UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR ENDED DECEMBER 31,
2009.
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD
FROM
TO
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COMMISSION
FILE NUMBER: 333-155299
BIODRAIN
MEDICAL, INC.
(Exact
name of registrant as specified in its charter)
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Minnesota
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33-1007393
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(State
or other jurisdiction
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(IRS
Employer
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of
incorporation or organization)
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Identification
No.)
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2060
Centre Pointe Boulevard, Suite 7
Mendota
Heights, Minnesota 55120
(Address
and Zip Code of principal executive offices)
(Registrant’s
telephone number, including area code): (651) 389-4800
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act: None.
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Common
Stock $.01 par value
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None
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicated
by checkmark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosures of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨ Accelerated
Filer ¨ Non-accelerated
filer ¨ Smaller
Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ¨ No x.
As of
June 30, 2009, no market price existed for the voting and non-voting common
equity held by non-affiliates of the registrant.
There
were 11,757,211 shares of the registrant’s common stock outstanding as of March
31, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the registrant’s definitive proxy statement for its 2010 annual meeting are
incorporated by reference into Part III of this Form 10-K.
TABLE OF
CONTENTS
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Page
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PART I
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ITEM 1. BUSINESS
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3
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ITEM 1A. RISK FACTORS
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17
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ITEM 2. PROPERTIES
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17
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ITEM 3. LEGAL PROCEEDINGS
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17
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ITEM 4. REMOVED AND RESERVED
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17
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EXECUTIVE OFFICERS OF THE
REGISTRANT
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18
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PART II
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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22
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ITEM 6. SELECTED FINANCIAL
DATA
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22
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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27
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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27
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
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27
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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27
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ITEM 9A(T). CONTROLS AND
PROCEDURES.
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27
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ITEM 9B. OTHER INFORMATION
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28
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PART III
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
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29
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ITEM 11. EXECUTIVE
COMPENSATION
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29
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
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29
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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29
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
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29
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PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
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29
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SIGNATURES
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31
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2
PART
I
ITEM
1. BUSINESS.
Overview
We are an
early-stage medical device company and our mission is to provide hospitals and
surgical centers 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 healthcare workers from exposure and is
environmentally friendly. We own 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, we believe our
technologies will provide cost savings to facilities over the aggregate costs
incurred today using the traditional canister method of collection,
neutralization and disposal. We intend to sell our products through independent
distributors and manufacturer’s 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, 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.
We
currently file reports with the Securities and Exchange Commission (the “SEC”).
Upon the October 19, 2009 effectiveness of the registration statement we filed
with the SEC, we became subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, and we intend
to continue filing periodic reports, proxy statements and other information with
the SEC.
Industry
and Market Analysis
Infectious
and Bio-hazardous Waste Management
There has
long been recognition of the collective potential for ill effects to healthcare
workers from exposure to infectious/bio-hazardous materials. Federal and state
regulatory agencies have issued mandatory guidelines for the control of such
materials, and 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,
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.”
3
The
majority of these procedures produce potentially infectious materials that must
be disposed 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 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 from April 24, 2006 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 cost increases significantly
for disposal of high capacity containers according to the average estimate of
three manufacturers and three different solidifiers as reported in a research
report by Frost & Sullivan in 2003 and in an article titled “Liquid Waste
Management & Disposal” that was published in Infection Control Today in
2006.
A study
by the Lewin Group, prepared for the Health Industry Group Purchasing
Association in April, reports that infectious fluid waste accounts
for more than 75% of U.S. hospitals biohazard disposal costs. The study 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.”
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 Institute 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 in 2009, followed by
an additional 5 percent gain in 2010.”
There are
currently approximately 40,000 operating rooms and surgical centers in the U.S.
(AHA, Hospital
Statistics, 2008). 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 heavily dependent
on the state of the economy. We benefit by having our products address both the
procedure market of nearly 70 million procedures (AHA, Beyond Health Care, January
2009) 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 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 no 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 is typically 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 powder is
poured into the canister, rendering the material gelatinous. These gelled
canisters are then red-bagged in their entirety and removed to a
bio-hazardous/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.
4
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 his or her 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 his or
her 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 health 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. Traditional, non-powered canisters and related suction and
fluid disposable products are exempt and do not require FDA clearance. We
believe that our virtually hands free technology will (a) significantly reduce
the risk of healthcare worker exposure to these infectious fluids by replacing
canisters, (b) further reduce the risk of worker exposure when compared to
powered canister technology that requires transport to and from the operating
room, (c) reduce the cost per procedure for handling these fluids, and (d)
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
powered medical devices have been developed which address some of the
deficiencies described above. MD Technologies, Inc., DeRoyal (formerly
Waterstone), Dornoch Medical Systems, Inc. and Stryker Instruments 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 most are sold with 510(k) concurrence from the FDA.
Cardinal Health, Inc. has received 510(k) concurrence to market a similar device
that it has recently started advertising. Most of these competing
products 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. We
believe that Stryker Instruments has the dominant market share
position. We do not believe Cardinal Health, Inc., though
having FDA concurrence, has made significant sales into the market.
Products
The
Streamway™ Fluid Management System (“FMS”)
The
Streamway™ 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 will replace 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
is minimal.
We
believe our product provides substantial cost savings and improvements in safety
in facilities that still use manual processes. In cases where healthcare
organizations re-use canisters, the FMS cleaning process eliminates the need for
cleaning of canisters for re-use. The FMS reduces the safety issues facing
operating room nurses, the cost of the handling process, and the amount of
infectious waste generated when the traditional method of disposing of canisters
is used. The FMS is fully automated, does not require transport to and from the
operating room and eliminates any canister that requires emptying. It
is positioned to penetrate its market segment due to its virtually hands free
operation, simple design, ease of use and efficiency in removal of infectious
waste with minimal exposure of operating room personnel to potentially
infectious material.
5
In
contrast 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 FMS will be the only known system that is wall mounted
and designed to collect, measure and dispose of, surgical waste. The product
from DeRoyal does not collect surgical waste fluid and is used in conjunction
with traditional canisters to assist in emptying the canisters. 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, after the surgery is complete, and
use canisters, which still require processing or require a secondary device
(such as a docking station) to dispose of the fluid in the sanitary sewer after
it has been collected. They are essentially powered canisters. A comparison of
the key features of the devices currently marketed and the FMS is presented in
the table below.
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Key Feature Comparison
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||||||||||
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Feature
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BioDrain
Medical, Inc.
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Stryker
Instruments
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DeRoyal
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Dornoch
Medical
Systems, Inc.
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MD Technologies,
Inc.
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|||||
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Portable
to Bedside vs. Fixed Installation
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Fixed
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Portable
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Fixed
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Portable
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Fixed
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|||||
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Uses
Canisters
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No
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Yes
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Yes
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Yes
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No
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|||||
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Secondary
Installed Device Required for Fluid Disposal
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No
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Yes
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Yes
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Yes
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No
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|||||
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Numeric
Fluid Volume Measurement
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Yes
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Yes
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No
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Yes
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Optional
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|||||
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Unlimited
Fluid Capacity
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Yes
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No
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No
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No
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Yes
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|||||
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Continuous,
Uninterrupted Vacuum
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Yes
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No | No | No | No | |||||
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Installation
Requirements
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||||||||||
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¨Water
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No
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Yes
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Yes
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Yes
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No
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|||||
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¨
Sewer
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Yes
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Yes
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Yes
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Yes
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Yes
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|||||
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¨Vacuum
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Yes
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Yes
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Yes
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Yes
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Yes
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|||||
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. Based upon our consultations with several
architects, we believe 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 based on information gathered from third parties at an average of 6
hours but will vary depending on the actual drain and suction systems already
resident in the hospital.
By
comparison, the majority of competing products are mobile, allowing movement
from room to room. The mobility adds time and labor to the process
and increases the chance of worker exposure to waste fluids but also allows the
hospital to potentially purchase less than one mobile unit for each operating
room. With the FMS, a unit much be installed in each room where it is
intended to be used.
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 is provided as part of our disposable cleaning kit, allows for expansion
to three inflow suction ports.
Although
the 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 the system may outweigh the expected
savings and/or lengthen the expected return on investment time.
6
One of
the current techniques utilized by Stryker, Cardinal Health and other smaller
companies typically utilizes 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 to infectious waste fluids generated by the operating room
procedure. Handling infectious waste in this manner is also more
costly.
The FMS
suctions potentially infectious fluid from the patient through standard surgical
tubing into the FMS. There the fluid is separated from the air stream and
deposited into a fluid chamber 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 chamber 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 at that point in the procedure. The
fluid removed from the fluid chamber 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 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 filed
a 510(k) submission in March 2009 and received written FDA clearance on April 1,
2009. The unit is classified as a Class II device by the FDA.
A
summary of the features of the wall unit include:
|
|
•
|
Minimal Human
Interaction. The wall-mounted FMS provides 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.
|
|
|
•
|
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.
|
|
|
•
|
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 in-line
filter 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 is expected to 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 minimizing the learning curve for operation at the
surgical site.
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Installation.
We will arrange installation of the FMS products through a partnership or
group of partnerships. Such partnerships will include, but not be limited
to, 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-mounted
units allowing for quick start-up
post-installation.
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7
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Sales Channel
Partners. We expect the FMS will be sold to end-users through a
combination of independent stocking distributors, manufacturer’s
representatives and, possibly later, direct sales personnel. We intend for
all personnel involved in direct contact with the end-user will have
extensive training and will be approved by BioDrain. We plan to maintain
exclusive agreements 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 expect that such agreements will contain
provisions allowing them to be terminated at any time by BioDrain based on
certain specified conditions.
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Competitive
Pricing. Estimated selling price is expected to be in the
range of $15,000 - $18,000 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. 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 Property
The
Company spent approximately $71,000 in the year ended December 31, 2009 and
approximately $183,000 in the year ended December 31, 2008 on Research and
Development Expense.
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”). These patents will expire on August 8, 2023. 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. All competing products,
except for MD Technologies, have a finite fluid collection capacity
necessitating that the device be emptied when capacity is reached during the
surgical procedure. In the case of MD Technologies their system has an unlimited
capacity but the process is not continuous because they have to interrupt the
process to manually switch over to a new container and drain the original
container in order to have it ready for use when the second container is
full.
In June
2008, we 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 Mid-State Stainless,
Inc., a corporation wholly owned by Mr. Ryan, an additional $100,000 payment on
June 30, 2009 for past research and development activities. We also granted Mr.
Ryan a warrant to purchase 150,000 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.
Our
competitive advantage, 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.
8
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 Messrs. 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).
We filed
a divisional application with the U.S. Patent Office with claims directed to the
method of use of the Ryan Embodiment. We also filed a Continuation-In-Part (CIP)
application to cover additional features and functionalities of our
FMS.
We have
not communicated 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 Messrs. 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.
Our
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 have obtained an exclusive distribution agreement with a
manufacturer of the fluid we will use in the cleaning kit for our FMS. While the
distribution agreement 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 bottle with a connection
mechanism to attach to the FMS. The disposal cleaning kit also includes an
in-line filter and an external manifold allowing for up to three suction ports.
The proprietary cleaning solution placed in the specially designed holder 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 disposable cleaning kit is a critical component of our business model.
The cleaning kit has the “razor blade business model” characteristic with an
ongoing stream of revenue for every FMS unit installed, and revenues from the
sale of the cleaning kit is expected to be significantly higher over time than
the revenues from the sale of the unit. We have exclusive distribution rights to
the fluid and facilitate the use of only our fluid for cleaning following
procedures by incorporating a special adapter to connect the fluid to the
connector on the FMS 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 manufacturers to provide fluids for utilization in this
process, it would require that they manufacture an adapter compatible with our
connector on the FMS, obtain a container that fit in the specially designed
container holder on the FMS and perform testing to demonstrate that any other
fluid would not damage the FMS. We believe that these barriers 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 multiple providers and we have
signed an agreement with Belimed to perform 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.
9
Corporate
Strategy
We intend
to succeed by deploying a strategy of focused expansion within our core product
and market segments, while utilizing a progressive approach to manufacturing and
marketing to ensure maximum flexibility and profitability.
Our
strategy is to:
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Develop a complete line of
wall-mounted fluid evacuation systems 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.
As one of the only stand-alone surgical fluid disposal
systems directly connected to the sanitary sewer, the FMS could advance
the manner in which such material is collected, measured and disposed of
in operating rooms, post-operating recovery, emergency rooms and intensive
care settings by eliminating the need to transport a device to the patient
bedside and remove it for emptying and cleaning at the end of the
procedure. 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 manufacturer’s representatives to
achieve the desired market penetration. Contacts have been
established with several existing medical products distributors and
manufacturer’s representatives and interest has been generated regarding
the sales of the 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 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 alternatives to
purchasing.
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Providing
service contracts to establish an additional revenue
stream.
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Utilizing
the international manufacturing experience of our management team to
develop international sources of supply and manufacturing to take
advantage of the lower cost of labor and materials while still obtaining
excellent quality. While cost is not a major consideration in the roll-out
of leading edge products, we believe that being a low-cost provider will
be important long term.
