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
|
||
|
Thomas
J. McGoldrick
|
67
|
Director
|
||
|
Andrew
P. Reding
|
38
|
Director
|
We
have not set a term of office for any of our directors and each director will
serve until their successors are elected and have duly
qualified.
There
are no family relationships between any of our directors or executive officers.
Our executive officers are appointed by our board of directors and serve at the
board’s discretion. There is no arrangement or understanding between any of our
directors or executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or
officer.
None
of our directors or executive officers has, during the past five
years,
|
•
|
had
any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer, either at the time of
the bankruptcy or within two years prior to that time,
|
|
|
•
|
been
convicted in a criminal proceeding and none of our directors or executive
officers is subject to a pending criminal proceeding,
|
|
|
•
|
been
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities, futures, commodities or
banking activities, or
|
|
|
•
|
been
found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or
vacated.
|
Business
Experience
Lawrence
W. Gadbaw, Chairman of the Board of Directors. Mr. Gadbaw has served as a
director since our inception in 2002. He served as our President and Chief
Executive Officer from 2002 to 2006 and Executive Vice President Business
Development from 2006 to 2008. Mr. Gadbaw has also been Chairman of Health Care
Marketing, Inc., a manufacturer and marketer of health care products, since
1992. From 1990 to 1992, he was President, Chief Operating Officer and Director
of Augustine Medical, Inc., a manufacturer of hypothermia treatment products.
Mr. Gadbaw was President, Chief Executive Officer, Treasurer and Director of
Bio-Vascular, Inc., a manufacturer of tissue and biosynthetic-based medical
devices and grafts for cardiovascular surgery, from 1985 to 1989. From 1979 to
1981, he was Director of Sales and Marketing for Medical Incorporated, a
manufacturer of cardiovascular products. Mr. Gadbaw was General Manager of Sween
Corporation, a manufacturer of health care products, from 1977 to 1979. He held
numerous positions in marketing and sales with Medtronic, Inc., a manufacturer
and distributor of cardiovascular products from 1967 to 1977, including the
position of Director of U.S. Sales.
58
Kevin
R. Davidson, President and Chief Executive Officer. Mr. Davidson has
served as our President and Chief Executive Officer since 2006 and has several
years of experience in the medical technology sector. He has been the Chief
Financial Officer of three medical technology companies including his most
recent position beginning in 2003 as Chief Financial Officer, Vice President of
Business Development at OrthoRehab, Inc., where he lead the successful sale of
the organization to Otto Bock GmbH. In addition to his Chief Financial Officer
experience, Mr. Davidson was an investment banker in the medical technology
sector as a Managing Director with the Arthur Andersen Global Corporate Finance
Group from 1998 to 2002, where he led and closed several transactions in this
sector. Mr. Davidson also has experience in the corporate development function
in the medical area, including holding positions at St. Jude Medical, Inc. from
1989 to 1992. In addition, he has extensive domestic and international
experience as a management consultant in this area. Mr. Davidson received a BA
in Economics from Gustavus Adolphus College in 1982 and an MBA from The Colgate
Darden Graduate School of Business Administration at the University of Virginia
in 1986.
Gerald
D. Rice, Chief Financial Officer and Secretary. Mr. Rice has over thirty
years of executive financial experience and has served as our Chief Financial
Officer and Secretary since our inception in 2002. From 1999 to 2002, he
provided financial consulting at a private practice and he served as Controller
of Medical Graphics Corporation from 1998 to 1999. From 1995 to 1998, Mr. Rice
served as Chief Financial Officer of Road Rescue and prior to that, from 1979 to
1995, he held various positions as Chief Financial Officer or financial
consultant at several companies. Mr. Rice spent ten years from 1969 to 1979 as a
manufacturing consultant for the public accounting firms of Arthur Andersen
& Co. and RSM McGladrey. During that time, he worked with a diverse array of
clients, including MTS, Arctic Cat, TESCOM and Lester’s, designing and
installing manufacturing information systems. Mr. Rice is a Certified Public
Accountant and holds several other certifications in various fields. He received
his business degree from the University of Minnesota in 1967 and his Masters of
Business Administration from the University of Minnesota in 1988.
Chad
A. Ruwe, Executive Vice President of Operations. Mr. Ruwe became our
Executive Vice President of Operations in 2008. He has over 20 years experience
in global business leadership in critical fluid management industries focused on
containment, management, and delivery of highly toxic and corrosive fluids. From
2002 to 2007 he held several senior management positions with Entegris, Inc.,
including General Manager of NT International, a wholly owned subsidiary of
Entegris, Vice President of the Fluid Handling Systems business, Vice President
of the Semiconductor business and Vice President & General Manager of the
Liquid MicroContamination business. From 1996 to 2002, Mr. Ruwe was with Tescom
Corporation (now part of Emerson’s Climate Technologies Group) serving as Vice
President & General Manager of the High Purity Controls Division and Hankuk
Tescom, Ltd., an assembly and test facility in South Korea. Mr. Ruwe held
several management level positions at Parker Hannifin Corporation from 1987 to
1996. Mr. Ruwe has previously served on the board of directors for two early
stage venture start-ups. He holds a Master of Science degree in Management,
specializing in Operations Research, from the University of Alabama and he
received his Bachelor of Science degree in Mechanical Engineering, specializing
in Fluid Dynamics, from The Ohio State University in Columbus,
Ohio.
Peter
L. Morawetz, PhD, Director. Dr. Morawetz is a consultant to
development-stage companies in the medical and high technology field. He has
served as a director of the Company since its inception in 2002. From 1985 to
2002, he provided consulting services in the fields of technology and product
positioning for a large number of U.S. and foreign corporations. Notable clients
included Medtronic, EMPI, Hutchinson Technologies, Minntech, Bauer Biopsy
Needles, American Medical, Lectec and Walker Reading Technologies. In the course
of a thirty-year career, he covered progressively important positions in
engineering and R&D management. His contributions include development of
neurological devices at Medtronic, Inc. from 1971 to 1981 and EMPI, Inc. from
1981 to 1985, as well as magnetic-storage devices at Univac from 1958 to 1961
and again from 1965 to 1967 and Fabri-Tek from 1961 to 1965. He has seven
patents and has been active in market planning and corporate
development.
59
Thomas
J. McGoldrick, Director. Mr. McGoldrick has served as a director of the
Company since 2005. Prior to that, he served as Chief Executive Officer of
Monteris Medical Inc. from November 2002 to November 2005. He has been in the
medical device industry for over thirty years and most recently was cofounder
and Chief Executive Officer of Fastitch Surgical in 2000. Fastitch is a startup
medical device company with unique technology in surgical wound closure. Prior
to Fastitch, Mr. McGoldrick was President and Chief Executive Officer of
Minntech from 1997 to 2000. Minntech is a $75 million per year publicly traded
(NASDAQ-MNTX) medical device company offering services for the dialysis,
filtration, and separation markets. Prior to employment at Minntech from 1970 to
1997, he held senior marketing, business development and international positions
at Medtronic, Cardiac Pacemakers, Inc. and Johnson & Johnson. Mr. McGoldrick
is on the board of directors of two other startup medical device
companies
Andrew
P. Reding, Director. Mr. Reding is an executive with extensive experience
in sales and marketing of capital equipment for the acute care markets. He has
served as a director of the Company since 2006 and he is currently the President
and Chief Executive Officer of TRUMPF Medical Systems, Inc., a position he has
held since April 2007. Prior to that, he was Director of Sales at Smith &
Nephew Endoscopy and prior to that, he served as Vice President of Sales and
Director of Marketing with Berchtold Corporation from 1994 to 2006. His
experience is in the marketing and sales of architecturally significant products
for the operating room, emergency department and the intensive care unit. Mr.
Reding has successfully developed high quality indirect and direct sales
channels, implemented programs to interface with facility planners and
architects and developed GPO and IDN portfolios. Mr. Reding holds a bachelors
degree from Marquette University and an MBA from The University of South
Carolina.
We
have set up a Medical Advisory Board to assist us in understanding the needs of
our market and ways to better serve that market. From time to time our 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.
Dr. Arnold S. Leonard, MD, PhD.
Dr. Leonard, an outstanding Minnesota-born and world-wide medical
pioneer, has been a surgeon specializing in orthopedic anterior spine approaches
and pediatric surgery from 1956 to 2006. He has distinguished himself in a
great number of areas too numerous to detail: University of Minnesota (UM)
1956-2004 where he was a Professor of Surgery and Chair in Pediatric Surgery;
membership in 13 medical societies; receiver of many special honors and awards
including The Wangensteen Distinguished Professor Award for Excellence in
Teaching; member of several hospital and national medical committees; lecturer
and author of over 250 abstracts, publications and presentations. He has
also performed several research projects in the treatment of cancer using
genetic engineering to boost the immune system. The Arnold S. Leonard, M.D.,
Ph.D. Chair in Pediatric Surgery was awarded to Dr. Leonard by the University of
Minnesota as an endowed scholar, alongside two other distinguished Minnesota
physicians, Dr. C. Walton Lillihei, MD, PhD, and Dr. Owen H. Wangensteen, MD,
PhD.
David Feroe. Mr. Feroe is a
practicing nurse anesthetist at Fairview University Hospital and also has a
private consulting practice. He previously served as a clinical research
executive with Augustine Medical, Inc. while in practice at Fairview University
Hospital. He was instrumental in gaining medical facility acceptance of
Augustine's innovative patient warming devices.
Debbie Heitzman, RN. Ms.
Heitzman, a healthcare planning consultant with Strategic Hospital Resources,
has more than 25 years of international experience as a consultant in clinical
architecture and design, medical equipment planning, clinical consulting and
nursing. Ms. Heitzman is a member of the educational faculty of Harvard
Graduate School of Design Professional Development Program. She formed
Strategic Hospital Resources in 2003 and is a principal in that firm. In
the course of her Practice, she is called upon to assist medical facilities in
designing and planning equipment for operating rooms.
Mary Wells Gorman, RN, CID.
Ms. Gorman, a healthcare planning consultant with Gorman Resources Ltd.,
has 14 years of nursing practice and 15 years of healthcare architectural
projects with her own consulting firm. Like Ms. Heitzman, Ms. Gorman works
with healthcare clients in facility programming and planning. She is an
advocate for healthcare administrative policy change and was instrumental in
changing the Minnesota Health Department's guidelines for inpatient care so that
healing environments are more firmly integrated into inpatient
practice.
60
There
are no family relationships between any of the members of the Medical Advisory
Board and any of our directors or executive officers nor any arrangement or
understanding with any of our directors or executive officers pursuant to which
any of the Medical Advisory Board members was selected.
None
of the members of the Medical Advisory Board has, during the past five years,
(i) had any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer, either at the time of the
bankruptcy or within two years prior to that time; (ii) been convicted in a
criminal proceeding and none of our directors or executive officers is subject
to a pending criminal proceeding; (iii) been subject to any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities, futures, commodities or banking activities; or (iv) been found by a
court of competent jurisdiction (in a civil action), the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated.
Other
than the warrant agreements described below, there are no agreements between the
Company and any of the members of the Medical Advisory Board.
In
2005, we issued warrants to purchase 2,993 shares of our common stock at $1.67
per share to each of Debbie Heitzman, Mary Wells Gorman and David Feroe for
their services on the Medical Advisory Board.
In
2006, we issued warrants to purchase 35,913 shares of our 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 the Company’s total outstanding shares reaching 2 million. The
second 35,913 shares of our common stock were granted to Mr. Leonard in June
2008 when we achieved the 2 million in outstanding shares of common stock
through the October 2008 financing.
In
addition, three individuals, Karen Ventura, Nancy Kolb and Kim Shelquist,
provided the Company with sales and marketing advisory services in 2006. In
consideration for their services, we granted each of them warrants to purchase
2,993 shares of our common stock at $1.67 per share.
61
Executive
Compensation
Summary
of Compensation
The
following table summarizes all compensation for the fiscal year ended December
31, 2007 paid to our President and Chief Executive Officer and our Chief
Financial Officer and Secretary. No executive officer received total
compensation exceeding $100,000 during the fiscal year ended 2007.
Summary
Compensation Table
|
Name
and principal
position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity
Incentive
Plan
Compen-
sation
($)
|
Nonquali-
fied
Deferred
Compen-
sation
Earnings
($)
|
All
Other
Compen-
sation
($)
|
Total
($)
|
|||||||||
|
Kevin
R. Davidson, President and Chief Executive Officer
|
2007
|
150,000
|
23,000
|
173,000(1)
|
||||||||||||||
|
Gerald
D. Rice, Chief Financial Officer and Secretary
|
2007
|
110,000
|
46,000
|
156,000(2)
|
||||||||||||||
|
(1)
|
In
2007, although Mr. Davidson was entitled to $150,000 in base salary under
his employment agreement, he received $59,375 in base salary, which is
less than he was entitled to, due to lack of funds by the
Company. In December 2007, upon request from our funding
brokers, we reduced accrued payroll liabilities by a total of $346,714
through November 2007 (of which Mr. Davidson had waived compensation in
the aggregate amount of $70,000). 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. The shares will vest and
the bonus will be paid when the Company raises an additional $3 million of
funding subsequent to the financing completed in October 2008. To date
there has been no stock issuance from this grant. No compensation expense
has been computed for financial statement reporting purposes for the
options granted to Mr. Davidson because no vesting of the options have
occurred since vesting is contingent upon the Company raising $3
million.
|
|
(2)
|
In
2007, although Mr. Rice was entitled to $110,000 in base salary under his
employment agreement, he received $43,542 in base salary, which is less
than he was entitled to, due to lack of funds by the Company. In December
2007, upon request from our funding brokers, we reduced accrued payroll
liabilities by $346,714 through November 2007 (of which Mr. Rice had
waived compensation in the aggregate amount of $125,000). In exchange
therefor, 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 bonus will be paid when we raise an additional $3
million of funding subsequent to the financing completed in October 2008.
To date there has been no stock issuance from this grant. No compensation
expense has been computed for financial statement reporting purposes for
the options granted to Mr. Rice because no vesting of the options have
occurred since vesting is contingent upon the Company raising $3
million.
|
62
Outstanding
Equity Awards at Fiscal Year-End
The table
below provides information concerning unexercised options that has not yet
vested for our President and Chief Executive Officer and our Chief Financial
Officer and Secretary outstanding as of December 31, 2007. To date, there
have been no stock issuances from these option grants.
Outstanding
Equity Awards at Fiscal Year-End Table
|
Option
awards
|
Stock
awards
|
||||||||||||||||||||||||||||||||
|
Name
|
Number
of securities underlying unexercised options
(#)
exercisable
|
Number
of securities
underlying
unexercised
options
(#)
unexercisable
|
Equity
incentive
plan
awards: Number of
securities
underlying
unexercised
unearned
options
(#)
|
Option
exercise
price
($)
|
Option
expiration date
|
Number
of shares or units of stock that have not vested
(#)
|
Market
value of shares of units of stock that have not vested
($)
|
Equity
incentive
plan
awards: Number of
unearned
shares,
units or other rights that have not vested
(#)
|
Equity
incentive
plan
awards: Market or payout value of
unearned
shares,
units or other rights that have not vested
($)
|
||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||||||||||||||||||||||||
|
Kevin
R. Davidson, President and Chief Executive Officer
|
- | 80,000 | (1) | - | $ | .35 |
12/31/13
|
- | - | - | - | ||||||||||||||||||||||
|
Gerald
D. Rice, Chief Financial Officer and Secretary
|
- | 160,000 | (1) | - | $ | .35 |
12/31/13
|
- | - | - | - | ||||||||||||||||||||||
|
(1)
|
Vesting
of these stock options is contingent upon the Company achieving $3 million
in total investment funding.
|
Discussion
of Compensation
Our
board of directors currently evaluates and sets the compensation policies and
procedures for our executive officers but as soon as established, this function
will be performed by a compensation committee composed solely of independent
directors. Except as provided for in the employment agreements described below,
annual reviews generally determine future salary and bonus amounts for our
executive officers, as a part of the Company’s compensation
procedures.
The
amounts reflected in the descriptions of the employment agreements for Mr.
Davidson and Mr. Rice below differ from the amounts disclosed in the Summary
Compensation Table because the Company did not pay them their full salaries due
to lack of funds.
Employment
Agreements, Termination of Employment and Change-in-Control
Arrangements
The
following discussions provide a description of the material terms and conditions
of the employment agreements described below. The discussions are qualified in
their entirety by the full text of the agreements.
We
entered into an employment agreement with Kevin R. Davidson, President and Chief
Executive Officer, on October 4, 2006. The term of the agreement is four years
and is automatically renewable except by action of our board of directors. The
agreement provides for an annual base salary of $150,000 (payable beginning when
cumulative new funding for the Company reaches $250,000), with an increase to
$170,000 upon reaching funding of $1,000,000 and $200,000 upon reaching
cumulative net sales of $5,000,000. Mr. Davidson is eligible to participate in
the Company’s bonus plan when it is completed and approved by our board of
directors or compensation committee when established. In addition, pursuant to
his employment agreement, Mr. Davidson is entitled to an initial grant of 50,000
shares of BioDrain common stock with 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 therefore his annual salary was
increased to $170,000. In addition, on September 12, 2008, our board of
directors ratified the issuance of the 543,292 options to Mr. Davidson as a
result of the milestones achieved pursuant to his employment
agreement.
63
In
2007, Mr. Davidson earned $59,375 in base salary, which is less than he was
entitled to under his employment agreement, due to lack of funds by the
Company. In December 2007, upon request from our funding brokers, we
reduced accrued payroll liabilities by a total of $346,714 through November 2007
(of which Mr. Davidson had waived compensation in the aggregate amount of
$70,000). 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. The shares will vest and the bonus will be paid when the Company
raises an additional $3 million of funding subsequent to the financing completed
in October 2008. To date there has been no stock issuance from this
grant.
Mr.
Davidson is also eligible for stock, stock options, deferred compensation, and
life insurance, as approved by our board of directors or compensation committee
when established, and reimbursements for all reasonable, deductible and
substantiated expenses, including, but not limited to, automobile mileage,
telephone, cell phone, and expenses related to home office and business
meetings. Mr. Davidson is entitled to a minimum of three weeks’ vacation per
year. In connection with the agreement, Mr. Davidson was granted a position on
our board of directors with the option of submitting for board approval one
nominee for Board membership.
We
entered into an employment agreement with Gerald D. Rice, Chief Financial
Officer and Secretary, on October 18, 2006. The term of the agreement is four
years and is automatically renewable except by action of our board of directors.
The agreement provides for an annual base salary of $118,000 (payable beginning
when cumulative new funding for the Company reaches $250,000). Mr. Rice is
eligible to participate in the Company’s bonus plan when it is completed and
approved by our board of directors or compensation committee when
established.
In
2007, Mr. Rice earned $43,542 in base salary, which is less than he was entitled
to under his employment agreement, due to lack of funds by the Company. In
December 2007, upon request from our funding brokers, we reduced accrued payroll
liabilities by $346,714 through November 2007 (of which Mr. Rice had waived
compensation in the aggregate amount of $125,000). In exchange therefor, 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
bonus will be paid when we raise an additional $3 million of funding subsequent
to the financing completed in October 2008. To date there has been no stock
issuance from this grant.
Mr.
Rice is also eligible for stock, stock options, deferred compensation, and life
insurance, as approved by our board of directors or compensation committee when
established, and reimbursements for all reasonable, deductible and substantiated
expenses, including, but not limited to, automobile mileage, telephone, cell
phone, and expenses related to home office and business meetings. Mr. Rice is
entitled to a minimum of three weeks’ vacation per year. In connection with the
agreement, Mr. Rice was granted a continued position on our board of
directors.
The
following termination, change of ownership and cessation of business clauses
apply to the employment agreements for Mr. Davidson and Mr. Rice, collectively
referred to as “Employee”:
We
are entitled to terminate Employee’s employment for “cause” at any time during
the term of the Employee’s employment and Employee may voluntarily resign from
his employment with us at any time. For purposes of the agreements, termination
for “cause” means termination for any of the following reasons:
|
a. the
continued noncompliance by the Employee with our directors’ written
instructions, directives or regulations, after fifteen (15) days’ written
notice of such noncompliance from us; a breach by the Employee of any
material term of the employment agreement, which breach is not cured
within seven (7) days of written notice thereof from us; unsatisfactory
performance of employment duties, obligations and work and production
standards that is not corrected within thirty (30) days after written
notice of such unsatisfactory performance from us, or such longer period
as specified in such notice;
|
64
|
b. malfeasance,
misfeasance, or nonfeasance by the Employee in the course of his
employment;
|
||
|
c. fraud
or a criminal act committed by Employee, provided such criminal act
adversely affects our business;
|
||
|
d. any
breach by Employee of his fiduciary duties and obligations to us or any
act or omission of Employee constituting a breach of his obligations
contained in the confidentiality and non-competition agreements entered
into by and between the Company and the Employee; and
|
||
|
e. the
Employee’s voluntary resignation at any
time.
|
||
In
the event of termination for cause, Employee is only entitled to receive payment
of base salary, adjusted pro-rata to the date of termination, subject to offset,
and to the extent permitted, for any amounts then owed to us by the
Employee.
In
the event the Employee is terminated by us without cause, Employee will be
entitled to receive an amount equal to twelve (12) months of Employee’s annual
base salary for the year of termination, conditioned upon (i) the return to us
in good condition any property owned by or belonging to us; (ii) Employee’s
disclosure of any passwords or procedures necessary for access to any computer
software or program; and (iii) Employee’s continued adherence to the
confidentiality and non-competition agreements entered into by and between the
Company and Employee for two (2) years from the date of
termination.
In
the case of any termination, the Employee’s rights and obligations regarding
stock options and shares of the Company’s common stock owned by the Employee
will be determined in accordance with and be governed by any shareholder
agreement entered into by and between the Company and the Employee and the 2008
Stock Option Plan.
Employee
may terminate this agreement for good reason and may also terminate without good
reason by giving a notice of termination during the year immediately following a
change in control of more than 40% of our outstanding common stock, with the
exception of stock issued by us, provided that, with the exception of dilution,
Employee is adversely affected by such change in control. In the case of
termination for good reason or without good reason, Employee will be entitled to
the same payments and benefits as if Employee was terminated by us without
cause.
Upon
the death or disability of the Employee, bonuses and other related benefits will
be paid pro-rata for the year in which such event occurred. The employment
agreements will remain in force in the event the Company is sold or if majority
ownership passes from the existing majority shareholders. The employment
agreements (and the confidentiality and non-competition agreements entered into
by the Company and the Employee) will become null and void in the event the
Company becomes insolvent or ceases business due to lack of funds.
We
entered into an employment agreement with Chad A. Ruwe, Executive Vice President
Operations, on June 16, 2008. Pursuant to the agreement, upon execution of an
investment in the Company of $200,000, we agreed to employ Mr. Ruwe for two
years, with such term to be automatically renewable annually except by action of
our President or board of directors. The agreement provides for an annual base
salary of $135,000. Pursuant to the agreement, Mr. Ruwe received a one-time
signing bonus of $15,000 and will be eligible to participate in the Company’s
bonus plan when it is completed and approved by our board of directors or
compensation committee when established. Mr. Ruwe is eligible to receive stock
options to purchase 250,000 shares of BioDrain common stock at $.35 per share,
which is governed by the 2008 Stock Option Plan. The options vest as follows:
(i) 50,000 shares upon execution of the employment agreement; (ii) an additional
50,000 shares upon submission of the 510(k) to the FDA for approval of the FMS
unit; (iii) an additional 50,000 shares upon approval of the 510(k) by the FDA;
(iv) an additional 50,000 shares upon the sale of the first commercial-ready FMS
unit; and (v) an additional 50,000 shares upon sale of the fiftieth
commercial-ready FMS unit.
65
Mr.
Ruwe is also eligible for stock, stock options, deferred compensation, and life
insurance, as approved by our board of directors or compensation committee when
established, and reimbursements for all reasonable, deductible and substantiated
expenses, including, but not limited to, automobile mileage, telephone, cell
phone, and expenses related to home office and business meetings. In addition,
beginning as of the date of his employment agreement, Mr. Ruwe receives a
monthly benefit amount of $1,000 until a Company-sponsored medical benefits
program is established. Mr. Ruwe is entitled to a minimum of three weeks’
vacation per year. In connection with the agreement, Mr. Ruwe was granted a
position on our board of directors.
Mr.
Ruwe’s employment agreement also provides that throughout his employment and for
one (1) year thereafter, he shall not, for any reason, directly or indirectly,
plan, organize, advise, own, manage, operate, control, be employed by,
participate or be connected in any manner with the ownership, management or
control of any business engaged in the development, marketing and sales of
medical devises dedicated or designed to safely manage and dispose of
contaminated fluids generated in the operating room and other similar locations.
For the purposes of the agreement, indirect competition includes any activity in
aid of a competing business such as being a partner, shareholder, officer,
director, member, owner, manager, governor, agent, employee, advisor, consultant
or independent contractor of any competing business. Furthermore, Mr. Ruwe’s
employment agreement provides that all rights, titles and interests of every
kind and nature, whether currently known or unknown, in any “Intellectual
Property” defined to include patent rights, trademarks, copyrights, ideas,
creations and properties invented, created, written, developed, furnished,
produced or disclosed by Mr. Ruwe in the course of his service to the Company,
shall be and remain the sole and exclusive property of the Company and Mr. Ruwe
shall have no right, title or interest therein or thereto or in and to any
results and proceeds therefrom. Also under the agreement, subject to applicable
Minnesota Statutes, Mr. Ruwe agreed to irrevocably assign to us, all worldwide
rights, title and interest, in perpetuity, in respect of any and all rights he
may have or acquired in the Intellectual Property, to waive any moral rights he
may have or many obtain in the Intellectual Property, and to assist us in every
proper way to apply for, obtain, perfect and enforce rights in the Intellectual
Property and to execute all documents for use in applying for, obtaining and
perfecting such rights and enforcing the same as the Company may
desire.
In
addition, the following terms apply to the employment agreement for Mr. Ruwe,
also referred to as “Employee”:
We
are entitled to terminate Employee’s employment for “cause” at any time during
the term of the Employee’s employment. For purposes of Mr. Ruwe’s employment
agreement, for “cause” shall mean termination for any of the following
reasons:
a. the
material noncompliance by Employee with written instructions, directions or
regulations of our board of directors applicable to him, the breach of any
material term of the agreement, or the unsatisfactory performance of his duties,
obligations, work and production standards and the failure of Employee to
correct such non-compliance, breach or performance within thirty (30) days after
receipt by him of written notice of the same by us;
b.
any willful or grossly
negligent act by Employee having the effect of materially injuring the Company,
as determined by a majority vote of our board of directors (excluding
Employee);
c. the
commission by Employee of fraud or a criminal act that adversely affects our
business; or
d. the
determination by an affirmative vote of the majority of our board of directors
(excluding Employee), after reasonable and good faith investigation by the
Company following a written allegation by another Company employee that he
engaged in some for of harassment or other improper conduct prohibited by law,
unless such actions were specifically directed by our board.
66
In
the event of termination for cause, Employee is only entitled to receive payment
of base salary, adjusted pro-rata to the date of termination, subject to offset,
and to the extent permitted, for any amounts then owed to us by the Employee.
The Employee’s rights and obligations regarding stock options and shares of the
Company’s common stock owned by the Employee will be determined in accordance
with and be governed by any shareholder agreement entered into by and between
the Company and the Employee and the 2008 Stock Option Plan, as well as taking
into account the completion (or non-completion) of Mr. Ruwe’s aforementioned
milestones. Only stock options that have vested as a result of completed
milestones are eligible for ownership by the Employee in the event of
termination for cause.
In
the event the Employee is terminated by us without cause, Employee will be
entitled to receive an amount equal to twelve (12) months of Employee’s annual
base salary for the year of termination as well as bonus payments on a pro-rata
basis for the portion of the year at termination, conditioned upon (i) the
return to us in good condition any property owned by or belonging to us; and
(ii) Employee’s disclosure of any passwords or procedures necessary for access
to any computer software or program. In lieu of a shareholders agreement, all
non-vested stock options held by Mr. Ruwe shall immediately vest upon
termination by us without cause and we will provide outplacement services, upon
mutual agreement between the Employee and our President and Chief Executive
Officer, for an amount of $15,000 for one (1) year.
Employee
may terminate his employment at any time for good reason. For the purposes of
the agreement, “good reason” means (i) any material breach by us of the
agreement that is not cured by us within thirty (30) days after receipt of
written notice from Employee of such breach; (ii) any material diminution or
adverse change to Employee of his duties, responsibilities, rights, or reporting
relationships available to him before at the time of such diminution or change,
without his consent, except as a result of termination by us for cause; (iii)
any requirement from our board of directors that Employee must relocate his
office outside the Twin Cities metropolitan area; or (iv) by Employee giving a
notice of termination during the year immediately following a change in control
of more than 40% of our outstanding common stock, except stock issued by us,
provided that, with the exception of dilution, Employee is adversely affected by
the change in control.
Employee
may also terminate employment at any time for any reason with one (1) month
notice and in such case, agrees to aid in transition and exit from the Company
causing no harm or hardship during such transition. Employee is not eligible for
salary continuation or bonus if he voluntarily resigns for reasons other than
good reason.
Upon
the death or disability of the Employee, bonuses and other related benefits will
be paid pro-rata for the year in which such event occurred. The employment
agreement will remain in force in the event the Company is sold or if majority
ownership passes from the existing majority shareholders and in such case, all
of Mr. Ruwe’s non-vested stock options, whether the milestone has been achieved
or not, shall become vested with the completion of the sale. The employment
agreement and all the terms thereof will become null and void in the event the
Company becomes insolvent or ceases business due to lack of funds.
In
2008, Mr. Ruwe invested $200,000 and received 571,429 shares of common stock and
warrants to purchase to 571,429 shares of common stock at $0.46 per
share.
Compensation
of Directors
None
of our directors received compensation during the fiscal year ended December 31,
2007. Lawrence Gadbaw, Chairman of our board of directors, receives $24,000 per
year starting in September 2008 ($2,000 per month) for his services as Chairman
of the board of directors. He also receives $2,000 per month in deferred
compensation payments, which he accrued while serving as our President and Chief
Executive Officer.
67
We
currently have four active non-employee members of the board of directors,
Lawrence W. Gadbaw, Peter L. Morawetz, Thomas J. McGoldrick, and Andrew P.
Reding. Messrs. Morawetz, McGoldrick and Reding are each considered independent
directors, as defined in NASDAQ Marketplace Rule 4200.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors, and persons who beneficially own more than 10% of a
registered class of our equity securities to file with the Securities and
Exchange Commission initial statements of beneficial ownership, reports of
changes in ownership and annual reports concerning their ownership of our common
shares and other equity securities, on Forms 3, 4 and 5 respectively. Since
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, we
were not required to file such forms with the Securities and Exchange
Commission. We do not intend to register a class of our securities on a national
securities exchange before this registration statement is effective. Once we
have a class of equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, we intend on filing all such forms
in a timely manner and if not, to disclose any untimely filings in accordance
with Item 405 Regulation S-K.
Code
of Ethics
In
November 2008, our board of directors adopted a Code of Ethics which is
applicable to all of our officers, directors and employees.
68
Described
below are certain transactions or series of transactions since inception between
us and our executive officers, directors and the beneficial owners of 5% or more
of our common stock, on an as converted basis, and certain persons affiliated
with or related to these persons, including family members, in which they had or
will have a direct or indirect material interest in an amount that exceeds the
lesser of $120,000 or 1% of the average of our total assets for the last three
years, other than compensation arrangements that are otherwise required to be
described under “Executive Compensation.”
In
September 2002, an oral agreement was made with director Peter Morawetz whereby
he would provide sales, marketing and general administrative support to BioDrain
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 fees were accrued through August 2006 and totaled
approximately $85,000 but no amount has been paid. Both Mr. Morawetz and
BioDrain personnel have discussed reducing the total fees accrued to a lesser
amount and, although no agreement has been reached, the parties have reached an
oral understanding that the amount to be paid will be less.
In
2007, three of the Company’s 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. In December 2007, upon request from the
Company’s funding brokers, the Company 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 his one-time cash bonus of $46,000 is
paid.
Unpaid
salaries from December 2007 through June 2008 were subsequently accrued with the
expectation that they would be paid when sufficient funds became available.
Accrued salaries for May 2008 and June 2008 were subsequently paid, leaving
unpaid accrual of salaries from December 2007 through April
2008.
Pursuant
to the terms of the Separation Agreement and Release between Mr. Gadbaw and the
Company, if we raise at least $3 million in additional funding prior to fully
paying off Mr. Gadbaw’s accrued salary at the rate of $2,000 per month, we will
then pay off any remaining balance on the accrued salary within 30 days of
receipt of the new funding. As part of the agreement, for as long as
Mr. Gadbaw remains Chairman of our board of directors, he will receive an
additional 30,000 stock options annually, so long as he is Chairman as of
September 1 of that year. These options will be priced based on the fair market
value of the Company’s common stock at the time of grant as determined by our
board of directors.
Negotiations
with Mr. Morawetz have not yet been completed in connection with compensation
for foregoing his consulting fee. Mr. Morawetz’s consulting services included
contacting potential distributors in Florida where he resides, seeking and
meeting with potential investors for our funding efforts and providing general
counsel services on various Company issues.
The
following selling shareholders beneficially own more than 5% of our common
stock: Schwartz Holding, Bernard Puder Revocable Trust, Chad A. Ruwe, James E.
Dauwalter Living Trust, James R. Taylor IV and Nimish Patel. All
became a related party through investing in the October 2008
funding.
69
The
following table sets forth the names of the selling shareholders who may sell
their shares under this prospectus from time to time. No selling shareholder
has, or within the past three years has had, any position, office or other
material relationship with us or any of our predecessors or affiliates other
than as a result of the ownership of our securities, except as set forth in the
footnotes of certain selling stockholders.
The
following table also provides certain information with respect to the selling
shareholders’ ownership of our securities as of November 1, 2008, the total
number of securities they may sell under this prospectus from time to time, and
the number of securities they will own thereafter assuming no other acquisitions
or dispositions of our securities. The selling shareholders can offer all, some
or none of their securities, thus we have no way of determining the number they
will hold after this offering. Therefore, we have prepared the table below on
the assumption that the selling shareholders will sell all shares covered by
this prospectus.
