for ill effects to
healthcare workers from exposure to infectious/biohazardous materials. Federal
and state regulatory agencies have issued mandatory guidelines for the control
of such materials, in particular bloodborne pathogens. The medical device
industry has responded to this need by developing various products and
technologies to limit exposure or to alert workers to potential
exposure.
The
presence of infectious materials is most prevalent in the surgical suite and
post-operative care units where often, large amounts of bodily fluids, including
blood, bodily and irrigation fluids are continuously removed from the patient
during the surgical procedure. Surgical teams and post-operative care personnel
may be exposed to these potentially serious hazards during the procedure via
direct contact of blood materials or more indirectly via splash and
spray.
According
to the Occupational Safety and Health Administration (“OSHA”), workers in many
different occupations are at risk of exposure to bloodborne pathogens, including
Hepatitis B and C, and HIV/AIDS. First aid team members, housekeeping personnel
in some settings, nurses and other healthcare providers are examples of workers
who may be at risk of exposure.
In
1991, OSHA issued the Bloodborne Pathogens Standard to protect workers from this
risk. In 2001, in response to the Needlestick Safety and Prevention Act, OSHA
revised the Bloodborne Pathogens Standard. The revised standard clarifies (and
emphasizes) the need for employers to select safer needle devices and to involve
employees in identifying and choosing these devices. The revised standard also
calls for the use of “automated controls” as it pertains to the minimization of
healthcare exposure to bloodborne pathogens. Additionally, employers are
required to have an exposure control plan that includes universal precautions to
be observed to prevent contact with blood or other potentially infectious
materials, such as implementing work practice controls, requiring personal
protective equipment and regulating waste and waste containment. The exposure
control plan is required to be reviewed and updated annually to reflect new or
modified tasks and procedures which affect occupational exposure and to reflect
changes in technology that eliminate or reduce exposure to bloodborne
pathogens.
According
to the American Hospital Association’s (AHA) Hospital Statistics, 2008 edition,
America’s hospitals performed 70 million surgeries. This number does not include
the many procedures performed at surgery centers across the country. In a recent
publicly-available Gallup survey, it was found that “on average, operating room
directors report their hospitals have approximately six operating
rooms.”
The
majority of these procedures produce potentially infectious materials that must
be disposed of with the lowest possible risk of cross-contamination to
healthcare workers. Current standards of care allow for these fluids to be
retained in canisters, which are located in the operating room where they can be
monitored throughout the surgical procedure. Once the procedure is complete
these canisters and their contents are disposed of using a variety of methods
all of which include manual handling and result in a heightened risk to
healthcare workers for exposure to their contents. A publicly-available Frost
& Sullivan research report estimates that 60,000,000 suction canisters are
sold each year and the estimated market value of canisters is upwards of
$120,000,000.
With
an average cost of $2.00 per canister, $2.00 per container of solidification
powder and an average disposal cost of $0.30/lb of infectious waste at
approximately 7.5 lbs per canister, the estimated disposal cost to the hospitals
who use solidifiers is $6.25 per canister. This number increases significantly
for disposal of high capacity containers according to the average estimate of
three manufacturers and three different solidifiers as reported in
publicly-available research reports by Frost & Sullivan in 2003 and the
Infection Control Today: Liquid Waste Management &
Disposals by Kathy Dix in 2006.
According
to an October 2005 article from Healthcare Purchasing entitled “Safe and
Cost-Effective Disposal of Infectious Fluid Waste,” infectious fluid waste
accounts for more than 75% of U.S. hospitals biohazard disposal costs. The
article also includes findings from a bulletin published by the University of
Minnesota’s Technical Assistance Program, “A vacuum system that uses reusable
canisters or empties directly into the sanitary sewer can help a facility cut
its infectious waste volume, and save money on labor, disposal and canister
purchase costs.” The Minnesota’s Technical Assistance Program bulletin also
estimated that, in a typical hospital, “...$75,000 would be saved annually in
suction canister purchase, management and disposal cost if a canister-free
vacuum system was installed.”
36
We
expect the hospital surgery market to continue to increase due to population
growth, the aging of the population, expansion of surgical procedures to new
areas, (for example, use of the endoscope, which requires more fluid management)
and new medical technology. According to the American Insitute of Architects
Consensus Construction Forecast, “Health care is expected to see even stronger
growth. With recent emphasis on increasing health-care coverage, including
several state mandates for universal or near-universal coverage, health-care
construction has become one of the fastest growing institutional construction
categories. Panel members are projecting an 8.5 percent increase in spending
this year, followed by an additional 5 percent gain next year.”
There
are currently approximately 40,000 operating rooms and surgical centers in the
U.S. (AHA Hospital Statistics, 2008 edition). The hospital market has typically
been somewhat independent of the U.S. economy; therefore we believe that our
targeted market is not cyclical, and the demand for our products will not be
dependent on the state of the economy. We benefit by having our products address
both the procedure market (roughly 70 million procedures) as well as the
hospital operating room market (approximately 40,000 operating
rooms).
Current
Techniques of Collecting Infectious Fluids
Typically,
during the course of the procedure, fluids are continuously removed from the
surgical site via wall suction and tubing and collected in large canisters
(1,500 - 3,000 milliliters (ml) capacity or 1.5 – 3.0 liters) adjacent to the
surgical table.
These
canisters, made of glass or more commonly high impact plastic, have graduated
markers on them allowing the surgical team to make estimates of fluid loss in
the patient both intra-operatively as well as for post operative documentation.
Fluid contents are retained in the canisters until the procedure is completed,
or until the canister is full and needs to be removed. During the procedure the
surgical team routinely monitors fluid loss using the measurement calibrations
on the canister and by comparing these fluid volumes to quantities of saline
fluid introduced to provide irrigation of tissue for enhanced visualization and
to prevent drying of exposed tissues. After the procedure is completed the
fluids contained in the canisters are measured and a calculation of total blood
loss is determined. This is done to ensure no excess fluids of any type remain
within the body cavity or that excessive blood loss has occurred, both
circumstances that may place the patient at an increased risk
post-operatively.
Once
total blood loss has been calculated, the healthcare personnel must dispose of
the fluids. This can be done by manually transporting the fluids from the
operating room to a waste station and directly pouring the material into a sink
that drains to the sanitary sewer where it is subsequently treated by the local
waste management facility, a process that exposes the healthcare worker to the
most risk for direct contact or splash exposure. Once emptied these canisters
are placed in large, red pigmented, trash bags and disposed of as infectious
waste - a process commonly referred to as “red-bagging.”
Alternatively
the canisters may be opened in the operating room and a gel-forming chemical
powder is poured into the canister, rendering the material gelatinous. These
gelled canisters are then red-bagged in their entirety and removed to a
biohazardous/infectious holding area for disposal. In larger facilities the
canisters, whether pre-treated with gel or not, are often removed to large carts
and transported to a separate special handling area where they are processed and
prepared for disposal. Material that has been red-bagged is disposed of
separately, and more expensively, from other medical and non-medical waste by
companies specializing in that method of disposal.
37
Although
all of these protection and disposal techniques are helpful, they represent a
piecemeal approach to the problem and fall short of providing adequate
protection for the surgical team and other workers exposed to infectious waste.
A major spill of fluid from a canister, whether by direct contact as a result of
leakage or breakage, splash associated with the opening of the canister lid to
add gel, while pouring liquid contents into a hopper, or during the disposal
process, is cause for concern of acute exposure to human blood components–one of
the most serious risks any worker faces in the performance of their job. Once a
spill occurs, the entire area must be cleaned and disinfected and the exposed
worker faces a potential of infection from bloodborne pathogens. These pathogens
include, but are not limited to, HIV, HPV, and other infectious agents. Given
the current legal liability environment the hospital, unable to identify at-risk
patients due to concerns over patient rights and confidentiality, must treat
every exposure incident as a potentially infectious incident and treat the
exposed employee according to a specific protocol that is both costly to the
facility and stressful to the affected employee and their co-workers. In cases
of possible exposure to communicable disease the employee could be placed on
paid administrative leave, frequently involving worker’s compensation, and
additional workers must be assigned to cover the affected employee’s
responsibilities. The facility bears the cost of both the loss of the affected
worker and the replacement healthcare worker in addition to any ongoing heath
screening and testing of the affected worker to confirm if any disease has been
contracted from the exposure incident. Employee morale issues also weigh heavily
on staff and administration when a healthcare worker suffers a potentially
serious exposure to bloodborne pathogens.
Canisters
are the most prevalent means of collecting and disposing of infectious fluids in
hospitals today. Canisters and related suction and fluid disposable
products are exempt and do not require FDA approval. Our management believes
that our technology will (a) significantly reduce the risk of healthcare worker
exposure to these infectious fluids, (b) reduce the cost per procedure for
handling these fluids, and (c) enhance the surgical team’s ability to collect
data to accurately assess the patient’s status during and after
procedures.
In
addition to the traditional canister method of waste fluid disposal, several new
medical devices have been developed which address the deficiencies described
above. MD Technologies, Inc., DeRoyal (formerly Waterstone), Dornoch Medical
Systems, Inc., Stryker Instruments, and Cardinal Health, Inc. have all developed
systems that provide for disposal into the sanitary sewer without pouring the
infectious fluids directly through a hopper disposal or using expensive gel
powders and are all currently sold with 510(K) concurrence from the FDA. Most of
them continue to utilize some variant on the existing canister technology, and
while not directly addressing the canister, most have been successful in
eliminating the need for expensive gel and its associated handling and disposal
costs.