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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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10
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 disposal of that waste either via incineration or in
segregated landfills.
Once the
procedure has ended, the canisters currently being used in many cases, 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 bio-hazardous/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.
Drainage
Systems
Several
new medical devices have been developed which address some of the deficiencies
described above. MD Technologies, Inc., DeRoyal (formerly Waterstone), Dornoch
Medical Systems, Inc. and Stryker Instruments have all developed systems that
provide disposal into the sanitary sewer without pouring the infectious fluids
directly through a hopper disposal or using expensive gel powders. All of these
newer products are currently sold with 510(k) concurrence from the FDA. Cardinal
Health, Inc. has received 510(k) concurrence to market a similar device that it
has started advertising. Most of these competing products incorporate an
internal collection canister with finite capacity, and while not directly
eliminating the need to transport a device to and from the surgical room, we
believe most have been successful in eliminating the need for expensive gel and
its associated handling and disposal costs.
Existing
competitors, that already have products on the market, have a competitive
advantage 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. We believe that Stryker
Instruments has the dominant market share position Cardinal Health, Inc., though
having FDA concurrence, has only recently started advertising its product. We
also believe competing products are used in select procedures and often in some,
but not all, surgical procedures.
11
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
than our Company. 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. We are
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 the red-bag procedure is followed when using these products. One
significant 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.
The FMS
eliminates 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 bio-hazardous/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.
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 dramatically reduce costs and the amount of canisters sent to
landfills.
12
Handling
Costs
Once the
surgical team has finished 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.
The 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 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. A July 2007 research article published in Infection Control Hospital
Epidemiology 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 per exposure. 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.
Nursing
Labor
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.
The FMS
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. For instance, some competing products
require transport of the mobile unit to a docking port and then emptying of the
fluid, while others require that the canister be 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 included in the section headed as Products for a comparison of the key
features of the devices currently marketed and the FMS.
Although
the mobility associated with most of the competing products adds time and labor
to the process and increases the chance of worker exposure to waste fluids, it
also allows the hospital to purchase only as many mobile units needed for
simultaneous procedures in multiple operating rooms. With the FMS, a
unit must be purchased and installed in each room where it is intended to be
used.
13
Marketing
and Sales
Distribution
We intend
to sell the FMS and cleaning kit through independent distributors and
manufacturer’s representatives covering the vast majority of major U.S. markets.
Our 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, nurses, biomedical engineering,
anesthetists, anesthesiologists, human resources, legal, administration and
housekeeping.
The major
focus of our marketing efforts will be to introduce the FMS 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.
Governmental
and professional organizations have become increasingly aggressive in attempting
to minimize the risk of exposure by medical personnel to bloodborne
pathogens. We believe that the FMS provides a convenient and cost
effective way to collect and dispose of this highly contaminated
material.
Our
distributors will have installation and service capability, or we will contract
those functions with 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. We believe our current cost and price
estimates are conservative and allow for reasonable profit margins for all
entities in the FMS and the cleaning fluid supply chain.
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 levels 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 website. We believe our
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,
use of scientific journal articles and a webpage 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 our trade show
booths 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 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 webpage or directly through postage
paid cards or direct contact. Additionally, we will create a press release
distribution to clinician-oriented periodicals for inclusion in their new
product development columns. These periodicals will provide the reader with an
overview of the FMS and will direct readers to pursue more information by direct
contact with us by accessing our webpage.
Pricing
We
believe prices for the FMS and its disposable cleaning kit reflect a substantial
cost savings to hospitals compared to their long-term procedure costs. Our
pricing strategy should ensure that the customer realizes actual cost savings
when using the FMS versus replacing traditional canisters, considering the
actual costs of the canisters and associated costs such as 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 contrast, 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). 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 or disposed with the rest of the facility’s plastics.
14
The FMS
lists for approximately $18,000 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. Because we will sell our products through
distributors and manufacturer’s representatives we expect to sell the FMS for
approximately $15,000 and the cleaning kit for approximately $15 per unit. 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 per procedure 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 disposal expenses.
Installation
will be done by distributors, independent contractors or 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, while 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 approach is for the disposable cleaning kit
to be priced at $15 - $20 per unit, and a commission to be paid to the
distributor/independent representative upon each sale, thus creating an ongoing
revenue stream to the distributor/representative as well as to
BioDrain.
Engineering
and Manufacturing
We are
currently in negotiations to finalize our relationship and execute a
manufacturing supply agreement with TriVirix, Inc. for the engineering and
manufacturing of the FMS, which does not include the cleaning fluid, cleaning
fluid packaging, external manifold or any other accessories. TriVirix is ISO
13485:2003 and GMP-certified and has the necessary expertise and experience to
build our product in a cost-effective manner.
We
anticipate that the manufacturing supply agreement with TriVirix will specify
the quantities for production of our product, which we expect 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 expected manufacturing supply agreement,
TriVirix, Inc. would manufacture only our FMS device. Upon execution of the
manufacturing supply agreement, Trivirix would be considered our primary
supplier of the FMS device. As part of a broader manufacturing sourcing
strategy, we plan to identify at most two second sources of production for the
FMS device. Except for the custom made stainless steel cabinet, all of the
components in the FMS are off-the-shelf products readily available from a number
of suppliers. Likewise, the custom designed cabinet can be produced by a variety
of suppliers with expertise in machining stainless steel.
The
disposable cleaning kit, including 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), an in-line filter 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 and
components.
To
further our manufacturing sourcing strategy we hired, in July 2008, 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. Mr. Ruwe was promoted to Chief
Operating Officer in 2009.
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)
|
15
|
|
•
|
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)
|
|
|
•
|
State,
county, hospital and other
institutions
|
Application
for Electrical Safety Testing and Certification
We sought
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 the FMS device. We issued request for quotes to
two of the three 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. On March 11,
2009, we received completed test documentation from TUV SUD America, Inc.
confirming the FMS device successfully completed and passed all testing showing
compliance to IEC 60606-1 and IEC 60606-1-2.
A
previous generation BioDrain FMS device (110/240VAC) successfully passed
electrical safety testing conducted by UL in November 2005 (reference UL File
E256928).
We filed
the 510(k) submission for FDA clearance of the FMS device on March 14, 2009 and
received written confirmation on April 1, 2009 that our 510(k) has been cleared
by the FDA. The FDA requires, pursuant to a final regulation for Establishment
Registration and Device Listing for Manufacturers of Devices, 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). The FMS is 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 clearance
process.
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 (“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 SE 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.
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), (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.
Following
FDA clearance to market our product, which we received on April 1, 2009, 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.
16
Foreign
Jurisdictions
Each
country in Europe and the Pacific Rim has unique laws, regulations, and
directives regarding the manufacture and or marketing of medical devices within
their borders that are comparable to the laws and regulations described
above. While we have not fully researched each country and the
respective laws, regulations, and directives, we will do so in advance and we
recognize product design changes will most likely be necessary based on
practices and procedures in the operative environment in Pacific Rim, as well as
product design changes necessitated by laws, regulations and
directives.
Employees
We
currently have four full-time employees: a Chief Executive
Officer/Chief Financial Officer; a Vice President of Sales; a Chief Operating
Officer; and a Director of Product Management. 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. We believe that our relations with our employees are
good.
ITEM
1A. RISK FACTORS.
Not
required.
ITEM
2. PROPERTIES.
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
one through twelve; $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 in months 13 through 60. The common area maintenance
expense was not payable in months one through twelve. The lease term began on
November 1, 2008 and will extend for a period of five 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 the term of the
lease.
ITEM
3. LEGAL PROCEEDINGS.
In April
2009 Gerald Rice, a former officer of the Company made a formal demand for
payment of past wages and threatened to sue the Company for in excess of
$100,000, if we did not meet his demand. Settlement discussions commenced but
the parties were unable to reach an agreement. Thereafter, the former officer
filed a lawsuit in Minnesota State Court, Dakota County alleging claims for
breach of contract and unpaid wages. The Company answered the complaint
and denied the allegations therein. The Company believes that the claims are
without merit and continues to defend the claims. We are not otherwise a party
to any other pending legal proceedings that, if decided adversely to us, would
have a material adverse effect upon our business, results of operations or
financial condition and are not aware of any threatened or contemplated
proceeding by any governmental authority against the Company. To our knowledge,
we are not otherwise a party to any pending civil or criminal action or
investigation.
ITEM
4. REMOVED AND RESERVED.
17
Executive
Officers of the Registrant
The following table identifies our
current executive officers and directors:
|
Name
|
Age
|
Position
Held
|
||
|
Lawrence
W. Gadbaw
|
72
|
Chairman
of the Board of Directors
|
||
|
Kevin
R. Davidson
|
50
|
President,
Chief Executive Officer, Chief Financial Officer and
Director
|
||
|
Chad
A. Ruwe
|
45
|
Chief
Operating Officer and Director
|
||
|
Jess
R. Carsello
|
47
|
Vice
President of Sales
|
||
|
James
E. Dauwalter
|
58
|
Director
|
||
|
Peter
L. Morawetz
|
82
|
Director
|
||
|
Thomas
J. McGoldrick
|
68
|
Director
|
||
|
Andrew
P. Reding
|
40
|
Director
|
We have
not set a term of office for 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,
|
|
1)
|
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,
|
|
|
2)
|
had
been convicted in a criminal proceeding and none of our directors or
executive officers is subject to a pending criminal
proceeding,
|
|
|
3)
|
has
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
|
|
|
4)
|
has
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 and Chairman of
the Board 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.
18
Kevin R. Davidson, President, Chief
Executive Officer and Chief Financial Officer. Mr. Davidson has served as
our President and Chief Executive Officer since 2006 and Chief Financial Officer
since January 2009. He has over 20 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 led 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.
Chad A. Ruwe, Chief Operating Officer. Mr.
Ruwe became our Executive Vice President of Operations in 2008 and Chief
Operating Officer in 2009. 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
Micro-Contamination 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, Huntsville,
and he received his Bachelor of Science degree in Mechanical Engineering,
specializing in Fluid Dynamics, from The Ohio State University in Columbus,
Ohio.
Jess R. Carsello, Vice President of
Sales. Mr. Carsello became our Vice President of Sales in
2010. He has over 20 years of sales and management experience in the medical
industry, the majority of which has been in selling single-use disposables and
capital equipment for operating room applications. From 2004 to 2009 Mr.
Carsello served as VP of Sales for Aspen Surgical with primary focus on sales
into distribution concentrating on Private Label sales for large distributors
nationwide. From 2002 to 2004 Mr. Casello served as VP of Sales for Sterion Inc.
where he was responsible for managing worldwide sales of Sterilization Container
Systems and Wound Care products. Mr. Carsello served as the VP of Sales for
Barriermed Inc, from 2001 to 2002 where he introduced a new technology in
Polyisoprene Surgical Gloves. From 1991 to 2001 he was with Regent Medical/SSL
Americas, (now Mölnlycke Health Care) where he was Director of Distributor
Relations for North America, Regional Manager covering 13 Midwest states, Sales
Rep and Sales Trainer. He began his career as a Sales Representative for Vital
Signs selling products into Anesthesia, Respiratory Care and all Critical Care
areas of the hospital. Mr. Carsello holds a Bachelor of Science degree from the
University of Wisconsin, Eau Claire.
James E. Dauwalter,
Director. Mr. Dauwalter has served as a director of the
Company since July 31, 2009. Mr. Dauwalter served as a director of VeraSun
Energy Corporation from April 2008 to May 2009. He served as a director of US
BioEnergy from July 2006 until April 2008, and served as chairman of the board
from November 2007 until April 2008. Mr. Dauwalter also served, from August 2005
until May 2008, as the chairman of the board of directors of Entegris, Inc., a
materials integrity management company. Prior to his appointment as chairman of
Entegris in August 2005, he served as the chief executive officer of Entegris
since January 2001. Mr. Dauwalter joined Entegris in 1972 and held a variety of
positions prior to his first executive appointment in March 2000 as chief
operating officer. Mr. Dauwalter was also instrumental in founding Metron
Technology, B.V., a supplier of semiconductor products in Europe, and served on
their board of directors from their date of formation until May 2008, and served
on the boards of several subsidiaries and affiliates of Fluoroware, Inc., a
predecessor company to Entegris, Inc. Mr. Dauwalter holds a bachelors degree in
business management from Bemidji State University.
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.
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 was co-founder 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 was 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
19
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.
Medical
Advisory Board
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 is a surgeon who specialized in orthopedic anterior spine
approaches and pediatric surgery from 1956 to 2006. Dr. Leonard served at
the University of Minnesota (UM) 1956-2004 where he was a Professor of Surgery
and Chair in Pediatric Surgery, maintains membership in 13 medical societies, is
a recipient of many special honors and awards including The Wangensteen
Distinguished Professor Award for Excellence in Teaching, is a member of several
hospital and national medical committees, and a 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.
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 Medical Inc.’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 experience 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.
