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FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to
Commission File Number: 000-54361
Skyline Medical Inc.
(Exact name of registrant as specified in its charter)
| Minnesota | 33-1007393 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 2915 Commers Drive, Suite 900 | Eagan, Minnesota 55121 | |
| (Address of principal executive offices) | (Zip Code) |
651-389-4800
(Registrant’s telephone number, including area code)
| BioDrain Medical, Inc. | ||
| (Former name, former address and former fiscal year, if changed since last report) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 8, 2013, the registrant had 121,952,831 shares of common stock, par value $.01 per share, outstanding.
| 1 |
SKYLINE MEDICAL INC.
TABLE OF CONTENTS
| Page No. | |
| PART I. FINANCIAL INFORMATION | |
| Item 1. Condensed Financial Statements | 3 |
| Condensed Balance Sheets June 30, 2013 and December 31, 2012 | 3 |
|
Condensed Statements of Operations for the three-and six month periods ended June 30, 2013 and June 30, 2012 and for the period from
April 23, 2002 (Inception) to June 30, 2013 |
4 |
| Statement of Stockholders’ Deficit from April 23, 2002 (Inception) to June 30, 2013 | 5 |
|
Condensed Statements of Cash Flows for the six-month periods ended June 30, 2013 and June 30, 2012 and for the period from
April 23, 2002 (Inception) to June 30, 2013 |
8 |
| Notes to Condensed Financial Statements | 9 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 32 |
| Item 4. Controls and Procedures | 32 |
| PART II. OTHER INFORMATION | |
| Item 1. Legal Proceedings | 32 |
| Item 1A. Risk Factors | 32 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 33 |
| Item 3. Defaults Upon Senior Securities | 34 |
| Item 4. Mine Safety Disclosures | 34 |
| Item 5. Other Information | 34 |
| Item 6. Exhibits | 34 |
| Signatures | 35 |
| Exhibit Index | 36 |
| 2 |
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
SKYLINE MEDICAL INC.
(A DEVELOPMENT STAGE COMPANY)
(Unaudited)
| June 30, 2013 | December 31, 2012 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 137,066 | $ | 13,139 | ||||
| Accounts Receivable, net of Allowance for Doubtful Accounts of $0 in 2013 and $4,073 in 2012. | 101,891 | 39,711 | ||||||
| Inventories | 108,036 | 145,209 | ||||||
| Prepaid Expense and other assets | 35,585 | 27,409 | ||||||
| Total Current Assets | 382,578 | 225,468 | ||||||
| Fixed Assets, net | 12,453 | 3,521 | ||||||
| Intangibles, net | 48,545 | 140,588 | ||||||
| Total Assets | $ | 443,576 | $ | 369,577 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Current portion of convertible debt, net of discounts of $164,947 and $21,138 (See Note 6) | $ | 978,843 | $ | 1,081,187 | ||||
| Convertible Notes Payable – Related Party (See Note 9) | 597,282 | - | ||||||
| Accounts payable | 661,081 | 733,595 | ||||||
| Accrued expenses | 1,143,532 | 1,599,519 | ||||||
| Deferred Revenue | 5,000 | - | ||||||
| Total Current Liabilities | 3,385,738 | 3,414,301 | ||||||
| Long-term convertible debt | - | 89,300 | ||||||
| Accrued Expenses | 468,903 | - | ||||||
| Liability for equity-linked financial instruments (See Note 8) | 80,506 | 169,179 | ||||||
| Stockholders' Deficit: | ||||||||
| Common stock, $.01 par value, 300,000,000 authorized, 121,952,832 and 104,247,228 outstanding | 1,219,529 | 1,042,473 | ||||||
| Additional paid-in capital | 17,857,072 | 14,945,435 | ||||||
| Deficit accumulated during development stage | (22,568,172 | ) | (19,291,111 | ) | ||||
| Total Stockholders' Deficit | (3,491,571 | ) | (3,303,203 | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | 443,576 | $ | 369,577 | ||||
See Notes to Condensed Financial Statements
| 3 |
SKYLINE MEDICAL INC.
(A DEVELOPMENT STAGE COMPANY)
(Unaudited)
|
Period
From
April 23, 2002 (Inception) |
||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | To June 30, | ||||||||||||||||||
| 2013 | 2012 | 2013 | 2012 | 2013 | ||||||||||||||||
| Revenue | $ | 150,856 | $ | 24,960 | $ | 278,583 | $ | 47,595 | $ | 580,017 | ||||||||||
| Cost of goods sold | 67,335 | 1,710 | 108,939 | 15,516 | 300,699 | |||||||||||||||
| Gross Margin | 83,521 | 23,250 | 169,644 | 32,079 | 279,318 | |||||||||||||||
| General and administrative expense | 888,133 | 1,950,974 | 2,711,216 | 2,516,695 | 18,461,579 | |||||||||||||||
| Operations expense | 204,928 | 148,563 | 409,395 | 218,300 | 2,699,976 | |||||||||||||||
| Sales and marketing expense | 108,593 | 29,164 | 195,562 | 61,064 | 1,254,017 | |||||||||||||||
| Interest expense | 126,654 | 89,271 | 222,206 | 144,758 | 1,148,662 | |||||||||||||||
| Loss (gain) on valuation of equity-linked financial instruments | (69,251 | ) | (58,947 | ) | (88,673 | ) | (59,597 | ) | (716,743 | ) | ||||||||||
| Total expense | 1,259,057 | 2,159,025 | 3,446,705 | 2,881,221 | 22,847,490 | |||||||||||||||
| Net income (loss) available to common shareholders | $ | (1,175,535 | ) | $ | (2,135,775 | ) | $ | (3,277,061 | ) | $ | (2,849,142 | ) | $ | (22,568,172 | ) | |||||
| Loss per common share basic and diluted | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (1.55 | ) | |||||
| Weighted average shares used in computation, basic and diluted | 121,267,500 | 54,656,895 | 111,045,552 | 44,619,113 | 14,591,515 | |||||||||||||||
See Notes to Condensed Financial Statements
| 4 |
SKYLINE MEDICAL INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM APRIL 23, 2002 (INCEPTION)
TO JUNE 30, 2013
| Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||||||
| Issuance of common stock 9/1/02, $.0167 (1) | 598,549 | $ | 5,985 | $ | 4,015 | $ | - | $ | 10,000 | |||||||||||
| Issuance of common 10/23/02, $1.67/share | 2,993 | 30 | 4,970 | 5,000 | ||||||||||||||||
| Net loss | (51,057 | ) | (51,057 | ) | ||||||||||||||||
| Balance 12/31/02 | 601,542 | $ | 6,015 | $ | 8,985 | $ | (51,057 | ) | $ | (36,057 | ) | |||||||||
| Issuance of common 2/12/03, $.0167 (2) | 23,942 | 239 | 161 | 400 | ||||||||||||||||
| Issuance of common 6/11&12,$1.67 (3) | 21,548 | 216 | 34,784 | 35,000 | ||||||||||||||||
| Net loss | (90,461 | ) | (90,461 | ) | ||||||||||||||||
| Balance 12/31/03 | 647,032 | $ | 6,470 | $ | 43,930 | $ | (141,518 | ) | $ | (91,118 | ) | |||||||||
| Issuance of common 5/25/04, $.0167 (4) | 6,567 | 66 | 44 | 110 | ||||||||||||||||
| Net loss | (90,353 | ) | (90,353 | ) | ||||||||||||||||
| Balance 12/31/04 | 653,599 | $ | 6,536 | $ | 43,974 | $ | (231,871 | ) | $ | (181,361 | ) | |||||||||
| Issuance of common 12/14/05, $.0167 (5) | 14,964 | 150 | 100 | 250 | ||||||||||||||||
| Vested stock options and warrants | 2,793 | 2,793 | ||||||||||||||||||
| Net loss | (123,852 | ) | (123,852 | ) | ||||||||||||||||
| Balance 12/31/05 | 668,563 | $ | 6,686 | $ | 46,867 | $ | (355,723 | ) | $ | (302,170 | ) | |||||||||
| Issuance of common 5/16 & 8/8, $.0167 (6) | 86,869 | 869 | 582 | 1,451 | ||||||||||||||||
| Issuance of common 10/19 & 23, $.0167 (7) | 38,906 | 389 | 261 | 650 | ||||||||||||||||
| Issuance of common 12/01, $1.67 (8) | 28,739 | 287 | 44,523 | 44,810 | ||||||||||||||||
| Vested stock options and warrants | 13,644 | 13,644 | ||||||||||||||||||
| Net loss | (273,026 | ) | (273,026 | ) | ||||||||||||||||
| Balance 12/31/06 | 823,077 | $ | 8,231 | $ | 105,877 | $ | (628,749 | ) | $ | (514,641 | ) | |||||||||
| Issuance of common 1/30/07 @ $1.67 (9) | 599 | 6 | 994 | 1,000 | ||||||||||||||||
| Value of equity instruments issued with debt | 132,938 | 132,938 | ||||||||||||||||||
| Capital contributions resulting from waivers of debt | 346,714 | 346,714 | ||||||||||||||||||
| Vested stock options and warrants | 73,907 | 73,907 | ||||||||||||||||||
| Net loss | (752,415 | ) | (752,415 | ) | ||||||||||||||||
| Balance 12/31/07 | 823,676 | $ | 8,237 | $ | 660,430 | $ | (1,381,164 | ) | $ | (712,497 | ) | |||||||||
| Issuance of common 6/11 to 9/30, $.35 (10) | 4,552,862 | 45,528 | 1,547,974 | 1,593,502 | ||||||||||||||||
| Shares issued to finders, agents | 2,012,690 | 20,127 | (20,127 | ) | - | |||||||||||||||
| Shares issued to pay direct legal fees | 285,714 | 2,857 | (2,857 | ) | - | |||||||||||||||
| Issuance of common due to anti-dilution provisions | 205,899 | 2,059 | (2,059 | ) | - | |||||||||||||||
| Shares issued to pay investor relations services 6/23/08, $.35 | 250,000 | 2,500 | 85,000 | 87,500 | ||||||||||||||||
| Vested stock options and warrants | 354,994 | 354,994 | ||||||||||||||||||
| Capital contributions resulting from waivers of debt | 129,684 | 129,684 | ||||||||||||||||||
| Net loss | (1,762,628 | ) | (1,762,628 | ) | ||||||||||||||||
| Balance 12/31/08 | 8,130,841 | $ | 81,308 | $ | 2,753,039 | $ | (3,143,792 | ) | $ | (309,445 | ) | |||||||||
| Cumulative effect of adoption of EITF 07-5 | (486,564 | ) | 6,654 | (479,910 | ) | |||||||||||||||
| Vested stock options and warrants | 111,835 | 111,835 | ||||||||||||||||||
| Shares issued 3/20/09 to pay for fund raising | 125,000 | 1,250 | (1,250 | ) | - | |||||||||||||||
| Shares issued under PMM in 2009, $.50 | 2,147,810 | 21,478 | 1,052,427 | 1,073,905 | ||||||||||||||||
| Capital contributions resulting from waivers of debt | 84,600 | 84,600 | ||||||||||||||||||
| Value of equity-linked financial instruments issued in connection with PPMs | (222,296 | ) | (222,296 | ) | ||||||||||||||||
| Value of equity instruments issued with debt | 30,150 | 30,150 | ||||||||||||||||||
| Shares issued to consultant for fund raising | 30,000 | 300 | (300 | ) | - | |||||||||||||||
| Shares issued upon conversion of debt and interest, $.27 | 935,446 | 9,354 | 247,100 | 256,454 | ||||||||||||||||
| Shares issued upon conversion of shareholder note, $.35 | 14,024 | 140 | 4,766 | 4,906 | ||||||||||||||||
| Net loss | (2,892,230 | ) | (2,892,230 | ) | ||||||||||||||||
| Balance 12/31/09 | 11,383,121 | $ | 113,830 | $ | 3,573,507 | $ | (6,029,368 | ) | $ | (2,342,030 | ) | |||||||||
| Shares issued in 2010 under PPM, $.50 | 354,550 | 3,546 | 173,729 | 177,275 | ||||||||||||||||
| Shares issued to consultants for IR and consulting, $.50 | 374,090 | 3,741 | 183,304 | 187,045 | ||||||||||||||||
| Value of equity instruments issued for consulting services | 354,602 | 354,602 | ||||||||||||||||||
| Vested stock options and warrants | 11,382 | 11,382 | ||||||||||||||||||
| Value of equity-linked financial instruments issued in connection with PPM in first quarter | (25,553 | ) | (25,553 | ) | ||||||||||||||||
| Shares issued in May 2010 to consultant, $.50 | 12,850 | 129 | 6,296 | 6,425 | ||||||||||||||||
| Shares issued in May 2010 to 2008 investors as a penalty for late registration, $.50 | 710,248 | 7,102 | 348,022 | 355,124 | ||||||||||||||||