Our
existing competitors that already have products on the market have a clear
competitive advantage over us in terms of brand recognition and market exposure.
In addition, the aforementioned companies have extensive marketing and
development budgets that could overpower an early-stage company like ours.
Information obtained by the Company from surgical clinicians during interviews
indicates that Stryker Instruments has the dominant market share position.
Cardinal Health, Inc., though having FDA concurrence, has not yet made
significant sales into the market place. These clinicians have also indicated
that the competitive devices are used in select procedures and often in some,
but not all, surgical rooms.
Products
The
Fluid Management System (“FMS”)
The
BioDrain FMS, a fluid collection and measurement system, addresses the need for
a simple, safe, virtually hands-free, touch-screen computer-controlled, method
of removing, retaining, calculating fluid loss and disposing of fluid waste
during operative procedures. The FMS replaces the manual process of collecting
fluids in canisters and transporting and dumping in sinks outside of the
operating room that is still being used by many hospitals and surgical centers.
The manual process involving canisters requires that the operating room
personnel open the canisters that contain waste fluid, often several liters, at
the end of the surgical procedure and either add a solidifying agent or empty
the canisters in the hospital drain system. Some facilities require that used
canisters be cleaned by staff and reused. It is during these processes that
there is increased potential for contact with the waste fluid through splashing
or spills. The FMS eliminates the use of canisters and these cleaning and
disposal steps by collecting the waste fluid in the internal collection chamber
and automatically disposing of the fluid with no handling by personnel. Near the
end of each procedure, a proprietary cleaning fluid is attached to the FMS and
an automatic cleaning cycle ensues, making the FMS ready for the next procedure.
The cleaning fluid bottle is attached to the port on the FMS
device. The cleaning fluid bottle and its contents are not
contaminated and are used to clean the internal fluid pathway in the FMS device
to which personnel have no exposure. During the cleaning cycle, the cleaning
fluid is pulled from the bottle into the FMS, and then disposed in the same
manner as the waste fluid from the surgical case. At the end of the
cleaning cycle, the bottle is discarded. Any suction tubing used
during the procedure must be disposed of in the same manner as suction tubing
used with the canister system. Handling of this tubing does present
the potential for personnel exposure but that potential in
minimal.
38
It
is in the facilities that still use manual processes that our product can
provide the greatest cost savings and improve safety. In cases where healthcare
organizations re-use canisters, the FMS cleaning process eliminates the need for
cleaning of canisters for re-use. The FMS greatly reduces the safety issues
facing operating room nurses, the cost of the handling process, and the amount
of infectious waste generated. The FMS is uniquely positioned to dominate its
market segment due to its simple design, ease of use and efficiency in removal
of infectious waste with minimal exposure of operating room personnel to
potentially infectious material.
Contrary
to competitive products, the wall-mounted FMS does not take up any operating
room floor space and it does not require the use of any external canisters or
handling by operating room personnel. It does require a dedicated system in each
operating room where it is to be used. With the exception of MD Technologies,
Inc., the BioDrain FMS will be the only known system that is wall mounted and
designed to collect, measure and dispose of, surgical waste. Other systems on
the market are portable, meaning that they are rolled to the bedside for the
surgical case and then rolled to a cleaning, are after the case, and use
canisters, which still require processing or require a secondary device (such as
a docking station) used to dispose of the fluid in the sanitary sewer after it
has been collected. A comparison of the key features of the devices currently
marketed and the FMS is presented in the table below.
|
Key
Feature Comparison
|
|||||
|
Feature
|
BioDrain
Medical, Inc.
|
Stryker
Instruments
|
DeRoyal
|
Dornoch
Medical Systems, Inc.
|
MD
Technologies, Inc.
|
|
Portable
to Bedside vs. Fixed Installation
|
Fixed
|
Portable
|
Fixed
|
Portable
|
Fixed
|
|
Uses
Canisters
|
No
|
Yes
|
Yes
|
Yes
|
No
|
|
Secondary
Installed Device Required for Fluid Disposal
|
No
|
Yes
|
Yes
|
Yes
|
No
|
|
Numeric
Fluid Volume Measurement
|
Yes
|
Yes
|
No
|
Yes
|
Optional
|
|
Unlimited
Fluid Capacity
|
Yes
|
No
|
No
|
No
|
Yes
|
|
Installation
Requirements
|
|||||
|
§Water
|
No
|
Yes
|
Yes
|
Yes
|
No
|
|
§Sewer
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
|
§Vacuum
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
The
FMS system may be installed on or in the wall, during new construction or
renovation, or installed in a current operating room by connecting the device to
the hospital’s existing sanitary sewer drain and wall suction systems. With new
construction or renovation, the system will be placed in the wall and the
incremental costs are minimal, limited to connectors to the hospital drain and
suction systems (which systems are already required in an operating room), the
construction of a wooden frame to hold the FMS in position, and minimal labor.
The fluid collection chamber is internal to the FMS unit and requires no
separate installation. Information resulting from the Company’s consultation
with several architects has indicated that there is no appreciable incremental
expense in planning for the FMS system during construction.
For
on-the-wall installation in a current operating room, the location of the FMS
may be chosen based on proximity to the existing hospital drain and suction
systems. Installation will require access to those systems through the wall and
connection to the systems in a manner similar to that for within-the-wall
installation. The FMS system is mounted on the wall using a mounting bracket
supplied with the system and standard stud or drywall
attachments. Labor is estimated at an average of 6 hours but will
vary depending on the actual drain and suction systems already resident in the
hospital.
39
Once
installed, the FMS has one inflow port positioned on the front of the device
that effectively replaces the current wall suction ports most commonly used to
remove fluids during surgery. Additionally, a disposable external manifold,
which will be provided as part of our disposable cleaning kit, allows for
expansion to up to three inflow suction ports.
Although
the BioDrain FMS is directly connected to the sanitary sewer helping to reduce
potential exposure to infectious fluids, it is possible that installation of the
system will cause inconvenience and lost productivity as the operating rooms
will need to be temporarily shut down. In addition, remodel work may
be necessary in preparation for, or as a result of, an
installation. In some cases, the costs to rework plumbing lines to
accommodate for the system may outweigh the expected savings and/or lengthen the
expected return on investment time.
One
of the current techniques typically utilize two to eight canisters positioned on
the floor or on elaborate rolling containers with tubing connected to the
hospital suction system and to the operative field. Once the waste fluids are
collected, they must be transported out of the operating room and disposed of
using various methods. These systems take up floor space in and around the
operating room and require additional handling by hospital personnel, thereby
increasing the risk of exposure of these people to infectious waste fluids
generated by the operating room procedure. Handling infectious waste in this
manner is also more costly.
Using
the BioDrain FMS during a procedure, potentially infectious fluid suctioned from
the patient is drawn through standard surgical tubing into the FMS. There, the
fluid is separated from the air stream and deposited into a large fluid
reservoir where it is retained until a measurement cycle is initiated. Once a
certain fluid level is reached in the chamber, a solenoid switch is opened and
the fluid is pumped from the fluid reservoir using a pump. The action of the
pump removes the fluid and measures the quantity of the fluid as it is removed.
This volume measurement is then continuously transmitted to a computer display,
which allows the surgical team to immediately assess the total amount of fluid
removed from the patient to that point in the procedure. The fluid removed from
the fluid reservoir is passed through the pump and transported directly to the
hospital sanitary sewer.
The
FMS has had four prototype iterations completed. The product has undergone
significant testing, including being utilized in veterinary cases. We are
currently finalizing the production specifications for the final production unit
and anticipate gearing up the production capabilities for the mass production
needed to meet the projected market demand. We will utilize an ISO
13485-certified outsource manufacturing service organization as our
manufacturer, at least until such time as it may make sense to vertically
integrate this process.
We
anticipate the filing of a 510(K) submission shortly. It is anticipated that the
unit will be classified as a Class II device by the FDA. While there is always
risk in dealing with the FDA and obtaining product approvals, we have retained
regulatory and product testing consultants and we have established timeframes
and plans for the regulatory process and we anticipate a fairly standard FDA
approval process. The two independent FDA consultants we have retained have
extensive knowledge and experience in filing 510(K) submissions. Additionally,
we have contracted with a third party firm whose sole business is performing
independent reviews of 510(K) submissions under the FDA Accredited Person
Program. The independent testing firms are currently conducting the necessary
system testing and documentation required for the FDA
submission.
A
summary of the features of the wall unit include:
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Minimal
Human Interaction. The wall-mounted FMS provides for a small
internal reservoir that keeps surgical waste isolated from medical
personnel and disposes the medical waste directly into the hospital
sanitary sewer with minimal medical personnel interaction. This minimal
interaction is facilitated by the automated electronic controls and
computerized LCD touch-screen allowing for simple and safe single touch
operation of the FMS.
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Minimizes Exposure. The FMS
minimizes surgical team and cleaning crew exposure to bloodborne
pathogens, as the system is hands-free and fully automated with electronic
controls with regards to handling any waste fluid. The FMS is unique and
provides advanced fluid management technology in that it eliminates the
use of canisters for fluid collection, is directly connected to the
hospital sanitary sewer and provides continuous flow of waste fluids from
the operative field.
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40
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Fluid
Measurement. The FMS volume measurement allows for
in-process, accurate measurement of blood/saline suctioned during the
operative procedure, and eliminates much of the estimation of fluid loss
currently practiced in the operating room. This will be particularly
important in minimally invasive surgical procedures, where accounting for
all fluids, including saline added for the procedure, is vital to the
operation. The surgical team can view in real time the color of the
extracted or evacuated fluid through the viewing window on the
FMS.