Some
of the selling shareholders may distribute their shares, from time to time, to
their limited and/or general partners or managers, who may sell shares pursuant
to this prospectus. Each selling shareholder may also transfer shares owned by
him or her by gift, and upon any such transfer the donee would have the same
right of sale as the selling shareholder.
We
may amend or supplement this prospectus from time to time to update the
disclosure set forth herein. None of the selling shareholders are or were
affiliated with any broker-dealers. See our discussion entitled “Plan of
Distribution” for further information regarding the selling shareholders’ method
of distribution of these shares.
The
common shares included in this selling security holder table
include:
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|
·
|
Shares
underlying convertible debenture with certain investors who loaned us
$170,000 in July 2007. Such securities are convertible into 620,096 shares
and the lenders were also entitled to receive warrants to purchase 620,096
shares at 0.35 per share;
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|
|
·
|
4,552,862
common shares and 4,552,862 common shares underlying warrants (at an
exercise price per share of $0.46) to 33 investors pursuant to an equity
private placement from June 2007 to October 2008 for $0.35 per share for
an aggregate of $1.6 million;
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|
|
·
|
547,285
common shares and 136,429 warrants to consultants who provided services in
connection with such equity private placement;
and
|
|
|
·
|
Shares
issued pursuant to a binding term sheet with a consultant pursuant to
which the consultant would assist us in obtaining bridge financing and
subsequent equity financing and the consultant and its assigns received
2,001,119 shares in satisfaction of such
obligation.
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|
Name
of Selling Shareholder
|
Number
of
Shares
Owned
Before
Offering(1)
|
Number
of Shares
Underlying
Warrants
Owned
Before
Offering
|
Number
of
Shares
Offered
in this
Offering(1)
|
Number
of
Shares
Owned
After
Offering(2)
|
Percentage
Owned
After
Offering(2)
|
|||||||||||||||
|
Caron
Partners LP(3)
|
246,500 | 100,000 | 246,500 | 0 | 0 | |||||||||||||||
|
Alan
Topchik
|
200,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||
|
Marc
I. Abrams
|
57,142 | 28,571 | 57,142 | 0 | 0 | |||||||||||||||
|
Douglas
J. Gold (21)
|
232,142 | 28,571 | 232,142 | 0 | 0 | |||||||||||||||
|
Stuart
A. Liner
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
|
Steven
M. Gold and Sheila A. Gold
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
|
Tangiers
Investors, L.P.(4)
|
285,714 | 142,857 | 285,714 | 0 | 0 | |||||||||||||||
|
Jerome
M. Cowan
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
|
Jeremy
Roll
|
68,573 | 40,001 | 68,573 | 0 | 0 | |||||||||||||||
|
Bernard
Vosika and Twyla Vosika
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
70
|
Name
of Selling Shareholder
|
Number
of
Shares
Owned
Before
Offering(1)
|
Number
of Shares
Underlying
Warrants
Owned
Before
Offering
|
Number
of
Shares
Offered
in this
Offering(1)
|
Number
of
Shares
Owned
After
Offering(2)
|
Percentage
Owned
After
Offering(2)
|
|||||||||||||||
|
Sally
Maslon & Naomi Maslon JTWROS
|
57,142 | 28,571 | 57,142 | 0 | 0 | |||||||||||||||
|
Michael
Sobeck
|
28,572 | 14,286 | 28,572 | 0 | 0 | |||||||||||||||
|
Cavalier
Consulting Corp.(5)
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
|
RP
Capital(6) (21)
|
326,848 | 142,857 | 326,848 | 0 | 0 | |||||||||||||||
|
Brian
Weitman
|
64,028 | 21,429 | 64,028 | 0 | 0 | |||||||||||||||
|
Bellajule
Partners LP(7)
|
173,858 | 71,429 | 173,858 | 0 | 0 | |||||||||||||||
|
Morris
Esquenazi
|
200,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||
|
Schwartz
Holding
|
1,000,000 | 500,000 | 1,000,000 | 0 | 0 | |||||||||||||||
|
Jack
Farbman and Thelma Farbman
|
200,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||
|
Morrie
R. Rubin
|
100,000 | 50,000 | 100,000 | 0 | 0 | |||||||||||||||
|
Lee
M. Terpstra and Orlando Stephenson
|
200,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||
|
Bernard
Puder Revocable Trust
|
860,000 | 430,000 | 860,000 | 0 | 0 | |||||||||||||||
|
Thomas
J. Klas
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
|
Chad
A. Ruwe(22)
|
1,192,858 | 571,429 | 1,142,858 | 50,000 |
(8)
|
* | ||||||||||||||
|
Peter
Abramowicz
|
114,286 | 57,143 | 114,286 | 0 | 0 | |||||||||||||||
|
Scott
R. Storick
|
200,000 | 100,000 | 200,000 | 0 | 0 | |||||||||||||||
|
James
R. Taylor, IV
|
1,142,858 | 571,429 | 1,142,858 | 0 | 0 | |||||||||||||||
|
Citigroup
Global Markets Inc. as IRA Custodian FBO John D.
Villas
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
|
Gregory
B. Graves
|
85,714 | 42,857 | 85,714 | 0 | 0 | |||||||||||||||
|
James
E. Dauwalter Living Trust dated 12/11/01(9)
|
1,142,858 | 571,429 | 1,142,858 | 0 | 0 | |||||||||||||||
|
Stan
Geyer Living Trust dated 10/15/2001, as amended, Stan Geyer & Beverly
Geyer, Trustees(10)
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
|
Fenton
Fitzpatrick
|
17,142 | 8,571 | 17,142 | 0 | 0 | |||||||||||||||
|
Peter
Persad
|
142,858 | 71,429 | 142,858 | 0 | 0 | |||||||||||||||
|
Nimish
Patel(11) (21)
|
503,602 | 45,595 | 503,602 | 0 | 0 | |||||||||||||||
|
Erick
Richardson(12) (21)
|
490,734 | 45,595 | 490,734 | 0 | 0 | |||||||||||||||
|
Core
Fund Management, LP(13)
|
364,762 | 182,381 | 364,762 | 0 | 0 | |||||||||||||||
|
James
Jensen(14)
|
364,762 | 182,381 | 364,762 | 0 | 0 | |||||||||||||||
|
Steve
Andress(15)
|
72,952 | 36,476 | 72,952 | 0 | 0 | |||||||||||||||
|
Kendall
Morrison(16)
|
72,952 | 36,476 | 72,952 | 0 | 0 | |||||||||||||||
|
Egavnit
LLC(17)
|
196,092 | 91,191 | 196,092 | 0 | 0 | |||||||||||||||
|
Thomas
Pronesti(23)
|
55,964 | 55,964 | 0 | 0 | ||||||||||||||||
|
Craig
Kulman(23)
|
38,821 | 38,821 | 0 | 0 | ||||||||||||||||
|
Kulman
IR LLC(18)(23)
|
125,000 | 125,000 | 0 | 0 | ||||||||||||||||
|
Cross
Street Partners, Inc.(19)(23)
|
125,000 | 125,000 | 0 | 0 | ||||||||||||||||
|
Bill
Glaser(23)
|
250,000 | 125,000 | 250,000 | 0 | 0 | |||||||||||||||
|
Ryan
Hong(21)
|
57,404 | 57,404 | 0 | 0 | ||||||||||||||||
|
Richardson
& Patel, LLP(20)
|
60,714 | 60,714 | 0 | 0 | ||||||||||||||||
|
Sean
Fitzpatrick
|
150,000 | 150,000 | 0 | 0 | ||||||||||||||||
|
David
Baker
|
225,000 | 225,000 | 0 | 0 | ||||||||||||||||
|
Si
Phillips
|
50,000 | 50,000 | 0 | 0 | ||||||||||||||||
|
Cameron
Broumand
|
35,000 | 35,000 | 0 | 0 | ||||||||||||||||
|
Sylvia
Karayan(21)
|
10,000 | 10,000 | 0 | 0 | ||||||||||||||||
|
Jason
Cavalier
|
15,000 | 15,000 | 0 | 0 | ||||||||||||||||
|
Greg
Suess
|
104,114 | 104,114 | 0 | 0 | ||||||||||||||||
|
Ben
Padnos
|
100,000 | 100,000 | 0 | 0 | ||||||||||||||||
|
Mark
Abdou
|
32,907 | 32,907 | 0 | 0 | ||||||||||||||||
|
Addison
Adams(21)
|
8,227 | 8,227 | 0 | 0 | ||||||||||||||||
|
Michael
Cavalier
|
8,227 | 8,227 | 0 | 0 | ||||||||||||||||
|
Mick
Cavalier
|
8,227 | 8,227 | 0 | 0 | ||||||||||||||||
|
Francis
Chen(21)
|
2,334 | 2,334 | 0 | 0 | ||||||||||||||||
|
Doug
Croxall
|
6,170 | 6,170 | 0 | 0 | ||||||||||||||||
|
Jennifer
& Michael Donahue(21)
|
28,009 | 28,009 | 0 | 0 | ||||||||||||||||
71
|
Name
of Selling Shareholder
|
Number
of
Shares
Owned
Before
Offering(1)
|
Number
of Shares
Underlying
Warrants
Owned
Before
Offering
|
Number
of
Shares
Offered
in this
Offering(1)
|
Number
of
Shares
Owned
After
Offering(2)
|
Percentage
Owned
After
Offering(2)
|
|||||||||||||||
|
Dan
Estrin
|
823 | 823 | 0 | 0 | ||||||||||||||||
|
Kevin
Friedmann(21)
|
1,440 | 1,440 | 0 | 0 | ||||||||||||||||
|
Sylvia
Karayan(21)
|
1,646 | 1,646 | 0 | 0 | ||||||||||||||||
|
Abdul
Ladha
|
4,114 | 4,114 | 0 | 0 | ||||||||||||||||
|
Jody
Samuels(21)
|
8,227 | 8,227 | 0 | 0 | ||||||||||||||||
|
Yossi
Stern
|
10,284 | 10,284 | 0 | 0 | ||||||||||||||||
|
Steve
Yakubov
|
10,284 | 10,284 | 0 | 0 | ||||||||||||||||
|
TOTAL
|
13,030,749 | 5,309,386 | 13,030,749 | 0 | * | |||||||||||||||
* Less
than 1% based on a total of 8,180,832 shares of common stock outstanding on
November 1, 2008
(1)
Includes up to that number of shares of common stock issuable upon the exercise
of a warrant listed in the selling security holder table.
(2)
Assumes that all shares will be resold by the selling shareholders after this
offering.
(3) The
natural person with voting and dispositive powers for this stockholder is Beth
Levine.
(4) The
natural person with voting and dispositive powers for this stockholder is
Michael Sobeck.
(5) The
natural person with voting and dispositive powers for this stockholder is Jason
Cavalier.
(6) The
natural persons with voting and dispositive powers for this stockholder are
Nimish Patel and Erick Richardson.
(7) The
natural person with voting and dispositive powers for this stockholder is Donald
Levine.
(8)
Includes 50,000 shares subject to exercise of options to purchase common stock.
Excludes 200,000 shares subject to exercise of options to purchase common stock
that become exerciseable upon satisfaction of achievement of performance
targets.
(9) The
natural person with voting and dispositive powers for this stockholder is James
Dauwalter.
(10) The
natural persons with voting and dispositive powers for this stockholder are Stan
Geyer and Beverly Geyer.
(11)
Includes 45,595 shares of common stock subject to conversion of a promissory
note.
(12)
Includes 45,595 shares of common stock subject to conversion of a promissory
note.
(13) The
natural person with voting and dispositive powers for this stockholder is David
Baker. Includes 182,381 shares of common stock subject to conversion of a
promissory note.
(14)
Includes 182,381 shares of common stock subject to conversion of a promissory
note.
(15)
Includes 36,476 shares of common stock subject to conversion of a promissory
note.
(16)
Includes 36,476 shares of common stock subject to conversion of a promissory
note.
(17)
Includes 182,381 shares of common stock subject to conversion of a promissory
note. The natural person with voting and dispositive powers for this
stockholder is Shai Stern.
(18) The
natural person with voting and dispositive powers for this stockholder is Craig
Kulman.
72
(19) The
natural person with voting and dispositive powers for this stockholder is Thomas
Pronesti.
(20)
The natural person with voting and dispositive powers for this stockholder is
Douglas Gold. Richardson & Patel LLP is the outside legal counsel for the
Company.
(22)
Mr. Ruwe is an officer of the Company.
(23)
The shareholder has assisted the Company in obtaining financing or investor
relations services.
73
Plan
of Distribution
Each
selling shareholder of the common stock and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTC Bulletin Board or any other stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. A selling shareholder may use
any one or more of the following methods when selling shares, subject to
applicable federal and state securities laws:
• ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
• block
trades in which the broker-dealer will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction;
• purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
• an
exchange distribution in accordance with the rules of the applicable
exchange;
• privately
negotiated transactions;
• settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a part;
• broker-dealers
may agree with the selling shareholders to sell a specified number of such
shares at a stipulated price per share;
• through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
• a
combination of any such methods of sale; or
•
any other method permitted pursuant to applicable law.
The
selling shareholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling shareholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance with
FINRA Rule 2440, and in the case of a principal transaction a markup or markdown
in compliance with FINRA IM-2440. The maximum commission or discount to be
received by any Financial Industry Regulatory Authority (“FINRA”) member or
independent broker-dealer will not be greater than 8% for the sale of any
securities included in the registration statement of which this prospectus is a
part.
In
connection with the sale of the common stock or interests therein, the selling
shareholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may, subject to applicable federal state
securities laws, in turn engage in short sales of the common stock in the course
of hedging the positions they assume. The selling shareholders may also, in
compliance with applicable federal and state securities laws, sell shares of the
common stock short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers that in turn may
sell these securities. The selling shareholders may also enter into option or
other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities that require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
74
The
selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act, in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling shareholder has informed us
that it does not have any written or oral agreement or understanding, directly
or indirectly, with any person to distribute our common stock.
We
are required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling shareholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
selling shareholders are deemed to be “underwriters” within the meaning of the
Securities Act, they will be subject to the prospectus delivery requirements of
the Securities Act, including Rule 172 thereunder. In addition, any securities
covered by this prospectus that qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the selling shareholders.
We
have agreed to use reasonable efforts to keep this registration statement
continuously effective (the “Effective Period”) until the first anniversary of
the effective date of this registration statement plus whatever period of time
as shall equal any period, if any, during the Effective Period in which the
Company was not current with our reporting requirements under the Exchange Act
of 1934, as amended (the “Exchange Act”). The resale shares will be sold only
through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the resale shares may not
be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the selling shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the selling shareholders or any other
person. We will make copies of this prospectus available to the selling
shareholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).
75
Security
Ownership of Certain Beneficial Owners and Management
The
following tables set forth certain information regarding beneficial ownership of
our securities as of November 1, 2008 by (i) each person who is known by us to
own beneficially 5% or more of the Company’s outstanding common stock, (ii) each
of our directors, (iii) each of our named executive officers, and (iv) all of
our directors and executive officers as a group. We have determined beneficial
ownership in accordance with the rules of the Securities and Exchange
Commission. Under these rules, beneficial ownership generally includes voting or
investment power over securities. A person (or group of persons) is deemed to be
the “beneficial owner” of our securities if he or she, directly or indirectly,
has or shares the power to vote or to direct the voting of, or to dispose or
direct the disposition of such securities. Accordingly, more than one person may
be deemed to be the beneficial owner of the same security. Unless otherwise
indicated, the persons named in the table below have sole voting and/or
investment power with respect to the number of shares of common stock indicated
as beneficially owned by them. A person is also deemed to be a beneficial owner
of any security, which that person has the right to acquire within 60 days, such
as options or warrants to purchase shares of our common stock. Beneficial
ownership and percentage ownership are based on 8,180,832 shares of common stock
outstanding as of November 1, 2008. Unless otherwise stated, the address of our
directors and executive officers is c/o BioDrain Medical, Inc., 2060 Centre
Pointe Boulevard, Suite 7, Mendota Heights, Minnesota 55120.
|
Name
of Beneficial Owner
|
Amount
and
Nature
of
Beneficial
Ownership
|
Percent
of
Class
|
||||||
|
Lawrence
W. Gadbaw (1)
|
139,563 | 1.7 | % | |||||
|
Kevin
R. Davidson (2)
|
573,219 | 6.6 | % | |||||
|
Gerald
D. Rice (3)
|
84,994 | 1.0 | % | |||||
|
Chad
A. Ruwe (4)
|
621,429 | 7.6 | % | |||||
|
Peter
L. Morawetz (5)
|
107,739 | 1.3 | % | |||||
|
Thomas
J. McGoldrick (6)
|
23,942 | * | % | |||||
|
Andrew
P. Reding (7)
|
23,942 | * | % | |||||
|
Carl
Schwartz (8)
|
500,000 | 6.1 | % | |||||
|
Bernard
Puder Revocable Trust (9)
|
430,000 | 5.3 | % | |||||
|
James
Dauwalter Living Trust (10)
|
571,429 | 7.0 | % | |||||
|
James
Taylor III (11)
|
571,479 | 7.0 | % | |||||
|
Nimish
Patel (12)
|
600,863 | 7.2 | % | |||||
|
Erick
Richardson (13)
|
587,995 | 7.3 | % | |||||
|
All
directors and executive officers as a group (7 persons)
|
1,574,828 | 17.9 | % | |||||
|
*
Less than one percent
|
||
|
(1)
|
Includes
139,563 shares of common stock. Mr. Gadbaw does not currently have any
options to acquire additional shares of common stock of the
Company.
|
|
|
(2)
|
Includes
(i) 29,927 shares of common stock and (ii) options to acquire up to an
additional 543,292 shares of common stock of the Company, all of which are
presently exercisable.
|
|
|
(3)
|
Includes
84,994 shares of common stock. Mr. Rice does not currently have any
options to acquire additional shares of common stock of the
Company.
|
|
76
|
(4)
|
Includes
571,429 shares of common stock and options to acquire up to an additional
50,000 shares of common stock that are presently exercisable. Does not
include (i) 571,429 shares of common stock underlying warrants that are
not exercisable within 60 days and (ii) options to purchase 200,000 shares
of common stock that are not exercisable until achievement of certain
performance targets as provided for in Mr. Ruwe’s employment
agreement.
|
|
|
(5)
|
Includes
107,739 shares of common stock. Mr. Morawetz does not currently have any
options to acquire additional shares of common stock of the
Company.
|
|
|
(6)
|
Includes
options to acquire up to 23,942 shares of common stock, which are
presently exercisable, granted pursuant to a director stock option
agreement by and between Mr. McGoldrick and the
Company.
|
|
|
(7)
|
Includes
options to acquire up to 23,942 shares of common stock, which are
presently exercisable, granted pursuant to a director stock option
agreement by and between Mr. Reding and the Company.
|
|
|
(8)
|
Includes
500,000 shares of common stock. Does not include 500,000 shares of common
stock underlying warrants that are not exercisable within 60
days.
|
|
|
(9)
|
Includes
430,000 shares of common stock. Does not include 430,000 shares of common
stock underlying warrants that are not exercisable within 60
days.
|
|
|
(10)
|
Includes
571,429 shares of common stock. Does not include 571,479 shares of common
stock underlying warrants that are not exercisable within 60
days.
|
|
|
(11)
|
Includes
571,479 shares of common stock. Does not include 571,479 shares of common
stock underlying warrants that are not exercisable within 60
days.
|
|
|
(12)
|
Includes
503,602 shares of common stock and, 45,595 shares of common stock
underlying convertible notes. Also includes 142,857 shares of common stock
held by RP Capital LLC, for which Nimish Patel and Erick Richardson have
shared voting and dispositive control. Does not include 60,714 shares of
common stock held by Richardson & Patel LLP. The voting and
dispositive control of such shares are held by Mr. Douglas Gold. Mr. Patel
does not currently have any options to acquire additional shares of common
stock of the Company.
|
|
|
(13)
|
Includes
490,734 shares of common stock and, 45,595 shares of common stock
underlying convertible notes. Also includes 142,857 shares of common stock
held by RP Capital LLC, for which Nimish Patel and Erick Richardson have
shared voting and dispositive control. Does not include 60,714 shares of
common stock held by Richardson & Patel LLP. The voting and
dispositive control of such shares are held by Mr. Douglas Gold. Mr.
Richardson does not currently have any options to acquire additional
shares of common stock of the
Company.
|
77
Description
of Securities
General
We
are authorized to issue only one class of shares, which is designated as common
stock. On October 20, 2008, our board of directors approved a resolution to
increase the total number of shares of common stock that we are authorized to
issue from 11,970,994 to 40,000,000 with $0.01 par value per share. 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.
Common
Stock
The
securities being offered by the selling shareholders are shares of our common
stock. Prior to this offering there has been no public or private trading market
for our common stock and there will be no such trading market until our common
stock is approved for quotation on the OTC Bulletin Board. As of November 1,
2008, there were issued and outstanding 8,180,832 shares of common stock that
were held of record by 88 shareholders.
The
holders of common stock are entitled to one vote per share on all matters to be
voted upon by the shareholders; provided that no proxy shall be voted if
executed more than one year prior to the date of the stockholders’ meeting
except as may otherwise be provided by our board of directors from time to time.
Only stockholders of record at the close of business on day twenty prior to the
date of the meeting are entitled to vote at the stockholders’ meeting. Holders
of our common stock do not have cumulative voting rights.
The
holders of common stock are entitled to receive ratably any dividends that may
be declared from time to time by our board of directors out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities. The common stock has no
preemptive or conversion rights or other subscription rights and there are no
redemption provisions applicable to our common stock. All outstanding shares of
common stock are fully paid and non-assessable, and the shares of common stock
offered in this offering will be fully paid and not liable for further call or
assessment.
Except
for directors, who are elected by receiving the highest number of affirmative
votes of the shares entitled to be voted for them, or as otherwise required by
Minnesota law, and subject to the rights of the holders of preferred stock then
outstanding (if any), all shareholder action is taken by the vote of a majority
of the issued and outstanding shares of common stock present at a meeting of
shareholders at which a quorum consisting of a majority of the issued and
outstanding shares of common stock is present in person or proxy. In the absence
of a quorum for the transaction of business, any meeting may be adjourned from
time to time. The stockholders present at a duly called or held meeting may
continue to do business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum. The Company’s President or, in
his absence, the Vice-President or any other person designated from time to time
by the board of directors, shall preside at all meetings of
stockholders.
Warrants
and Convertible Notes
As
of November 1, 2008, there were outstanding warrants to purchase 5,309,386
shares of our common stock, comprised of 620,096 warrants exercisable at a price
of $0.35 per share, issued in conjunction with a bridge loan we undertook in
July 2007, and 4,689,290 warrants exercisable at a price of $0.46 per share,
issued in conjunction with the private offering we completed in October 2008,
including 4,552,862 warrants issued to investors and 136,429 warrants issued to
consultants who provided services in connection with the offering. These
warrants are immediately exercisable. If there is no effective registration
statement registering the underlying shares by August 31, 2009, these warrants
contain cashless exercise provisions that allow the holder to exercise the
warrant for a lesser number of shares of common stock in lieu of paying cash.
The number of shares that would be issued in this case would be based upon the
market price of the common stock at the time of the net exercise, or if there is
no market price, the price per share as determined by mutual agreement of the
Company and the holder. As of September 30, 2008, there were other outstanding
warrants to purchase 4,975,050 shares of our common stock at exercise prices
ranging from $.02 to $3.76 per share.
78
There
are also outstanding convertible notes to purchase 620,096 shares of our common
stock at an exercise price of $.35 per share, which were issued in conjunction
with the bridge loan we undertook in July 2007. The convertible notes total
$170,000 and are held by seven holders. The notes are convertible into 620,096
shares of common stock. Warrants to purchase 620,096 shares of common
stock were granted in connection therewith. The notes bear no interest rate and
have passed their original maturity date of April 2008. If there is no effective
registration statement registering the underlying shares by within 180 days of
the closing of the October 2008 private placement offering, these notes contain
certain monetary penalties imposed upon the Company. These penalties will not
exceed 16% of the total funds raised, or approximately $250,000, which would be
paid out on a pro rata basis to the investors of the October 2008 offering. This
penalty was provided to create incentive for the Company to complete the
registration of the securities tied to this investment, which would provide
potential liquidity to these investors.
The
exercise price and the number of shares issuable upon exercise of all the
above-referenced warrants will be adjusted upon the occurrence of certain
events, including reclassifications, reorganizations or combinations of the
common stock. At all times that the warrants are outstanding, we will authorize
and reserve at least that number of shares of common stock equal to the number
of shares of common stock issuable upon exercise of all outstanding
warrants.
Stock
Options
As
of September 30, 2008, there were employment agreements and director stock
option agreements outstanding with options to purchase 1,131,174 shares of
common stock with various vesting periods and amounts. We have 975,405 shares
reserved for issuance under the 2008 Equity Incentive Plan.
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.
Registration
Rights
Under
the Registration Rights Agreement entered into in connection with the October
2008 financing with certain accredited and institutional investors (the
“Investors”), we are obligated to register the following securities beneficially
owned by the Investors to permit the offer and resale from time to time of such
securities: (i) all of the common stock issued or issuable upon the conversion
of shares of common stock (including the shares underlying the warrants we
issued in conjunction with our private placement financing) acquired from the
Company pursuant to a Subscription Agreement entered into between the Investors
and the Company; and (ii) any securities issued or issuable directly or
indirectly with respect to the securities referred to in (i) by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other
reorganization.
Anti-Takeover
Effects of Certain Provisions of Minnesota Law
Certain
provisions of Minnesota law described below could have an anti-takeover effect.
These provisions are intended to provide management flexibility, to enhance the
likelihood of continuity and stability in the composition of our board of
directors and in the policies formulated by our board of directors and to
discourage an unsolicited takeover if our board of directors determines that
such a takeover is not in our best interests or the best interests of our
shareholders. However, these provisions could have the effect of discouraging
certain attempts to acquire us that could deprive our shareholders of
opportunities to sell their shares of our stock at higher values.
79
Section
302A.671 of the Minnesota Business Corporation Act applies, with certain
exceptions, to any acquisitions of our stock (from a person other than us, and
other than in connection with certain mergers and exchanges to which we are a
party) resulting in the beneficial ownership of 20% or more of the voting stock
then outstanding. Section 302A.671 requires approval of any such acquisition by
a majority vote of our shareholders prior to its consummation. In general,
shares acquired in the absence of such approval are denied voting rights and are
redeemable by us at their then-fair market value within 30 days after the
acquiring person has failed to give a timely information statement to us or the
date the shareholders voted not to grant voting rights to the acquiring person’s
shares.
Section
302A.673 of the Minnesota Business Corporation Act generally prohibits any
business combination by us, or any of our subsidiaries, with an interested
shareholder, which means any shareholder that purchases 10% or more of our
voting shares within four years following such interested shareholder’s share
acquisition date, unless the business combination is approved by a committee of
all of the disinterested members of our board of directors before the interested
shareholder’s share acquisition date.
80
We
are a Minnesota corporation and certain provisions of the Minnesota Statutes and
our Bylaws provide for indemnification of our officers and directors against
liabilities which they may incur in such capacities. A summary of the
circumstances in which indemnification is provided is discussed below, but this
description is qualified in its entirety by reference to our Bylaws and to the
statutory provisions.
Section
302A.521, Subd. 2 of the Minnesota Statutes requires a corporation to indemnify
a person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person against judgments, penalties,
fines, including, without limitation, excise taxes assessed against the person
with respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys’ fees and disbursements, incurred by the person in
connection with the proceeding, if, with respect to the acts or omissions of the
person complained of in the proceeding, the person:
|
(1)
|
has
not been indemnified by another organization or employee benefit plan for
the same judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys’
fees and disbursements, incurred by the person in connection with the
proceeding with respect to the same acts or omissions;
|
|
|
(2)
|
acted
in good faith;
|
|
|
(3)
|
received
no improper personal benefit and Section 302A.255, if applicable, has been
satisfied;
|
|
|
(4)
|
in
the case of a criminal proceeding, had no reasonable cause to believe the
conduct was unlawful; and
|
|
|
(5)
|
in
the case of acts or omissions occurring in the person’s performance in the
official capacity of director or, for a person not a director, in the
official capacity of officer, board committee member or employee,
reasonably believed that the conduct was in the best interests of the
corporation or, in the case of performance by a director, officer or
employee of the corporation involving service as a director, officer,
partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the
best interests of the corporation. If the person’s acts or omissions
complained of in the proceeding relate to conduct as a director, officer,
trustee, employee, or agent of an employee benefit plan, the conduct is
not considered to be opposed to the best interests of the corporation if
the person reasonably believed that the conduct was in the best interests
of the participants or beneficiaries of the employee benefit
plan
|
Section
302A.521 Subd. 2 further provides that the termination of a proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent does not, of itself, establish that the person did not meet the
criteria set forth in this subdivision.
In
addition, Section 302A.521, Subd. 3, requires that if a person is made or
threatened to be made a party to a proceeding, the person is entitled, upon
written request to the corporation, to payment or reimbursement by the
corporation of reasonable expenses, including attorneys’ fees and disbursements,
incurred by the person in advance of the final disposition of the proceeding,
(a) upon receipt by the corporation of a written affirmation by the person of a
good faith belief that the criteria for indemnification set forth in Section
302A.521, Subd. 2 have been satisfied and a written undertaking by the person to
repay all amounts so paid or reimbursed by the corporation, if it is ultimately
determined that the criteria for indemnification have not been satisfied, and
(b) after a determination that the facts then known to those making the
determination would not preclude indemnification under this section. The written
undertaking required by clause (a) is an unlimited general obligation of the
person making it, but need not be secured and shall be accepted without
reference to financial ability to make the repayment.
81
Section
302A.521 Subd. 4 provides that the articles of incorporation or bylaws of a
corporation either may prohibit indemnification or advances of expenses
otherwise required by Section 302A.521 or may impose conditions on
indemnification or advances of expenses in addition to the conditions contained
in Subd. 2 and 3 including, without limitation, monetary limits on
indemnification or advances of expenses, if the prohibition or conditions apply
equally to all persons or to all persons within a given class. A prohibition or
limit on indemnification or advances may not apply to or affect the right of a
person to indemnification or advances of expenses with respect to any acts or
omissions of the person occurring prior to the effective date of a provision in
the articles of incorporation or the date of adoption of a provision in the
corporation’s bylaws establishing the prohibition or limit on indemnification or
advances.
Section
302A.521 Subd. 5 provides that Section 302A.521 does not require, or limit the
ability of a corporation to reimburse expenses, including attorneys’ fees and
disbursements, incurred by a person in connection with an appearance as a
witness in a proceeding at a time when the person has not been made or
threatened to be made a party to a proceeding
Section
302A.521 Subd. 6 further provides that:
|
(a)
all determinations whether indemnification of a person is required because
the criteria set forth in Subd. 2 have been satisfied and whether a person
is entitled to payment or reimbursement of expenses in advance of the
final disposition of a proceeding as provided in Subd. 3 shall be
made:
|
||
|
(1)
|
by
the board by a majority of a quorum, if the directors who are at the time
parties to the proceeding are not counted for determining either a
majority or the presence of a quorum;
|
|
|
(2)
|
if
a quorum under clause (1) cannot be obtained, by a majority of a committee
of the board, consisting solely of two or more directors not at the time
parties to the proceeding, duly designated to act in the matter by a
majority of the full board including directors who are
parties;
|
|
|
(3)
|
if
a determination is not made under clause (1) or (2), by special legal
counsel, selected either by a majority of the board or a committee by vote
pursuant to clause (1) or (2) or, if the requisite quorum of the full
board cannot be obtained and the committee cannot be established, by a
majority of the full board including directors who are
parties;
|
|
|
(4)
|
if
a determination is not made under clauses (1) to (3), by the affirmative
vote of the shareholders required by Section 302A.437 of the Minnesota
Statutes, but the shares held by parties to the proceeding must not be
counted in determining the presence of a quorum and are not considered to
be present and entitled to vote on the determination;
or
|
|
|
(5)
|
if
an adverse determination is made under clauses (1) to (4) or under
paragraph (b), or if no determination is made under clauses (1) to (4) or
under paragraph (b) within 60 days after (i) the later to occur of the
termination of a proceeding or a written request for indemnification to
the corporation or (ii) a written request for an advance of expenses, as
the case may be, by a court in this state, which may be the same court in
which the proceeding involving the person’s liability took place, upon
application of the person and any notice the court requires. The person
seeking indemnification or payment or reimbursement of expenses pursuant
to this clause has the burden of establishing that the person is entitled
to indemnification or payment or reimbursement of
expenses.
|
|
|
(b)
With respect to a person who is not, and was not at the time of the acts
or omissions complained of in the proceedings, a director, officer, or
person possessing, directly or indirectly, the power to direct or cause
the direction of the management or policies of the corporation, the
determination whether indemnification of this person is required because
the criteria set forth in Subd. 2 have been satisfied and whether this
person is entitled to payment or reimbursement of expenses in advance of
the final disposition of a proceeding as provided in Subd. 3 may be made
by an annually appointed committee of the board, having at least one
member who is a director. The committee shall report at least annually to
the board concerning its actions.
|
||
Section
302A.521 Subd 7 allows a corporation to purchase and maintain insurance on
behalf of a person in that person’s official capacity against any liability
asserted against and incurred by the person in or arising from that capacity,
whether or not the corporation would have been required to indemnify the person
against the liability under the provisions of section 302A.521 of the Minnesota
Statutes.
82
Section
302A.521 Subd. 8 requires a corporation that indemnifies or advances expenses to
a person in accordance with Section 302A.521 in connection with a proceeding by
or on behalf of the corporation to report to the shareholders in writing the
amount of the indemnification or advance and to whom and on whose behalf it was
paid not later than the next meeting of shareholders.
Section
302A.521 Subd. 9 provides that nothing in Section 302A.521 shall be construed to
limit the power of the corporation to indemnify persons other than a director,
officer, employee, or member of a committee of the board of the corporation by
contract or otherwise.