| Value of equity instruments issued with debt | 119,474 | 119,474 | ||||||||||||||||||
| Value of equity-linked financial instruments issued in connection with PPM in second quarter | (31,332 | ) | (31,332 | ) | ||||||||||||||||
| Value of equity-linked financial instruments issued in connection with PPM in third quarter | (31,506 | ) | (31,506 | ) | ||||||||||||||||
| Shares issued in September 2010 under PPM, $.10 | 250,000 | 2,500 | 22,500 | 25,000 | ||||||||||||||||
| Shares issued to consultants in third quarter at $.22 per share | 488,860 | 4,889 | 102,660 | 107,549 | ||||||||||||||||
| Shares issued in November 2010 upon exercise of warrants at $.135 per share | 128,571 | 1,286 | 16,071 | 17,357 | ||||||||||||||||
| Shares issued in November 2010 to directors as compensation at $.15 per share | 300,000 | 3,000 | 42,000 | 45,000 | ||||||||||||||||
| Vested stock options in fourth quarter | 161,107 | 161,107 | ||||||||||||||||||
| Equity instruments issued to consultants in fourth quarter | 26,234 | 26,234 | ||||||||||||||||||
| Net loss | (1,352,709 | ) | (1,352,709 | ) | ||||||||||||||||
| Balance 12/31/2010 | 14,002,290 | $ | 140,023 | $ | 5,052,497 | $ | (7,382,077 | ) | $ | (2,189,557 | ) | |||||||||
| 5 |
| Value of equity instruments issued with debt in first quarter | 47,908 | 47,908 | ||||||||||||||||||
| Shares issued at $.075 per share under PPM | 5,333,334 | 53,334 | 346,666 | 400,000 | ||||||||||||||||
| Shares issued at $.085 per share under PPM | 1,882,353 | 18,823 | 141,177 | 160,000 | ||||||||||||||||
| Shares issued at $.09 per share under PPM | 200,000 | 2,000 | 16,000 | 18,000 | ||||||||||||||||
| Shares issued at $.10 per share under PPM | 150,000 | 1,500 | 13,500 | 15,000 | ||||||||||||||||
| Vested stock options and warrants in first quarter | 1,937,638 | 1,937,638 | ||||||||||||||||||
| Equity instruments issued to consultants in first quarter | 91,504 | 91,504 | ||||||||||||||||||
| Stock issued upon conversion of debt in first quarter | 416,010 | 4,160 | 15,840 | 20,000 | ||||||||||||||||
| Stock issued to pay interest on debt | 158,036 | 1,580 | 20,920 | 22,500 | ||||||||||||||||
| Shares issued at $.07 per share under PPM | 1,071,429 | 10,715 | 64,285 | 75,000 | ||||||||||||||||
| Stock issued upon conversion of debt and interest | 941,034 | 9,410 | 22,590 | 32,000 | ||||||||||||||||
| Equity instruments issued to consultants | 12,256 | 12,256 | ||||||||||||||||||
| Equity instruments issued to consultants | 147,116 | 147,116 | ||||||||||||||||||
| Restricted stock issued to consultants | 822,842 | 8,228 | 46,772 | 55,000 | ||||||||||||||||
| Shares issued at $.06 per share under PPM | 3,500,000 | 35,000 | 175,000 | 210,000 | ||||||||||||||||
| Shares issued at $.20 per share under PPM | 1,375,000 | 13,750 | 261,250 | 275,000 | ||||||||||||||||
| Shares issued upon exercise of stock options at $.01 | 100,000 | 1,000 | 1,000 | |||||||||||||||||
| Shares issued at $.35 per share IR compensation | 575,000 | 5,750 | 195,500 | 201,250 | ||||||||||||||||
| Equity instruments upon conversion of Accounts Payable | 20,000 | 20,000 | ||||||||||||||||||
| Shares issued to private investor at $.15 per share | 1,546,667 | 15,467 | 216,533 | 232,000 | ||||||||||||||||
| Net loss | (4,486,879 | ) | (4,486,879 | ) | ||||||||||||||||
| Balance 12/31/2011 | 32,074,000 | $ | 320,740 | $ | 8,844,952 | $ | (11,868,956 | ) | $ | (2,703,264 | ) | |||||||||
| Shares issued to institutional investor upon conversion of Note Payable at $.1342 per share | 59,613 | 596 | 7,404 | 8,000 | ||||||||||||||||
| Shares issued to institutional investor upon conversion of Note Payable at $.13 per share | 107,692 | 1,077 | 12,923 | 14,000 | ||||||||||||||||
| Shares issued to institutional investor upon conversion of Note Payable at $.088 per share | 170,455 | 1,705 | 13,295 | 15,000 | ||||||||||||||||
| Shares issued to institutional investor upon conversion of Note Payable at $.0446 per share | 343,348 | 3,433 | 12,567 | 16,000 | ||||||||||||||||
| Shares issued to institutional investor upon conversion of Note Payable at $.0446 per share | 269,058 | 2,690 | 9,310 | 12,000 | ||||||||||||||||
| Shares issued to institutional investor upon conversion of Note Payable at $.0446 per share | 268,670 | 2,687 | 7,313 | 10,000 | ||||||||||||||||
| Shares issued to institutional investor upon conversion of Note Payable at $.0397 per share | 428,212 | 4,282 | 4,218 | 8,500 | ||||||||||||||||
| Shares issued to a private investor at $.065 per share | 9,230,770 | 92,308 | 507,692 | 600,000 | ||||||||||||||||
| Shares issued for consulting to the then interim CEO at $.065 per share | 300,000 | 3,000 | 16,500 | 19,500 | ||||||||||||||||
| Vested stock options and warrants | 830,372 | 830,372 | ||||||||||||||||||
| Shares issued to an institutional investor upon conversion of Note Payable at $.0286 per share | 349,650 | 3,497 | 6,503 | 10,000 | ||||||||||||||||
| Shares issued to a private investor per a convertible note default at $.15 per share | 7,500,000 | 75,000 | 1,050,000 | 1,125,000 | ||||||||||||||||
| Shares issued to a private investor at $.15 per share | 263,333 | 2,633 | 36,867 | 39,500 | ||||||||||||||||
| Shares issued upon exercise of options at $.01 per share | 412,963 | 4,130 | 4,130 | |||||||||||||||||
| Stock issued upon conversion of debt at $.15 per share | 3,292,557 | 32,926 | 460,958 | 493,884 | ||||||||||||||||
| Stock issued upon conversion of debt at $.065 per share | 2,850,754 | 28,508 | 156,791 | 185,299 | ||||||||||||||||
| Shares issued to private investor upon conversion of Note Payable at $.18 per share | 316,898 | 3,169 | 53,873 | 57,042 | ||||||||||||||||
| Shares issued to private investor upon conversion of Note Payable at $.052 per share | 1,147,078 | 11,471 | 48,063 | 59,534 | ||||||||||||||||
| Shares issued to private investor upon conversion of Note Payable at $.10 per share | 565,834 | 5,658 | 50,926 | 56,584 | ||||||||||||||||
| Shares issued to a private investor upon conversion of Note Payable at $.032 per share | 1,572,327 | 15,723 | 34,277 | 50,000 | ||||||||||||||||
| Shares issued to an institutional investor upon conversion of Note Payable at $.031 per share | 387,097 | 3,871 | 8,129 | 12,000 | ||||||||||||||||
| Stock issued upon conversion of debt at $.15 per share | 397,267 | 3,973 | 55,617 | 59,590 | ||||||||||||||||
| Shares issued to a Director as compensation at $.09 per share | 277,778 | 2,778 | 22,222 | 25,000 | ||||||||||||||||
| Shares issued under PPM at $.07 per share | 9,870,666 | 98,707 | 592,239 | 690,946 | ||||||||||||||||
| Shares issued to institutional investor upon conversion of Note Payable at $.0353 per share | 509,915 | 5,099 | 12,901 | 18,000 | ||||||||||||||||
| Shares issued to a private investor upon conversion of Note Payable at $.032 per share | 283,718 | 2,837 | 6,185 | 9,022 | ||||||||||||||||
| Shares issued to an institutional investor upon conversion of Note Payable at $.0297 per share including $11,021 of interest. | 740,741 | 7,407 | 25,614 | 33,021 | ||||||||||||||||
| Shares issued at $.15 per share as Investor Relations compensation | 625,000 | 6,250 | 87,500 | 93,750 |
| 6 |
| Shares issued as settlement to remove anti-dilution agreement at $.065 per share | 26,500,000 | 265,000 | 1,457,500 | 1,722,500 | ||||||||||||||||
| Shares issued in settlement with former COO at $.15 per share less shares cancelled at $.09 per share | 803,701 | 8,037 | 134,296 | 142,333 | ||||||||||||||||
| Equity value for options and warrants | 150,189 | 150,189 | ||||||||||||||||||
| Shares issued at $.07 per share as Investor Relations compensation | 300,000 | 3,000 | 18,000 | 21,000 | ||||||||||||||||
| Shares issued at $.15 per share as conversion of debt | 157,088 | 1,571 | 21,992 | 23,563 | ||||||||||||||||
| Shares issued to a private investor exercising options at $.01 per share | 71,826 | 718 | 718 | |||||||||||||||||
| Shares issued to debtors as compensation at $.10 per share | 1,563,031 | 15,630 | 140,613 | 156,243 | ||||||||||||||||
| Value of equity instruments issued with debt | 33,469 | 33,469 | ||||||||||||||||||
| Shares issued upon conversion of Note Payable at $.07 per share | 236,092 | 2,361 | 14,165 | 16,526 | ||||||||||||||||
| Share true-up to certified shareholders list per the stock transfer agency | 100 | 1 | 1 | |||||||||||||||||
| Net loss | (7,422,155 | ) | (7,422,155 | ) | ||||||||||||||||
| Balance at 12/31/2012 | 104,247,228 | $ | 1,042,473 | $ | 14,945,435 | $ | (19,291,111 | ) | $ | (3,303,203 | ) | |||||||||
| Shares issued to debtors as compensation at $.15 per share | 290,143 | 2,901 | 40,620 | 43,521 | ||||||||||||||||
| Shares issued under PPM to five investors at $.07 per share | 7,142,857 | 71,429 | 428,571 | 500,000 | ||||||||||||||||
| Shares issued to an escrow account underlying a debt agreement (11) | 1,000,000 | 10,000 | 10,000 | |||||||||||||||||
| Shares issued to debtors as compensation at $.15 per share | 230,332 | 2,303 | 32,247 | 34,550 | ||||||||||||||||
| Shares issued to an institutional investor at $.07 per share | 7,142,858 | 71,429 | 428,571 | 500,000 | ||||||||||||||||
| Value of shares per an agreement with a former officer (12) | 40,480 | 40,480 | ||||||||||||||||||
| Vesting expense | 1,378,090 | 1,378,090 | ||||||||||||||||||
| Shares issued to consultant as compensation at $.067 per share | 250,000 | 2,500 | 14,250 | 16,750 | ||||||||||||||||
| Value of Equity instruments issued with debt | 392,556 | 392,556 | ||||||||||||||||||
| Shares issued to former consultant exercising options at $.01 per share | 200,000 | 2,000 | - | 2,000 | ||||||||||||||||
| Shares issued to former CEO exercising options at $.01 per share. | 333,330 | 3,333 | - | 3,333 | ||||||||||||||||
| Shares issued upon conversion of four notes payable at $.15 per share | 1,041,622 | 10,416 | 145,827 | 156,243 | ||||||||||||||||
| Shares issued for interest to the four notes payable at $.15 per share | 74,462 | 745 | 10,425 | 11,170 | ||||||||||||||||
| Net loss | (3,277,061 | ) | (3,277,061 | ) | ||||||||||||||||
| Balance at 6/30/13 | 121,952,832 | 1,219,529 | 17,857,072 | (22,568,172 | ) | (3,491,571 | ) |
(1) Founders shares, 1,000,000 pre-split
(2) 23,492 (40,000 pre-split) shares valued at $.0167 per share as compensation for loan guarantees by management
(3) Investment including 670 shares issued as a 10% finder’s fee
(4) For payment of patent legal fees
(5) Compensation for loan guarantees by management
(6) For vendor contractual consideration
(7) Employment agreements
(8) Investment
(9) Conversion of convertible notes by management
(10) Investment, "October 2008 financing".