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Disposable Cleaning Kit . A single-use,
disposable cleaning kit that is used for the automated cleaning cycle at
the conclusion of each procedure prepares the FMS for the next use,
reducing operating room turnover time. The cleaning kit includes a
BioDrain proprietary cleaning fluid for cleaning the internal tubing,
pathways and chamber within the FMS unit and a disposable external
manifold required for each surgical procedure. The cleaning solution
bottle is attached to the FMS with a cleaning fluid adapter which is
designed to mate with the special connector on the FMS. One manifold will
be supplied with each bottle of cleaning fluid, attached to the bottle for
user convenience in securing all consumables needed for each use of the
FMS. The disposable cleaning fluid bottle collapses at the end of the
cleaning cycle rendering it unusable; therefore it cannot be refilled with
any other solution. The instructions for use clearly state that the FMS
cleaning fluid, and only the FMS cleaning fluid, must be used with the FMS
following each surgical case. The cleaning fluid should be a substantial
revenue generator for the life of the FMS.
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Ease
of Use.
The
FMS simply connects to the existing
suction tubing from the operative field (causing no change to the current
operative methods). Pressing the START
button on the FMS touch screen causes the suction tip to operate similarly
to preexisting systems, thereby requiring virtually no learning curve for
operation at the surgical site.
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Installation. BioDrain will arrange installation of the
FMS products through a partnership or group of partnerships. Such
partnerships will include but not be limited to being executed with
distribution partners, manufacturer's representatives, hospital supply
companies and the like. We will train our partners and standardize the
procedure to ensure the seamless installation of our products. The FMS is
designed for minimal interruption of operating room and surgical room
utilization. Plug-and-play features of the design allow for almost
immediate connection and hook up to hospital utilities for wall-hung units
allowing for quick start-up post installation.
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Sales Channel
Partners. The FMS will be sold to end-users through a
combination of independent stocking distributors, manufacturers
representatives and, possibly later, direct sales personnel. All personnel
involved in direct contact with the end-user will have extensive training
and will be approved by BioDrain. Exclusive agreements will be in place
between BioDrain and the sales channel partners outlining stocking
expectations, sales objectives, target accounts, and the like. Contractual
agreements with the sales channel partners will be reviewed on an annual
basis and could possibly be terminated at any time by BioDrain based on
certain specified conditions.
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Competitive
Pricing. Estimated end-user pricing is
expected to be in the range of $12,000 - $15,000 list per system (one per
operating room - installation extra) and $15 - $20 per unit retail for the
proprietary cleaning kit to the U.S. hospital market. The distributor or
channel partner then sets the final retail price based on quantity
discounts for multiple
installations.
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Patents
and Intellectual Properties
We
were granted a European patent on April 4, 2007 (Patent No. EP1539580)
and a U.S. patent on December 30, 2008 (U.S. Patent No. 7,469,727)
(collectively, the “Patents”). We also have a divisional application pending
before the U.S. Patent Office. A feature claimed in the Patents is the
ability to continue suctioning waste fluids into a collection chamber, to
measure the fluid collected, and to pump that collected fluid from the
collection chamber all while negative pressure is being maintained. This
provides for continuous operation of the FMS unit in suctioning waste fluids,
which means that the unit never has to be shut off or paused during a surgical
operation, for example, to empty a fluid collection container or otherwise
dispose of the collected fluid. We believe that this continuous operation
feature provides us with a significant competitive advantage, particularly on
large fluid generating procedures.
41
We
recently completed and executed an agreement with Marshall C. Ryan, the named
inventor of the Patents, to secure exclusive ownership of the Patents. In
exchange for the transfer of his ownership interests in the Patents, we paid Mr.
Ryan a combination of cash and warrants, agreed to pay him 4% royalty on FMS
sales for the life of the Patents and agreed to make additional payments if
there is a change in control of the Company (defined in the agreement as either
50% or more of the Company’s outstanding stock or substantially all of its
assets being transferred to one independent person or entity). At the signing of
the agreement, we paid Mr. Ryan $75,000 and agreed to pay a corporation wholly
owned by Mr. Ryan, Mid-State Stainless, Inc., an additional $100,000 payment on
June 30, 2009 for past research and development activities. We also granted Mr.
Ryan 150,000 warrants to purchase shares of our common stock at a price of $.35
per share. The warrant has a term of five years, ending on June 30, 2013. Should
there be a change in control of the Company, we will pay Mr. Ryan a total of $2
million to be paid out over the life of the U.S. patent if the change in control
occurs within 12 months of the first sale of any products, or $1 million to be
paid out over the life of the U.S. patent if the change in control occurs
between 12 and 24 months of the first sale of any products, or $500,000 to be
paid out over the life of the U.S. patent if the change in control occurs
between 24 and 36 months of the first sale of any product, which has not yet
occurred.
Our
competitive advantage, if any, based upon the Patents, would be lost if these
Patents were found to be invalid in the jurisdictions in which we sell or plan
to sell our products. No assurance can be given that any measure we implement
will be sufficient to protect our intellectual property rights or that we could
afford to take such measures. If we cannot protect our rights, we may lose our
competitive advantage. There is no assurance that any of these protections can
be maintained or that they will afford us a meaningful competitive advantage.
Moreover, if it is determined that our products infringe on the intellectual
property rights of third parties, we may be prevented from marketing our
products.
In
2002, two individuals, Jay D. Nord and Jeffrey K. Drogue, who are no longer
affiliated with the Company, filed a provisional patent application disclosing a
particular embodiment for a medical waste fluid collection system (the
“Nord/Drogue Embodiment”). The Nord/Drogue Embodiment included a separation
chamber and a collection chamber. A negative pressure source in communication
with the separation chamber would cause liquid surgical waste to be drawn into
the separation chamber. When the amount of collected liquid reached a high level
sensor, a valve would open in the bottom of the separation chamber to allowing
the collected liquid to flow by gravity into the collection chamber below. When
the liquid flowing into the collection chamber reached a high level sensor, the
valve would close. A second valve would then open allowing the known volume
within the collection chamber to flow by gravity into a drain. Each time the
collection chamber was emptied, the known volume of the collection chamber was
added to the total collected volume.
We
engaged the services of Marshall C. Ryan to further develop the medical waste
fluid collection system for commercialization. Mr. Ryan conceived of an
alternative embodiment for the medical waste fluid collection system (the “Ryan
Embodiment”). In the Ryan Embodiment, a pump was utilized to measure and
discharge the collected fluid while negative pressure was maintained in the
separation and collection chambers. An international (PCT) application was
timely filed disclosing both the Nord/Drogue Embodiment and the Ryan Embodiment.
National stage applications were subsequently timely filed in the U.S., Europe
and Canada based on the PCT application. During prosecution of the U.S. and
European national stage applications, the claims directed to the Nord/Drogue
Embodiment were rejected as being unpatentable of the prior art. Accordingly,
the claims directed to the Nord/Drogue Embodiment were canceled and the
remaining claims were amended to specifically claim only the Ryan Embodiment. It
was learned during prosecution of the U.S. and European applications that Mr.
Ryan was inadvertently omitted as a named inventor. Appropriate documents were
then filed with the European and U.S. patent offices to add Mr. Ryan as a named
inventor. Additionally, pursuant to U.S. patent law, because the claims directed
to the Nord/Drogue Embodiment were canceled, leaving only the Ryan Embodiment
claimed, appropriate documents were filed to remove Nord and Drogue as named
inventors. The U.S. patent and the European patent were allowed after the claims
were amended to relate solely to the Ryan Embodiment. The Canadian patent office
has not yet examined the Canadian national stage application (which will be
amended consistent with the U.S. and European patents to claim only the Ryan
Embodiment).
42
We
filed a divisional application with the U.S. Patent Office with claims directed
to the method of use of the Ryan Embodiment. We anticipate that we will file a
Continuation-In-Part (CIP) application to cover additional features and
functionalities of our FMS. We anticipate filing the CIP with the U.S. Patent
Office approximately by the end of the first quarter of 2009.
We
have had no communications with Mr. Nord or Mr. Drogue since notifying them that
they have been removed as inventors of the then-pending patent applications. We
are not aware of any current intention by Mr. Nord or Mr. Drogue to challenge
ownership or inventorship of the Patents. We believe that Nord and Drogue have
no valid claims of inventorship or ownership of the Patents. Even if Mr. Nord or
Mr. Drogue were to assert such a claim, we believe that, independent of our
dealings with them, we obtained rights to the Patents from Mr. Ryan, who even if
found not to be the sole inventor of the subject matter of the claims of the
Patents, is at least a joint inventor. As a joint inventor, he would have
co-ownership interest in the Patents and would have the power to transfer to us
his undivided co-ownership interest in the Patents.
The
Company’s system based on our patents includes a cleaning kit that contains a
pre-measured amount of a cleaning solution for cleaning the suction unit before
a subsequent use. We are currently working on finalizing an exclusive
distribution agreement with a manufacturer of the fluid we will use in the
cleaning kit to be utilized with our FMS. While we expect that any agreement
with a manufacturer of the fluid will allow use of the fluid in connection with
our devices, we do not expect to acquire ownership of any patent rights or
claims pertaining to such fluid.
