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.

At December 31, 2009, stock options to purchase 1,496,174 shares of our common stock were fully vested and currently exercisable with a weighted average exercise price of $.27 and a weighted average remaining term of 6.7 years. There were warrants to purchase 7,372,813 shares of our common stock that were 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.

 

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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.

 

Based upon an agreement with Investors in the October 2008 financing, we agreed to limit our post-financing ownership percentage and that we would cause our common stock to be reverse split such that 1,920,000 shares of our common stock on a fully-diluted basis would be outstanding among shareholders, existing prior to the new investment (such shareholders also referred to as the “original shareholders” or the “Founders”) and July 2007 bridge loans. Since the total of our fully- diluted shares of common stock was greater than 1,920,000, our board of directors approved a reverse stock split of 1-for-1.2545. After this split was approved, additional options and warrants were identified, requiring a second reverse stock split in order to reach the 1,920,000. The second reverse stock split on the reduced 1-for-1.2545 balance was determined to be 1-for-1.33176963. Taken together, if only one reverse stock were performed, the number would have been a reverse stock split of 1-for-1.670705.

On June 6, 2008, our board of directors approved the first reverse stock split. The authorized number of common stock of 20,000,000 was proportionately divided by 1.2545 to 15,942,607.

 

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On October 20, 2008, our board of directors approved a second reverse stock split. The authorized number of common stock of 15,942,607 was proportionately divided by 1.33177 to arrive at 11,970,994.

 

On October 20, 2008, our board of directors also approved a resolution to increase the number of authorized shares of our common stock from 11,970,994 to 40,000,000, which was approved by the Company’s shareholders at a special meeting of shareholders held on December 3, 2008.

 

The table below reflects the effect of the reverse stock splits on our shares outstanding:

  

Reverse Stock Split Table

 

		Before				Number of Shares Outstanding After				Reverse Split Ratio
As of June 30, 2008:
- original shareholders			1,376,105	(1)			1,096,935				1.2545
- new investors,			3,720,293				3,720,293
other Total			5,096,398				4,817,228
As of September 30, 2008:
- original shareholders			1,096,935				1,096,935
- new investors,			6,997,842				6,997,842
other Total			8,094,237				8,094,237
As of October 20, 2008:
- original shareholders			1,096,935				823,676				1.33177
- new investors,			7,307,165				7,307,165
other Total			8,403,560				8,130,841
As of October 30, 2008 (closing date):
- original shareholders			823,676
- new investors,			7,307,165
other Total			8,130,841

 

(1)

1,376,105 divided by 1.670705 equals 823,676.

 

 

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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 10 - Liability for Equity - Linked Financial Instruments in Notes to Financial Statements in this prospectus) 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 five-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 three-year expected life, a 54% expected volatility, a zero dividend rate and a 2.53% risk free interest rate.

Other Securities For Issuance Upon Certain Contingencies

 

In 2007, Mr. Davidson, Mr. Gadbaw and Mr. Rice each received less in base salary than they were entitled to under their employment agreements due to lack of funds. In December 2007, the Company reduced accrued payroll liabilities by a total of $346,714 and treated it as a contribution to capital. This total included waived compensation from Mr. Davidson in the amount of $90,000, waived compensation from Mr. Rice in the amount of $ 125,000 and waived compensation from Mr. Gadbaw in the amount of $138,500. In addition Mr. Davidson waived $58,350 in underpaid compensation, Mr. Rice waived $40,725 and Mr. Gadbaw waived $30,610 in underpaid compensation from 2008 which was treated as a contribution to capital in 2008. In exchange, per an agreement in June 2008, Mr. Davidson will be granted a one-time cash payment of $23,000 as well as an option to purchase 80,000 shares of common stock at $.35 per share and Mr. Rice will be granted a one-time cash payment of $46,000 as well as an option to purchase 160,000 shares of common stock at $.35 per share when the Company raises an additional $3 million of funding subsequent to the financing completed in October 2008. Mr. Gadbaw will be granted a one-time cash payment of $25,000 and an option to purchase 160,000 shares of common stock at $.35 per share upon the Company raising an additional $3 million and is currently receiving $2,000 per month until a total of $46,000 of accrued salary liability is paid. The balance remaining, if any, of the amount due Mr. Gadbaw will also be paid upon the Company raising an additional $3 million. The Company’s agreement to pay the cash payments and grant the stock options is solely dependent on raising the $3 million and does not require the participation of the three individuals in the fundraising activity.

 

Waived salaries in the amount of $90,000 for Mr. Davidson, $125,000 for Mr. Rice and $138,500 for Mr. Gadbaw were treated as a capital contribution in 2007 in accordance with Staff Accounting Bulletin (SAB) 79. The years to which the waived salaries originated were $102,700 for 2007 and $244,000 for 2006 and prior years. In addition, the Company recorded a capital contribution in the amount of $129,685 in 2008 representing $58,350, $40,375 and $30,610 in waived 2008 salaries for Mr. Davidson, Mr. Rice and Mr. Gadbaw, respectively.

 

In September 2002, an oral agreement was made with director Peter Morawetz whereby he would provide sales, marketing and general administrative consulting to the Company for a fee of $1,770 per month. The Company’s expectation at the time was that the Company would have received equity financing to fund these payments but the Company did not receive that funding. Pursuant to an oral agreement with Mr. Morawetz, the Company could defer payment of these amounts until such date that they had cash to pay him. The Company accrued these fees through August 2006 when Mr. Morawetz’s consulting services ended. On May 15, 2009 Mr. Morawetz and the Company reached agreement whereby he would waive payment of his consulting fees, in the amount of $84,600, and accept a cash payment of $30,000 and an option to buy 75,000 shares of common stock at $.35 per share upon the Company raising $3 million. Mr. Morawetz has no obligation to participate in raising the funds. The debt forgiveness was treated as a capital contribution, in accordance with SAB 79, because Mr. Morawetz is both a director and a significant shareholder, and the $30,000 obligation and the Black-Scholes value of the option were expensed in the second quarter of 2009.

 

On June 16, 2008, we entered into an employment agreement with Chad Ruwe, Executive Vice President of Operations, pursuant to which we granted an option to purchase 250,000 shares of common stock at an exercise price of $.35 per share with 50,000 shares vested immediately and increments of 50,000 shares vesting upon achievement of certain milestones related to obtaining FDA clearance and achieving commercial sales of our StreamwayTM Fluid Management System. On April 1, 2009 Mr. Ruwe earned 100,000 shares, as a result of FDA application and final clearance, and on June 15, 2009 he earned an additional 50,000 shares based upon achieving our first revenue producing FMS unit.

 

On August 11, 2008, we entered into an employment agreement with David Dauwalter, then Director of Sales and now Director of Product Management, pursuant to which we granted him an option to purchase 50,000 shares of common stock at an exercise price of $.35 per share with 10,000 shares vested immediately and increments of 10,000 shares vesting upon reaching certain performance milestones. On April 1, 2009 Mr. Dauwalter earned 10,000 shares, as a result of FDA application and final clearance, and on June 15, 2009 he earned an additional 10,000 shares based upon achieving our first revenue producing FMS unit.

 

In August and September 2008, we issued a warrant to purchase 75,000 shares of common stock at $.35 per share to each of two human resource consulting firms, Andcor Companies, Inc. and Taylor & Associates, Inc., as payment for their search for candidates to fill the position of Vice President of Sales and Marketing for our Company. Andcor and Taylor will not earn the warrants until the candidate is hired and remains an employee for a period of at least one year. Ms. Kirsten Doerfert was hired as the Company's VP of Sales and Marketing on February 1, 2009 and terminated her employment on January 31, 2010.

 

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On October 20, 2008, we entered into an agreement with Gregory Sachs, a regulatory consultant, pursuant to which the Company agreed to grant a warrant to purchase up to 50,000 shares of our common stock contingent upon reaching certain performance goals from April 1, 2009 to June 30, 2009. Mr. Sachs assisted the Company in obtaining FDA 510(k) clearance. The purpose of the performance goal provision was to help to ensure a timely clearance of the 510(k). Upon reaching FDA clearance by April 1, 2009, Mr. Sachs received a warrant to purchase 50,000 shares of our common stock at $.46 per share.

 

Off-Balance Sheet Arrangements

 

We do not have any off balance sheet transactions.

 

Dividend Policy

 

We follow a policy of retaining earnings, if any, to finance the expansion of our business. We have not paid, and do not expect to declare or pay, cash dividends in the foreseeable future.

 

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Description of Business

 

Overview

 

We are an early-stage medical device company and our mission is to provide medical facilities with an effective, efficient and affordable means to safely dispose of contaminated fluids generated in the operating room and other similar medical locations in a manner that protects hospital workers from exposure and is environmentally friendly. We have obtained patent rights in the United States and Europe to our Streamway TM Fluid Management System (“FMS”) and will distribute our products to medical facilities where bodily and irrigation fluids produced during surgical procedures must be contained, measured, documented and disposed. Our products minimize the exposure potential to the healthcare workers who handle such fluids. Our goal is to create products that dramatically reduce staff exposure without significant changes to established operative procedures, historically a major stumbling block to innovation and product introduction. In addition to simplifying the handling of these fluids, our technologies will provide cost savings to facilities over the aggregate costs incurred today using the traditional canister method of collection, neutralization and disposal. Our products will be sold through independent distributors and manufacturers representatives in the United States and Europe, initially, and eventually to other areas of the world.

 

We were founded as a Minnesota corporation in 2002 by Lawrence Gadbaw, who has over 40 years of experience in the medical devices field, Peter L. Morawetz, who has extensive experience consulting with development-stage companies in the medical and high technology field, Jay Nord and Jeffery K. Drogue. Our address is 2060 Centre Pointe Boulevard, Suite 7, Mendota Heights, Minnesota 55120. Our telephone number is (651) 389-4800 and our website address is www.biodrainmedical.com. Our website and the content thereon are not a part of this registration statement.

 

We currently file reports with the SEC and are subject to the information and periodic reporting requirements of the Exchange Act.

 

Private Placement Financing

 

From July 2007 through October 2008, we completed a private placement financing with certain accredited and institutional investors (the “Investors”). We received gross proceeds of approximately $1.6 million from this financing. Pursuant to securities purchase agreements entered into with these Investors, we sold an aggregate total of 4,552,862 units at a price per unit of $0.35, with each unit consisting of one share of our common stock, par value $0.01 per share, and one warrant to purchase one share of our common stock at $0.46 per share. We also issued 547,285 shares valued at $.35 per share and warrants to purchase 136,429 shares at an exercise price of $.46 per share to “Finders” who provided services in connection with the private placement. The warrants issued to Investors and Finders are immediately exercisable (other then a provision that prohibits exercise of warrants if it would cause the holder to hold more than 4.99% of the outstanding shares of our common stock).

 

The issuance of our common stock and warrants in connection with the private placement financing, including, upon exercise, the shares of our common stock underlying the warrants, is intended to be exempt from registration under the Securities Act pursuant to Section 4(2) and such other available exemptions. As such, these issued securities may not be offered or sold in the United States unless they are registered under the Securities Act, or an exemption from the registration requirements of the Securities Act is available.

 

In connection with the private placement financing, we entered into a registration rights agreement (the “Registration Rights Agreement”) with the Investors. Pursuant to this agreement, we were required to register all the common stock and shares underlying the warrants issued that were beneficially owned by the Investors to permit the offer and re-sale from time to time of such securities. Additional information regarding the Registration Rights Agreement is set forth below under the section titled “Description of Securities”.

 

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Industry and Market Analysis

 

Infectious and Biohazardous Waste Management

 

The dangers of exposure to infectious fluid waste are well recognized in the medical community. Federal and state regulatory agencies have issued mandatory guidelines for the control of such materials, in particular bloodborne pathogens. The medical device industry has responded to this need by developing various products and technologies to limit exposure or to alert workers to potential exposure.

 

The presence of infectious materials is most prevalent in the surgical suite and post-operative care units where often, large amounts of bodily fluids, including blood, bodily and irrigation fluids are continuously removed from the patient during the surgical procedure. Surgical teams and post-operative care personnel may be exposed to these potentially serious hazards during the procedure via direct contact of blood materials or more indirectly via splash and spray.

 

According to the Occupational Safety and Health Administration (“OSHA”), workers in many different occupations are at risk of exposure to bloodborne pathogens, including Hepatitis B and C, and HIV/AIDS. First aid team members, housekeeping personnel in some settings, nurses and other healthcare providers are examples of workers who may be at risk of exposure.

 

In 1991, OSHA issued the Bloodborne Pathogens Standard to protect workers from this risk. In 2001, in response to the Needlestick Safety and Prevention Act, OSHA revised the Bloodborne Pathogens Standard. The revised standard clarifies (and emphasizes) the need for employers to select safer needle devices and to involve employees in identifying and choosing these devices. The revised standard also calls for the use of “automated controls” as it pertains to the minimization of healthcare exposure to bloodborne pathogens. Additionally, employers are required to have an exposure control plan that includes universal precautions to be observed to prevent contact with blood or other potentially infectious materials, such as implementing work practice controls, requiring personal protective equipment and regulating waste and waste containment. The exposure control plan is required to be reviewed and updated annually to reflect new or modified tasks and procedures which affect occupational exposure and to reflect changes in technology that eliminate or reduce exposure to bloodborne pathogens.

 

According to the American Hospital Association’s (AHA) Beyond Health Care January 2009 update, America’s hospitals annually perform 27 million surgeries. In a January 2009 report, The National Center for Health Statistics (NCHS) of the Center for Disease Control (CDC) cites that nearly 43% of the 35 million ambulatory surgeries, or a total of 15 million surgeries, are performed in freestanding ambulatory surgery centers each year. Therefore, the total US surgeries are estimated at approximately 42 million per year.

 

The majority of these procedures produce potentially infectious materials that must be disposed of with the lowest possible risk of cross-contamination to healthcare workers. Current standards of care allow for these fluids to be retained in canisters, which are located in the operating room where they can be monitored throughout the surgical procedure. Once the procedure is complete these canisters and their contents are disposed of using a variety of methods all of which include manual handling and result in a heightened risk to healthcare workers for exposure to their contents. A Frost & Sullivan research report released in 2003 estimates that the U.S. market for suction canisters is $94 million and, driven by the aging population, is expected to grow at .4% per year.

 

In an Infection Control Today article, Stanley Shelver reported that disposal costs consisted of an average cost of $2.00 per canister, $2.00 per container of solidification powder and an average disposal cost of $0.40/lb of infectious waste at approximately 8 lbs per canister. Therefore, the estimated disposal cost to the hospitals who use solidifiers is $7.20 per canister. This number increases significantly for disposal of high capacity containers.

 

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According to an October 2005 article from Healthcare Purchasing entitled “Safe and Cost-Effective Disposal of Infectious Fluid Waste,” infectious fluid waste accounts for more than 75% of U.S. hospitals biohazard disposal costs. The article also includes findings from a bulletin published by the University of Minnesota’s Technical Assistance Program, “A vacuum system that uses reusable canisters or empties directly into the sanitary sewer can help a facility cut its infectious waste volume, and save money on labor, disposal and canister purchase costs.” The Minnesota’s Technical Assistance Program bulletin also estimated that, in a typical hospital, “...$75,000 would be saved annually in suction canister purchase, management and disposal cost if a canister-free vacuum system was installed.”

 

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 most recent American Institute of Architects Consensus Construction Forecast, healthcare is expected to be one of the strongest performers in 2009 with projected growth of 3.6 percent.

 

There are an estimated 40,000 operating rooms in the U.S. The hospital market has typically been independent of the U.S. economy, therefore, we believe that our targeted market is not cyclical, and the demand for our products will not be dependent on the state of the economy. We benefit by having our products address the surgical procedure market of nearly 42 million procedures performed in the country’s 40,000 operating rooms.

 

Current Techniques of Collecting Infectious Fluids

 

Typically, during the course of a surgical procedure, fluids are continuously removed from the 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 can be done by manually transporting the fluids from the operating room to a waste station and directly pouring the material into a sink that drains to the sanitary sewer where it is subsequently treated by the local waste management facility, a process that exposes the healthcare worker to the most risk for direct contact or splash exposure. Once emptied these canisters are placed in large, red pigmented, trash bags and disposed of as infectious waste - a process commonly referred to as “red-bagging.”

 

Alternatively, the canisters may be opened in the operating room and a gel-forming chemical powder is poured into the canister, rendering the material gelatinous. These gelled canisters are then red-bagged in their entirety and removed to a biohazardous/infectious holding area for disposal. In larger facilities the canisters, whether pre-treated with gel or not, are often removed to large carts and transported to a separate special handling area where they are processed and prepared for disposal. Material that has been red-bagged is disposed of separately, and more expensively, from other medical and non-medical waste by companies specializing in that method of disposal.

 

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Although all of these protection and disposal techniques are helpful, they represent a partial solution to the problem and fall short of providing adequate protection for the surgical team and other workers exposed to infectious waste. A major spill of fluid from a canister, whether by direct contact as a result of leakage or breakage, splash associated with the opening of the canister lid to add gel, while pouring liquid contents into a hopper, or during the disposal process, is cause for concern of acute exposure to human blood components–one of the most serious risks any worker faces in the performance of their job. Once a spill occurs, the entire area must be cleaned and disinfected and the exposed worker faces a potential of infection from bloodborne pathogens. These pathogens include, but are not limited to, HIV, HPV, and other infectious agents. Given the current legal liability environment, the hospital, unable to identify at-risk patients due to concerns over patient rights and confidentiality, must treat every exposure incident as a potentially infectious incident and treat the exposed employee according to a specific protocol that is both costly to the facility and stressful to the affected employee and their co-workers. In cases of possible exposure to communicable disease the employee could be placed on paid administrative leave, frequently involving worker’s compensation, and additional workers must be assigned to cover the affected employee’s responsibilities. The facility bears the cost of both the loss of the affected worker and the replacement healthcare worker in addition to any ongoing heath screening and testing of the affected worker to confirm if any disease has been contracted from the exposure incident. Employee morale issues also weigh heavily on staff and administration when a healthcare worker suffers a potentially serious exposure to bloodborne pathogens.

 

Canisters are the most prevalent means of collecting and disposing of infectious fluids in hospitals today. 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 they have recently begun advertising. Most of our competiting 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 in terms of brand recognition and market exposure. In addition, the aforementioned companies have extensive marketing and development budgets that could overpower an early-stage company like ours. Information obtained by the Company from surgical clinicians during interviews indicates that Stryker Instruments has the dominant market share position. Further, we believe, Cardinal Health, Inc., though having FDA concurrence, has not yet made significant sales into the market place. These clinicians have also indicated that the competitive devices are used in select procedures and often in some, but not all, surgical rooms.

 

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Products

 

The Fluid Management System (“FMS”)

 

The BioDrain 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 would 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, that is provided under an exclusive licensing agreement with Oculus Innovative Sciences, for surgical fluid management applications, is attached to the FMS and an automatic cleaning cycle ensues, making the FMS ready for the next procedure. The cleaning fluid bottle is attached to the port on the FMS device. The cleaning fluid bottle and its contents are not contaminated and are used to clean the internal fluid pathway in the FMS device to which personnel have no exposure. During the cleaning cycle, the cleaning fluid is pulled from the bottle into the FMS, and then disposed in the same manner as the waste fluid from the surgical case. At the end of the cleaning cycle, the bottle is discarded. Any suction tubing used during the procedure must be disposed of in the same manner as suction tubing used with the canister system. Handling of this tubing does present the potential for personnel exposure, but that potential in minimal.