Pursuant
to our Bylaws, we may indemnify our directors and executive officers to the
fullest extent not prohibited by any applicable law; provided, however, that we
may modify the extent of such indemnification by individual contracts with our
directors and executive officers; and, provided, further, that we shall not be
required to indemnify any director or executive officer in connection with any
proceeding (or part thereof) initiated by such person unless: (i) such
indemnification is expressly required to be made by law; (ii) the proceeding was
authorized by our Board of Directors; or (iii) such indemnification is provided
by the Company, in our sole discretion, pursuant to the powers vested in the
Company under any applicable law. We shall have the power to indemnify our other
officers, employees and other agents as set forth in any other applicable law.
Our Board of Directors shall have the power to delegate the determination of
whether indemnification shall be given to any such person to such officers or
other persons as our board of directors shall determine.
In
addition, our Bylaws provide that we will advance to any person who was or is a
party to a threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or executive officer, of the Company, prior to the final
disposition of the proceeding, promptly following request therefore, all
expenses incurred by any director or executive officer in connection with such
proceeding; provided, however, that the advancement of expenses shall be made
only upon delivery to the Company of an undertaking by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses.
Notwithstanding the foregoing, unless otherwise determined, no advance shall be
made by the Company to an officer of the Company (except by reason of the fact
that such officer is or was a director of the Company in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made: (i) by a majority vote of directors who are not parties to the
proceeding; (ii) by a committee of such directors designated by a majority vote
of such directors; or (iii) if there are no such directors, or such directors so
direct, by a written opinion from independent legal counsel, that the facts
known to the decision making party at the time such determination is made
demonstrate clearly and convincingly that such person acted in bad faith or in a
manner that such person did not believe to be in the best interests of the
Company.
83
Our
Bylaws also provide that without the necessity of entering into an express
contract, all rights to indemnification and advances to our directors and
executive officers shall be deemed to be contractual rights and to be effective
to the same extent and as if provided for in a contract between the Company and
the director or executive officer. Any right to indemnification or advances
granted to a director or executive officer shall be enforceable by or on behalf
of the person holding such right in any court of competent jurisdiction if: (i)
the claim for indemnification or advances is denied, in whole or in part; or
(ii) no disposition of such claim is made within ninety (90) days of request
therefore. The claimant in such enforcement action, if successful, shall be
entitled to be paid also the expense of prosecuting the claim. In connection
with any claim for indemnification, the Company shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under applicable law for the Company to
indemnify the claimant for the amount claimed. In connection with any claim by
an executive officer of the Company (except in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such executive officer is or was a director of the Company) for advances,
the Company shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in the best interests of the Company, or with
respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that his conduct was lawful. A determination by the
Company (including the board of directors, independent legal counsel or the
stockholders) that indemnification of the claimant is proper because he has met
the applicable standard of conduct or that the claimant has not med such
applicable standard of conduct shall not be a defense to the action nor shall it
create a presumption that claimant has not met the applicable standard of
conduct.
84
We
have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock being offered in this offering.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed as part of the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedules filed as a part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, we refer you to the copy of the contract
or document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. The reports and other information we file with the SEC can be
read and copied at the SEC’s Public Reference Room at 100 F Street, N.E,,
Washington D.C. 20549, on official business days during the hours of 10 a.m. to
3 p.m. Copies of these materials can be obtained at prescribed rates from the
Public Reference Section of the SEC at the principal offices of the SEC, 100 F
Street, N.E., Washington D.C. 20549. You may obtain information regarding the
operation of the public reference room by calling 1(800) SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC.
After
this offering, 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 and other information with the Securities and Exchange
Commission. We are not required by these requirements to deliver an annual
report to our shareholders and, due to the cost involved, it is not likely that
we will deliver an annual report with audited financial statements to our
shareholders.
85
Olsen
Thielen & Company, Ltd., our independent registered public accounting firm,
audited our financial statements at December 31, 2007 and December 31, 2006, as
set forth in their report. We have included our financial statements and
financial information in this prospectus and elsewhere in this registration
statement in reliance on the report of Olsen Thielen & Company, Ltd. given
on their authority as experts in accounting and auditing.
Richardson
& Patel LLP has given us an opinion relating to the due issuance of the
common stock being registered. The law firm of Richardson & Patel, LLP (“R
& P”) owns 60,714 shares of our common stock. Nimish Patel, a principal of R
& P, holds 412,411 shares of our common stock, 45,595 shares underlying
certain convertible notes, and 45,595 shares underlying certain warrants. Erick
Richardson, another principal of R & P, holds 399,543 shares of our common
stock, 45,595 shares underlying certain convertible notes, and 45,595 shares
underlying certain warrants. RP Capital, a limited liability company owned by
Mr. Richardson and Mr. Patel, holds 142,857 shares of our common stock and
warrants to purchase 142,857 shares of our common stock. Other R & P
employees and principals beneficially own 320,858 shares of our common stock and
warrants to purchase 28,571 shares of our common stock. This describes all
Company securities held by Richardson & Patel LLP and its affiliates. All of
these shares are being registered pursuant to this registration
statement.
86
The
unaudited interim financial statements for the periods ended September 30, 2008
and September 30, 2007 and for the period from April 23, 2002 (inception) to
September 30, 2008 and the audited financial statements for the fiscal years
ended December 31, 2007 and December 31, 2006 and for the period from April 23,
2002 (inception) to December 31, 2007 commence on the following
page.
87
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
||
|
Unaudited Interim Financial
Statements:
|
F-1
|
|
|
Consent of Independent
Registered Public Accounting Firm
|
F-2
|
|
|
Balance
Sheets
|
F-3
|
|
|
Statements of
Operations
|
F-4
|
|
|
Statements of Changes in
Stockholders’ Equity (Deficit)
|
F-5
|
|
|
Statements of Cash
Flows
|
F-6
|
|
|
Notes to Interim Financial
Statements
|
F-7
|
|
|
Report of Independent
Registered Public Accounting Firm
|
F-16
|
|
|
Audited Annual Financial
Statements:
|
F-17
|
|
|
Balance
Sheets
|
F-18
|
|
|
Statements of
Operations
|
F-19
|
|
|
Statements of Changes in
Stockholders’ Equity (Deficit)
|
F-20
|
|
|
Statements of Cash
Flows
|
F-21
|
|
|
Notes to Financial
Statements
|
F-22
|
|
BIODRAIN
MEDICAL, INC.
|
|
(A
DEVELOPMENT STAGE COMPANY)
|
BioDrain
Medical, Inc.
(A
Development Stage Company)
September
30, 2008
(Unaudited)
F-1
We
consent to the use in this Registration Statement on Form S-1 of our audit
report, dated August 12, 2008, relating to the financial statements of BioDrain
Medical, Inc. appearing in the Prospectus which are a part of this Registration
Statement. We also consent to the reference to our Firm under captions “Experts”
in the Prospectus.
Olsen,
Thielen & Co. Ltd.
St. Paul,
Minnesota
January
12, 2009
F-2
|
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 AND
YEAR
ENDED DECEMBER 31, 2007
|
|
September
30,
2008
|
December
31,
2007
|
September
30,
2007
|
||||||||||
|
(Unaudited)
|
(Audited)
|
(Unaudited)
|
||||||||||
|
ASSETS
|
||||||||||||
|
Current
assets:
|
||||||||||||
|
Cash
|
$ | 744,929 | $ | 4,179 | $ | 17,733 | ||||||
|
Prepaid
expenses
|
37,241 | 4,558 | 547 | |||||||||
|
Other
current assets
|
163,333, | — | — | |||||||||
|
Total
current assets
|
945,503 | 8,737 | 18,280 | |||||||||
|
Fixed
assets
|
8,699 | — | — | |||||||||
|
Intangibles,
net
|
134,299 | 113,056 | 110,425 | |||||||||
|
Total
assets
|
$ | 1,088,501 | $ | 121,793 | $ | 128,705 | ||||||
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||||||
|
Current
liabilities:
|
||||||||||||
|
Current
portion of long-term debt (See Note 6)
|
$ | 185,800 | $ | 203,800 | $ | 199,800 | ||||||
|
Accounts
payable
|
284,567 | 207,657 | 136,072 | |||||||||
|
Accrued
expenses
|
277,087 | 226,429 | 439,818 | |||||||||
|
Notes
payable (See Note 6)
|
10,000 | 10,000 | 20,973 | |||||||||
|
Total
current liabilities
|
757,454 | 647,886 | 796,663 | |||||||||
|
Long-term
debt (See Note 6)
|
129,560 | 136,508 | 140,682 | |||||||||
|
Stockholders’
equity (deficit):
|
||||||||||||
|
Common
stock $0.01 par value; 40,000,000, 11,970,994, 11,970,994 shares
authorized; 8,180,832, 1,376,105 and 1,375,105 shares issued and
outstanding
|
87,333 | 13,761 | 13,761 | |||||||||
|
Additional
paid-in capital
|
1,831,821 | 112,309 | 108,400 | |||||||||
|
Deficit
accumulated during development stage
|
(1,717,667 | ) | (788,671 | ) | (930,801 | ) | ||||||
|
Total
stockholders’ equity (deficit)
|
201,487 | (662,601 | ) | (808,640 | ) | |||||||
|
Total
liabilities and stockholders’ equity (deficit)
|
$ | 1,088,501 | $ | 121,793 | $ | 128,705 | ||||||
See
accompanying notes to financial statements.
F-3
|
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 AND
YEAR
ENDED DECEMBER 31, 2007 AND
PERIOD
FROM APRIL 23, 2002 (INCEPTION) TO SEPTEMBER 30,
2008
|
|
For
the Nine
Months
Ended
September 30,
|
For
the Year
Ended
December
31,
|
For
the Nine
Months
Ended
September
30,
|
For
the Period
From
April
23, 2002
(Inception)
To
September 30,
|
|||||||||||||
|
2008
|
2007
|
2007
|
2008
|
|||||||||||||
|
(Unaudited)
|
(Audited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
|
Operating
expenses
|
$ | 826,411 | $ | 126,684 | $ | 282,839 | $ | 1,428,889 | ||||||||
|
Product
development
|
$ | 91,449 | $ | — | $ | 393 | $ | 224,118 | ||||||||
|
Interest
expense
|
$ | 11,135 | 33,238 | 18,819 | 64,660 | |||||||||||
|
Net
loss
|
$ | 928,995 | $ | 159,922 | $ | 302,051 | $ | 1,717,667 | ||||||||
See
accompanying notes to financial statements.
F-4
|
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
PERIOD
FROM APRIL 23, 2002 (INCEPTION) TO SEPTEMBER 30,
2008
|
|
Common
Stock
|
Additional
|
Accumulated
|
||||||||||||||||||
|
Shares
|
Amount
|
|
Paid-in
Capital
|
Deficit
|
Total
|
|||||||||||||||
|
Issuance
of common stock 9/1/02 at $.0167/share (1)
|
598,549 | $ | 10,000 | $ | — | $ | — | $ | 10,000 | |||||||||||
|
Issuance
of common stock 10/23/02 at $1.67/share
|
2,993 | 50 | 4,950 | 5,000 | ||||||||||||||||
|
Vested
stock options and warrants
|
— | — | — | — | — | |||||||||||||||
|
Net
loss
|
— | — | — | (51,057 | ) | (51,057 | ) | |||||||||||||
|
Balance
on December 31, 2002 (Unaudited)
|
601,542 | $ | 10,050 | $ | 4,950 | $ | (51,057 | ) | $ | (36,057 | ) | |||||||||
|
Issuance
of common stock 2/12/03 at $.0167/share (2)
|
23,942 | 400 | — | — | 400 | |||||||||||||||
|
Issuance
of common stock 6/11-12/3/03 (3)
|
21,548 | 360 | 34,650 | 35,000 | ||||||||||||||||
|
Vested
stock options and warrants
|
— | — | — | — | — | |||||||||||||||
|
Net
loss
|
— | — | — | (90,461 | ) | (90,461 | ) | |||||||||||||
|
Balance
on December 31, 2003 (Unaudited)
|
647,032 | $ | 10,810 | $ | 39,600 | $ | (141,518 | ) | $ | (91,118 | ) | |||||||||
|
Issuance
of common stock 5/25/04
at $1.67/share (4)
|
6,567 | 110 | — | — | 110 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | — | — | — | |||||||||||||||
|
Net
loss
|
— | — | — | (90,353 | ) | (90,353 | ) | |||||||||||||
|
Balance
on December 31, 2004 (Unaudited)
|
653,599 | $ | 10,920 | $ | 39,600 | $ | (231,871 | ) | $ | (181,361 | ) | |||||||||
|
Issuance
of common stock 12/14/05
at $1.67/share (5)
|
14,964 | 250 | — | — | 250 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | 2,793 | — | 2,793 | |||||||||||||||
|
Net
loss
|
— | — | — | (123,853 | ) | (123,853 | ) | |||||||||||||
|
Balance
on December 31, 2005 (Unaudited)
|
668,563 | $ | 11,170 | $ | 42,393 | $ | (355,724 | ) | $ | (302,161 | ) | |||||||||
|
Issuance
of common stock 5/16, 8/8/06
at $1.67/share (6)
|
86,869 | 1,451 | — | — | 1,451 | |||||||||||||||
|
Issuance
of common stock 10/19, 23/06
at $1.67/share (7)
|
38,906 | 650 | — | — | 650 | |||||||||||||||
|
Issuance
of common stock 12/01/06
at $1.67/share (8)
|
28,730 | 480 | 44,320 | — | 43,000 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | 13,644 | — | 13,644 | |||||||||||||||
|
Net
loss
|
— | — | — | (273,026 | ) | (273,026 | ) | |||||||||||||
|
Balance
on December 31, 2006
|
823,068 | $ | 13,751 | $ | 100,357 | $ | (628,750 | ) | $ | (514,642 | ) | |||||||||
|
Issuance
of common stock 1/30/07
at $1.67/share (9)
|
599 | 10 | 990 | — | 1,000 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | 10,962 | — | 10,962 | |||||||||||||||
|
Net
loss
|
— | — | — | (159,922 | ) | (159,922 | ) | |||||||||||||
|
Balance
on December 31, 2007
|
823,667 | $ | 13,761 | $ | 112,309 | $ | (788,671 | ) | $ | (662,601 | ) | |||||||||
|
Issuance
of common stock 6/11 - 9/30//08 at
$.35/share (10)
|
7,357,164 | 73,572 | 1,508,724 | — | 1,582,695 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | 210,389 | — | 210,389 | |||||||||||||||
|
Net
loss
|
— | — | — | (928,995 | ) | (928,995 | ) | |||||||||||||
|
Balance
on September 30, 2008 (Unaudited)
|
8,810,382 | $ | 87,333 | $ | 1,831,821 | $ | (1,717,667 | ) | $ | 201,487 | ||||||||||
(1)
Founders shares, 1,000,000 pre-split.
(2)
40,000 shares valued at $1.00 per share for loan guarantees by
management.
(3)
Investment including 670 shares issued as a finders fee of 10%.
(4)
For patent legal fee payments.
(5)
For loan guarantees by management.
(6)
For vendor contractual consideration.
(7)
Employment agreements.
(8)
Investment.
(9)
Conversion of convertible note by management.
(10)
Investment, October 2008 financing.
See
accompanying notes to financial statements.
F-5
|
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
NINE
MONTHS ENDED SEPTEMBER 30, 2008
YEAR
ENDED DECEMBER 31, 2007 AND
PERIOD
FROM APRIL 23, 2002 (INCEPTION) TO SEPTEMBER 30,
2008
|
|
For
the Nine
Months
Ended
September
30,
2008
(Unaudited)
|
For
the Year
Ended
December
31,
2007
(Audited)
|
For
the Period
From
April 23,
2002
(Inception)
To
September 30,
2008
(Unaudited)
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (928,995 | ) | $ | (159,922 | ) | $ | (1,717,667 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Amortization
|
— | 47 | — | |||||||||
|
Vested
stock options and warrants
|
210,389 | 10,962 | 237,788 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Prepaid
expenses
|
(32,684 | ) | (4,287 | ) | (37,242 | ) | ||||||
|
Other
assets
|
(163,333 | ) | — | (163,333 | ) | |||||||
|
Accounts
payable
|
76,910 | 127,125 | 284,567 | |||||||||
|
Accrued
expenses
|
50,657 | (187,092 | ) | 277,086 | ||||||||
|
Net
cash used in operating activities
|
(787,056 | ) | (213,167 | ) | (1,118,801 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of fixed assets
|
(8,699 | ) | — | (8,699 | ) | |||||||
|
Purchases
of intangibles
|
(21,242 | ) | (46,092 | ) | (134,298 | ) | ||||||
|
Net
cash used in investing activities
|
(29,941 | ) | (46,092 | ) | (142,997 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Note
payable to shareholder
|
— | (10,973 | ) | (10,973 | ) | |||||||
|
Proceeds
on long-term debt
|
— | 274,000 | 421,505 | |||||||||
|
Principal
payments on long-term debt
|
(24,949 | ) | (1,592 | ) | (85,173 | ) | ||||||
|
Issuance
of common stock (1)
|
1,582,696 | 1,000 | 1,681,367 | |||||||||
|
Net
cash provided by financing activities
|
1,557,747 | 273,408 | 2,006,726 | |||||||||
|
Net
increase in cash and cash equivalents
|
740,750 | 14,149 | 744,929 | |||||||||
|
Cash
at beginning of period
|
4,179 | 1,003 | — | |||||||||
|
Cash
at end of period
|
$ | 744,929 | $ | 15,152 | $ | 744,929 | ||||||
|
(1)
|
All
funds collected were a part of the October 2008 financing at $.35 per
unit, which included one share of common stock and one warrant to purchase
an equal number of shares at $.46 per share as of September 30,
2008.
|
See
accompanying notes to financial statements.
F-6
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO INTERIM FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Operations
BioDrain
Medical, Inc. was incorporated under the laws of the State of Minnesota in 2002.
The Company is developing an environmentally safe system for the collection and
disposal of infectious fluids that result from surgical procedures and
post-operative care.
Accounting
Estimates
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The interim financial statements include all adjustments that, in the opinion of
management, are necessary in order to make the financial statements not
misleading in compliance with Rule 8-03 of Regulation S-X.
Intangible
Assets
Intangible
assets consist of patent costs. These assets are not subject to amortization
until the property patented is in production. The assets are reviewed for
impairment annually, and impairment losses, if any, are charged to operations
when identified. No impairment losses have been identified by
management.
Income
Taxes
Deferred
income taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The major temporary differences are the net operating
losses. Due to historical losses on the accrual basis the related deferred tax
assets are not recorded in the financial statements.
Research
and Development
Research
and development costs are charged to operations as incurred. Research and
development costs were $91,400 and $400 for the nine months ended September 30,
2008 and 2007, respectively.
Patent
and Intellectual Property
The
Company recently completed and executed an agreement to secure exclusive
ownership of the patent-pending product and rights from an inventor, Marshall
Ryan. Mr. Ryan received a combination of cash and warrants, and he will receive
a 4% royalty on FMS sales for the life of the patent. At the signing of the
agreement, Mr. Ryan received $75,000 in exchange for the exclusive assignment of
the patent. In addition, on June 30, 2009, Mr. Ryan, through his
Mid-State Stainless, Inc. entity, will receive $100,000 as payment (currently
recorded as an account payable with the Company) for past research and
development activities. Should Mr. Ryan be utilized in the future for
additional product development activities, he will be compensated at a rate of
ninety five dollars ($95.00) per hour. Mr. Ryan also received 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 (defined as
greater than 50% of the Company’s outstanding stock or substantially all of its
assets being transferred to one independent person or entity), Mr. Ryan will be
owed a total of $2 million to be paid out over the life of the patent if the
change in control occurs within 12 months of the first sale of any products;
or $1 million to be paid out over the life of the patent if the change in
control occurs between 12 and 24 months of the first sale of any products; or
$500,000 to be paid out over the life of the patent if the change in control
occurs between 24 and 36 months of the first sale of any product. The fair value
assigned to the warrants is $52,500 based on the per share price of the October
2008 financing.
F-7
NOTE 2 – DEVELOPMENT STAGE
OPERATIONS
The
Company was formed April 23, 2002. Since inception to September 30, 2008,
7,427,685 shares have been issued between par value and $1.67. Operations since
incorporation have been devoted to raising capital, obtaining financing,
development of the Company’s product, and administrative
services.
NOTE 3 – STOCK OPTIONS AND
WARRANTS
In
connection with the financing completed in October 2008, the Company has
effected two reverse stock splits, one on June 6, 2008 and another on October
20, 2008. Under SAB Topic 4C, all stock options and warrants and their related
exercise prices are stated at their post-reverse stock split
values.
The
Company has a stock option plan, which allows issuance of both incentive and
non-qualified stock options to employees, directors and consultants of the
Company, where permitted under the plan. The exercise price for each stock
option is determined by the board of directors. Vesting requirements are
determined by the board of directors when granted and currently range from
immediate to three years. Options under this plan have terms varying from three
to seven years.
The
Company was required to adopt the provisions of FASB Statement No. 123R, Share-Based Payment. (SFAS 123R)
effective January 1, 2006. As permitted by SFAS No. 123R, the Company accounts
for stock option awards using the calculated value method. The Company opted for
early adoption of the provisions of SFAS 123R.
The
provisions of SFAS No. 123R are applicable to stock options awarded by the
Company beginning in 2005. Under SFAS No. 123R, the Company is required to
recognize compensation expense for options granted in 2005 and
thereafter.
The
Company has 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 expense recognized in the financial statements
was $210,311 and $8,245 for September 30, 2008 and 2007,
respectively.
The
following summarizes transactions for stock options and warrants for the periods
indicated:
|
Stock
Options (1)
|
Warrants
(1)
|
|||||||||||||||
|
Number
of
Shares
|
Average
Exercise
Price
|
Number
of
Shares
|
Average
Exercise
Price
|
|||||||||||||
|
Outstanding
at December 31, 2005
|
17,956 | $ | 1.67 | 20,950 | $ | 2.62 | ||||||||||
|
Issued
|
23,942 | 1.67 | 71,826 | 0.85 | ||||||||||||
|
Outstanding
at December 31, 2006
|
41,898 | $ | 1.67 | 92,776 | $ | 1.25 | ||||||||||
|
Issued
|
5,985 | 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.
F-8
At
September 30, 2008, 651,174 stock options are fully vested and currently
exercisable. 4,850,050 warrants are fully vested and
exercisable.
The
following summarizes the status of options and warrants outstanding at September
30, 2008:
|
Range
of Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Life
|
|||||||
|
Options
|
|||||||||
|
$
|
0.01
|
$ | 543,292 | $ | 9.68 | ||||
|
$
|
0.35
|
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 | ||||||
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 the 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 offering (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, the 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, the Board of Directors (i) approved the second reverse stock
split pursuant to which the authorized number of shares of common stock of
15,942,607 was proportionately divided by 1.33177 to 11,970,994 and (ii)
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.
Stock,
Stock Options and Warrants Granted by the Company
Warrants
In
2005 and 2006, the Company 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.
F-9
In
2006, the Company 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 the Company’s total outstanding shares reaching 2
million. The second 35,913 shares of the Company’s 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, the Company 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, the Company
issued warrants to purchase 20,949 shares of common stock at $1.67 per share to
WREF.
In
August 2008, the Company 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, the Company 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, the Company 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, the Company entered into a consulting agreement with Jeremy
Roll for referral services for the Company’s funding that was completed in
October 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.
The
Company 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. Changes in exercise prices or number of
warrants would occur if the Company issues any shares of its common stock (other
than excluded securities, as defined in the warrant) for a consideration per
share less than the exercise price in effect at the time of exercise of the
warrant. The warrant contains a cashless exercise provision which provides that
after one year following the closing date of the offering, if a registration
statement covering the warrants is not available for resale for the warrants,
the warrant holder may exercise the warrant in whole or in part in lieu of
making a cash payment by electing to receive the net number of common stock
determined by the following formula: net number = ((A x B)- (A x
C))/B. A equals the total number of shares with respect to which the
warrant is then being exercised. B equals the closing sale price of the shares
of common stock (as reported by Bloomberg) on the date immediately preceding the
date of notice of an exercise. C equals the exercise price then in effect for
the applicable warrant shares at the time of such exercise. There are no
registration obligations on the Company nor are there any liquidated damages or
potential penalties to which the Company is subject.
Stock
and Stock Options
On
August 22, 2005, the Company 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, the Company 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, the Company issued 7,482 shares of common stock to officers
Lawrence Gadbaw and Gerald Rice for personal guarantees on Company
loans.
F-10
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, the Company issued 14,964 shares of common stock to Andcor
Companies, Inc. in partial payment of an invoice.
On
October 23, 2006, the Company 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, the Company 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, the Company 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, the Company 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 the Company 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, the Company entered into a finder agreement with Thomas Pronesti
for referral services for the Company’s funding that was completed in October
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, the Company 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 the Company’s common stock. On June 23,
2008 Kulman and Cross Street Partners, Inc. each received 125,000 shares of
common stock.
On
June 16, 2008, the Company entered into an employment agreement with Chad Ruwe,
Executive Vice President of Operations, pursuant to which the Company granted
him options to purchase 50,000 shares of common stock.
On
June 30, 2008, the Company 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, the Company entered into an employment agreement with David
Dauwalter, Director of Sales, pursuant to which the Company 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 50,000 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 therefore his annual salary
was increased to $170,000. 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 pursuant to his employment agreement. The options are
recorded by footnote only in our financial statements; however vesting will be
recorded as compensation expense in the operating statement.
F-11
Other
Securities For Issuance Upon Certain Contingencies
In
2007, three of the Company’s 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 the Company’s funding brokers, the Company 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. Because the bonus and stock option
grants to Mr. Davidson and Mr. Rice are contingent on raising an additional $3
million, no accounting entry was made. The fair value of the equity
instruments granted to Mr. Davidson and Mr. Rice was based on the funding price
of $.35 per share for a total of $84,000.
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, the Company
granted Mr. Ruwe options to purchase up to 200,000 shares of the Company’s
common stock contingent upon reaching certain performance goals, the timing of
which was not set. The Company believes 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, the
Company 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. The Company believes 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 the Company 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, the Company 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. The basis used for valuation of the
options and warrants was the stock and warrant prices at which investors of the
October 2008 financing paid and/or will pay for their shares.
F-12
From
FR-72 Critical Accounting Estimates, we provide the following with regard to
valuation of stock options and warrants: the basis used for valuation
of the options and warrants was the stock and warrant prices at which investors
of the October funding paid and/or will pay for their shares. The valuation is
subject to change due to downward pressure from the current economic downturn
and unknown barriers to successful approvals of our product by FDA and UL or TUV
or from successful market penetration. We believe that the likelihood of change
in the near future is relatively high; however, not necessarily in a negative
manner. Warrant and stock option pricing is often sensitive to change in the
market.
NOTE 4 – INCOME TAXES
There is
no income tax provision in the accompanying statement of operations due
primarily to the valuation allowance for the deferred tax assets and state
income taxes.
Federal
and state income tax return operating loss carryovers as of September 30, 2008,
were approximately $1,261,000 and will begin to expire in 2018.
The
valuation allowance has been recorded due to the uncertainty of realization of
the benefits associated with the net operating losses. Future events and changes
in circumstances could cause this valuation allowance to change.
The
components of deferred income taxes at September 30 are as
follows:
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
Deferred
Tax Asset:
|
||||||||
|
Net
Operating Loss
|
$ | 428,000 | $ | 231,000 | ||||
|
Total
Deferred Tax Asset
|
428,000 | 231,000 | ||||||
|
Less
Valuation Allowance
|
428,000 | 231,000 | ||||||
|
Net
Deferred Income Taxes
|
$ | — | $ | — | ||||
NOTE 5 –NOTES PAYABLE
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 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.
F-13
NOTE 6 – LONG-TERM DEBT
Long-term
debt 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. 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 effective within 180 days from August 31, 2008.
Principal
payments required during the next five years are: 2009 - $185,800;
2010 - $12,000; 2011 - $13,300; 2012 - $107,300;
and 2013 - $0.
Commitments
and Contingencies
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.
|
F-14
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.
NOTE 7 – SUBSEQUENT EVENTS
Subsequent
to September 30, 2008, the Company received $21,700 after financing, commissions
and other associated costs in the October 2008 offering. This offering closed as
of October 30, 2008.
On
October 20, 2008, the Board of Directors approved a second reverse stock split
of 1.33-to-1. This brought the total reverse stock split to 1-for -1.670705. The
authorized number of common stock of 15,942,607 was proportionately divided by
1.33177 to 11,970,994.
On
October 20, 2008 the Board of Directors also approved an increase in the number
of authorized shares of the Company’s common stock from 11,970,994 to
40,000,000, which was approved by the Company’s shareholders holding a majority
of the shares entitled to vote thereon at a special meeting of shareholders held
on December 3, 2008..
On
December 30, 2008 the Company received notification from the U.S. Patent Office
that its patent application had been issued as U.S. Patent No.
7,469,727.
F-15
Board of
Directors
BioDrain
Medical, Inc.
Orono,
Minnesota
We have
audited the balance sheet of BioDrain Medical, Inc. (a development stage
company) as of December 31, 2007 and 2006 and the related statements of
operations and cash flows for the years then ended and for the period from April
23, 2002 (inception), to December 31, 2007 and the statement of stockholders’
deficit for the period from April 23, 2002 to December 31, 2007. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of BioDrain Medical, Inc. as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended and from April 23, 2002 (inception), to December 31,
2007 in conformity with accounting principles generally accepted in the United
States of America.
/s/Olsen
Thielen & Co., Ltd
St. Paul,
Minnesota
August
12, 2008
F-16
|
BIODRAIN
MEDICAL, INC.
|
|
(A
DEVELOPMENT STAGE COMPANY)
|
BioDrain
Medical, Inc.
(A
Development Stage Company)
December
31, 2007
(Audited)
F-17
|
December
31,
2007
|
December
31,
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 4,179 | $ | 1,003 | ||||
|
Prepaid
expenses
|
4,558 | 271 | ||||||
|
Total
current assets
|
8,737 | 1,274 | ||||||
|
Intangibles,
net
|
113,056 | 67,011 | ||||||
|
Total
assets
|
$ | 121,793 | $ | 68,285 | ||||
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt (See Note 6)
|
$ | 203,800 | $ | 20,500 | ||||
|
Accounts
payable
|
207,657 | 80,532 | ||||||
|
Accrued
expenses
|
226,429 | 413,521 | ||||||
|
Note
payable (See Note 6)
|
10,000 | 10,000 | ||||||
|
Note
Payable to Shareholder
|
— | 10,973 | ||||||
|
Total
current liabilities
|
647,886 | 535,526 | ||||||
|
Long-term
debt (See Note 6)
|
136,508 | 47,400 | ||||||
|
Stockholders’
equity (deficit):
|
||||||||
|
Common
stock $0.01 par value; 20,000,000 shares authorized; 1,376,105 and
1,375,105 shares issued
|
13,761 | 13,751 | ||||||
|
Additional
paid-in capital
|
112,309 | 100,357 | ||||||
|
Deficit
accumulated during development stage
|
(788,671 | ) | (628,749 | ) | ||||
|
Total
stockholders’ equity (deficit)
|
(662,601 | ) | (514,641 | ) | ||||
|
Total
liabilities and stockholders’ equity (deficit)
|
$ | 121,793 | $ | 68,285 | ||||
See
accompanying notes to financial statements.
F-18
|
BIODRAIN
MEDICAL, INC.
|
|
(A
DEVELOPMENT STAGE COMPANY)
|
|
YEARS
ENDED DECEMBER 31, 2007 AND 2006 AND
|
|
THE
PERIOD FROM APRIL 23, 2002 (INCEPTION) TO DECEMBER 31,
2007
|
|
For
the Year
Ended
December
31,
|
For
the Year
Ended
December
31,
|
For
the Period
From
April
23, 2002
(Inception)
To
December
31,
|
||||||||||
|
2007
|
2006
|
2007
|
||||||||||
|
Operating
expenses
|
$ | 126,684 | $ | 266,958 | $ | 735,146 | ||||||
|
Interest
expense
|
33,238 | 6,068 | 53,525 | |||||||||
|
Net
loss
|
$ | 159,922 | $ | 273,026 | $ | 788,671 | ||||||
See
accompanying notes to financial statements.
F-19
|
BIODRAIN
MEDICAL, INC.
|
|||||||||||
|
(A
DEVELOPMENT STAGE COMPANY)
|
|||||||||||
|
STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
|||||||||||
|
PERIOD
FROM APRIL 23, 2002 (INCEPTION) TO DECEMBER 31,
2007
|
|
Common
Stock
|
Additional
|
Accumulated
|
||||||||||||||||||
|
Shares
|
Amount
|
Paid-in
Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Issuance
of common stock 9/1/02 at $.0167/share (1)
|
598,549 | $ | 10,000 | $ | — | $ | — | $ | 10,000 | |||||||||||
|
Issuance
of common stock 10/23/02 at $1.67/share
|
2,993 | 50 | 4,950 | 5,000 | ||||||||||||||||
|
Vested
stock options and warrants
|
— | — | — | — | — | |||||||||||||||
|
Net
loss
|
— | — | — | (51,057 | ) | (51,057 | ) | |||||||||||||
|
Balance
on December 31, 2002 (Unaudited)
|
601,542 | 10,050 | 4,950 | (51,057 | ) | (36,057 | ) | |||||||||||||
|
Issuance
of common stock 2/12/03 at $.0167/share (2)
|
23,942 | 400 | — | — | 400 | |||||||||||||||
|
Issuance
of common stock 6/11-12/3/03 (3)
|
21,548 | 360 | 34,650 | 35,000 | ||||||||||||||||
|
Vested
stock options and warrants
|
— | — | — | — | — | |||||||||||||||
|
Net
loss
|
(90,461 | ) | (90,461 | ) | ||||||||||||||||
|
Balance
on December 31, 2003 (Unaudited)
|
647,032 | 10,810 | 39,600 | (141,518 | ) | (91,118 | ) | |||||||||||||
|
Issuance
of common stock 5/25/04 at $1.67/share
(4)
|
6,567 | 110 | — | — | 110 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | — | — | — | |||||||||||||||
|
Net
loss
|
— | — | — | (90,353 | ) | (90,353 | ) | |||||||||||||
|
Balance
on December 31, 2004 (Unaudited)
|
653,599 | 10,920 | 39,600 | (231,871 | ) | (181,361 | ) | |||||||||||||
|
Issuance
of common stock 12/14/05 at $1.67/share
(5)
|
14,964 | 250 | — | — | 250 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | 2,793 | — | 2,793 | |||||||||||||||
|
Net
loss
|
— | — | — | (123,853 | ) | (123,853 | ) | |||||||||||||
|
Balance
on December 31, 2005 (Unaudited)
|
668,563 | 11,170 | 42,393 | (355,724 | ) | (302,161 | ) | |||||||||||||
|
Issuance
of common stock 5/16, 8/8/06 at $1.67/share
(6)
|
86,869 | 1,451 | — | — | 1,451 | |||||||||||||||
|
Issuance
of common stock 10/19, 23/06 at $1.67/share
(7)
|
38,906 | 650 | — | — | 650 | |||||||||||||||
|
Issuance
of common stock 12/01/06 at $1.67/share
(8)
|
28,730 | 480 | 44,320 | — | 44,800 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | 13,644 | — | 13,644 | |||||||||||||||
|
Net
loss
|
— | — | — | (273,026 | ) | (273,026 | ) | |||||||||||||
|
Balance
on December 31, 2006
|
823,068 | 13,751 | 100,357 | (628,750 | ) | (514,642 | ) | |||||||||||||
|
Issuance
of common stock 1/30/07 at $1.67/share
(9)
|
599 | 10 | 990 | — | 1,000 | |||||||||||||||
|
Vested
stock options and warrants
|
— | — | 10,962 | — | 10,962 | |||||||||||||||
|
Net
loss
|
(159,922 | ) | (159,922 | ) | ||||||||||||||||
|
Balance
on December 31, 2007
|
823,667 | 13,761 | 112,309 | (788,671 | ) | (662,601 | ) | |||||||||||||
|
(1)
Founders shares, 1,000,000 pre-split.
|
|
|
(2)
40,000 shares valued at $1.00 per share for loan guarantees by
management.
|
|
|
(3)
Investment including 670 shares issued as a finders fee of
10%.
|
|
|
(4)
For patent legal fee payments.
|
|
|
(5)
For loan guarantees by management.
|
|
| (6) For vendor contractual consideration. | |
| (7) Employment agreements. | |
| (8) Investment. | |
| (9) Conversion of convertible note by management. |
See
accompanying notes to financial statements.