(11) The shares reduce by 1/3 yearly and are returned to the Company as the debt is paid.
(12) The Company purchased shares previously issued to a former officer equal to the cost of withholding taxes advanced by the Company. The value here represents the net pay from the transaction that was retained by the Company.
See Notes to Financial Statements
| 7 |
SKYLINE MEDICAL INC.
(A DEVELOPMENT STAGE COMPANY)
(Unaudited)
|
Six Months Ended
June 30, |
April 23, 2002 (Inception) | |||||||||||
| 2013 | 2012 | To June 30, 2013 | ||||||||||
| Cash flow from operating activities: | ||||||||||||
| Net loss | (3,277,061 | ) | (2,849,142 | ) | (22,568,172 | ) | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 141,482 | 457 | 152,126 | |||||||||
| Vested stock options and warrants | 1,378,090 | 69,941 | 4,875,762 | |||||||||
| Equity instruments issued for management and consulting | 67,230 | 1,877,750 | 5,856,998 | |||||||||
| Stock-based registration payments | - | - | 355,124 | |||||||||
| Capital contributions resulting from waivers of debt | - | - | 476,398 | |||||||||
| Amortization of debt discount | 92,538 | 45,187 | 435,340 | |||||||||
| (Gain) loss on valuation of equity-linked instruments | (88,673 | ) | (59,597 | ) | (716,743 | ) | ||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable | (62,180 | ) | 18,232 | (101,891 | ) | |||||||
| Inventories | 37,173 | 813 | (108,036 | ) | ||||||||
| Prepaid expense and other assets | (8,176 | ) | (36,119 | ) | (35,585 | ) | ||||||
| Notes payable to shareholders | - | (14,957 | ) | |||||||||
| Accounts payable | (28,993 | ) | 177,236 | 1,689,846 | ||||||||
| Accrued expenses | (379,465 | ) | 111,137 | 1,338,224 | ||||||||
| Deferred Revenue | 5,000 | - | 5,000 | |||||||||
| Net cash used in operating activities: | (2,123,035 | ) | (644,105 | ) | (8,360,566 | ) | ||||||
| Cash flow from investing activities: | ||||||||||||
| Purchase of fixed assets | (9,826 | ) | - | (22,084 | ) | |||||||
| Purchase of intangibles | (48,545 | ) | - | (191,040 | ) | |||||||
| Net cash used in investing activities | (58,371 | ) | - | (213,124 | ) | |||||||
| Cash flow from financing activities: | ||||||||||||
| Proceeds from long-term and convertible debt | 1,300,000 | 372,283 | 3,412,491 | |||||||||
| Repayment of convertible debt | - | (250,000 | ) | |||||||||
| Principal payments on long-term debt | - | (75,667 | ) | |||||||||
| Issuance of common stock | 1,005,333 | 184,120 | 5,623,932 | |||||||||
| Net cash provided by (used in) financing activities | 2,305,333 | 556,403 | 8,710,756 | |||||||||
| Net increase (decrease) in cash | 123,927 | (87,702 | ) | 137,066 | ||||||||
| Cash at beginning of period | 13,139 | 122,985 | - | |||||||||
| Cash at end of period | 137,066 | 35,283 | 137,066 | |||||||||
| Non cash transactions: | ||||||||||||
| Conversion of debt to accrued liabilities | 415,775 | 515,775 | ||||||||||
| Common stock issued for accrued interest/bonus | 23,394 | 99,784 | 241,564 | |||||||||
| Conversion of accounts payable to convertible debt | - | - | 546,600 | |||||||||
| Common stock issued to satisfy debt | 178,568 | 807,800 | 1,220,367 | |||||||||
| Stock/warrant issued to satisfy accounts payable/liabilities | 43,521 | 244,890 | 482,165 | |||||||||
See Notes to Condensed Financial Statements
| 8 |
SKYLINE MEDICAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Amounts presented at and for the six months ended June 30, 2013 and June 30, 2012 are unaudited)
Nature of Operations and Continuance of Operations
Skyline Medical Inc. (the "Company") was incorporated under the laws of the State of Minnesota in 2002. The Company has developed an environmentally safe system for the collection and disposal of infectious fluids that result from surgical procedures and post-operative care. The Company also makes ongoing sales of our proprietary cleaning fluid to users of our systems. In April 2009, the Company received 510(k) clearance from the FDA to authorize the Company to market and sell its STREAMWAY® FMS products.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations and has a stockholders’ deficit. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Since inception to June 30, 2013, the Company has raised approximately $5,624,000 in equity and $3,412,000 in debt financing, including $1,000,000 in equity and $1,300,000 in convertible debt in 2013. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.
Recent Accounting Developments
We reviewed all other significant newly issued accounting pronouncements and determined they are either not applicable to our business or that no material effect is expected on our financial position and results of our operations.
Valuation of Intangible Assets
We review identifiable intangible assets for impairment in accordance with ASC 350- Intangibles – Goodwill and Other, whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Our intangible assets are currently solely the costs of obtaining trademarks and patents. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant change in the medical device marketplace and a significant adverse change in the business climate in which we operate. If such events or changes in circumstances are present, the undiscounted cash flows method is used to determine whether the intangible asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. If the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, the asset is considered impaired, and the impairment is measured by reducing the carrying value of the asset to its fair value using the discounted cash flows method. The discount rate utilized is based on management's best estimate of the related risks and return at the time the impairment assessment is made.
Our accounting estimates and assumptions bear various risks of change, including the length of the current economic downturn facing the United States, the expansion of the slowdown in consumer spending in the U.S. medical markets despite the early expressed opinions of financial experts that the medical market would not be as affected as other markets and failure to gain acceptance in the medical market.
Accounting Policies and Estimates
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 9 |
Presentation of Taxes Collected from Customers
Sales taxes are imposed on the Company’s sales to nonexempt customers. The Company collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting policy is to exclude the taxes collected and remitted from revenues and expenses.
Shipping and Handling
Shipping and handling charges billed to customers are recorded as revenue. Shipping and handling costs are recorded within cost of goods sold on the statement of operations.
Advertising
Advertising costs are expensed as incurred. There were no advertising expenses in the three and six months ended June 30, 2013 and June 30, 2012.
Research and Development
Research and development costs are charged to operations as incurred. Research and development expenses were $75,264 and $0 for the three months ended June 30, 2013 and June 30, 2012, and $133,541 in the six months ended June 30, 2013 and $0 for the six months ended June 30, 2012.
Revenue Recognition
The Company recognizes revenue in accordance with the SEC’s Staff Accounting Bulletin Topic 13 Revenue Recognition and ASC 605-Revenue Recognition.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectability is probable. Delivery is considered to have occurred upon either shipment of the product or arrival at its destination based on the shipping terms of the transaction. The Company’s standard terms specify that shipment is FOB Skyline and the Company will, therefore, recognize revenue upon shipment in most cases. The Company recognizes revenue for trial base units when the customer signs our Terms and Conditions contract for the purchase of the trial unit. This revenue recognition policy applies to shipments of the STREAMWAY FMS units as well as shipments of cleaning solution kits. When these conditions are satisfied, the Company recognizes gross product revenue, which is the price it charges generally to its customers for a particular product. Under the Company’s standard terms and conditions, there is no provision for installation or acceptance of the product to take place prior to the obligation of the customer. The customer’s right of return is limited only to the Company’s standard one-year warranty whereby the Company replaces or repairs, at its option, and it would be rare that the STREAMWAY FMS unit or significant quantities of cleaning solution kits may be returned. Additionally, since the Company buys both the STREAMWAY FMS units and cleaning solution kits from “turnkey” suppliers, the Company would have the right to replacements from the suppliers if this situation should occur.