 

In the facilities that still use manual processes, our product may provide substantial cost savings and improvements in safety. In cases where healthcare organizations re-use canisters, the FMS cleaning process eliminates the need for cleaning of canisters for re-use. The FMS 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.

 

In contrast to competitive products, the wall-mounted FMS does not take up operating room floor space and it does not require the use of 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., to our knowledge the BioDrain FMS will be the only 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 (a) portable, meaning that they are rolled to the bedside for the surgical case and then rolled to a cleaning, (b) post-operative, and (c) use canisters, which still require processing or require a secondary device (such as a docking station) used to dispose of the fluid in the sanitary sewer after it has been collected. These products are essentially powered canisters. A comparison of the key features of the devices currently marketed and the FMS is presented in the table below.

 

Key Feature Comparison

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Feature

BioDrain Medical

Stryker

Cardinal Health

DeRoyal

Dornoch

MD Technologies

Portable to Bedside vs. Fixed Installation

Fixed

Portable

Portable

Fixed

Portable

Fixed

Uses Canisters

No

Yes

Yes

Yes

Yes

No

Secondary Installed Device Required for Fluid Disposal

No

Yes

Yes

Yes

Yes

No

Numeric Fluid Volume Measurement

Yes

Yes

No

No

Yes

Optional

Unlimited Fluid Capacity

Yes

No

No

No

No

Yes

Installation Requirements

-    Water

No

Yes

Yes

Yes

Yes

No

-    Sewer

Yes

Yes

Yes

Yes

Yes

Yes

-    Vacuum

Yes

No

No

No

No

Yes

 

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The FMS system may be installed in or on 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 on 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 conclusions made on information gathered from third parties at an estimated average of six hours but will vary depending on the actual drain and suction systems already resident in the hospital.

 

By contrast, 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 purchase less than one mobile unit for each operating room. With the FMS, a unit must be purchased and 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 will be provided as part of our disposable cleaning kit, allows for expansion to up to three inflow suction ports.

 

Although the BioDrain FMS is directly connected to the sanitary sewer, helping to reduce potential exposure to infectious fluids, it is possible that installation of the system will cause inconvenience and lost productivity as the operating rooms will need to be temporarily shut down. In addition, remodel work may be necessary in preparation for, or as a result of, an installation. In some cases, the costs to rework plumbing lines to accommodate for the system may outweigh the expected savings and/or lengthen the expected return on investment time.

 

One of the competing systems 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 of these people to infectious waste fluids generated by the operating room procedure. Handling infectious waste in this manner is also more costly.

 

Using the BioDrain FMS during a procedure, potentially infectious fluid suctioned from the patient is drawn through standard surgical tubing into the FMS. There, the fluid is separated from the air stream and deposited into a large fluid reservoir where it is retained until a measurement cycle is initiated. Once a certain fluid level is reached in the chamber, a solenoid switch is opened and the fluid is pumped from the fluid reservoir using a pump. The action of the pump removes the fluid and measures the quantity of the fluid as it is removed. This volume measurement is then continuously transmitted to a computer display, which allows the surgical team to immediately assess the total amount of fluid removed from the patient to that point in the procedure. The fluid removed from the fluid reservoir is passed through the pump and transported directly to the hospital sanitary sewer.

 

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The FMS has completed four prototype iterations. The product has undergone significant testing, including being utilized in veterinary cases and limited human surgical cases. We have finalized the production specifications for the 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 received written confirmation from the FDA on April 1, 2009 that our FMS products have received final 510(k) clearance. This clearance allows us to commence our sales and marketing efforts and to get the Company ready for significant production capability.

 

A summary of the features of the wall unit include:

 

·

Minimal Human Interaction. The wall-mounted FMS provides for a small internal reservoir that keeps surgical waste isolated from medical personnel and disposes the medical waste directly into the hospital sanitary sewer with minimal medical personnel interaction. This minimal interaction is facilitated by the automated electronic controls and computerized LCD touch-screen allowing for simple and safe single touch operation of the FMS.

 

·

Minimizes Exposure. The FMS minimizes surgical team and cleaning crew exposure to bloodborne pathogens, as the system is hands-free and fully automated with electronic controls with regards to handling any waste fluid. The FMS provides advanced fluid management technology in that it eliminates the use of canisters, traditional or powered, for fluid collection, is directly connected to the hospital sanitary sewer, provides continuous flow of waste fluids from the operative field, allows visualization of those fluids prior to disposal and provides measurement of disposed fluids. It does not require any transport to and from the operating room or any secondary procedure such as attachment to a companion device for disposal of the waste fluids.

·

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 a disposable external manifold required for each surgical procedure. The cleaning solution bottle is attached to the FMS with a cleaning fluid adapter which is designed to mate with the special connector on the FMS. One manifold will be supplied with each bottle of cleaning fluid, attached to the bottle for user convenience in securing all consumables needed for each use of the FMS. The disposable cleaning fluid bottle collapses at the end of the cleaning cycle rendering it unusable, therefore, it cannot be refilled with any other solution. The instructions for use clearly state that the FMS cleaning fluid, and only the FMS cleaning fluid, must be used with the FMS following each surgical case. The cleaning fluid should be a substantial revenue generator for the life of the FMS.

·

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. BioDrain will arrange installation of the FMS 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-hung units allowing for quick start-up post installation.

 

·

Sales Channel Partners. The FMS will be sold to end-users through a combination of independent stocking distributors, manufacturers’ representatives and, possibly later, direct sales personnel. All personnel involved in direct contact with the end-user will have extensive training and will be approved by BioDrain. Exclusive agreements will be in place between BioDrain and the sales channel partners outlining stocking expectations, sales objectives, target accounts, and the like. Contractual agreements with the sales channel partners will be reviewed on an annual basis and could possibly be terminated at any time by BioDrain based on certain specified conditions.

 

·

Competitive Pricing. Estimated end-user pricing is expected to be in the range of $12,000 - $15,000 list per system (one per operating room - installation extra) and $15 - $20 per unit retail for the proprietary cleaning kit to the U.S. hospital market. The distributor or channel partner then sets the final retail price based on quantity discounts for multiple installations.

 

Patents and Intellectual Properties

 

We were granted a European patent on April 4, 2007 (Patent No. EP1539580) and a U.S. patent on December 30, 2008 (U.S. Patent No. 7,469,727) (collectively, the “Patents”). We also have a divisional application pending before the U.S. Patent Office. A feature claimed in the Patents is the ability to continue suctioning waste fluids into a collection chamber, to measure the fluid collected, and to pump that collected fluid from the collection chamber all while negative pressure is being maintained. This provides for continuous operation of the FMS unit in suctioning waste fluids, which means that the unit never has to be shut off or paused during a surgical operation, for example, to empty a fluid collection container or otherwise dispose of the collected fluid. We believe that this continuous operation feature provides us with a significant competitive advantage, particularly on large fluid generating procedures. With the exception of one model from MD Technologies, all competing products have a limited fluid collection capacity necessitating that the device be emptied when capacity is reached during the surgical procedure.

 

We also have an exclusive licensing agreement for surgical room fluid management applications with Oculus Innovative Sciences (Petaluma, CA) for the supply of a cleaning fluid manufactured according to a proprietary recipe exclusive to BioDrain Medical. The proprietary fluid for BioDrain Medical is derived from a fluid on which Oculus has 10 patents issued and over 80 patents pending.

 

In June 2008, we executed an agreement with Marshall C. Ryan, the named inventor of the Patents, to secure exclusive ownership of the Patents. In exchange for the transfer of his ownership interests in the Patents, we paid Mr. Ryan a combination of cash and warrants, agreed to pay him 4% royalty on FMS sales for the life of the Patents and agreed to make additional payments if there is a change in control of the Company (defined in the agreement as either 50% or more of the Company’s outstanding stock or substantially all of its assets being transferred to one independent person or entity). At the signing of the agreement, we paid Mr. Ryan $75,000 and agreed to pay a corporation wholly-owned by Mr. Ryan, Mid-State Stainless, Inc., an additional $100,000 payment on June 30, 2009 for past research and development activities. We also granted Mr. Ryan 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.

 

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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 allow the collected liquid to flow by gravity into the collection chamber below. When the liquid flowing into the collection chamber reached a high level sensor, the valve would close. A second valve would then open allowing the known volume within the collection chamber to flow by gravity into a drain. Each time the collection chamber was emptied, the known volume of the collection chamber was added to the total collected volume.

 

We engaged the services of Marshall C. Ryan to further develop the medical waste fluid collection system for commercialization. Mr. Ryan conceived of an alternative embodiment for the medical waste fluid collection system (the “Ryan Embodiment”). In the Ryan Embodiment, a pump was utilized to measure and discharge the collected fluid while negative pressure was maintained in the separation and collection chambers. An international (PCT) application was timely filed disclosing both the Nord/Drogue Embodiment and the Ryan Embodiment. National stage applications were subsequently timely filed in the U.S., Europe and Canada based on the PCT application. During prosecution of the U.S. and European national stage applications, the claims directed to the Nord/Drogue Embodiment were rejected as being an un-patentable form of prior art. Accordingly, the claims directed to the Nord/Drogue Embodiment were canceled and the remaining claims were amended to specifically claim only the Ryan Embodiment. It was learned during prosecution of the U.S. and European applications that Mr. Ryan was inadvertently omitted as a named inventor. Appropriate documents were then filed with the European and U.S. patent offices to add Mr. Ryan as a named inventor. Additionally, pursuant to U.S. patent law, because the claims directed to the Nord/Drogue Embodiment were canceled, leaving only the Ryan Embodiment claimed, appropriate documents were filed to remove Nord and Drogue as named inventors. The U.S. patent and the European patent were allowed after the claims were amended to relate solely to the Ryan Embodiment. The Canadian patent office has not yet examined the Canadian national stage application (which will be amended consistent with the U.S. and European patents to claim only the Ryan Embodiment).

 

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, in March 2009 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 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.

 

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The Company’s patented system includes a cleaning kit that contains a pre-measured amount of a cleaning solution for cleaning the suction unit before each use. We signed, in March 2009, an exclusive distribution agreement with Oculus Innovative Science, the manufacturer of the fluid we will use in the cleaning kit to be utilized with our FMS. Our exclusive licensing agreement applies to all surgical fluid management applications.

 

From time to time, we may encounter disputes over rights and obligations concerning intellectual property. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business, our reputation, or our ability to compete. Also, protecting our intellectual property rights could be costly and time consuming.

 

The Disposable Cleaning Kit

 

The disposable cleaning kit is an integral, critical component of the FMS and our total value proposition to the customer. It consists of a proprietary, pre- measured amount of cleaning solution in a plastic pouch, bottle or similar container with a connection mechanism to attach to the FMS. The disposal cleaning kit also includes an external manifold allowing for up to three suction ports. The proprietary cleaning solution placed in the specially designed holder is attached, and due to the nature of the fluids and particles removed during surgical procedures, the FMS is recommended to be cleaned following each use. Utilizing the available vacuum of the wall system, the proprietary cleaning fluid is drawn into the FMS to provide a highly effective cleaning process that breaks up bio-film at the cellular level. Proper cleaning is required for steady, dependable and repeated FMS performance and for maintenance of the warranty of the FMS.

 

The BioDrain proprietary cleaning fluid is a critical component of our business model. The cleaning fluid has the “razor blade business model” characteristic with an ongoing stream of revenue for every FMS unit installed, and revenues from the sale of fluids are expected to be significantly higher over time than the revenues from the unit. We will have exclusive distribution rights to the fluid and facilitate the use of our fluid for cleaning following procedures by incorporating a special adapter to connect the fluid to the special 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 fits 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 accompany the product will clearly state how the fluid is to be hooked up to the FMS machine. Further, a diagram on the FMS will also assist the user in attaching the fluid bottle to the machine. This will be a very simple task, and we do not anticipate that any training of operating room staff will be necessary.

 

All installations of our FMS product will be completed by a service and maintenance organization that is familiar with completing such installations in health care settings. We have had conversations with more than one of this type of company and we are now in the process of selecting the best company(s) to partner with regarding this function. The general availability of these types of service and maintenance personnel in the healthcare sector should not hinder us from forming a beneficial relationship in this area.

 

Corporate Strategy

 

BioDrain intends to become successful by deploying a strategy of focused expansion within its core product and market segments, while utilizing a progressive approach to manufacturing and marketing to ensure maximum flexibility and profitability.

 

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Our strategy will be to:

 

·

Develop a complete line of wall-installed fluid evacuation systems (“FMS”) for use in hospitals and free standing surgery centers as well as clinics and physicians’ offices. Initially, we have developed the FMS to work in hospital operating rooms and surgical centers. This device was developed for use with the wall vacuum suction currently installed in hospitals. Opportunities for future products include an FMS developed for post-operation and recovery rooms with multiple inlet ports and multiple volume measurements.

 

·

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 few 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..

 

·

Utilize experienced independent distributors and manufacturers’ representatives of medical products to achieve the desired market penetration. Contacts have been established with several existing medical products distributors and manufacturers’ representatives and interest has been generated regarding the sales of the BioDrain FMS and cleaning kits. In addition to their normal sales practices, the distributors will carry a significant inventory of cleaning kits for their current customers and could purchase an FMS for demonstration to new potential customers.

 

·

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.

 

·

Utilize a Medical Advisory Board to assist in market penetration. We have a Medical Advisory Board consisting of a respected 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.

 

Other strategies may include:

 

·

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.

 

·

Providing a leasing program and/or “pay per use” program as purchasing alternatives.

 

·

Providing service contracts to establish an additional revenue stream.

 

·

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 over time.

 

·

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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Technology and Competition

 

Fluid Management for Surgical Procedures

 

The management of infectious fluids produced during and after surgery is a complex mix of materials and labor that consists of primary collection of fluid from the patient, transportation of the waste fluid within the hospital to a disposal or processing site and finally to the disposal of that waste either via incineration or in segregated landfills.

 

Once the surgical procedure has ended, the canisters and their contents must be removed from the operating room and disposed. There are several methods used for disposal, all of which present certain risks to the operating room team, the crews who clean the rooms following the procedure, and the other personnel involved in their final disposal. These methods include:

 

·

Direct Disposal Through the Sanitary Sewer. In virtually all municipalities, the disposal of liquid blood may be done directly to the sanitary sewer where it is treated by the local waste management facility. This practice is approved and recommended by the EPA. In most cases, these municipalities specifically request that disposed bio-materials not be treated with any known anti-bacterial agents such as glutalderhyde, as these agents not only neutralize potentially infectious agents but also work to defeat the bacterial agents employed by the waste treatment facilities themselves. Disposal through this method is fraught with potential exposure to the service workers, putting them at risk for direct contact with these potentially infectious agents through spillage of the contents or via splash when the liquid is poured into a hopper - a specially designated sink for the disposal of infectious fluids. Once the infectious fluids are disposed of into the hopper, the empty canister is sent to central processing for re-sterilization (glass and certain plastics) or for disposal in the biohazardous/infectious waste generated by the hospital (red-bagged).

 

·

Conversion to Gel for Red-Bag Disposal. In many hospital systems, the handling of liquid bodily 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:

 

o

It does not ensure protection for healthcare workers, as there remains the potential for splash when the top of the canister is opened.

 

o

Based on industry pricing data, the total cost per canister increases by approximately $2.00.

 

o

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.

 

o

The canister filled with gelled fluid must be disposed; it cannot be cleaned and re-sterilized for future use.

 

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.

 

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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 and 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 they have begun 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, 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 our product in terms of brand recognition and market exposure. In addition, the aforementioned companies have extensive marketing and development budgets that could overpower an early-stage company like ours. Information the Company obtained from surgical clinicians during interviews indicate that Stryker Instruments has the dominant market share position. Cardinal Health, Inc., though having FDA concurrence, is only now beginning to advertise their product. The clinicians we interviewed also indicated that the competitive devices are used in select procedures and often in some, but not all, surgical rooms.

 

Current Competition, Technology, and Costs

 

 Single Use Canisters

 

In the U.S., glass reusable containers are infrequently used as their high initial cost, frequent breakage and costs of reprocessing are typically more costly than single use high impact plastic canisters, even when disposal is factored in. Each single use canister costs roughly $2.00 each and it is estimated that a range of two to eight canisters are used in each procedure, depending on the operation.

 

Our FMS would replace the use of canisters and render them unnecessary, as storage and disposal would be performed automatically by the FMS. It should be noted that these canisters are manufactured by companies with substantially more resources that BioDrain. Cardinal Health, a very significant competitor, manufacturers both single use canisters as well as a more automated fluid handling system that will compete with us. Accordingly, faced with this significant competition, we may have difficulty penetrating this market.

 

Solidifying Gel Powder

 

The market potential for solidifying gel was estimated at over $100 million in 2002. This market is not yet fully realized, but many hospitals, responding to increased concerns over inadvertent worker exposure to liquid waste, are converting to this technology. There have been many reports (Allina and Fairview to name two Minneapolis-based health systems) of nursing contracts containing language that requires the facilities to use gels after every procedure. 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 red-bag procedure is followed when using these products. One drawback of the solidifying gels is that they increase the weight of the materials being sent to the landfill by a factor of five to seven times, resulting in a significant cost increase to the hospitals that elect to use the products.

BioDrain’s Streamway™ FMS would eliminate the need for solidifying gel, providing savings in both gel powder usage and associated landfill costs.

 

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Sterilization and Landfill Disposal

 

Current disposal methods include the removal of the contaminated canisters (with or without the solidifying gel) to designated biohazardous/infectious waste  sites. Previously many hospitals used incineration as the primary means of disposal, but environmental concerns at the international, domestic and local level, have resulted in a systematic decrease in incineration worldwide as a viable method for disposing of blood, organs or materials saturated with bodily fluids. When landfill disposal is used, canisters are included in the general red-bag disposal and, when gel is used, comprise a significant weight factor. Where hopper disposal is still in use, most of the contents of the red-bag consist only of outer packaging of supplies used in surgery and small amounts of absorbent materials impregnated with blood and other waste fluid. These, incidentally, are retained and measured at the end of the procedure to provide a more accurate assessment of fluid loss or retention. Once at the landfill site, the red-bagged material is often steam-sterilized with the remaining waste being ground up and interred into a specially segregated waste dumpsite.

 

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 occupied by otherwise homeless or poverty level people, who scavenge the sites for food and clothing, and often come into contact with blood soaked medical waste. Disposal of fluid down the sanitary sewer and elimination of large numbers of canisters from the volume of red-bag material, while not addressing all of the concerns regarding landfills, would certainly reduce the amount of disposed and blood impregnated waste.

By eliminating large numbers of canisters and the gel powder, our FMS products would reduce costs and the amount of canisters sent to landfills dramatically.

Handling Costs

 

Once the surgical team has finished with the procedures and a blood loss estimate is calculated, the liquid waste (with or without solidifying gels) is removed from the operating room, and either disposed of down the sanitary sewer or transported to an infectious waste area of the hospital for later removal.

Our FMS would significantly reduce the labor costs associated with the disposal of fluid or handling of contaminated canisters, as the liquid waste is automatically emptied into the sanitary sewer after measurements are obtained. We will utilize the same suction tubing currently being used in the operating room, so no additional cost is incurred with our process. While each hospital handles fluid disposal differently, we believe that the cost of our cleaning fluid after each procedure will be less than the current procedural cost that could include the cost of canisters, labor to transport the canisters, solidifying powder, gloves, gowns, mops, goggles, shipping and transportation, as well as costs associated with any spills that may occur due to manual handling.