F-20
|
BIODRAIN
MEDICAL, INC.
|
|
(A
DEVELOPMENT STAGE COMPANY)
|
|
YEARS
ENDED DECEMBER 31, 2007 AND 2006 AND
|
|
THE
PERIOD FROM APRIL 23, 2002 (INCEPTION) TO DECEMBER 31,
2007
|
|
For
the Year
Ended
December
31,
2007
|
For
the Year
Ended
December
31,
2006
|
For
the Period
From
April 23,
2002
(Inception)
To
December 31,
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (159,922 | ) | $ | (273,026 | ) | $ | (788,671 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Amortization
|
47 | 70 | 350 | |||||||||
|
Vested
stock options and warrants
|
10,962 | 13,644 | 27,399 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Prepaid
expenses
|
(4,287 | ) | 201 | (4,558 | ) | |||||||
|
Accounts
payable
|
127,125 | 46,823 | 207,657 | |||||||||
|
Accrued
expenses
|
(187,092 | ) | 198,118 | 226,429 | ||||||||
|
Net
cash used in operating activities
|
(213,167 | ) | (14,170 | ) | (331,394 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of intangibles
|
(46,092 | ) | (29,675 | ) | (113,406 | ) | ||||||
|
Net
cash used in investing activities
|
(46,092 | ) | (29,675 | ) | (113,406 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Note
payable to shareholder
|
(10,973 | ) | — | (10,973 | ) | |||||||
|
Proceeds
on long-term debt
|
274,000 | 10,000 | 421,505 | |||||||||
|
Principal
payments on long-term debt
|
(1,592 | ) | (37,658 | ) | (60,224 | ) | ||||||
|
Issuance
of common stock
|
1,000 | 46,901 | 98,671 | |||||||||
|
Net
cash provided by financing activities
|
262,435 | 19,243 | 448,979 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
3,176 | (24,602 | ) | 4,179 | ||||||||
|
Cash
at beginning of year
|
1,003 | 25,605 | — | |||||||||
|
Cash
at end of year
|
$ | 4,179 | $ | 1,003 | $ | 4,179 | ||||||
See
accompanying notes to financial statements.
F-21
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Operations
BioDrain
Medical, Inc. was incorporated under the laws of the State of Minnesota in 2002.
The Company is developing an environmentally safe system for the collection and
disposal of infectious fluids that result from surgical procedures and
post-operative care.
Accounting
Estimates
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Intangible
Assets
Intangible
assets consist of patent costs. These assets are not subject to amortization
until the property patented is in production. The assets are reviewed for
impairment annually, and impairment losses, if any, are charged to operations
when identified. No impairment losses have been identified by
management.
Income
Taxes
Deferred
income taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The major temporary differences are the net operating
losses. Due to historical losses on the accrual basis the related deferred tax
assets are not recorded in the financial statements.
Research
and Development
Research
and development costs are charged to operations as incurred. Research and
development costs were $1,434 and $75,383 for 2007 and 2006, respectively. As of
December 31, 2007, the Company accrued $100,000 for unbilled product development
work since 2002. Mid-State Stainless, Inc., the company who performed the
product development work, notified the Company in late 2007 that the amount for
all development costs totaled $100,000 and would be billed to the Company as a
lump sum. Mid-State Stainless, Inc. later billed the Company for that amount in
2008. The amount remains in accounts payable as of the date of this registration
statement.
NOTE 2 – DEVELOPMENT STAGE
OPERATIONS
The
Company was formed April 23, 2002. One million shares of common stock were
issued at par value and since inception 376,105 shares have been issued between
par value and $1. Operations since incorporation have been devoted to raising
capital, obtaining financing, development of the Company’s product, and
administrative services.
F-22
NOTE 3 – STOCK OPTIONS AND
WARRANTS
In
connection with the financing completed in October 2008, the Company has
effected two reverse stock splits, one on June 6, 2008 and another on October
20, 2008. Under SAB Topic 4C, all stock options and warrants and their related
exercise prices are stated at their post-reverse stock split
values.
The
Company has a stock option plan, which allows issuance of both incentive and
non-qualified stock options to employees, directors and consultants of the
Company, where permitted under the plan. The exercise price for each stock
option is determined by the Board of Directors. Vesting requirements are
determined by the Board of Directors when granted and currently range from
immediate to three years. Options under this plan have terms varying from five
to seven years. The Company was required to adopt the provisions of
FASB Statement No. 123R, Share-Based Payment (SFAS 123R) effective
January 1, 2006. As permitted by SFAS No. 123R, the Company accounts for stock
option awards using the calculated value method. The Company opted for early
adoption of the provisions of SFAS 123R.The provisions of SFAS No. 123R are
applicable to stock options awarded by the Company beginning in 2005. Under SFAS
No. 123R, the Company is required to recognize compensation expense for options
granted in 2005 and thereafter.
The
Company has 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
4.12% to 5.07%, an expected life of 5 years and an expected volatility and
dividend rate of 0%. Compensation expense recognized in the financial statements
was $10,962 and $13,644 for 2007 and 2006, respectively.
The
following summarizes transactions for stock options and warrants for the years
ended December 31, 2007 and 2006:
|
Stock
Options
|
Warrants
|
|||||||||||||||
|
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
|
41,897 | $ | 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 | ||||||||||
At
December 31, 2007, 40,000 stock options are fully vested and currently
exercisable. 202,620 warrants are fully vested and exercisable.
The
following summarizes the status of options and warrants outstanding at December
31, 2007:
|
Range
of Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Life
|
|||||||
|
Options
|
|||||||||
|
$
|
0.35
|
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 | ||||||
|
$
|
3.76
|
11,971 | 0.79 | ||||||
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 the common stock warrant purchase agreement.
F-23
Securities
for issuance upon certain contingencies:
In
2007, three of the Company’s 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. In December 2007, upon request from the
Company’s funding brokers, the Company 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. Because the bonus and stock option grants to Mr. Davidson and
Mr. Rice are contingent on raising an additional $3 million, no accounting entry
was made. The fair value of the equity instruments granted to Mr.
Davidson and Mr. Rice was based on the funding price of $.35 per share for a
total of $84,000.
NOTE 4 – INCOME TAXES
There is
no income tax provision in the accompanying statement of operations due
primarily to the valuation allowance for the deferred tax assets and state
income taxes.
Federal
and state income tax return operating loss carryovers as of December 31, 2007,
were approximately $785,000 and will begin to expire in 2017.
The
valuation allowance has been recorded due to the uncertainty of realization of
the benefits associated with the net operating losses. Future events and changes
in circumstances could cause this valuation allowance to change.
The
components of deferred income taxes at December 31 are as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
Tax Asset:
|
||||||||
|
Net
Operating Loss
|
$ | 196,000 | $ | 156,000 | ||||
|
Total
Deferred Tax Asset
|
196,000 | 156,000 | ||||||
|
Less
Valuation Allowance
|
196,000 | 156,000 | ||||||
|
Net
Deferred Income Taxes
|
$ | — | $ | — | ||||
NOTE 5 –NOTES PAYABLE
The
Company has a convertible debenture with Andcor Companies, Inc. (“Andcor”) of
$10,000 at 10.25% that matures in 2007. The debenture is convertible to 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.
F-24
NOTE 6 – LONG-TERM DEBT
Long-term
debt is as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Notes
payable to several individuals due April 2008 including 8% fixed interest.
The notes are convertible into 620,096 shares of the Company’s common
stock.
|
$ | 170,000 | $ | — | ||||
|
Note
payable to bank in monthly installments of $1,255/including variable
interest at 2% above the prevailing prime rate (7.25% at December 31,
2007) to August 2011 when the remaining balance is payable. The note is
personally guaranteed by executives of the Company.
|
48,308 | 49,900 | ||||||
|
Note
payable to Development Corporation 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 | 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
shares of stock in the Company at a price equal to the next completed
funding transaction by the Company.
|
100,000 | — | ||||||
|
Notes
payable to four shareholders of the Company that are overdue. The notes
are convertible into shares of stock in the Company at $1.00 per
share.
|
4,000 | — | ||||||
|
Total
|
340,308 | 67,900 | ||||||
|
Less
amount due within one year
|
203,800 | 20,500 | ||||||
|
Long-Term
Debt
|
$ | 136,508 | $ | 47,400 | ||||
Cash
payments for interest were $8,069 in 2007 and $8,948 in 2006.
Principal
payments required during the next five years are: 2008 - $203,800; 2009 -
$12,000; 2010 - $13,300; 2011 - $11,200; and 2012 - $100,000.
NOTE 7 – SUBSEQUENT EVENTS
Subsequent
to year end 2007, the Company has received $1,582,696 before financing,
commissions and other associated costs in a private placement
offering.
On June
6, 2008, the Board of Directors approved a 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 a subsequent 1-for-1.33176963
reverse stock split. The authorized number of common stock of
15,942,607 was proportionately divided by 1.33176963 to
11,970,994.
On
October 20, 2008, our board of directors also approved an increase in the
authorized shares of our common stock from 11,970, 994 to
40,000,000. On December 3, 2008, our shareholders approved the
increase in authorized shares of our common stock.
F-25
Part II
Item
24. Indemnification of Directors and Officers.
We
are a Minnesota corporation and certain provisions of the Minnesota Statutes and
our Bylaws provide for indemnification of our officers and directors against
liabilities which they may incur in such capacities. A summary of the
circumstances in which indemnification is provided is discussed below, but this
description is qualified in its entirety by reference to our Bylaws and to the
statutory provisions.
Section
302A.521, Subd. 2 of the Minnesota Statutes requires a corporation to indemnify
a person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person against judgments, penalties,
fines, including, without limitation, excise taxes assessed against the person
with respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys’ fees and disbursements, incurred by the person in
connection with the proceeding, if, with respect to the acts or omissions of the
person complained of in the proceeding, the person:
|
(1)
|
has
not been indemnified by another organization or employee benefit plan for
the same judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys’
fees and disbursements, incurred by the person in connection with the
proceeding with respect to the same acts or omissions;
|
|
|
(2)
|
acted
in good faith;
|
|
|
(3)
|
received
no improper personal benefit and Section 302A.255, if applicable, has been
satisfied;
|
|
|
(4)
|
in
the case of a criminal proceeding, had no reasonable cause to believe the
conduct was unlawful; and
|
|
|
(5)
|
in
the case of acts or omissions occurring in the person’s performance in the
official capacity of director or, for a person not a director, in the
official capacity of officer, board committee member or employee,
reasonably believed that the conduct was in the best interests of the
corporation or, in the case of performance by a director, officer or
employee of the corporation involving service as a director, officer,
partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the
best interests of the corporation. If the person’s acts or omissions
complained of in the proceeding relate to conduct as a director, officer,
trustee, employee, or agent of an employee benefit plan, the conduct is
not considered to be opposed to the best interests of the corporation if
the person reasonably believed that the conduct was in the best interests
of the participants or beneficiaries of the employee benefit
plan.
|
Section
302A.521 Subd. 2 further provides that the termination of a proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent does not, of itself, establish that the person did not meet the
criteria set forth in this subdivision.
In
addition, Section 302A.521, Subd. 3, requires that if a person is made or
threatened to be made a party to a proceeding, the person is entitled, upon
written request to the corporation, to payment or reimbursement by the
corporation of reasonable expenses, including attorneys’ fees and disbursements,
incurred by the person in advance of the final disposition of the proceeding,
(a) upon receipt by the corporation of a written affirmation by the person of a
good faith belief that the criteria for indemnification set forth in Section
302A.521, Subd. 2 have been satisfied and a written undertaking by the person to
repay all amounts so paid or reimbursed by the corporation, if it is ultimately
determined that the criteria for indemnification have not been satisfied, and
(b) after a determination that the facts then known to those making the
determination would not preclude indemnification under this section. The written
undertaking required by clause (a) is an unlimited general obligation of the
person making it, but need not be secured and shall be accepted without
reference to financial ability to make the repayment.
Section
302A.521 Subd. 4 provides that the articles of incorporation or bylaws of a
corporation either may prohibit indemnification or advances of expenses
otherwise required by Section 302A.521 or may impose conditions on
indemnification or advances of expenses in addition to the conditions contained
in Subd. 2 and 3 including, without limitation, monetary limits on
indemnification or advances of expenses, if the prohibition or conditions apply
equally to all persons or to all persons within a given class. A prohibition or
limit on indemnification or advances may not apply to or affect the right of a
person to indemnification or advances of expenses with respect to any acts or
omissions of the person occurring prior to the effective date of a provision in
the articles of incorporation or the date of adoption of a provision in the
corporation’s bylaws establishing the prohibition or limit on indemnification or
advances.
II-1
Section
302A.521 Subd. 5 provides that Section 302A.521 does not require, or limit the
ability of a corporation to reimburse expenses, including attorneys’ fees and
disbursements, incurred by a person in connection with an appearance as a
witness in a proceeding at a time when the person has not been made or
threatened to be made a party to a proceeding
Section
302A.521 Subd. 6 further provides that:
|
(a)
all determinations whether indemnification of a person is required because
the criteria set forth in Subd. 2 have been satisfied and whether a person
is entitled to payment or reimbursement of expenses in advance of the
final disposition of a proceeding as provided in Subd. 3 shall be
made:
|
||
|
(1)
|
by
the board by a majority of a quorum, if the directors who are at the time
parties to the proceeding are not counted for determining either a
majority or the presence of a quorum;
|
|
|
(2)
|
if
a quorum under clause (1) cannot be obtained, by a majority of a committee
of the board, consisting solely of two or more directors not at the time
parties to the proceeding, duly designated to act in the matter by a
majority of the full board including directors who are
parties;
|
|
|
(3)
|
if
a determination is not made under clause (1) or (2), by special legal
counsel, selected either by a majority of the board or a committee by vote
pursuant to clause (1) or (2) or, if the requisite quorum of the full
board cannot be obtained and the committee cannot be established, by a
majority of the full board including directors who are
parties;
|
|
|
(4)
|
if
a determination is not made under clauses (1) to (3), by the affirmative
vote of the shareholders required by Section 302A.437 of the Minnesota
Statutes, but the shares held by parties to the proceeding must not be
counted in determining the presence of a quorum and are not considered to
be present and entitled to vote on the determination;
or
|
|
|
(5)
|
if
an adverse determination is made under clauses (1) to (4) or under
paragraph (b), or if no determination is made under clauses (1) to (4) or
under paragraph (b) within 60 days after (i) the later to occur of the
termination of a proceeding or a written request for indemnification to
the corporation or (ii) a written request for an advance of expenses, as
the case may be, by a court in this state, which may be the same court in
which the proceeding involving the person’s liability took place, upon
application of the person and any notice the court requires. The person
seeking indemnification or payment or reimbursement of expenses pursuant
to this clause has the burden of establishing that the person is entitled
to indemnification or payment or reimbursement of
expenses.
|
|
|
(b)
With respect to a person who is not, and was not at the time of the acts
or omissions complained of in the proceedings, a director, officer, or
person possessing, directly or indirectly, the power to direct or cause
the direction of the management or policies of the corporation, the
determination whether indemnification of this person is required because
the criteria set forth in Subd. 2 have been satisfied and whether this
person is entitled to payment or reimbursement of expenses in advance of
the final disposition of a proceeding as provided in Subd. 3 may be made
by an annually appointed committee of the board, having at least one
member who is a director. The committee shall report at least annually to
the board concerning its actions.
|
||
Section
302A.521 Subd 7 allows a corporation to purchase and maintain insurance on
behalf of a person in that person’s official capacity against any liability
asserted against and incurred by the person in or arising from that capacity,
whether or not the corporation would have been required to indemnify the person
against the liability under the provisions of section 302A.521 of the Minnesota
Statutes.
Section
302A.521 Subd. 8 requires a corporation that indemnifies or advances expenses to
a person in accordance with Section 302A.521 in connection with a proceeding by
or on behalf of the corporation to report to the shareholders in writing the
amount of the indemnification or advance and to whom and on whose behalf it was
paid not later than the next meeting of shareholders.
II-2
Section
302A.521 Subd. 9 provides that nothing in Section 302A.521 shall be construed to
limit the power of the corporation to indemnify persons other than a director,
officer, employee, or member of a committee of the board of the corporation by
contract or otherwise.
Pursuant
to our Bylaws, we may indemnify our directors and executive officers to the
fullest extent not prohibited by any applicable law; provided, however, that we
may modify the extent of such indemnification by individual contracts with our
directors and executive officers; and, provided, further, that we shall not be
required to indemnify any director or executive officer in connection with any
proceeding (or part thereof) initiated by such person unless: (i) such
indemnification is expressly required to be made by law; (ii) the proceeding was
authorized by our Board of Directors; (iii) such indemnification is provided by
the Company, in our sole discretion, pursuant to the powers vested in the
Company under any applicable law. We shall have the power to indemnify our other
officers, employees and other agents as set forth in any other applicable law.
Our Board of Directors shall have the power to delegate the determination of
whether indemnification shall be given to any such person to such officers or
other persons as our Board of Directors shall determine.
In
addition, our Bylaws provide that we will advance to any person who was or is a
party to a threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or executive officer, of the Company, prior to the final
disposition of the proceeding, promptly following request therefore, all
expenses incurred by any director or executive officer in connection with such
proceeding; provided, however, that the advancement of expenses shall be made
only upon delivery to the Company of an undertaking by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses.
Notwithstanding the foregoing, unless otherwise determined, no advance shall be
made by the Company to an officer of the Company (except by reason of the fact
that such officer is or was a director of the Company in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made: (i) by a majority vote of directors who are not parties to the
proceeding; (ii) by a committee of such directors designated by a majority vote
of such directors; or (iii) if there are no such directors, or such directors so
direct, by a written opinion from independent legal counsel, that the facts
known to the decision making party at the time such determination is made
demonstrate clearly and convincingly that such person acted in bad faith or in a
manner that such person did not believe to be in the best interests of the
Company.
Our
Bylaws also provide that without the necessity of entering into an express
contract, all rights to indemnification and advances to our directors and
executive officers shall be deemed to be contractual rights and to be effective
to the same extent and as if provided for in a contract between the Company and
the director or executive officer. Any right to indemnification or advances
granted to a director or executive officer shall be enforceable by or on behalf
of the person holding such right in any court of competent jurisdiction if: (i)
the claim for indemnification or advances is denied, in whole or in part; or
(ii) no disposition of such claim is made within ninety (90) days of request
therefore. The claimant in such enforcement action, if successful, shall be
entitled to be paid also the expense of prosecuting the claim. In connection
with any claim for indemnification, the Company shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under applicable law for the Company to
indemnify the claimant for the amount claimed. In connection with any claim by
an executive officer of the Company (except in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such executive officer is or was a director of the Company) for advances,
the Company shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in the best interests of the Company, or with
respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that his conduct was lawful. A determination by the
Company (including the Board of Directors, independent legal counsel or the
stockholders) that indemnification of the claimant is proper because he has met
the applicable standard of conduct or that the claimant has not med such
applicable standard of conduct shall not be a defense to the action nor shall it
create a presumption that claimant has not met the applicable standard of
conduct.
II-3
Item
25. Other Expenses of Issuance and Distribution.
The
following table sets forth an estimate of the costs and expenses payable by us
in connection with the registration of the common stock offered hereby. All of
the amounts shown are estimates except the Securities and Exchange Commission
Registration Fee:
|
Amount
|
||||
|
SEC
Registration Fee
|
$
|
200
|
||
|
Printing
Fees
|
$
|
30,000
|
||
|
Legal
Fees and Expenses
|
$
|
80,000
|
||
|
Accounting
Fees and Expenses
|
$
|
60,000
|
||
|
Miscellaneous
|
$
|
55,000
|
||
|
Total
|
$
|
225,200
|
||
Item
26. Recent Sales of Unregistered Securities.
During
the past three years, the Company has issued the following securities without
registration under the Securities Act of 1933, as amended. The discussions below
take into account the June 6, 2008 and October 20, 2008 reverse stock
splits.
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. This transaction was effected under Rule 701 promulgated
under the Act on the basis that the transaction was pursuant to a contract
relating to compensation provided under Rule 701. The recipient of securities in
this transaction represented his intentions to acquire the securities for
investment only and not with a view towards distribution thereof. He had access,
through his relationship with the Company, to information about
us.
On
August 31, 2005, we issued warrants to purchase 2,993 shares of our common stock
at $1.67 per share to each of three members of our Medical Advisory Board,
Debbie Heitzman, Mary Wells Gorman and David Feroe, for their services on the
Medical Advisory Board.
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, we issued 71,906 shares of our common stock to the inventor of our
intellectual property, Marshall Ryan, for the development work he performed with
respect to our product.
On
June 12, 2006, we issued warrants to purchase 35,913 shares of our common stock
at $.02 per share to Dr. Arnold Leonard for his services on the
Medical Advisory Board. The warrant agreement contained an anti-dilution clause
that would add another 35,913 shares upon any large, dilutionary offering. The
second warrants to purchase 35,913 shares of our common stock were granted to
Mr. Leonard in June 2008 when we achieved 2 million in outstanding shares of
common stock through the October 2008 financing.
On
August 8, 2006, we issued 14,964 shares of our common stock to Andcor Companies,
Inc. in partial payment of an invoice. Also 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.
On
August 22, 2006, pursuant to a stock option agreement with Thomas McGoldrick, a
member of our board of directors, we issued options to purchase 5,986 shares of
our common stock at $.46 per share to Mr. McGoldrick. This transaction was
effected under Rule 701 promulgated under the Act on the basis that the
transaction was pursuant to a contract relating to compensation provided under
Rule 701. The recipient of the securities in this transaction represented his
intentions to acquire the securities for investment only and not with a view
towards distribution thereof. He had access, through his relationship with the
Company, to information about us.
II-4
On
October 4, 2006, we entered into an employment agreement with Kevin Davidson,
our Chief Executive Officer. As part of this agreement, we agreed to issue
50,000 shares of our common stock to Mr. Davidson. The grant under the
employment agreement 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 raised by the Company. On June 5, 2008, pursuant to a
stock option agreement with the Company, which amended Mr. Davidson’s employment
agreement, Mr. Davidson opted to receive options to purchase 543,292 shares of
common stock, exercisable at $.01, in lieu of obtaining the shares to which he
was entitled under his employment agreement.
On
October 23, 2006, we issued 8,979 shares of our common stock to a former
employee as a part of his compensation package in his employment agreement. This
transaction was effected under Rule 701 promulgated under the Act on the basis
that the transaction was pursuant to a contract relating to compensation
provided under Rule 701. The recipient of securities in this transaction
represented his intentions to acquire the securities for investment only and not
with a view towards distribution thereof. He had access, through his
relationship with the Company, to information about us.
On
November 11, 2006, 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, Andrew Reding,
for his services as a director. The options were grantable annually at 10,000
per year starting in 2007. This transaction was effected under Rule 701
promulgated under the Act on the basis that the transaction was pursuant to a
contract relating to compensation provided under Rule 701. The recipient of
securities in this transaction represented his intentions to acquire the
securities for investment only and not with a view towards distribution thereof.
He had access, through his relationship with the Company, to information about
us.
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, the Company issued warrants to
purchase 20,949 shares of common stock at $1.67 per share to
WREF.
On
December 1, 2006, we issued 3,986 shares of our common stock to pay a consulting
fee to Wisconsin Business Innovation Corporation, a related firm of
WREF.
On
December 7, 2006 and December 20, 2006 we issued warrants to purchase 2,993
shares of our common stock at $1.67 per share to each of Karen Ventura, Nancy
Kolb and Kim Shelquist for their sales and marketing advisory
services.
On
January 30, 2007 we fully repaid a Company loan of $1,000 due one of our former
employees by issuing him 599 shares of our common stock.
In
February 2007, Messrs. Davidson, Morawetz, Reding and McGoldrick loaned the
Company $1,000 each and obtained a 8.25% convertible promissory note in the
principal amount of $1,000. Each note matured on July 31, 2007 and the note
was convertible into common stock at the lower of (i) $1.00 per share or (ii)
the price of the sale of common stock the next financing which ultimately was
$0.35 per share.
On
March 1, 2007, we entered into a convertible debenture agreement with two
payees, Roy Moore and Carl Moore, who loaned us $50,000 each, whereby we granted
warrants to purchase up to an aggregate of 28,502 to them at $.46 per share.
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
July 23, 2007, we entered into a convertible debenture with certain investors
who loaned us $170,000. Such securities are convertible into 620,096
shares and the lenders were also entitled to receive warrants to purchase
620,096 shares at 0.35 per share. The Company will issue the warrants by the end
of January 2009.
From
July 2007 to October 2008, we issued 4,552,862 shares of our common stock at a
price per share of $0.35 to a number of investors pursuant to a private
placement, and raised gross proceeds of approximately $1.6 million. The
transaction was a unit offering, pursuant to which each investor received a unit
comprised of one share of common stock and one warrant to purchase common stock
at $0.46 per share. Thirty-three investors, including one of our officers, Chad
Ruwe, participated in the transaction, which we completed in October 2008. The
transaction is described further in “Description of Business” Section. This
transaction was in reliance upon the exemption from registration set forth in
Rule 506 of Regulation D. Each and all of the investors in this financing
qualified as an “accredited investor,” as that term is defined in the Act. The
following conditions were all met with respect to this transaction: (1) the
registrant did not advertise this issuance in any public medium or forum; (2)
the registrant did not solicit any investors with respect to this issuance; (3)
the registrant did not publicize any portion of the purchase or sale of the
shares issued; (4) none of the shares issued were offered in conjunction with
any public offering; and (5) neither the registrant nor the investors paid any
fees to any finder or broker-dealer in conjunction with this
issuance. In July 2007, we entered into a binding term sheet with a
consultant pursuant to which the consultant would assist us in obtaining bridge
financing and subsequent equity financing and such term sheet provided that the
consultant and its assigns would receive 13.3% of the Company’s anticipated
issued and outstanding common stock following the proposed bridge and equity
financing on a fully-diluted basis. The parties subsequently agreed that we
would issue 2,001,119 shares to such parties in satisfaction of such
obligation.
II-5
On
November 11, 2007, pursuant to a stock option agreement with Andrew Reding, a
member of our board of directors, we issued options to purchase 5,986 shares of
our common stock at $.46 per share to Mr. Reding. This transaction was effected
under Rule 701 promulgated under the Act on the basis that the transaction was
pursuant to a contract relating to compensation provided under Rule 701. The
recipient of securities in this transaction represented his intentions to
acquire the securities for investment only and not with a view towards
distribution thereof. He had access, through his relationship with the Company,
to information about us.
On
February 29, 2008, we entered into a consulting agreement with Jeremy Roll for
referral services for the Company’s funding that was completed in October 2008.
Under the agreement, in addition to a cash referral fee, Mr. Roll was entitled
to receive warrants to purchase our common stock at $.35 per share equal to 10%
of his gross proceeds of the funds raised for us. As a result, in July 7, 2008
Mr. Roll received warrants to purchase 11,429 shares of our 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 in October 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 our 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 our common stock.
On
April 15, 2008, we entered into an agreement with Kulman IR, LLC for investor
relations services. 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 our common
stock.
On
June 16, 2008, we entered into an employment agreement with Chad Ruwe. As part
of this agreement we issued him options to purchase 50,000 shares of our common
stock. This transaction was effected under Rule 701 promulgated under the Act on
the basis that the transaction was pursuant to a contract relating to
compensation provided under Rule 701. The recipient of securities in this
transaction represented his intentions to acquire the securities for investment
only and not with a view towards distribution thereof. He had access, through
his relationship with the Company, to information about us.
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
our common stock and warrants to purchase 125,000 shares of our common stock at
$.46 per share.
On
August 11, 2008, we entered into an employment agreement with David Dauwalter.
As part of this agreement we issued him options to purchase 50,000 shares of our
common stock.
On
August 15, 2008, we issued a warrant to purchase 75,000 shares of our common
stock at $.46 per share to Taylor & Associates, Inc. for their HR services
in selecting a Vice President of Sales and Marketing.
On
August 26, 2008, we issued a warrant to purchase 50,000 shares of our common
stock at $.46 per share to a regulatory consultant, Thomas Bachinski, for his
past services.
Unless
otherwise specified above, the Company believes that all of the above
transactions were transactions not involving any public offering within the
meaning of Section 4(2) of the Securities Act, since (a) each of the
transactions involved the offering of such securities to a substantially limited
number of persons; (b) each person took the securities as an investment for
his/her/its own account and not with a view to distribution; (c) each person had
access to information equivalent to that which would be included in a
registration statement on the applicable form under the Securities Act; (d) each
person had knowledge and experience in business and financial matters to
understand the merits and risk of the investment; therefore no registration
statement needed to be in effect prior to such issuances.
II-6
EXHIBIT
INDEX
|
3.1
|
Articles
of Incorporation of the Registrant, as amended**
|
|
|
3.2
|
Bylaws
of the Registrant, as amended**
|
|
|
5.1
|
Opinion
of Richardson & Patel LLP***
|
|
|
10.1
|
Form
of Employment Agreement by and between the Registrant and Kevin R.
Davidson dated October 4, 2006**
|
|
|
10.2
|
Form
of Employment Agreement by and between the Registrant and Gerald D. Rice
dated October 18, 2006**
|
|
|
10.3
|
Form
of Employment Agreement by and between the Registrant and Chad A. Ruwe
dated June 16, 2008**
|
|
|
10.4
|
Form
of Confidential Separation Agreement and Release by and between the
Registrant and Lawrence W. Gadbaw dated August 13,
2008**
|
|
|
10.5
|
Form
of Nondisclosure and Noncompete Agreement by and between the Registrant
and Lawrence W. Gadbaw dated October 18, 2006**
|
|
|
10.6
|
Form
of Stock Option Agreement by and between the Registrant and Kevin R.
Davidson dated June 5, 2008**
|
|
|
10.7
|
Form
of Director Stock Option Agreement between the Registrant and Thomas
McGoldrick dated August 22, 2006**
|
|
|
10.8
|
Form
of Director Stock Option Agreement between the Registrant and Andrew P.
Reding dated November 11, 2006**
|
|
|
10.9
|
Form
of Consulting Agreement by and between the Registrant and Jeremy Roll
dated February 29, 2008**
|
|
|
10.10
|
Form
of Consulting Agreement by and between the Registrant and Namaste
Financial, Inc. dated June 30, 2008**
|
|
|
10.11
|
Form
of Consulting Agreement by and between the Registrant and Marshall C. Ryan
and Mid-State Stainless, Inc. dated June 2008**
|
|
|
10.12
|
Form
of Investor Relations Agreement by and between the Registrant and Kulman
IR, LLC dated April 15, 2008**
|
|
|
10.13
|
Form
of Finder Agreement by and between the Registrant and Thomas Pronesti
dated March 10, 2008**
|
|
|
10.14
|
Form
of Patent Assignment by Marshall C. Ryan in favor of the Registrant dated
June 18, 2008**
|
|
|
10.15
|
Form
of Convertible Debenture by and between the Registrant and Kevin R.
Davidson dated February 2, 2007**
|
|
|
10.16
|
Form
of Convertible Debenture by and between the Registrant and Peter L.
Morawetz dated February 2, 2007**
|
|
|
10.17
|
Form
of Convertible Debenture by and between the Registrant and Andrew P.
Reding dated February 2, 2007**
|
|
|
10.18
|
Form
of Convertible Debenture by and between the Registrant and Thomas
McGoldrick dated January 30, 2007**
|
|
|
10.19
|
Form
of Convertible Debenture by and between the Registrant and Andcor
Companies, Inc. dated September 29, 2006**
|
|
|
10.20
|
Form
of Convertible Debenture by and between the Registrant and Carl Moore
dated March 1, 2007**
|
|
|
10.21
|
Form
of Convertible Debenture by and between the Registrant and Roy Moore dated
March 1, 2007**
|
|
|
10.22
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and
Debbie Heitzman dated August 31, 2005**
|
|
|
10.23
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and Mary
Wells Gorman dated August 31,
2005**
|
II-7
|
10.24
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and
David Feroe dated August 31, 2005**
|
|
|
10.25
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and Dr.