Receivables
Receivables are reported at the amount the Company expects to collect on balances outstanding. The Company provides for probable uncollectible amounts through charges to earnings and credits to the valuation based on management’s assessment of the current status of individual accounts, changes to the valuation allowance have not been material to the financial statements.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. Inventory balances are as follows:
| June 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Finished goods | $ | 92,602 | $ | 91,008 | ||||
| Raw materials | 15,434 | 39,543 | ||||||
| Work-In-Process | 0 | 14,658 | ||||||
| Total | $ | 108,036 | $ | 145,209 | ||||
| 10 |
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. Estimated useful asset life by classification is as follows:
| Years | ||
| Computers and office equipment | 3 | |
| Furniture and fixtures | 5 |
Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.
Intangible Assets
Intangible assets consist of patent costs. These assets are not subject to amortization until the property patented is in production. The assets are reviewed for impairment annually, and impairment losses, if any, are charged to operations when identified. The Company wrote off the entire STREAMWAY One product patent of $140,588 in June 2013. The balance represented intellectual property in the form of patents for our STREAMWAY One product. The Company’s new STREAMWAY Two product has a new provisional patent, see “Patents and Intellectual Property”.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740- Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company reviews income tax positions expected to be taken in income tax returns to determine if there are any income tax uncertainties. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by taxing authorities, based on technical merits of the positions. The Company has identified no income tax uncertainties.
Tax years subsequent to 2009 remain open to examination by federal and state tax authorities.
Patents and Intellectual Property
On January 25, 2013, the Company filed a U.S. Provisional Patent Application, number 61756763. The provisional patent application is for a new model of the surgical fluid waste management system that has embodiments, based on our patent attorney’s recommendations that are patentable over all prior art and will not infringe on any existing patents. This provisional patent adds features that are novel and non-obvious over all BioDrain’s previously filed applications.
Subsequent Events
The former CEO and the Company had a dispute concerning stock options negated under the former CEO’s settlement agreement. The Company and the former CEO have entered into an amended settlement agreement whereby he will retain the 333,330 shares of common stock already exercised and the right to exercise options with respect to an additional 325,187 shares of common stock (as adjusted for two past reverse stock splits) at $.01 per share. Additionally, the Company agreed to pay the former CEO $20,000 in cash. In exchange the former CEO agreed to relinquish warrants to purchase an aggregate 800,000 shares of common stock.
| 11 |
The Company has evaluated all other subsequent events through the date of this filing. The Company does not believe there are any other subsequent events that required disclosure.
Interim Financial Statements
The Company has prepared the unaudited interim financial statements and related unaudited financial information in the footnotes in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. These interim financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly the Company’s financial position, the results of its operations and its cash flows for the interim periods. These interim financial statements should be read in conjunction with the annual financial statements and the notes thereto contained in the Form 10-K filed with the SEC on March 22, 2013. The nature of the Company’s business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.
The Company was formed April 23, 2002. Since inception to August 8, 2013, 121,952,831 shares of common stock have been issued between par value and $1.67. Operations since incorporation have been devoted to raising capital, obtaining financing, development of the Company’s product, and administrative services.
In connection with the financing completed in October 2008, the Company has effected two reverse stock splits, one on June 6, 2008 and another on October 20, 2008. In accordance with SAB Topic 4C, all stock options and warrants and their related exercise prices are stated at their post-reverse stock split values.
The Company has an equity incentive plan, which allows issuance of incentive and non-qualified stock options to employees, directors and consultants of the Company, where permitted under the plan. The exercise price for each stock option is determined by the Board of Directors. Vesting requirements are determined by the Board of Directors when granted and currently range from immediate to three years. Options under this plan have terms ranging from three to ten years.
Accounting for share-based payment
The Company has adopted ASC 718- Compensation-Stock Compensation ("ASC 718"). Under ASC 718 stock-based employee compensation cost is recognized using the fair value based method for all new awards granted after January 1, 2006 and unvested awards outstanding at January 1, 2006. Compensation costs for unvested stock options and non-vested awards that were outstanding at January 1, 2006, are being recognized over the requisite service period based on the grant-date fair value of those options and awards, using a straight-line method. We elected the modified-prospective method under which prior periods are not retroactively restated.
ASC 718 requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model or other acceptable means. The Company uses the Black-Scholes option valuation model which requires the input of significant assumptions including an estimate of the average period of time employees will retain vested stock options before exercising them, the estimated volatility of the Company's common stock price over the expected term, the number of options that will ultimately be forfeited before completing vesting requirements, the expected dividend rate and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognized. The assumptions the Company uses in calculating the fair value of stock-based payment awards represent the Company's best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based compensation expense could be materially different in the future.
| 12 |
Since the Company's common stock has no significant public trading history, and the Company has experienced no significant option exercises in its history, the Company is required to take an alternative approach to estimating future volatility and estimated life and the future results could vary significantly from the Company's estimates. The Company compiled historical volatilities over a period of 2 to 7 years of 15 small-cap medical companies traded on major exchanges and 10 mid-range medical companies on the OTC Bulletin Board and combined the results using a weighted average approach. In the case of ordinary options to employees the Company determined the expected life to be the midpoint between the vesting term and the legal term. In the case of options or warrants granted to non-employees, the Company estimated the life to be the legal term unless there was a compelling reason to make it shorter.
When an option or warrant is granted in place of cash compensation for services, the Company deems the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or warrant is granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing an option pricing model. For that reason the Company also uses the Black-Scholes option-pricing model to value options and warrants granted to non-employees, which requires the input of significant assumptions including an estimate of the average period the investors or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of the Company's common stock price over the expected term, the number of options and warrants that will ultimately be forfeited before completing vesting requirements, the expected dividend rate and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based consulting and/or compensation and, consequently, the related expense recognized.
Since the Company has limited trading history in its stock and no first-hand experience with how its investors and consultants have acted in similar circumstances, the assumptions the Company uses in calculating the fair value of stock-based payment awards represent its best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based consulting and interest expense could be materially different in the future.
Valuation and accounting for options and warrants
The Company determines the grant date fair value of options and warrants using a Black-Scholes option valuation model based upon assumptions regarding risk-free interest rate, expected dividend rate, volatility and estimated term. For grants issued during 2008, the Company 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 them to be treated as a liability (See Note 8) and warrants granted in connection 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 that closed March 1, 2007 created a debt discount of $40,242 that is being amortized as additional interest over its 5-year term. Warrants issued in connection with the $170,000 convertible “bridge” debt that 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 of common stock at $.65 per share. The Company determined that the warrant had an initial value of $30,150 that was treated as a debt discount and amortized as additional interest expense over the 24-month term of the note.
The Company also issued $200,000 in convertible debt in June 2010 and issued a warrant, in connection with the debt, to purchase 1,111,112 shares of common stock at $.46 per share. The Company determined that the value of the June 2010 warrant is $96,613. This value is treated as a debt discount and amortized as additional interest expense over the 22-month term of the note.
| 13 |
The Company also issued $32,000 in convertible debt in September 2010 and issued a warrant to purchase 320,000 shares of common stock at $.18 per share. The Company determined that this warrant has a value of $15,553 that was treated as a debt discount and amortized as additional interest expense over the 18-month term of the note.
The Company also issued $16,800 in convertible debt in December 2010 and issued a warrant to purchase 200,000 shares of common stock at $.084 per share. The Company determined that this warrant has a value of $7,232 that was treated as a debt discount and amortized as additional interest expense over the 24- month term of the note.
In January 2011, the Company issued three convertible notes of $50,000 each and also issued warrants to purchase 1,595,239 common shares at $.20 per share. The value of the warrants was determined to be $47,908 and is being treated as a debt discount and amortized as additional interest expense over the 24-month term of the notes.
For grants of stock options and warrants in 2011 the Company used a 0.34 to 2.44% risk-free interest rate, 0% dividend rate, 54-66% volatility and estimated term of 3 to 10 years. Values computed using these assumptions ranged from $0.0126 to $0.3412 per share.
In November 2012, the Company issued four convertible notes of $27,500, $27,500, $51,243 and $50,000, respectively. The note holders were issued shares of our common stock at $.10 per share value as bonus equity in consideration for the notes. Though short term the value of the notes are being treated as a debt discount with an aggregate discount of $33,469 and amortized as additional interest expense over the six month term of the notes.
For grants of stock options and warrants in 2012 the Company used a 0.33% to 1.80% risk-free interest rate, 0% dividend rate, 54%, 59% or 66% volatility and estimated term of 3, 5 or 10 years. Value computed using these assumptions ranged from $0.0111 to $0.096 per share.
In January 2013, in connection with a private placement offering the Company issued 8% convertible one year promissory notes in an aggregate principal amount of $300,000 convertible into 2,500,000 shares of common stock assuming a conversion rate of $.12 per share and five year warrants to purchase up to an aggregate of 2,500,000 shares of the corporation’s common stock at an exercise price of $.15 per share. The value of the notes are being treated as a debt discount with an aggregate discount of $77,644, and amortized as an additional interest expense over the twelve month term of the notes. In addition, we issued to the placement agent for these sales five year warrants to purchase an aggregate of 200,000 shares of common stock at an exercise price of $.12 per share.
In January and March 2013, in connection with a separate and new private placement offering we issued 7,142,857 shares of common stock at $.07 per share and warrants to purchase 7,142,857 shares of common stock at $.15 per share to 5 investors in return for their $500,000 investment in the Company.
On March 15, 2013 the Company completed the private sale of 7,142,858 shares of the Company’s common stock, par value $.01 per share, at $.07 per share for an aggregate purchase price of $500,000, warrants to purchase 7,142,858 shares of common stock at an exercise price of $.08 per share, and warrants to purchase 3,571,429 shares of common stock at an exercise price of $.15 per share.
In April 2013, the Company issued 200,000 shares of common stock, par value $.01 per share, at $.01 per share to a former consultant exercising options; the Company issued 333,330 shares of common stock, par value $.01 per share, at $.01 per share to the former CEO exercising options.
In May 2013, the Company converted four (4) notes totaling $156,243, plus $11,169 in interest; issued in November 2012, the noteholders received 1,116,084 shares of common stock, par value $.01, at $.10 per share. One of the noteholders is Dr. Samuel Herschkowitz who received 357,163 shares.
In May and June 2013, in connection with a private placement offering we issued 8% convertible one year promissory notes in an aggregate principal amount of $1,000,000 convertible into 6,000,000 shares of common stock assuming a conversion rate of $.18 per share and five year warrants to purchase up to an aggregate of 4,611,111 shares of the corporation’s common stock at an exercise price of $.198 per share. The value of the notes is net of discounts of $275,640 in 2013; due in May and June 2014. In addition, we issued to the placement agent for these sales five year warrants to purchase an aggregate of 444,444 shares of common stock at an exercise price of $.18 per share.
| 14 |
For grants of stock options and warrants in 2013 the Company used a 0.33% to 1.80% risk-free interest rate, 0% dividend rate, 59% volatility and estimated term of 5 years. Value computed using these assumptions ranged from $0.014261 to $0.036616 per share.