 

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Nursing Labor

 

Often overlooked as a direct cost, nursing personnel spend significant time in the operating room readying canisters for use, calculating blood loss and removing or supervising the removal of the contaminated canisters after each procedure. Various estimates have been made, but an internal study at a large healthcare facility in Minneapolis, Minnesota, revealed that the average nursing team spends twenty minutes pre-operatively and intra-operatively setting up, monitoring fluid levels and changing canisters as needed and twenty minutes post-operatively readying blood loss estimates or disposing of canisters. Estimates for the other new technologies reviewed have noted few cost savings to nursing labor.

 

Our FMS products would save nursing time as compared to the manual process of collecting and disposing of surgical waste. Set-up is as easy as attaching the suction tube to the inflow port of the FMS. Post-operative clean-up requires approximately five minutes, the time required to dispose of the suction tubing to the red-bag, calculate the patient’s blood loss, attach the bottle of cleaning solution to the inlet port of the unit, initiate the cleaning cycle, and dispose of the emptied cleaning solution. The steps that our product avoids, which are typically involved with the manual disposal process include, canister setup, interpretation of an analog read out for calculating fluid, canister management during the case (i.e. swapping out full canisters) and then temporarily storing, transferring, dumping and properly disposing of the canisters.

 

Competitive Products

 

Disposable canister system technology for fluid management within the operating room has gone virtually unchanged for decades. As concern for the risk of exposure of healthcare workers to bloodborne pathogens, and the costs associated with canister systems has increased, market attention has increasingly turned toward fluid management. The first quarter of 2009 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 $15.00 (including single-use-manifold plus cleaning solution).

 

We differentiate from these competitors since we have the most automatic, hands-free process of any of the systems currently on the market. Each of our competitors, with the exception of MD Technologies, Inc., has some significant manual handling involved in the process. It may require the need to transport the mobile unit to a docking port and then empty the fluid or it may be that the canister is still manually transported to a more efficient dumping station. Regardless, most of our competitors require more human interaction with the fluid than BioDrain. Please refer to the chart on page 35 for a comparison of the key features of the devices currently marketed versus 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 much be purchased and installed in each room where it is intended to be used.

 

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Marketing and Sales

 

Distribution

 

Our FMS products will be sold through independent distributors and manufacturers’ representatives covering the vast majority of major U.S. markets. The targeted customer base will include nursing administration, operating room managers, CFOs, risk management, and infection control. Other professionals with an interest in the product include physicians, nursing, biomedical engineering, anesthetists, anesthesiologists, human resources, legal, administration, and housekeeping.

 

The major focus of our marketing effort will be to introduce our product as a standalone device capable of effectively removing infectious waste and disposing of it automatically, while providing accurate measurement of fluids removed and also limiting exposure of the surgical team and healthcare support staff.

 

Governmental and professional organizations have become increasingly aggressive in attempting to minimize the risk of exposure by medical personnel to bloodborne pathogens. It is believed that our technology provides a convenient and cost-effective way to collect and dispose of this highly contaminated material.

 

Our distributors will either have installation and service expertise, or we will contract those functions to an independent service/maintenance company. We have been in contact with both distributors and service companies regarding these installation requirements. The Company will establish extensive training and standards for the service and installation of the FMS to ensure consistency and dependability in the field. Users of the system will require a minimal amount of training to operate the FMS. The instructions for use and the installation guide will be included with every system along with a quick start guide and a trouble shooting manual.

 

We will structure our pricing and relationships with distributors and/or service companies to ensure that these entities receive at least a typical industry-level compensation for their activities. The cost and price estimates currently in place with the Company conservatively allow for reasonable profit margins for all entities in the FMS and the cleaning fluid supply chain. Although the customer may arrange their own installation of the FMS unit, we have contracted with Belimed to be our preferred installation company and we are in the early stages of training their personnel.

 

Promotion

 

The dangers of exposure to infectious fluid waste are well recognized in the medical community. It is our 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 web site. Our management team believes its greatest challenge lies in reaching and educating the 1.6 million medical personnel who are exposed daily to fluid waste in the operating room or in other healthcare settings (OSHA, CPL 2-2.44C). These efforts will require utilizing single page selling literature, video educational pieces for technical education, liberal use of scientific journal articles and a web page featuring product information, educational materials, and training sites.

We will support our sales organization by attending major scientific meetings where large numbers of potential users are in attendance. The theme of our trade show booth will focus on education, the awareness of the hazards of infectious waste fluids and the Company’s innovative solution to the problem. We will focus our initial efforts on the Association of Operating Room Nurses (“AORN”) trade show, 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. Our initial efforts will focus on features of the product and ways of contacting the Company via the web page or directly through postage paid cards or direct contact. Additionally, we will create a press release mailing to clinician-oriented periodicals for inclusion in their “New Product News” columns. The press release, if published, will provide the reader with an overview of the product and will direct readers to pursue more information by direct contact with us by accessing our web page.

 

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Pricing

 

Prices for the FMS and its disposable cleaning kit will reflect a cost savings to the hospital compared to its current procedure costs over time. This pricing strategy should ensure that the customer will realize actual cost savings when using the FMS and 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 comparison, an operation using traditional disposal methods will often produce multiple canisters destined for biohazard processing. Biohazard disposal costs are estimated by Outpatient Surgery Magazine to be five times more per pound to dispose of than regular waste (Outpatient Surgery Magazine, April 2007, p.44). Once the canister has touched blood, it is considered “red bag” biohazard waste, whereas the cleaning fluid bottle used in our system can be recycled with the rest of the facility’s plastics or, less desirably, they can be thrown in the regular trash.

 

The FMS will list for approximately $18,000 per system (one per operating room - installation extra) and $15.00 - $20.00 per unit retail for the proprietary cleaning kit to the U.S. hospital market. By comparison, the disposal system of Stryker Instruments, one of our competitors, retails for $10,000 plus a $9,000 docking station and requires a disposable component with an approximate cost of $15.00 and a proprietary cleaning fluid (cost unknown per procedure). Per procedure cost of the traditional disposal process includes approximate costs of $2.00 per liter canister, plus solidifier at $2.00 per liter canister, plus the biohazard premium disposal cost approximated at $1.80 per liter canister. In addition, the labor, gloves, gowns, goggles, and other related material handling costs are also included in the current disposal expenses.

 

Installation of the FMS will be completed by our 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 utilized, while, larger institutions typically 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. We currently estimate that the disposable cleaning kit will be priced at $15.00 - $20.00, and a commission will be paid to the distributor or independent representative upon each sale.

 

Engineering and Manufacturing

 

We are currently in negotiations to finalize our relationship with TriVirix, Inc. for the engineering and manufacturing of our product, FMS, cleaning fluid packaging, external manifold or any other accessories. TriVirix, Inc. is ISO 13485:2003 and GMP-certified and has the necessary expertise and experience to build our product in a cost-effective manner. We are in negotiations and have not yet executed a Manufacturing Supply Agreement with TriVirix.

Upon execution, we believe that the Manufacturing Supply Agreement will specify the quantities for production of our product, which we anticipate will be based on a six-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, Inc. would be considered a primary supplier of the FMS device. Our management, as part of a broader manufacturing sourcing strategy, plans to identify second sources of production for the FMS device.

 

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We have entered into an exclusive licensing agreement for surgical room fluid management applications with Oculus Innovative Sciences (Petaluma, CA) for the supply of a cleaning fluid manufactured according to a proprietary recipe exclusive to BioDrain Medical. The proprietary fluid for BioDrain Medical is derived from a fluid on which Oculus has 10 patents issued and over 80 patents pending. The agreement has an initial term of five years and contains minimum quantity purchase requirements to maintain preferential pricing but does not contain an absolute obligation to purchase the minimum quantities.

 

The disposable cleaning kit consists of a proprietary cleaning solution, a cleaning solution package (high density polyethylene bottle), a cleaning solution adapter assembly (barbed bottle cap, attached surgical tubing, and attached valved quick coupling), and a multi-port external, non-sterile manifold. Oculus has multiple production facilities located in North America and Europe. The proprietary cleaning solution can be obtained from any of these locations. Other single use disposable accessories, such as a fluid sampling system, will be sourced separately, as individual components. We have not yet entered into agreements with any suppliers for these products.

 

To further our manufacturing sourcing strategy we hired, in June 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 and authorities maintain oversight function concerning various aspects of pertinent technologies and methods of protection.

 

These agencies include:

 

·

OSHA (Occupational Safety and Health Administration)

 

·

EPA (Environmental Protection Agency)

 

·

DOT (Department of Transportation)

 

·

JCAHO (Joint Commission of Accreditation of Hospitals)

 

·

NFPA (National Fire Protection Association)

 

·

AIA (American Institute of Architects)

 

·

AORN (Association of Operating Room Nurses)

 

·

Specific state, county, hospital or institution guidelines

 

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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 our FMS device. We issued request for quotes to two of three of these NRTLs in addition to issuing initial inquiries to certified third party testing entities conducting testing on behalf of the NRTLs. Based on responses to our request for quotes noting pricing and timing of conducting the testing, we have contracted with TUV SUD America, Inc. located in New Brighton, MN for this electrical safety testing. 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 (1 10/240VAC) 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 required, 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 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 substantially equivalent to an already legally-marketed device (or a “predicate device”). The ultimate burden of demonstrating the substantial equivalence of a new device to a predicate device remains with the 510(k) submitter, and in those occasions when the Center for Devices and Radiological Health is unfamiliar with certain aspects of the predicate device, the submitter will be required to provide information that substantiates a claim of substantial equivalence.

 

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 (e.g., 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.

 

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Foreign Jurisdictions

 

Each country in Europe and Asia 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 complete this analysis in advance and we recognize product design changes will most likely be necessary based on practices and procedures in the operative environment in Asia as well as product design changes necessitated by laws, regulations, and directives.

 

Restructuring upon Failure to obtain FDA Approval

 

In June 2007, we entered into a restructuring agreement, in connection with our October 2008 Financing, whereby in the event that we failed to obtain FDA clearance by the end of August 2009, the majority-in-interest of investors (“the Investors”) would have the right to cause the Company to make significant restructuring changes. Since the Company received written notice of a 510(k) clearance from the FDA on April 1, 2009, this restructuring was avoided and the rights of the Investors to effect a restructuring terminated.

 

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Employees

 

We currently have 4 full-time employees; consisting of a Chief Executive 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 our relations with our employees are good.

 

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, Rice 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 against 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..

 

Description of Property

 

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 the first twelve months; $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 is not payable in the first twelve months. 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.

 

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Directors, Executive Officers, Promoters and Control Persons

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		48		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 ten 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.

 

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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. We believe Mr. Gadbaw’s experience in the healthcare and medical device industries as well as being a co-founder of BioDrain makes him a valuable member of the Board.

Kevin R. Davidson, President, Chief Executive Officer, Chief Financial Officer and Director. Mr. Davidson has served as our President and Chief Executive Officer and a director 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 and Director. Mr. Ruwe became our Executive Vice President of Operations and director  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. We believe that Mr. Dauwalter's experience as CEO and board member of public companies is a very important contribution to our Board.

 

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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. We believe that Dr. Morawetz’s extensive consulting experience with development-stage companies and role as a co-founder of BioDrain are strong endorsements for membership on our Board.

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. We believe Mr. McGoldrick’s experience as CEO of a public company and extensive experience in the medical device industry provide valuable insight on our Board.

 Andrew P. Reding, Director. Mr. Reding is an executive with extensive experience in sales and marketing of capital equipment for the acute care markets. He has served as a director of the Company since 2006 and he is currently the President and Chief Executive Officer of TRUMPF Medical Systems, Inc., a position he has held since April 2007. Prior to that, he was Director of Sales at Smith & Nephew Endoscopy and prior to that, he served as Vice President of Sales and Director of Marketing with Berchtold Corporation from 1994 to 2006. His experience is in the marketing and sales of architecturally significant products for the operating room, emergency department and the intensive care unit. Mr. Reding has successfully developed high quality indirect and direct sales channels, implemented programs to interface with facility planners and architects and developed GPO and IDN portfolios. Mr. Reding holds a bachelors degree from Marquette University and an MBA from The University of South Carolina. We believe Mr. Reding’s strong experience in sales and marketing of capital equipment to hospital operating rooms provides unique insight into the industry we serve and makes him a valued member of the Board.

 

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Medical Advisory Board

 

We have 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 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.

 

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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 ten years: (i) had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time; (ii) been convicted in a criminal proceeding and none of our directors or executive officers is subject to a pending criminal proceeding; (iii) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; or (iv) been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Other than the warrant agreements described below, there are no agreements between the Company and any of the members of the Medical Advisory Board.

 

In 2005, we issued warrants to purchase 2,993 shares of our common stock at $1.67 per share to each of Debbie Heitzman, Mary Wells Gorman and David Feroe for their services on the Medical Advisory Board.

 

In 2006, we issued 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.

 

Executive Compensation

 

Summary of Compensation

 

The following table provides information regarding the compensation earned during the fiscal years ended December 31, 2009 and December 31, 2008 by each of the named executive officers:

 

(1)	Mr. Ruwe joined the Company as Executive Vice President of Operations in June 2008 and became Chief Operating Officer in 2009.

(2)	Ms. Doerfert joined the Company in February 2009 and terminated her employment on January 31, 2010.

(3)	Restricted stock awards were granted to management and directors under the 2008 Equity Incentive Plan on August 24, 2009. The value of the restricted stock was determined to be $.50 per common share on the date of the grant as determined pursuant to FASB ASC 718 Compensation- Stock Compensation.

(4)

Represents the full value of an option to purchase 80,000 shares at $.35 per share that will be issued when the Company raises a minimum of $3 million in additional equity. The value expressed represents the actual compensation cost recognized during 2008 as determined pursuant to FASB ASC 718 Compensation- Stock Compensation utilizing the assumptions discussed in Note 3, “Stockholders’ Deficit, Stock Options and Warrants,” in the Notes to Financial Statements included in this prospectus.

 

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Outstanding Equity Awards at Fiscal Year-end for Fiscal 2009

 

The following table sets forth certain information regarding outstanding equity awards held by the named executive officers as of December 31, 2009:

Option Awards

Stock Awards

Equity

Equity

Incentive

Incentive

Number of

Number of

Plan

Plan

Securities

Securities

Awards;

Awards;

Underlying

Underlying

Option

Option

Number

Number

Grant

Options

Options

Exercise

Expiration

of Shares

of Shares

Date

Exercisable

Unexercisable

Price

Date

Vested

Unvested

Kevin R. Davidson

6/5/2008

543,292

$

0.01

6/5/2018

6/11/2008

80,000

$

0.35

6/11/2013

8/24/2009

300,000

Chad A. Ruwe

6/16/2008

200,000

50,000

$

0.35

6/16/2013

200,000

8/24/2009

Kirsten Doerfert

2/1/2009

60,000

40,000

$

0.35

2/1/2014

75,000

8/24/2009

  

Discussion of Compensation

 

Our board of directors currently evaluates and sets the compensation policies and procedures for our executive officers in conjunction with the recommendations made by our compensation committee composed solely of independent directors. Except as provided for in the employment agreements described below, annual reviews generally determine future salary and bonus amounts for our executive officers, as a part of the Company’s compensation procedures.

 

The amounts reflected in the descriptions of the employment agreement for Mr. Davidson below differ from the amounts disclosed in the Summary Compensation Table because the Company did not pay his full salary due to lack of funds.

 

Employment Agreements, Termination of Employment and Change-in-Control Arrangements

 

The following discussions provide a description of the material terms and conditions of the employment agreements described below. The discussions are qualified in their entirety by the full text of the agreements.

 

We entered into an employment agreement with Kevin R. Davidson, President and Chief Executive Officer, on October 4, 2006. The term of the agreement is four years and is automatically renewable except by action of our board of directors. The agreement provides for an annual base salary of $150,000 (payable beginning when cumulative new funding for the Company reaches $250,000), with an increase to $170,000 upon reaching funding of $1 million and $200,000 upon reaching cumulative net sales of $5 million. Mr. Davidson’s base salary was increased to $170,000 on July 1, 2008 as a result of reaching the $1 million in new funding. Mr. Davidson is eligible to participate in the Company’s 2008 Equity Incentive Plan. In addition, pursuant to his employment agreement, Mr. Davidson is entitled to an initial grant of 50,000 shares of BioDrain common stock with an anti-dilution protection amounting to 3.81% of the fully-diluted outstanding shares of common stock of the Company up to the completion of the first $1 million of new funding raised, which pursuant to an option agreement dated June 5, 2008 amending his employment agreement, Mr. Davidson chose to receive in options to purchase 543,292 shares of common stock, exercisable at $.01, in lieu of obtaining the shares to which he was entitled. The options vest immediately, and the term of the options is 10 years from the date of issuance. In 2008, Mr. Davidson achieved the $1 million funding target provided for in his employment agreement and therefore his annual salary was increased to $170,000. In addition, on September 12, 2008, our board of directors ratified the issuance of the options to purchase 543,292 shares of common stock to Mr. Davidson as a result of the milestones achieved pursuant to his employment agreement.

 

In 2007, Mr. Davidson was paid $59,375 in base salary, which is less than he was entitled to under his employment agreement, due to lack of funds. In June 2008 we reached agreement with three current and former officers to reduce accrued payroll liabilities relating to 2007 and prior years, by a total of $346,700 (of which Mr. Davidson had waived compensation in the aggregate amount of $90,000). In addition, Mr. Davidson waived $58,350 in underpaid compensation for 2008. In exchange therefore, Mr. Davidson will be granted a one-time cash payment of $23,000 as well as an option to purchase 80,000 shares of common stock at $.35 per share when we raise an additional $3 million of funding subsequent to the financing completed in October 2008. Mr. Davidson is also eligible for stock, stock options, deferred compensation, and life insurance, as approved by our board of directors or compensation committee, and reimbursements for all reasonable, deductible and substantiated expenses, including, but not limited to, automobile mileage, telephone, cell phone, and expenses related to home office and business meetings. Mr. Davidson is entitled to a minimum of three weeks’ vacation per year. In connection with the agreement, Mr. Davidson was granted a position on our board of directors with the option of submitting for board approval one nominee for Board membership.

 

 

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On February 1, 2009, we entered into an employment agreement with Kirsten Doerfert, Vice President of Sales and Marketing, pursuant to which we granted her an option to purchase 100,000 shares of common stock at $.35 per share with 20,000 shares vested immediately and increments of 20,000 shares vesting upon reaching certain performance milestones. In addition, we granted Ms. Doerfert a warrant to purchase 15,000 shares at $.46 per share as compensation for her consulting services prior to becoming an employee. As of December 31, 2009 the warrant is fully vested and a total of 60,000 shares underlying stock options are vested. The employment agreement specifies an annual salary of $135,000 until three months after the company receives FDA clearance to sell the FMS product and the product is commercially ready for sale, at which time the annual salary will be reduced to $125,000 per year but she will be entitled to commissions on sales of all products under a commission plan to be recommended by management and approved by the board of directors. Ms. Doerfert terminated her employment with the Company on January 31, 2010.