Arnold S. Leonard dated June 12, 2006**
|
|
|
10.26
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and
Karen A. Ventura dated December 7, 2006**
|
|
|
10.27
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and
Nancy A. Kolb dated December 20, 2006**
|
|
|
10.28
|
Form
of Advisory Board Warrant Agreement by and between the Registrant and Kim
Shelquist dated December 20, 2006**
|
|
|
10.29
|
Form
of Warrant Agreement by and between the Registrant and Wisconsin Rural
Enterprise Fund, LLC dated December 1, 2006**
|
|
|
10.30
|
Form
of Stock Purchase and Sale Agreement by and between the Registrant and
Wisconsin Rural Enterprise Fund, LLC dated July 31,
2006**
|
|
|
10.31
|
Form
of Subscription Agreement**
|
|
|
10.32
|
Form
of Registration Rights Agreement**
|
|
|
10.33
|
Form
of Escrow Agreement**
|
|
|
10.34
|
Form
of Warrant**
|
|
|
10.35
|
2008
Equity Incentive Plan**
|
|
|
10.36
|
Office
Lease Agreement by and between the Registrant and Roseville Properties
Management Company, as agent for Lexington Business Park,
LLC**
|
|
|
10.37
|
Form
of Employment Agreement by and between the Registrant and David Dauwalter
dated August 11, 2008*
|
|
|
10.38
|
Form
of Amendment No. 1 to Employment Agreement by and between the Registrant
and David Dauwalter dated September 11, 2008*
|
|
|
10.39
|
Form
of Consulting Agreement by and between the Registrant and Andcor
Companies, Inc. dated September 15, 2008*
|
|
|
10.40
|
Form
of Consulting Agreement by and between the Registrant and Taylor &
Associates, Inc. dated August 15, 2008*
|
|
|
10.41
|
Form
of Consulting Agreement by and between the Registrant and Gregory Sachs
dated October 20, 2008*
|
|
|
10.42
|
Form
of Restructuring Agreement dated June 9, 2008*
|
|
|
10.43
|
Form
of Secured Convertible Note Purchase Agreement dated July 23,
2007*
|
|
|
10.44
|
Form
of Secured Convertible Note dated July 2007*
|
|
|
10.45
|
Form
of Secured Convertible Note Security Agreement dated July
2007*
|
|
|
14
|
Code
of Ethics*
|
|
|
21
|
Subsidiaries
of the Registrant**
|
|
|
23.1
|
Consent
of Olsen Thielen & Co., Ltd.*
|
|
|
23.2
|
Consent
of Richardson & Patel LLP (See Exhibit
5.1)***
|
*
Filed herewith.
**
Previously filed
*** To
be filed by amendment.
II-8
Item
28. Undertakings.
The
undersigned registrant hereby undertakes:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
|
|
||
|
i.
|
Include
any prospectus required by section 10(a)(3) of the Securities Act of
1933;
|
|
|
ii.
|
Reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) any deviation from the
low or high end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement; and
|
|
|
iii.
|
Include
any additional or changed material information on the plan of
distribution.
|
2. For
determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
3. File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of offering.
4.
If the registrant is
subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons under the foregoing
provisions or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than our payment of expenses incurred or paid by any of our
directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
[The remainder of this page left
blank intentionally]
II-9
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of Mendota Heights,
State of Minnesota on January 12, 2009.
|
BIODRAIN
MEDICAL, INC.
|
|||
|
By:
|
/s/
Kevin R. Davidson
|
||
|
Kevin
R. Davidson
|
|||
|
President
and Chief Executive Officer
|
|||
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints, jointly and severally, Kevin Davidson and
Gerald Rice, and each of them, as his or her attorney-in-fact, with full power
of substitution, for him or her in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration Statement,
and any and all registration statements related to the offering covered by this
Registration Statement and filed under the Securities Act of 1933, as amended,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by his said attorney to any and
all amendments to said registration statement.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated:
|
Name
|
Title
|
Date
|
||
|
/s/
Lawrence W. Gadbaw
|
Chairman
of the Board of Directors
|
January
12, 2009
|
||
|
Lawrence
W. Gadbaw
|
|
|||
|
/s/
Kevin R. Davidson
|
President,
Chief Executive Officer and
|
January
12, 2009
|
||
|
Kevin
R. Davidson
|
director
(Principal Executive Officer)
|
|||
|
/s/
Gerald D. Rice
|
Chief
Financial Officer (Principal
|
January
12, 2009
|
||
|
Gerald
D. Rice
|
Financial
Officer and Principal Accounting Officer) and
Secretary
|
|
/s/
Chad A. Ruwe
|
President,
Chief Executive Officer and
|
January
12, 2009
|
||
|
Chad
A. Ruwe
|
director
(Principal Executive Officer)
|
|||
|
/s/
Peter L. Morawetz
|
Director
|
January
12, 2009
|
||
|
Peter
L. Morawetz
|
|
|
/s/
Thomas J. McGoldrick
|
Director
|
January
12, 2009
|
||
|
Thomas
J. McGoldrick
|
|
|||
|
/s/
Andrew P. Reding
|
Director
|
January
12, 2009
|
||
|
Andrew
P. Reding
|
|
II-10
EXHIBIT
10.37
Page 1 of
6
August
11, 2008
EMPLOYMENT
AGREEMENT
This
Agreement made and entered into effective the 11th of August 2008 by and between
David Dauwalter, an individual residing at 2686 Nightingale Court, Chaska,
Minnesota 55318 (“Employee”), and BioDrain Medical Incorporated, 699 Minnetonka
Highlands Lane, Orono, MN 55356-9728, a Minnesota corporation
(“Company”).
WITNESSETH:
WHEREAS, the Company desires
to employ the Employee to render services for the Company as its Director of
Sales and Marketing on the terms and conditions hereinafter set forth, and the
Employee desires to be employed by the Company on such terms and
conditions;
NOW, THEREFORE, in
consideration of the promises and of the mutual covenants and agreements
contained herein, the parties hereby agree as follows:
|
|
1.
|
Employment. Upon
execution of an investment in the Company secured by the Employee of
$200,000, the Company agrees to employ the Employee for a period of one
(1) year from the date of this Agreement: unless Employee violates the
terms set forth in Paragraph 6: Termination by the Company for Cause or
the Employee voluntarily resigns. The term is automatically
renewable annually except by action of the President or the Board of
Directors.
|
|
|
2.
|
Duties. The Employee
will hold the title of Director of Sales and Marketing and shall report to
the President & CEO of the Company. The general scope of
the Employee’s duties shall include but not be limited to responsible for
developing and implementing the overall market strategy and tactical plans
to grow sales revenue and account penetration supporting the overall
business strategy. Sales channel identification and
establishment are key priorities including the advancement of the Company
website and development of Company marketing
collateral. The incumbent will be decisive, driven,
hands-on and results-oriented. Market segmentation,
positioning, branding, and business development will be additional
responsibilities for the incumbent. The Director of Marketing
and Sales will play a significant role in establishing and managing beta
sites for the Company’s product(s). Additionally, the incumbent
will drive securing initial purchase orders and obtaining initial sales
and sustaining growth in revenues from the Company’s
product(s).
|
The
Employee’s duties may be modified from time to time by mutual agreement between
the Employee and the President & CEO as they deem to be in the best interest
of the Company.
|
|
3.
|
Extent of Services. The
Employee shall devote his full attention, energy and skills to the
business of the Company and use his best efforts to fully and competently
perform the duties of his office.
|
Page 2
of 6
|
|
4.
|
Compensation.
|
|
|
a.
|
Base Salary. $70,000 per
year. Initial payment will be monthly and will be according to
the Company’s salary schedule. Employee will have an informal
performance review in six (6) months and will receive annual salary
reviews and potential increases, based on Employee’s
performance.
|
|
|
b.
|
Commission. The Employee
will receive sales commission of 4% of sales that Employee directly
managed. Commission to be paid on a monthly
basis.
|
|
|
c.
|
Bonus. The
Employee will be eligible for participation in the Company’s bonus plan
when completed and approved by the Board of Directors and the Compensation
Committee.
|
|
|
d.
|
Stock
Options. The Employee will receive total stock options
to purchase 50,000 shares of the Company’s common stock at $.35 per
share. This will be governed by a Company Stock Option Plan
(“Plan”) to be established by the Company in a timely manner upon hiring
of the Employee. The options will vest as
follows: 10,000 shares upon execution of this Agreement, to be
issued to Employee upon establishment of the Plan; the balance (40,000) in
achievement of mutually agreed upon, specific milestones to be identified
within thirty (30) days of execution of
Agreement.
|
The total
of these options, assuming all milestones are achieved, will be 50,000, as
described above.
|
5.
|
Additional
Benefits.
|
|
|
a.
|
Automobile. The
Company shall reimburse the Employee for deductible automobile mileage
according to its Expense Reporting
Procedures.
|
|
|
b.
|
Business
Expense. The Company will reimburse the Employee for all
reasonable, deductible and substantiated business expenses per its Expense
Reporting Procedures. This includes, but is not limited to such
expenses as cell phones, and business meetings,
etc.
|
|
|
c.
|
Benefits. The
Employee will be eligible for the Company’s benefits package effective on
or about September 1, 2008.
|
|
|
d.
|
Vacation. The
Employee will receive a minimum of two (2) weeks vacation per
year.
|
|
|
e.
|
Education. The Company
will support the Employee in his pursuit of continuing education provided
sufficient cash flows support tuition reimbursement and he meets the
conditions and terms of the tuition reimbursement guidelines as outlined
in the Employee Manual when
written.
|
|
|
6.
|
Non-Compete. Throughout
the period of Employee’s employment with the Company, and thereafter for a
period of one (1) year, Employee shall not, for any reason whatsoever,
directly or indirectly, plan, organize, advise, own, manage, operate,
control, be employed by, participate in or be connected in any manner with
the ownership, management, operation or control of any business of the
following type: the development, marketing and sales of medical devises
dedicated or designed to safely manage and dispose of contaminated fluids
generated in the operating room and other similar medical
locations. For purposes of this Agreement, indirect competition
shall be deemed to include any activity by Employee in aid of a competing
Business, including but not limited to, being a partner, shareholder,
officer, director, member, owner, manager, governor, agent, employee,
advisor, consultant or independent contractor of any competing
Business. Company is aware of Employee’s relationship with
Clean Door Systems, and, as long as this relationship does not interfere
with Employee fully performing his duties for the Company, and there is no
direct competition for Company customers or with the Company, Company
agrees to permit the continued
relationship.
|
Page 3
of 6
|
|
7.
|
Intellectual
Property. Employee agrees that all right,
title and interest of every kind and nature whatsoever, whether now known
or unknown, in and to any “Intellectual Property,” defined to include, but
not be limited to, any patent rights, trademarks, copyrights, ideas,
creations and properties invented, created, written, developed, furnished,
produced or disclosed by Employee in the course of rendering his/her
services to Company (both before the execution of this Agreement and
thereafter) shall, as between the parties, be and remain the sole and
exclusive property of Company for any and all purposes and uses
whatsoever, and Employee shall have no right, title or interest of any
kind or nature therein or thereto, or in and to any results and proceeds
there from. Employee agrees to assign, and hereby expressly and
irrevocably assigns, to Company all worldwide rights, title and interest,
in perpetuity, in respect of any and all rights Employee may have or
acquire in the Intellectual Property. The assignment of the rights
as above shall not lapse if Company has not exercised its rights under the
assignment for any period of time or in any jurisdiction or
territory. Pursuant to Section 181.78 of the Minnesota
Statutes, the preceding sentence does not apply to an invention for which
no equipment, supplies, facility or trade secret information of Company
was used and which was developed entirely on the Employee's own time,
and (1) which does not relate (a) directly to the business of Company
or (b) to Company's actual or demonstrably anticipated research or
development, or (2) which does not result from any work performed
by Employee for Company. To the extent any of the
rights, title, and interest in and to the Intellectual Property cannot be
assigned to Company (and to the extent any of Employee’s retained
rights under Section 181.78 were incorporated by Employee (directly or
indirectly) in any of Company's past, current or future products or
services), Employee hereby grants to Company an exclusive,
royalty-free, transferable, perpetual, irrevocable, unrestricted,
worldwide license (with rights to sublicense through one or more tiers of
sublicensees) to such non-assignable (or non-assigned)
rights. To the extent any rights, title and interest in and to
Intellectual Property rights can be neither assigned nor so licensed by
Employee to Company, Employee hereby irrevocably waives and agrees
never to assert such non-assignable and non-licensable rights, title and
interest against Company, any of Company's successors in
interest, and the customers and licensees of either. Further,
Employee agrees to waive, and hereby waives, any "moral rights" Employee
may have or may obtain in the Intellectual Property. Employee
further agrees to assist Company in every proper way to apply for,
obtain, perfect and enforce rights in the Intellectual Property in any and
all countries, and to that end Employee will execute all documents for use
in applying for, obtaining and perfecting such rights and enforcing same,
as Company may desire, together with any assignments thereof
to Company or persons designated by it. Employee
appoints Company as its attorney in fact to execute any documents
necessary to achieve such results. To the maximum extent
possible, Company shall be shown in all documentation as the owner of
all rights in the Intellectual
Property
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8.
|
Termination by Company for
Cause. The Company may terminate Employee’s employment for “cause”
at any time during the Term. For purposes of this section 8.,
the term “cause” shall mean any of the
following:
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|
|
o
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The
material non-compliance by the Employee with written instructions,
directions or regulations of the Board of Directors applicable to
Employee, the breach by Employee of any material term of this Agreement,
or the unsatisfactory performance by Employee of Employee’s duties,
obligations, work and production standards, and the failure of Employee to
correct such non-compliance, breach or unsatisfactory performance within
thirty (30) days after receipt by Employee of written notice of the same
by the Company;
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Page 4
of 6
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o
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Any
willful or grossly negligent act by the Employee having the effect of
injuring in a material way the Company as determined by the affirmative
vote of the majority of the members of the Board of Directors (excluding
Employee);
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o
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The
commission by the Employee of fraud or a criminal act that adversely
affects the business of the Company;
or,
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o
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The
determination by an affirmative vote of the majority of the members of the
Board of Directors (excluding Employee), after a reasonable and good faith
investigation by the Company following a written allegation by another
employee of the Company, that Employee engaged in some form of harassment
or other improper conduct prohibited by law, unless such actions were
specifically directed by the Board.
|
In the
event of a termination for cause, as defined herein, the Employee shall only be
entitled to receive payment of base salary, adjusted pro-rata to the date of
such termination, subject to offset, and to the extent permitted, for any
amounts then owed to the Company by Employee. The Employee shall have
absolutely no right to receive or retain any other payment or compensation
whatsoever under this Agreement, regardless of the term of the employment then
elapsed. The Employee’s rights and obligations regarding stock
options and shares of the Company’s common stock owned by Employee shall be
determined in accordance with and be governed by the Shareholder Agreement and
the Company’s Stock Option Plan as well as taking into account the completion
(or non-completion) of the aforementioned milestones. Only options
that have vested as a result of completed milestones shall be eligible for
ownership by Employee.
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9.
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Termination by Company without
Cause. In the event the Employee’s employment is
terminated by the Company without cause, as “cause” is defined in section
8 hereof, Employee shall be entitled to receive from the Company as
severance pay in an amount equal to three (3) months of Employee’s Base
Salary then in effect at the time of termination, payable in three (3)
equal monthly installments, commencing on the first day of the month
following termination and continuing on the same day of each month
thereafter until paid in full. The Employee shall
receive bonus payment on a pro-rata basis for the portion of the fiscal
year at termination. The consideration provided in this section
is conditioned upon the Employee’s return to the Company of any and all
property belonging to the Company in Employee’s possession or control and
Employee’s disclosure to the Company of any information known to Employee
and necessary for the Company to access any computer software or programs
of the Company controlled by Employee. In lieu of a
Shareholders Agreement all non-vested stock options shall immediately be
vested.
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10.
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Termination by Employee for
Good Reason. Employee may terminate his employment at
any time during the Term for good reason. For purposes of this
Agreement, “good reason” shall mean (i) any material breach by the Company
of this Agreement that is not cured by the Company within thirty (30) days
after receipt of written notice from Employee of such material breach,
(ii) any material diminution or adverse (to Employee) change in the
duties, responsibilities, rights, privileges or the reporting
relationships, which were applicable to and enjoyed by the Employee at the
time of such diminution of change, without the consent of the Employee,
except as a result of the termination of Employee’s employment by the
Company as provided in section 8. hereof, or (iii) any requirement from
the Board of Directors that the Employee must relocate his office outside
the Twin Cities metropolitan area. In the event of a termination by
Employee of his employment as provided in this section 10, Employee shall
be entitled to severance pay and benefits as provided in section 9
hereof.
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Page 5 of 6
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11.
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Termination by
Employee. Employee may terminate employment at any
time during the Term for any reason with one (1) month
notice. Employee agrees to aid in transition and exit from the
Company causing no harm or hardship during such
transition. Employee is bound by Paragraph 6 of this
Agreement. Employee is not eligible for salary continuation or
bonus or additional stock option vesting if he voluntarily resigns for
reasons other than “good reason” as defined in section
10.
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12.
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Sale, Reorganization or
Transfer of Ownership. In the event the Company is sold,
or if majority ownership of the Company should pass from the existing
majority shareholders, the terms of this Agreement shall remain in
force. Terms of all executive employment agreements will
identify the specifics for sale, reorganization or transfer of ownership,
to be approved by the Compensation Committee. All non-vested
stock options, whether milestone has been achieved or not, shall become
vested with the completion of the
sale.
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13.
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Insolvency or Cessation of
Business. In the event the Company becomes insolvent or
ceases business due to lack of funds, this Agreement is immediately null
and void and the terms and conditions are rendered non-enforceable,
specifically those clauses associated with non-disclosure and
non-competition.
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14.
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Governing
Law. This agreement will be governed by and construed in
accordance with the laws of the State of
Minnesota.
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15.
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Notices. Any
notice or other communication required or permitted hereunder shall be in
writing and shall be deemed to have been given, when received, if
delivered by hand or by telegram, or three (3) working days after
deposited, if placed in the mails for delivery by certified mail, return
receipt requested, postage prepaid and addressed to the appropriate party
at the following address:
|
|
Company:
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BioDrain
Medical Inc.
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Attention: Kevin R.
Davidson President & CEO
16771 Ironwood Circle
Lakeville, MN 55044
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Employee:
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David
Dauwalter
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2686 Nightingale Court
Chaska, MN 55318
Addresses
may be changed by written notice given pursuant to this Section; however any
such notice shall not be effective, if mailed, until three (3) working days
after depositing in the mails or when actually received, whichever occurs
first.
Page 6
of 6
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16.
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Other
Agreements. This Agreement contains the entire agreement
between the parties concerning terms of employment and supersedes at the
effective date hereof any other agreement, written or
oral.
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17.
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Parties and
Interest. This Agreement is personal to Executive, and
Executive may not delegate his duties or assign his rights
hereunder. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective heirs, legal
representatives, successors and permitted
assigns.
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18.
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Modification and
Waiver. A waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed as a
waiver of any subsequent breach
thereof.
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19.
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Binding Effect, Assigns,
Successors, Etc. This Agreement shall be binding upon
the parties hereto and their respective heirs, representatives, successors
and assigns, and shall continue in full force unless and until terminated
by the mutual agreement of all parties
hereto.
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20.
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Savings
Clause. If any provision, portion or aspect of this
Agreement is determined to be void, or voidable by any legislative,
judicial or administrative action as properly applied to this Agreement,
then this Agreement shall be construed to so limit such provision, portion
or aspect thereof to render same enforceable to the greatest extent
permitted by or in the relevant
jurisdiction.
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21.
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Headings. The
headings of this Agreement are intended solely for convenience and
reference, and shall give no effect in the construction or interpretation
of this Agreement.
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22.
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Survival. Employee
understands and agrees that portions of the provisions of this Agreement
extend beyond termination of the Employee’s employment and shall continue
in full force and effect after such termination of employment or
termination of this
Agreement.
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23.
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Execution. This
Agreement may be executed in two (2) or more counterparts, and each such
counterpart deemed an original. Original signatures on copies
of the Agreement transmitted by facsimile will be deemed originals for all
purposes hereunder.
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24.
|
Confidential. Company
and Employee agree to keep the terms and conditions of this Agreement
confidential during the terms of the Agreement and for one (1) years after
termination of Agreement.
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IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be executed effective as of the day
and year first written above.
BioDrain Medical
Incorporated
By: /s/ Kevin R.
Davidson
Kevin
R. Davidson, President & CEO
By: /s/ David
Dauwalter
David
Dauwalter, Employee
EXHIBIT
10.38
(DATE)
September 11, 2008
AMENDMENT
TO EMPLOYMENT AGREEMENT
The
Agreement dated August 11, 2008 by and between David Dauwalter and BioDrain
Medical, Inc. has been amended as follows:
4 d. Stock Options line 4 shall be
changed to read: “The options will vest as follows: 10,000 shares
upon execution of this Agreement, to be issued to Employee upon establishment of
the Plan; the balance (40,000) will vest upon achievement of the following
specific milestones:
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·
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An
additional 10,000 shares to vest upon approval of the 510(k) by the
FDA,
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·
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An
additional 10,000 shares to vest upon the establishment of four (4) beta
site approvals via purchase order, letter of intent or testimonial Please
revise as appropriate
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·
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An
additional 10,000 shares to vest upon the sale of the first
commercial-ready FMS unit,
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·
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An
additional 10,000 shares to vest upon the sale of the 50th
commercial-ready FMS unit.”
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IN WITNESS WHEREOF, the
parties hereto have caused this Amendment to be executed effective as of the day
and year first written above.
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BioDrain
Medical Incorporated
By:
/s/ Kevin R.
Davidson
Kevin
R. Davidson, President & CEO
By:
/s/ David J.
Dauwalter
David
J. Dauwalter
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EXHIBIT
10.39
Mr. Ty
Anderson
Andcor
Companies, Inc.
294 Grove
Lane E., Suite 170
Wayzata,
MN 55391
September
15, 2008
Dear
Ty:
This is
to confirm that BioDrain Medical, Inc. (the “Company”) has approved an agreement
between the Company and Andcor Companies, Inc. to issue a warrant to
purchase 75,000 shares of the Company’s stock in conjunction with your efforts
relating to the search for the Company’s Vice President of Sales & Marketing
position. The warrants will have a price of $.46 per share, will have
a five year term, and they will be issued to you upon the commencement of
Kirsten Doerfert’s employment with the Company. Standard Andcor
guarantees will apply to the issuance of the warrants if Ms. Doerfert should not
remain employed with the Company for at least one year from here commencement
date, currently scheduled for February 1, 2009. If this
meets with your understanding, please sign and return to me at your earliest
convenience.
Ty, we
appreciate your continued support and look forward to fulfilling all of our
obligations to your firm. Thank you.
Sincerely,
|
/s/ Kevin R.
Davidson
|
/s/ Ty
Anderson
|
|
Kevin
R. Davidson
|
Ty
Anderson
|
|
President
& CEO
|
Andcor
Companies, Inc.
|
BioDrain
Medical, Incorporated
2060
Centre Pointe Boulevard | Suite 7 | Mendota Heights, Minnesota, USA
55120-1269
Phone: +1-651-389-4800
| fax: +1-651-389-4801 | www.biodrainmedical.com
EXHIBIT
10.40
Mr. Jimmy
Taylor
JT &
Associates, Inc.
2645
Shumard Oak Dr.
Braselton
GA, 30517
August
15, 2008
Dear
Jimmy:
This is
to confirm that BioDrain Medical, Inc. (the “Company”) has approved an agreement
between the Company and JT& Associates to issue a warrant to purchase 75,000
shares of the Company’s stock in conjunction with our verbal agreement with you
relating to the search for the Vice President of Sales and Marketing
position. The warrants will be priced at $.46 per share,
will have a five-year term and will be subject to the Company’s standard Warrant
Agreement, which will be issued to you upon commencement of the candidate’s
employment with the Company. If this meets with your understanding,
please sign and return to me at your earliest convenience.
Jimmy, we
appreciate your continued support and look forward to working with you in the
future. Thank you.
Sincerely,
|
/s/ Kevin R.
Davidson
|
/s/ Jimmy
Taylor
|
|
Kevin
R. Davidson
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Jimmy
Taylor
|
|
President
& CEO
|
JT
& Associates, Inc.
|
BioDrain
Medical, Incorporated
2060
Centre Pointe Boulevard | Suite 7 | Mendota Heights, Minnesota, USA
55120-1269
Phone: +1-651-389-4800
| fax: +1-651-389-4801 | www.biodrainmedical.com
EXHIBIT
10.41
EXHIBIT
10.42
BIODRAIN
MEDICAL, INC.
699
Minnetonka Highlands Lane
Orono,
Minnesota 55356-9728.
(612)
850-9460
June 9,
2008
To:
Current BioDrain Medical, Inc. equityholders
RE: 510(K) APPROVAL AND STOCK
ISSUANCE
Dear
Current Equityholder:
As you may know, BioDrain Medical,
Inc., a Minnesota corporation (“BioDrain” or the “Company”), will be closing an
equity financing of more than $800,000 and no less than $1.2 million this week
(“Offering”) with certain investors (“Investors”). With a portion of
the proceeds of this financing, BioDrain will complete preparation and submit
its 510(K) filing with the Food and Drug Administration for its primary product,
the Fluid Management Systems, as a Class II product.
Management and the Investors expect
that the FDA will approve this application within 12 months. However,
upon the earlier to occur of the FDA (i) rejects the application or (ii) does
not approve the application within 12 months, then the Investors holding a
majority of common stock (“Majority-in-Interest Investors”) sold during that
Offering shall at any time be able to cause the Company to take the following
events to occur upon their election.
1. All
Company assets shall be distributed to a wholly-owned subsidiary
(“Privco”). Privco will have the identical number of common shares
outstanding as the Company.
2. Current
Equityholders, including you, will cancel all Company stock, options, and
warrants you hold and no longer own any Company equity.
3. In
consideration of such cancellation, you will receive Privco stock and options so
that you have the same percentage ownership of Privco that you had in the
Company. Company will retain the rest of Privco equity.
4. All
your Company stock options, warrants, convertible debt (if any) will be
cancelled and replaced with Privco stock options, warrants and convertible debt
at substantially same terms of the Company securities.
5. Company
will have new directors and officers selected by Investors.
Current Equityholders of
BioDrain
June 9, 2008
Page 2
Your stock certificate will be required
to include a separate legend until this restriction lapses in 12
months. The legend shall state the stock certificate may not be sold
or otherwise transferred until the restriction has terminated. The
Majority-in-Interest Investors are a third party beneficiary to this
acknowledgement and this letter agreement may not be amended without their
consent.
|
Very
truly yours,
BIODRAIN
MEDICAL
By:/s/ Kevin
Davidson
Kevin
Davidson, President
|
On behalf
of the holder of BioDrain common stock, options, warrants or convertible debt, I
have read the above letter and agree to its terms.
| Date: | |
| Shareholder Name: | |
| Shareholder Signature: | |
| Title: | |
| (if shareholder is an entity, such as a partnership, corporation or trust) | |
EXHIBIT
10.43
SECURED CONVERTIBLE NOTE
PURCHASE AGREEMENT
This
SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT is made as of this 23th day of July,
2007 by and between BioDrain Medical, Inc., a Minnesota corporation (the
“Company”) and the Purchasers identified in Schedule A (hereinafter collectively
referred to as the “Purchasers” or the “Buyers”) including Core Fund Management,
L.P. (“Core Fund”).
ARTICLE
I
PURCHASE,
SALE AND TERMS OF NOTES
1.01. The
Notes. The Company has authorized the issuance and sale to the
Purchasers of the Company’s Secured Convertible Notes, due April __, 2008, in
the original aggregate principal amount of $150,000.00. The Secured
Convertible Notes shall be substantially in the form set forth in Exhibit 1.01 hereto
and are herein referred to individually as a “Note” and collectively as the
“Notes”, which terms shall also include any notes delivered in exchange or
replacement therefor. The Notes shall be secured under the terms of
the Security Agreement. The Company intends to complete an equity financing of
approximately $1.5 million. The Notes shall be convertible into
shares of the common stock (“Common Stock”) of the Company and warrants to
purchase shares of Company common stock upon the terms set forth in the Notes.
Any references herein to “Notes” shall be a reference to a single Note, in the
event only one Note in the aggregate amount of $150,000 is issued and sold by
the Company hereunder.
1.02. Purchase and Sale of
Notes.
(a) The
Closing. The Company agrees to issue and sell to the
Purchasers, and, subject to and in reliance upon the representations,
warranties, terms and conditions of this Agreement, the Purchasers agree to
purchase, the Notes for an aggregate purchase price of $150,000. Such
purchase and sale shall take place at a closing (the “Closing”) to be held at
the offices of Richardson & Pate LLP, 10900 Wilshire Boulevard, Suite 500,
Los Angeles, CA 90024 at 1:00 P.M., or on such other date and at
such time as may be mutually agreed upon.
(b) Use of
Proceeds. The Company agrees to use the full proceeds from the
sale of the Notes solely for general working capital net of a retainer of legal
fees to Richardson & Patel LLP of $15,000 and fees to Longport of 10% of
gross proceeds.
1.03. Payments and
Endorsements. Payments of principal, interest and premium, if
any, on the Notes, shall be made directly by check duly mailed or delivered to
the Purchasers at the addresses provided by Purchasers from time to
time.
1.04. Payment on Non-Business
Days. Whenever any payment to be made shall be due on a
Saturday, Sunday or a public holiday under the laws of the State of Minnesota,
such payment may be made on the next succeeding business day, and such extension
of time shall in such case be included in the computation of payment of interest
due.
1.05. Representations by the
Purchasers. The Purchasers represent, severally and not
jointly, that it is each Purchaser’s present intention to acquire the Notes for
their own account and that the Notes are being and will be acquired for the
purpose of investment and not with a view to distribution or resale thereof;
subject, nevertheless, to the
condition that the disposition of the Notes or shares underlying the Notes shall
at all times be within each Purchaser’s control.
ARTICLE
II
CONDITIONS
TO PURCHASERS’ OBLIGATION
The obligation of the Purchasers to
purchase and pay for the Notes at the Closing is subject to the following
conditions:
2.01. Representations and
Warranties. Each of the representations and warranties of the
Company set forth in Article III hereof shall be true on the date of the
Closing.
2.02. Documentation at
Closing. The Purchasers shall have received prior to or at the
Closing all of the following, each in form and substance satisfactory to the
Purchasers and its special counsel:
(a) A
Security Agreement, in the form attached as Exhibit 2.02(a), (the
“Security Agreement”), and all related financing statements and other similar
instruments and documents, shall have been executed and delivered to the
Purchasers by a duly authorized officer of the Company.
(b) A
certificate of good standing from the Minnesota Secretary of State certifying
that the Company is in good standing under the laws of the State of
Minnesota.
(c) The
Notes in the form attached as Exhibit 2.02(o).
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES
The Company represents and warrants as
follows:
3.01. Organization and Standing of
the Company. The Company is a duly organized and validly
existing corporation in good standing under the laws of the jurisdiction in
which it was organized and has all requisite corporate power and authority for
the ownership and operation of its properties and for the carrying on of its
business as now conducted and as now proposed to be conducted. The
Company has no Subsidiaries.
-2-
3.02. Corporate
Action. The Company has all necessary corporate power and has
taken all corporate action required to make all the provisions of this
Agreement, the Security Agreement, the Notes and any other agreements and
instruments executed in connection herewith and therewith the valid and
enforceable obligations they purport to be. The issuance of the Notes
is not subject to preemptive or other similar statutory or contractual rights
and will not conflict with any provisions of any agreement or instrument to
which the Company is a party or by which it is bound.
3.03. Governmental
Approvals. No authorization, consent, approval, license,
exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for, or in connection with, the offer,
issuance, sale, execution or delivery by the Company of, or for the performance
by it of its obligations under, this Agreement, the Security Agreement or the
Notes.
3.04. Litigation. There
is no litigation or governmental proceeding or investigation pending or, to the
best of the knowledge of the Company, threatened against the Company affecting
any of its properties or assets, or against any officer, key employee or
principal stockholder of the Company where such litigation, proceeding or
investigation, either individually or in the aggregate, would have a material
adverse effect on the Company. Neither the Company, nor, to the best
of the knowledge of the Company, any officer or key employee of the Company, or
principal stockholder of the Company, is in default with respect to any order,
writ, injunction, decree, ruling or decision of any court, commission, board or
other government agency affecting the Company.
3.05. Compliance with Other
Instruments. The Company is in compliance in all respects with
the terms and provisions of its charter and by-laws and in all material respects
with the terms and provisions of the mortgages, indentures, leases, agreements
and other instruments and of all judgments, decrees, governmental orders,
statutes, rules and regulations by which it is bound or to which its properties
or assets are subject.
3.06. Title to Assets, Trademarks,
Patents. The Company has good and clear record and marketable title in
fee to such of its fixed assets as are real property, and good and merchantable
title to all of its other assets, now carried on its books including those
reflected in the most recent balance sheet of the Company or acquired since the
date of such balance sheet (except personal property disposed of since said date
in the ordinary course of business) free of any mortgages, pledges, charges,
liens, security interests or other encumbrances. The Company enjoys
peaceful and undisturbed possession under all leases under which it is
operating, and all said leases are valid and subsisting and in full force and
effect. The Company owns or has a valid right to use the patents,
patent rights, licenses, permits, trade secrets, trademarks, trademark rights,
trade names or trade name rights or franchises, copyrights, inventions and
intellectual property rights being used to conduct its business as now operated
and as now proposed to be operated; and the conduct of its business as now
operated and as now proposed to be operated does not and will not conflict with
valid patents, patent rights, licenses, permits, trade secrets, trademarks,
trademark rights, trade names or trade name rights or franchises, copyrights,
inventions and intellectual property rights of others.
-3-
3.07. Taxes. The
Company has accurately prepared and timely filed all federal, state and other
tax returns required by law to be filed by it, and all taxes shown to be due and
all additional assessments have been paid or provision made
therefor. The Company knows of no assessments or adjustments pending
or threatened against the Company for any period, nor of any basis for any such
assessment or adjustment.
3.08. Insurance. The
Company carries insurance covering its properties and business adequate and
customary for the type and scope of the properties and business, but in any
event in amounts sufficient to prevent the Company from becoming a
co-insurer.