The following summarizes transactions for stock options and warrants for the periods indicated:
| Stock Options (1) | Warrants (1) | |||||||||||||||
|
Number
of Shares |
Average
Exercise Price |
Number
of Shares |
Average
Exercise Price |
|||||||||||||
| Outstanding at December 31, 2005 | 17,956 | $ | 1.67 | 20,950 | $ | 2.62 | ||||||||||
| Issued | 23,942 | 1.67 | 71,826 | 0.85 | ||||||||||||
| Outstanding at December 31, 2006 | 41,898 | 1.67 | 92,776 | 1.25 | ||||||||||||
| Issued | 5,984 | 1.67 | 28,502 | 0.35 | ||||||||||||
| Outstanding at December 31, 2007 | 47,882 | 1.67 | 121,278 | 1.04 | ||||||||||||
| Issued | 1,243,292 | 0.20 | 5,075,204 | 0.45 | ||||||||||||
| Expired | (11,971 | ) | 3.76 | |||||||||||||
| Outstanding at December 31, 2008 | 1,291,174 | 0.26 | 5,184,511 | 0.45 | ||||||||||||
| Issued | 205,000 | 0.37 | 2,188,302 | 0.65 | ||||||||||||
| Outstanding at December 31, 2009 | 1,496,174 | 0.27 | 7,372,813 | 0.49 | ||||||||||||
| Issued | 2,210,000 | 0.17 | 3,435,662 | 0.34 | ||||||||||||
| Expired | (207,956 | ) | 0.43 | (8,979 | ) | 1.67 | ||||||||||
| Exercised | (128,571 | ) | 0.46 | |||||||||||||
| Outstanding at December 31, 2010 | 3,498,218 | 0.19 | 10,670,925 | 0.44 | ||||||||||||
| Issued | 2,483,334 | 0.01 | 18,222,243 | 0.14 | ||||||||||||
| Expired | (83,941 | ) | 0.73 | (2,010,917 | ) | 0.48 | ||||||||||
| Exercised | (100,000 | ) | 0.01 | |||||||||||||
| Outstanding at December 31, 2011 | 5,797,611 | 0.11 | 26,882,251 | 0.23 | ||||||||||||
| Issued | 9,514,286 | 0.08 | 11,688,166 | 0.15 | ||||||||||||
| Expired | (2,235,368 | ) | 0.11 | (3,366,455 | ) | 0.50 | ||||||||||
| Exercised | (412,963 | ) | 0.01 | (71,826 | ) | 0.01 | ||||||||||
| Outstanding at December 31, 2012 | 12,663,566 | 0.09 | 35,132,136 | 0.13 | ||||||||||||
| Issued | 16,565,508 | 0.08 | 25,739,682 | 0.14 | ||||||||||||
| Expired | (1,030,070 | ) | 0.19 | (4,217,216 | ) | 0.19 | ||||||||||
| Exercised | (533,330 | ) | 0.01 | |||||||||||||
| Outstanding at June 30, 2013 | 27,665,674 | $ | 0.08 | 56,654,602 | $ | 0.15 | ||||||||||
| (1) | Adjusted for the reverse stock splits in total at June 6, 2008 and October 20, 2008. |
| 15 |
At June 30, 2013, 24,462,481 stock options are fully vested and currently exercisable with a weighted average exercise price of $0.08 and a weighted average remaining term of 9.15 years. All warrants are fully vested and exercisable. Stock-based compensation recognized for the six months ending June 2013 and June 2012 was $1,378,541 and $69,941, respectively. The Company has $230,882 of unrecognized compensation expense related to non-vested stock options that are expected to be recognized over a weighted average period of approximately 13 months.
The following summarizes the status of options and warrants outstanding at June 30, 2013:
| Range of Exercise Prices | Shares |
Weighted
Average Remaining Life |
||||||||
| Options: | ||||||||||
| $ | 0.01 | 650,000 | 6.79 | |||||||
| $ | 0.017 | 325,187 | 4.93 | |||||||
| $ | 0.065 | 20,000 | 9.70 | |||||||
| $ | 0.07 | 214,286 | 9.19 | |||||||
| $ | 0.075 | 14,400,000 | 9.71 | |||||||
| $ | 0.079 | 1,740,508 | 9.72 | |||||||
| $ | 0.08 | 9,300,000 | 9.13 | |||||||
| $ | 0.088 | 400,000 | 8.57 | |||||||
| $ | 0.15 | 410,000 | 5.93 | |||||||
| $ | 0.17 | 5,000 | 9.86 | |||||||
| $ | 0.35 | 75,000 | 0.87 | |||||||
| $ | 0.585 | 125,693 | 0.75 | |||||||
| Total | 27,665,674 | |||||||||
| Warrants: | ||||||||||
| $ | 0.01 | 200,000 | 2.44 | |||||||
| $ | 0.075 | 8,657,746 | 0.84 | |||||||
| $ | 0.08 | 7,714,286 | 4.71 | |||||||
| $ | 0.10 | 1,428,572 | 2.08 | |||||||
| $ | 0.12 | 700,000 | 1.90 | |||||||
| $ | 0.13 | 360,000 | 1.60 | |||||||
| $ | 0.15 | 25,348,285 | 4.25 | |||||||
| $ | 0.16 | 500,000 | 0.77 | |||||||
| $ | 0.17 | 1,882,353 | 0.77 | |||||||
| $ | 0.18 | 644,444 | 3.62 | |||||||
| $ | 0.198 | 4,166,666 | 4.91 | |||||||
| $ | 0.20 | 2,532,739 | 0.58 | |||||||
| $ | 0.25 | 1,375,000 | 1.24 | |||||||
| $ | 0.46 | 403,207 | 0.35 | |||||||
| $ | 0.769 | 741,304 | 0.85 | |||||||
| Total | 56,654,602 | |||||||||
(1) Includes stock options to purchase 543,292 shares (325,187 shares) reflecting two reverse stock splits in 2008 that should have been reflected.
Stock options and warrants expire on various dates from July 2013 to May 2023.
| 16 |
Under the terms of the Company's agreement with investors in the October 2008 financing, 1,920,000 shares of common stock were the maximum number of shares allocated to the Company's existing shareholders at the time of the offering (also referred to as the original shareholders or the "Founders"). Since the total of the Company's fully diluted shares of common stock was greater than 1,920,000 shares, in order for the Company to proceed with the offering, the 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 shares. 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 split was performed, the number would have been a reverse stock split of 1-for-1.670705.
On June 6, 2008, the Board of Directors approved the first reverse stock split. The authorized number of shares of common stock of 20,000,000 was proportionately divided by 1.2545 to arrive at 15,942,607.
On October 20, 2008, the Board of Directors (i) approved the second reverse stock split pursuant to which the authorized number of shares of common stock of 15,942,607 was proportionately divided by 1.33177 to arrive at 11,970,994 shares and (ii) approved a resolution to increase the number of authorized shares of the Company's common stock from 11,970,994 to 40,000,000, which was approved by the Company’s shareholders holding a majority of the shares entitled to vote thereon at a special meeting of shareholders held on December 3, 2008.
The shareholders approved an increase in authorized shares to 80 million shares in an annual shareholder meeting held on June 22, 2010 and approved an increase in authorized shares to 200 million shares in a special shareholder meeting held on September 7, 2011.
The shareholders approved an increase in authorized shares to 300 million shares in a special shareholder meeting held on January 15, 2013.
The shareholders approved an amendment of the Company’s 2012 Stock Incentive Plan to increase the reserve of shares authorized for issuance to 50 million shares and to increase the threshold of limitation on certain grants to 20 million shares on April 15, 2013.
Stock Options and Warrants Granted by the Company
The following table is the listing of stock options and warrants as of June 30, 2013 by year of grant:
| Stock Options: | |||||||||||
| Year | Shares | Price | |||||||||
| 2008 | 450,880 | $ | .01-.35 | ||||||||
| 2009 | 75,000 | .35 | |||||||||
| 2010 | 410,000 | .15 | |||||||||
| 2011 | 650,000 | .01 | |||||||||
| 2012 | 9,514,286 | .07 - .08 | |||||||||
| 2013 | 16,565,508 | .065 - .17 | |||||||||
| Total | 27,665,674 | $ | .01 - .35 | ||||||||
| Warrants: | |||||||||||
| Year | Shares | Price | |||||||||
| 2008 | 741,304 | $ | .217 - .769 | ||||||||
| 2009 | 193,207 | .13-.46 | |||||||||
| 2010 | 970,000 | .01-.65 | |||||||||
| 2011 | 18,122,243 | .075-.25 | |||||||||
| 2012 | 10,888,166 | .10 - .20 | |||||||||
| 2013 | 25,739,682 | .08 - .198 | |||||||||
| Total | 56,654,602 | $ | .01-.769 | ||||||||
| 17 |
The following table presents the shares used in the basic and diluted loss per common share computations:
| Three Months Ended June 30, | Six Months Ended June 30, |
Period from
April 23, 2002 (Inception) to June 30, |
||||||||||||||||||
| 2013 | 2012 | 2013 | 2012 | 2013 | ||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Net loss available in basic and diluted calculation | $ | (1,175,535 | ) | $ | (2,135,775 | ) | $ | (3,277,061 | ) | $ | (2,849,142 | ) | $ | (22,568,172 | ) | |||||
| Denominator: | ||||||||||||||||||||
| Weighted average common shares outstanding-basic | 121,267,500 | 54,656,895 | 111,045,552 | 44,619,113 | 14,591,515 | |||||||||||||||
| Effect of diluted stock options and warrants (1) | ||||||||||||||||||||
| Weighted average common shares outstanding-diluted | 121,267,500 | 54,656,895 | 111,045,552 | 44,619,113 | 14,591,515 | |||||||||||||||
| Loss per common share-basic and diluted | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (1.55 | ) | |||||
(1) The number of shares underlying options and warrants outstanding as of June 30, 2013 and June 30, 2012 are 84,320,276 and 84,210,232 respectively. The effect of the shares that would be issued upon exercise of such options and warrants has been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.
The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
There is no income tax provision in the accompanying statements of operations due to the cumulative operating losses that indicate a 100% valuation allowance for the deferred tax assets and state income taxes is appropriate.
Federal and state income tax return operating loss carryovers as of June 30, 2013, were approximately $11,429,000 and will begin to expire in 2017.
The valuation allowance has been recorded due to the uncertainty of realization of the benefits associated with the net operating losses. Future events and changes in circumstances could cause this valuation allowance to change.