 

The following termination, change of ownership and cessation of business clauses apply to the employment agreements for Mr. Davidson, referred to as “Employee”:

 

We are entitled to terminate Employee’s employment for “cause” at any time during the term of the Employee’s employment and Employee may voluntarily resign from his employment with us at any time. For purposes of the agreements, termination for “cause” means termination for any of the following reasons:

 

a.        the continued noncompliance by the Employee with our directors’ written instructions, directives or regulations, after fifteen (15) days’ written notice of such noncompliance from us; a breach by the Employee of any material term of the employment agreement, which breach is not cured within seven (7) days of written notice thereof from us; and unsatisfactory performance of employment duties, obligations and work and production standards that is not corrected within thirty (30) days after written notice of such unsatisfactory performance from us, or such longer period as specified in such notice;

 

b.        malfeasance, misfeasance, or nonfeasance by the Employee in the course of his employment;

 

c.        fraud or a criminal act committed by Employee, provided such criminal act adversely affects our business;

 

d.

any breach by Employee of his fiduciary duties and obligations to us or any act or omission of Employee constituting a breach of his obligations contained in the confidentiality and non-competition agreements entered into by and between the Company and the Employee; and

 

e.        the Employee’s voluntary resignation at any time.

 

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In the event of termination for cause, Employee is only entitled to receive payment of base salary, adjusted pro-rata to the date of termination, subject to offset, and to the extent permitted, for any amounts then owed to us by the Employee. In the event the Employee is terminated by us without cause, Employee will be entitled to receive an amount equal to twelve (12) months of Employee’s annual base salary for the year of termination, conditioned upon (i) the return to us in good condition any property owned by or belonging to us; (ii) Employee’s disclosure of any passwords or procedures necessary for access to any computer software or program; and (iii) Employee’s continued adherence to the confidentiality and non-competition agreements entered into by and between the Company and Employee for two (2) years from the date of termination.

 

In the case of any termination, the Employee’s rights and obligations regarding stock options and shares of the Company’s common stock owned by the Employee will be determined in accordance with and be governed by any shareholder agreement entered into by and between the Company and the Employee and the 2008 Equity Incentive Plan.

 

Employee may terminate this agreement for good reason and may also terminate without good reason by giving a notice of termination during the year immediately following a change in control of more than 40% of our outstanding common stock, with the exception of stock issued by us, provided that, with the exception of dilution, Employee is adversely affected by such change in control. In the case of termination for good reason or without good reason, Employee will be entitled to the same payments and benefits as if Employee was terminated by us without cause.

 

Upon the death or disability of the Employee, bonuses and other related benefits will be paid pro-rata for the year in which such event occurred. The employment agreements will remain in force in the event the Company is sold or if majority ownership passes from the existing majority shareholders. The employment agreements (and the confidentiality and non-competition agreements entered into by the Company and the Employee) will become null and void in the event the Company becomes insolvent or ceases business due to lack of funds.

 

We entered into an employment agreement with Chad A. Ruwe, Executive Vice President Operations, on June 16, 2008. Pursuant to the agreement, upon execution of an investment in the Company of $200,000, we agreed to employ Mr. Ruwe for two years, with such term to be automatically renewable annually except by action of our President or board of directors. The agreement provides for an annual base salary of $135,000. Pursuant to the agreement, Mr. Ruwe received a one-time signing bonus of $15,000 and will be eligible to participate in the Company’s 2008 Equity Incentive Plan. Mr. Ruwe is eligible to receive stock options to purchase 250,000 shares of BioDrain common stock at $.35 per share, which is governed by the 2008 Equity Incentive Plan. The options vest as follows: (i) 50,000 shares upon execution of the employment agreement; (ii) an additional 50,000 shares upon submission of the 510(k) to the FDA for clearance of the FMS unit; (iii) an additional 50,000 shares upon clearance of the 510(k) by the FDA; (iv) an additional 50,000 shares upon the sale of the first commercial-ready FMS unit; and (v) an additional 50,000 shares upon sale of the fiftieth commercial-ready FMS unit. As a result of the FDA application and April 1, 2009 clearance, Mr. Ruwe earned the vesting of 100,000 shares under the options and earned an additional 50,000 shares under the options in June 2009, as a result of the first sale of our FMS unit.

Mr. Ruwe is also eligible for stock, stock options, deferred compensation, and life insurance, as approved by our board of directors or compensation committee and reimbursements for all reasonable, deductible and substantiated expenses, including, but not limited to, automobile mileage, telephone, cell phone, and expenses related to home office and business meetings. In addition, beginning as of the date of his employment agreement, Mr. Ruwe receives a monthly benefit amount of $1,000 until a Company-sponsored medical benefits program is established. Mr. Ruwe is entitled to a minimum of three weeks’ vacation per year. In connection with the agreement, Mr. Ruwe was granted a position on our board of directors.

 

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Mr. Ruwe’s employment agreement also provides that throughout his employment and for one (1) year thereafter, he shall not, for any reason, directly or indirectly, plan, organize, advise, own, manage, operate, control, be employed by, participate or be connected in any manner with the ownership, management or control of any business engaged in the development, marketing and sales of medical devises dedicated or designed to safely manage and dispose of contaminated fluids generated in the operating room and other similar locations. For the purposes of the agreement, indirect competition includes any activity in aid of a competing business such as being a partner, shareholder, officer, director, member, owner, manager, governor, agent, employee, advisor, consultant or independent contractor of any competing business. Furthermore, Mr. Ruwe’s employment agreement provides that all rights, titles and interests of every kind and nature, whether currently known or unknown, in any “Intellectual Property” defined to include patent rights, trademarks, copyrights, ideas, creations and properties invented, created, written, developed, furnished, produced or disclosed by Mr. Ruwe in the course of his service to the Company, shall be and remain the sole and exclusive property of the Company and Mr. Ruwe shall have no right, title or interest therein or thereto or in and to any results and proceeds therefrom. Also under the agreement, subject to applicable Minnesota Statutes, Mr. Ruwe agreed to irrevocably assign to us, all worldwide rights, title and interest, in perpetuity, in respect of any and all rights he may have or acquired in the Intellectual Property, to waive any moral rights he may have or many obtain in the Intellectual Property, and to assist us in every proper way to apply for, obtain, perfect and enforce rights in the Intellectual Property and to execute all documents for use in applying for, obtaining and perfecting such rights and enforcing the same as the Company may desire.

 

In addition, the following terms apply to the employment agreement for Mr. Ruwe, also referred to as “Employee”:

 

We are entitled to terminate Employee’s employment for “cause” at any time during the term of the Employee’s employment. For purposes of Mr. Ruwe’s employment agreement, for “cause” shall mean termination for any of the following reasons:

 

a.         the material noncompliance by Employee with written instructions, directions or regulations of our board of directors applicable to him, the breach of any material term of the agreement, or the unsatisfactory performance of his duties, obligations, work and production standards and the failure of Employee to correct such non-compliance, breach or performance within thirty (30) days after receipt by him of written notice of the same by us;

 

b.         any willful or grossly negligent act by Employee having the effect of materially injuring the Company, as determined by a majority vote of our board of directors (excluding Employee);

 

c.          the commission by Employee of fraud or a criminal act that adversely affects our business; or

 

d.         the determination by an affirmative vote of the majority of our board of directors (excluding Employee), after reasonable and good faith investigation by the Company following a written allegation by another Company employee that he engaged in some form of harassment or other improper conduct prohibited by law, unless such actions were specifically directed by our board.

 

In the event of termination for cause, Employee is only entitled to receive payment of base salary, adjusted pro-rata to the date of termination, subject to offset, and to the extent permitted, for any amounts then owed to us by the Employee. The Employee’s rights and obligations regarding stock options and shares of the Company’s common stock owned by the Employee will be determined in accordance with and be governed by any shareholder agreement entered into by and between the Company and the Employee and the 2008 Equity Incentive Plan, as well as taking into account the completion (or non-completion) of Mr. Ruwe’s aforementioned milestones. Only stock options that have vested as a result of completed milestones are eligible for ownership by the Employee in the event of termination for cause.

 

In the event the Employee is terminated by us without cause, Employee will be entitled to receive an amount equal to twelve (12) months of Employee’s annual base salary for the year of termination as well as bonus payments on a pro-rata basis for the portion of the year at termination, conditioned upon (i) the return to us in good condition any property owned by or belonging to us; and (ii) Employee’s disclosure of any passwords or procedures necessary for access to any computer software or program. In lieu of a shareholders’ agreement, all non-vested stock options held by Mr. Ruwe shall immediately vest upon termination by us without cause and we will provide outplacement services, upon mutual agreement between the Employee and our President and Chief Executive Officer, for an amount of $15,000 for one (1) year.

 

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Employee may terminate his employment at any time for good reason. For the purposes of the agreement, “good reason” means (i) any material breach by us of the agreement that is not cured by us within thirty (30) days after receipt of written notice from Employee of such breach; (ii) any material diminution or adverse change to Employee of his duties, responsibilities, rights, or reporting relationships available to him before at the time of such diminution or change, without his consent, except as a result of termination by us for cause; (iii) any requirement from our board of directors that Employee must relocate his office outside the Twin Cities metropolitan area; or (iv) by Employee giving a notice of termination during the year immediately following a change in control of more than 40% of our outstanding common stock, except stock issued by us, provided that, with the exception of dilution, Employee is adversely affected by the change in control.

 

Employee may also terminate employment at any time for any reason with one (1) month notice and in such case, agrees to aid in transition and exit from the Company causing no harm or hardship during such transition. Employee is not eligible for salary continuation or bonus if he voluntarily resigns for reasons other than good reason.

 

Upon the death or disability of the Employee, bonuses and other related benefits will be paid pro-rata for the year in which such event occurred. The employment agreement will remain in force in the event the Company is sold or if majority ownership passes from the existing majority shareholders and in such case, all of Mr. Ruwe’s non-vested stock options, whether the milestone has been achieved or not, shall become vested with the completion of the sale. The employment agreement and all the terms thereof will become null and void in the event the Company becomes insolvent or ceases business due to lack of funds.

 

In 2008, Mr. Ruwe invested $200,000 and received 571,429 shares of common stock and a warrant to purchase an additional 571,429 shares of common stock at $0.46 per share. In April 2009 Mr. Ruwe made an additional investment of $25,000 and received 50,000 shares of common stock and a warrant to purchase 50,000 shares of common stock at $.65 per share.

DIRECTOR COMPENSATION

 

The directors of BioDrain Medical, Inc. are not paid cash compensation for their service on the Board except for Lawrence Gadbaw, who is paid $2,000 per month for his service as Chairman of the Board. In addition, Mr. Gadbaw receives $2,000 per month as payment under his Separation Agreement and Release dated August 13, 2008. The final payment under this agreement will be the earlier of August 15, 2010 or upon the Company raising an additional $3 million in equity.

 

Beginning in 2009, the Board instituted an annual restricted stock award program for non-employee directors, except for the Chairman, under which they will be awarded 20,000 shares of restricted stock annually on each anniversary date of service on the board. The Board further determined that Mr. McGoldrick, Mr. Reding and Mr. Morawetz would be awarded 40,000 shares, 20,000 shares and 100,000 shares, respectively, for their prior service on the Board. Mr. Gadbaw is entitled to a stock option, as of September 30 of each year that he continues to serve as Chairman of the Board, to purchase 30,000 shares of common stock for a fixed price that is determined by the board to be the market value on the date of grant. Mr. Gadbaw was granted an option to purchase 30,000 shares at $.50 per share on November 13, 2009. The option is immediately vested and has a term of three years.

 

Director Compensation Table for Fiscal 2009

 

The following table summarizes the compensation paid to each non-employee director in the fiscal year ended December 31, 2009:

 

Name (1)		Fees Earned or Paid in Cash				Stock Awards (2)				Option Awards (1)(2)				Total ($)
Lawrence W. Gadbaw		$	48,000							$	5,728			$	53,728
Peter L. Morawetz						$	50,000			$	22,658			$	72,658
Thomas J. McGoldrick						$	20,000							$	20,000
Andrew P. Reding						$	10,000							$	10,000

 

(1)

Mr. Gadbaw received $2,000 per month as compensation for serving as Chairman of the Board, $2,000 per month as payment under a Separation Agreement and Release dated August 13, 2008 and an option to purchase 30,000 shares at $.50 per share on November 13, 2009. The value of the option was determined to be $5,728 in accordance with FASB ASC 718 Compensation-Stock Compensation using the Black-Scholes option valuation model and, because the option was immediately vested, this amount was expensed in full during fiscal 2009 in accordance with FASB ASC 718 Compensation-Stock Compensation.

 

(2)

Mr. Morawetz received 100,000 shares of restricted stock on August 24, 2009, with a value of $50,000, as compensation for his prior years’ service on the Board. In addition, the Company agreed to grant Mr. Morawetz an option to buy 75,000 shares at $.35 per share upon the Company raising an additional $3 million in equity in return for his agreement to forgive approximately $85,000 in consulting fees that had accrued in prior years. The value of the option was determined to be $22,658 in accordance with FASB ASC 718 Compensation-Stock Compensation, using the Black-Scholes option valuation model and this amount was expensed in full during fiscal 2009. Mr. McGoldrick received 40,000 shares of restricted stock and Mr. Reding received 20,000 shares of restricted stock on August 24, 2009 as compensation for their prior years’ service on the Board. The stock was determined to have a value of $.50 per share or $20,000 and $10,000, respectively, for Mr. McGoldrick and Mr. Reding.

 

Corporate Governance

 

Although we are not required to comply with the Nasdaq Stock Market (“Nasdaq”) listing standards, we use these listing standards as our guide toward determining independence of our directors and other areas of corporate governance. Under Nasdaq listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. Our Board of Directors consults with the Company’s counsel to ensure that the Board of Directors’ determinations are consistent with relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of the Nasdaq, as in effect from time to time.

 

Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and the Company, its senior management and its independent registered public accounting firm, the Board of Directors has affirmatively determined that the following directors are independent directors within the meaning of the Nasdaq listing standards: Messrs. Dauwalter, Gadbaw, McGoldrick and Reding and Dr. Morawetz. In making this determination, the Board of Directors found that none of these directors or nominees for director had a material or other disqualifying relationship with the Company. Mr. Davidson, the Company’s President, Chief Executive Officer, and Chief Financial Officer, and Mr. Ruwe, the Company’s Chief Operating Officer, are not independent directors by virtue of their employment with the Company.

 

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, based on a review of the copies of such reports furnished to the Company during the fiscal year ended December 31, 2009, all reports needed to be filed have been filed for the fiscal year ended December 31, 2009.

 

Code of Ethics

 

On November 14, 2008, the Board adopted the Code of Ethics of BioDrain Medical, Inc. that applies to all officers, directors and employees of the Company. We intend to maintain the highest standards of ethical business practices and compliance with all laws and regulations applicable to our business. The Code of Ethics was filed as Exhibit 14 to the Company’s Registration Statement on Form S-1/A filed with the SEC on January 12, 2009.

 

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Certain Relationships and Related Transactions

 

Described below are certain transactions or series of transactions since inception between us and our executive officers, directors and the beneficial owners of 5.0% or more of our common stock, on an as converted basis, and certain persons affiliated with or related to these persons, including family members, in which they had or will have a direct or indirect material interest in an amount that exceeds the lesser of $120,000 or 1% of the average of our total assets for the last three years, other than compensation arrangements that are otherwise required to be described under “Executive Compensation.”

 

In June 2008, we reached agreement with an employee and three current and former officers to reduce accrued payroll liabilities relating to 2007 and prior years, by a total of $346,700 This includes waived compensation from Mr. Davidson in the amount of $90,000, Mr. Rice in the amount of $125,000 and Mr. Gadbaw in the amount of $138,500. In addition Mr. Davidson waived $58,350, Mr. Rice waived $40,725 and Mr. Gadbaw waived $30,610 in underpaid compensation for 2008. In exchange therefore, Mr. Gadbaw and Mr. Rice will be each granted an option to purchase 160,000 shares of common stock and Mr. Davidson will be granted an option to purchase 80,000 shares of common stock, all at $.35 per share upon the Company raising an additional $3 million in financing subsequent to the October 2008 financing. In addition, Mr. Rice is entitled to receive a one-time cash payment of $46,000, Mr. Gadbaw is entitled to receive a one-time cash payment of $25,000 and Mr. Davidson is entitled to receive a one-time cash payment of $23,000 when the Company raises an additional $3 million subsequent to the October 2008 financing. Mr. Gadbaw is currently receiving $2,000 per month until a total of $46,000 is paid with the remaining balance, if any, paid upon the Company raising an additional $3 million.

 

Pursuant to the terms of the Separation Agreement and Release between Mr. Gadbaw and the Company, if we raise at least $3 million in additional funding prior to fully paying off Mr. Gadbaw’s accrued salary at the rate of $2,000 per month, we will then pay off any remaining balance on the accrued salary within 30 days of receipt of the new funding. As part of the agreement, for as long as Mr. Gadbaw remains Chairman of our board of directors, he will receive an additional 30,000 stock options annually, so long as he is Chairman as of September 1 of that year. These options will be priced based on the fair market value of the Company’s common stock at the time of grant as determined by our board of directors.

 

In September 2002, an oral agreement was made with director Peter Morawetz whereby he would provide sales, marketing and general administrative consulting to the Company for a fee of $1,770 per month. The Company’s expectation at the time was that the Company would have received equity financing to fund these payments but the Company did not receive that funding. Pursuant to an oral agreement with Mr. Morawetz, the Company could defer payment of these amounts until such date that they had cash to pay him. The Company accrued these fees through August 2006 when Mr. Morawetz’s consulting services ended. On May 15, 2009 Mr. Morawetz and the Company reached agreement whereby he would waive payment of his consulting fees, in the amount of $84,600, and accept a cash payment of $30,000 and an option (outside of the Plan) to buy 75,000 shares of common stock at $.35 per share upon the Company raising $3 million. Mr. Morawetz has no obligation to participate in raising the funds. The debt forgiveness was treated as a capital contribution, in accordance with SAB 79, because Mr. Morawetz is both a director and a significant shareholder, and the $30,000 obligation and the Black-Scholes value of the option were expensed in the second quarter of 2009.

 

The following Selling Security Holders beneficially own more than 5.0% of our common stock: Schwartz Holding, Bernard Puder Revocable Trust, Chad A. Ruwe, James E. Dauwalter Living Trust, James R. Taylor IV, Erick Richardson and Nimish Patel. All were or became a related party through investing in the October 2008 financing.

 

Selling Security Holders

 

The following table sets forth the names of the Selling Security Holders who may sell their shares under this prospectus from time to time. No Selling Security Holders has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessors or affiliates other than as a result of the ownership of our securities, except as set forth in the footnotes of certain Selling Security Holders.

 

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The following table also provides certain information with respect to the Selling Security Holders’ ownership of our securities as of April 20, 2010, the total number of securities they may sell under this prospectus from time to time, and the number of securities they will own thereafter assuming no other acquisitions or dispositions of our securities. The Selling Security Holders can offer all, some or none of their securities, thus we have no way of determining the number they will hold after this offering. Therefore, we have prepared the table below on the assumption that the Selling Security Holders will sell all shares covered by this prospectus.

 

Some of the Selling Security Holders may distribute their shares, from time to time, to their limited and/or general partners or managers, who may sell shares pursuant to this prospectus. Each Selling Security Holder may also transfer shares owned by him or her by gift, and upon any such transfer the donee would have the same right of sale as the selling shareholder.

 

We may amend or supplement this prospectus from time to time to update the disclosure set forth herein. None of the Selling Security Holders are or were affiliated with any broker-dealers. See our discussion entitled “Plan of Distribution” for further information regarding the Selling Security Holders’ method of distribution of these shares.