From
time to time, we may encounter disputes over rights and obligations concerning
intellectual property. Also, the efforts we have taken to protect our
proprietary rights may not be sufficient or effective. Any significant
impairment of our intellectual property rights could harm our business, our
reputation, or our ability to compete. Also, protecting our intellectual
property rights could be costly and time consuming.
The
Disposable Cleaning Kit
The
disposable cleaning kit is an integral, critical component of the FMS and our
total value proposition to the customer. It consists of a proprietary,
pre-measured amount of cleaning solution in a plastic pouch, bottle or similar
container with a connection mechanism to attach to the FMS. The disposal
cleaning kit also includes an external manifold allowing for up to three suction
ports. The proprietary cleaning solution is attached and recommended to be used
following each surgical procedure. Due to the nature of the fluids and particles
removed during surgical procedures, the FMS is recommended to be cleaned
following each use. Utilizing the available vacuum of the wall system, the
proprietary cleaning fluid is drawn into the FMS to provide a highly effective
cleaning process that breaks up bio-film at the cellular level. Proper cleaning
is required for steady, dependable and repeated FMS performance and for
maintenance of the warranty of the FMS.
The
BioDrain proprietary cleaning fluid is a critical component of our business
model. The cleaning fluid has the “razor blade business model” characteristic
with an annuity-type of revenue situation for every FMS unit installed, and
revenues from the sale of fluids are forecast to be significantly higher than
the revenues from the unit. We will encourage that only our fluid will be
utilized following procedures by incorporating a special adapter to connect the
fluid to the system. We will also tie the fluid usage, which we will keep track
of with the FMS software, to the product warranty. While it could be
possible for other fluids to be utilized in this process, we believe that the
special adapter and the warranty control will allow us to achieve substantial
revenue from our cleaning fluid.
The
instructions for use which accompanies the product will clearly state how the
fluid is to be hooked up to the FMS machine. Further, a diagram on the FMS will
also assist the user in attaching the fluid bottle to the machine. This will be
a very simple task, and we do not anticipate that any training of operating room
staff will be necessary.
All
installations of our FMS product will be completed by a service and maintenance
organization that is familiar with completing such installations in health care
settings. We have had conversations with more than one of this type
of company and we are now in the process of selecting the best company(s) to
partner with regarding this function. The general availability of these types of
service and maintenance personnel in the health care sector should not hinder us
from forming a beneficial relationship in this area.
43
Corporate
Strategy
BioDrain
will become successful by deploying a strategy of focused expansion within its
core product and market segments, while utilizing a progressive approach to
manufacturing and marketing to ensure maximum flexibility and
profitability.
Our
strategy will be to:
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Develop a complete line of
wall-installed fluid evacuation systems (“FMS”) for use in hospitals and
free standing surgery centers as well as clinics and physicians’ offices.
Initially, we have developed the FMS to work in hospital operating
rooms and surgical centers. This device was developed for use with the
wall vacuum suction currently installed in hospitals. Opportunities for
future products include an FMS developed for post-operation and recovery
rooms with multiple inlet ports and multiple volume
measurements.
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Provide products that greatly
reduce worker and patient exposure to harmful materials present in
infectious fluids and that contribute to an adverse working environment.
By efficiently removing infectious fluid waste the FMS protects
healthcare workers from contact with potential contamination as compared
to manual disposal processes. As one of the only stand-alone surgical
fluid disposal systems directly connected to the sanitary sewer, the FMS
will redefine the manner in which such material is collected, measured and
disposed of in operating rooms, post-operating recovery, emergency rooms
and intensive care settings. The cost of such exposures, measured in terms
of human suffering, disease management costs, lost productivity, liability
or litigation, will be, when properly leveraged, the strongest motivating
factor for facilities looking at investing in the FMS line of
products.
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Utilize existing medical
products independent distributors and manufacturers representatives to
achieve the desired market penetration. Contacts have been
established with several existing medical products distributors and
manufacturers representatives and interest has been generated regarding
the sales of the BioDrain FMS and cleaning kits. In addition to their
normal sales practices, the distributors will carry a significant supply
of cleaning kits for their current customers and could purchase an FMS for
demonstration to new potential customers.
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Continue to utilize operating
room consultants, builders and architects as referrals to hospitals and
day surgery centers. To date, referrals have been received from
this group resulting in several potential sales and a potential beta site.
These referrals have shortened the time frame for contacting and
demonstrating the FMS to potential customers as well as providing us with
valuable responses to the FMS from the customer base, the vast majority of
which have been extremely positive to date.
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Utilize a Medical Advisory
Board to assist in market penetration. We have set up a Medical
Advisory Board consisting of a pioneering surgeon, two operating room
consultants and a nurse anesthetist to assist us in understanding the
needs of our market and ways to better serve that market. From time to
time executive management may elect to change the composition of the
Medical Advisory Board, including but not limited to, expanding the size
of the Medical Advisory Board.
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Other
strategies may include:
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Employing
a lean operating structure, while utilizing the latest trends and
technologies in manufacturing and marketing, to achieve both market share
growth and projected profitability.
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Providing
a leasing program and/or “pay per use” program as purchasing
alternatives.
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Providing
service contracts to establish an additional revenue
stream.
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Utilizing
management team contacts in global sourcing of key sub-assemblies to drive
significant per unit cost reduction at volume.
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Offering
an innovative warranty program that is contingent on the exclusive use of
our disposable cleaning kit to insure the success of our after-market
disposable products.
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44
Technology
and Competition
Fluid
Management for Surgical Procedures
The
management of infectious fluids produced during and after surgery is a complex
mix of materials and labor that consists of primary collection of fluid from the
patient, transportation of the waste fluid within the hospital to a disposal or
processing site and finally to the disposal of that waste either via
incineration or in segregated landfills.
Once
the procedure has ended, the canisters and their contents must be removed from
the operating room and disposed. There are several methods used for disposal,
all of which present certain risks to the operating room team, the crews who
clean the rooms following the procedure, and the other personnel involved in
their final disposal. These methods include:
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Direct Disposal Through the
Sanitary Sewer. In virtually all municipalities, the disposal of
liquid blood may be done directly to the sanitary sewer where it is
treated by the local waste management facility. This practice is approved
and recommended by the EPA. In most cases these municipalities
specifically request that disposed bio-materials not be treated with any
known anti-bacterial agents such as glutalderhyde, as these agents not
only neutralize potentially infectious agents but also work to defeat the
bacterial agents employed by the waste treatment facilities themselves.
Disposal through this method is fraught with potential exposure to the
service workers, putting them at risk for direct contact with these
potentially infectious agents through spillage of the contents or via
splash when the liquid is poured into a hopper - a specially designated
sink for the disposal of infectious fluids. Once the infectious fluids are
disposed of into the hopper, the empty canister is sent to central
processing for re-sterilization (glass and certain plastics) or for
disposal in the biohazardous/infectious waste generated by the hospital
(red-bagged).
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Conversion to Gel for Red-Bag
Disposal. In many hospital systems the handling of this liquid
waste has become a liability issue due to worker exposure incidents and in
some cases has even been a point of contention during nurse contract
negotiations. Industry has responded to concerns of nurses over splash and
spillage contamination by developing a powder that, when added to the
fluid in the canisters, produces a viscous, gel-like substance that can be
handled more safely. After the case is completed and final blood loss is
calculated, a port on the top of each canister is opened and the powder is
poured into it. It takes several minutes for the gel to form, after which
the canisters are placed on a service cart and removed to the red-bag
disposal area for disposal with the other infectious waste. There are four
major drawbacks to this system:
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It
does not ensure protection for healthcare workers, as there remains the
potential for splash when the top of the canister is
opened.
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Based
on industry pricing data, the total cost per canister increases by
approximately $2.00.
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Disposal
costs to the hospital increase dramatically as shipping, handling and
landfill costs are based upon weight rather than volume in most
municipalities. The weight of an empty 2,500 ml canister is approximately
one pound. A canister and its gelled contents weigh approximately 7.5
pounds.
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The
canister filled with gelled fluid must be disposed; it cannot be cleaned
and re-sterilized for future use.
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Despite
the increased cost of using gel and the marginal improvement in health care
worker protection it provides, several hospitals have adopted gel as their
standard procedure.
45
Drainage
Systems
Several
new medical devices have been developed which address the deficiencies described
above. MD Technologies, Inc., DeRoyal (formerly Waterstone), Dornoch Medical
Systems, Inc., Stryker Instruments, and Cardinal Health, Inc. have all developed
systems that provide for disposal into the sanitary sewer without pouring the
infectious fluids directly through a hopper disposal or using expensive gel
powders and are all currently sold with 510(K) concurrence from the FDA. Most of
them continue to utilize some variant on the existing canister technology, and
while not directly addressing the canister, most have been successful in
eliminating the need for expensive gel and its associated handling and disposal
costs.
Our
existing competitors that already have products on the market have a clear
competitive advantage over us in terms of brand recognition and market exposure.
In addition, the aforementioned companies have extensive marketing and
development budgets that could overpower an early-stage company like ours.
Information the Company obtained from surgical clinicians during interviews
indicate that Stryker Instruments has the dominant market share position.
Cardinal Health, Inc., though having FDA concurrence, has not yet made
significant sales into the market place. These clinicians have also indicated
that the competitive devices are used in select procedures and often in some,
but not all, surgical rooms.
Current
Competition, Technology, and Costs
Single
Use Canisters
In
the U.S., glass reusable containers are infrequently used as their high initial
cost, frequent breakage and costs of reprocessing are typically more costly than
single use high impact plastic canisters, even when disposal is factored in.