The components of deferred income taxes at June 30, 2013 and December 31, 2012 are as follows:
| June 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Deferred Tax Asset: | ||||||||
| Net Operating Loss | $ | 2,667,000 | $ | 2,209,000 | ||||
| Other | 21,000 | 73,000 | ||||||
| Total Deferred Tax Asset | 2,688,000 | 2,282,000 | ||||||
| Less Valuation Allowance | 2,688,000 | 2,282,000 | ||||||
| Net Deferred Income Taxes | $ | — | $ | — | ||||
| 18 |
Long-term debt is as follows:
|
June 30, 2013 |
December 31, 31, 2012 |
|||||||||||
| Note payable issued on October 26, 2009 with interest at 8% to March 31, 2012 and convertible into shares of common stock at $.35 per share. The note was renegotiated in February 2013. | - | 100,000 | ||||||||||
| Note payable issued on June 12, 2010 with interest at 12% to March 31, 2012, and convertible into common stock at $.18 per share. The note was renegotiated in February 2013. | - | 200,000 | ||||||||||
| Note payable issued on December 23, 2010 with interest at 12%, matures December 23, 2012 and is convertible into common stock at $.084 per share. The note was renegotiated in February 2013. | - | 16,800 | ||||||||||
| Note payable issued on September 21, 2010 with interest at 12%, matures December 23, 2012 and is convertible into common stock at $.18 per share. The note was renegotiated in February 2013. | - | 32,000 | ||||||||||
| Note payable issued January 1, 2011 to a law firm that accepted this note in full payment of their past due legal fees. The Note bears interest at 6%, matures December 31, 2014 and is convertible into common stock at $.15 per share. The note was renegotiated in March 2013. | - | 89,300 | ||||||||||
| On November 6, 2012 the Company issued four convertible notes at 20% interest, each, net of an aggregate discounts of $0 and $21,138; due on April 6, 2013. The four notes were converted into 1,041,622 shares at $.10 per share. | - | 122,774 | ||||||||||
| In January 2013, in connection with a private placement offering we issued convertible one year promissory notes that bear interest at 8%, in an aggregate principal amount of $300,000 convertible into 2,500,000 shares of common stock assuming a conversion rate of $.12 per share and five year warrants to purchase up to an aggregate of 2,500,000 shares of the corporation’s common stock at an exercise price of $.15 per share. The value of the notes are net discounts of $45,517 in 2013; due in January 2014. In addition, we issued to the placement agent for these sales five year warrants to purchase an aggregate of 200,000 shares of common stock at an exercise price of $.15 per share. | 254,483 | - | ||||||||||
| In May and June 2013, in connection with a private placement offering we issued convertible one year promissory notes that bear interest at 8%, in an aggregate principal amount of $1,000,000 convertible into 6,000,000 shares of common stock assuming a conversion rate of $.18 per share and five year warrants to purchase up to an aggregate of 4,611,111 shares of the corporation’s common stock at an exercise price of $.198 per share. The value of the notes is net discounts of $275,640 in 2013; due in May and June 2014. In addition, we issued to the placement agent for these sales five year warrants to purchase an aggregate of 444,444 shares of common stock at an exercise price of $.18 per share. | 724,360 | |||||||||||
| Total | $ | 978,843 | $ | 560,874 | ||||||||
| Less amount due within one year | 978,843 | 471,574 | ||||||||||
| Long-Term Debt | $ | - | $ | 89,300 | ||||||||
Cash payments for interest were $26,205 for the six months ended June 30, 2013 and $0 for the six months ended June 30, 2012.
| 19 |
Principal payments required during the 12 month periods ending June 30:
| 2014 | $ | 1,300,000 |
The Company leases its principal office under a lease that can be cancelled after three years with proper notice per the lease and an amortized schedule of adjustments that will be due to the landlord. The lease extends five years and expires January 2018. In addition to rent, the Company pays real estate taxes and repairs and maintenance on the leased property. Rent expense was $35,159 and $26,084 through the six months ended June 30, 2013 and June 30, 2012, respectively.
The Company’s rent obligation for the next five years is as follows:
| 2014 | $ | 36,000 | ||
| 2015 | $ | 37,000 | ||
| 2016 | $ | 38,000 | ||
| 2017 | $ | 39,000 | ||
| 2018 | $ | 3,600 |
The Company adopted ASC 815- Derivatives and Hedging (“ASC 815”) on January 1, 2009. ASC 815 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity's own stock. It was effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, which was the Company's first quarter of 2009. Many of the warrants issued by the Company contain a strike price adjustment feature, which upon adoption of ASC 815, changed the classification (from equity to liability) and the related accounting for warrants with a $479,910 estimated fair value of as of January 1, 2009. An adjustment was made to remove $486,564 from paid-in capital (the cumulative values of the warrants on their grant dates), a positive adjustment of $6,654 was made to accumulated deficit, representing the gain on valuation from the grant date to January 1, 2009, and $479,910 was booked as a liability. The warrants issued in 2011 do not contain a strike price adjustment feature and, therefore, are not treated as a liability.
The January 1, 2009 valuation was computed using the Black-Scholes valuation model based upon a 2.5-year expected term, an expected volatility of 63%, an exercise price of $.46 per share, a stock price of $.35, a zero dividend rate and a 1.37% risk free interest rate. Subsequent to January 1, 2009 these warrants were re-valued at the end of each quarter and a gain or loss was recorded based upon their increase or decrease in value during the quarter. Likewise, new warrants that were issued during 2009 and 2010 were valued, using the Black-Scholes valuation model on their date of grant and an entry was made to reduce paid-in capital and increase the liability for equity-linked financial instruments. These warrants were also re-valued at the end of each quarter based upon their expected life, the stock price, the exercise price, assumed dividend rate, expected volatility and risk free interest rate. A significant reduction in the liability was realized in 2010 primarily due to a reduction from $.50 to $.22 per share in the underlying stock price. The Company realized a slight increase in the liability for existing warrants during the first quarter of 2012, and a large decrease in the liability for existing warrants in the second quarter of 2012 as many of the existing warrants expired and the spread of the remaining warrants between exercise and market price was more consistent. In the first and second quarters of 2013 there was a decrease in the liability primarily due to current expirations and the amount of warrants reaching expiration in the near term. The remaining warrants are set to expire between July 2013 and September 2015.
The inputs to the Black-Scholes model during 2009, 2010, 2011, 2012 and 2013 were as follows:
| Stock price | $ .35 to $.50 | |
| Exercise price | $ .13 to $.50 | |
| Expected life | .01 to 2.2 years | |
| Expected volatility | 54% to 66% | |
| Assumed dividend rate | - % | |
| Risk-free interest rate | .13% to 2.97% |
| 20 |
The original valuations, annual gain/(loss) and end of year valuations are shown below:
| Value at 12/31/09 | 2010 Gain (Loss) | Value at 12/31/10 | 2011 Gain (Loss) | Value at 12/31/2011 | 2012 Gain (Loss) | Value at12/31/2012 | 2013 Gain (Loss) | Value at 6/30/2013 | ||||||||||||||||||||||||||||
| January 1, 2009 adoption | $ | 870,278 | $ | 868,772 | $ | 1,506 | $ | (88,290 | ) | $ | 89,796 | $ | (21,856 | ) | $ | 111,652 | $ | 82,481 | $ | 29,171 | ||||||||||||||||
| Warrants issued in quarter ended 6/30/2009 | 149,007 | 147,403 | 1,604 | (4,689 | ) | 6,293 | 6,293 | - | - | - | ||||||||||||||||||||||||||
| Warrants issued in quarter ended 9/30/2009 | 40,481 | 40,419 | 62 | (1,562 | ) | 1,624 | 910 | 714 | 679 | 35 | ||||||||||||||||||||||||||
| Warrants issued in quarter ended 12/31/2009 | 12,081 | 12,053 | 28 | (724 | ) | 752 | 78 | 337 | - | 337 | ||||||||||||||||||||||||||
| Warrants issued in quarter ended 3/31/2010 | 25,014 | 539 | (5,571 | ) | 6,109 | 3,701 | 2,408 | 2,408 | - | |||||||||||||||||||||||||||
| Warrants issued in quarter ended 6/30/2010 | 30,740 | 592 | (6,122 | ) | 6,714 | 6,083 | 631 | 631 | - | |||||||||||||||||||||||||||
| Warrants issued in quarter ended 9/30/2010 | 20,811 | 10,615 | (44,160 | ) | 54,775 | 1,338 | 53,437 | 2,474 | 50,963 | |||||||||||||||||||||||||||
| Total | $ | 1,071,847 | $ | 1,145,212 | $ | 14,946 | $ | (151,118 | ) | $ | 166,063 | $ | (3,453 | ) | $ | 169,179 | $ | 86,673 | $ | 80,506 | ||||||||||||||||
The Audit Committee has the responsibility to review and approve all transactions to which a related party and the Company may be a party prior to their implementation, to assess whether such transactions meet applicable legal requirements.
The Company entered into agreements, in 2008, with our Chairman of the Board, Lawrence Gadbaw, and in 2009 with a 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 received 277,778 shares at $.09 per share in June 2012 as compensation in lieu of the $25,000 cash for raising $3 million in new equity. Mr. Gadbaw was paid the balance due under his separation agreement from 2008. This amount was $46,000 upon signing the agreement in 2008 payable at $2,000 per month; the payments to Mr. Gadbaw are complete. Mr. Gadbaw is due $10,000 in accounts payable as of December 31, 2012 pertaining to his monthly fee as Chairman of the Board of Directors. Mr. Gadbaw also received a warrant for 30,000 shares at $.15 per share in June 30, 2012 as compensation for service as Chairman.
On March 28, 2012, the Company, entered into a Convertible Note Purchase Agreement, dated as of March 28, 2012 (the “SOK Purchase Agreement”) with SOK Partners, LLC (“SOK Partners”), an investment partnership. Josh Kornberg, who is a member of the Company’s Board of Directors, and Dr. Samuel Herschkowitz are affiliates of the manager of SOK Partners and Ricardo Koenigsberger, a director, is a holder of membership units of SOK Partners. Pursuant to the SOK Purchase Agreement, the Company issued a 20.0% convertible note due August 2012 in the principal amount of up to $600,000. Principal and accrued interest on the note is due and payable on August 28, 2012. The Company’s obligations under the note are secured by the grant of a security interest in substantially all tangible and intangible assets of the Company. The SOK Purchase Agreement and the note include customary events of default that include, among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross-defaults to other indebtedness and bankruptcy and insolvency defaults. The occurrence of an event of default could result in the acceleration of the Company’s obligations under the note, and interest rate of twenty-four (24%) percent per annum accrues if the note is not paid when due.
| 21 |
On March 28, 2012, the Company received an advance of $84,657 under the note, including a cash advance of $60,000 net of a prepayment of interest on the first $300,000 in advances under the note. The holder of the note is entitled to convert the note into shares of common stock of the Company at an initial conversion price per share of $0.065 per share, subject to adjustment in the event of (1) certain issuances of common stock or convertible securities at a price lower than the conversion price of the note, and (2) recapitalizations, stock splits, reorganizations and similar events. In addition, the Company is required to issue two installments of an equity bonus to SOK Partners in the form of common stock valued at the rate of $0.065 per share. In March 2012, the Company issued the first equity bonus to SOK Partners, consisting of 4,615,385 shares of common stock, with a second installment due within five business days after SOK Partners has made aggregate advances under the note of at least $300,000. In May 2012 the Company issued the second installment consisting of 4,615,385 shares of common stock subsequent to SOK Partners surpassing the aggregate advances of $300,000. Until the maturity date of the note, if the Company obtains financing from any other source without the consent of SOK Partners, then the Company is required to issue additional bonus equity in an amount equal to $600,000 less the aggregate advances on the note made prior to the breach. The principal balance of the SOK Partners note was $357,282 as of December 31, 2012.
As long as any amount payable under the note remains outstanding, SOK Partners or its designee is entitled to appoint a new member to the Company’s Board of Directors, who will be appointed upon request. Mr. Koenigsberger was appointed to the Board by SOK Partners on June 25, 2012.