 

The shares of common stock included in this Selling Security Holder table include:

 

·

Shares of common stock resulting from conversion, as of October 19, 2009, of a convertible bridge loan and accrued interest and penalties from seven investors who loaned us $170,000 in July 2007. The note was converted into 620,095 shares of common stock and the accrued interest and penalties was converted into 315,351 shares of common stock. The 315,351 shares are not registered shares. The lenders also hold warrants to purchase 620,095 shares of common stock at $.35 per share;

 

·

4,552,862 shares of common stock and 4,552,862 shares of common stock underlying warrants (at an exercise price per share of $0.46) to 33 investors pursuant to an equity private placement from June 2007 to October 2008 for $0.35 per share for an aggregate of approximately $1.6 million;

 

·

547,285 shares of common stock and 136,429 warrants to purchase shares of common stock to consultants who provided services in connection with such equity private placement; and

 

·

Shares of common stock issued pursuant to a binding term sheet with a consultant pursuant to which the consultant would assist us in obtaining bridge financing and subsequent equity financing and the consultant and its assigns received 2,001,119 shares of common stock in satisfaction of such obligation.

 

 

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Name of Selling Shareholder		Number of Shares Owned Before Offering(1)				Number of Shares Underlying Warrants, Options  and Convertible debt Owned Before Offering				Number of Shares Offered in this Offering(1)				Number of Shares Owned After Offering(2)				Percentage Owned After Offering(2)
Caron Partners LP(3) (25)(30)(31)			666,500				210,000				446,500				220,000				1.8	%
Marc I. Abrams (25)(31)			57,142				28,571				57,142				0				0
Douglas J. Gold (21) (25) (27)(31)			232,142				28,571				232,142				0				0
Stuart A. Liner (25)(31)			142,858				71,429				142,858				0				0
Steven M. Gold and Sheila A. Gold (25)(31)			142,858				71,429				142,858				0				0
Tangiers Investors, L.P.(4) (25)(31)			285,714				142,857				285,714				0				0
Jerome M. Cowan (25)(31)			142,858				71,429				142,858				0				0
Jeremy Roll (25) (26)(3 1)			68,573				40,001				68,573				0				0
Bernard Vosika and Twyla Vosika (25)(31)			142,858				71,429				142,858				0				0
Sally Maslon & Naomi Maslon JTWROS (25)(31)			57,142				28,571				57,142				0				0
Michael Sobeck (25)(31)			28,572				14,286				28,572				0				0
Cavalier Consulting Corp.(5) (25)(31)			142,858				71,429				142,858				0				0
RP Capital(6) (21) (25)(31)			326,848				142,857				326,848				0				0
Brian Weitman (25)(31)			64,028				21,429				64,028				0				0
Bellajule Partners LP(7) (25)(31)			173,858				71,429				173,858				0				0
Morris Esquenazi (25(31))			200,000				100,000				200,000				0				0
Schwartz Holding (25)(28)(31)			1,000,000				500,000				1,000,000				0				0
Jack Farbman and Thelma Farbman (25)(31)(34)			313,000				130,000				200,000				113,0000				*
Morrie R. Rubin (25)(31)			275,,000				50,000				100,000				175,0000				1.4	%
Lee M. Terpstra and Orlando Stephenson (25)(30)(31)			200,000				100,000				200,000				0				0
Bernard Puder Revocable Trust (25)(31)			860,000				430,000				860,000				0				0
Thomas J. Klas (25)(31)			142,858				71,429				142,858				0				0
Chad A. Ruwe(22) (25) (30)(31)			1,692,858				821,429				1,142,858				500,000	(8)			3.9	%
Peter Abramowicz (25)(31)			114,286				57,143				114,286				0				0
Scott R. Storick (25)(31)			200,000				100,000				200,000				0				0
James R. Taylor, IV(25)(31)(33)			1,342,858				771,429				1,142,858				200,000				1.6	%
Citigroup Global Markets Inc. as IRA Custodian FBO John D. Villas (25)(30)(31)			242,858				121,429				142,858				100,000				*
Gregory B. Graves (25)(30)(31)			125,714				62,857				85,714				40,000				*
James E. Dauwalter Living Trust dated 12/11/01(9) (25) (29)(30)(31)(33)			1,822,858				1,001,429				1,142,858				680,000				5.2	%
Stan Geyer Living Trust dated 10/15/2001, as amended, Stan Geyer & Beverly Geyer, Trustees(10) (25)(31)			142,858				71,429				142,858				0				0

 

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Name of Selling Shareholder		Number of Shares Owned Before Offering(1)				Number of Shares Underlying Warrants, Options and Convertible debt Owned Before Offering				Number of Shares Offered in this Offering(1)				Number of Shares Owned After Offering(2)				Percentage Owned After Offering(2)
Fenton Fitzpatrick (25)(31)			17,142				8,571				17,142				0				0
Peter Persad (25)(31)			142,858				71,429				142,858				0				0
Nimish Patel(11) (21) (24)			526,789				45,595				503,601				23,188				*
Erick Richardson(12) (21) (24)			513,921				45,595				490,733				23,188				*
Core Fund Management, LP(13) (24)			457,512				182,381				364,762				92,750				*
James Jensen(14) (24)			457,512				182,381				364,762				92,750				*
Steve Andress(15) (24)			91,502				36,476				72,952				18,550				*
Kendall Morrison(16) (24)			91,502				36,476				72,952				18,550				*
EGATNIV, LLC(17) (24)			241,467				91,191				196,092				46,375				*
Thomas Pronesti(23) (26)			55,964								55,964				0				0
Craig Kulman(23) (26)			38,821								38,821				0				0
Kulman IR LLC(1 8)(23) (26)(36)			225,000								125,000				100,000				*
Cross Street Partners, Inc.(19)(23) (26)(35)			525,000				150,000				125,000				400,000				3.3	%
Bill Glaser(23) (26)			250,000				125,000				250,000				0				0
Ryan Hong(21) (27)			57,404								57,404				0				0
Richardson & Patel, LLP(20) (27)			60,714								60,714				0				0
Sean Fitzpatrick (27)			150,000								150,000				0				0
David Baker (27)(32)			625,000				400,000				225,000				400,000				3.2	%
Si Phillips (27)			50,000								50,000				0				0
Cameron Broumand (27)			35,000								35,000				0				0
Sylvia Karayan(21) (27)			10,000								10,000				0				0
Jason Cavalier (27)			15,000								15,000				0				0
Greg Suess (27)			104,114								104,114				0				0
Ben Padnos (27)			100,000								100,000				0				0
Mark Abdou (27)			32,907								32,907				0				0
Addison Adams(21) (27)			8,227								8,227				0				0
Michael Cavalier (27)			8,227								8,227				0				0
Mick Cavalier			8,227								8,227				0				0
Francis Chen (21) (27)			2,334								2,334				0				0
Doug Croxall (27)			6,170								6,170				0				0
Jennifer & Michael Donohue (21) (27)			28,009								28,009				0				0
Dan Estrin (27)			823								823				0				0
Kevin Friedmann(21) (27)			1,440								1,440				0				0
Sylvia Karayan(21) (27)			1,646								1,646				0				0
Abdul Ladha (27)			4,114								4,114				0				0
Jody Samuels(21) (27)			8,227								8,227				0				0
Yossi Stern (27)			10,284								10,284				0				0
Steve Yakubov			10,284								10,284				0				0
TOTAL			16,274,098				6,949,386				13,030,747				3,243,351				19.7	%

 

* Less than 1.0% based on a total of 12,031,761 shares of common stock outstanding on April 20, 2010.

 

(1)     Includes up to that number of shares of common stock issuable upon the exercise of options, warrants, and conversion of convertible debt listed in the Selling Security Holder table.

 

(2)     Assumes that all shares will be resold by the Selling Security Holders after this offering.

 

(3)     The natural person with voting and dispositive powers for this stockholder is Beth Levine. Includes 110,000 shares of common stock and a warrant to purchase 110,000 shares of common stock at $.65 per share purchased in a 2009 private placement.

 

(4)     The natural person with voting and dispositive powers for this stockholder is Michael Sobeck.

 

(5)     The natural person with voting and dispositive powers for this stockholder is Jason Cavalier.

 

(6)     The natural persons with voting and dispositive powers for this stockholder are Nimish Patel and Erick Richardson.

 

(7)     The natural person with voting and dispositive powers for this stockholder is Ronald Levine.

 

(8)     Includes 200,000 shares subject to exercise of options to purchase common stock, and includes 200,000 shares of restricted stock issued August 24, 2009 under the 2008 Equity Incentive Plan. Also includes 50,000 shares purchased on April 14, 2009 and a warrant to purchase 50,000 shares of common stock at an exercise price of $.65 per share but does not include an option to purchase 50,000 shares of common stock at $.35 per share that have not vested as of June 30, 2009 and does not include 200,000 shares of common stock purchased April 20, 2009 and a warrant to purchase 200,000 shares of common stock at an exercise price of $.65 per share held by Dean M. and Carol L. Ruwe, the parents of Chad A. Ruwe.

 

(9)     The natural person with voting and dispositive powers for this stockholder is James E. Dauwalter. Mr. Dauwalter became a director of the Company on July 31, 2009.

 

(10)   The natural persons with voting and dispositive powers for this stockholder are Stan Geyer and Beverly Geyer.

 

(11)     Includes 45,595 shares of common stock obtained in the conversion of a convertible promissory note plus 23,188 shares of common stock issued in payment of accrued penalty and interest on the convertible note.

 

(12)     Includes 45,595 shares of common stock obtained in the conversion of a convertible promissory note plus 23,188 shares of common stock issued in payment of accrued penalty and interest on the convertible note.

 

(13)   The natural person with voting and dispositive powers for this stockholder is David Baker. Includes 182,381 shares of common stock issued upon conversion of a convertible bridge loan and 92,750 shares of common stock issued to pay accrued penalties and interest on the note.

 

(14)     Includes 182,381 shares of common stock issued upon conversion of a convertible bridge loan and 92,750 shares of common stock issued to pay accrued interest and penalties on the note.

 

(15)     Includes 36,476 shares of common stock issued upon conversion of a convertible bridge loan and 18,550 shares of common stock issued to pay accrued interest and penalties on the note.

 

(16) Includes 36,476 shares of common stock issued upon conversion of a convertible bridge loan and 18,550 shares of common stock issued to pay accrued interest and penalties on the note.

 

(17)     Includes 91,191 shares of common stock issued upon conversion of a convertible bridge loan and 46,375 shares of common stock issued to pay accrued interest and penalties on the note  The natural person with voting and dispositive powers for this stockholder is Shai Stern.

(18)   The natural person with voting and dispositive powers for this stockholder is Craig Kulman.

 

(19)     The natural person with voting and dispositive powers for this stockholder is Thomas Pronesti.

 

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(20)     The natural person with voting and dispositive powers for this stockholder is Douglas Gold. Richardson & Patel LLP, was the outside legal counsel for the Company.

 

(21)     The shareholder is an employee or partner of Richardson & Patel LLP, former outside legal counsel for the Company.

 

(22)     Mr. Ruwe is an officer and director of the Company. Includes an option to purchase 200,000 shares of common stock at $.35 per share, but does not include an option to purchase 50,000 shares of common stock at $.35 per share that have not vested as of June 30, 2009.

 

(23)	The shareholder has assisted the Company in obtaining financing or investor relations services.

 

(24)   Each person that participated in lending $170,000 to the Company under a convertible promissory note had a right to convert their note into shares of common stock at $.27 per share and also received a warrant to purchase an equal number of shares of common stock at $.35 per shares. In the aggregate the note holders had rights to convert their debt into 620,095 shares of common stock and also hold warrants to purchase 620,095 shares of common stock.  The note was converted into 935,446 shares of common stock as of October 19, 2009 including payment of accrued interest and penalty in the amount of 315,351 shares of common stock.

 

(25)   Participated in the sale of up to 4,552,862 shares of common stock and 4,552,862 shares of common stock underlying warrants (at an exercise price per share of $0.46) to 33 investors pursuant to an equity private placement from June 2007 to October 2008 for $0.35 per share for an aggregate of $1.6 million.

 

(26)   Participated in the acquisition of 547,285 shares of common stock and warrants to purchase 136,429 shares of common stock by certain consultants who provided services in connection with such equity private placement.

 

(27)   Obtained shares pursuant to a binding term sheet with a consultant under which the consultant would assist the Company in obtaining bridge financing and subsequent equity financing and the consultant and its assigns received 2,001,119 shares of common stock in satisfaction of such obligation.

 

(28)	The natural person with voting and dispositive powers for this stockholder is Charles I. Schwartz.

 

(29)   Includes an option to purchase 30,000 shares of common stock at $.35 per share and 50,000 restricted shares, issued August 24, 2009 under the 2008 Equity Incentive Plan, held by David Dauwalter, the son of James Dauwalter. Does not include an option to purchase 20,000 shares of common stock at $.35 per share held by David Dauwalter that are exercisable only upon achievement of certain performance conditions.

 

(30)   Participated in the sale of 1,250,000 units at $.50 per unit, including one share of common stock and one warrant to purchase a share of common stock at $.65 per share.

 

(31)   Shareholder is entitled to additional shares of common stock at the rate of 2% per month, based upon the shares purchased in the October 2008 financing, commencing March 1, 2009 until October 19, 2009, the effective date of the Company’s Registration Statement on Form S-1. Such shares were determined to be 710,248 based upon an October 19, 2009 effective date and will be issued upon receipt of signed agreements of all Investors.

 

(32)   Includes a warrant to purchase 400,000 shares of common stock at $.10 per share issued February 23, 2010 in connection with consulting and fundraising activities.

 

(33)   Includes a convertible note dated January 13, 2010 in the amount of $50,000, convertible at an estimated $.25 per share into 200,000 shares of common stock.

 

(34)   Includes 30,000 shares of common stock and a warrant to purchase 30,000 shares of common stock at $.65 per shares acquired in a private placement for $.50 per unit in 2009. Also includes 53,000 shares of common stock granted for consulting services in January and February 2010.

 

(35)   Includes 250,000 shares of common stock and a warrant to purchase 150,000 shares of common stock at $.65 per shares granted in January 2010 in return for investor relations services.

 

(36)   Includes a warrant to purchase 100,000 shares at $.65 per share granted in January 2010 in return for investor relations services.

 

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Plan of Distribution

 

Each Selling Security Holder and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the OTC Bulletin Board or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A selling shareholder may use any one or more of the following methods when selling shares, subject to applicable federal and state securities laws:

 

·	ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

·	block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

·	purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

·	an exchange distribution in accordance with the rules of the applicable exchange;

 

·	privately negotiated transactions;

 

·

settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part; broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share; through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; a combination of any such methods of sale; or

 

·	any other method permitted pursuant to applicable law.

 

The Selling Security Holders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

 

Broker-dealers engaged by the Selling Security Holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Security Holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440, and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440. The maximum commission or discount to be received by any Financial Industry Regulatory Authority (“FINRA”) member or independent broker-dealer will not be greater than 8% for the sale of any securities included in the registration statement of which this prospectus is a part.

 

In connection with the sale of the common stock or interests therein, the Selling Security Holders may enter into hedging transactions with broker-dealers or other financial institutions, which may, subject to applicable federal state securities laws, in turn engage in short sales of the common stock in the course of hedging the positions they assume. The Selling Security Holders may also, in compliance with applicable federal and state securities laws, sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Security Holders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities that require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

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The Selling Security Holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act, in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Security Holder has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute our common stock.

 

We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the Selling Security Holders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

Because the Selling Security Holders are deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act, including Rule 172 thereunder. In addition, any securities covered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Security Holders.

 

We have agreed to use reasonable efforts to keep this registration statement continuously effective (the “Effective Period”) until the first anniversary of the effective date of this registration statement plus whatever period of time as shall equal any period, if any, during the Effective Period in which the Company was not current with our reporting requirements under the Exchange Act. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Security Holders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Security Holders or any other person. We will make copies of this prospectus available to the Selling Security Holders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth as of April 20, 2010 certain information regarding beneficial ownership of our common stock by:

 

•

Each person known to us to beneficially own 5% or more of our common stock and those shareholders who would beneficially own 5% or more of our common stock except for a 61 day notice of intent to exercise warrants (see Note 11 of this beneficial ownership table);

 

•

Each executive officer named in the Summary Compensation Table in this Report are collectively referred to as the “Named Executive Officers;”

 

•

Each of our directors; and

 

•

All of our executive officers (as that term is defined under the rules and regulations of the SEC) and directors as a group.

 

We have determined beneficial ownership in accordance with Rule 13d-3 under the Exchange Act. Beneficial ownership generally means having sole or shared voting or investment power with respect to securities. Unless otherwise indicated in the footnotes to the table, each stockholder named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite the stockholder’s name. We have based our calculation of the percentage of beneficial ownership on 12,031,761 shares of the Company’s common stock outstanding on April 20, 2010. Unless otherwise noted below, the address for each person or entity listed in the table is c/o BioDrain Medical, Inc., 2060 Centre Pointe Boulevard, Suite 7, Mendota Heights, Minnesota 55120.

 

Name of Beneficial Owner		Amount and Nature of Beneficial Ownership				Percent of Class
Lawrence W. Gadbaw (1)			169,563				1.4	%
Kevin R. Davidson (2)			876,725				7.0	%
Chad A. Ruwe (3)(11)			1,021,429				8.4	%
Kirsten Doerfert (14)			150,000				1.2	%
Jess Carsello (15)			8,332				0.1	%
Peter L. Morawetz (4)			211,245				1.8	%
Thomas J. McGoldrick (5)			67,447				0.6	%
Andrew P. Reding (6)			47,447				0.4	%
James Dauwalter Living Trust (9)(11)			1,051,429				8.6	%
Carl Schwartz (7)(11)			500,000				4.2	%
Bernard Puder Revocable Trust (8)			430,000				3.6	%
James R. Taylor IV (10) (11)			771,429				6.3	%
Nimish Patel (12)			710,780				5.9	%
Erick Richardson (13)			697,912				5.8	%
Total			6,713,738				49.9	%
All directors and executive officers as a group (9 persons)			3,453,617				26.4	%

(1)

Includes 139,563 shares of common stock and an option to purchase 30,000 shares of common stock at a price of $.50 per share. Does not include an option to purchase 160,000 shares of common stock at $.35 per shares to be issued upon the Company raising an additional $3 million in equity.

(2)

Includes (i) 33,433 shares of common stock, (ii) 300,000 shares of restricted stock issued August 24, 2009 under the 2008 Equity Incentive Plan and (iii) options to acquire up to an additional 543,292 shares of common stock of the Company, all of which are presently exercisable. Does not include an option to purchase 80,000 shares of common stock at $.35 per shares to be issued upon the Company raising an additional $3 million in equity.

(3)

Includes 621,429 shares of common stock, 200,000 shares of restricted stock issued August 24, 2009 under the 2008 Equity Incentive Plan and options to acquire an additional 200,000 shares of common stock at $.35 per share that are presently exercisable. Does not include options to purchase 50,000 shares of common stock at $.35 per share that are not exercisable until achievement of certain performance targets as provided in Mr. Ruwe’s employment agreement, and does not include warrants to purchase 621,429 shares of common stock that are not currently exercisable.

(4)

Includes 111,245 shares of common stock and 100,000 shares of restricted stock, issued August 24, 2009 under the 2008 Equity Incentive Plan, but does not include an option to purchase 75,000 shares of common stock at $.35 per share to be issued upon the Company raising an additional $3 million in equity.