Each single use canister costs roughly $2.00 each and it is estimated that a
range of two to eight canisters are used in each procedure, depending on the
operation.
Our
FMS would replace the use of canisters and render them unnecessary, as storage
and disposal would be performed automatically by the FMS. It should be noted
that these canisters are manufactured by companies with substantially more
resources that BioDrain. Cardinal Health, a very significant competitor,
manufacturers both single use canisters as well as a more automated fluid
handling system that will compete with us. Accordingly, faced with
this significant competition, we may have difficulty penetrating this
market.
Solidifying
Gel Powder
The
market potential for solidifying gel was estimated at over $100 million in
2002.This market is not yet fully realized, but many hospitals, responding to
increased concerns over inadvertent worker exposure to liquid waste, are
converting to this technology. There have been many reports (Allina and Fairview
to name two Minneapolis-based health systems) of nursing contracts containing
language that requires the facilities to use gels after every procedure. Our
management is aware that at a large healthcare facility in Minneapolis,
Minnesota, routine usage of gel increased annual operating room expenditures by
$63,000, based on 14,000 procedures done in 2006. It is clear that solidifying
gels, while not providing complete freedom from exposure to workers does present
a level of safety and peace of mind to the healthcare workers who handle
gel-treated canisters. While several gel manufacturers proclaim that sterility
of the contents is achieved with the use of their product, protocols continue to
recommend that red-bag procedure is followed when using these products. One
drawback of the solidifying gels is that they increase the weight of the
materials being sent to the landfill by a factor of five to seven times,
resulting in a significant cost increase to the hospitals that elect to use the
products.
BioDrain’s
FMS would eliminate the need for solidifying gel, providing savings in both gel
powder usage and associated landfill costs.
Sterilization
and Landfill Disposal
Current
disposal methods include the removal of the contaminated canisters (with or
without the solidifying gel) to designated biohazardous/infectious waste sites.
Previously many hospitals used incineration as the primary means of disposal,
but environmental concerns at the international, domestic and local level have
resulted in a systematic decrease in incineration worldwide as a viable method
for disposing of blood, organs or materials saturated with bodily fluids. When
landfill disposal is used, canisters are included in the general red-bag
disposal and, when gel is used, comprise a significant weight factor. Where
hopper disposal is still in use, most of the contents of the red-bag consist
only of outer packaging of supplies used in surgery and small amounts of
absorbent materials impregnated with blood and other waste fluid. These,
incidentally, are retained and measured at the end of the procedure to provide a
more accurate assessment of fluid loss or retention. Once at the landfill site,
the red-bagged material is often steam-sterilized with the remaining waste being
ground up and interred into a specially segregated waste dumpsite.
46
On
a related note, many countries are struggling with landfills within their own
borders, and a thriving and growing biohazardous/infectious waste disposal
business is emerging. The inevitable disputes connected with such a highly
charged and potentially politically sensitive topic have developed, particularly
in Europe and the former Soviet Republics, over the disposition and disposal of
these infectious wastes. Such disputes have also arisen in the U.S. as states
lacking landfill capacity (New Jersey, for example) seek to offload their
medical waste on less populous states or those which lack stringent
enforcement.
Moreover,
as incineration increasingly loses its appeal, and as individual countries and
states reject importation of infectious materials, the disposal of these fluids
may take on more important political and environmental overtones. For example,
there are several recent rulings within the European Union that resulted in
medical waste being categorized as a tradable commodity meaning that no member
country can reject medical waste from another European Union partner. Germany,
which used to dump its medical waste in the former East Germany, is now
exporting its waste to Belgium and France. France in particular is fighting this
waste and wants Germany to deal with its own waste within its own borders. In
other parts of the world, landfills are often habitated by otherwise homeless or
poverty level people, who scavenge the sites for food and clothing, and often
come into contact with blood soaked medical waste. Disposal of fluid down the
sanitary sewer and elimination of large numbers of canisters from the volume of
red-bag material, while not addressing all of the concerns regarding landfills,
would certainly reduce the amount of disposed and blood impregnated
waste.
By
eliminating large numbers of canisters and the gel powder, our FMS products
would reduce costs and the amount of canisters sent to landfills
dramatically.
Handling
Costs
Once
the surgical team has finished with the procedures and a blood loss estimate is
calculated, the liquid waste (with or without solidifying gels) is removed from
the operating room, and either disposed of down the sanitary sewer or
transported to an infectious waste area of the hospital for later
removal.
Our
FMS would significantly reduce the labor costs associated with the disposal of
fluid or handling of contaminated canisters, as the liquid waste is
automatically emptied into the sanitary sewer after measurements are obtained.
We will utilize the same suction tubing currently being used in the operating
room, so no additional cost is incurred with our process. While each
hospital handles fluid disposal differently, we believe that the cost of our
cleaning fluid after each procedure will be less than the current procedural
cost that could include the cost of canisters, labor to transport the canisters,
solidifying powder, gloves, gowns, mops, goggles, shipping and transportation,
as well as any costs associated with any spills that may occur due to manual
handling.
A
hidden but very real and considerable handling cost is the cost of an infectious
fluid exposure. In a free, publicly availble July 2007 research article
published by Infection Control Hospital Epidemiology, it is concluded that
“Management of occupational exposures to blood and bodily fluids is costly; the
best way to avoid these costs is by prevention of exposures.” The research shows
that hospital management cost associated with occupational blood exposure can,
conservatively, be more than $4,500. Because of privacy laws, it is difficult to
obtain estimates of exposure events at individual facilities, however in each
exposure the worker must be treated as a worst case event. This puts the
healthcare worker through a tremendous amount of personal trauma, and the health
care facility through considerable expense and exposure to liability and
litigation.
47
Nursing
Labor
Often
overlooked as a direct cost, nursing personnel spend significant time in the
operating room readying canisters for use, calculating blood loss and removing
or supervising the removal of the contaminated canisters after each procedure.
Various estimates have been made, but an internal study at a large healthcare
facility in Minneapolis, Minnesota, revealed that the average nursing team
spends twenty minutes pre-operatively and intra-operatively setting up,
monitoring fluid levels and changing canisters as needed and twenty minutes
post-operatively readying blood loss estimates or disposing of canisters.
Estimates for the other new technologies reviewed have noted few cost savings to
nursing labor.
Our
FMS products would save nursing time as compared to the manual process of
collecting and disposing of surgical waste. Set-up is as easy as attaching the
suction tube to the inflow port of the FMS. Post-operative clean-up requires
approximately five minutes, the time required to dispose of the suction tubing
to the red-bag, calculate the patient’s blood loss, attach the bottle of
cleaning solution to the inlet port of the unit, initiate the cleaning cycle,
and dispose of the emptied cleaning solution. The steps that our product avoids,
which are typically involved with the manual disposal process include, canister
setup, interpretation of an analog read out for calculating fluid, canister
management during the case (i.e. swapping out full canisters) and then
temporarily storing, transferring, dumping and properly disposing of the
canisters.
Competitive
Products
Disposable
canister system technology for fluid management within the operating room has
gone virtually unchanged for decades. As concern for the risk of exposure of
healthcare workers to bloodborne pathogens, and the costs associated with
canister systems has increased, market attention has increasingly turned toward
fluid management. The first quarter of 2001 saw the introduction of three new
product entries within the infectious material control field. Stryker
Instruments introduced the “Neptune” system, offering a combination of
bio-aerosol and fluid management in a portable two piece system; Waterstone
Medical (now DeRoyal) introduced the “Aqua Box” stationary system for fluid
disposal; and Dornoch Medical Systems, Inc. introduced the “Red Away” stationary
system for fluid collection and disposal. All companies, regardless of size,
have their own accessory kits. For purposes of comparison, based on information
obtained from a surgical center in Minnesota, the Stryker Neptune system’s
estimated cost per procedure is more than $15 (including single-use-manifold
plus cleaning solution).
We
differentiate from these competitors since we have the most automatic,
hands-free process of any of the systems currently on the
market. Each of our competitors, with the exception of MD
Technologies, Inc., has some significant manual handling involved in the
process. It may require the need to transport the mobile unit to a
docking port and then empty the fluid or it may be that the canister is still
manually transported to a more efficient dumping station. Regardless,
most of our competitors require more human interaction with the fluid than
BioDrain. Please refer to the chart on page 39 for a comparison of the key
features of the devices currently marketed vs. the FMS.
Marketing
and Sales
Distribution
Our
FMS products will be sold through independent distributors and manufacturers
representatives covering the vast majority of major U.S. markets. The targeted
customer base will include nursing administration, operating room managers,
CFOs, risk management, and infection control. Other professionals with an
interest in the product include physicians, nursing, biomedical engineering,
anesthetists, anesthesiologists, human resources, legal, administration, and
housekeeping.
The
major focus of the marketing effort will be to introduce our product as a
standalone device capable of effectively removing infectious waste and disposing
of it automatically while providing accurate measurement of fluids removed, and
also limiting exposure of the surgical team and healthcare support
staff.
48
Governmental
and professional organizations have become increasingly aggressive in attempting
to minimize the risk of exposure to bloodborne pathogens by medical personnel.
It is believed that our technology provides a convenient and cost effective way
to collect and dispose of this highly contaminated material.
Distributors
will either have installation and service capability, or we will contract those
functions out to an independent service/maintenance company. We have been in
contact with both distributors, and service companies regarding these
installation requirements. The Company will establish extensive training and
standards for the service and installation of the FMS to ensure consistency and
dependability in the field. Users of the system will require a minimal amount of
training to operate the FMS. The instructions for use and the
installation guide will be included with every system along with a quick start
guide and a trouble shooting manual.