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.
20
In 2006,
we issued a warrant 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 contains 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 reached 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 a warrant to purchase
2,993 shares of our common stock at $1.67 per share.
21
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK HOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information
Holders
As of
March 15, 2010, there were approximately 125 shareholders of record of our
Common Stock. Our Common Stock is not traded on a public
market.
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.
Securities
Authorized for Issuance under Equity Compensation Plans
The
information required by Item 5 is incorporated herein by reference to the
sections entitled “Principal Shareholders and Management Shareholdings” and
“Equity Compensation Plan Information,” which appear in our definitive proxy
statement for our 2010 Annual Meeting of Shareholders. Also see Item 12
below.
Purchases
of Equity Securities by the Company
None.
Recent
Sales of Unregistered Securities
On
November 10, 2009, the Company issued 50,000 shares of its Common Stock and a
warrant to purchase 50,000 shares of Common Stock at an exercise price of $.65
per share to Russell H. Yaucher for his $25,000 investment in the
Company.
ITEM
6. SELECTED FINANCIAL DATA.
Not
Required.
22
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
You
should read the following discussion and analysis of our financial condition and
results of operations together with our financial statements and the related
notes appearing under Item 8 of this Form 10-K. Some of the information
contained in this discussion and analysis or set forth elsewhere in this Annual
Report, including information with respect to our plans and strategy for our
business and expected financial results, includes forward-looking statements
that involve risks and uncertainties. You should review the “Risk Factors” in
our Registration Statement on Form S-1 for a discussion of important factors
that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following
discussion and analysis.
Overview
We were
incorporated in Minnesota in April 2002. We are an early-stage development
company developing an environmentally conscientious system for the collection
and disposal of infectious fluids that result from surgical procedures and
post-operative care. We achieved our first sale in June 2009. Since our
inception in 2002, we have invested significant resources into product
development and in preparing for approval from the FDA. We believe that our
success depends upon converting the traditional process of collecting and
disposing of infectious fluids from the operating rooms of medical facilities to
our wall-mounted Fluid Management System (“FMS”) and use of our proprietary
cleaning fluid.
Since
inception, we have been unprofitable. We incurred a net loss of approximately
$1,763,000 for the fiscal year ended 2008 and a net loss of approximately
$2,892,000 for the fiscal year ended December 31, 2009. As of December 31, 2009,
we had an accumulated deficit of approximately $6,029,000. As a company in the
early stage of development, our limited history of operations makes prediction
of future operating results difficult. We believe that period to period
comparisons of our operating results should not be relied on as predictive of
our future results.
We have
focused on finalizing our production processes and obtaining final FDA clearance
to sell our product to the medical facilities market. FDA final clearance was
obtained on April 1, 2009. We intend to sell the FMS through experienced,
independent medical distributors and manufacturer’s representatives, who we
believe will enhance acceptability of the FMS in the market. We are currently in
the process of signing agreements with independent sales representatives and
product installation organizations and conducting training sessions. We achieved
our first billable shipment in June 2009 and anticipate several orders during
the first half of 2010. Since our FDA clearance to sell our FMS
product was only received on April 1, 2009, it is too early to know with a high
degree of confidence how quickly, and in what amounts, new orders will
develop.
Since we
do not expect to generate sufficient revenues in 2010 to fund our capital
requirements, our capital needs for the next 12 months are expected to be
approximately $3 million even though we plan to use outside third party contract
manufacturers to produce the FMS and independent sales representatives to sell
the FMS. Our future cash requirements and the adequacy of available funds will
depend on our ability to sell our FMS and related products now that FDA final
clearance has been obtained. We expect that we will require additional funding
to finance operating expenses and to enter the international
marketplace.
As of
December 31, 2009, 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 our Common Stock. In August 2006, we secured a
$10,000 convertible loan from one of our vendors. In February 2007, we obtained
$4,000 in officer and director loans and in March 2007, we arranged a $100,000
convertible note from two private investors. In July 2007, we obtained a
convertible bridge loan of $170,000. In June 2008, we paid off the remaining
$18,000 loan from WREF and raised approximately $1.6 million through our October
2008 financing. The $170,000 convertible bridge loan and the $4,000 in officer
and director loans were converted into shares of the Company’s Common Stock in
October 2009. During 2009 we raised an additional $725,000 in a
private placement of stock units and/or convertible debt, with each stock or
debt unit consisting of, or converting into, respectively, one share of our
Common Stock, and a warrant to purchase one share of our Common Stock at $.65
per share.
Related
Party Transactions
The
Company entered into agreements in 2008, with our Chairman of the Board Lawrence
Gadbaw, and in 2009 with board member, Peter Morawetz, to pay Mr. Gadbaw $25,000
and Mr. Morawetz $30,000 upon the Company raising $3 million in new equity. Mr.
Gadbaw will also be paid the balance, if any, due under his separation agreement
from 2008. This amount was $46,000 upon signing the agreement in 2008, is
payable at $2,000 per month, and $16,000 remains in accounts payable as of
December 31, 2009. Mr. Morawetz will also receive a stock option for 75,000
shares at $.35 per share and Mr. Gadbaw will receive a stock option for 160,000
shares at $.35 per share upon the Company raising $3 million.
Critical
Accounting Policies and Estimates and Recent Accounting
Developments
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are
based upon our audited Financial Statements, which have been prepared in
accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of our financial statements, the reported amounts of revenues and
expenses during the reporting periods presented, as well as our disclosures of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates and assumptions, including, but not limited to, fair value of
stock-based compensation, fair value of acquired intangible assets and goodwill,
useful lives of intangible assets and property and equipment, income taxes, and
contingencies and litigation.
23
We base
our estimates and assumptions on our historical experience and on various other
information available to us at the time that these estimates and assumptions are
made. We believe that these estimates and assumptions are reasonable under the
circumstances and form the basis for our making judgments about the carrying
values of our assets and liabilities that are not readily apparent from other
sources. Actual results and outcomes could differ from our
estimates.
Our
significant accounting policies are described in “Note 1 – Summary of
Significant Accounting Policies,” in Notes to Financial Statements of this
Annual Report on Form 10-K. We believe that the following discussion addresses
our critical accounting policies and reflects those areas that require more
significant judgments, and use of estimates and assumptions in the preparation
of our Financial Statements.
Revenue
Recognition We recognize revenue in accordance with the SEC’s
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, as amended by Staff Accounting Bulletin No. 104
(together, SAB 101) and ASC 605-Revenue
Recognition.
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is probable.
Delivery is considered to have occurred upon either shipment of the product or
arrival at its destination based on the shipping terms of the transaction. Our
standard terms specify that shipment is FOB BioDrain and we will, therefore
recognize revenue upon shipment in most cases. This revenue recognition policy
applies to shipments of our FMS units as well as shipments of cleaning solution
kits. When these conditions are satisfied, we recognize gross product revenue,
which is the price we charge generally to our customers for a particular
product. Under our standard terms and conditions, there is no
provision for installation or acceptance of the product to take place prior to
the obligation of the customer. The customer’s right of return is
limited only to our standard one-year warranty, whereby we replace or repair, at
our option. We believe it would be rare that the FMS unit or
significant quantities of cleaning solution kits may be returned. Additionally,
since we buy both the FMS units and cleaning solution kits from “turnkey”
suppliers we would have the right to replacements from the suppliers if this
situation should occur.
Stock-Based
Compensation. Effective January 1, 2006, we adopted SFAS
No. 123 (revised 2004) which replaced SFAS No. 123, and superseded
Accounting Principles Board (APB) Opinion No. 25, all codified as ASC 718-Compensation-Stock
Compensation (“ASC 718”). Under ASC 718 stock-based employee
compensation cost is recognized using the fair value based method for all new
awards granted after January 1, 2006 and unvested awards outstanding at January
1, 2006. Compensation costs for unvested stock options and non-vested awards
that were outstanding at January 1, 2006, are being recognized over the
requisite service period based on the grant-date fair value of those options and
awards as previously calculated under SFAS 123 for pro forma disclosures, using
a straight-line method. We elected the modified-prospective method in adopting
ASC 718 under which prior periods are not retroactively restated.
ASC 718
requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model. We use the Black-Scholes-Merton
option-pricing model which requires the input of significant assumptions
including an estimate of the average period of time employees and directors will
retain vested stock options before exercising them, the estimated volatility of
our common stock price over the expected term, the number of options that will
ultimately be forfeited before completing vesting requirements and the risk-free
interest rate.
Because
we do not have historical trading data on our Common Stock we relied upon
trading data from a composite of 10 medical companies traded on major exchanges
and 15 medical companies traded on the OTCBB to help us arrive at expectations
as to volatility of our own stock when public trading commences. Likewise, we
have no history of option and warrant exercises because there was no liquidity
in our stock as a private company and we were required to make a significant
judgment as to expected option and warrant exercise patterns in the future
regarding employee and director options and warrants. In the case of
options and warrants issued to consultants and investors we used the legal term
of the option/warrant as the estimated term unless there was a compelling reason
to use a shorter term. The measurement date for employee and non-employee
options and warrants is the grant date of the option or warrant. The
vesting period for options that contain service conditions is based upon
management’s best estimate as to when the applicable service condition will be
achieved. Changes in the assumptions can materially affect the estimate of fair
value of stock-based compensation and, consequently, the related expense
recognized. The assumptions we use in calculating the fair value of stock-based
payment awards represent our best estimates, which involve inherent
uncertainties and the application of management's judgment. As a result, if
factors change and we use different assumptions, our equity-based compensation
expense could be materially different in the future. See “Note 3 – Stock-Based
Compensation” in
Notes to Financial Statements of this Annual Report on Form 10-K for additional
information.
24
When an
option or warrant is granted in place of cash compensation for services we deem
the value of the service rendered to be the value of the option or
warrant. In most cases, however, an option or warrant is granted in
addition to other forms of compensation and its separate value is difficult to
determine without utilizing an option pricing model. For that reason
we also use the Black-Scholes-Merton option-pricing model to value options and
warrants granted to non-employees, which requires the input of significant
assumptions including an estimate of the average period that investors or
consultants will retain vested stock options and warrants before exercising
them, the estimated volatility of our Common Stock price over the expected term,
the number of options and warrants that will ultimately be forfeited before
completing vesting requirements and the risk-free interest rate. Changes in the
assumptions can materially affect the estimate of fair value of stock-based
compensation and, consequently, the related expense recognizes that. Since we
have no trading history in our Common Stock and no first-hand experience with
how our investors and consultants have acted in similar circumstances, the
assumptions we use in calculating the fair value of stock-based payment awards
represent our best estimates, which involve inherent uncertainties and the
application of management's judgment. As a result, if factors change and we use
different assumptions, our equity-based consulting and interest expense could be
materially different in the future.
Since our
Common Stock has no public trading history we were required to take an
alternative approach to estimating future volatility and the future results
could vary significantly from our estimates. We compiled historical
volatilities over a period of 2-7 years of 15 small-cap medical companies traded
on major exchanges and ten medical companies in the middle of the market cap
size range on the OTC Bulletin Board (“OTCBB”) and combined the results using a
weighted average approach. In the case of standard options to
employees we determined the expected life to be the midpoint between the vesting
term and the legal term. In the case of options or warrants granted
to non-employees we estimated the life to be the legal term unless there was a
compelling reason to make it shorter.
Valuation of Intangible
Assets We review identifiable intangible assets for
impairment in accordance with ASC 360-Property Plant and Equipment
(“ASC 360”), whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. Our intangible assets are currently solely the
costs of obtaining trademarks and patents. Events or changes in
circumstances that indicate the carrying amount may not be recoverable include,
but are not limited to, a significant change in the medical device marketplace
and a significant adverse change in the business climate in which we operate. If
such events or changes in circumstances are present, the undiscounted cash flows
method is used to determine whether the intangible asset is impaired. Cash flows
would include the estimated terminal value of the asset and exclude any interest
charges. If the carrying value of the asset exceeds the undiscounted cash flows
over the estimated remaining life of the asset, the asset is considered
impaired, and the impairment is measured by reducing the carrying value of the
asset to its fair value using the discounted cash flows method. The discount
rate utilized is based on management's best estimate of the related risks and
return at the time the impairment assessment is made.
Our
accounting estimates and assumptions bear various risks of change, including the
length of the current recession facing the United States, the expansion of the
slowdown in consumer spending in the U.S. medical markets despite the early
expressed opinions of financial experts that the medical market would not be as
affected as other markets and failure to gain acceptance in the medical
market.