 

 

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(5)

Includes 3,506 shares of common stock and 40,000 restricted shares, issued August 24, 2009 under the 2008 Equity Incentive Plan, and an option to acquire up to 23,941 shares of common stock, which are presently exercisable, granted pursuant to a director stock option agreement by and between Mr. McGoldrick and the Company

(6)

Includes 3,506 shares of common stock and 20,000 restricted shares, issued August 24, 2009 under the 2008 Equity Incentive Plan, and an option to acquire up to 23,941 shares of common stock, which are presently exercisable, granted pursuant to a director stock option agreement by and between Mr. Reding and the Company.

(7)

Includes 500,000 shares of common stock but does not include 500,000 shares of common stock underlying a warrant at $.46 per share that is not currently exercisable.

(8)

Includes 430,000 shares of common stock but does not include 430,000 shares of common stock underlying a warrant at $.46 per share that is not currently exercisable.

(9)

Includes 771,429 shares of common stock but does not include 771,429 shares of common stock underlying warrants at $.46 per share and $.65 per share that are not exercisable. Includes 200,000 shares of common stock underlying a $50,000 convertible debt agreement based upon an estimated conversion price of $.25 per share.  Also includes an option to purchase 30,000 shares of common stock and 50,000 restricted shares, issued August 24, 2009 under the 2008 Equity Incentive Plan, held by David Dauwalter, the son of James Dauwalter. Does not include an option to purchase 20,000 shares of common stock held by David Dauwalter because such option vests only upon achieving certain performance conditions and is, therefore, not exercisable within 60 days. James Dauwalter disavows any ownership or control over the shares and options held by David Dauwalter.

(10)

Includes 571,429 shares of common stock and 200,000 shares of common stock underlying a $50,000 convertible debt agreement based upon an estimated conversion price of $.25 per share but does not include 571,429 shares of common stock underlying a warrant at $.46 per share that is not currently exercisable.

(11)

These warrants are fully vested. However, they include a clause that prohibits the warrants to be exercised if it would cause the holdings of such equity holder to be in excess of 4.99% of our total outstanding shares of common stock. The warrant holder may amend the clause to eliminate this requirement. However, such amendment will not take effect until the 61st day after notice has been given. Consequently they cannot exercise their warrants within 60 days of the current date, and those warrants are not included in the total outstanding and percentage of outstanding shares.

(12)

Consists of 665,185 shares of common stock, including 142,857 shares of common stock held by RP Capital LLC, for which Nimish Patel and Erick Richardson have shared voting and dispositive control, and 45,595 shares of common stock underlying warrants. Does not include a warrant to purchase 142,857 shares of common stock held by RP Capital LLC because these warrants are not exercisable within 60 days. Does not include 60,714 shares of common stock held by Richardson & Patel LLP. The voting and dispositive control of such shares are held by Mr. Douglas Gold.

(13)

Consists of 652,317 shares of common stock, including 142,857 shares of common stock held by RP Capital LLC, for which Nimish Patel and Erick Richardson have shared voting and dispositive control, and 45,595 shares of common stock underlying warrants. Does not include a warrant to purchase 142,857 shares of common stock held by RP Capital LLC because these warrants are not exercisable within 60 days. Does not include 60,714 shares of common stock held by Richardson & Patel LLP. The voting and dispositive control of such shares are held by Mr. Douglas Gold.

(14)

Includes a warrant to purchase 15,000 shares of common stock at $.46 per share, an option to purchase 60,000 shares of common stock at $.35 per share and 75,000 restricted shares issued August 24, 2009 under the 2008 Equity Incentive Plan. Does not include an option to purchase 40,000 shares of common stock at $.35 per share that are not excercisable until achievement of certain performance targets as provided in Ms. Doerfert’s employment agreement. Ms. Doerfert terminated her employment on January 31, 2010.

(15)

Includes an option to purchase 8,332 shares of common stock at $.50 per share, under a 150,000 share stock option agreement issued to Mr. Carsello on February 2, 2010, under the Company’s 2008 Equity Incentive Plan.  Does not include 141,688 shares of common stock under the stock option agreement that have not vested.  The option vests at 4,167 shares per month for the first 35 months of employment and 4,190 shares in month 36.

 

Equity Compensation Plan Information

The following table presents the equity compensation plan information as of December 31, 2009:

 

		Number of securities to be issued upon exercise of outstanding restricted stock, warrants and options				Weighted-average exercise price of outstanding options, warrants				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by security holders (1)			935,107			$	0.367				40,298
Equity compensation plans not approved by security holders (2)			1,396,174			$	0.237				-
TOTAL			2,331,281			$	0.247				40,298

 

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	(1)	Includes 816,900 shares of restricted stock and 18,207 warrant shares issued under the 2008 Equity Incentive Plan.
	(2)	The Company issued stock options to purchase 1,291,174 shares to employees and directors prior to the adoption of the 2008 Equity Incentive Plan and stock options to purchase 105,000 shares outside of the 2008 Equity Incentive Plan after the Plan was adopted.

 

 

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Description of Securities

 

General

 

We are authorized to issue only one class of shares, which is designated as common stock. On October 20, 2008, our board of directors approved a resolution to increase the total number of shares of common stock that we are authorized to issue from 1 1,970,994 to 40,000,000 with $0.01 par value per share. Such action was approved by the Company’s shareholders holding a majority of the shares entitled to vote thereon at a special meeting of shareholders held on December 3, 2008.

 

Common Stock

 

The securities being offered by the Selling Security Holders are shares of our common stock. Prior to this offering there was no public or private trading market for our common stock and the quotation of our common stock on the OTC Bulletin Board commenced on November 13, 2009. As of April 20 2010, there were issued and outstanding 12,031,761 shares of common stock that were held by 125 shareholders of record.

 

The holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders, provided that no proxy shall be voted if executed more than one year prior to the date of the stockholders’ meeting except as may otherwise be provided by our board of directors from time to time. Only stockholders of record at the close of business on day twenty prior to the date of the meeting are entitled to vote at the stockholders’ meeting. Holders of our common stock do not have cumulative voting rights.

 

The holders of common stock are entitled to receive ratably any dividends that may be declared from time to time by our board of directors out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities. The common stock has no preemptive or conversion rights or other subscription rights and there are no redemption provisions applicable to our common stock. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock offered in this offering will be fully paid and not liable for further call or assessment.

 

Except for directors, who are elected by receiving the highest number of affirmative votes of the shares entitled to be voted for them, or as otherwise required by Minnesota law, and subject to the rights of the holders of preferred stock then outstanding (if any), all shareholder action is taken by the vote of a majority of the issued and outstanding shares of common stock present at a meeting of shareholders at which a quorum consisting of a majority of the issued and outstanding shares of common stock is present in person or proxy. In the absence of a quorum for the transaction of business, any meeting may be adjourned from time to time. The stockholders present at a duly called or held meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. The Company’s President or, in his absence, the Vice-President or any other person designated from time to time by the board of directors, shall preside at all meetings of stockholders.

 

Warrants and Convertible Debt

 

As of December 31, 2009, there were outstanding warrants to purchase 7,372,813 shares of our common stock, including 620,095 warrants exercisable at a price of $0.35 per share, issued in conjunction with a convertible bridge loan we undertook in July 2007, and 4,689,291 warrants exercisable at a price of $0.46 per share, issued in conjunction with the private offering we completed in October 2008, including 4,552,862 warrants issued to investors and 136,429 warrants issued to consultants who provided services in connection with the offering. These warrants are immediately exercisable (except for a provision that prohibits exercise of warrants if it would cause the holder to hold more than 4.99% of the outstanding shares of common stock) and have a three-year term. As of December 31, 2009, there were warrants to purchase 1,485,000 shares at $.65 issued in connection with a private placement in 2009, and there are other outstanding warrants to purchase 578,427 shares of our common stock at exercise prices ranging from $.02 to $1.67 per share.

 

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We had bridge loan notes outstanding convertible into shares of our common stock at a conversion price of $.27 per share, which were issued in conjunction with the bridge loan we undertook in July 2007 but also considered part of the October 2008 financing. The bridge loan was undertaken primarily to give the private placement agents sufficient time to raise additional equity and they were ultimately successful in raising approximately $1.6 million by October 2008. The convertible notes totalled $170,000 and were held by seven holders. The names, individual face amounts of the convertible bridge loan notes and the number of shares upon conversion is as follows:

 

		Conversion Price 0.274151 shares of:
Name		Amount				Stock
Core Fund Mgmt LP		$	50,000				182,381
C. James Jensen			50,000				182,381
Steve Andress			10,000				36,476
Kendall Morrison			10,000				36,476
EGATNIV, LLC			25,000				91,191
Erick Richardson			12,500				45,595
Nimish Patel			12,500				45,595
Total		$	170,000				620,095

 

The notes were convertible into 620,095 shares of common stock and warrants to purchase 620,095 shares of common stock at $.35 per share were granted in connection therewith. The notes bore interest at 8% and passed their original maturity date of April 2008. If there was no effective registration statement registering the underlying shares by within 180 days of the closing of the October 2008 private placement offering, these notes contained certain monetary penalties imposed upon the Company. The Company incurred a penalty of $5,000 payable pro-rata to noteholders for each 30-day period after February 27, 2009 until such registration was declared effective. As a result of the SEC declaring our Registration Statement on Form S-1 effective on October 19, 2009, the Company reached agreement with the noteholders to accept 315,351 shares of common stock as payment of the accrued interest and penalties in addition to the 620,095 in shares of common stock issued upon conversion of the note.  Consequently, the Company issued 935,446 shares of common stock in aggregate as of October 19, 2009 to the above firms and individuals.

 

In addition, the Company is required to issue additional shares to the purchasers of units in the October 2008 financing, equal to 2% of the shares purchased in the financing, for each 30 day period beyond 180 days from the August 31, 2008 closing date until the registration was declared effective with a maximum of 16% or 728,458 shares. This penalty was provided to create an incentive for the Company to complete the registration of the securities tied to this investment in a timely manner. As of June 30, 2009 the Company was obligated to pay $20,500 in accrued penalties to the noteholders, in addition to regular accrued interest of $43,360. The penalty continued to accrue at $5,000 for each 30 day period after February 27, 2009 until there was an effective registration of the Company’s shares and there is no maximum. The accrued penalties are included as interest expense in the Financial Statements contained in this prospectus. As a result of our Registration Statement on Form S-1 being declared effective as of October 19, 2009, we are obligated to issue 710,248 additional shares of common stock to the Investors.  The Company is in the process of obtaining signed agreements with all of the Investors prior to issuance of the shares. In the meantime the Company has recorded a $355,124 liability for Registration Payment Arrangement as of December 31, 2009 that will be satisfied when the shares are issued.

 

The exercise price and the number of shares of common stock issuable upon exercise of all the above-referenced warrants will be adjusted upon the occurrence of certain events, including reclassifications, reorganizations or combinations of the common stock. At all times that the warrants are outstanding, we will authorize and reserve at least that number of shares of common stock equal to the number of shares of common stock issuable upon exercise of all outstanding warrants.

 

As of April 20, 2010, there were employee, consultant and director stock option agreements outstanding with options to purchase 1,496,174 shares of common stock with various vesting periods and amounts. We have 40,298 shares remaining reserved for issuance under the 2008 Equity Incentive Plan.

 

Dividends

 

We have never paid dividends and do not currently intend to pay any dividends on our common stock in the foreseeable future. Instead, we anticipate that any future earnings will be retained for the development of our business. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including, but not limited to, our financial condition, operating results, cash needs, growth plans, the terms of any credit agreements that we may be a party to at the time and the Minnesota Business Corporations Act, which provides that dividends are only

payable out of surplus or current net profits.

 

Registration Rights

 

Under the Registration Rights Agreement entered into in connection with the October 2008 financing with certain accredited and institutional investors (the “Investors”), we are obligated to register the following securities beneficially owned by the Investors to permit the offer and resale from time to time of such securities: (i) all of the common stock issued or issuable upon the conversion of shares of common stock (including the shares underlying the warrants we issued in conjunction with our private placement financing) acquired from the Company pursuant to a Subscription Agreement entered into between the Investors and the Company; and (ii) any securities issued or issuable directly or indirectly with respect to the securities referred to in (i) by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization.

 

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Anti-Takeover Effects of Certain Provisions of Minnesota Law

 

Certain provisions of Minnesota law described below could have an anti-takeover effect. These provisions are intended to provide management flexibility, to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by our board of directors and to discourage an unsolicited takeover if our board of directors determines that such a takeover is not in our best interests or the best interests of our shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire us that could deprive our shareholders of opportunities to sell their shares of our stock at higher values.

 

Section 302A.671 of the Minnesota Business Corporation Act applies, with certain exceptions, to any acquisitions of our stock (from a person other than us, and other than in connection with certain mergers and exchanges to which we are a party) resulting in the beneficial ownership of 20% or more of the voting stock then outstanding. Section 302A.671 requires approval of any such acquisition by a majority vote of our shareholders prior to its consummation. In general, shares acquired in the absence of such approval are denied voting rights and are redeemable by us at their then-fair market value within 30 days after the acquiring person has failed to give a timely information statement to us or the date the shareholders voted not to grant voting rights to the acquiring person’s shares.

 

Section 302A.673 of the Minnesota Business Corporation Act generally prohibits any business combination by us, or any of our subsidiaries, with an interested shareholder, which means any shareholder that purchases 10% or more of our voting shares within four years following such interested shareholder’s share acquisition date, unless the business combination is approved by a committee of all of the disinterested members of our board of directors before the interested shareholder’s share acquisition date.

 

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Disclosure of Commission Position of Indemnification for Securities Act Liabilities

 

We are a Minnesota corporation and certain provisions of the Minnesota Statutes and our By-Laws provide for indemnification of our officers and directors against liabilities which they may incur in such capacities. A summary of the circumstances in which indemnification is provided is discussed below, but this description is qualified in its entirety by reference to our By-Laws and to the statutory provisions.

 

Section 302A.521, Subd. 2 of the Minnesota Statutes requires a corporation to indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding, if, with respect to the acts or omissions of the person complained of in the proceeding, the person:

 

(1)

has not been indemnified by another organization or employee benefit plan for the same judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions;

 

(2)

acted in good faith;

 

(3)

received no improper personal benefit and Section 302A.255, if applicable, has been satisfied;

 

(4)

in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and

 

(5)

in the case of acts or omissions occurring in the person’s performance in the official capacity of director or, for a person not a director, in the official capacity of officer, board committee member or employee, reasonably believed that the conduct was in the best interests of the corporation or, in the case of performance by a director, officer or employee of the corporation involving service as a director, officer, partner, trustee, employee or agent of another organization or employee benefit plan, reasonably believed that the conduct was not opposed to the best interests of the corporation. If the person’s acts or omissions complained of in the proceeding relate to conduct as a director, officer, trustee, employee, or agent of an employee benefit plan, the conduct is not considered to be opposed to the best interests of the corporation if the person reasonably believed that the conduct was in the best interests of the participants or beneficiaries of the employee benefit plan.

 

Section 302A.521 Subd. 2 further provides that the termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent does not, of itself, establish that the person did not meet the criteria set forth in this subdivision.

 

In addition, Section 302A.521, Subd. 3, requires that if a person is made or threatened to be made a party to a proceeding, the person is entitled, upon written request to the corporation, to payment or reimbursement by the corporation of reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in advance of the final disposition of the proceeding, (a) upon receipt by the corporation of a written affirmation by the person of a good faith belief that the criteria for indemnification set forth in Section 302A.521, Subd. 2 have been satisfied and a written undertaking by the person to repay all amounts so paid or reimbursed by the corporation, if it is ultimately determined that the criteria for indemnification have not been satisfied, and (b) after a determination that the facts then known to those making the determination would not preclude indemnification under this section. The written undertaking required by clause (a) is an unlimited general obligation of the person making it, but need not be secured and shall be accepted without reference to financial ability to make the repayment.

 

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Section 302A.521 Subd. 4 provides that the articles of incorporation or bylaws of a corporation either may prohibit indemnification or advances of expenses otherwise required by Section 302A.521 or may impose conditions on indemnification or advances of expenses in addition to the conditions contained in Subd. 2 and 3 including, without limitation, monetary limits on indemnification or advances of expenses, if the prohibition or conditions apply equally to all persons or to all persons within a given class. A prohibition or limit on indemnification or advances may not apply to or affect the right of a person to indemnification or advances of expenses with respect to any acts or omissions of the person occurring prior to the effective date of a provision in the articles of incorporation or the date of adoption of a provision in the corporation’s bylaws establishing the prohibition or limit on indemnification or advances.

 

Section 302A.521 Subd. 5 provides that Section 302A.521 does not require, or limit the ability of a corporation to reimburse expenses, including attorneys’ fees and disbursements, incurred by a person in connection with an appearance as a witness in a proceeding at a time when the person has not been made or threatened to be made a party to a proceeding

 

Section 302A.521 Subd. 6 further provides that:

 

(a) all determinations whether indemnification of a person is required because the criteria set forth in Subd. 2 have been satisfied and whether a person is entitled to payment or reimbursement of expenses in advance of the final disposition of a proceeding as provided in Subd. 3 shall be made:

 

(1)

by the board by a majority of a quorum, if the directors who are at the time parties to the proceeding are not counted for determining either a majority or the presence of a quorum;

 

(2)

if a quorum under clause (1) cannot be obtained, by a majority of a committee of the board, consisting solely of two or more directors not at the time parties to the proceeding, duly designated to act in the matter by a majority of the full board including directors who are parties;

 

(3)

if a determination is not made under clause (1) or (2), by special legal counsel, selected either by a majority of the board or a committee by vote pursuant to clause (1) or (2) or, if the requisite quorum of the full board cannot be obtained and the committee cannot be established, by a majority of the full board including directors who are parties;

 

(4)

if a determination is not made under clauses (1) to (3), by the affirmative vote of the shareholders required by Section 302A.437 of the Minnesota Statutes, but the shares held by parties to the proceeding must not be counted in determining the presence of a quorum and are not considered to be present and entitled to vote on the determination; or

 

(5)

if an adverse determination is made under clauses (1) to (4) or under paragraph (b), or if no determination is made under clauses (1) to (4) or under paragraph (b) within 60 days after (i) the later to occur of the termination of a proceeding or a written request for indemnification to the corporation or (ii) a written request for an advance of expenses, as the case may be, by a court in this state, which may be the same court in which the proceeding involving the person’s liability took place, upon application of the person and any notice the court requires. The person seeking indemnification or payment or reimbursement of expenses pursuant to this clause has the burden of establishing that the person is entitled to indemnification or payment or reimbursement of expenses.

 

(b) With respect to a person who is not, and was not at the time of the acts or omissions complained of in the proceedings, a director, officer, or person possessing, directly or indirectly, the power to direct or cause the direction of the management or policies of the corporation, the determination whether indemnification of this person is required because the criteria set forth in Subd. 2 have been satisfied and whether this person is entitled to payment or reimbursement of expenses in advance of the final disposition of a proceeding as provided in Subd. 3 may be made by an annually appointed committee of the board, having at least one member who is a director. The committee shall report at least annually to the board concerning its actions.

Section 302A.521 Subd 7 allows a corporation to purchase and maintain insurance on behalf of a person in that person’s official capacity against any liability asserted against and incurred by the person in or arising from that capacity, whether or not the corporation would have been required to indemnify the person against the liability under the provisions of section 302A.521 of the Minnesota Statutes.