On March 28, 2012, the Company signed an Amended and Restated Note Purchase Agreement, dated as of December 20, 2011, with Dr. Herschkowitz (as amended, the “Herschkowitz Purchase Agreement”). Pursuant to the Herschkowitz Purchase Agreement, the Company issued a 20.0% convertible note due June 20, 2012 in the principal amount of $240,000 for previous advances under the note. The Company’s obligations under the note are secured by the grant of a security interest in substantially all tangible and intangible assets of the Company. The Company has previously issued to Dr. Herschkowitz an equity bonus consisting of 1,546,667 shares of common stock. An additional 7,500,000 shares were transferred to Dr. Herschkowitz effective in April 2012, upon the occurrence of an event of default on the note. On August 13, 2012, the Company entered into a settlement and forbearance agreement described below, relating to the defaults under the note and other matters.
As long as any amount payable under the note remains outstanding, Dr. Herschkowitz or his designee is entitled to appoint a special advisor to the Company’s Board of Directors, who will be appointed as a member of the Board upon request. Pursuant to this authority, Josh Kornberg was appointed to the Board on March 9, 2012. In addition, pursuant to this authority, Ricardo Koenigsberger was appointed to the Board on June 25, 2012.
Pursuant to a letter dated April 20, 2012, Dr. Herschkowitz advised the Company of the occurrence of numerous events of default under the terms of the Herschkowitz Note and the Herschkowitz Note Purchase Agreement. As a result of such events of default, Dr. Herschkowitz asserted significant rights as a secured creditor of the Company, including his rights as a secured creditor with a security interest in substantially all assets of the Company. Without a settlement relating to the defaults and other matters, Dr. Herschkowitz could have taken action to levy upon the Company’s assets, including patents and other intellectual property.
In addition, the Company and APA were parties to a letter agreement dated March 14, 2012, providing APA and its affiliates (including Dr. Herschkowitz and SOK) with rights to avoid dilution relating to additional issuances of equity securities by the Company through July 14, 2012, evidencing the parties’ intent that APA would be provided with significant protection against dilution. This protection was in recognition of APA’s investments in the Company involving a high degree of risk and the Company’s contemplated need for restructuring its indebtedness, which were anticipated to result, and have resulted, in significant dilution. The parties acknowledged that Dr. Herschkowitz and SOK would not have made their historical cash investments in the Company to the same degree had the dilution protection not been provided, and the investments by these parties have enabled the Company to avoid insolvency. Since the respective dates of the Herschkowitz Note Purchase Agreement and the SOK Note Purchase Agreement, the Company has issued in excess of 16,000,000 shares of common stock to parties other than APA and its affiliates, resulting in significant dilution.
| 22 |
Effective August 15, 2012, the Company entered into a letter agreement with Dr. Herschkowitz, APA and SOK (the “Forbearance Agreement”). Under the Forbearance Agreement, among other things, (i) Dr. Herschkowitz agreed to forbear from asserting his rights as a secured creditor to substantially all of the Company’s assets, resulting from the Company’s defaults; (ii) the Company issued an aggregate 26.5 million shares of common stock to Dr. Herschkowitz and SOK and adjusted the conversion price of their convertible notes to $0.014 per share from $0.065 per share, to satisfy the Company’s obligations to adjust for dilution under the March 14, 2012 letter agreement; (iii) Dr. Herschkowitz and SOK agreed to extend the maturity of their notes to December 31, 2012; (iv) the Company agreed to pay certain compensation to Dr. Herschkowitz upon the achievement of financial milestones and (v) Dr. Herschkowitz clarified and waived certain of his rights, including the right to interest at a penalty rate upon default.
In the Forbearance Agreement, Dr. Herschkowitz agrees to forbear from exercising any of his rights arising under the Herschkowitz Note or the Herschkowitz Note Purchase Agreement with respect to the existing defaults against the Company, subject to the limitations set forth in the letter agreement and without releasing or waiving any future breach of the letter agreement. He further agrees to forbear from exercising any rights with respect to events of default, security interests in the collateral and other similar remedies against the Company or his interests under the Herschkowitz Note or the Herschkowitz Note Purchase Agreement until the occurrence of an event of default in the Herschkowitz Note: (a) that does not constitute an existing default and (b) occurs and accrues after the effective date of the letter agreement.
Dr. Herschkowitz and the Company acknowledge that 7.5 million shares of the Company’s common stock, constituting the “penalty shares” under the Herschkowitz Note Purchase Agreement, were delivered to Dr. Herschkowitz in April 2012 as provided in the Herschkowitz Note Purchase Agreement upon an event of default. Notwithstanding a provision that would have increased the rate of interest from 20% to 24% upon an event of default, Dr. Herschkowitz agreed that the Company would not pay the increased rate of interest but would accrue interest at 20% until a subsequent event of default.
Under the Forbearance Agreement, the Herschkowitz Note and the SOK Note were amended as follows: (i) the due dates of the notes were extended to December 31, 2012, from the previous due dates of June 20, 2012 and August 28, 2012, respectively; (ii) Dr. Herschkowitz will release his security agreement after payment of all currently outstanding promissory notes to parties other than SOK; and (iii) the Herschkowitz Note was amended to add certain events of default relating to judgments against the Company or other creditors taking action with respect to the collateral. In consideration of the extension additional milestone fees were revised as described below. Pursuant to a Forbearance and Settlement Agreement with these parties dated August 15, 2012, as subsequently amended, the due date of these notes has been extended to August 31, 2013.
APA and its affiliates agreed to terminate the letter agreement regarding dilution dated March 14, 2012. In consideration of the various provisions of the letter agreement and in recognition of the understanding of the parties regarding dilution and the agreements of APA and its affiliates to forebear and to extend the due dates of the notes, the Company (i) issued 13,250,000 shares to Dr. Herschkowitz, (ii) issued 13,250,000 shares to SOK, and (iii) the conversion price of the Herschkowitz Note and the SOK Note were changed to $0.014 per share from $0.065 per share.
In the event that the Company consummates the following series of transactions on or prior to June 30, 2013: (i) a merger or similar transaction with a public shell company, (ii) raising between $2 million and $4 million through an offering of the securities of the public shell company concurrent with or subsequent to the shell merger and (iii) listing the Company’s shares on NASDAQ pursuant to an underwritten offering of the Company’s securities resulting in gross proceeds of between $5 million and $30 million then the Company shall deliver to Dr. Herschkowitz the following compensation: (A) $75,000 upon consummating the shell merger, (B) $150,000 upon consummating the qualifying financing round and (C) 3% of the gross proceeds of the NASDAQ underwriting, which payment shall under no circumstances be less than $200,000 or greater than $1,000,000. The Company shall reimburse Dr. Herschkowitz at his actual out-of-pocket cost for reasonable expenses incurred in connection with the shell transactions but in no event in an amount greater than $10,000.
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In connection with the extension of the due date for the convertible notes on March 6, 2013, the milestone fees were revised as follows. The following fees are payable to Dr. Herschkowitz in the event that the Company consummates the following series of transactions on or prior to December 31, 2013: (i) financing raising not less than $1 million, compensation of $75,000; (ii) a going private transaction, compensation of $200,000 and (iii) 3% of the gross proceeds of the NASDAQ underwriting, which payment shall under no circumstances be less than $200,000 or greater than $3,000,000. In May 2013 Dr. Herschkowitz received $75,000 after the Company surpassed raising $1 million.
As a result of the transactions under the Forbearance Agreement and other investments, Dr. Herschkowitz, SOK and their affiliates currently own shares of common stock and derivative securities representing beneficial ownership of more than 65% of the Company’s outstanding common stock, giving such parties significant control over election of the Board of Directors and other matters. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Additional Convertible Notes. On November 6, 2012, the Company issued and sold convertible promissory notes in the total principal amount of $156,243 to Dr. Herschkowitz and certain of his assignees. The Company issued to these parties an aggregate 1,562,430 shares of common stock in consideration of placement of the notes. The notes bear interest at a rate of 20% per annum and are secured by a security interest in the Company’s accounts receivable, patents and certain patent rights and are convertible into common stock upon certain mergers or other fundamental transactions at a conversion price based on the trading price prior to the transaction. The proceeds from this transaction were used to pay off approximately $155,000 in principal amount of secured indebtedness. The notes were converted in April 2013 into 1,041,622 shares of common stock at $.10 per share.
Overview
We were incorporated in Minnesota in April 2002. We are a development stage company manufacturing an environmentally conscientious system for the collection and disposal of infectious fluids that result from surgical procedures and post-operative care. Since our inception in 2002, we have invested significant resources into product development. We believe that our success depends upon converting the traditional process of collecting and disposing of infectious fluids from the operating rooms of medical facilities to our wall-mounted Fluid Management System (“FMS”) and use of our proprietary cleaning fluid and filter kit.
We have two direct salespersons and an independent representative selling the STREAMWAY System, and expect to hire additional direct salespersons in 2013 as well as potentially reaching agreement with regional and/or national sales organizations. We have sold a number of systems and have recognized revenues from sales of our disposable procedure kits. We also have hundreds of trial procedures being performed on a monthly basis with institutions that have installed our Streamway System for a 30-60 day trial period. We have brought the manufacturing process in house and plan to supplement capacity through outside third party contract manufacturers.
Since inception, we have been unprofitable. We incurred net losses of approximately $3.3 million and $2.8 million for the six months ended June 30, 2013 and 2012, respectively and net losses of approximately $1.2 million and $2.1 million in the three month periods ended June 30, 2013 and 2012, respectively. As of June 30, 2013, we had an accumulated deficit of approximately $22.6 million. We received approval from the FDA in April 2009 to commence sales and marketing activities of the STREAMWAY FMS system and shipped the first system in 2009. However, there was no significant revenue prior to 2011, primarily due to lack of funds to build and ship the product. We sold five STREAMWAY units in 2011, and another 17 to date.
The Company has completed the design of a STREAMWAY Two version of the STREAMWAY system which will provide a number of enhancements to the existing product line including a more intuitive and easier to navigate control screen, data storage capabilities, and additional inlet ports on the filters, among other improvements. The Company has purchase orders for pending sales of 43 STREAMWAY STREAMWAY Two units that we anticipate producing in the third quarter of 2013. The Company has installed first generation STREAMWAY units in hospitals for evaluation purposes, and all of those units installed for trial during 2013 have been purchased by the hospital. If purchased, at that time, t he Company recognizes revenue for trial base units if the customer signs a binding contract for the purchase of the trial unit. The Company invoices the customer based upon a contracted price negotiated prior to the trial.
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We have never generated sufficient revenues to fund our capital requirements. We have funded our operations through a variety of debt and equity instruments. See “Liquidity and Capital Resources - Historical Financing” below. Our capital needs for the next 6 months are expected to be approximately $1 million because of our cash flow deficit. We will attempt to raise these funds through equity or debt financing, alternative offerings or other means. Our future cash requirements and the adequacy of available funds depend on our ability to sell our products. We will also continue to endeavor to negotiate to extend the maturity dates of our indebtedness, convert existing obligations into equity, settle such obligations or otherwise reduce their amounts. See “Liquidity and Capital Resources - Plan of Financing; Going Concern Qualification” below.