Recent
Accounting Developments
In June
2008, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues
Task Force (EITF) Issue No. 07-5, now codified under ASC 815-Derivatives and Hedging (“ASC
815”). ASC 815 mandates a two-step process for evaluating whether an
equity-linked financial instrument or embedded feature is indexed to the
entity’s own stock. It is effective for fiscal years beginning after December
15, 2008 and interim periods within those fiscal years, which is our first
quarter of 2009. Most of the warrants issued by the Company contain a strike
price adjustment feature which, upon adoption of ASC 815, changed the
classification (from equity to liability) and the related accounting for many
warrants with an estimated fair value of $479,910 as of December 31, 2008. As of
January 1, 2009 the Company removed $486,564 from paid-in-capital (representing
the combined fair values of the warrants on their date of grant), recorded a
positive adjustment to accumulated deficit representing the gain on the
valuation of the warrants from the grant dates to January 1, 2009, and
established a liability for equity-linked instruments in the net amount of
$479,910. The Company also re-computed the value of the warrants as of March 31,
2009, June 30, 2009, September 30, 2009 and December 31, 2009 and recorded
a loss of $369,642 in the 12-month period ended December 31, 2009 as a
result of the increase in the valuation of the liability. See “Note 10 –
Liability for Equity-Linked Financial Instrument” to the Notes to Financial
Statements of this Annual Report on Form 10-K.
Issued in
January 2010, ASU Update 2010-06, Fair Value Measures and
Disclosures, provides amendments to Topic 820 that will provide more robust
disclosures about (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the activity in
level 3 fair value measurements, and (4) the transfers between levels 1, 2, and
3. ASC Update 2010-06 is effective for fiscal years beginning after
December 15, 2010. We do not expect adoption of ASU Update 2010-06 to have
a material effect to our financial statements or our disclosures.
Issued in
October 2009, ASU Update 2009-13, Revenue Recognition Topic 605 -
Multiple-Deliverable Revenue Arrangements provides guidance for separating
consideration in multiple-deliverable arrangements. ASC Number 2009-13 is
effective for fiscal years beginning on or after June 15, 2010. We do not expect
adoption of ASU Update 2009-13 to have a material effect on our financial
statements.
Effective
February 2010, we adopted ASU Update 2010-09, Subsequent
Events,which provides amendments to Topic 855 removing the requirement
for SEC filers to disclose the date through which an entity has evaluated
subsequent events. The adoption of ASU Update 2010-09 did not have a significant
impact on our disclosures.
Effective
October 1, 2009, we adopted ASU Update 2009-05, Fair Value Measurement and
Disclosures Topic 820 which provides further guidance on the fair value
measurement of liabilities. The adoption of ASU 2009-05 did not have a material
effect on our consolidated financial statements.
Effective
September 15, 2009, we adopted ASC 105 making the FASB Accounting Standards
Codification, (“Codification”) the single source of authoritative
nongovernmental U.S. generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All other accounting
literature not included in the Codification is non-authoritative.
Effective
June 15, 2009, we adopted requirements within ASC 855 which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date, but before financial statements are issued or are available
to be issued. ASC 855 sets forth (1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (3) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The adoption
of the requirements within ASC 855 did not have a material effect on our
consolidated financial statements. Subsequent events have been evaluated through
the filing date of this Annual Report on Form 10-K.
Results
of Operations
Comparison
of Fiscal Year Ended December 31, 2009 with Fiscal Year Ended December 31,
2008
Revenue. We recorded revenue
of $15,737 in 2009 compared to none in 2008. We received approval
from the FDA on April 1, 2009 to commence sales and marketing activities of its
patented Streamway FMS system and recorded its first shipment in June
2009. Since the system was first approved for sale during 2009 there
was no revenue in 2008.
General and Administrative
expense. General and administrative expense consists of, management
salaries, professional fees, consulting fees, travel expense, administrative
fees and general office expenses.
25
General
and administrative expense increased to $1,598,000 for the year ended December
31, 2009 from $1,316,000 for the year ended December 31, 2008. General and
administrative expense increased primarily due to an increase of $54,000 in
stock-based compensation expense, a $48,000 increase in audit and accounting
expense, a $355,000 increase in stock-based registration payments and a $119,000
increase in consulting expense offset, in part, by a $66,000 reduction in legal
fees and a $119,000 reduction in stock-based consulting. The increase in
stock-based compensation expense resulted from a significant grant of restricted
stock to officers and directors in 2009. The large increase in registration
payments was due to the monthly penalty arising from our inability to obtain
effective registration of our Common Stock within 180 days of the closing date
of the October 2008 financing. Legal fees decreased when our Registration
Statement on Form S-1 became effective. We anticipate that general and
administrative expense will increase in absolute dollars in 2010 as we incur
increased costs associated with a growing company, of adding personnel, paying
market rate salaries, proceeding from the development phase to the operating
phase, and complying with public reporting obligations.
Operations expense.
Operations expense primarily consists of expenses related to product development
and prototyping and testing in the Company’s current stage.
Operations
expense, including product development expense, increased to $447,000 in the
year ended December 31, 2009 compared to $321,000 in the year ended December 31,
2008, primarily due to a $31,000 increase in salaries and a $86,000 increase in
stock-based compensation. The increase in salaries was due to the
Chief Operating Officer being employed for the entire year, compared to only 7
months in 2008, and the increase in stock-based compensation resulted from a
significant grant of restricted stock to officers and directors in
2009.
Sales and marketing expense.
Sales and marketing expense consists of expenses required to sell products
through independent reps, attendance at trades shows, product literature and
other sales and marketing activities.
Sales and
marketing expense grew to $407,000 in the year ended December 31, 2009 compared
to $36,000 in the year ended December 31, 2008, primarily as a result of an
increase of $195,000 in salaries and benefits, a $75,000 increase in stock-based
compensation, a $21,000 increase in travel and a $73,000 increase in trade show,
promotion and marketing supplies expenses. On February 1, 2009, the
Company hired a Vice President of Sales and Marketing and began purchasing
marketing literature and attending trade shows in anticipation of receiving
clearance from the FDA, which the Company received on April 1, 2009, to
begin commercial sale of the Streamway™ Fluid Management
System. Consequently, the Company expects sales and marketing
expenses in 2010 to exceed, by a significant amount, the expenses incurred in
2009.
Interest expense. Interest
expense, including loss on valuation of equity-linked financial instruments,
increased to $449,000 in the year ended December 31, 2009 from $89,000 in the
year ended December 31, 2008, primarily due to adoption of ASC 815 which,
beginning January 1, 2009, requires the Company to re-compute the value of
equity-linked financial instruments on each balance sheet date resulting in a
$370,000 (non-cash) loss on valuation of equity-linked financial instruments
during 2009.
Liquidity
and Capital Resources
We had a
cash balance of $16,632 as of December 31, 2009 and $463,838 as of December 31,
2008. Since our inception, we have incurred significant losses, and as of
December 31, 2009, we had an accumulated deficit of approximately $6,029,000. We
have not achieved profitability and anticipate that we will continue to incur
net losses for the foreseeable future. We expect that our operations expense,
including product development expense, sales and marketing and general and
administrative expenses will increase, and as a result, we will need to generate
significant revenue to achieve profitability.
Through
December 31, 2009, our operations have been funded through a bank loan in the
original amount of $41,400, a private party loan totaling $10,000, convertible
debt in the amounts of $170,000 and $100,000 and equity investments totaling
approximately $2,317,000. The $170,000 in convertible debt was converted into
620,095 shares of our Common Stock as of October 19, 2009. As of
December 31, 2009, we had accounts payable of $814,000 and accrued liabilities
of $201,000.
Net cash
used in operating activities was $1,310,000 for 2009 as compared with net cash
used of $901,000 for 2008. The increased use of cash was due primarily to an
increase to $2,892,000 in net loss offset, in part, by an increase of $317,000
in accounts payable and the net loss including $399,000 in stock issued for
management and consulting services, $355,000 in stock-based registration
payments and a $370,000 loss on equity-linked financial instruments that did not
consume cash.
Cash
flows used in investing activities was zero for 2009 as compared to $42,000 cash
used in investing activities for 2008. The amount in 2008 represented $30,000 in
investments in intellectual property and $12,000 in purchases of
furniture.
Net cash
provided by financing activities was $863,000 for 2009 as compared to net cash
provided by financing activities of $1,402,000 for 2008. The decrease in 2009
was primarily the result of selling approximately $1,600,000 in stock in 2008,
compared to $625,000 in 2009 although the Company was also successful in
arranging a $100,000 convertible debt loan, converting $87,000 in accrued
interest into shares of our Common Stock and utilizing $60,000 from the
restricted cash in escrow account in 2009.
26
Information
Regarding Forward-Looking Statements
This
Annual Report on Form 10-K contains “forward-looking statements” that indicate
certain risks and uncertainties related to the Company and this Offering, many
of which are beyond the Company’s control. The Company’s actual
results could differ materially and adversely from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this report. Important factors that may
cause actual results to differ from projections include:
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Adverse
economic conditions;
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Inability
to raise sufficient additional capital to operate our
business;
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Unexpected
costs and operating deficits, and lower than expected sales and revenues,
if any;
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•
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Adverse
results of any legal proceedings;
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The
volatility of our operating results and financial
condition;
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Inability
to attract or retain qualified senior management personnel, including
sales and marketing personnel; and
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Other
specific risks that may be alluded to in this
report.
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All
statements, other than statements of historical facts, included in this report
regarding the Company’s growth strategy, future operations, financial position,
estimated revenue or losses, projected costs, prospects and plans and objectives
of management are forward-looking statements. When used in this
report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,”
“expect,” “project,” “plan” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as
of the date of this report. The Company does not undertake any
obligation to update any forward-looking statements or other information
contained herein. Potential investors should not place undue reliance
on these forward-looking statements. Although BioDrain believes that
its plans, intentions and expectations reflected in or suggested by the
forward-looking statements in this report are reasonable, the Company cannot
assure potential investors that these plans, intentions or expectations will be
achieved. The Company discloses important factors that could cause
the Company’s actual results to differ materially from its expectations in the
“Risk Factors” section of our Registration Statement on Form S-1 and elsewhere in this
report. These cautionary statements qualify all forward-looking
statements attributable to the Company or persons acting on its
behalf.
Information
regarding market and industry statistics contained in this report are included
based on information available to the Company that it believes is
accurate. It is generally based on academic and other publications
that are not produced for purposes of securities offerings or economic
analysis. The Company has not reviewed or included data from all
sources, and the Company cannot assure potential investors of the accuracy or
completeness of the data included in this report. Forecasts and other
forward-looking information obtained from these sources are subject to the same
qualifications and the additional uncertainties accompanying any estimates of
future market size, revenue and market acceptance of products and
services. The Company has no obligation to update forward-looking
information to reflect actual results or changes in assumptions or other factors
that could affect those statement
Off-Balance
Sheet Transactions
BioDrain
Medical, Inc. has no off-balance sheet transactions.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
required.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our
financial statements and supplementary data are included on pages F-1 to F-14 of
this report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A(T). CONTROLS AND PROCEDURES.
Disclosure
Controls
27
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the timelines specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can only provide reasonable assurance of achieving the
desired control objectives, and in reaching a reasonable level of assurance,
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Our Chief
Executive Office/Chief Financial Officer evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) as of the end of the period covering this report. Based on this
evaluation, our Chief Executive Officer/Chief Financial Officer concluded that
our disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports that are
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified by the Securities and Exchange
Commission’s rules and forms and that our disclosure controls and procedures are
designed to ensure that information required to be disclosed in the reports that
we file or submit under the Exchange Act is accumulated and communicated to our
management including our Chief Executive Officer/Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Management’s
Report on Internal Control Over Financial Reporting
This
annual report does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of the
Company’s registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies.
Limitations
on Controls
Our
management, including our Chief Executive Officer/Chief Financial Officer, does
not expect that our disclosure controls or our internal control over financial
reporting will prevent or detect all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. In addition, the design of any system of controls is based in
part on certain assumptions about the likelihood of future events, and controls
may become inadequate if conditions change. There can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
Changes
in Internal Controls
There
were no changes in our internal controls over financial reporting during the
fourth quarter of fiscal year 2009 that may have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM
9B. OTHER INFORMATION.
None.
28
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
Other
than the information included in this Form 10-K under the heading “Executive
Officers of the Registrant,” which is set forth at the end of Part I, the
information required by Item 10 is incorporated by reference to the sections
labeled “Election of Directors,” “Corporate Governance” and “Section 16(a)
Beneficial Ownership Reporting Compliance,” all of which appear in our
definitive proxy statement for our 2010 Annual Meeting of
Shareholders.