 

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Section 302A.521 Subd. 8 requires a corporation that indemnifies or advances expenses to a person in accordance with Section 302A.521 in connection with a proceeding by or on behalf of the corporation to report to the shareholders in writing the amount of the indemnification or advance and to whom and on whose behalf it was paid not later than the next meeting of shareholders.

 

Section 302A.521 Subd. 9 provides that nothing in Section 302A.521 shall be construed to limit the power of the corporation to indemnify persons other than a director, officer, employee, or member of a committee of the board of the corporation by contract or otherwise.

 

Pursuant to our By-Laws, we may indemnify our directors and executive officers to the fullest extent not prohibited by any applicable law; provided, however, that we may modify the extent of such indemnification by individual contracts with our directors and executive officers; and, provided, further, that we shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless: (i) such indemnification is expressly required to be made by law; (ii) the proceeding was authorized by our Board of Directors; or (iii) such indemnification is provided by the Company, in our sole discretion, pursuant to the powers vested in the Company under any applicable law. We shall have the power to indemnify our other officers, employees and other agents as set forth in any other applicable law. Our Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person to such officers or other persons as our board of directors shall determine.

 

In addition, our By-Laws provide that we will advance to any person who was or is a party to a threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the Company, prior to the final disposition of the proceeding, promptly following request therefore, all expenses incurred by any director or executive officer in connection with such proceeding; provided, however, that the advancement of expenses shall be made only upon delivery to the Company of an undertaking by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses. Notwithstanding the foregoing, unless otherwise determined, no advance shall be made by the Company to an officer of the Company (except by reason of the fact that such officer is or was a director of the Company in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made: (i) by a majority vote of directors who are not parties to the proceeding; (ii) by a committee of such directors designated by a majority vote of such directors; or (iii) if there are no such directors, or such directors so direct, by a written opinion from independent legal counsel, that the facts known to the decision making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in the best interests of the Company.

 

Our By-Laws also provide that without the necessity of entering into an express contract, all rights to indemnification and advances to our directors and executive officers shall be deemed to be contractual rights and to be effective to the same extent and as if provided for in a contract between the Company and the director or executive officer. Any right to indemnification or advances granted to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if: (i) the claim for indemnification or advances is denied, in whole or in part; or (ii) no disposition of such claim is made within ninety (90) days of request therefore. The claimant in such enforcement action, if successful, shall be entitled to be paid also the expense of prosecuting the claim. In connection with any claim for indemnification, the Company shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under applicable law for the Company to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the Company (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the Company) for advances, the Company shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in the best interests of the Company, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. A determination by the Company (including the board of directors, independent legal counsel or the stockholders) that indemnification of the claimant is proper because he has met the applicable standard of conduct or that the claimant has not met such applicable standard of conduct shall not be a defense to the action nor shall it create a presumption that claimant has not met the applicable standard of conduct.

 

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%

		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-15

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Part II

 

Item 13. Other Expenses of Issuance and Distribution.

 

The following table sets forth an estimate of the costs and expenses payable by us in connection with the registration of the common stock offered hereby. All of the amounts shown are estimates except the Securities and Exchange Commission Registration Fee:

		Amount
SEC Registration Fee		$	200
Printing Fees		$	30,000
Legal Fees and Expenses		$	80,000
Accounting Fees and Expenses		$	60,000
Miscellaneous		$	55,000
Total		$	225,200

 

Item 14. Indemnification of Directors and Officers.

 

We are a Minnesota corporation and certain provisions of the Minnesota Statutes and our By-Laws provide for indemnification of our officers and directors against liabilities which they may incur in such capacities. A summary of the circumstances in which indemnification is provided is discussed below, but this description is qualified in its entirety by reference to our By-Laws and to the statutory provisions.

 

Section 302A.521, Subd. 2 of the Minnesota Statutes requires a corporation to indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding, if, with respect to the acts or omissions of the person complained of in the proceeding, the person:

 

(1)

has not been indemnified by another organization or employee benefit plan for the same judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions;

 

(2)

acted in good faith;

 

(3)

received no improper personal benefit and Section 302A.255, if applicable, has been satisfied;

 

(4)

in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and

 

(5)

in the case of acts or omissions occurring in the person’s performance in the official capacity of director or, for a person not a director, in the official capacity of officer, board committee member or employee, reasonably believed that the conduct was in the best interests of the corporation or, in the case of performance by a director, officer or employee of the corporation involving service as a director, officer, partner, trustee, employee or agent of another organization or employee benefit plan, reasonably believed that the conduct was not opposed to the best interests of the corporation. If the person’s acts or omissions complained of in the proceeding relate to conduct as a director, officer, trustee, employee, or agent of an employee benefit plan, the conduct is not considered to be opposed to the best interests of the corporation if the person reasonably believed that the conduct was in the best interests of the participants or beneficiaries of the employee benefit plan.

 

Section 302A.521 Subd. 2 further provides that the termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent does not, of itself, establish that the person did not meet the criteria set forth in this subdivision.

 

In addition, Section 302A.521, Subd. 3, requires that if a person is made or threatened to be made a party to a proceeding, the person is entitled, upon written request to the corporation, to payment or reimbursement by the corporation of reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in advance of the final disposition of the proceeding, (a) upon receipt by the corporation of a written affirmation by the person of a good faith belief that the criteria for indemnification set forth in Section 302A.521, Subd. 2 have been satisfied and a written undertaking by the person to repay all amounts so paid or reimbursed by the corporation, if it is ultimately determined that the criteria for indemnification have not been satisfied, and (b) after a determination that the facts then known to those making the determination would not preclude indemnification under this section. The written undertaking required by clause (a) is an unlimited general obligation of the person making it, but need not be secured and shall be accepted without reference to financial ability to make the repayment.

 

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Section 302A.521 Subd. 4 provides that the articles of incorporation or bylaws of a corporation either may prohibit indemnification or advances of expenses otherwise required by Section 302A.521 or may impose conditions on indemnification or advances of expenses in addition to the conditions contained in Subd. 2 and 3 including, without limitation, monetary limits on indemnification or advances of expenses, if the prohibition or conditions apply equally to all persons or to all persons within a given class. A prohibition or limit on indemnification or advances may not apply to or affect the right of a person to indemnification or advances of expenses with respect to any acts or omissions of the person occurring prior to the effective date of a provision in the articles of incorporation or the date of adoption of a provision in the corporation’s bylaws establishing the prohibition or limit on indemnification or advances.

 

Section 302A.521 Subd. 5 provides that Section 302A.521 does not require, or limit the ability of a corporation to reimburse expenses, including attorneys’ fees and disbursements, incurred by a person in connection with an appearance as a witness in a proceeding at a time when the person has not been made or threatened to be made a party to a proceeding

 

Section 302A.521 Subd. 6 further provides that:

 

(a) all determinations whether indemnification of a person is required because the criteria set forth in Subd. 2 have been satisfied and whether a person is entitled to payment or reimbursement of expenses in advance of the final disposition of a proceeding as provided in Subd. 3 shall be made:

 

(1)

by the board by a majority of a quorum, if the directors who are at the time parties to the proceeding are not counted for determining either a majority or the presence of a quorum;

 

(2)

if a quorum under clause (1) cannot be obtained, by a majority of a committee of the board, consisting solely of two or more directors not at the time parties to the proceeding, duly designated to act in the matter by a majority of the full board including directors who are parties;

 

(3)

if a determination is not made under clause (1) or (2), by special legal counsel, selected either by a majority of the board or a committee by vote pursuant to clause (1) or (2) or, if the requisite quorum of the full board cannot be obtained and the committee cannot be established, by a majority of the full board including directors who are parties;

 

(4)

if a determination is not made under clauses (1) to (3), by the affirmative vote of the shareholders required by Section 302A.437 of the Minnesota Statutes, but the shares held by parties to the proceeding must not be counted in determining the presence of a quorum and are not considered to be present and entitled to vote on the determination; or

 

(5)

if an adverse determination is made under clauses (1) to (4) or under paragraph (b), or if no determination is made under clauses (1) to (4) or under paragraph (b) within 60 days after (i) the later to occur of the termination of a proceeding or a written request for indemnification to the corporation or (ii) a written request for an advance of expenses, as the case may be, by a court in this state, which may be the same court in which the proceeding involving the person’s liability took place, upon application of the person and any notice the court requires. The person seeking indemnification or payment or reimbursement of expenses pursuant to this clause has the burden of establishing that the person is entitled to indemnification or payment or reimbursement of expenses.

 

(b) With respect to a person who is not, and was not at the time of the acts or omissions complained of in the proceedings, a director, officer, or person possessing, directly or indirectly, the power to direct or cause the direction of the management or policies of the corporation, the determination whether indemnification of this person is required because the criteria set forth in Subd. 2 have been satisfied and whether this person is entitled to payment or reimbursement of expenses in advance of the final disposition of a proceeding as provided in Subd. 3 may be made by an annually appointed committee of the board, having at least one member who is a director. The committee shall report at least annually to the board concerning its actions.

 

II-2

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Section 302A.521 Subd 7 allows a corporation to purchase and maintain insurance on behalf of a person in that person’s official capacity against any liability asserted against and incurred by the person in or arising from that capacity, whether or not the corporation would have been required to indemnify the person against the liability under the provisions of section 302A.521 of the Minnesota Statutes.

 

Section 302A.521 Subd. 8 requires a corporation that indemnifies or advances expenses to a person in accordance with Section 302A.521 in connection with a proceeding by or on behalf of the corporation to report to the shareholders in writing the amount of the indemnification or advance and to whom and on whose behalf it was paid not later than the next meeting of shareholders.

 

Section 302A.521 Subd. 9 provides that nothing in Section 302A.521 shall be construed to limit the power of the corporation to indemnify persons other than a director, officer, employee, or member of a committee of the board of the corporation by contract or otherwise.

 

Pursuant to our By-Laws, we may indemnify our directors and executive officers to the fullest extent not prohibited by any applicable law; provided, however, that we may modify the extent of such indemnification by individual contracts with our directors and executive officers; and, provided, further, that we shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless: (i) such indemnification is expressly required to be made by law; (ii) the proceeding was authorized by our Board of Directors; (iii) such indemnification is provided by the Company, in our sole discretion, pursuant to the powers vested in the Company under any applicable law. We shall have the power to indemnify our other officers, employees and other agents as set forth in any other applicable law. Our Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person to such officers or other persons as our Board of Directors shall determine.

 

In addition, our By-Laws provide that we will advance to any person who was or is a party to a threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the Company, prior to the final disposition of the proceeding, promptly following request therefore, all expenses incurred by any director or executive officer in connection with such proceeding; provided, however, that the advancement of expenses shall be made only upon delivery to the Company of an undertaking by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses. Notwithstanding the foregoing, unless otherwise determined, no advance shall be made by the Company to an officer of the Company (except by reason of the fact that such officer is or was a director of the Company in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made: (i) by a majority vote of directors who are not parties to the proceeding; (ii) by a committee of such directors designated by a majority vote of such directors; or (iii) if there are no such directors, or such directors so direct, by a written opinion from independent legal counsel, that the facts known to the decision making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in the best interests of the Company.

 

II-3

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Our By-Laws also provide that without the necessity of entering into an express contract, all rights to indemnification and advances to our directors and executive officers shall be deemed to be contractual rights and to be effective to the same extent and as if provided for in a contract between the Company and the director or executive officer. Any right to indemnification or advances granted to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if: (i) the claim for indemnification or advances is denied, in whole or in part; or (ii) no disposition of such claim is made within ninety (90) days of request therefore. The claimant in such enforcement action, if successful, shall be entitled to be paid also the expense of prosecuting the claim. In connection with any claim for indemnification, the Company shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under applicable law for the Company to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the Company (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the Company) for advances, the Company shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in the best interests of the Company, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. A determination by the Company (including the Board of Directors, independent legal counsel or the stockholders) that indemnification of the claimant is proper because he has met the applicable standard of conduct or that the claimant has not met such applicable standard of conduct shall not be a defense to the action nor shall it create a presumption that claimant has not met the applicable standard of conduct.

 

Item 15. Recent Sales of Unregistered Securities.

 

During the past four years, the Company has issued the following securities without registration under the Securities Act. The discussions below take into account the June 6, 2008 and October 20, 2008 reverse stock splits.

 

On August 22, 2005, we issued an option agreement to purchase 17,957 shares (30,000 shares at $1 pre-split) of our common stock at $1.67 per share to Thomas McGoldrick, for his services as a director. In addition to the initial grant the option agreement specifies that he will we granted an option for 5,985 shares per year, on his anniversary date of joining the board, at the market price on the grant date. On August 22, 2006, we issued an option to purchase 5,985 shares of common stock at $1.67 per share to Mr. McGoldrick. This transaction was effected under Rule 701 promulgated under the Securities Act on the basis that the transaction was pursuant to a contract relating to compensation provided under Rule 701. The recipient of the securities in this transaction represented his intentions to acquire the securities for investment only and not with a view towards distribution thereof. Mr. McGoldrick had access, through his relationship with the Company, to information about us.

 

On August 31, 2005, we issued a warrant to purchase 2,993 shares of our common stock at $1.67 per share to each of three members of our Medical Advisory Board, Debbie Heitzman, Mary Wells Gorman and David Feroe, for their services on the Medical Advisory Board.

 

On December 14, 2005, we issued 7,482 shares of common stock to officers Lawrence Gadbaw and Gerald Rice as compensation for personal guarantees on Company loans.

 

On May 16, 2006, we issued 71,906 shares of our common stock to the inventor of our intellectual property, Marshall Ryan, for the development work he performed with respect to our product.

 

II-4

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On June 12, 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 agreement contained an anti-dilution clause that would add another 35,913 shares upon any large, dilutionary offering. The second warrant to purchase 35,913 shares of our common stock was granted to Mr. Leonard in June 2008 when we achieved 2 million in outstanding shares of common stock through the October 2008 financing.

 

On August 8, 2006, we issued 14,964 shares of our common stock to Andcor Companies, Inc. in partial payment of an invoice. Also in 2006, we issued warrants to purchase 5,985 shares of common stock at $1.67 per share to Andcor Companies, Inc. as part of a convertible loan agreement.

 

On October 4, 2006, we entered into an employment agreement with Kevin Davidson, our Chief Executive Officer. As part of this agreement, we agreed to issue 50,000 shares of our common stock to Mr. Davidson. The grant under the employment agreement contained an anti-dilution protection amounting to 3.81% of the fully-diluted outstanding common stock of the Company up to the completion of the first $1,000,000 raised by the Company. On June 5, 2008, pursuant to a stock option agreement with the Company, which amended Mr. Davidson’s employment agreement, Mr. Davidson opted to receive an option to purchase 543,292 shares of common stock, exercisable at $.01, in lieu of obtaining the shares to which he was entitled under his employment agreement.

 

On October 23, 2006, we issued 8,979 shares of our common stock to a former employee as a part of his compensation package in his employment agreement. This transaction was effected under Rule 701 promulgated under the Act on the basis that the transaction was pursuant to a contract relating to compensation provided under Rule 701. The recipient of securities in this transaction represented his intentions to acquire the securities for investment only and not with a view towards distribution thereof. The recipient had access, through his relationship with the Company, to information about us.

 

On November 11, 2006 we issued an option agreement to purchase 17,957 shares (30,000 at $1 pre-split) of common stock at $1.67 per share to Andrew Reding, for his services as a director. In addition to the initial grant the option agreement specifies that he will we granted an option for 5,985 shares per year, on his anniversary date of joining the board, at the market price on the grant date. On November 11, 2007, we issued an option to purchase 5,985 shares of common stock at $1.67 per share to Mr. Reding. This transaction was effected under Rule 701 promulgated under the Securities Act on the basis that the transaction was pursuant to a contract relating to compensation provided under Rule 701. The recipient of securities in this transaction represented his intentions to acquire the securities for investment only and not with a view towards distribution thereof. The recipient had access, through his relationship with the Company, to information about us.

 

On December 1, 2006, we fully repaid two of our three loans, in the combined amount of $37,500, due to Wisconsin Rural Enterprise Fund (“WREF”). To pay the outstanding loan to WREF, the Company issued warrants to purchase 20,949 shares of common stock at $1.67 per share to WREF.

 

On December 1, 2006, we issued 3,986 shares of our common stock to pay a consulting fee to Wisconsin Business Innovation Corporation, a related firm of WREF.

 

On December 7, 2006 and December 20, 2006 we issued warrants to purchase 2,993 shares of our common stock at $1.67 per share to each of Karen Ventura, Nancy Kolb and Kim Shelquist for their sales and marketing advisory services.

 

On January 30, 2007 we fully repaid a Company loan of $1,000 due one of our former employees by issuing him 599 shares of our common stock.

 

II-5

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In February 2007, Messrs. Davidson, Morawetz, Reding and McGoldrick loaned the Company $1,000 each and obtained an 8.25% convertible promissory note in the principal amount of $1,000. Each note matured on July 31, 2007 and the note was convertible into common stock at the lower of (i) $1.00 per share or (ii) the price of the sale of common stock the next financing which ultimately was $0.35 per share.

 

On March 1, 2007, we entered into a convertible debenture agreement with two individuals, Roy Moore and Carl Moore, who loaned us $50,000 each, whereby we granted warrants to purchase up to an aggregate of 28,502 shares of common stock to them at $.46 per share. There were no special terms contained in the warrant other than that the two individuals would pay a per share price equal to that of the October 2008 financing when exercising their warrants.

 

On July 23, 2007, we entered into a convertible debenture with certain investors who loaned us $170,000. Such securities are convertible into 620,095 shares of common stock and the lenders were also entitled to receive warrants to purchase 620,095 shares of common stock at $.35 per share. The Company issued the warrants February 24, 2009.

 

From July 2007 to October 2008, we issued 4,552,862 shares of our common stock at a price per share of $0.35 to a number of investors pursuant to a private placement, and raised gross proceeds of approximately $1.6 million. The transaction was a unit offering, pursuant to which each investor received a unit including one share of common stock and one warrant to purchase common stock at $0.46 per share. Thirty-three investors, including one of our officers, Chad Ruwe, participated in the transaction, which we completed in October 2008. The transaction is described further in “Description of Business” section of the prospectus. This transaction was in reliance upon the exemption from registration set forth in Rule 506 of Regulation D of the Securities Act. Each and all of the investors in this financing qualified as an “accredited investor,” as that term is defined in the Securities Act. The following conditions were all met with respect to this transaction: (1) the registrant did not advertise this issuance in any public medium or forum; (2) the registrant did not solicit any investors with respect to this issuance; (3) the registrant did not publicize any portion of the purchase or sale of the shares issued; (4) none of the shares issued were offered in conjunction with any public offering; and (5) neither the registrant nor the investors paid any fees to any finder or broker-dealer in conjunction with this issuance. In July 2007, we entered into a binding term sheet with a consultant pursuant to which the consultant would assist us in obtaining bridge financing and subsequent equity financing and such term sheet provided that the consultant and its assigns would receive 13.3% of the Company’s anticipated issued and outstanding common stock following the proposed bridge and equity financing on a fully-diluted basis. The parties subsequently agreed that we would issue 2,001,119 shares to such parties in satisfaction of such obligation.

 

On November 11, 2007, pursuant to a stock option agreement with Andrew Reding, a member of our board of directors, we issued an option to purchase 5,985 shares of our common stock at $.46 per share to Mr. Reding. This transaction was effected under Rule 701 promulgated under the Securities Act on the basis that the transaction was pursuant to a contract relating to compensation provided under Rule 701. The recipient of securities in this transaction represented his intentions to acquire the securities for investment only and not with a view towards distribution thereof. The recipient had access, through his relationship with the Company, to information about us.