We
will structure our pricing and relationships with distributors and/or service
companies to ensure that these entities receive at least a typical industry
level compensation for their activities. The cost and price estimates currently
in place with the Company conservatively allow for reasonable profit margins for
all entities in the FMS and the cleaning fluid supply chain. While we have had
discussions with related companies, there are no installation or service
companies contracted or trained to install our fluid management system at this
time.
Promotion
The
dangers of exposure to infectious fluid waste are well recognized in the medical
community. It is our promotional strategy to effectively educate medical staff
regarding the risks of contamination using current waste collection procedures
and the advantages of the FMS in protecting medical personnel from inadvertent
exposure. We intend to leverage this medical awareness and concern with
education of regulatory agencies at the local, state and federal level about the
advantages of the FMS.
We
intend to supplement our sales efforts with a promotional mix that will include
a number of printed materials, video support and a web site. Our management team
believes its greatest challenge lies in reaching and educating the 1.6 million
medical personnel who are exposed daily to fluid waste in the operating room or
in other healthcare settings (OSHA, CPL 2-2.44C). These efforts will require
utilizing single page selling pieces, video educational pieces for technical
education, liberal use of scientific journal articles and a web page featuring
product information, educational materials, and training sites.
We
will support our sales organization by attending major scientific meetings where
large numbers of potential users are in attendance. The theme of the trade show
booth will focus on education, the awareness of the hazards of infectious waste
fluids and the Company’s innovative solution to the problem. We will focus our
efforts in initially on the Association of Operating Room Nurses (“AORN”)
meeting, where the largest concentration of potential buyers and influencers are
in attendance. We will obtain an Internet mailbox and will feature information
on protection of the healthcare worker as well as links to other relevant sites.
We intend to invest in limited journal advertising until targeted audiences have
been fully identified. The initial thrust will focus on features of the product
and ways of contacting the Company via the web page or directly through postage
paid cards or direct contact. Additionally, we will create a press release
mailing to clinician oriented periodicals for inclusion in New Product News
columns. These periodicals will provide the reader with an overview of the
product and will direct readers to pursue more information by direct contact
with us by accessing our web page.
Pricing
Prices
for the FMS and its disposable cleaning kit will reflect a cost saving to the
hospital compared to its current procedure costs over time. This strategy should
ensure that sales objectives will be addressed in actual hard cost comparisons
rather than by addressing soft costs such as warehouse and operating room space
wasted storing canisters, inventory cost, ordering cycles, worker’s comp
exposure - all debatable arguments fraught with defendable positions from the
customer’s knowledge base. Our focus will be on the hard costs of canisters,
biohazard processing labor and added costs of biohazard waste
disposal. Suction tubing that is currently used in the operating room
will continue to be used with our system and should not be considered in the
return on investment equation. An argument could be made that our
system produces waste through the disposable cleaning solution
bottle. However, our cleaning solution’s bottle is completely
recyclable, and the anticipated selling price of the fluid is built into our
cost analysis. In comparison, an operation using traditional disposal
methods will often produce multiple canisters destined for biohazard
processing. Biohazard disposal costs are estimated by Outpatient
Surgery Magazine to be 5 times more per pound to dispose of than regular waste
(Outpatient Surgery Magazine, April 2007, p.44). Once the canister
has touched blood, it is considered “red bag” biohazard waste, whereas the
cleaning fluid bottle used in our system can be recycled with the rest of the
facility’s plastics or, less desirably, they can be thrown in the regular
trash.
49
The
FMS will list for approximately $12,000 - $15,000 per system (one per operating
room - installation extra) and $15 - $20 per unit retail for the proprietary
cleaning kit to the U.S. hospital market. By comparison, the disposal system of
Stryker Instruments, one of our competitors, retails for $10,000 plus a $9,000
docking station and requires a disposable component with an approximate cost of
$15 and a proprietary cleaning fluid (cost unknown per
procedure). Per procedure cost of the traditional disposal process
includes approximate costs of $2 per liter canister, plus solidifier at $2 per
liter canister, plus the biohazard premium disposal cost approximated at $1.80
per liter canister. In addition, the labor, gloves, gowns, goggles,
and other related material handling costs are also included in the current
disposal expenses.
Installation
will be done by distributors, independent contractors, or in the case of larger
facilities by in-house engineering at an estimated price of $2,000, depending on
the operating room. Installation of the FMS requires access only to the
hospital’s sanitary sewer, vacuum suction, and electricity. To help facilities
maintain their utilization rates, we will recommend installation during off peak
hours. In smaller facilities an outside contractor may be called in, larger
institutions have their own installation and maintenance workforce. Installation
time should not seriously impact the use of the operating room. Each FMS will
have an industry standard warranty period that can be extended through
documented use of the Company’s sterilization kit.
Actual
selling price of the hardware will be at a standard rate to the distributor,
permitting them to have price flexibility when selling multiple units to
hospitals and clinics. The current plan is for the disposable cleaning kit to be
priced at $15 - $20, and a commission to be paid to the distributor or
independent representative upon each sale.
Engineering
and Manufacturing
We
have recently finalized our relationship with TriVirix, Inc. for the engineering
and manufacturing of our product, FMS, which refers to the FMS device itself and
not the cleaning fluid, cleaning fluid packaging, external manifold or any other
accessories. TriVirix, Inc. is ISO 13485:2003 and GMP-certified and has the
necessary expertise and experience to build our product in a cost-effective
manner. We are currently in negotiations with TriVirix, Inc. to finalize our
Manufacturing Supply Agreement, which we expect to be executed by the end of
January 2009. The Manufacturing Supply Agreement will specify the quantities for
production of our product, which will be based on a 6-month rolling forecast,
the allocation of production and the price and price increase terms. Under the
terms of the Manufacturing Supply Agreement, TriVirix, Inc. would manufacture
only our FMS device. Upon execution of the Manufacturing Supply Agreement,
Trivirix, Inc. would be considered a primary supplier of the FMS device. Our
management, as part of a broader manufacturing sourcing strategy plans to
identify at most two second sources of production for the FMS
device.
The
disposable cleaning kit, comprised of a proprietary cleaning solution, a
cleaning solution package (high density polyethylene bottle), a cleaning
solution adapter assembly (barbed bottle cap, attached surgical tubing, and
attached valved quick coupling), and a multi-port external, non-sterile
manifold, will be sourced through alternative suppliers segregated as primary
and secondary suppliers. Other single use disposable accessories, such as a
fluid sampling system, will be sourced separately, as individual components. We
have not yet entered into agreements with any suppliers for these
products.
To
further our manufacturing sourcing strategy, we recently hired an Executive Vice
President of Operations, Chad Ruwe, who has 20 years of fluid management systems
experience and a demonstrated history of driving lean manufacturing global
sourcing and joint venture leadership.
50
Government
Regulation
To
date, no regulatory agency has established exclusive jurisdiction over the area
of biohazardous and infectious waste in healthcare facilities. Several prominent
organizations maintain oversight function concerning various aspects of
pertinent technologies and methods of protection.
These
agencies include:
|
•
|
OSHA
(Occupational Safety and Health Administration)
|
|
|
•
|
EPA
(Environmental Protection Agency)
|
|
|
•
|
DOT
(Department of Transportation)
|
|
|
•
|
JCAHO
(Joint Commission of Accreditation of Hospitals)
|
|
|
•
|
NFPA
(National Fire Protection Association)
|
|
|
•
|
AIA
(American Institute of Architects)
|
|
|
•
|
AORN
(Association of Operating Room Nurses)
|
|
|
•
|
Specific
state, county, hospital or institution
guidelines
|
Application
for Electrical Safety Testing and Certification
We
are seeking testing and certification to the IEC 60606-1 and IEC 60606-1-2, two
internationally recognized standards. In the United States there are three
Nationally Recognized Testing Laboratories (“NRTLs”), Underwriters Laboratories
(“UL”), TUV SUD America, Inc. and Intertek-Semko (ETL), that can perform such
tests for electrical safety of our FMS device. We issued request for quotes to
two of three of these NRTLs in addition to issuing initial inquiries to
certified third party testing entities conducting testing on behalf of the
NRTLs. Based on responses to our request for quotes noting pricing
and timing of conducting the testing, we have contracted with TUV SUD America,
Inc. located in New Brighton, MN for this electrical safety
testing. We delivered one FMS device to TUV SUD America, Inc. on
December 18, 2008 to commence testing. Expected completion of the
testing and associated final documentation of the testing results is scheduled
for January 31, 2009.
In
addition to delivering the FMS device, we have provided various documents to TUV
SUD America, Inc., including a critical components list, electrical schematics,
3D CAD model drawings of selected components, dimension drawings of selected
components, engineered drawings of labels, an operations manual containing
instructions for use, a bill of materials, and related electrical documents
describing critical components of the BioDrain FMS.
Based
on our product design advancements, we expect to have successful test results
and secure the electrical safety approval mark from TUV SUD America,
Inc. We may experience some unexpected hurdles but expect any that
might arise can be responded to quickly. The BioDrain FMS undergoing electrical
testing operates entirely on 24VDC. This low voltage system poses considerable
less risk to a 110/240 VAC powered system. This being the case, we
expect successful testing.