ITEM
11. EXECUTIVE COMPENSATION.
The
information required by Item 11 is incorporated herein by reference to the
sections entitled “Executive Compensation,” “2009 Director Compensation,” and
“Compensation Committee,” all of which appear in our definitive proxy statement
for our 2010 Annual Meeting of Shareholders.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
information required by Item 12 is incorporated herein by reference to the
sections entitled “Principal Shareholders and Management Shareholdings” and
“Equity Compensation Plan Information,” which appear in our definitive proxy
statement for our 2010 Annual Meeting of Shareholders.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The
information required by Item 13 is incorporated herein by reference to the
sections entitled “Corporate Governance — Independence” and “Certain
Transactions,” which appear in our definitive proxy statement for our 2010
Annual Meeting of Shareholders.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
information required by Item 14 is incorporated herein by reference to the
section entitled “Audit Fees,” which appears in our definitive proxy statement
for our 2010 Annual Meeting of Shareholders.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The
following exhibits and financial statements are filed as part of, or are
incorporated by reference into, this report:
(1)
Financial
Statements
The
following financial statements are filed with this Annual Report and can be
found beginning at page F-1 of this report:
|
·
|
Report
of Independent Registered Public Accounting Firm dated March
31,
2010;
|
|
|
·
|
Balance
Sheets as of December 31, 2009 and December 31,
2008;
|
|
|
·
|
Statements
of Operations for the Fiscal Years Ended December 31, 2009 and December
31, 2008 and from Inception to December 31,
2009;
|
|
|
·
|
Statements
of Stockholders’ Equity from Inception to December 31,
2009;
|
|
|
·
|
Statements
of Cash Flows for the Fiscal Years Ended December 31, 2009 and December
31, 2008 and from Inception to December 31, 2009;
and
|
|
|
·
|
Notes
to Financial Statements.
|
(2) Financial
Statement Schedules
The
following financial statement schedule is filed with this Annual Report on Form
10-K and can be found following the Notes to Financial Statements:
|
|
·
|
Schedule
II—Valuation and Qualifying
Accounts.
|
All other
schedules have been omitted because the information required to be shown in the
schedules is not applicable or is included elsewhere in the financial statements
and Notes to Financial Statements.
29
(3) Exhibits
See
“Exhibit Index” following the signature page of this Form 10-K for a description
of the documents that are filed as Exhibits to this Annual Report on Form 10-K
or incorporated by reference herein.
30
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March
31, 2010
BioDrain
Medical, Inc.
|
By
|
/s/ Kevin R. Davidson
|
|
President,
Chief Executive Officer and Chief Financial
Officer
|
|
POWER
OF ATTORNEY
Each person whose signature appears
below constitutes KEVIN R. DAVIDSON his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof. Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signatures
|
Title
|
||
|
/s/
Lawrence W. Gadbaw
|
Chairman
of the Board of Directors
|
March
31, 2010
|
|
|
/s/
Kevin R. Davidson
|
President,
Chief Executive Officer, Chief Financial
|
March
31, 2010
|
|
|
Officer
and Director (principal executive officer
and
principal financial and accounting officer)
|
|||
|
/s/
James E. Dauwalter
|
Director
|
March
31, 2010
|
|
|
/s/
Thomas J. McGoldrick
|
Director
|
March
31, 2010
|
|
|
/s/ Peter
L. Morawetz
|
Director
|
March
31, 2010
|
|
|
/s/ Andrew
P. Reding
|
Director
|
March
31, 2010
|
|
|
/s/ Chad
A. Ruwe
|
Director
|
March
31,
2010
|
31
EXHIBIT
INDEX
BIODRAIN
MEDICAL, INC.
FORM
10-K
|
Exhibit No.
|
Description
|
||
|
23.1*
|
Consent
of Olsen Thielen & Co., Ltd.
|
||
|
31.1*
|
Certification
of principal executive officer and principal financial officer required by
Rule 13a-14(a).
|
||
|
32.1*
|
Section
1350 Certification.
|
* Filed
herewith.
32
The
audited financial statements for the periods ended December 31, 2009, December
31, 2008 and Inception through December 31, 2009 are included on the following
pages:
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
||||
|
Financial
Statements:
|
||||
|
Report of Independent Registered Public Accounting
Firm
|
F-1
|
|||
|
Balance Sheets
|
F-2
|
|||
|
Statements of Operations
|
F-3
|
|||
|
Statements of Changes in Stockholders’
Deficit
|
F-4
|
|||
|
Statements of Cash Flows
|
F-5
|
|||
|
Notes to Financial
Statements
|
F-6
|
|||
33
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
BioDrain
Medical, Inc.
Mendota
Heights, MN
We have
audited the accompanying balance sheets of BioDrain Medical, Inc. (a development
stage company) as of December 31, 2009 and 2008 and the related statements of
operations, stockholders’ deficit and cash flows for the years then ended and
for the period from April 23, 2002 (inception), to December 31, 2009. 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 audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of BioDrain Medical, Inc. (a
development stage company) as of December 31, 2009 and 2008, and the results of
its operations and its cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
The
accompanying financial statements have been prepared assuming that the company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the company has incurred losses since inception, has an
accumulated deficit and has not received significant revenue from sales of
products and services. These factors raise substantial doubt about
its ability to continue as a going concern. Managements’ plan in
regard to these matters are also described in Note 1. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Olsen
Thielen & Co., Ltd.
St. Paul,
Minnesota
March 31,
2010
F-1
PART 1.
FINANCIAL INFORMATION
Item 1.
Financial Statements
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEETS
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
|
$ | 16,632 | $ | 463,838 | ||||
|
Accounts
receivable
|
15,737 | - | ||||||
| Prepaid expense and other assets | 3,801 | 7,974 | ||||||
|
Restricted
cash in escrow (See Note 4)
|
103,333 | 163,333 | ||||||
|
Total
Current Assets
|
139,503 | 635,145 | ||||||
|
Fixed
assets, net
|
9,260 | 11,689 | ||||||
|
Intangibles,
net
|
141,532 | 142,145 | ||||||
|
Total
Assets
|
$ | 290,295 | $ | 788,979 | ||||
|
LIABILITIES AND SHAREHOLDERS'
DEFICIT
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
portion of bank debt (See Note 8)
|
$ | 13,620 | $ | 17,620 | ||||
|
Current
portion of convertible debt
|
50,000 | 170,000 | ||||||
|
Accounts
payable
|
814,137 | 497,150 | ||||||
|
Shares
due investors under registration payment arrangement
|
355,124 | - | ||||||
|
Accrued
expenses
|
201,490 | 305,248 | ||||||
|
Convertible
debenture
|
10,000 | 10,000 | ||||||
|
Total
Current Liabilites
|
1,444,371 | 1,000,018 | ||||||
|
Long
term debt and convertible debt, net of discounts of $44,873 and $26,157
(See Note 8)
|
116,108 | 98,406 | ||||||
|
Liability
for equity-linked financial instruments (See Note 11)
|
1,071,847 | - | ||||||
|
Shareholders’
Deficit:
|
||||||||
|
Common
stock, par value $.01, 40,000,000 authorized, 11,383,121 and 8,130,841
outstanding
|
113,831 | 81,308 | ||||||
|
Additional
paid-in capital
|
3,573,506 | 2,753,039 | ||||||
|
Deficit
accumulated during development stage
|
(6,029,368 | ) | (3,143,792 | ) | ||||
|
Total
Shareholder' Deficit
|
(2,342,031 | ) | (309,445 | ) | ||||
|
Total
Liabilities and Shareholders' Deficit
|
$ | 290,295 | $ | 788,979 | ||||
See Notes
to Financial Statements
F-2
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF OPERATIONS
|
Period
From
|
||||||||||||
|
April
23, 2002
|
||||||||||||
|
(Inception)
|
||||||||||||
|
Twelve Months Ended December
31,
|
To December 31,
|
|||||||||||
|
2009
|
2008
|
2009
|
||||||||||
|
Revenue
|
$ | 15,737 | $ | - | $ | 15,737 | ||||||
|
Cost
of goods sold
|
7,000 | 7,000 | ||||||||||
|
Gross
margin
|
8,737 | - | 8,737 | |||||||||
|
General
and administrative expense
|
1,598,286 | 1,316,398 | 4,028,427 | |||||||||
|
Operations
expense
|
447,000 | 321,205 | 900,874 | |||||||||
|
Sales
and marketing expense
|
407,101 | 35,682 | 456,176 | |||||||||
|
Interest
expense
|
78,938 | 89,343 | 289,640 | |||||||||
|
Loss
(gain) on valuation of equity-linked financial instruments
|
369,642 | - | 362,988 | |||||||||
|
Total
expense
|
2,900,967 | 1,762,628 | 6,038,105 | |||||||||
|
Net
loss available to common shareholders
|
$ | 2,892,230 | $ | 1,762,628 | $ | 6,029,368 | ||||||
|
Loss
per common share basic and diluted
|
$ | 0.31 | $ | 0.41 | $ | 2.56 | ||||||
|
Weighted
average shares used in computation, basic and diluted
|
9,475,369 | 4,335,162 | 2,355,376 | |||||||||
See Notes
to Financial Statements
F-3
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF STOCKHOLDERS' DEFICIT
PERIOD
FROM APRIL 23, 2002 (INCEPTION)
TO
DECEMBER 31, 2009
|
Shares
|
Amount
|
Paid in Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Issuance
of common stock 9/1/02, $.0167 (1)
|
598,549 | $ | 5,985 | $ | 4,015 | $ | - | $ | 10,000 | |||||||||||
| - | ||||||||||||||||||||
|
Issuance
of common stock 10/23/02, $1.67/share
|
2,993 | 30 | 4,970 | 5,000 | ||||||||||||||||
|
Net
loss
|
(51,057 | ) | (51,057 | ) | ||||||||||||||||
|
Balance
12/31/02
|
601,542 | $ | 6,015 | $ | 8,985 | $ | (51,057 | ) | $ | (36,057 | ) | |||||||||
|
Issuance
of common stock 2/12/03, $.0167 (2)
|
23,942 | 239 | 161 | 400 | ||||||||||||||||
|
Issuance
of common stock 6/11&12,$1.67 (3)
|
21,548 | 216 | 34,784 | 35,000 | ||||||||||||||||
|
Net
Loss
|
(90,461 | ) | (90,461 | ) | ||||||||||||||||
|
Balance
12/31/03
|
647,032 | $ | 6,470 | $ | 43,930 | $ | (141,518 | ) | $ | (91,118 | ) | |||||||||
|
Issuance
of common stock 5/25/04, $.0167 (4)
|
6,567 | 66 | 44 | 110 | ||||||||||||||||
|
Net
Loss
|
(90,353 | ) | (90,353 | ) | ||||||||||||||||
|
Balance
12/31/04
|
653,599 | $ | 6,536 | $ | 43,974 | $ | (231,871 | ) | $ | (181,361 | ) | |||||||||
|
Issuance
of common stock 12/14/05, $.0167 (5)
|
14,964 | 150 | 100 | 250 | ||||||||||||||||
|
Vested
stock options and warrants
|
2,793 | 2,793 | ||||||||||||||||||
|
Net
Loss
|
(123,852 | ) | (123,852 | ) | ||||||||||||||||
|
Balance
12/31/05
|
668,563 | $ | 6,686 | $ | 46,867 | $ | (355,723 | ) | $ | (302,170 | ) | |||||||||
|
Issuance
of common stock 5/16 & 8/8, $.0167 (6)
|
86,869 | 869 | 582 | 1,451 | ||||||||||||||||
|
Issuance
of common stock 10/19 & 23, $.0167 (7)
|
38,906 | 389 | 261 | 650 | ||||||||||||||||
|
Issuance
of common stock 12/01, $1.67 (8)
|
28,739 | 287 | 44,523 | 44,810 | ||||||||||||||||
|
Vested
stock options and warrants
|
13,644 | 13,644 | ||||||||||||||||||
|
Net
Loss
|
(273,026 | ) | (273,026 | ) | ||||||||||||||||
|
Balance
12/31/06
|
823,077 | $ | 8,231 | $ | 105,877 | $ | (628,749 | ) | $ | (514,641 | ) | |||||||||
|
Issuance
of common stock 1/30/07 @ 1.67 (9)
|
599 | 6 | 994 | 1,000 | ||||||||||||||||
|
Value
of equity instruments issued with debt
|
132,938 | 132,938 | ||||||||||||||||||
|
Capital
contributions resulting from waivers of debt
|
346,714 | 346,714 | ||||||||||||||||||
|
Vested
stock options and warrants
|
73,907 | 73,907 | ||||||||||||||||||
|
Net
loss
|
(752,415 | ) | (752,415 | ) | ||||||||||||||||
|
Balance
12/31/07
|
823,676 | $ | 8,237 | $ | 660,430 | $ | (1,381,164 | ) | $ | (712,497 | ) | |||||||||
|
Issuance
of common stock 6/11 to 9/30, $.35 (10)
|
4,552,862 | 45,528 | 1,547,974 | 1,593,502 | ||||||||||||||||
|
Shares
issued to finders, agents and attorneys
|
2,012,690 | 20,127 | (20,127 | ) | - | |||||||||||||||
|
Shares
issued to pay direct legal fees
|
285,714 | 2,857 | (2,857 | ) | ||||||||||||||||
|
Issuance
of common due to antidilution provisions
|
205,899 | 2,059 | (2,059 | ) | - | |||||||||||||||
|
Shares
issued to pay investor relations services 6/23/08,
$.35
|
250,000 | 2,500 | 85,000 | 87,500 | ||||||||||||||||
|
Vested
stock options and warrants
|
354,994 | 354,994 | ||||||||||||||||||
|
Capital
contributions resulting from conversion of accrued
liabilities
|
129,684 | 129,684 | ||||||||||||||||||
|
Net
loss
|
(1,762,628 | ) | (1,762,628 | ) | ||||||||||||||||
|
Balance
12/31/08
|
8,130,841 | $ | 81,308 | $ | 2,753,039 | $ | (3,143,792 | ) | $ | (309,445 | ) | |||||||||
|
Cumulative
effect of adoption of EITF 07-5
|
(486,564 | ) | 6,654 | (479,910 | ) | |||||||||||||||
|
Vested
stock options and warrants
|
111,835 | 111,835 | ||||||||||||||||||
|
Shares
issued 3/20/09 to pay for fund raising
|
125,000 | 1,250 | (1,250 | ) | - | |||||||||||||||
|
Shares
issued under PPM in April 2009, $.50
|
700,000 | 7,000 | 343,000 | 350,000 | ||||||||||||||||
|
Shares
issued under PPM in May 2009, $.50
|
220,000 | 2,200 | 107,800 | 110,000 | ||||||||||||||||
|
Shares
issued under PPM in June 2009, $.50
|
50,000 | 500 | 24,500 | 25,000 | ||||||||||||||||
|
Shares
issued under PPM in August 2009, $.50
|
80,000 | 800 | 39,200 | 40,000 | ||||||||||||||||
|
Shares
issued under PPM in September 2009, $.50
|
150,000 | 1,500 | 73,500 | 75,000 | ||||||||||||||||
|
Shares
issued to directors, management and consultant in August 2009,
$.50
|
797,810 | 7,978 | 390,927 | 398,905 | ||||||||||||||||
|
Shares
issued to finder in September 2009, $.50
|
100,000 | 1,000 | 49,000 | 50,000 | ||||||||||||||||
|
Shares
issued under PPM in November 2009, $.50
|
50,000 | 500 | 24,500 | 25,000 | ||||||||||||||||
|
Capital
contributions resulting from conversion of accrued
liabilities
|
84,600 | 84,600 | ||||||||||||||||||
|
Value
of equity-linked financial instruments issued in connection with
PPMs
|
(222,296 | ) | (222,296 | ) | ||||||||||||||||
|
Value
of equity instruments issued with debt
|
30,150 | 30,150 | ||||||||||||||||||
|
Shares
issued to consultant for fund raising
|
30,000 | 300 | (300 | ) | - | |||||||||||||||
|
Shares
issued upon conversion of debt and interest, $.27
|
935,446 | 9,355 | 247,099 | 256,454 | ||||||||||||||||
|
Shares
issued upon conversion of shareholder note, $.35
|
14,024 | 140 | 4,766 | 4,906 | ||||||||||||||||
|
Net
Loss
|
$ | (2,892,230 | ) | (2,892,230 | ) | |||||||||||||||
|
Balance
12/31/09
|
11,383,121 | $ | 113,831 | $ | 3,573,506 | $ | (6,029,368 | ) | $ | (2,342,021 | ) | |||||||||
|
(1)
|
Founders
shares, 1,000,000 pre-split
|
|
(2)
|
23,492
(40,000 pre-split) shares valued at $.0167 per share as compensation for
loan guarantees by management
|
|
(3)
|
Investment
including 670 shares issued as a 10% finders
fee
|
|
(4)
|
For
payment of patent legal fees
|
|
(5)
|
Compensation
for loan guarantees by management
|
|
(6)
|
For
vendor contractual consideration
|
|
(7)
|
Employment
agreements
|
|
(8)
|
Investment
|
|
(9)
|
Conversion
of convertible notes by management
|
|
(10)
|
Investment,
"October 2008 financing".