 

On February 29, 2008, we entered into a consulting agreement with Jeremy Roll for referral services for the Company’s funding that was completed in October 2008. Under the agreement, in addition to a cash referral fee, Mr. Roll was entitled to receive warrants to purchase shares of our common stock at $.35 per share equal to 10% of his gross proceeds of the funds raised for us. As a result, in July 7, 2008 Mr. Roll received warrants to purchase 11,429 shares of our common stock.

 

On March 10, 2008, we entered into a finder agreement for referral services for the Company’s funding that was completed in October 2008. This agreement also covered the following finders: Thomas Pronesti, Craig Kulman, Caron Partners, LP and Bellajule Partners, LP. Under the agreement, in addition to a cash referral fee, the finders were entitled to receive 10% of their gross proceeds raised for us with a fair market value of our common stock, or $.35 per share. As a result, on June 23, 2008, the group of finders received an aggregate of 155,142 shares of our common stock.

 

II-6

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On April 15, 2008, we entered into an agreement with Kulman IR, LLC for investor relations services. Under the agreement, in addition to cash fees, Kulman was entitled to receive 250,000 shares of our common stock. On June 23, 2008 Kulman and Cross Street Partners, Inc., a party related to Kulman, each received 125,000 shares of our common stock.

 

On June 16, 2008, we entered into an employment agreement with Chad Ruwe, Executive Vice President of Operations, pursuant to which we granted him an option to purchase 250,000 shares of common stock with 50,000 shares vested immediately and increments of 50,000 shares vesting upon achievement of certain milestones related to obtaining FDA clearance and achieving commercial sales of our StreamwayTM Fluid Management System. This transaction was effected under Rule 701 promulgated under the Securities Act on the basis that the transaction was pursuant to a contract relating to compensation provided under Rule 701. The recipient of securities in this transaction represented his intentions to acquire the securities for investment only and not with a view towards distribution thereof. The recipient had access, through his relationship with the Company, to information about us.

 

On June 30, 2008, we entered into a consulting agreement with Namaste Financial, Inc. for a one-year period of general business, strategic and growth advisory services. Under the agreement, Namaste received 125,000 shares of common stock and a warrant to purchase 125,000 shares of common stock at $.46 per share. This firm was engaged to arrange new equity financing and the warrants and shares. The shares were valued at $43,750 and the warrants were valued at $12,800 using a Black-Scholes valuation model. The total value of $56,550 is shown as a net reduction of paid in capital as they were treated as an incremental cost of raising capital under the guidance of SAB Topic 5-A.

 

On August 11, 2008, we entered into an employment agreement with David Dauwalter, Director of Sales, pursuant to which we granted him an option to purchase 50,000 shares of common stock with 10,000 shares vested immediately and increments of 10,000 shares vesting upon reaching certain performance milestones.

 

On August 15, 2008, we issued warrants to purchase 75,000 shares each of our common stock at $.46 per share to Taylor & Associates, Inc. and Andcor Corporation for their HR services in selecting a Vice President of Sales and Marketing.

 

On August 26, 2008, we issued a warrant to purchase 50,000 shares of our common stock at $.46 per share to a regulatory consultant, Thomas Bachinski, for his past services.

 

On October 20, 2008, we entered into an agreement with Gregory Sachs, a regulatory consultant, pursuant to which the Company granted an agreement to purchase up to 50,000 shares of our common stock contingent upon reaching certain performance goals from April 1, 2009 to June 30, 2009. Mr. Sachs assisted the Company in obtaining FDA 510(k) clearance. The purpose of the performance goal provision was to help to ensure a timely clearance of the 510(k). Upon reaching FDA clearance on April 1, 2009, Mr. Sachs received a warrant to purchase 50,000 shares of our common stock. The warrant has a five-year term and an exercise price of $.46 per share.

 

On February 1, 2009, we entered into an employment agreement with Kirsten Doerfert, Vice President of Sales and Marketing, pursuant to which we granted her an option to purchase 100,000 shares of common stock at $.35 per share with 20,000 shares vested immediately and increments of 20,000 shares vesting upon reaching certain performance milestones. In addition, we granted Ms. Doerfert a warrant, vested immediately, to purchase 15,000 shares of common stock at $.46 per share as compensation for her consulting services prior to becoming an employee.

 

On March 27, 2009 we issued 125,000 shares of common stock to Cross Street Partners/Morrie Rubin as compensation in connection with raising up to $500,000 in new equity prior to June 30, 2009.

 

On April 6, 2009 we issued 50,000 shares of common stock and a warrant to purchase 50,000 shares of common stock at $.65 to Russell H. Yaucher for his $25,000 investment in the Company.

 

II-7

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On April 14, 2009 we issued 50,000 shares of common stock and a warrant to purchase 50,000 shares of common stock at $.65 to Chad A. and Marianne K. Ruwe for their $25,000 investment in the Company.

 

On April 20, 2009 we issued 200,000 shares of common stock and a warrant to purchase 200,000 shares of common stock at $.65 to Dean M. and Carol L. Ruwe for their $100,000 investment in the Company.

 

On April 21, 2009 we issued 200,000 shares of common stock and a warrant to purchase 200,000 shares of common stock at $.65 to Richard J. Butler for his $100,000 investment in the Company. On April 30, 2009 we issued 200,000 shares of common stock and a warrant to purchase 200,000 shares of common stock at $.65 to James Dauwalter for his $100,000 investment in the Company. On May 5, 2009 we issued 20,000 shares of common stock and a warrant to purchase 20,000 shares of common stock at $.65 to Gregory B. Graves for his $10,000 investment in the Company.

 

On May 15, 2009 we entered into an agreement with Peter Morawetz, a co-founder of the Company, a significant shareholder and a member of the board of directors, whereby Mr. Morawetz agreed to waive unpaid consulting fees in the amount of $84,600, relating to 2006 and prior years and, in exchange, would receive a cash payment of $30,000 and an option to purchase 75,000 shares of common stock at $.35 per share upon the Company raising an additional $3 million in equity. Mr. Morawetz is not required to participate in any way in the effort to raise $3 million.

 

On May 21, 2009 we issued 200,000 shares of common stock and a warrant to purchase 200,000 shares of common stock at $.65 to Richard J. Butler for his additional $100,000 investment in the Company.

 

On June 10, 2009 we issued 50,000 shares of common stock and a warrant to purchase 50,000 shares of common stock to Citigroup FBO John Villas for his $25,000 investment in the Company.

 

On August 5, 2009 we issued 50,000 shares of common stock and a warrant to purchase 50,000 shares of common stock at $.65 per share to Arnold A. Angeloni for his $25,000 investment in the Company.

 

On August 18, 2009 we issued 30,000 shares of common stock and a warrant to purchase 30,000 shares of common stock at $.65 per share to Peter G. Kertes for his $15,000 investment in the Company.

 

On August 24, 2009 we issued restricted shares under the 2008 Equity Incentive Plan to certain management and directors of the Company to reward them for past service and to incentivize them for future service. The shares are subject to forfeiture until the earlier of a Change in Control, as defined in the Plan, attainment of six consecutive quarters of a minimum of $250,000 in net income or attainment of a 30-day average trading volume of not less than 25,000 shares of common stock. The shares will forfeited to the Company if none of these “acceleration events” occurs by the 10th anniversary of the grant date. The shares granted are as follows:

 

Peter Morawetz, Director	100,000 shares
Thomas McGoldrick, Director	40,000 shares
Andrew Reding, Director	20,000 shares
Kevin Davidson, President and Chief Executive Officer	300,000 shares
Chad Ruwe, Chief Operating Officer	200,000 shares
Kirsten Doerfert, VP Sales and Marketing	75,000 shares
David Dauwalter, Direct of Product Management	50,000 shares

 

The value of these shares was determined to be $.50 per share and the expense for their grant was recorded in August 2009.

 

In addition, on August 24, 2009 the Company issued 12,810 shares of restricted stock under the 2008 Equity Incentive Plan and a warrant to purchase 18,207 shares of common stock at $.46 per share to Alan Shuler as partial compensation under his consulting arrangement with the Company. The warrant has a term of five years and the shares are subject to forfeiture until the earlier of a Change in Control, as defined in the Plan, attainment of six consecutive quarters of a minimum of $250,000 in net income or attainment of a 30 day average trading volume of not less than 25,000 shares of stock. The shares will forfeited to the Company if none of these “acceleration events” occurs by the 10th anniversary of the grant date. The value of the warrant was determined to be $4,943 using the Black-Scholes valuation model with an expected term of five years, an expected volatility of 59%, a dividend rate of zero and a risk free interest rate of 2.5%. The value of the restricted shares was determined to be $6,405 at $.50 per share. These expenses were recorded in August 2009.

 

On September 8, 2009 we issued 100,000 common shares to a consulting firm for their consulting services.

 

On September 8, 2009 we issued 10,000 common shares and a warrant to purchase 10,000 shares at $.65 per share to an investor for his $5,000 investment in the Company.

On September 8, 2009 we issued 10,000 common shares and a warrant to purchase 10,000 shares at $.65 per share to an investor for her $5,000 investment in the Company.

On September 25, 2009 we issued 20,000 common shares and a warrant to purchase 20,000 shares at $.65 per share to an investor for her $10,000 investment in the Company.

On September 25, 2009 we issued 30,000 common shares and a warrant to purchase 30,000 shares at $.65 per share to co-investors for their $15,000 investment in the Company.

On September 30, 2009 we issued 80,000 common shares and a warrant to purchase 80,000 shares at $.65 per share to an investor for his $40,000 investment in the Company.

On October 2, 2009 we issued 30,000 common shares and a warrant to purchase 30,000 common shares at $.65 per share to a consultant for their consulting services.

On October 15, 2009 we issued 3,000 common shares and a warrant to purchase 3,000 common shares at $.65 per share to consultants for their consulting services.

On October 15, 2009 we issued 2,000 common shares and a warrant to purchase 2,000 common shares at $.65 per share to a consultant for her consulting services.

On October 26, 2009 we issued a note, convertible into 200,000 common shares, and a warrant to purchase 200,000 shares at $.65 per share to co-investors for their $100,000 investment in the Company.

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 an investor for his $25,000 investment in the Company.

In January 2010 the Company issued 19,090 restricted shares of common stock under the 2008 Equity Incentive Plan to a consultant as partial payment for his services.

In March 2010 the Company issued 350,000 shares of common stock as payment to three consultants for their investor relations consulting services.

In March and April 2010 the Company issued 274,550 shares of common stock and warrants for 274,550 shares of common stock, at an exercise price of $.65 per share, to 9 investors for their $137,275 investment in the Company.

 

Unless otherwise specified above, the Company believes that all of the above transactions were transactions not involving any public offering within the meaning of Section 4(2) of the Securities Act, since (a) each of the transactions involved the offering of such securities to a substantially limited number of persons; (b) each person took the securities as an investment for his/her/its own account and not with a view to distribution; (c) each person had access to information equivalent to that which would be included in a registration statement on the applicable form under the Securities Act; and (d) each person had knowledge and experience in business and financial matters to understand the merits and risk of the investment; therefore no registration statement needed to be in effect prior to such issuances.

 

Item 16. Exhibits.

 

EXHIBIT INDEX

 

Exhibit
No.		Description
3.1		Articles of Incorporation of the Registrant, as amended (4)
3.2		Bylaws of the Registrant, as amended (1)
3.3		Amendment to Articles (3)
5.1		Opinion of Richardson & Patel LLP (8)
10.1†		Form of Employment Agreement by and between the Registrant and Kevin R. Davidson dated October 4, 2006 (1)
10.2†		Form of Employment Agreement by and between the Registrant and Gerald D. Rice dated October 18, 2006 (1)
10.3†		Form of Employment Agreement by and between the Registrant and Chad A. Ruwe dated June 16, 2008 (1)
10.4†		Form of Confidential Separation Agreement and Release by and between the Registrant and Lawrence W. Gadbaw dated August 13, 2008 (1)

10.5		Form of Nondisclosure and Non-compete Agreement by and between the Registrant and Lawrence W. Gadbaw dated October 18, 2006 (1)
10.6†		Form of Stock Option Agreement by and between the Registrant and Kevin R. Davidson dated June 5, 2008 (1)
10.7†		Form of Director Stock Option Agreement between the Registrant and Thomas McGoldrick dated August 22, 2006 (1)
10.8†		Form of Director Stock Option Agreement between the Registrant and Andrew P. Reding dated November 11, 2006 (1)
10.9		Form of Consulting Agreement by and between the Registrant and Jeremy Roll dated February 29, 2008 (1)
10.10		Form of Consulting Agreement by and between the Registrant and Namaste Financial, Inc. dated June 30, 2008 (1)
10.11		Form of Consulting Agreement by and between the Registrant and Marshall C. Ryan and Mid-State Stainless, Inc. dated June 2008 (1)
10.12		Form of Investor Relations Agreement by and between the Registrant and Kulman IR, LLC dated April 15, 2008 (1)
10.13		Form of Finder Agreement by and between the Registrant and Thomas Pronesti dated March 10, 2008 (1)
10.14		Form of Patent Assignment by Marshall C. Ryan in favor of the Registrant dated June 18, 2008 (1)
10.15		Form of Convertible Debenture by and between the Registrant and Kevin R. Davidson dated February 2, 2007 (1)
10.16		Form of Convertible Debenture by and between the Registrant and Peter L. Morawetz dated February 2, 2007 (1)
10.17		Form of Convertible Debenture by and between the Registrant and Andrew P. Reding dated February 2, 2007 (1)
10.18		Form of Convertible Debenture by and between the Registrant and Thomas McGoldrick dated January 30, 2007 (1)
10.19		Form of Convertible Debenture by and between the Registrant and Andcor Companies, Inc. dated September 29, 2006 (1)
10.20		Form of Convertible Debenture by and between the Registrant and Carl Moore dated March 1, 2007 (1)
10.21		Form of Convertible Debenture by and between the Registrant and Roy Moore dated March 1, 2007 (1)
10.22		Form of Advisory Board Warrant Agreement by and between the Registrant and Debbie Heitzman dated August 31, 2005 (1)
10.23		Form of Advisory Board Warrant Agreement by and between the Registrant and Mary Wells Gorman dated August 31, 2005 (1)

 

 

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10.24		Form of Advisory Board Warrant Agreement by and between the Registrant and David Feroe dated August 31, 2005 (1)
10.25		Form of Advisory Board Warrant Agreement by and between the Registrant and Dr. Arnold S. Leonard dated June 12, 2006 (1)
10.26		Form of Advisory Board Warrant Agreement by and between the Registrant and Karen A. Ventura dated December 7, 2006 (1)
10.27		Form of Advisory Board Warrant Agreement by and between the Registrant and Nancy A. Kolb dated December 20, 2006 (1)
10.28		Form of Advisory Board Warrant Agreement by and between the Registrant and Kim Shelquist dated December 20, 2006 (1)
10.29		Form of Warrant Agreement by and between the Registrant and Wisconsin Rural Enterprise Fund, LLC dated December 1, 2006 (1)
10.30		Form of Stock Purchase and Sale Agreement by and between the Registrant and Wisconsin Rural Enterprise Fund, LLC dated July 31, 2006 (1)
10.31		Form of Subscription Agreement (1)
10.32		Form of Registration Rights Agreement (1)
10.33		Form of Escrow Agreement (1)
10.34		Form of Warrant (1)
10.35†		2008 Equity Incentive Plan (1)
10.36		Office Lease Agreement by and between the Registrant and Roseville Properties Management Company, as agent for Lexington Business Park, LLC (1)
10.37†		Form of Employment Agreement by and between the Registrant and David Dauwalter dated August 11, 2008 (2)
10.38†		Form of Amendment No. 1 to Employment Agreement by and between the Registrant and David Dauwalter dated September 11, 2008 (2)
10.39		Form of Consulting Agreement by and between the Registrant and Andcor Companies, Inc. dated September 15, 2008 (2)
10.40		Form of Consulting Agreement by and between the Registrant and Taylor & Associates, Inc. dated August 15, 2008 (2)
10.41		Form of Consulting Agreement by and between the Registrant and Gregory Sachs dated October 20, 2008 (2)
10.42		Form of Restructuring Agreement dated June 9, 2008 (2)
10.43		Form of Secured Convertible Note Purchase Agreement dated July 23, 2007 (2)
10.44		Form of Secured Convertible Note dated July 2007 (2)
10.45		Form of Secured Convertible Note Security Agreement dated July 2007 (2)

10.46		Independent Contractor Agreement dated as of February 2, 2009 by and between Belimed, Inc. and BioDrain Medical, Inc. (4)
10.47		Supply Agreement dated as of February 20, 2009 by and between Oculus Innovative Sciences, Inc., and BioDrain Medical, Inc. (6)
10.48†		Employment Agreement made and entered into effective the 1st of February, 2009 by and between Kirsten Doerfert (4)
10.49		Term Sheet by and among the Registrant and Longport Holdings, as amended (4)
10.50†		Agreement between the Company and Peter Morawetz dated May 15, 2009 (5) (7)
14		Code of Ethics (2)
21		Subsidiaries of the Registrant (1)
23.1*		Consent of Olsen Thielen & Co., Ltd.
23.2		Consent of Richardson & Patel LLP (contained in the opinion filed as Exhibit 5.1 hereto) (8)
24.1		Power of Attorney (2)

* Filed herewith.

† Compensatory plan or agreement.

(1)           Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, filed with the SEC on November 12, 2008.

(2)           Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, Amendment No. 1, filed with the SEC on January 12, 2009.

(3)           Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, Amendment No. 2, filed with the SEC on February 12, 2009.

(4)           Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, Amendment No. 3, filed with the SEC on April 6, 2009.

(5)           Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, Amendment No. 4, filed with the SEC on May 14, 2009.

(6)           Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, Amendment No. 5, filed with the SEC on July 1, 2009.

(7)           Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, Amendment No. 7, filed with the SEC on August 12, 2009.

(8)           Previously filed with the SEC as an Exhibit to and incorporated herein by reference from the Company’s Registration Statement on Form S-1, Amendment No. 11, filed with the SEC on October 19, 2009.

 

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Item 17. Undertakings.

 

The undersigned registrant hereby undertakes:

 

1.  To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:

 

i.

Include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

ii.

Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement and the most recent post-effective amendment thereof. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

 

iii.

Include any additional or changed material information on the plan of distribution.

 

2.  For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

3.  File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of offering.

 

4.  If the registrant is relying on Rule 430B:

 

Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

 

Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

 

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If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

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SIGNATURES

 

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Post-Effective Amendment No.1 on Form S-1 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Mendota Heights, State of Minnesota on May 5, 2010.

 

	BIODRAIN MEDICAL, INC.
		By:	/s/ Kevin R. Davidson
		Kevin R. Davidson
		President, Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer).

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

 

Name		Title		Date
*		Chairman of the		May 5, 2010
Lawrence W. Gadbaw		Board of Directors
* /s/ Kevin Davidson		President, Chief Executive Officer,		May 5, 2010
		Chief Financial Officer and Director
*		Chief  Operating Officer and		May 5, 2010
Chad A. Ruwe		Director
*		Director		May 5, 2010
James E. Dauwalter
*		Director		May 5, 2010
Peter L. Morawetz
*		Director		May 5, 2010
Thomas J. McGoldrick
*		Director		May 5, 2010
Andrew P. Reding
* /s/ Kevin Davidson		Chief Executive Officer		May 5, 2010
Kevin Davidson		and Power of Attorney

 

 

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