3.09. Books and
Records. The books of account, ledgers, order books, records
and documents of the Company accurately and completely reflect all material
information relating to the business of the Company, the nature, acquisition,
maintenance, location and collection of the assets of the Company, and the
nature of all transactions giving rise to the obligations or accounts receivable
of the Company.
3.10 Other
Debt. The Company has no other secured or unsecured debt,
other than obligations incurred in the ordinary course of its
business.
ARTICLE
IV
COVENANTS
OF THE COMPANY
4.01. Affirmative Covenants of the
Company . Without limiting any other covenants and provisions
hereof, the Company covenants and agrees that, as long as any of the Notes are
outstanding, it will perform and observe the following covenants and
provisions:
(a) Punctual
Payment. Pay the principal of, premium, if any, and interest
on each of the Notes at the times and place and in the manner provided in the
Notes and herein.
(b) Payment of Taxes and Trade
Debt. Pay and discharge all taxes, assessments and
governmental charges or levies imposed upon it or upon its income or profits or
business, or upon any properties belonging to it, prior to the date on which
penalties attach thereto, and all lawful claims which, if unpaid, might become a
lien or charge upon any properties of the Company, provided that neither the
Company shall be required to pay any such tax, assessment, charge, levy or claim
which is being contested in good faith and by appropriate proceedings if the
Company shall have set aside on its books adequate reserves with
respect thereto. Pay when due, or in conformity with customary trade
terms, all lease obligations, all trade debt, and all other Indebtedness
incident to the operations of the Company, except such as are being contested in
good faith and by appropriate proceedings if the Company concerned shall have
set aside on its books adequate reserves with respect thereto.
-4-
(c) Maintenance of
Insurance. Maintain insurance with responsible and reputable
insurance companies or associations in such amounts and covering such risks as
is usually carried by companies engaged in similar businesses and owning similar
properties in the same general areas in which the Company operates, but in any
event in amounts sufficient to prevent the Company from becoming a
co-insurer.
(d) Preservation of Corporate
Existence. Preserve and maintain its corporate existence,
rights, franchises and privileges in the jurisdiction of its
incorporation. Preserve and maintain all licenses and other rights to
use patents, processes, licenses, trademarks, trade names, inventions,
intellectual property rights or copyrights owned or possessed by it and
necessary to the conduct of its business.
(e)
Compliance with
Laws. Comply with all applicable laws, rules, regulations and
orders of any governmental authority, noncompliance with which could materially
adversely affect its business or condition, financial or other.
(f)
Keeping of Records and Books
of Account. Keep adequate records and books of account, in
which complete entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company a and in which, for each fiscal year, all proper
reserves for depreciation, depletion, obsolescence, amortization, taxes, bad
debts and other purposes in connection with its business shall be
made.
(g) Maintenance of Properties,
etc. Maintain and preserve all of its properties, necessary or
useful in the proper conduct of its business, in good repair, working order and
condition, ordinary wear and tear excepted.
(h) Equity
Financing. On or before 100 days from the date of this
Agreement, the Company will conduct an equity financing (“Equity Financing”) or
similar transaction approved by Core Fund. If such a transaction is
not consummated within the fixed term of the Notes, then the Company shall owe a
one-time cash payment equal to 10% of the principal amount of the Notes in
addition to the principal and interest then owing. In connection with
the Equity Financing, ownership of company shareholders shall reflected in the
target capitalization table in Exhibit 3.03, on a fully diluted post equity
financing basis. Should the final fully-diluted, post-equity
financing capitalization of the Company result in additional outstanding shares,
warrants, options or other equity linked securities compared to the proposed
capitalization set forth in Exhibit 3.03, the amount of Company shares shall be
adjusted accordingly to reflect 10% of the surviving corporation’s common stock
on a fully-diluted, post-Equity Financing basis.
(i)
Registration of
Shares. The Company shall include the shares issuable upon
conversion of the Note including in a Registration Statement filed within 120
days after closing of the Equity Financing and use its best efforts to have the
Registration Statement declared effective as soon as possible. In the
event the Company does not file the required Registration Statement within 120
days after the closing of the Equity Financing, then the Company shall pay to
the Purchasers a one-time payment equal to $25,000. In the event the
Registration Statement is not declared effective within 180 days of the closing
of the Equity Financing, the Company shall pay an amount equal to an additional
$5,000 each month until the Registration Statement is declared effective, or
until such time as Rule 144 is available for sale of the shares, whichever is
first.
-5-
(j) Conversion of
Note. The Notes are contemplated as a bridge loan to an equity
financing of approximately $1,500,000 in conjunction with a going public
transaction pursuant to a reverse merger or similar transaction. At
the closing of such financing and reverse merger, this Note shall automatically
convert into shares of Company common stock at $0.17 per share and 882,353
warrants to purchase Company common stock at $0.42 per share.
(k) No
Refinancing. The Company cannot call, refinance, or repay the
Notes prior to consummation of the Reverse Merger.
ARTICLE
V
EVENTS OF
DEFAULT
5.01. Events of
Default. If any of the following events (“Events of Default”)
shall occur and be continuing:
(a) The
Company shall fail to pay any installment of principal of any of the Notes when
due; or
(b) The
Company shall fail to pay any interest or premium on any of the Notes when due
and such failure shall continue for five (5) business days; or
(c) The
Company shall default in the performance of any covenant contained in this
Agreement or the Security Agreement; or
(d) Any
representation or warranty made by the Company this Agreement or the Security
Agreement or by the Company in any certificate, instrument or written statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement, shall prove to have been incorrect when made in any material
respect.
-6-
ARTICLE
VI
DEFINITIONS
AND ACCOUNTING TERMS
6.01. Certain Defined
Terms. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
“Agreement” means this Secured
Convertible Note Purchase Agreement as from time to time amended and in effect
between the parties.
“Company” means and shall include
BioDrain Medical, Inc., and its successors and assigns.
“Notes” shall have the meaning assigned
to that term in Section 1.01.
“Person” means an individual,
corporation, partnership, joint venture, trust, or unincorporated organization,
or a government or any agency or political subdivision thereof.
“Purchaser” means and shall include the
Purchasers identified in Schedule A.
“Securities Act” means the Securities
Act of 1933 or any similar Federal statute, and the rules and regulations of the
Securities and Exchange Commission (or of any other Federal agency then
administering the Securities Act) thereunder, all as the same shall be in effect
at the time.
“Subsidiary” or “Subsidiaries” means
any corporation or trust of which the Company and/or any of its other
Subsidiaries (as herein defined) directly or indirectly owns at the time all of
the outstanding shares of every class of such corporation or trust other than
directors’ qualifying shares.
6.02. Accounting
Terms. All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting principles
consistent with those applied in preparation of financial statements in the
United States.
ARTICLE
VII
MISCELLANEOUS
7.01. No Waiver; Cumulative
Remedies. No failure or delay on the part of the Purchaser, or
any other holder of the Notes in exercising any right, power or remedy hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
7.02. Amendments, Waivers and
Consents. Any provision in this Agreement the Notes to the
contrary notwithstanding, changes in or additions to this Agreement may be made,
and compliance with any covenant or provision herein or therein set forth may be
omitted or waived, if the Company (i) shall obtain consent thereto in writing
from the holder or holders of at least seventy-five percent (75%) in principal
amount of all Notes then outstanding, and (ii) shall, in each case, deliver
copies of such consent in writing to any holders who did not execute the same;
provided that
no such consent shall be effective to reduce or to postpone the date fixed for
the payment of the principal (including any required redemption) or interest
payable on any Note, without the consent of the holder thereof, or to reduce the
percentage of the Notes the consent of the holders of which is required under
this Section. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. Written notice of any waiver or consent effected under this
subsection shall promptly be delivered by the Company to any holders who did not
execute the same.
-7-
7.03. Addresses for Notices,
etc. All notices, requests, demands and other communications
provided for hereunder shall be in writing (including telegraphic communication)
and mailed via certified mail or by courier delivery
and delivered to the applicable party at the addresses indicated
below:
If to the Company:
Kevin
Davidson, CEO
BioDrain
Medical, Inc.
699
Minnetonka Highlands Lane
Orono,
Minnesota, 55356-9728
With a copy to:
Ryan S.
Hong, Esq.
Richardson
& Patel LLP
10900
Wilshire Boulevards, Suite 500
Los
Angeles, California 90024-6525
If to the Purchaser:
Payments should be mailed
to:
The address indicated on such
Purchaser’s Lender Questionnaire
If to any other holder of the
Notes: at such holder’s address for notice as set forth in the
register maintained by the Company, or, as to each of the foregoing, at such
other address as shall be designated by such Person in a written notice to the
other party complying as to delivery with the terms of this
Section. All such notices, requests, demands and other communications
shall, when mailed or sent by courier, respectively, be effective when deposited
in the mails or delivered by courier, respectively, addressed as
aforesaid.
7.04. Costs, Expenses and
Taxes. The Company agrees to pay on demand all costs and
expenses of the Purchaser in connection with the preparation, execution and
delivery of this Agreement, the Security Agreement, the Notes and other
instruments and documents to be delivered hereunder, including attorneys fees,
up to a maximum of $10,000, payable out of funds received through the
Notes. In addition, the Company shall pay any and all stamp and other
taxes payable or determined to be payable in connection with the execution and
delivery of this Agreement, the Security Agreement, the Notes and the other
instruments and documents to be delivered hereunder or thereunder and agrees to
save the Purchaser harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
and filing fees.
-8-
7.05. Binding Effect;
Assignment. This Agreement shall be binding upon and inure to
the benefit of the Company and the Purchaser and their respective successors and
assigns, except that the Company shall not have the right to assign its rights
hereunder or any interest herein without the prior written consent of the
Purchaser.
7.06. Survival of Representations
and Warranties. All representations and warranties made in
this Agreement, the Notes, or any other instrument or document delivered in
connection herewith or therewith, shall survive the execution and delivery
hereof or thereof and the making of the loans.
7.07. Prior
Agreements. This Agreement constitutes the entire agreement
between the parties and supersedes any prior understandings or agreements
concerning the subject matter hereof.
7.08. Severability. The
invalidity or unenforceability of any provision hereof shall in no way affect
the validity or enforceability of any other provision.
7.09. Governing
Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Oregon.
7.10. Headings. Article,
Section and subsection headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
7.11. Sealed
Instrument. This Agreement is executed as an instrument under
seal.
7.12. Counterparts. This
Agreement may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument, and each of the parties
hereto may execute this Agreement by signing any such counterpart.
7.13. Further
Assurances. From and after the date of this Agreement, upon
the request of the Purchaser, the Company and each Subsidiary shall execute and
deliver such instruments, documents and other writings as may be necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement, the Security Agreement and the Notes.
REMAINDER
OF PAGE INTENTIONALLY BLANK
-9-
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by
their respective officers thereunto duly authorized, as of the date first above
written.
|
BIODRAIN
MEDICAL, INC.
By: /s/ Kevin
Davidson
Kevin
Davidson, CEO
|
PURCHASER(S):
-10-
EXHIBIT
1.01
FORM
OF SECURED CONVERTIBLE NOTE
-11-
EXHIBIT
2.02(a)
FORM
OF SECURITY AGREEMENT
-12-
EXHIBIT
10.44
THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO,
OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT.
BIODRAIN
MEDICAL, INC.
SECURED
CONVERTIBLE NOTE DUE APRIL __, 2008
| $150,000.00 |
July __,
2007
|
For value received, BIODRAIN MEDICAL,
INC., a Minnesota corporation (the “Company”), hereby promises to pay, jointly
and not severally, to the Note Holders identified in Schedule A or their
registered assigns (hereinafter collectively referred to as the “Payee”), on or
before April __, 2008 (the “Maturity Date”), the principal sum of ONE
HUNDRED FIFTY THOUSAND DOLLARS ($150,000.00) or such part thereof as then
remains unpaid, to pay interest from the date hereof on the whole amount of said
principal sum remaining from time to time unpaid at the rate of 8 percent (8%)
per annum, such interest to be payable on the Maturity
Date. Principal, premium, if any, and interest shall be payable in
lawful money of the United States of America, in immediately available funds, at
the principal office of the Payee or at such other place as the legal holder may
designate from time to time in writing to the Company. Interest shall
be computed on the basis of a 360-day year and a 30-day month.
This Note is issued pursuant to and is
entitled to the benefits of a certain Secured Convertible Note Purchase
Agreement, dated as of July __, 2007, between the Company and Payee (as the same
may be amended from time to time, hereinafter referred to as the “Purchase
Agreement”).
This Note is secured by and entitled to
the benefits of that certain Security Agreement (”Security Agreement”), dated
July __, 2007, from the Company to Payee.
This Note is contemplated as a bridge
loan to an equity financing of approximately $1,500,000 in conjunction with a
going public transaction pursuant to a public offering. At the
closing of such financing this Note shall automatically convert into common
stock of the Company pursuant to the terms of the Purchase
Agreement. If such a transaction is not consummated within the fixed
term of this Note, then the Company shall owe a one-time cash payment equal to
10% of the principal amount of this Note in addition to the principal and
interest then owing.
In case any payment herein provided for
shall not be paid when due, the Company promises to pay all cost of collection,
including all reasonable attorney’s fees.
This Note shall be governed by, and
construed in accordance with, the laws of the State of Oregon and shall have the
effect of a sealed instrument.
The Company and all endorsers and
guarantors of this Note herein waive presentment, demand, notice of nonpayment,
protest and all other demands and notices in connection with the delivery,
acceptance, performance or enforcement of this Note.
|
BIODRAIN
MEDICAL, INC.
By:/s/ Kevin
Davidson
Kevin
Davidson, CEO
|
EXHIBIT
10.45
SECURITY
AGREEMENT
The undersigned, BioDrain Medical,
Inc., a Minnesota corporation with a place of business and executive office
located at 699 Minnetonka Highlands Lane, Orono, Minnesota 55356-9728,
(hereinafter referred to as “Debtor”) hereby grants to the Purchasers listed on
Schedule A to that certain Secured Convertible Note Purchase Agreement dated as
of the date of this Agreement (hereinafter called the “Secured Party”), a
security interest in and agrees and acknowledges that Secured Party has and will
continue to have a security interest in the following:
(A) All
of Debtor’s inventory of whatever name, nature, kind or description, all
Debtor’s goods held for sale or lease or to be furnished under contracts of
service, finished goods, work in process, raw materials, materials used or
consumed by the Debtor, parts, supplies, all wrapping, packaging, advertising,
labeling, and shipping materials, devices, names and marks, all contract rights
and documents relating to any of the foregoing, whether any of the foregoing be
now existing or hereafter arising, wherever located, now owned or hereafter
acquired by the Debtor (all of which is sometimes hereinafter referred to as
“Inventory”);
(B) All
of the Debtor’s presently owned and hereafter acquired equipment, machinery,
furniture, fixtures and all other tangible personal property of whatsoever kind
or nature, together with all proceeds thereof, additions and accessions thereto
or replacements thereof or substitutions therefor (all of which is sometimes
hereinafter referred to as “Equipment”);
(C) All
of the Debtor’s accounts, accounts receivable, notes, bills, drafts,
acceptances, instruments, documents, chattel paper and all other debts,
obligations and liabilities in whatever form owing to the Debtor for goods sold
by it or for services rendered by it, or however otherwise established or
created, all guaranties and security therefor, all right, title and interest of
the Debtor in the goods or services which gave rise thereto, including rights of
an unpaid seller of goods or services; whether any of the foregoing be now
existing or hereafter arising, now or hereafter received by or owing or
belonging to the Debtor (all of which are sometimes hereinafter referred to as
“Accounts”);
(D) All
of the Debtor’s general intangibles, including without limitation, names,
goodwill, trade secrets, copyrights, trademarks, trademark applications,
tradenames, patents, patent applications, licenses, other intellectual property,
permits, governmental approvals, deposit accounts, tax refunds, claims under
insurance policies (whether or not proceeds from Collateral), other rights to
payment, rights of setoff, choses in action, rights under judgments, computer
programs and software, contract rights, and all contracts and agreements to, or
of which it is a party or beneficiary, and all intangible personal property of
whatsoever kind or nature now owned by the Debtor as well as any and all thereof
that may be hereafter acquired and in and to all proceeds thereof;
(E) All
of the Debtor’s books and records, as they exist from time to time, relating to
(A) through (D) above, inclusive;
(F) All
other assets of every nature and description, whether it be now existing or
hereafter arising and whether now or hereafter belonging to the
Debtor;
(all
hereinafter sometimes collectively referred to as “Collateral”); to secure the
payment of all sums due or which may become due under certain Secured
Convertible Notes, due April __, 2008, of the Debtor in the original aggregate
principal amount of One Hundred Fifty Thousand Dollars ($150,000), such notes
being issued pursuant to a certain Secured Convertible Note Purchase Agreement
(the “Purchase Agreement”) by and between the Debtor and Secured Party of even
date herewith (hereinafter sometimes collectively referred to as “Obligation” or
“Obligations”).
I.
WARRANTIES
AND COVENANTS.
The Debtor hereby warrants and
covenants that:
(A) The
Equipment and Inventory are used primarily for business purposes.
(B) The
Equipment and Inventory of the Debtor will be kept at the Debtor’s places of
business, set forth above.
(C) Except
for the security interest granted hereby the Debtor is the owner of its
presently owned Collateral and will be the owner of its Collateral hereafter
acquired free from any adverse lien, security interest or encumbrance, and the
Debtor will defend the Collateral against the claims and demands of all persons
at any time claiming the same or any interest therein.
(D) No
financing statements covering any Collateral or any proceeds thereof are on file
in any public office, and at the request of Secured Party, the Debtor will join
with Secured Party in executing one or more (i) financing statements pursuant to
the Uniform Commercial Code, (ii) title certificate lien application forms; and
(iii) other documents necessary or advisable to perfect the security interests
evidenced hereby, all in form satisfactory to Secured Party and the Debtor will
pay the cost of filing the same or filing or recording this Agreement in all
public offices wherever filing or recording is deemed by Secured Party to be
necessary or desirable.
(E) The
Debtor will have and maintain insurance at all times with respect to all its
Collateral against risks of fire (including so-called extended coverage), theft,
embezzlement and such other risks as Secured Party may reasonably require
containing such terms, in such form, for such periods and written by such
companies as may be reasonably satisfactory to Secured Party.
(F) The
Debtor will upon request made by the Secured Party render to the Secured Party a
list of all Accounts and a statement indicating the total dollar amount of the
Accounts then outstanding.
(G) The
Debtor will keep its Collateral free from any adverse lien, security interest or
encumbrances. The Debtor will at all times keep accurate and complete
records of its Accounts. The Debtor shall immediately notify the
Secured Party of any event causing material loss or depreciation in value of any
of its Accounts and the amount of such loss or depreciation.
-2-
II. ADDITIONAL RIGHTS AND
ASSURANCES.
(A) At
the Secured Party’s request, the Debtor at its expense will promptly and duly
execute and deliver such documents and assurances and take such actions as may
be necessary or desirable or as the Secured Party may request in order to
correct any defect, error or omission which may at any time be discovered or to
more effectively carry out the intent and purpose of this Agreement and to
establish, perfect and protect the Secured Party’s security interest, rights and
remedies created or intended to be created hereunder.
(B) Subject
to the law of the State of Minnesota., the Secured Party will at any time
following an occurrence of an Event of Default hereunder have the right to take
physical possession of the Collateral and to maintain such possession on the
Debtor’s premises or to remove the Collateral or any part thereof to such other
places as the Secured Party may desire. If the Secured Party
exercises such right, the Debtor shall at its sole expense upon the Secured
Party’s request assemble the same and make it available to the Secured Party at
a place reasonably convenient to the Secured Party.
III. EVENTS OF
DEFAULT.
The Debtor shall be in default under
this Agreement upon the happening of any of the following events or conditions
(individually and collectively an “Event of Default”):
(A) Failure
by the Debtor to observe or perform any covenant or agreement referred to herein
and, if no other grace or cure period is applicable thereto, the continuance of
such failure for fifteen (15) business days;
(B) Sale,
transfer or assignment of any of the Collateral (including via an assignment of
transfer of any interest of the Debtor) (except the sale of inventory in the
ordinary course of business); or
(C) An
Event of Default (as defined in the Purchase Agreement or the Notes, or under
any of the documents referred to therein) shall have occurred and is continuing
and such Event of Default has not been annulled.
IV. REMEDIES.
(A) If
an Event of Default occurs:
(1) The
Secured Party may declare all obligations secured hereby to be immediately due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby expressly waived.
-3-
(2) The
Secured Party may exercise and shall have any and all rights and remedies
accorded it by the Minnesota. Uniform Commercial Code or the Uniform Commercial
Code as adopted in such state whose laws govern the disposition of certain
Collateral.
(B) No
delay in accelerating the maturity of any obligation as aforesaid or in taking
any other action with respect to any Event of Default or in exercising any
rights with respect to the Collateral such affect the rights of the Secured
Party later to take such action with respect thereto, and no waiver as to one
Event of Default shall affect rights as to any other default.
V.
MISCELLANEOUS.
(A) The
Debtor irrevocably
(1) agrees
that any suit, action, or other legal proceeding arising out of this Agreement
may be brought in the courts of record of the State of Minnesota. or the courts
of the United States located in such state;
(2) consents
to the jurisdiction of each such court in any such suit; action or proceeding;
and
(3) to
the extent permitted under applicable law, waives any objection which it may
have to the laying of venue of such suit, action or proceeding in any of such
courts and waives any right to a trial by jury in any of such
courts.
(B) In
case any one or more of the provisions contained herein should be invalid,
illegal or unenforceable in any respect, the validity, legality or
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
(C) All
rights of the Secured Party hereunder shall inure to the benefit of its
successors and assigns; and all obligations of the Debtor shall bind the
successors or assigns of the Debtor. All the provisions of this
Agreement shall be construed by and administered in accordance with the local
laws of the State of Minnesota.. This Agreement shall become
effective when it is signed by the Debtor. The Debtor acknowledges
receipt of a copy of this Agreement.
(D) In
the absence of gross negligence or willful misconduct, neither the Secured Party
nor any attorney-in-fact appointed hereunder shall be liable to the Debtor or
any other person for any act or omission, any mistake of fact or any error of
judgment in exercising any right or remedy granted herein.
REMAINDER
OF PAGE INTENTIONALLY BLANK
-4-
IN WITNESS WHEREOF, THE DEBTOR HAS
EXECUTED THIS AGREEMENT AS OF JULY __, 2007.
|
DEBTOR:
BIODRAIN
MEDICAL, INC.
|
|
|
By: /s/ Kevin
Davidson
Kevin
Davidson, CEO
|
PURCHASER(S):
CORE FUND
MANAGEMENT, LP
By:
Cascade Management LLC
Its:
General Partner
By: /s/ David Baker
David Baker, Manager
-5-
EXHIBIT
14
CODE
OF ETHICS
OF
BIODRAIN
MEDICAL, INC.
(as
adopted November 14, 2008)
|
I.
|
Introduction
|
The board
of directors (the “Board”) of BioDrain Medical,
Inc., a Minnesota corporation, (the “Company”), has adopted this
BioDrain Medical, Inc. Code of Ethics (this “Code”), which is applicable to
all directors, officers and employees of the Company, to:
|
|
·
|
promote
honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
|
|
|
·
|
promote
the full, fair, accurate, timely and understandable disclosure in reports
and documents that the Company files with, or submits to, the Securities
and Exchange Commission (the “SEC”), as well as in
other public communications made by or on behalf of the
Company;
|
|
|
·
|
promote
compliance with applicable governmental laws, rules and
regulations;
|
|
|
·
|
deter
wrongdoing; and
|
|
|
·
|
require
prompt internal reporting of breaches of, and accountability for adherence
to, this Code.
|
No code
or policy can anticipate every situation that may arise. Accordingly, this Code
is intended to serve as a source of guiding principles. Directors, officers and
employees are encouraged to bring questions about particular circumstances that
may involve one or more of the provisions of this Code to the attention of the
Company’s Chief Executive Officer or Chairman of the Board, who may consult with
the Company’s outside legal counsel as appropriate.
This Code
may be amended only by unanimous resolution of the Board.
|
II.
|
Honest,
Ethical and Fair Conduct
|
Each
director, officer and employee of the Company owes a duty to the Company to act
with integrity. Integrity requires, among other things, being honest, fair and
candid. Deceit, dishonesty and subordination of principle are inconsistent with
integrity. Service to the Company should never be subordinated to personal gain
and advantage.
Each
director, officer and employee of the Company must:
|
|
1.
|
act
with integrity, including being honest and candid while still maintaining
the confidentiality of the Company’s information where required or in the
Company’s interests;
|
|
|
2.
|
observe
all applicable governmental laws, rules and
regulations;
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|
|
3.
|
comply
with the requirements of applicable accounting and auditing standards, as
well as Company policies, in order to maintain a high standard of accuracy
and completeness in the Company’s financial records and other
business-related information and
data;
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|
|
4.
|
adhere
to a high standard of business ethics and not seek competitive advantage
through unlawful or unethical business
practices;
|
|
|
5.
|
deal
fairly with the Company’s customers, suppliers, competitors and
employees;
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|
|
6.
|
refrain
from taking advantage of anyone through manipulation, concealment, abuse
of privileged information, misrepresentation of material facts or any
other unfair-dealing practice;
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|
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7.
|
protect
the assets (both tangible and intangible) of the Company and ensure their
proper use;
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|
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8.
|
refrain
from taking personal opportunities that are discovered through the use of
corporate assets or using corporate assets, information or position for
personal gain outside the scope of employment or service with the
Company;
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|
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9.
|
refrain
from trading in the Company’s securities at any time when aware of
material nonpublic information about the Company, or passing on to others
material nonpublic information about the
Company;
|
|
10.
|
avoid
conflicts of interest, wherever possible, except under guidelines or
resolutions approved by the Board (or the appropriate committee of the
Board). Anything that would be a conflict for a person subject to this
Code also will be a conflict if it is related to a member of his or her
family or a close relative.
|
Examples
of conflict of interest situations include, but are not limited to, the
following:
|
|
a.
|
any
significant ownership interest in any supplier or
customer;
|
|
|
b.
|
any
consulting or employment relationship with any customer, supplier or
competitor;
|
|
|
c.
|
any
outside business activity that detracts from an individual’s ability to
devote appropriate time and attention to his or her responsibilities with
the Company;
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|
|
d.
|
conducting
business with, or competing with, an entity in which a director, officer
or employee has an ownership interest or in which a close relative
has an ownership or employment interest, unless such business
relationship has been disclosed and authorized by a majority of the
independent members of the Board;
|
|
|
e.
|
the
receipt of any money, non-nominal gifts or excessive entertainment from
any company with which the Company has current or prospective business
dealings or from any entity if the money, gift or entertainment is for the
purposes of influencing the director, officer or employee in his or her
capacity as such;
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f.
|
being
in the position of supervising, reviewing or having any influence on the
job evaluation, pay or benefit of any close
relative;
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g.
|
selling
anything to the Company or buying anything from the Company, except on the
same terms and conditions as comparable officers or directors are
permitted to so purchase or sell;
and
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|
|
h.
|
any
other circumstance, event, relationship or situation in which the personal
interest of a person subject to this Code interferes–or even appears to
interfere–with the interests of the Company as a
whole.
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|
III.
|
Disclosure
|
The
Company strives to ensure that the contents of and the disclosures in the
reports and documents that the Company files with the SEC and other public
communications shall be full, fair, accurate, timely and understandable in
accordance with applicable disclosure standards, including standards of
materiality, where appropriate. Each director, officer and employee
must:
|
|
1.
|
not
knowingly misrepresent, or cause others to misrepresent, facts about the
Company to others, whether within or outside the Company, including to the
Company’s independent auditors, governmental regulators, self-regulating
organizations and other governmental officials, as appropriate;
and
|
|
|
2.
|
in
relation to his or her area of responsibility, properly review and
critically analyze proposed disclosure for accuracy and
completeness.
|
In
addition to the foregoing, the Chief Executive Officer and Chief Financial
Officer of the Company and each subsidiary of the Company (or persons performing
similar functions), and each other person that typically is involved in the
financial reporting of the Company must familiarize himself or herself with the
disclosure requirements applicable to the Company as well as the business and
financial operations of the Company.
Each
director, officer and employee must promptly bring to the attention of the
Chairman of the Audit Committee of the Board (or the Chairman of the Board) any
information he or she may have concerning (i) significant deficiencies in the
design or operation of internal and/or disclosure controls which could adversely
affect the Company’s ability to record, process, summarize and report financial
data or (ii) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company’s financial
reporting, disclosures or internal controls.
|
IV.
|
Compliance
|
It is the
Company’s obligation and policy to comply with all applicable governmental laws,
rules and regulations. It is the personal responsibility of each person to, and
each person must, adhere to the standards and restrictions imposed by those
laws, rules and regulations, including those relating to accounting and auditing
matters.
|
V.
|
Reporting
and Accountability
|
The Board
or Audit Committee of the Board is responsible for applying this Code to
specific situations in which questions are presented to it and has the authority
to interpret this Code in any particular situation. Any director, officer or
employee who becomes aware of any existing or potential breach of this Code is
required to notify the Chairman of the Board or the Chairman of the Audit
Committee promptly. Failure to do so is itself a breach of this
Code.
|
|
1.
|
Each
director, officer and employee
must:
|
|
|
a.
|
notify
the Chairman of the Board or the Chairman of the Audit Committee promptly
of any existing or potential violation of this Code;
and
|
|
|
b.
|
not
retaliate against any other person for reports of potential violations
that are made in good faith.
|
|
|
2.
|
The
Company will follow the following procedures in investigating and
enforcing this Code and in reporting on the
Code:
|
|
|
a.
|
The
Board or Audit Committee will take all appropriate action to investigate
any breaches reported to it.
|
|
|
b.
|
If
the Board or Audit Committee determines (by majority decision) that a
breach has occurred, it will inform the entire
Board.
|
|
|
c.
|
Upon
being notified that a breach has occurred, the Board (by majority
decision) will take or authorize such disciplinary or preventive action as
it deems appropriate, after consultation with the Audit Committee and/or
the Company’s counsel, up to and including dismissal or, in the event of
criminal or other serious violations of law, notification of the SEC or
other appropriate law enforcement
authorities.
|
No person
who reports an incident in accordance with the above procedure shall, as a
result of following such procedure, be subject by the Company or any officer or
employee thereof to discharge, demotion suspension, threat, harassment, or, in
any manner, discrimination against such person in terms and conditions of
employment.
|
VI.
|
Waivers
and Amendments
|
Any
waiver, including an implicit waiver, from a provision of this Code or any
amendment to this Code that applies to the principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, is required to be disclosed in a Report on
Form 8-K filed with the SEC, unless the Company discloses the required
information on its Internet website and has disclosed in its most recently filed
annual report its Internet address and intention to provide disclosure in this
manner.
A
“waiver” means the approval by the Company’s Board of a material departure from
a provision of the Code. An “implicit waiver” means the Company’s failure to
take action within a reasonable period of time regarding a material departure
from a provision of the Code that has been made known to an executive officer of
the Company. An “amendment” means any amendment to this Code other than
technical, administrative or other non-substantive amendments
hereto.
All
persons should note that it is not the Company’s intention to grant or to permit
waivers from the requirements of this Code. The Company expects full compliance
with this Code.
|
VII.
|
Other
Policies and Procedures
|
Any other
policy or procedure set out by the Company in writing or made generally known to
employees, officers or directors of the Company prior to the date hereof or
hereafter are separate requirements and remain in full force and
effect.
|
VIII.
|
Inquiries
|
All
inquiries and questions in relation to this Code or its applicability to
particular people or situations should be addressed to the Company’s Chief
Executive Officer, or such other compliance officer as shall be designated from
time to time by the Company.
BIODRAIN
MEDICAL, INC.
CODE
OF ETHICS
ACKNOWLEDGEMENT
FORM
All
directors, officers and employees of BioDrain Medical, Inc. (the “Company”) are
required to read and follow the BioDrain Medical, Inc. Code of Ethics and
complete this Acknowledgement Form.
Acknowledgement
I hereby
acknowledge that I have received a copy of the BioDrain Medical, Inc. Code of
Ethics and that I will be responsible for obtaining any and all future
amendments and modifications thereto.
I further
acknowledge that I have read, understand, and am in full compliance with all of
my obligations, duties, and responsibilities under each provision of the
BioDrain Medical, Inc. Code of Ethics.
I
understand and agree that upon receipt of proof of a violation of the BioDrain
Medical, Inc. Code of Ethics, the Board of Directors of the Company may proceed
with an investigation and proper action may be taken.
Name
(Print):______________________________________
Signature:_________________________________________
Date:__________
Please
complete the above and submit only this page to BioDrain Medical, Inc. at 2060
Centre Pointe Boulevard, Suite 7, Mendota Heights, Minnesota 55120, Phone Number
(651) 389-4800.
EXHIBIT
23.1
We
consent to the use in this Registration Statement on Form S-1 of our audit
report, dated August 12, 2008, relating to the financial statements of BioDrain
Medical, Inc. appearing in the Prospectus which are a part of this Registration
Statement. We also consent to the reference to our Firm under captions “Experts”
in the Prospectus.
Olsen,
Thielen & Co. Ltd.
St. Paul,
Minnesota
January
12, 2009
January
9, 2008
VIA
FEDERAL EXPRESS AND EDGAR
Geoffrey
Kruczek
Securities
and Exchange Commission
Division
of Corporate Finance
Mail
Stop 3030
Washington
D.C. 20549
|
Re:
|
BioDrain
Medical, Inc.
Registration
Statement on Form S-1
File
November 12, 2008
File
No. 333-155299
|
Dear Mr.
Davidson:
We have reviewed your filing and have
the following comments. Where indicated, we think you should revise your
document in response to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision necessary.
Please be detailed as necessary in your explanation. In some of our comments, we
may ask you to provide us with information so we may better understand your
disclosure. After reviewing this information, we may raise additional
comments.
Please
understand that the purpose of our review process is to assist you in your
compliance with the applicable disclosure requirements and to enhance the
overall disclosure in your filing. We look forward to working with you in these
respects. We welcome any questions you may have about our comments or any other
aspect of our review. Feel free to call us at the telephone numbers listed at
the end of this letter.