|
See Notes
to Financial Statements
F-4
BIODRAIN
MEDICAL, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF CASH FLOWS
|
April 23,
|
||||||||||||
|
2002
|
||||||||||||
|
Twelve Months
|
(Inception)
|
|||||||||||
|
Ended December 31,
|
To December 31,
|
|||||||||||
|
2009
|
2008
|
2009
|
||||||||||
|
|
|
|
||||||||||
|
Cash
flow from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (2,892,230 | ) | $ | (1,762,628 | ) | $ | (6,029,368 | ) | |||
|
Adjustments
to reconcile net loss to
|
||||||||||||
|
net
cash used in operating activities:
|
||||||||||||
|
Depreciation
|
3,042 | 569 | 3,961 | |||||||||
|
Vested
stock options and warrants
|
111,835 | 354,994 | 557,153 | |||||||||
|
Stock
issued for management and consulting services
|
448,905 | 87,500 | 536,405 | |||||||||
|
Stock
based registration payments
|
355,124 | 355,124 | ||||||||||
|
Conversion
of accrued liabilites to capital
|
84,600 | 129,684 | 560,998 | |||||||||
|
Amortization
of debt discount
|
11,435 | 38,948 | 118,216 | |||||||||
|
Loss
on valuation of equity-linked instruments
|
369,642 | - | 362,988 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(15,737 | ) | - | (15,737 | ) | |||||||
|
Prepaid
expense and other
|
4,173 | (3,417 | ) | (3,801 | ) | |||||||
|
Notes
payable to shareholders
|
(4,000 | ) | - | (14,973 | ) | |||||||
|
Accounts
payable
|
316,987 | 290,003 | 814,137 | |||||||||
|
Accrued
expenses
|
(103,761 | ) | (36,181 | ) | 201,491 | |||||||
|
Net
cash used in operating activities:
|
(1,309,985 | ) | (900,528 | ) | (2,553,390 | ) | ||||||
|
Cash
flow from investing activities:
|
||||||||||||
|
Purchase
of fixed assets
|
- | (12,258 | ) | (12,258 | ) | |||||||
|
Purchase
of intangibles
|
(29,599 | ) | (142,495 | ) | ||||||||
|
Net
cash used in investing activities
|
- | (41,857 | ) | (154,753 | ) | |||||||
|
Cash
flow from financing activities:
|
||||||||||||
|
Proceeds
from long term debt
|
100,000 | - | 521,505 | |||||||||
|
Principal
payments on long term debt
|
(183,581 | ) | (28,125 | ) | (271,930 | ) | ||||||
|
Restricted
cash in escrow
|
60,000 | (163,333 | ) | (103,333 | ) | |||||||
|
Debt
converted to common stock
|
174,000 | - | 174,000 | |||||||||
|
Accrued
interest converted to stock
|
87,360 | 87,360 | ||||||||||
|
Issuance
of common stock
|
625,000 | 1,593,502 | 2,317,173 | |||||||||
|
Net
cash provided by financing activities
|
862,779 | 1,402,044 | 2,724,775 | |||||||||
|
Net
increase (decrease) in cash
|
(447,206 | ) | 459,659 | 16,632 | ||||||||
|
Cash
at beginning of period
|
463,838 | 4,179 | - | |||||||||
|
Cash
at end of period
|
$ | 16,632 | $ | 463,838 | $ | 16,632 | ||||||
See Notes
to Financial Statements
F-5
BIODRAIN
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Continuance 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.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The company has suffered recurring losses from
operations and has a stockholders’ deficit. These factors raise substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Management
hired an investment banker in January 2010 to raise an additional $3-$5 million
in new equity with an interim closing of up to $500,000 expected by March 31,
2010. Although our ability to raise this new capital is in substantial
doubt we received $725,000 through private placements of equity and convertible
debt in 2009, and our April 1, 2009 510(k) clearance from the FDA to authorize
us to market and sell our FMS products is being received very positively.
If the Company is successful in raising at least $3 million in new equity we
will have sufficient capital to operate our business and execute our business
plan for at least the next 12 months. If the Company raises the additional
capital by issuing additional equity securities its shareholders could
experience substantial dilution.
Recent
Accounting Developments
In June
2008, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues
Task Force (EITF) Issue No. 07-5, now codified under ASC 815-Derivatives and Hedging (“ASC
815”). ASC 815 mandates a two-step process for evaluating whether an
equity-linked financial instrument or embedded feature is indexed to the
entity’s own stock. It is effective for fiscal years beginning after December
15, 2008 and interim periods within those fiscal years, which is our first
quarter of 2009. Most of the warrants issued by the Company contain a strike
price adjustment feature which, upon adoption of ASC 815, changed the
classification (from equity to liability) and the related accounting for many
warrants with an estimated fair value of $479,910 as of December 31, 2008. As of
January 1, 2009 the Company removed $486,564 from paid-in-capital (representing
the combined fair values of the warrants on their date of grant), recorded a
positive adjustment to accumulated deficit representing the gain on the
valuation of the warrants from the grant dates to January 1, 2009, and
established a liability for equity-linked instruments in the net amount of
$479,910. The Company also re-computed the value of the warrants as of March 31,
2009, June 30, 2009, September 30, 2009 and December 31, 2009 and recorded
a loss of $369,642 in the 12-month period ended December 31, 2009 as a
result of the increase in the valuation of the liability. See “Note 10 –
Liability for Equity-Linked Financial Instrument” to the Notes to Financial
Statements of this Annual Report on Form 10-K.
Issued in
January 2010, ASU Update 2010-06, Fair Value Measures and
Disclosures, provides amendments to Topic 820 that will provide more robust
disclosures about (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the activity in
level 3 fair value measurements, and (4) the transfers between levels 1, 2, and
3. ASC Update 2010-06 is effective for fiscal years beginning after
December 15, 2010. We do not expect adoption of ASU Update 2010-06 to have
a material effect to our financial statements or our disclosures.
Issued in
October 2009, ASU Update 2009-13, Revenue Recognition Topic 605 -
Multiple-Deliverable Revenue Arrangements provides guidance for separating
consideration in multiple-deliverable arrangements. ASC Number 2009-13 is
effective for fiscal years beginning on or after June 15, 2010. We do not expect
adoption of ASU Update 2009-13 to have a material effect on our financial
statements.
Effective
February 2010, we adopted ASU Update 2010-09, Subsequent
Events,which provides amendments to Topic 855 removing the requirement
for SEC filers to disclose the date through which an entity has evaluated
subsequent events. The adoption of ASU Update 2010-09 did not have a significant
impact on our disclosures.
Effective
October 1, 2009, we adopted ASU Update 2009-05, Fair Value Measurement and
Disclosures Topic 820 which provides further guidance on the fair value
measurement of liabilities. The adoption of ASU 2009-05 did not have a material
effect on our consolidated financial statements.
Effective
September 15, 2009, we adopted ASC 105 making the FASB Accounting Standards
Codification, (“Codification”) the single source of authoritative
nongovernmental U.S. generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All other accounting
literature not included in the Codification is non-authoritative.
Effective
June 15, 2009, we adopted requirements within ASC 855 which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date, but before financial statements are issued or are available
to be issued. ASC 855 sets forth (1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (3) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The adoption
of the requirements within ASC 855 did not have a material effect on our
consolidated financial statements. Subsequent events have been evaluated through
the filing date of this Annual Report on Form 10-K.
Accounting
Policies and Estimates
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Presentation
of Taxes Collected from Customers
Sales
taxes are imposed on the Company’s sales to nonexempt customers. The
Company collects the taxes from customers and remits the entire amounts to the
governmental authorities. The Company’s accounting policy is to
exclude the taxes collected and remitted from revenues and
expenses.
Shipping
and Handling
Shipping
and handling charges billed to customers are recorded as
revenue. Shipping and handling costs are recorded within cost of
goods sold on the statement of operations.
Advertising
Advertising
costs are expensed as incurred. Total advertising expenses were approximately
$1,600 for 2009 and none in 2008.
Research
and Development
Research
and development costs are charged to operations as incurred. Research
and development costs were approximately $71,000 and $183,000 in 2009 and 2008,
respectively.
Revenue Recognition We
recognize revenue in accordance with the SEC’s Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial
Statements , as amended by Staff Accounting Bulletin No. 104
(together, SAB 101), and ASC 605 Revenue
Recognition.
F-6
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectability is probable.
Delivery is considered to have occurred upon either shipment of the product or
arrival at its destination based on the shipping terms of the transaction. Our
standard terms specify that shipment is FOB BioDrain and we will, therefore
recognize revenue upon shipment in most cases. This revenue recognition policy
applies to shipments of our FMS units as well as shipments of cleaning solution
kits. When these conditions are satisfied, we recognize gross product revenue,
which is the price we charge generally to our customers for a particular
product. Under our standard terms and conditions there is no provision for
installation or acceptance of the product to take place prior to the obligation
of the customer. The Customer’s right of return is limited only to our
standard warranty whereby we replace or repair, at our option, and it would be
very rare that the unit or significant quantities of cleaning solution kits may
be returned. Additionally, since we buy both the FMS units and cleaning
solution kits from “turnkey” suppliers we would have the right to replacements
from the suppliers if this situation should occur.
Receivables
Receivables
are reported at the amount the Company expects to collect on balances
outstanding at year end. The Company has concluded there will be no losses on
balances outstanding at year end.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets. Estimated
useful asset life by classification is as follows:
|
Years
|
|||
|
Computers
and office equipment
|
3 | ||
|
Furniture
and fixtures
|
5 |
Upon
retirement or sale, the cost and related accumulated depreciation are removed
from the balance sheet and the resulting gain or loss is reflected in
operations. Maintenance and repairs are charged to operations as
incurred.