Consequences
and risks of not passing the electrical safety testing on the first attempt
include (i) a delay in submitting the 510(k) to the FDA and thus a longer
lead-time to market entry, which could result in competitors having more time in
the market to further execute their strategies; (ii) increased design costs to
redesign the system; and (iii) subsequent increased costs to re-submit for a
second attempt at electrical safety testing.
A
previous generation BioDrain FMS device (110/240VAC) successfully passed
electrical safety testing conducted by UL in November 2005 (reference UL File
E256928). This UL approval can be directly accessed on the web at the
following link:
http://database.ul.com/cgi-bin/XYV/cgifind.new/LISEXT/1FRAME/srchres.html.
51
After
we secure electrical safety testing approval for the FMS, we plan to file a
510(K) submission for FDA approval of the FMS. The FDA requires, pursuant to a
final regulation for Establishment Registration and Device Listing for
Manufacturers of Devices (21 CFR Part 807), that a 510(k) premarket notification
be submitted at least ninety days before marketing a device that: (1) is being
introduced into distribution for the first time by that person or entity, or (2)
is in distribution but is being significantly modified in design or use. A
510(k) submission must contain, among other things (i) proposed labeling
sufficient to describe the device’s intended use; (ii) a description of how the
device is similar to or different from other devices of comparable type, or
information about what consequences a proposed device modification may have on
the device's safety and effectiveness; and (iii) any other information necessary
to determine whether the device is substantially equivalent (as defined below).
We anticipate that this will be a Class II device, which is less stringently
reviewed as that of a Class III device. We have teamed with regulatory
consultants with significant experience in the FDA approval process. While each
submission and approval is different, our regulatory consultants have advised
that this is a fairly standard type of FDA 510(K) submission, with a high
probability of approval by the FDA.
The
510(k) Submittal Process
Upon
successful completion of the electrical safety testing at TUV SUD America, Inc.
and assuming there is no delay in conducting and concluding this testing, the
510(k) submittal process is as follows:
|
|
1.
|
Our
contracted FDA consultant will compile the following
documents:
|
|
|
a.
|
Electrical
safety testing report and conclusions from TUV SUD America,
Inc.,
|
|
|
b.
|
Risk
and hazard analysis
documentation,
|
|
|
c.
|
BioDrain
FMS product labeling such as the instructions for use, preventative,
maintenance schedules, troubleshooting
guidelines,
|
|
|
d.
|
Documentation
regarding the proprietary cleaning fluid and the labeling and instructions
for use related to the use of the proprietary cleaning
fluid,
|
|
|
e.
|
Software
and hardware design inputs and outputs including requirements related
specifications and documents,
and
|
|
|
f.
|
Other
documentation the FDA deems
necessary.
|
|
|
2.
|
Upon
compiling these documents, a 510(k) Submittal Document will be drafted in
the format instructed by the FDA. This entire package, upon completion by
the BioDrain FDA consultant and approval by BioDrain management, will be
submitted to a contracted third party 510(k) reviewer, Mark Job of
Regulatory Technical Services.
|
|
|
3.
|
Mr.
Job will review the BioDrain submittal and a question and answer iteration
will take place between us and Regulatory Technical Services until he is
satisfied with the BioDrain submittal. Once satisfied, Mr. Job will submit
the BioDrain 510(k) Submittal Document and all necessary, related
documentation directly to the
FDA.
|
|
|
4.
|
The
FDA has thirty days to review and respond to the BioDrain 510(k)
Submittal. Similarly, a question and answer iteration may take
place between the FDA and Mr. Job or Regulatory Technical Services
regarding the submittal. BioDrain, at the request and as needed by Mr.
Jobor Regulatory Technical Services, will take all necessary steps and
actions to provide the answers to any and all FDA inquires specific to the
510(k) submittal.
|
|
|
5.
|
Upon
successfully addressing the FDA’s questions, BioDrain can expect to
receive FDA 510(k) clearance for the FMS
device.
|
The
products we expect to be covered by this 510(k) application or submittal are (1)
the BioDrain FMS device both in the on-the-wall and in-the-wall formats, and (2)
the proprietary cleaning solution kit including the cleaning solution, the
bottle or container for the fluid and the associated cleaning fluid
adapter.
FDA
Process for Clearing a Device Under Section 510(k)
The
FDA Center for Devices and Radiological Health requires 510(k) submitters to
provide information that compares its new device to a marketed device of a
similar type, in order to determine whether the device is substantially
equivalent (or “SE”). This means that a manufacturer can submit a 510(k)
comparing a new device to a device that has been found to be SE and the FDA can
use this as evidence to determine whether the new device is substantially
equivalent to an already legally marketed device (or a “predicate device”). The
ultimate burden of demonstrating the substantial equivalence of a new device to
a predicate device remains with the 510(k) submitter, and in those occasions
when the Center for Devices and Radiological Health is unfamiliar with certain
aspects of the predicate device, the submitter will be required to provide
information that substantiates a claim of substantial
equivalence.
52
As
a matter of practice, the Center for Devices and Radiological Health generally
considers a device to be SE to a predicate device if, in comparison to the
predicate device, (i) the new device has the same intended use; (ii) the new
device has the same technological characteristics (i.e. same materials, design,
energy source, etc.); (iii) the new device has new technological characteristics
that could not affect safety or effectiveness or (iv) the new device has new
technological characteristics that could affect safety or effectiveness but
there are accepted scientific methods for evaluating whether safety or
effectiveness has been adversely affected and there is data to demonstrate that
the new technological features have not diminished safety or effectiveness.
Premarket notification submissions are designed to facilitate these
determinations.
The
timing to complete the 510(K) process varies with each submission, however we
anticipate that the product could receive FDA approval a few months after the
submission is filed. However, there is no assurance that FDA approval will be
obtained.
Following
FDA approval to market our product, we will be subject to the normal ongoing
audits and reviews by the FDA and other governing agencies. These audits and
reviews are standard and typical in the medical device industry, and we do not
anticipate being affected by any extraordinary guidelines or regulations, beyond
those standard to the industry.
The
Code of Federal Regulations (CFR) Title 21 - Food and Drugs contain the most
recent FDA statutory and regulatory requirements for medical devices. The
relevant regulations start with Part 800 and encompass an extensive listing of
FDA regulatory requirements, such as product classification/registration,
establishment registration, labeling, etc., placed on a medical device
manufacturer in the U.S. Please visit the following website for
further information: (http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfcfr/cfrsearch.cfm).
In
July 2007, we entered into a restructuring agreement whereby in the event that
we fail to obtain FDA approval by the end of August 2009, the
majority-in-interest of investors (“the Investors”) through our October 2008
offering would have the right to cause the Company to make the following
restructuring changes:
|
1.
|
All
Company assets will be distributed to a wholly-owned subsidiary
(“Privco”). Privco will have the identical number of common shares
outstanding as the Company. The Investors will have the same percentage
ownership of Privco that they had in the Company and will maintain their
shares of Company common stock.
|
|
|
2.
|
BioDrain
Original Shareholders (the “Founders”) will cancel all Company stock held
by the Founders only and the Founders will no longer own any Company
equity. Ownership of shares of the Company’s common stock by the Investors
would not be affected.
|
|
|
3.
|
In
consideration of such cancellation, the Founders will receive Privco stock
and options so that the Founders have the same percentage ownership of
Privco that it had in the Company. The Company will retain the rest of
Privco equity.
|
|
|
4.
|
All
Company stock options will be cancelled and replaced with Privco stock
options.
|
|
|
5.
|
The
Company will have new directors and officers selected by
Investors.
|
|
|
6.
|
In
the event of a reverse merger or other similar transaction with a new
operating business, the Company will either spin-off the remaining Privco
equity to the remaining Company shareholders or liquidate the Privco
securities and distribute any net proceeds to the Company
shareholders.
|
53
The
Private Placement Memorandum related to our offering of securities completed in
October 2008 has been modified to reflect the restructuring if the 510(k)
approval is not obtained within the 12 month timeframe from the end of August
2008.
These potential restructuring changes were put in place
in the October 2008 financing to reduce the risk of not obtaining FDA approval
for those Investors involved in that financing. We were able to
attract more investors for that financing by providing the Investors with the
restructuring agreement, which provides them with additional potential value
(ownership of a public entity) should we not achieve FDA approval by the end of
August 2009. The potential impact on our business could be to cause our
operations to cease. The financial statements of the Company would
show no value; rather all assets would be in Privco, the new entity. Operations
could be continued from Privco, however, the Investors would have the option to
liquidate our assets and distribute the proceeds to our shareholders if a
reverse merger or similar transaction took place.
Following
such a transaction, there would be no distinction between the “Founders” and the
“Investors” and the terms of the restructuring agreement would no longer exist.
The difference between the two groups would be that the Investors would own and
control all of the Company’s common stock and would also own the same percentage
of Privco that they did in the Company before the transaction, and the Founders
would only own Privco stock. The Founders, as shareholders of Privco,
would be entitled to vote on any asset sale or reverse merger or similar
transaction of Privco only. At this time, there is no reverse merger
or other similar transaction being negotiated or considered by us. By placing
sole ownership of the Company in the hands of the Investors, the restructuring
agreement gives them flexibility of utilizing a public company shell for other
business opportunities as well as keeping their same ownership in Privco with
the ability to operate the entity or dispose of assets in connection with a
shareholder vote.