Fee
Table
|
|
1.
|
Please
reconcile your disclosures here and on pages 27 and 58 regarding the
number of warrants issued by you in your August 2008
financing.
|
Response:
We have revised our disclosures throughout the document to indicate that we
issued warrants to purchase 4,689,290 shares of common stock in connection with
the private offering in a series of financings which the last closing took place
in October 2008 (not August 2008), including 4,552,682 warrants issued to
investors and 136,429 warrants issued to consultants who provided services in
connection with the offering.
Please
find an additional breakdown of the share amounts reflected in the Calculation
of Registration Fee Table below for your reference.
The
7,101,267 shares of common stock to be registered reflected on the Calculation
of Registration Fee Table consist of:
|
|
·
|
4,552,862 shares for
investors;
|
|
|
·
|
547,285 shares for
finders;
|
|
|
·
|
1,715,405 shares for deal
principals; and
|
|
|
·
|
285,714 shares in exchange for
legal fees.
|
The
4,689,290 shares of common stock underlying warrants to be registered reflected
on the Calculation of Registration Fee Table consist of:
|
|
·
|
4,552,862 shares for
investors; and
|
|
|
·
|
136,429 shares for
finders.
|
The
total stock outstanding of 8,180,831 reflected throughout the document consists
of:
|
|
·
|
7,101,267 shares (explained
above);
|
|
|
·
|
808,704 shares from original
shareholders;
|
|
|
·
|
142,291 anti-dilution shares
from the original shareholder’s agreement;
and
|
|
|
·
|
128,571 contractual shares
from the original shareholder’s
agreement.
|
|
|
2.
|
Given
that there does not appear to be an existing market for your securities,
your reference to Rule 457(c) appears to be inapplicable. Please
revise.
|
Response:
We have revised the Calculation of Registration Fee Table
accordingly.
Prospectus Cover
Page
|
|
3.
|
Because
there is no current market for the registrant’s securities, please revise
to clarify that the selling shareholders will sell at a specified fixed
price per share until the registrant’s shares are quoted on the OTC
Bulletin Board (or other specified market) and thereafter at prevailing
market prices or privately negotiated
prices.
|
Response:
We have revised the Prospectus Cover Page accordingly.
|
|
4.
|
We
note that you are registering the resale if 620,096 common shares
underlying warrants that are issuable upon conversion of notes. Because
the warrants have not yet been issued, it is premature to register the
underlying common shares for resale. Please remove them from this
registration statement.
|
Response: The
620,096 common shares underlying warrants in conjunction with the bridge loan we
undertook in July 2007 will be issued by the end of January 2009 so we
included the warrants in the registration statement.
Prospectus Summary, page
1
|
|
5.
|
Please
Disclose that you have not yet requested or received FDA regulatory
clearance to market and sell your
products.
|
Response: We
have included the above phrase in the prospectus Summary page 1.
2
Risk Factors, page
3
|
|
6.
|
Include
a risk factor to discuss the anticipated restructuring in the event you do
not obtain FDA approval by August 2009, and discuss the risks this
presents to potential investors.
|
Response:
We have included a risk factor on page 6 to discuss the risks associated with
the anticipated restructuring in the event we do not obtain FDA approval by
August 2009.
|
|
7.
|
We
note the disclosure on page 49 regarding registration of a class of your
equity securities under Exchange Act. Please tell us when you plan to
register a class of your securities. If you do not intend to register a
class of securities before this registration statement is effective,
please:
|
|
|
·
|
Disclose
the risks related to termination of periodic disclosure due to the
automatic reporting suspension under Section 15(d) of the Exchange Act;
and
|
|
|
·
|
Explain
the effect of the inapplicability of the proxy rules and Section 26 of the
Exchange Act.
|
Response:
We have added such disclosures on page 10.
|
|
8.
|
It
appears from your disclosures on pages 3, 25 and 58 that you recently
approved a reverse stock split that reduced the number of shares you are
authorized to issue to 11,970,994. We also note that you will be
submitting a proposal to your shareholders for approval to increase the
number of authorized and unissued shares. Please ensure that shareholder
approval is obtained prior to requesting acceleration of this registration
statement so that the shares being registered for issuance are actually
authorized.
|
Response: Shareholder
approval for the increase in authorized shares from 11,970,994 to 40 million was
obtained on December 3, 2008 and we amended our disclosures in the registration
statement accordingly.
Because we are a development
stage company … page 3
|
|
9.
|
Please
reconcile your disclosure here and on page 13 regarding whether you will
receive proceeds from this offering. If the proceeds you will receive from
this offering depend solely on whether the holders of outstanding warrants
exercise those securities, then please revise to clarify that fact
here.
|
Response:
We have reconciled our disclosure on page 3 with the disclosure on page 15
regarding receipt of proceeds from this offering.
Our business would be
materially and adversely affected… page 4
|
|
10.
|
Please
clarify the nature of your interest in the intellectual property you
claim. For example, you indicate in the first sentence on page 5 that the
intellectual property developed by Mr. Ryan was “licensed” to you.
However, the last sentence of this risk factor states that you are the
“exclusive owner of the patent.” Additionally, you indicate on pages 1 and
4 that you own patent and patent- pending rights and disclose on page 32
that you are the assignee of “the patent-pending
product.”
|
Response: We
are the exclusive owners of the patent. The language on page 5 was
changed to omit the word “licensed” and the word “assignment” on page 32 was
changed to “ownership”
3
|
|
11.
|
We
note the disclosure that Mr. Ryan was added as a named inventor to the
pending patent application. We also note the disclosure that you removed
from the U.S. patent application Messrs. Nord and Drogue as inventors.
However, it is our understanding that Messrs. Nord and Drogue continue to
be listed as inventors on the pending application and that Mr. Ryan is not
listed as an inventor. Please revise or
advice.
|
Response: Mr. Ryan is the
inventor and is so listed on the pending patent application No. 10/524086 and
also on the divisional application No.12277985 filed on November 25, 2008.
Messrs. Nord and Drogue have been removed from the U.S. patent application. We
revised our disclosure on page 5 accordingly.
We face intense
competition…page5
|
|
12.
|
Please
provide us with supplemental support for the data referenced in your
prospectus, marketing the relevant sections to support the disclosure. For
example, you cite to Frost & Sullivan here and page 28. You also cite
to numerous other publications throughout your “Description of Business”
section. Also, please tell us whether the studies and articles you cite
were financed by you or performed at your direction and whether the
authors have consented to use of their name in this
document.
|
Response: We obtained the Frost &
Sullivan data from the internet at www.frost.com and have updated our disclosure
accordingly. We did not obtain consent and we have not paid for any data used in
the Form S-1.
|
|
13.
|
It
is generally inappropriate for a risk factor to contain language that
mitigates the risk discussed. We note specifically the discussion at the
end of the first paragraph regarding the “distinct advantages” of your
product. Also, it appears that Stryker and other competitors have designed
systems that also eliminate handling and exposure to infectious fluids, so
the disclosure, if retained, should be more
balanced.
|
Response: We removed the language that
mitigates the risk discussed.
Our products require FDA
approval… page 6
4
|
|
14.
|
Given
the variety of uncertainties discussed in this risk factor, please revise
the first paragraph to remove your belief that “the likelihood of
regulatory approval for our products is very
high.”
|
Response: The above
phrase has been removed from the sentence on page 6.
|
|
15.
|
Expand
to discuss your obligation to obtain FDA approval by the end of August,
2009, and the related risks if you have not done so, as described on pages
39 and 40.
|
Response: We included a risk factor on
page 6 of our obligation to obtain FDA approval by the end of August
2009.
There is currently no public
trading market… page 8
|
|
16.
|
Please
clarify when you anticipate submitting an application for quotation to the
OTC Bulletin Board. Also disclose any obstacles that exist before such an
application will be submitted and accepted. For example, it is our
understanding that an application for quotation must be submitted by a
market maker. Has a market maker already committed to submitting such an
application?
|
Response: We included disclosure on our
application for quotation on the OTC Bulletin Board on page 9.
If our common stock is
accepted for quotation…page 9
|
|
17.
|
We
note the reference here and your prospectus cover page to applying for
trading on the Nasdaq or NYSE markets. Please disclose here and on your
cover page whether you currently meet the objective listing criteria for
those markets. Also disclose here what hurdles remain before you will
satisfy those criteria.
|
Response: We included a risk factor on
our application for trading on the Nasdaq or NYSE markets on page
10.
Other Securities For
Issuance Upon Certain Contingencies, page 18
|
|
18.
|
Please
disclose the identities of the persons with whom you entered into the
agreements mentioned here. Also describe the nature of the service to be
provided by the regulatory consultant and file that agreement as an
exhibit. Include a description of the purpose of the provision requiring
the attainment of performance goals and disclose of those performance
goals.
|
Response: The
persons have been identified and the nature of the consulting services described
on page 18. The consulting agreements have been added as exhibits
10.37 through 10.41 to Amendment 1. The purpose of the provision requiring the
attainment of performance goals was added “to help to ensure a timely approval
of the 510(k).” and the performance goals themselves were
disclosed. We also moved this entire section to the MD&A so that
it explains the disclosure we added to the financial statements.
5
|
|
19.
|
Please
expand the notes to financial statements to describe the equity
arrangements disclosed under this heading. Your disclosure should fully
describe the accounting applied or that will be applied, as appropriate,
and the basis in GAAP for that accounting. The disclosure should also
describe the specific performance goals and any other conditions of the
grants that impact vesting or exercisability. Refer to SFAS 123(R) for
further guidance. Please ensure that the notes to financial statements
include disclosure about all obligations to issue equity securities,
including contingent obligations.
|
Response: The notes to
financial statements have been expanded to include all of the contingent equity
arrangements, accounting applied and basis, under Page F-9 Note 3 Stock Options
and Warrants “Other Securities for Issuance Upon Certain
Contingencies”.
Management’s Discussion and
Analysis… page 20
|
|
20.
|
We
note your disclosure that your capital requirements for the next 12 months
are expected to be “rather moderate”. Please reconcile this statement with
your disclosure on page 3 that you will need to raise at least $3 million
in order to have sufficient financial resources to fund our operations for
the next 12 months and your disclosure on page 22 that you anticipate
needing secondary financing during
2009.
|
Response: The sentence
including the phrase “rather moderate” was changed to read “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…”
Critical Accounting Policies
and Estimates, page 20
|
|
21.
|
Please
revise to provide a discussion of your critical accounting policies and
estimates. This discussion should present your analysis of the
uncertainties involved in applying an accounting principle at a given time
or the variability that is reasonably likely to result from its
application over time. You should address specifically why your accounting
estimates or assumptions bear the risk of change. For example, it appears
that there is significant judgment in valuing stock options and warrants.
Refer to FR-72.
|
Response: A
paragraph was added on page 22 identifying how accrued liabilities, accrued
interest, compensation expense and warrants and options were computed /
estimated along with the risk of change with regard to the valuation of warrants
and options.
Results of Operations, page
21
|
|
22.
|
We
see that general and administrative expense increased in the six months
ended June 30, 2008 in part due to $91,400 of “product development” costs.
In addition, you disclose that research and development costs increased to
$91,400 for the six months ended June 30, 2008. Please explain whether
these disclosures are referring to the same expenses and, if so, how they
can be included in two different expense classifications. Please revise as
appropriate.
|
Response: These disclosures
are referring to the same expenses. We have moved any discussion
regarding product development out of the general and administrative section and
updated the general and administrative section to include reasons for the
increase in general and administrative expenses on page 22.
6
|
|
23.
|
Please
revise to discuss the reasons for the increase in legal fees of $78,500
and salaries of $68,100 for 2008 compared to
2007.
|
Response: The reasons for
the increases in legal fees and salaries, namely S-1 filing and paying less than
full salaries in 2007, respectively, have been added to the discussion on page
22.
|
|
24.
|
We
reference the disclosure that research and development expense increased
in 2008 due to “an accumulation of unbilled work from 2003 to 2007” and
the discussion of the increase in research and development expense in 2006
due to “unbilled development fees since inception.” Please revise to
discuss the nature of the unbilled work, the timing of the billings for
work performed and the circumstance that resulted in the aforementioned
increased expenses.
|
Response: The nature of the
unbilled work has been included on page 22 along with the timing of the billing
for work performed and the circumstance that gave rise to the increased
expenses.
|
|
25.
|
As
a related matter, it would appear unusual for a third party to incur
billable work since 2003 without billing and payment. If you have incurred
costs or entered into other transactions with related parties, such as
non- employees, shareholders, please ensure that the notes to financial
statements provide all of the disclosures required by SFAS
57.
|
Response: There
have been no other such incurred costs or transactions with related parties and
therefore we believe no disclosures are necessary.
|
|
26.
|
With
a view toward disclosures, tell us to whom the $91,400 was
paid.
|
Response: An invoice for
$100,000 was submitted by Mid-State Stainless, Inc. in 2008. This
amount has not yet been paid and is included in accounts
payable. This information has been included on page 22.
|
|
27.
|
You
disclosed that accrued payroll totaling $336,600 was “eliminated” in
2007. Please expand the notes to financial statements to
describe this significant transaction and the accounting applied. If these
individuals were also shareholders, it is not clear why the “eliminated”
of these salaries is not a capital contribution. Accordingly, please
explain to us the basis in GAAP for your accounting. We refer you to APB
26.
|
Response: The elimination of
the salaries of $346,714 was charged to salaries as of December 31, 2007 with a
note to partially compensate the individuals involved with cash bonuses and
stock options when our company reached $3million in funding. This
information was added to the discussion on page 23.
7
|
|
28.
|
Further,
please clarify in MD&A why general and administration expense for six
months ended June 30, 2007 are 153,900 but general and administrative
expenses for the year ended 12/31/07 are $125,300. If this is related to
the “elimination” of payroll, please elaborate by providing additional
disclosures in your MD&A.
|
Response: The discussion
regarding the elimination of accrued payroll on page 23 was expanded to include
the difference between the June 30, 2007 and December 31, 2007 decrease in
general and administrative expense.
Liquidity and Capital
Resources, page 21
|
|
29.
|
We
note your disclosure on page 22 regarding sufficiently of funds through
the first half of 2009 and anticipated need for a secondary financing. We
also note your disclosure on page 3 regarding the need to raise $3 million
to fund your operations for the next 12 months. Please provide investors
with a better understanding of your currently known capital requirements
and amounts needed to satisfy your outstanding obligations. For example,
discuss and quantify, among other
things:
|
|
|
·
|
The accrued payroll expense as
of June 30, 2008 noted on page
3;
|
|
|
·
|
The amounts necessary to seek
and obtain approval from the FDA and Underwriters Laboratories mentioned
on page 39;
|
|
|
·
|
The expenses you will incur in
connection with your August 2008 financing, as noted on page
II-4;
|
|
|
·
|
The fees you owe in connection
with your August 2008 financing, as noted on page
4;
|
|
|
·
|
Any ongoing payments required
by you to satisfy outstanding debt, such as the instruments mentioned on
page 23, including if the holders of those instruments decide not to
receive shares in lieu of cash;
and
|
|
|
·
|
The amount you will need to
satisfy your reporting obligations under the
Exchange.
|
Please
also provide your assessment of the accessibility of and risks to accessing
needed capital. For example, will your doubts about your ability to continue as
a going concern make your access to needed capital more difficult or expensive?
How does your statement regarding sufficiently of funds account for the
uncertainty regarding whether holders of your outstanding warrants will exercise
those securities?
Response: We
have added a table to page 23 listing the items suggested above and others to
provide detail to our known capital requirements and we also discussed the risks
to accessing the capital.
8
|
|
30.
|
We
see that you have experienced recurring operating losses and negative cash
flows. We also note that you will need significant additional capital to
fund the development of your business. Please expand the disclosure in
this section to discuss the
following:
|
|
|
·
|
Your plan of operation for the
next twelve months, including a how you expect to obtain additional
financing and plans for the “secondary financing” that is anticipated in
2009;
|
|
|
·
|
The effect of the current
economic conditions on your operating
plans;
|
|
|
·
|
A summary of any product
research and development that you will perform for the term of the
plan;
|
|
|
·
|
An indication of the amount of
cash that will be required to bring your products under development to the
market;
|
|
|
·
|
Any expected purchase or sale
of plant and significant equipment;
and
|
|
|
·
|
Any expected significant
changes in the number of
employees.
|
Refer to
Item 303 of Regulation S-K
Response:
We added disclosure on page 25 to address the bullet points listed
above.
|
|
31.
|
Please
clarify how net cash provided by financing activities increased during the
six months ended June 30, 2008 due to the receipt of investment capital
from a private offering that occurs subsequent to that
period.
|
Response: The receipt of cash from the
October 2008 financing covered a span of five months from June through
October. We received approximately $580,000 of financing in the month
of June. We revised the disclosure on page 25 accordingly.
Commitments and
Contingencies, page 22
|
|
32.
|
From
your disclosure on page 23, it appears that notes payable previously
issued by you and are now overdue. Please disclose the potential
consequences of failing to make required payments on these instruments,
such as quantification of the monetary payments on these instruments, such
as quantification of the monetary payments mentioned on page 59. Please
also refer to our first comment under the heading “Liquidity and Capital
Resources.”
|
Response: We added a
statement to page 27 regarding potential consequences of failure to make
payments on the notes and quantified the penalties associated with failure to
pay the note.
9
|
|
33.
|
Please
disclose the number of shares into which the $100,000 note payable may be
converted. Given the dates on which exhibits 10.20 and 10.21 were executed
and the disclosure in your document regarding the August 2008 private
placement, it appears that “next completed financing” has already
occurred.
|
Response: The notes are convertible
into 285,713 shares of common stock at $.35 per share. This change
was added to the table on page 26/27.
Stock Options and Warrants,
page 24
|
|
34.
|
Please
tell us why your tables here and page 25 do not
include
|
|
|
·
|
The
stock options issuance to Mr. Ruwe on June 16, 2008 that is mentioned on
page 46;
|
|
|
·
|
The
stock option grant to Mr. Davidson on June 5, 2008 that is mentioned on
page 44; and
|
|
|
·
|
The
stock option grants mentioned in the last paragraph of page
50.
|
Response: The
stock options mentioned in the bullet points above have been added to the tables
on page 29.
|
|
35.
|
Please
ensure that your disclosure regarding the reverse stock splits
consistently and completely describes the nature and amount of those
transactions. For example, we note:
|
|
|
·
|
Your
disclosure here and on pages 2,F-5, F-9, F-10 and F-20 refer to
inconsistent reverse stock split
ratios;
|
|
|
·
|
Your
disclosure does not describe the impact of those transactions on the
number of shares that were outstanding before and after each
transaction;
|
|
|
·
|
That
the purpose for the multiple reverse stock splits within a short period of
time is clear; and
|
|
|
·
|
That
your disclosure regarding the reverse stock split approved on October 20,
2008 appears to be inconsistent with your disclosure on page F-3, in that
the disclosure on page F-3 indicates that the transaction occurred prior
to June 30, 2008.
|
Response: We added a Reverse Stock
Split Table on page 30 to reflect the information requested and updated
inconsistencies throughout the registration statement. The reason for the two
stock splits is also disclosed on page 30.
10
|
|
36.
|
We
note that the reverse stock splits mentioned here changed the number of
shares that you were authorized to issue. It also appears from your
disclosure on page 2 that no shareholder approval was obtained for these
transactions. Please tell us how not obtaining shareholder approval is
consistent with your governing documents and the laws of the state in
which you are incorporated. Cite all authority on which you
rely.
|
Response: As disclosed on page 2,
Pursuant to Section 302A.402 of the Minnesota Business Corporations Act, since
the reverse stock splits 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 splits exceeding the percentage of authorized shares of
that class or series that were unissued before the reverse stock splits, no
shareholder approval was required.
|
|
37.
|
It
is not clear whether the impact of the stock splits have been fully
reflected in the table on page 25 since the numbers of options and
warrants and related exercise prices as of December 31, 2007 do not appear
to agree to the corresponding information presented on page 24. Please
appropriately revise.
|
Response:
We amended the table on page 29 to reflect the impact of the stock
splits.
Overview, page
27
|
|
38.
|
Please
disclose the identities of the “three other individuals” who founded the
company.
|
Response:
We included the names of the three other founders of the Company on page
35.
|
|
39.
|
We
note that you make numerous claims regarding the safety and efficacy of
your product, including that it “minimizes the exposure potential to the
healthcare workers who handles such fluids,” “greatly reduces the safety
issues facing operating room nurses” and has “distinct advantages” over
existing products. You also state on page 33 that it represents the “first
true innovation” and “will redefine the manner in which such material is
collected…” Reconcile these statements with the fact that other companies
have also developed systems that dispose infectious fluids into sanitary
sewer systems without exposure of healthcare workers to infectious
fluids.
|
Response:
We revised our disclosures throughout the Description of Business Section
accordingly.
Private Placement Financing,
page 27
|
|
40.
|
Please
ensure that description of your transaction is accurate and complete. For
example, you describe the private offering here as having been completed
in August 2008, but you disclose on page F-10 that it closed on November
1, 2008. Please revise. Also reconcile your disclosures on pages 4, 27,
F-10 and F-20 regarding the amount of funds you have received in the
private financing and when you received those
funds.
|
Response:
We amended our disclosure throughout the registration statement to reflect that
the offering closed in October 2008 and also to reconcile the funds we received
through the offering.
11
Products, page
30
The Fluid Management System
(“FMS”), page 30
|
|
41.
|
Please
clarify how your product significantly reduces the risk of healthcare
worker exposure to infectious fluids and requires minimal human
interaction. We note, for example, your disclosure here that your
proprietary cleaning fluid needs to be attached near the end of each
procedure. We also note your disclosure on page 37 regarding the disposal
of suction tubing and empty cleaning solution
containers.
|
Response:
We have included more specific descriptions on pages 36 and 37 of the individual
processes helping to clarify how our system improves safety. We addressed how
disposal of cleaning solution and suction tubing post procedure will affect
healthcare workers’ safety.
|
|
42.
|
Please
fully describe the potential steps and costs involved in the installation
of your system, including those relating to labor and professional fees,
such as architects. For example, might a hospital need to redirect sewer
lines and wall suction systems to join with your system? Would the room
also be unavailable for us during this period of installation? Where would
the “large fluid reservoir” be located? Also explain how the system could
be installed “on or in the wall” of the operating room. It appears that
the other systems on the market that dispose infectious fluids directly
into sanitary sewers are portable. Discuss any disadvantages that may
result from an immovable system in an operating
room.
|
Response: We have expanded our
disclosures of additional costs related to our products on page 40 and
throughout the Description of Business Section.
|
|
43.
|
Clarify
the nature of your “substantial” regulatory work you have done to date in
preparation of your submission to the FDA as mentioned on page
31
|
Response: We have expanded on the steps
we have taken in preparation for our FDA Submission starting on page
40.
Patents and Intellectual
Properties, page 32
12
|
|
44.
|
We
note the disclosure on page 5. Please expand the disclosure here to
describe in more detail the issues related to the Nord/Drogue patent
application. For example, describe the Nord/Drogue embodiment, and the
Ryan embodiment. Describe your current relationship with Nord/Drogue,
including whether you are aware of any intention by them to challenge your
use of their technology and/or pursuer legal action against you to breach
of contract and/ or infringement.
|
Response:
We have expanded our disclosure of Patents and Intellectual Property starting on
page 41.
|
|
45.
|
We
note your disclosure on page 33 that the disposable kit is an “integral,
critical component of the FMS” and consist of a proprietary cleaning
solution. Please disclose whether you may have any intellectual property
rights to the cleaning kit and the cleaning
solution.
|
Response:
We added disclosure on page 43 to clarify that we do not own patent rights on
the cleaning kit and solution.
|
|
46.
|
Please
disclose the material terms of Mr. Ryan’s consulting agreement with you,
including the amount of cash and warrants you provided to Mr. Ryan in
exchange for the assignment of intellectual property rights, the amounts
you are obligated to compensate him for consulting services and any
payments required upon a change in control. Also clarify when you
anticipate completing the expected filing of the “CIP” mentioned here,
including any steps that you need to complete before making that
submission.
|
Response:
We added disclosure to page 42 on the material terms of Mr. Ryan’s consulting
agreement.
The Disposable Cleaning Kit,
page 33
|
|
47.
|
Please
clarify how you will “ensure that only our fluid will be utilized
following procedures.” For example, will the system only operate with a
kit and fluid made by you or could medical providers use kits and fluids
made by others?
|
Response:
We added disclosure on page 43 to clarify how we will encourage that our fluid
be utilized following procedures.
|
|
48.
|
We
note the disclosure on page 37 regarding the establishment of extensive
training and services standards for the persons who will service and
install your FMS. Please clarify whether users of this system will also
require training, including with respect to the installation and use of
the disposable cleaning kit.
|
Response:
We added disclosure on page 49 regarding training for users of our
system.
Drainage Systems, page
35
13
|
|
49.
|
We
note the disclosure under this caption. Explain the current status of
these technologies, including whether they have received FDA approval and
the extent to which they are currently in use in hospitals. Please also
disclose this information under the caption “Current Techniques of
Collecting infectious Fluids” beginning on page 29. Under the caption
“Products”, compare your system with those already developed that dispose
of infectious fluids directly into the sanitary
sewer.
|
Response:
We added disclosure of other competitive products currently on the market
including a competitive key feature comparison chart on page 39.
Current Competition,
Technology and Costs, page 35
|
|
50.
|
Please
disclose your competitive disadvantages with equal prominence as you
disclose your perceived competitive advantages. For example, we note your
disclosure that the current standard of care involves the collection,
retention, and disposal of fluids using canisters and that the large and
growing market for suction canisters that is currently served by entities
with significantly greater financial resources. Therefore, it appears you
may have difficulty penetrating the existing market for canisters and
having your product adopted as a standard of
care.
|
Response:
We added disclosure to page 46 regarding our competitive
disadvantages.
Handling Costs, page
36
|
|
51.
|
Please
clarify how your products would reduce disposal and sterilization costs
entirely, as noted here, given your disclosure on page 37 regarding the
need to dispose of suction tubing and the cleaning
solution.
|
Response:
We amended the disclosure on page 40 to remove the indication that our products
would reduce disposal and sterilization costs entirely.
Competitive Products, page
37
|
|
52.
|
Compare
and contrast your proposed products with systems that dispose of fluids
directly into sanitary sewers and are apparently already on the market and
in use in hospitals.
|
Response:
We expanded our disclosure and included a competitive comparison on page
48.
Distribution, page
37
14
|
|
53.
|
Explain
the basis for the focus of your marketing effort described in the second
paragraph. It appears that there are other products already being marketed
that are capable of disposing on infectious fluids without direct handling
by healthcare workers. It is also not clear why you believe your
technology “represents a breakthrough” and will be “widely acclaimed” and
“quickly adopted.” Please expand to
discuss.
|
Response: We expanded our disclosure on our marketing efforts starting on
page 48.
|
|
54.
|
It
appears from your disclosure on pages 31,33 and here that you have not
entered into any agreements related to the distribution or installation of
your products, begun marketing efforts or demonstrated your product to
potential customers. It also appears that no distributors or independent
contractors are currently capable of, or have been trained in, the service
and installation of your products. If that is correct, please revise your
disclosures to state so directly.
|
Response:
We added disclosure on page 49 to clarify that there are currently no
installation companies contracted or trained to install our
product.
Pricing, page
38
|
|
55.
|
Please
clarify how the prices “for the FMS and its disposable cleaning kit will
reflect a cost saving to the hospital over its current procedure costs.”
For example, explain how the undetermined installation and labor costs and
disposal required for suction tubing and empty cleaning solution factor
into that statement. Also explain how your costs compare with automated
disposal systems marketed by Waterstone Medical, Dornach Medical Systems,
and Stryker.
|
Response: We expanded disclosure on page 49 to clarify how our
FMS will reflect cost savings.
|
|
56.
|
Please
provide investors with a comparison of the anticipated per-procedure costs
to end users of your disposable cleaning kit as opposed to your
competitors’ canisters.
|
Response:
We added disclosure relating to such comparison on page 50.
Engineering and
Manufacturing, page 39
|
|
57.
|
Please
disclose the material terms of your relationship for the engineering and
manufacturing of your product. For example, do you have a long-term
production contract that guarantees the production of a minimum number of
units or could the manufacturer choose to prioritize its capacity for
other customers, reduce or eliminate deliveries to you on short notice or
increase the prices charged to you. If you have entered into a written
agreement, please file it as an
exhibit.
|
Response:
We expanded disclosure of our relationship for the engineering and manufacturing
of our product on page 50.
15
|
|
58.
|
As
a related matter, please clarify to which of your products the
manufacturing relationship noted here relates. Will this third party make
your wall mount unit, disposable cleaning kit or both? Your revised
disclosure should clearly state who will perform the manufacturing of each
of your principal products.
|
Response:
We added disclosure regarding our products to which the manufacturing
relationship relates on page 50.
Government Regulation, page
39
|
|
59.
|
We
see the contingency regarding the FDA submission described at the bottom
of page 39. Please add footnote disclosure about this contingency and the
potential impact on your business and financial statements. It appears
that MD&A should present appropriate disclosure about this
contingency. Please revise.
|
Response:
We revised the disclosure throughout the registration statement, including
adding such disclosure to the MD&A, to clarify the contingency regarding the
FDA submission.
|
|
60.
|
Briefly
describe the 510(k) process and the finding the FDA makes when it clears a
device under section 510(k).
|
Response:
We added disclosure on the 510(k) process and the FDA clearing process starting
on page 51.
|
|
61.
|
Include
in your disclosure a description of the following FDA statutory and
regulatory requirements:
|
|
|
·
|
Device classification
information;
|
|
|
·
|
Registration and labeling
requirements;
|
|
|
·
|
Advertising and
promotion;
|
|
|
·
|
Quality system regulation and
manufacturing of the device;
and
|
|
|
·
|
Post- market reporting and
record- keeping requirements, including medical device reporting and
reports of corrections or
removals;
|
Provide
similar disclosure regarding regulations in foreign jurisdictions in which you
will seek to do business.
Response:
Since the FDA device classification, registration and labeling requirements are
extensive, we provided information on page 53 on where to obtain the information
requested above.
16
|
|
62.
|
We
note your disclosure here regarding seeking approval from the Underwriters
Laboratories. Please:
|
|
|
·
|
Clarify whether you have
submitted your application yet and when you expect to seek approval from
the Underwriter
Laboratories;
|
|
|
·
|
Disclose what steps you have
taken and must take in the future to secure that approval, including any
hurdles you will need to overcome;
and
|
|
|
·
|
Describe the consequences and
risks from failing to secure such
approval.
|
Response:
We added disclosure to page 51 on our application for electrical safety testing
and certification where we addressed the bullet points above.
|
|
63.
|
Please
clarify when you anticipate submitting your application to the FDA. Also
clarify the products covered by this application. For example, will it
include your wall mount unit, disposable cleaning kit and proprietary
cleaning solution?
|
Response:
We added disclosure starting on page 51 regarding submitting our application to
the FDA and clarifying the products covered by the application.
|
|
64.
|
Please
explain the business purpose for and file this restructuring agreement as
an exhibit. We may have further
comments.
|
Response:
We explained the purpose of the restructuring agreement throughout the document
and attached the agreement as Exhibit 10.42.
|
|
65.
|
Regarding
the disclosure of the transaction to be effected if you do not obtain FDA
approval by the end of August 2009,
please:
|
|
|
·
|
Indentify the
“majority-in-interest of investors” and
Founders”;
|
|
|
·
|
Disclose the number and
percentage of outstanding stock held by
each;
|
|
|
·
|
Clarify who will comprise the
“majority- in-interest of investors” after the transaction registered here
is completed;
|
|
|
·
|
Tell us, with a view toward
disclosure, whether your shareholders will be entitled to vote on the
asset sale mentioned on page 39 and reverse merger or entitled to vote on
the asset sale mentioned on page 39 and reverse merger or similar
transaction mentioned on page
40;
|
|
|
·
|
Disclose whether a “reverse,
merger or other similar transaction” is currently being negotiated or
considered by you;
|
|
|
·
|
Disclose the purpose and effect
of each of the transaction mentioned here;
and
|
|
|
·
|
Explain the purpose of this
agreement.
|
Response:
We revised our disclosure on pages 53 and 54 to address each bullet point listed
above.
17
|
|
66.
|
Clarify
in bullet two whether “all Company stock” will be cancelled, or only that
company stock held by the
“Founders”.
|
Response:
We clarified our disclosure to state that all Company stock held by the Founders
only will be cancelled and that ownership of the Company’s stock held by the
Investors would not be affected.
|
|
67.
|
The
last paragraph regarding modification of your private placement memorandum
is not clear since the offering has already taken place. Please explain
your intent.
|
Response:
We revised our disclosure to state that our private placement memorandum has
been modified already. It was modified so that the private placement memorandum
would contain complete disclosure since it may be distributed for informational
purposes in the future.
Directors, Executive
Officers, Promoters and Control Persons, page 41
|
|
68.
|
Please
indentify and discuss the business experience of the members of the
medical advisory board mentioned on page 34. Also disclose the principal
functions performed by that board and the material terms of agreements you
have with its members.
|
Response:
We revised our disclosure on page 60 to add the business experience
of, and material agreements with, the Medical Advisory Board
members.
|
|
69.
|
Please
disclose the term of office for each of your
directors.
|
Response:
We have not set terms of office for any of our directors and have added
disclosure to page 58 to reflect this.
Summary Compensation Table,
page 44
|
|
70.
|
It
appears from your disclosure on page 50 that during 2007, Messrs. Davidson
and Rice agreed to waive accrued and unpaid salaries in exchange for stock
options. Please tell us how your summary compensation table accounts for
that agreement. Refer to Instruction 2 to Item
402(n)(2)(iii)and(iv)
|
Response:
We added footnote disclosure to the Summary Compensation Table to reflect unpaid
salary, and the reasons therefore, in exchange for stock options for Messrs.
Davidson and Rice.
Outstanding Equity Awards at
Fiscal Year- End, page 44
|
|
71.
|
We
note the disclosure that you have made no equity awards during the
fiscal-year ended December 31, 2007. Please note that Item 402(p) of
Regulation S-K requires disclosure of equity awards outstanding at
fiscal-year end, not simply those that were made during that fiscal year.