Intangible
Assets
Intangible
assets consist of patent costs. These assets are not subject to amortization
until the property patented is in production. The assets are reviewed for
impairment annually, and impairment losses, if any, are charged to operations
when identified. No impairment losses have been identified by
management.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-Income Taxes(“ASC 740”).
Under ASC 740, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and net operating loss and credit carry forwards using enacted tax
rates in effect for the year in which the differences are expected to impact
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. In June 2006, the
FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”), which became effective for the Company beginning January 1, 2007.
FIN 48, now included within ASC 740, addresses how tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under ASC 740, the tax benefit from an uncertain tax position can be
recognized only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
resolution. The Company has identified no income tax uncertainties.
Patents
and Intellectual Property
The
Company, in June 2008, completed and executed an agreement to secure exclusive
ownership of the patent- from an inventor, Marshall Ryan. Mr. Ryan received a
combination of cash and warrants, and he will receive a 4% royalty on FMS (the
Product) sales for the life of the patent. At the signing of the agreement, Mr.
Ryan received $75,000 in exchange for the exclusive assignment of the
patent. In addition, on June 30, 2009, Mr. Ryan, through his Mid-State
Stainless, Inc. entity, was entitled to receive $100,000 as payment (currently
recorded as an account payable with the Company) for past research and
development activities. Should Mr. Ryan be utilized in the future for
additional product development activities, he will be compensated at a rate of
ninety five dollars ($95.00) per hour.
F-7
Mr. Ryan
also received a warrant, with immediate vesting, to purchase 150,000 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 and is assigned a value of $28,060 using a
Black-Scholes formula and this amount was expensed as consulting expense in 2008
using a 5 year expected life, a 3.73% risk free interest rate, an expected 59%
volatility and a zero dividend rate. Should there be a change in control of the
Company (defined as greater than 50% of the Company’s outstanding stock or
substantially all of its assets being transferred to one independent person or
entity), Mr. Ryan will be owed a total of $2 million to be paid out over the
life of the patent if the change in control occurs within 12 months of the first
sale of the Product; or $1 million to be paid out over the life of the patent if
the change in control occurs between 12 and 24 months of the first sale of the
Product; or $500,000 to be paid out over the life of the patent if the change in
control occurs between 24 and 36 months of the first sale of the Product. There
will be no additional payment if a change in control occurs more than 36 months
after the first sale of the Product.
Subsequent
Events
In May
2009, Financial Accounting Standards Board issued ASC 855 Subsequent Events. This
standard is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 is
effective for interim and annual periods ended after June 15, 2009. The Company
adopted this standard effective June 15, 2009.
The
Company has evaluated any subsequent events through the date of this
filing. The Company does not believe there are subsequent events that
require disclosure.
NOTE
2 – DEVELOPMENT STAGE OPERATIONS
The
Company was formed April 23, 2002. Since inception to December 31, 2009,
11,383,121 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 – STOCKHOLDERS’ DEFICIT, STOCK OPTIONS AND WARRANTS
In
connection with the financing completed in October 2008, the Company has
effected two reverse stock splits, one on June 6, 2008 and another on October
20, 2008. In accordance with SAB Topic 4C, all stock options and warrants and
their related exercise prices are stated at their post-reverse stock split
values.
The
Company has an equity incentive plan, which allows issuance of incentive and
non-qualified stock options to employees, directors and consultants of the
Company, where permitted under the plan. The exercise price for each stock
option is determined by the board of directors. Vesting requirements are
determined by the board of directors when granted and currently range from
immediate to three years. Options under this plan have terms ranging from three
to ten years.
Accounting
for share-based payment
Effective
January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R)) which replaced SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and superseded Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), all now codified under ASC 718-Compensation-Stock
Compensation (“ASC 718). Under ASC 718 stock-based employee compensation
cost is recognized using the fair value based method for all new awards granted
after January 1, 2006 and unvested awards outstanding at January 1,
2006. Compensation costs for unvested stock options and non-vested awards that
were outstanding at January 1, 2006, are being recognized over the
requisite service period based on the grant-date fair value of those options and
awards as previously calculated under SFAS 123 for pro forma disclosures,
using a straight-line method. We elected the modified-prospective method in
under which prior periods are not retroactively restated.
F-8
ASC 718
requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model or other acceptable means. We
use the Black-Scholes option valuation model which requires the input of
significant assumptions including an estimate of the average period of time
employees will retain vested stock options before exercising them, the estimated
volatility of our common stock price over the expected term, the number of
options that will ultimately be forfeited before completing vesting
requirements, the expected dividend rate and the risk-free interest rate.
Changes in the assumptions can materially affect the estimate of fair value of
stock-based compensation and, consequently, the related expense recognized. The
assumptions we use in calculating the fair value of stock-based payment awards
represent our best estimates, which involve inherent uncertainties and the
application of management's judgment. As a result, if factors change and we use
different assumptions, our equity-based compensation expense could be materially
different in the future.
Since our
company stock has no public trading history, and we have experienced no option
exercises in our history, we were required to take an alternative approach to
estimating future volatility and estimated life and the future results could
vary significantly from our estimates. We compiled historical volatilities
over a period of 2-7 years of 15 small-cap medical companies traded on major
exchanges and 10 medical companies in the middle of the size range on the OTC
Bulletin Board and combined the results using a weighted average approach.
In the case of ordinary options to employees we determined the expected life to
be the midpoint between the vesting term and the legal term. In the case
of options or warrants granted to non-employees we estimated the life to be the
legal term unless there was a compelling reason to make it shorter.
When an
option or warrant is granted in place of cash compensation for services we deem
the value of the service rendered to be the value of the option or warrant. In
most cases, however, an option or warrant is granted in addition to other forms
of compensation and its separate value is difficult to determine without
utilizing an option pricing model. For that reason we also use the
Black-Scholes-Merton option-pricing model to value options and warrants granted
to non-employees, which requires the input of significant assumptions including
an estimate of the average period the investors or consultants will retain
vested stock options and warrants before exercising them, the estimated
volatility of our common stock price over the expected term, the number of
options and warrants that will ultimately be forfeited before completing
vesting requirements, the expected dividend rate and the risk-free interest
rate. Changes in the assumptions can materially affect the estimate of fair
value of stock-based consulting and/or compensation and, consequently, the
related expense recognized.
Since we
have no trading history in our stock and no first-hand experience with how these
investors and consultants have acted in similar circumstances, the assumptions
we use in calculating the fair value of stock-based payment awards represent our
best estimates, which involve inherent uncertainties and the application of
management's judgment. As a result, if factors change and we use different
assumptions, our equity-based consulting and interest expense could be
materially different in the future.
Valuation
and accounting for options and warrants
The
Company determines the grant date fair value of options and warrants using a
Black-Scholes-Merton option valuation model based upon assumptions regarding
risk-free interest rate, expected dividend rate, volatility and estimated
term. For grants during 2008 we used a 2.0 to 4.5% risk-free interest
rate, 0% dividend rate, 53-66% volatility and estimated term of 2.5 to 7.5
years. Values computed using these assumptions ranged from $.102 per share
to $.336 per share. Warrants or options awarded for services rendered are
expensed over the period of service (normally the vesting period) as
compensation expense for employees or an appropriate consulting expense category
for awards to consultants and directors. Warrants granted in connection
with a common equity financing are included in stockholders’ equity, provided
that there is no re-pricing provision that requires they be treated as a
liability (See Note 11) and warrants granted in connections with a debt
financing are treated as a debt discount and amortized using the interest method
as interest expense over the term of the debt. Warrants issued in
connection with the $100,000 convertible debt, closed March 1, 2007, created a
debt discount of $40,242 that is being amortized as additional interest over its
5 year term. Warrants issued in connection with the $170,000 in
convertible “bridge” debt, closed in July 2007, created a calculated debt
discount of $92,700 that was fully expensed over its loan term that matured
April 30, 2008. The
Company issued $100,000 in convertible debt in October 2009 and issued a
warrant, in connection with the debt, for 200,000 shares at $.65 per
share. The Company determined that the warrant had an initial value
of $30,150 that is treated as a debt discount and amortized as additional
interest expense over the 24 month term of the note. The value was
determined using the Black-Scholes-Merton option valuation model with a 3 year
expected life, a 54% expected volatility, a zero dividend rate and a 2.53% risk
free interest rate.
F-9
The
following summarizes transactions for stock options and warrants for the periods
indicated:
|
Stock Options (1)
|
Warrants (1)
|
|||||||||||||||
|
Number of
Shares
|
Average
Exercise
Price
|
Number of
Shares
|
Average
Exercise
Price
|
|||||||||||||
|
Outstanding
at December 31, 2005
|
17,956 | $ | 1.67 | 20,950 | $ | 2.62 | ||||||||||
|
Issued
|
23,942 | 1.67 | 71,826 | 0.85 | ||||||||||||
|
Outstanding
at December 31, 2006
|
41,898 | $ | 1.67 | 92,776 | $ | 1.25 | ||||||||||
|
Issued
|
5,984 | 1.67 | 28,502 | 0.35 | ||||||||||||
|
Outstanding
at December 31, 2007
|
47,882 | $ | 1.67 | 121,278 | $ | 1.04 | ||||||||||
|
Issued
|
1,243,292 | 0.20 | 5,075,204 | 0.45 | ||||||||||||
|
Expired
|
(11,971 | ) | 3.76 | |||||||||||||
|
Outstanding
at December 31, 2008
|
1,291,174 | $ | 0.26 | 5,184,511 | 0.45 | |||||||||||
|
Issued
|
205,000 | 0.37 | 2,188,302 | 0.65 | ||||||||||||
|
Outstanding
at December 31, 2009
|
1,496,174 | 0.27 | 7,372,813 | 0.49 | ||||||||||||
|
|
(1)
|
Adjusted
for the reverse stock splits in total at June 6, 2008 and October 20,
2008. There were no options or warrants exercised in the
periods.
|
The
weighted average grant date fair value of stock options granted
through December 31, 2009 and the fair value of shares vesting in each
year are as follows:
|
Year
|
Options
|
Fair Value
|
Fair value vested
|
|||||||||
|
2005
|
17,956 | $ | 0.671 | $ | 1,673 | |||||||
|
2006
|
23,942 | $ | 0.682 | $ | 12,919 | |||||||
|
2007
|
5,984 | $ | 0.687 | $ | 71,038 | |||||||
|
2008
|
1,243,292 | $ | 0.232 | $ | 220,287 | |||||||
|
2009
|
205,000 | $ | 0.243 | $ | 52,272 | |||||||
|
Total
|
1,496,174 | $ | 0.207 | $ | 358,189 | |||||||
At
December 31, 2009, 1,496,174 stock options are fully vested and currently
exercisable with a weighted average exercise price of $.27 and a weighted
average remaining term of 6.7 years. There are 7,372,813 warrants that are fully
vested and exercisable. Stock based compensation recognized in the year ended
December 31, 2008 was $220,287 the year ended December 31, 2009 was
$111,835.
F-10
The
following summarizes the status of options and warrants outstanding at December
31, 2009:
|
Range of Exercise Prices
|
Shares
|
Weighted
Average
Remaining
Life
|
||||||
|
Options
|
||||||||
|
$0.01
|
$ | 543,292 | $ | 8.43 | ||||
|
$0.35
|
875,000 | 3.61 | ||||||
|
$0.50
|
30,000 | 2.87 | ||||||
|
$1.67
|
47,882 | 1.50 | ||||||
|
Total
|
1,496,174 | |||||||
|
Warrants
|
||||||||
|
$0.02
|
71,826 | 4.45 | ||||||
|
$0.35
|
798,597 | 2.40 | ||||||
|
$0.46
|
4,972,498 | 1.62 | ||||||
|
$0.65
|
1,485,000 | 2.48 | ||||||
|
$1.67
|
44,892 | 1.69 | ||||||
|
Total
|
7,372,813 | |||||||
Stock
options and warrants expire on various dates from August 2010 to June
2018.