The
following tables identify each of the Investors and the Founders and the number
and percentage of the Company’s common stock held by each:
|
Name
|
Number
of Shares
|
Percentage
of Common Stock Outstanding
|
||||||
|
Investors:
|
||||||||
|
Caron
Partners LP
|
246,500 | 3.0 | % | |||||
|
Marc
I. Abrams
|
28,571 | 0.3 | % | |||||
|
Douglas
Gold
|
203,571 | 2.5 | % | |||||
|
Stuart
A. Liner
|
71,429 | 0.9 | % | |||||
|
Steven
M & Sheila A. Gold
|
71,429 | 0.9 | % | |||||
|
Tangiers
Investors, L.P.
|
142,857 | 1.7 | % | |||||
|
MLPF&S:
Jerome Cowan
|
71,429 | 0.9 | % | |||||
|
Jeremy
Roll
|
28,572 | 0.3 | % | |||||
|
Bernard
& Twyla Vosika
|
71,429 | 0.9 | % | |||||
|
Sally
& Naomi Maslon JTWROS
|
28,571 | 0.3 | % | |||||
|
Michael
Sobeck
|
14,286 | 0.2 | % | |||||
|
Cavalier
Consulting Corp.
|
71,429 | 0.9 | % | |||||
|
RP
Capital
|
183,991 | 2.2 | % | |||||
|
Brian
Weitman
|
42,599 | 0.5 | % | |||||
|
Bellajule
Partners LP
|
102,429 | 1.3 | % | |||||
|
Morris
Esquenazi
|
100,000 | 1.2 | % | |||||
|
Schwartz
Holding
|
500,000 | 6.1 | % | |||||
|
Jack
& Thelma Farbman
|
100,000 | 1.2 | % | |||||
|
Morrie
R. Rubin
|
50,000 | 0.6 | % | |||||
|
Lee
M. Terpstra & Orlando Stephenson
|
100,000 | 1.2 | % | |||||
54
|
Name
|
Number
of Shares
|
Percentage
of Common Stock Outstanding
|
||||||
|
Bernard
Puder Revocable Trust
|
430,000 | 5.3 | % | |||||
|
Thomas
J. Klas
|
71,429 | 0.9 | % | |||||
|
Chad
Ruwe
|
571,429 | 7.0 | % | |||||
|
Peter
Abramowicz
|
57,143 | 0.7 | % | |||||
|
Scott
R. Storick
|
100,000 | 1.2 | % | |||||
|
James
Dauwalter Living Trust
|
571,429 | 7.0 | % | |||||
|
CGMI
as IRA Custodian FBO John D. Villas
|
71,429 | 0.9 | % | |||||
|
Stan
Geyer Living Trust
|
71,429 | 0.9 | % | |||||
|
Jimmy
Taylor, IV
|
571,429 | 7.0 | % | |||||
|
Gregory
B, Graves
|
42,857 | 0.5 | % | |||||
|
Fenton
Fitzpatrick
|
8,571 | 0.1 | % | |||||
|
Peter
Persad
|
71,429 | 0.9 | % | |||||
|
Thomas
M. Pronesti
|
55,964 | 0.7 | % | |||||
|
Craig
Kulman
|
38,821 | 0.5 | % | |||||
|
Kulman
IR LLC
|
125,000 | 1.5 | % | |||||
|
Cross
Street Partners, Inc.
|
125,000 | 1.5 | % | |||||
|
Namaste
Financial, Inc.
|
125,000 | 1.5 | % | |||||
|
Ryan
Hong
|
57,404 | 0.7 | % | |||||
|
Richardson
& Patel LLP
|
60,714 | 0.7 | % | |||||
|
Sean
Fitzpatrick
|
150,000 | 1.8 | % | |||||
|
David
Baker
|
225,000 | 2.8 | % | |||||
|
Si
Phillips
|
50,000 | 0.6 | % | |||||
|
Cameron
Broumand
|
35,000 | 0.4 | % | |||||
|
Sylvia
Karayan
|
11,646 | 0.1 | % | |||||
|
Jason
Cavalier
|
15,000 | 0.2 | % | |||||
|
Greg
Suess
|
104,114 | 1.3 | % | |||||
|
Ben
Padnos
|
100,000 | 1.2 | % | |||||
|
Nimish
Patel
|
412,411 | 5.0 | % | |||||
|
Erick
Richardson
|
399,543 | 4.9 | % | |||||
|
Mark
Abdou
|
32,907 | 0.4 | % | |||||
|
Addison
Adams
|
8,227 | 0.1 | % | |||||
|
Michael
Cavalier
|
8,227 | 0.1 | % | |||||
|
Mick
Cavalier
|
8,227 | 0.1 | % | |||||
|
Francis
Chen
|
2,334 | 0.0 | % | |||||
|
Doug
Croxall
|
6,170 | 0.1 | % | |||||
|
Jennifer
& Michael Donahue
|
28,009 | 0.3 | % | |||||
|
Egavnit
LLC
|
13,710 | 0.2 | % | |||||
|
Dan
Estrin
|
823 | 0.0 | % | |||||
|
Kevin
Friedmann
|
1,440 | 0.0 | % | |||||
|
Abdul
Ladha
|
4,114 | 0.1 | % | |||||
|
Jody
Samuels
|
8,227 | 0.1 | % | |||||
|
Yossi
Stern
|
10,284 | 0.1 | % | |||||
|
Steve
Yakubov
|
10,284 | 0.1 | % | |||||
|
Total
|
7,101,266 | 86.8 | % | |||||
55
|
Name
|
Number
of Shares
|
Percentage
of Common Stock Outstanding
|
||||||
|
Lawrence
W. Gadbaw
|
139,163 | 1.7 | % | |||||
|
Peter
L. Morawetz
|
107,739 | 1.3 | % | |||||
|
Gerald
D. Rice
|
85,293 | 1.0 | % | |||||
|
Jay
D. Nord
|
102,335 | 1.3 | % | |||||
|
Sophia
M. Nord, Trust
|
29,927 | 0.4 | % | |||||
|
Emily
A. Nord, Trust
|
29,927 | 0.4 | % | |||||
|
Jeffrey
K. Drogue
|
53,869 | 0.7 | % | |||||
|
Jonathon
N. Drogue, Trust
|
29,927 | 0.4 | % | |||||
|
Samantha
N. Drogue, Trust
|
29,927 | 0.4 | % | |||||
|
Staci
M. Lauer (Spade)
|
35,913 | 0.4 | % | |||||
|
Wisconsin
Rural Enterprise
|
37,709 | 0.5 | % | |||||
|
Richard
E. & Carol A. Thurk
|
5,985 | 0.1 | % | |||||
|
Thomas
W. Gadbaw
|
599 | 0.0 | % | |||||
|
Gail
C. & Ginger L. Smith
|
2,993 | 0.0 | % | |||||
|
Charles
W. Gadbaw
|
299 | 0.0 | % | |||||
|
Judith
A. Bright
|
1,496 | 0.0 | % | |||||
|
Marshall
C. Ryan
|
71,906 | 0.9 | % | |||||
|
Alice
I. North
|
399 | 0.0 | % | |||||
|
Arliss
A. Gadbaw
|
400 | 0.0 | % | |||||
|
Gaynelle
A. Templin
|
399 | 0.0 | % | |||||
|
Kevin
R. Davidson
|
29,927 | 0.4 | % | |||||
|
Mark
K. Lawlis
|
9,577 | 0.1 | % | |||||
|
Wisconsin
Business Innovation Corporation
|
2,993 | 0.0 | % | |||||
|
Andcor
Companies, Inc.
|
128,571 | 1.6 | % | |||||
|
Wisconsin
Rural Enterprise Fund
|
142,291 | 1.7 | % | |||||
|
Total
|
1,079,566 | 13.2 | % | |||||
Employees
We
currently have 4 full-time employees, a Chief Executive Officer, a Chief
Financial Officer, an Executive Vice President of Operations and a Director of
Sales. In addition, we use contractors and consultants to supplement our
functional needs. We will seek to add additional employees in sales and
marketing, operations, product development and other areas as we grow and
penetrate the market. No employee is represented by a labor union, and we have
never suffered an interruption of business caused by labor disputes. Management
believes that our relations with our employees are good.
56
We
are not a party to any 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.
Our
corporate offices are located at 2060 Centre Pointe Boulevard, Suite 7, Mendota
Heights, Minnesota 55120. We currently lease approximately 3,600 square feet
with possible expansion to 4,700 square feet of office space at this location.
The monthly base rent for the 3,600 square feet is $3,000 per month for months 1
through 12; $2,395 per month for months 13 through 24; $2,467 per month for
months 25 through 36; $2,541 per month for months 37 through 48; and $2,617 per
month for months 49 through 60. In addition to the base rent, we also pay our
share of common area maintenance expenses, real estate tax expenses/assessments
and utilities, which are determined by the square footage of the premises we
lease. The common area maintenance expense is not applicable in months 1 through
12, but will be in place for the remainder of the lease. The lease term began on
November 1, 2008 and will extend for a period of 5 years, ending on October 31,
2013. We expect that the premises in which our principal executive office is
located will be adequate for our office needs for term of the
lease.
57
The
following table identifies our current executive officers and
directors.
|
Name
|
Age
|
Position
Held
|
||
|
Lawrence
W. Gadbaw
|
71
|
Chairman
of the Board of Directors
|
||
|
Kevin
R. Davidson
|
48
|
President,
Chief Executive Officer and Director
|
||
|
Gerald
D. Rice
|
66
|
Chief
Financial Officer, Secretary and Director
|
||
|
Chad
A. Ruwe
|
44
|
Executive
Vice President of Operations and Director
|
||
|
Peter
L. Morawetz
|
81
|
Director
|
||