Please revise, as appropriate. Also reconcile your current disclosure with
your disclosure on page 50 regarding the options granted to your named
executives during 2007.
|
Response:
We added an Outstanding Equity Awards Table to page 62.
18
Employment Agreements…page
44
|
|
72.
|
Reconcile
the amounts in employment agreements with the amount in the summary
compensation table, and explain the differences. Also disclose whether the
funding targets have been achieved and what salary each of your named
executives earned during your 2007 fiscal year. In this regard, please
note that Item 402 of Regulation S-K requires clear disclosures of all
compensation earned by your named
executives.
|
Response: The amounts reflected in
the descriptions of the employment agreements for Mr. Davidson and Mr. Rice
differ from the amounts disclosed in the Summary Compensation Table because the
Company did not pay them their full salaries due to lack of funds. We added
disclosure to this effect on page 63.
|
|
73.
|
Please
ensure that the disclosure regarding your compensation arrangements is
complete. We note that you have not disclosed the bonus shares to be
issued to Mr. Davidson that are discussed in section 4.b. of exhibit 10.1.
We also note that you have not discussed the waiver of accrued salary and
stock option grants mentioned on page
50.
|
Response:
We expanded disclosure of our compensation arrangements on page 63.
|
|
74.
|
Please
disclose the number of shares acquired by Mr. Ruwe in connection with his
investment of $200,000.
|
Response: We added disclosure on page
67 of the number of shares acquired by Mr. Ruwe in connection with his
investment.
Corporate Governance, page
49
|
|
75.
|
We
note that you believe Mr. Gadbow is considered “independent” under Nasdaq
Marketplace Rule 4200. Please tell us how you reached this conclusion,
given your disclosure on page 41 and in exhibit 10.13 that Mr. Gadbaw was
employed by you until August 2008. Please refer to Nasdaq Marketplace Rule
4200(a)(15)(A). Also tell us how your conclusion regarding Mr. Morawetz’s
independence considers the nature of your relationship with him, as noted
on page 50.
|
Response: We revised our disclosure on
page 68 to reflect that Mr. Gadbaw is not considered to be an independent
director.
Certain Relationships and
Related Transactions, page 50
19
|
|
76.
|
Please
provide financial statements disclosure about the transactions described
in the third paragraph. In that regard: (1) provide a description of the
arrangements with your directors/ officers, (2) disclose how you accounted
for the arrangements, (3) disclose the basis in GAAP for the accounting
and (4) disclose the fair value assigned to the equity instruments
granted. If this disclosure is related to the “elimination” of accrued
salaries described in MD&A, please revise the filing to reconcile the
amounts on page 50 to the S336,600 disclosed in
MD&A.
|
Response:
Financial statement disclosure has been made for the accrued payroll given up by
the Company’s officers, including a description of the arrangements, accounting
and fair value. The correct amount of the accrual was entered to the
MD&A.
|
|
77.
|
Please
file as an exhibit a written summary of the oral agreement with Mr.
Morawetz. Also describe the services rendered in view of the fact that you
have no product available to market or
sell.
|
Response: We have prepared a written
summary of the oral agreement with Mr. Morawetz and described the services he
rendered to the Company We have not included the summary as an
exhibit because the written oral agreement summary has not yet been approved by
both parties.
|
|
78.
|
Please
clarify your disclosure regarding Mr. Morawetz by discussing the
registrant’s relationship with him
separately.
|
Response: We have added a paragraph on
page 69 to clarify our relationship with Mr. Morawetz.
|
|
79.
|
We
note the disclosure in the last paragraph on page 50 regarding the waiver
of accrued and unpaid salaries. This disclosure indicates that the amounts
owed by you were waived by December 2007 with the exception of fees owed
to Mr. Morawetz. However, your disclosure on page 3 indicates that these
unpaid salaries and fees continued to accrue though June 30, 2008. Please
revise or advise.
|
Response: The accrual of unpaid
salaries from December 2007 to June 2008 was a separate issue from the earlier
accrual and waiver from inception through November 2007. Accrued
salaries for May and June 2008 were subsequently paid from funding proceeds,
leaving an unpaid accrual from December 2007 through April 2008 outstanding to
be paid when funds are available. We added disclosure on page 69 to explain
this.
|
|
80.
|
Please
revise the last paragraph to discuss each related party individuality,
including the amount of unpaid salary waived and the number of shares and
options received. Reconcile the options disclosure here with the
disclosure in the beneficial ownership table for these
individuals.
|
Response: We added this disclosure to
page 69.
20
|
|
81.
|
Also
include in your revised disclosure a description of the material terms of
the severance agreement between you and Mr. Gadbaw, filed as exhibit 10.4.
For example, we note that your current disclosure does not indentify the
yearly stock option grant mentioned in paragraph 4 or the acceleration of
payments mentioned in paragraph 2.b. Please also file copies of the
agreements governing the waivers as
exhibits.
|
Response: We added additional
disclosure on page 69 regarding the terms of Mr. Morawetz’s severance
agreement.
|
|
82.
|
Please
note that information set forth Item 404 of Regulation S-K is required to
be disclosed if a transaction resulted in the person becoming a 5%
shareholder or continues after that date, such as through the ongoing
receipt of payments. It appears from your disclosure on pages 27, 51and 52
that several of your selling shareholders beneficially own more than 5% of
your common shares. Therefore, please expand your disclosure here to
provide the information required by Item 404 with respect to the
transaction that resulted in their becoming a related
party.
|
Response: We have included this
disclosure on page 69.
|
|
83.
|
Please
tell us why you have not provided the information required by Item 404 of
Regulation S-K with respect to:
|
|
|
·
|
The transactions noted in
exhibits 10.15-10.18; and
|
|
|
·
|
The transaction in which Mr.
Ruwe acquired your warrants, as noted on page
51.
|
Response:
We have included this disclosure on page 69.
Selling Security Holders,
page 51
|
|
84.
|
Given
the nature and size of the transaction being registered, advise the staff
of the company’s basis for determining that the transaction is
appropriately characterized as a transaction that is eligible to be made
on shelf basis under Rule
415(a)(1)(i).
|
Response: Please see Schedule 1, which
is attached to this letter.
|
|
85.
|
We
note your disclosure in the first paragraph regarding the lack of material
relationships between you and the selling shareholders. Please tell us how
this disclosure considers the referral, consulting, finder and investor
relations agreements mentioned on page II-6 and filed as
exhibits.
|
Response: We have added footnotes
describing the relationships between certain selling shareholders and the
Company.
21
|
|
86.
|
Please
describe in this section the transactions in which the selling
shareholders acquired the offered shares. Include the date of the
transaction and the amount of consideration
received.
|
Response:
We have updated this section accordingly.
|
|
87.
|
Please
tell us whether any if the selling shareholders are broker- dealers. A
selling shareholder who is a broker- dealer must be indentified in the
prospectus as underwriter. In addition, we note your disclosure that none
of the selling shareholders are or were affiliated with registered broker-
dealers. Please tell us whether any of selling shareholders are affiliated
with any
broker- dealer. A selling shareholder who is an affiliate of a broker-
dealer must be identified in the prospectus as an underwriter unless that
selling shareholder is able t o make the following representations in the
prospectus.
|
|
|
·
|
The selling shareholders
purchased the shares being registered for the resale in the ordinary
course of business, and
|
|
|
·
|
At the time of the purchase,
the selling shareholder had no agreements or understandings, directly or
indirectly, with any person to distribute the
securities.
|
Please
revise as appropriate.
Response:
We have revised the disclosure to indicate there are no relationships with any
broker-dealer.
|
|
88.
|
Please
indentify the natural persons with voting and/or dispositive powers with
respect to the shares to be offered and sold by Egavnit
LLC.
|
Response:
We have added this disclosure to the Selling Security Holder Table.
|
|
89.
|
Please
reconcile your disclosures here and on page II-6 regarding the number of
shares underlying warrants held by Jeremy
Roll.
|
Response: We have revised the
disclosure accordingly.
Security Ownership of
Certain Beneficial Owners and Management, page 56
|
|
90.
|
Please
reconcile your disclosures in note 11 and on page 51 regarding the number
of shares underlying warrants held by James R. Taylor. Also reconcile your
disclosure in notes 12 and 13 and on pages 51 and 66 regarding the number
of common shares held by RP Capital LLC. Also tell us why the number of
shares underlying warrants held by RP Capital, as noted on page 51, was
excluded from your disclosure here.
|
Response: We have reconciled these
disclosures. Common shares underlying warrants that were not exercisable within
60 days were not included in the Security Ownership Table, but were included in
the Selling Security Holder Table.
Warrants and Convertible
Notes, page 58
22
|
|
91.
|
Please
tell us how you determined that Mr. McGoldrick holds 23, 942 shares
underlying options. We note that exhibit 10.7 indicates that his option
grant was for 10,000 shares.
|
Response: Pursuant to Mr. McGoldrick’s
stock option agreement, he is entitled to receive options to purchase 10,000
shares of our common stock for each year of service. As of the date
of this registration statement, Mr. McGoldrick has earned options to purchase
40,000 shares of our common stock, or 23,942 shares post-split.
Warrants and Convertible
Notes, page 58
|
|
92.
|
Please
clarify why the imposition of monetary penalties related to the July 2007
convertible note financing is tied to the registration rights granted in
your August 2008 private placement. Also disclose the amount of monetary
penalties that you may owe.
|
Response: We added disclosure on the
potential penalties to page 79.
Legal Matters and Interests
of Named Experts, page 66
|
|
93.
|
Expand
to state the total number of shares and warrants currently held by all
affiliates of the law firm and the number that are being registered in
this offering that are beneficially owned by Richardson & Patel, Mr.
Richardson, Mr. Patel, RP Capital, and other affiliates. Reconcile the
amounts with those listed in the selling shareholder table. We may have
further comments.
|
Response: We have added this disclosure
to page 86.
Financial
Statements
Interim Financial Statements
for the six months ended June 30, 2008, page F-1
|
|
94.
|
We
see that you included the consent of your independent registered public
accounting firm on page F-2. Note that the consent should be filed as an
exhibit to your registration statement, as specified in Item 601 of
Regulation S-K. Please revise to remove the consent from this section and
to present the consent as an appropriately numbered
exhibit.
|
Response: We filed the Consent of
Independent Registered Public Accounting Firm as Exhibit 23.1 to our Form S-1
filed on November 12, 2008. We have also included the consent in the body of the
S-1 at the request of our auditors.
23
|
|
95.
|
Please
update the financial statements as required by Rule 8-08 of Regulation
S-X.
|
Response:
We have provided financial statements as of September 30, 3008 with the filing
of this Amendment 1 as required by Rule 8-08 of Regulation S-X.
|
|
96.
|
Please
revise to remove the label “audited” from the top of the balance sheet,
statement of operations and statement of cash flow as of and for the year
ended December 31, 2007, since full audited financial statements,
including an audit opinion, are not included in the interim
presentation.
|
Response:
Our auditors have requested that we leave the label “audited” from the financing
statements containing December 31, 2007 disclosures.
Statement of Stockholders’
Equity (Deficit), page F-5
|
|
97.
|
Please
revise so that the amount of Total Stockholders’ Equity (Deficit) as of
June 30, 2008 agrees to the corresponding amount presented on the face of
the Balance Sheet as of that date. As a related matter, the column for
Accumulated Deficit does not appear to be mathematically accurate. Please
verify the mathematical integrity of any updated financial
statements.
|
Response: The Stockholders’ Equity
(Deficit) as of September 30, 2008 corresponds to the amount on the face of the
Balance Sheet as of the same date.
|
|
98.
|
Please
revise to present a Statement of Stockholders’ Equity (Deficit), showing
from inception:
|
|
|
·
|
For each issuance, the date and
number of shares of stock, warrants, rights, or other equity securities
issued for cash and for other
consideration.
|
|
|
·
|
For each issuance, the dollar
amounts (per share or other equity unit and in total) assigned to the
consideration received for shares of stock, warrants, rights, or other
equity securities. Dollar amounts should be assigned to any noncash
consideration received.
|
|
|
·
|
For each issuance involving
noncash consideration, disclosure the nature of the noncash consideration
and the basis for assigning
amounts.
|
This
analysis should be presented in the form of reconciliation of the beginning
balance to the ending balance for each period since inception. Please note that
the issuances should not be combined except for separate issuances of equity
securities within the same fiscal year for the same type of consideration and
for the same amount per equity unit. Refer to paragraph 11(d) of SFAS 7 and Rule
3- 04 of Registration S-X.
Response: The Statement of
Stockholders’ Equity (Deficit) as of September 30, 2008 has been prepared as
requested above.
24
|
|
99.
|
In
addition, we see that the effect of the reverse stock split instituted on
6/6/08 is reflected as a separate line item in the Statement of
Stockholders’ Equity (Deficit). Under SAB Topic 4C, changes in capital
structure such as a reverse stock split must be given retroactive effect,
even if the change occurs after the date of the balance sheet. An
appropriately cross-referenced note should disclose the retroactive
treatment, explain the change made and state the date the change became
effective. Please revise for all applicable stock
splits.
|
Response: We have revised the Statement of
Stockholders’ Equity (Deficit) so that all entries are now post- split with no
separate line item.
Statement of Cash Flows,
page F-6
|
|
100.
|
We
see that you issued common stock for cash proceeds of $824,534 in the six
months ended June 30, 2008. Please revise to provide footnote
disclosure that fully describes the transaction, including all significant
terms of the equity instruments
issued.
|
Response:
A footnote for the proceeds in the nine months ended September 30, 2008
describing the investment has been added to page F-6.
Note 1. Summary of
Significant Accounting Policies, page F-7
|
|
101.
|
Please
revise to provide an affirmative representation that the interim financial
statements include all adjustments that, in the opinion of management, are
necessary in order to make the financial statements not
misleading. Refer to Rule 8-03 of Regulation
S-X.
|
Response:
We have added the above statement under Accounting Estimates on page
F-8.
|
|
102.
|
We
note disclosure on page 32 that you recently completed and executed an
agreement to secure the assignment of patent-pending product and rights
from an inventor in exchange for cash, warrants and future
royalties. Please expand the notes to financial statements to
describe the transaction, the rights and assets acquired and the
accounting applied. Your disclosure should fully describe all
significant terms of the warrants, the fair value assigned to those
warrants and how that fair value was
determined.
|
Response:
We have added disclosure to page F-8 under Patent and Intellectual Property
including the fair value of the warrants and the basis for the fair
value.
Note 3. Stock Options and
Warrants, page F-7
|
|
103.
|
Please
add footnote disclosure that describes all significant terms and
provisions of the 2.6 million warrants issued in the first six months of
2008. In the regard, (1) describe the transaction(s) leading to
the issuances, (2) clarify whether the warrants were sold in financing
arrangements or were issued in compensatory arrangements, (3) describe any
terms or provisions that may lead to changes in exercise prices or the
number of warrants outstanding, (4) describe any cashless exercise
provisions, (5) describe any registration obligations and (5) describe any
liquidated damages or potential penalties that you may incur under the
arrangement(s). Also disclose how the warrants were valued and
accounted for, including the model(s) and all significant
assumptions. The list is not intended to be comprehensive and
your disclosure should be based on the terms and provisions of the
underlying agreements. The substance of this comment also
applies to warrants issued in annual periods and subsequent on June 30,
2008.
|
Response:
We have added disclosure starting on page F-9 that discloses all significant
terms of the now 4.5 million warrants issued in the offering and all other
warrants to inception.
25
|
|
104.
|
We
see from page 44 that in June 2008, it was agreed that Mr. Davidson would
be issued options to purchase 543,292 shares of common stock exercisable
at $.01 upon completion of the first $1 million of new funding
raised. It appears that this funding may have been received in
the third quarter of 2008. Please add footnote disclosure to
describe the arrangement, including the performance obligation, and to
describe the terms of the options. Disclose how these options
have been or will be recorded in your financial statements, as
applicable.
|
Response:
Disclosure regarding Mr. Davidson’s performance stock options were added to page
F-12.
Note 6. Long-term Debt, page
F-9
|
|
105.
|
The
tabular information indicates that a $100,000 note matures in
2012. However, the last sentence of the footnote appears to
suggest that the maturity date is 2013. Please reconcile here
and on page 23.
|
Response:
The correct maturity date of 2012 was applied to the tables on page F-15 and in
the MD&A.
Consolidated Financial
Statements for the year ended December 31, 2007
Report of Independent
Registered Public Accounting Firm, page F-11
|
|
106.
|
Please
have your auditors revise the second paragraph of their audit report to
state that the audit was performed in accordance with “the standards of
the Public Company Accounting Oversight Board (United
States).”
|
Response:
Our auditors have revised their audit report accordingly.
26
|
|
107.
|
Please
also revise the report to include the signature or name of the independent
registered public accounting firm.
|
Response: Our auditors have included
their conformed signature to the audit report.
|
|
108.
|
We
see that you are a development stage business with recurring losses,
operating cash flow deficits and no revenues. Please have your
auditors tell us how they evaluated the requirements of AU Section 341 in
concluding that the audit report should not include a paragraph regarding
going concern with accompanying footnote disclosure as specified in the
referenced guidance.
|
Response:
According to our auditors in their evaluation of the requirements of AU Section
34, because we are a development stage business and are identified as such on
the opinion, there is no need to add going-concern language. Our
auditors further indicated that this is a common practice in the
industry.
Balance Sheet, page
F-13
|
|
109.
|
We
see from Note 5 and Note 6 that certain of your notes payable and
long-term debt are convertible into shares of your common
stock. Please revise to accurately label convertible debt as
convertible on the face of your balance sheet, as
applicable.
|
Response:
The Balance Sheet has been annotated as such.
Statement of Stockholders’
Equity (Deficit), page F-15
|
|
110.
|
Please
revise to present a Statement of Stockholders’ Equity (Deficit), showing
from inception:
|
|
|
.
|
For
each issuance, the date and number of shares of stock, warrants, rights,
or other equity securities issued for cash and for other
consideration;
|
|
|
.
|
For
each issuance, the dollar amounts (per share or other equity unit and in
total) assigned to the consideration received for shares of stock,
warrants, rights, or other equity securities. Dollar amounts should be
assigned to any noncash consideration and the basis for assigning
amounts.
|
This
analysis should be presented in the form of a reconciliation of the beginning
balance to the ending balance for each period since inception. Please
note that issuances should not be combined except for separate issuances of
equity securities within the same fiscal year for the same type of consideration
and for the same amount per equity unit. Refer to paragraph 11(d) of
SFAS 7 and Rule 3-04 of Regulation S-X.
Response:
The Shareholders’ Equity/Deficit on page F-21 has been revised as
requested.
27
|
|
111.
|
As
a related mater, we see in Item 26 (Recent Sales of Unregistered
Securities) that you have issued shares and other equity instruments in
exchange for assets, services and in connection with borrowings and other
financing arrangements with both related and unrelated
parties. For other than employee stock options, please expand
the notes to financial statements to describe the individual transactions,
to describe the consideration received by the Company and to disclose how
the equity instruments issued in those transactions were accounted for and
valued. We may have further comment on your accounting for
these transactions after you have provided us the revised
disclosure. The expanded disclosure should be readily
reconcilable to disclosure in the revised Statement of Stockholders’
Equity (Deficit).
|
Response:
We have expanded the financial statements to include the requested transactions
starting on page F-10.
|
|
112.
|
We
see that the Board of Directors approved reverse stock splits on June 6,
2008 and October 20, 2008. Please clarify whether the equity
information included in the Statement of Stockholders’ Equity (Deficit) is
on a post-split basis. Under SAB Topic 4C, changes in capital
structure such as a reverse stock split must be given retroactive effect,
even if the change occurs after the date of the balance
sheet. An appropriately cross-referenced note should disclose
the retroactive treatment, explain the change made and state the date the
change became effective. Please revise as appropriate for all
splits. All per share information included in the footnotes
(for instance for stock options) should be similarly retroactively
restated.
|
Response:
The equity information included in the Statement of Stockholders’ Equity/Deficit
has been restated to reflect post stock-split numbers. All stock
options and warrants throughout the S-1 Amendment have been restated in a
similar manner. A note has been added to pages F-9 and F-24 under
Stock Options and Warrants disclosing this.
Statement of Cash Flows,
page F-16
|
|
113.
|
Tell
us why the change in notes payable to shareholder is included as an
operating cash outflow. Cash flows from notes payable are
normally financing activities under SFAS 95. Please revise or
advise how the presentation conforms to SFAS
95.
|
Response:
The Statement of Cash Flows Tables have been revised to reflect the notes
payable to shareholder as a financing activity.
Note 1. Summary of
Significant Accounting Policies, page F-17
|
|
114.
|
We
see that you have capitalized $113,056 of patent costs. Please
revise to disclose the nature of the patent costs capitalized as an
intangible asset. Please note that costs of internally
developing intangible assets that are not specifically identifiable, that
have indeterminate lives, or that are inherent in a continuing business
and related to an entity as a whole are expensed as incurred pursuant to
the requirements of SFAS142. Generally, only legal fees and
similar costs relating to patents, copyrights, and trademarks may be
capitalized. Please
advise.
|
Response:
Only legal and similar fees have been capitalized. The notes under
Intangible Assets have been updated to include this disclosure.
28
|
|
115.
|
Tell
us why the patent costs should not be expensed as research and
development.
|
Response:
We believe patent costs should not be expensed because they comply with
SFAS142. As stated in Question 114 above, they consist solely of
legal and similar fees.
Note 3. Stock Options and
Warrants, page F-17
|
|
116.
|
You
disclose that you use the calculated value method to value stock
options. Under SFAS 123(R) that method is defined as a measure
of the value of a share option or similar instrument determined by
substituting the historical volatility of an appropriate industry sector
index for the expected volatility of a nonpublic entity’s share price in
an option-pricing model. Your disclosure suggests that you did
not apply a measure of volatility since that measure is
zero. Tell us why your volatility assumption is appropriate
under the guidance set forth in paragraphs A43 through A48 of SFAS
123(R). Please also refer to the guidance about volatility set
forth in SAB Topic 14. your response should fully demonstrate that you
have appropriately applied SFAS 123(R) in establishing a volatility
assumption.
|
Response:
We are still analyzing this matter and will address it in a future Form S-1
Amendment.
|
|
117.
|
As
a related matter, SFAS 123(R) calls for numerous disclosures as set forth
in paragraphs A240 and A241 that are required for both employee and
non-employee transactions. Also note that you should comply
with all disclosures applicable to a public company as a result of your
registration statement. Your disclosures do not appear complete
under the cited guidance. Please appropriately
revise.
|
Response:
We are still analyzing this matter and will address it in a future Form S-1
Amendment.
|
|
118.
|
Your
filing indicates that you have applied the Black-Scholes Merton method for
options, but appears to be silent with respect to
warrants. Please make all relevant valuation disclosures about
warrants required by SFAS 123(R).
|
Response:
Warrants are included in the application of the Black-Scholes Merton
method.
29
|
|
119.
|
Tell
us the common share fair values used in applying the Black-Scholes model
for options and warrants granted in 2007 and 2008 and tell us how you
determined those common share fair values. Specifically address the common
share fair values applied in valuing the options granted to Mr. Davidson
and the 2.6 million warrants both issued in 2008. If those
common share fair values are less than the per share prices realized in
your recent private placement, please provide us an analysis that explains
the basis for the common share fair value used for Black-Scholes
purposes.
|
Response:
The common fair values used in applying the Black-Scholes model for options and
warrants granted in 2007 and 2008 were based on recent, prevailing stock
purchase transactions. For Mr. Davidson, the common share fair values
were, pursuant to his employment agreement, $.35 per share, based on the
estimated offering price and the 4.5 million investor warrants common share
values of $.46 per share were also based on the estimated offering price. As
noted on the cover page of the S-1, we estimate the offering price to be between
$.35 to $.46 per share.
|
|
120.
|
Please
note that under the definitions in the Glossary t SFAS 123(R) you are no
longer a non-public entity as of the filing date of the Form
S-1. Accordingly, any share options or similar instruments
issued on or after that date should be valued and accounted for under the
guidance applicable to public companies under SFAS 123(R). That is, you
should not use the calculated value method for instruments issued or
modified on or after November 12, 2008. Refer to SAB Topic 14
for further guidance.
|
Response:
We are still analyzing this matter and will address it in a future Form S-1
Amendment.
|
|
121.
|
We
see that in October 2007, the exercise price of the $2.00 warrants
increased to $2.25. Please revise to disclose all of the
significant terms and conditions of the warrants, including a discussion
of the provision leading to the change in exercise prices. Also
disclose how you accounted for the change. In addition, tell us
why the warrants are still included in the table on page F-18 at a $2.00
exercise price.
|
Response:
A disclosure was added to Stock Options and Warrants Section. All tables showing
such warrants have been adjusted to the price of $3.76 ($2.25 pre-split). As of
October16, 2008, these warrants have expired.
Note 5. Note Payable, page
F-19
|
|
122.
|
We
see that your convertible debenture matures in 2007. Since the
financial statements are as of December 31, 2007, please revise to update
this disclosure and state whether the maturity date has been extended, the
amount is past due or otherwise how you plan to settle the outstanding
debt.
|
Response:
This issue has been addressed under Note 5-Notes Payable on page
F-25.
30
Part II
Item 26. Recent Sales of
Unregistered Securities, page II-4
|
|
123.
|
Please
ensure that your description of unregistered sales of securities during
the past three years is complete. We note, for example, that
you have not included the information required by Item 701 of Regulation
S-K with respect to the August 2008 private placement noted on pages 3, 4
and 27 and the March 2007 convertible loan financing mentioned on page 3
and 23. You have also not disclosed the information required by
Item 701 of Regulation S-K with respect to the shares acquired by Mr. Ruwe
in exchange for his $200,000 investment noted on page 46 or the
transactions referenced in exhibits
10.15-10.19.
|
Response:
We have updated this section accordingly.
|
|
124.
|
Please
disclose the information required by Item 701 of Regulation S-K with
respect to each unregistered sale of your securities. We note
that many of the unregistered sales you disclose do not identify the
nature and amount of consideration provided. We also note that
none of the unregistered sales you disclose identify the exemption relied
on and factual basis supporting that
exemption.
|
Response:
We identified the nature of consideration provided for each unregistered sale of
securities starting on page II-4. We also added disclosures starting on page
II-4 to describe the exemption(s) relied on and factual basis supporting the
exemption(s).
|
|
125.
|
As
of June 30, 2008, your balance sheet states that there are 3,644,524
shares issued and page 1 of the prospectus states there are 8,163,687
shares outstanding. Please reconcile, and ensure that all
issuances are disclosed here.
|
Response:
We have updated this section accordingly.
Item 28. Undertakings, page
II-8
|
|
126.
|
Please
include the full undertaking required by Regulation S-K Item
512(a)(5)(ii). Also, please note that due, in part, to the
language of Securities Act Rule 430C(d), the undertaking included in Item
512(a)(6) of Regulation S-K should be included in filings for initial
public offerings. Please revise your filing to include that
undertaking.
|
Response:
We revised our Undertakings Section on page II-8 to include the information
requested.
Signatures, page
II-10
31
|
|
127.
|
Please
indicate below the second paragraph of text which individual signed in the
capacity of principal accounting officer or
controller.
|
Response:
Our Principal Financial Officer, Gerald Rice, has signed in the capacity of
Principal Accounting Officer and we have added this to his title on page
II-10.
Exhibits
|
|
128.
|
Please
file as exhibits:
|
|
|
·
|
the 2008 Stock Option Plan
mentioned on page 46. Also revise your document to include disclosure of
the material terms of the
plan;
|
|
|
·
|
the employment agreement with
Mr. Dauwalter that is noted on page II-6;
and
|
|
|
·
|
the documents governing the
$170,000 convertible bridge loan mentioned on pages 22 and
59;
|
Response:
The 2008 Equity Incentive Plan has been filed as Exhibit 10.35 to our Form S-1
filed on November 12, 2008. We have filed Mr. Dauwalter’s employment agreement
and the amendment thereto as Exhibits 10.37 and 10.38 to our Form S-1/A. We have
filed the bridge loan documents as Exhibits 10.43 through
10.45. Please note that the principal amount of the document is
erroneously listed as $150,000 as lenders had oversubscribed to the financing by
$20,000 but this has yet to be memorialized.
|
|
129.
|
Please
tell us which exhibit relates to the warrants issued in your August 2008
financing. We note that exhibit 10.34 includes a year 2007 date
of issuance.
|
Response:
The “August 2008 financing” commenced in July 2007 and continued through a
series of closings, the last one of which closed in October 2008. Hence we now
refer to the financing as the “October 2008 financing” but the warrant has a
2007 date of issuance.
|
|
130.
|
Please
file complete exhibits to this registration statement. As one
example, we note that exhibit 10.32 currently omits Schedule
A.
|
Response: There
was no Schedule A to the Registration Rights Agreement (Exhibit 10.32), the
Escrow Agreement (Exhibit 10.33) or the Note Purchase Agreement (new Exhibit
10.43). The recitals to such agreements erroneously made reference,
but the Schedules were never completed. All parties who signed these agreements
and the Subscription Agreement as part of the October 2008 financing are
included in this registration statement.
Exhibit
3.1
32
|
|
131.
|
Please
ensure that the exhibits you file are correct and current. We
note, for example, that exhibit 3.1 lists the number of authorized shares
as 10 million and does not appear to include subsequent amendments that
changed your authorized share capital, such as those described on pages 2
and 25. Also note that when you amend your charter and bylaws,
you should file a complete copy of the document as amended rather than
require investors to piece together documents from multiple
exhibits. See Regulation S-K Item 601
(b)(3).
|
Response:
We will file an amended Articles of Incorporation reflecting the new authorized
share amount as an amendment to this Form S-1/A.
Exhibit
23.1
|
|
132.
|
Please
include a currently dated and signed consent from your independent
auditors prior to requesting
effectiveness.
|
Response:
We have included a currently dated and signed consent from our
independent
auditors.
33
Schedule
1
Rule
415(a)(1)(i) Analysis
Rule
415(a)(1)(i) provides in relevant part that securities may be registered for an
offering to be made on a continuous or delayed basis in the future, provided
that the registration statement pertains only to securities which are to be
offered or sold solely by or on behalf of persons other than the registrant. The
Company respectfully submits that all the shares registered for resale under the
Registration Statement are covered by Rule 415(a)(1)(i) because (i) all the
securities will be offered or sold solely by security holders of the Company and
not by the Company; and (ii) none of the security holders is acting on behalf of
the Company.
Each of
the selling shareholders is acting on its own behalf and not on behalf of the
Company. Each of the selling shareholders has the full economic and market risk
at least for the period from the date of purchase to the effective date of the
Registration Statement, which has not yet occurred. The selling shareholders
purchased the shares for investment purposes and not with a view to
distribution. There are no indicia that any of the selling shareholders is
engaged in a "distribution." A distribution is defined under Regulation M as an
offering of securities that differs from normal trading activities for reasons
that include special selling efforts and selling methods. To the knowledge of
the Company, none of the selling shareholders is making any special selling
efforts, utilizing any special selling methods, or entering into any agreements,
understandings or arrangements with any underwriter, broker-dealer, or other
person or entity with respect to the sale of the shares covered by the
Registration Statement.
Because
none of the selling shareholders is acting on behalf of the Company, and because
the Registration Statement pertains only to securities being offered or sold by
persons other than the Company, the transaction is appropriately characterized
as a transaction that is eligible to be made on a shelf basis under Rule
415(a)(I)(i).
Item D.29
of the SEC's Manual of Publicly Available Telephone Interpretations sets forth
six factors which an issuer should analyze to determine the application of Rule
415. The Company has analyzed these factors, and believes this analysis provides
further confirmation that the sales of securities being registered are
appropriately characterized as a transaction that is eligible to be made on a
shelf basis under Rule 415(a)(1)(i).
A. How
long the selling shareholders have held the shares.
The
selling shareholders have held the common stock and warrants for at least three
months. 90% of the securities have been held at least six
months. During the entire period since the date of acquisition, the
selling shareholder has been subject to the full economic and market risks of
ownership, with no assurance of the shareholder's ability to sell the shares,
either in a liquid market - or at all. This situation is contrary to that of a
shareholder that undertakes the purchase of stock "with a view to distribution"
or otherwise on behalf of the Company.
34
B. The
circumstances under which the selling shareholders acquired the
shares.
Substantially
all the shares being registered are issuable to security holders pursuant to the
terms of private placement offerings made by the Company to
accredited investors within the past year. In this private offering,
equity-based securities, including common stock and warrants, were purchased by
security holders for cash at a fixed price, and each investor represented to the
Company that it was acquiring the securities for its own account, not as nominee
or agent, and not with a view toward resale or distribution. From the date of
purchase, each of the selling shareholders has borne, and continues to bear, the
full economic and market risk of ownership. All of these securities
were issued to "accredited investors," and were exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended.
C. The
selling shareholders' relationship to the issuer.
Other
than with very few exceptions which are described in the selling shareholder
table, none of the investors in the private placements had any prior
relationship with the Company.
D. The
amount of shares involved.
The
Company currently has 8,180,831 common shares outstanding. We are
requesting registration of 7,101,267 common shares and 5,929,482 shares
underlying convertible notes or warrants.
We
acknowledge that our registration of common shares does exceed 33% of the
current public float. However, there is no registering investor in a position to
control us either because of the number of shares owned or by contract. We have
no selling shareholder with share holdings exceeding 10% of the
Company. With these factors, we believe we satisfy Rule
415.
E. Whether
the selling shareholders are in the business of underwriting
securities.
Among the
investors that purchased shares being registered, none is involved in the
business of underwriting securities.
F. Whether,
under all the circumstances, it appears that the selling shareholders are acting
as a conduit for the issuer.
None of
the selling shareholders is acting as a conduit for the issuer. Not only do the
Company's relationships - or lack of relationships - confirm this, but there is
no indication of any kind relevant to acting as a conduit.
Most of
the selling shareholders are investors and made an independent investment
decision to acquire the shares. The selling shareholders are not in the
underwriting business. The private placements were negotiated at arm's length
terms with immediate and continuing economic and market risk.
Based on
all the facts, circumstances and other matters related to the Registration
Statement, including those set forth above, the Company believes and
respectfully submits that the transaction covered by the Registration Statement
is appropriately characterized as a transaction that is eligible to be made on a
shelf basis under Rule 415(a)(1)(i).
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