F-11
Under
terms of our agreement with investors in the October 2008 financing 1,920,000
shares of common stock were the maximum number of shares allocated to our
existing shareholders at the time of the offering (also referred to as the
original shareholders or the Founders). Since the total of our fully-diluted
shares of common stock was greater than 1,920,000, in order for us to proceed
with the offering, 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
The
following table is the listing of stock options and warrants as of December 31,
2009 by year of grant:
F-12
|
Stock
Options:
|
||||||||
|
Year
|
Shares
|
Price
|
||||||
|
2005
|
17,956 | $ | 1.67 | |||||
|
2006
|
23,942 | 1.67 | ||||||
|
2007
|
5,984 | .35-1.67 | ||||||
|
2008
|
1,243,292 | .01-.35 | ||||||
|
2009
|
205,000 | .35-.50 | ||||||
|
Total
|
1,496,174 | $ | .01-$1.67 | |||||
|
Warrants:
|
||||||||
|
Year
|
Shares
|
Price
|
||||||
|
2005
|
8,979 | $ | 1.67 | |||||
|
2006
|
71,826 | .02-1.67 | ||||||
|
2007
|
28,502 | .35 | ||||||
|
2008
|
5,075,204 | .02-.46 | ||||||
|
2009
|
2,188,302 | .35-.65 | ||||||
|
Total
|
7,372,813 | $ | .02-$1.67 | |||||
NOTE
4- RESTRICTED CASH IN ESCROW
Under
terms of the escrow agreement established in connection with the October 2008
financing, certain amounts were to be withheld to pay legal, accounting and
placement agent fees as well as to pay for investor relations activities that
commenced upon receiving an effective registration of the Company’s stock and an
initial listing with the OTC Bulletin Board. All amounts related to legal,
accounting and placement agent fees have been disbursed and the current balance
is solely being held to fund investor relations activities.
During
the fourth quarter of 2009 $60,000 was released to pay for investor relations
activities. The balance in this escrow account will be released to
the Company if we should withdraw our public company registration or otherwise
by mutual agreement of the investors who established the escrow as a condition
of the October 2008 financing.
NOTE
5 - LOSS PER SHARE
The
following table presents the shares used in the basic and diluted loss per
common share computations:
F-13
|
From
|
||||||||||||
|
Twelve Months Ended
|
April 23, 2002
|
|||||||||||
|
December 31,
|
(Inception) To
|
|||||||||||
|
2009
|
2008
|
December 31, 2009
|
||||||||||
|
Numerator
|
||||||||||||
|
Net
Loss available in basic and diluted calculation
|
$ | 2,892,230 | $ | 1,762,628 | $ | 6,029,368 | ||||||
|
Denominator
|
||||||||||||
|
Weighted
average common shares oustanding-basic
|
9,475,369 | 4,335,162 | 2,355,376 | |||||||||
|
Effect
of dilutive stock options and warrants (1)
|
- | - | - | |||||||||
|
Weighted
average common shares outstanding-diluted
|
9,475,369 | 4,335,162 | 2,355,376 | |||||||||
|
Loss
per common share-basic and diluted
|
$ | 0.31 | $ | 0.41 | $ | 2.56 | ||||||
(1) The
number of options and warrants outstanding as of December 31, 2009 and December
31, 2008 are 8,868,987 and 6,475,685 respectively. The effect of the shares that
would be issued upon exercise has been excluded from the calculation of diluted
loss per share because those shares are anti-dilutive.
NOTE
6 – INCOME TAXES
The
provision for income taxes consists of an amount for taxes currently payable and
a provision for tax consequences deferred to future periods. Deferred
income taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
There is
no income tax provision in the accompanying statement of operations due to the
cumulative operating losses that indicate a 100% valuation allowance for the
deferred tax assets and state income taxes is appropriate.
Federal
and state income tax return operating loss carryovers as of December 31, 2009,
were approximately $5,415,000 and will begin to expire between 2017 and
2019.
The
valuation allowance has been recorded due to the uncertainty of realization of
the benefits associated with the net operating losses. Future events and changes
in circumstances could cause this valuation allowance to change. Tax returns
subsequent to 2005 are open for examination.
The
components of deferred income taxes at December, 2009 and December 31, 2008 are
as follows:
|
December 31,
|
December 31 ,
|
|||||||
|
2009
|
2008
|
|||||||
|
Deferred
Tax Asset:
|
||||||||
|
Net
Operating Loss
|
$ | 1,278,000 | $ | 747,000 | ||||
|
Total
Deferred Tax Asset
|
1,278,000 | 747,000 | ||||||
|
Less
Valuation Allowance
|
1,278,000 | 747,000 | ||||||
|
Net
Deferred Income Taxes
|
$ | — | $ | — | ||||
NOTE
7 –NOTES PAYABLE
The
Company has a convertible debenture with Andcor Companies, Inc. (“Andcor”) of
$10,000 with interest at 10.25% that matured in 2007. The debenture is
convertible to the Company’s common stock at the lower of $0.90 per share or the
price per share at which the next equity financing agreement is completed, and
is now re-set to $.35 per share. The convertible debenture has not yet been
paid, and it is currently in default. While Andcor could demand payment on this
note at any time, they have verbally 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.
F-14
NOTE
8 – LONG-TERM DEBT
Long-term
debt is as follows:
|
December 31,
2009
|
December 31,
2008
|
|||||||
|
Notes
payable to seven individuals due April 2008 including 8% fixed interest.
The notes were convertible into 620,095 shares of the Company’s common
stock and automatically converted as of October 19, 2009, the effective
date of the Company’s registration statement.
|
$ | 0 | $ | 170,000 | ||||
|
Note
payable to bank in monthly installments of $1,275/including variable
interest at 2% above the prevailing prime rate (3.25% at December 31,
2008) to August 2011 when the remaining balance is payable. The note is
personally guaranteed by former executives of the Company.
|
24,601 | 38,183 | ||||||
| 82,562 | 73,843 | |||||||
|
Note
payable issued on October 26, 2009 to the parents of one our officers, net
of a $27,435 discount, with interest at 8% to October 26, 2011 and
convertible into 200,000 shares of common stock at $.50 per
share.
|
72,565 | |||||||
|
Notes
payable to four shareholders of the Company that are overdue. The notes
converted into 11,432 shares of stock in the Company at $.35 per share on
October 31, 2009.
|
- | 4,000 | ||||||
|
Total
|
179,728 | 286,026 | ||||||
|
Less
amount due within one year
|
63,620 | 187,620 | ||||||
|
Long-Term
Debt
|
$ | 116,108 | $ | 98,406 | ||||
Cash
payments for interest were $5,175 for the year ended December 31, 2008 and
$1,718 for the year ended December 31, 2009. The convertible debenture of
$10,000 (discussed in Note 7), is delinquent and could be called by the holders,
putting additional strains on our liquidity. The note for $170,000 contained
provisions for 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 30 day period, after
February 27, 2009, until the registration statement is declared effective by the
SEC. The total accrued interest and penalty in the amount of $86,454 was
converted into 315,351 shares of stock and the $170,000 principal balance was
converted into 620,095 shares of common stock as of October 19,
2009. In addition, beginning March 2009 the Company was obligated to
issue additional shares to the investors who purchased units in October 2008
financing equal to 2% of the units sold for each month until the registration is
declared effective. The Company is obligated to issue 710,248 shares as a result
of an effective registration on October 19, 2009.
Principal
payments required during the years 2010 to 2014 are:
|
2010 -
|
$ | 73,620 | ||
|
2011 -
|
$ | 60,981 | ||
|
2012 -
|
$ | 100,000 | ||
|
2013 -
|
$ | 0 | ||
|
2014
|
$ | 0 |
F-15
The
Company leases it principal office under a non-cancelable lease that extends 5
years. In addition to rent the Company also pays real estate taxes,
repairs and maintenance on the leased property. Rent expense was $38,035 and
$13,219 for 2009 and 2008, respectively.
The Company’s
rent obligation for the years 2010 to 2014 is as follows:
|
2010
|
29,000
|
|||
|
2011
|
30,000
|
|||
|
2012
|
30,000
|
|||
|
2013
|
26,000
|
|||
|
2014
|
0
|
The
Company adopted ASC 815-Derivatives and Hedging (“ASC
815”) on January 1, 2009. ASC 815 mandates a two-step process for
evaluating whether an equity-linked financial instrument or embedded feature is
indexed to the entity's own stock. It is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years, which
was our first quarter of 2009. Most of the warrants issued by the Company
contain a strike price adjustment feature, which upon adoption of ASC 815,
changed the classification (from equity to liability) and the related accounting
for warrants with a $479,910 estimated fair value of as of January 1, 2009. An
adjustment was made to remove $486,564 from paid-in capital (the cumulative
values of the warrants on their grant dates), a positive adjustment of $6,654
was made to accumulated deficit, representing the gain on valuation from the
grant date to January 1, 2009, and booked $479,910 as a liability.
The
January 1, 2009 valuation was computed using the Black-Scholes valuation model
based upon a 2.5 year expected term, an expected volatility of 63%, an exercise
price of $.46 per share, a stock price of $.35, a zero dividend rate and a 1.37%
risk free interest rate. Subsequent to January 1, 2009 these warrants were
revalued at the end of each quarter and a gain or loss was recorded based upon
their increase or decrease in value during the quarter. Likewise, new
warrants that were issued during 2009 were valued, using the Black-Scholes
valuation model on their date of grant and an entry was made to reduce paid-in
capital and increase the liability for equity-linked financial instruments.
These warrants were also re-valued at the end of each quarter based upon their
expected life, the stock price, the exercise price, assumed dividend rate,
expected volatility and risk free interest rate.
The
inputs to the Black-Scholes model during 2009 were as follows:
|
Stock
price
|
$.35
to $.50
|
|
|
Exercise
price
|
$.46
to $.65
|
|
|
Expected
life
|
2.00
to 3.00 years
|
|
|
Expected
volatility
|
63%
to 66%
|
|
|
Assumed
dividend rate
|
-%
|
|
|
Risk
free interest rate
|
.895%
to
1.375%
|
The
original valuations, annual gain/(loss) and end of year valuations are shown
below:
|
Initial
|
Annual
|
Value at
|
||||||||||
|
Value
|
Gain (Loss)
|
12/31/2009
|
||||||||||
|
January
1, 2009 Adoption
|
$ | 479,910 | $ | (390,368 | ) | $ | 870,278 | |||||
|
Warrants
issued in quarter ended 6/30/09
|
169,854 | 20,847 | 149,007 | |||||||||
|
Warrants
issued in quarter ended 9/30/09
|
39,743 | (738 | ) | 40,481 | ||||||||
|
Warrants
issued in quarter ended 12/31/09
|
12,698 | 617 | 12,081 | |||||||||
|
Total
|
$ | 702,205 | $ | (369,642 | ) | $ | 1,071,847 | |||||
NOTE
11 - RELATED PARTY
The
Company entered into agreements, in 2008, with our Chairman of the Board
Lawrence Gadbaw, and in 2009 with board member, Peter Morawetz, to pay Mr.
Gadbaw $25,000 and Mr. Morawetz $30,000 upon the Company raising $3 million in
new equity. Mr. Gadbaw will also be paid the balance, if any, due under his
separation agreement from 2008. This amount was $46,000 upon signing the
agreement in 2008, is payable at $2,000 per month, and $16,000 remains in
accounts payable as of December 31, 2009. Mr. Morawetz will also receive a stock
option for 75,000 shares at $.35 per share and Mr. Gadbaw will receive a stock
option for 160,000 shares at $.35 per share upon the Company raising $3
million.
F-16
Schedule
II
Valuation
and Qualifying Accounts
(None)
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statement No.
333-155299 of BioDrain Medical, Inc. (the Company) on Form S-1/A of our report,
dated March 31, 2010, which expresses an unqualified opinion and includes an
explanatory paragraph relating to the Company’s ability to continue as a going
concern, appearing in this Annual Report on Form 10-K of BioDrain Medical, Inc.
for the year ended December 31, 2009.
Olsen
Thielen & Co., Ltd.
St. Paul,
Minnesota
March 31,
2010
Exhibit
31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT
TO SECTION 302 OF
THE
SARBANES-OXLEY ACT OF 2002
I, Kevin
R. Davidson, certify that:
1. I
have reviewed this Annual Report on Form 10-K for the year ending December 31,
2009 of BioDrain Medical, Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. Acting
as both the Principal Executive Officer and the Principal Financial Officer, I
am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant. This quarterly report does not include a report of
management’s assessment regarding internal control over financial reporting or
an attestation report of the Company’s registered public accounting firm due to
a transition period established by rules of the Securities and Exchange
Commission for newly public companies. I have;
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under my supervision, to ensure that
material information relating to the small business issuer is made known to me
by others within this entity, particularly during the period in which this
report is being prepared;
(b)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c)
Disclosed in this report any change in the small business issuer’s internal
control over financial reporting that occurred during the small business
issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer’s internal
control over financial reporting;
5. I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer’s auditors and the audit
committee of small business issuer’s board of directors (or persons performing
the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer’s ability to record, process,
summarize and report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the small business issuer’s internal control over
financial reporting.
Date:
March 31, 2010
/s/ Kevin
R. Davidson
Kevin R.
Davidson
Chief
Executive Officer
(Principal
Executive Officer and Principal Financial Officer)
Exhibit
32.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906
OF THE
SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report on Form 10-K of BioDrain Medical, Inc. (the
"Company") for the year ended December 31, 2009 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Kevin R. Davidson.,
Chief Executive Officer and Chief Financial Officer, of the Company, certify,
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, that to
my knowledge:
(1) The
Report fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m); and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date:
March 31, 2010
/s/ Kevin
R. Davidson
Kevin R.
Davidson
Chief
Executive Officer and Chief Financial Officer
(Principal
Executive Officer and Principal Financial Officer)