As a company still in development, our limited history of operations makes prediction of future operating results difficult. We believe that period to period comparisons of our operating results should not be relied on as predictive of our future results.
Results of Operations
Revenue. The Company recognized $278,583 of revenue in the six months ended June 30, 2013 and $47,595 in revenue in the six months ended June 30, 2012. The Company recognized $150,856 of revenue in the three months ended June 30, 2013 and $24,960 in revenue in the three months ended June 30, 2012.The revenue in the second quarter of 2013 included the sale of 6 STREAMWAY FMS systems plus disposables. The Company is no longer installing first generation STREAMWAY FMS units in hospitals for evaluation purposes, but has 4 units in trials with purchase orders for 43 STREAMWAY Two units that we anticipate producing in the third quarter.
Cost of sales. Cost of sales in the six months ended June 30, 2013 was $108,939 and $15,516 in the six months ended June 30, 2012. Cost of sales in the three months ended June 30, 2013 was $67,335 and $1,710 in the three months ended June 30, 2012. The gross profit margin was approximately 61% for both the hardware and the cleaning solution kits in the six months ended June 30, 2013, and 67% in the six months ended June 30, 2012. As revenues increase, gross margins will depend on various factors including manufacturing costs and volume purchasing discounts on both the equipment and the cleaning solution. As the year progresses we expect the revenue to cost relationship generally to improve from period to period.
General and Administrative expense. General and administrative expense primarily consists of management salaries, professional fees, consulting fees, travel expense, administrative fees and general office expenses.
General and Administrative (G&A) expenses increased by $194,000 from the six months ended June 30, 2013 compared to June 30, 2012. Conversely General and Administrative (G&A) expenses decreased by $1,100,000 from the three months ended June 30, 2013 compared to June 30, 2012. The increase in the six month period was primarily due to an $180,000 increase in salaries due to the full time employment of a CEO and CFO for the full six month period in 2013; investor relations rose by $231,000 predominantly for firms hired to promote the Company’s improving position to institutional investors; legal fees were higher by $132,000 as a result of additional filings, private placements and other funding agreements; amortization expense increased by $140,588 as our intangible assets related to STREAMWAY One patents no longer have value. Lastly, stock based compensation increased by $639,716, mostly as a result of equity awards to officers and employees, but this and the aforementioned expenses were almost offset by a reduction of $1,179,786 in investors stock compensation. The decrease for three month period ended June 30, 2013 as compared to June 30, 2012 was primarily due to $1,399,065 of investor relations expense incurred in 2012. In an effort to reduce convertible debt, numerous agreements were negotiated since the second quarter of 2012, converting the debt to equity in the form of common stock. The decrease for the three month period was partially offset by increases in investor relation fees, $147,812, legal fees, $8,529, and salaries, $134,626.
Operations expense. Operations expense primarily consists of expenses related to product development and prototyping and testing in the company’s current stage.
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Operations expense increased to $409,395 in the six months ended June 30, 2013 compared to $218,300 in the six months ended June 30, 2012. Operations expenses increased by $56,365 in the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Both the year-to-date and quarter expenses were affected by the same expenses. Salaries increased $141,722 for the six months period and $69,859 in the three months period predominantly because the Company had a full time COO, but this was partially offset by reduced consulting fees of $99,903 for the six months period and $74,058 in the three months period since the COO was previously a consultant for the Company. The other major increase was due to research and development, which increased by $133,541 and $75,264, for the six month and three month periods, respectively.
Sales and Marketing expense. Sales and marketing expense consists of expenses required to sell products through independent reps, attendance at trades shows, product literature and other sales and marketing activities .
Sales and marketing expenses increased to $195,562 in the six months ended June 30, 2013 compared to $61,064 in the six months ended June 30, 2012. Sales and marketing expenses increased by $79,429 in the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Both the year-to-date and quarter expenses were affected by the same expenses. Public Relations were up by $63,333 for the six months period and $42,833 for the three months periods because of a newly hired public relations firm in 2013. Salaries also increased by $31,614 and $24,530 in the six and three month’s periods, respectively, as an additional sales person was hired in April 2013. Commission expense has grown commensurate with sales, increasing by $13,837 and $12,302 in the six and three month’s periods, respectively.
Interest expense. Interest expense increased by $77,448 in the six months ended June 30, 2013 compared to the six months ended June 30, 2012. There was an increase of $37,383 in interest expense in the three-month period. The higher interest is due to a combination of ongoing notes that have had a moderate reduction in principal and new agreements paying off previous notes at higher interest rates with higher principal balances.
The (Gain)/Loss on revaluation of equity-linked financial instruments reflected a gain of $88,673 in the six months ended June 30, 2013 compared to a gain of $59,597 in the six months ended June 30, 2012. The (Gain)/Loss on revaluation of equity-linked financial instruments reflected a gain of $69,251 in the three months ended June 30, 2013 compared to the $58,947 in the three months ended June 30, 2012. The increased gain in the current periods resulted from warrants moving closer to expiration.
Liquidity and Capital Resources
Cash Flows
Net cash used in operating activities was $2,123,000 for the six months ended June 30, 2013 compared with net cash used of $644,000 for the June 2012 period. The $1,479,000 increase in cash used in operating activities was most affected by a $491,000 decrease in accruals particularly reduced payroll liabilities, as well as $206,000 reduction in payables.
Cash flows used in investing activities was $58,372 for 2013 and zero in 2012. Investments consisted of tablet computers for sales personnel and legal bills directly incurred for new patent protection.
Net cash provided by financing activities was $2,300,000 for June 2013 compared to net cash provided of $556,403 for June 2012. The increase in 2013 was primarily the result of selling $1,000,000 more in common stock in 2013 compared to 2012, and obtaining an additional $1,300,000 in convertible debt funding. We expect to show additional cash provided by financing activities in the next few quarters provided we are successful in raising capital . See “Plan of Financing; Going Concern Qualification” below.
Capital Resources
We had a cash balance of $137,066 as of June 30, 2013. Since our inception, we have incurred significant losses. As of June 30, 2013, we had an accumulated deficit of approximately $22,600,000.
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From inception to June 30, 2013, our operations have been funded through a bank loan and private convertible debt of approximately $3,412,000 and equity investments that totaled approximately $5,624,000. See “Historical Financing” below. Also, in January 2013, the Company raised an additional $300,000 from the sales of convertible notes and an additional $500,000 from the private sales of equity securities in January and March 2013. In March, the Company issued shares to an institutional investor for an additional $500,000. In June 2013, the Company raised an additional $1,000,000 from the sale of convertible notes. The funds from our October 2008 offering allowed us to complete the testing and certification of our FMS unit and to receive, on April 1, 2009, final FDA clearance. Management hired an investment banker in 2010 to raise an additional $3 to $5 million in new equity. The banker was unable to raise the expected $500,000 by September 30, 2010 and the balance within three months, but we raised approximately $229,000 in equity and $605,000 in convertible debt in 2010, and $1,386,000 in equity and $525,000 in convertible debt in 2011 through alternative means. In 2012, the Company converted $818,000 of debt into equity, raised $3,764,000 in equity and $1,053,000 in convertible debt. In the first two quarters of 2013 the company raised $1,300,000 in debt financing, and $1,000,000 in equity.
We are currently incurring operating expenses of approximately $150,000 per month. Although we are attempting to curtail our expenses, there is no guarantee that we will be able to reduce these expenses significantly, and expenses for some periods may be higher as we prepare our product for broader sales, increase our sales efforts and maintain adequate inventories. Further, we have approximately $3,386,000 in debts, liabilities and cash obligations that become due over the next 12 months. We believe that we will need to raise at least an aggregate of $1 million from future financing in order to have sufficient financial resources to fund our operations for the next 6 months because of our cash flow deficit. We will attempt to raise these funds through equity or debt financing, alternative offerings or other means, and we will also endeavor to convert existing obligations into equity, settle such obligations or otherwise reduce their amounts. If successful we are planning significant capital investments, and we will have human resource additions over the next 6 months.
Although we have been able to fund our current working capital requirements, principally through debt and equity financing, there is no assurance that we will be able to do so in the future. If financing is available, it may be highly dilutive to our existing shareholders and may otherwise include burdensome or onerous terms. Our independent registered public accounting firm has indicated in their audit opinion, contained in our financial statements that they have serious doubts about our ability to continue as a going concern. Our inability to raise additional working capital at all or to raise it in a timely manner would negatively impact our ability to fund our operations, to generate revenues, and to otherwise execute our business plan, leading to the reduction or suspension of our operations and ultimately forcing us to declare bankruptcy, reorganize or to go out of business. Should this occur, the value of any investment in our securities could be adversely affected, and an investor would likely lose all or a significant portion of their investment.
Based on our current operating plan we believe that we have sufficient cash, cash equivalents and short-term investment balances to last approximately through September 30, 2013 after which additional financing will be needed to continue to satisfy our obligations.
Historical Financing
We have funded our operations through a combination of debt and equity instruments. We funded our early operations through a bank loan of $41,400, an equity investment of $68,000 from the Wisconsin Rural Enterprise Fund (“WREF”) and $30,000 in early equity investment from several individuals. WREF had also previously held debt in the form of three loans of $18,000, $12,500 and $25,000. In December 2006, WREF converted two of the loans totaling $37,500 into 43,000 shares of our common stock. In August 2006, we secured a $10,000 convertible loan from one of our vendors. In February 2007, we obtained $4,000 in officer and director loans and in March 2007, we arranged a $100,000 convertible note from two private investors. In July 2007, we obtained a convertible bridge loan of $170,000. In June 2008, we paid off the remaining $18,000 loan from WREF and raised approximately $1.6 million through a private common stock offering completed in October 2008. The $170,000 convertible bridge loan and the $4,000 in officer and director loans were converted into shares of our common stock in October 2009. During 2009, we raised an additional $725,000 in a private placement of stock units and/or convertible debt, with each stock or debt unit consisting of, or converting into, respectively, one share of our common stock, and a warrant to purchase one share of our common stock at $.65 per share.
In 2010, we raised approximately $229,000 in equity and $605,000 in convertible debt.
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In 2011, we raised $1,386,000 in equity and $525,000 in convertible debt, including the convertible debt investment by Dr. Sam Herschkowitz described under Item 13, “Certain Relationships and Related Party Transactions, and Director Independence.”
In 2012, the Company raised $696,000 in equity and $529,000 in convertible debt, and $818,000 of debt was converted into equity. This convertible debt included advances on a convertible promissory note from SOK Partners, LLC, and an investment fund affiliated with one of our directors, for approximately $357,000. See Item 13, “Certain Relationships and Related Party Transactions, and Director Independence.” On November 6, 2012, we entered into additional note purchase agreements with Dr. Samuel Herschkowitz, pursuant to which on the same date, we issued and sold convertible promissory notes in the total principal amount of $156,243 to Dr. Herschkowitz and certain of his assignees. Pursuant to the note purchase agreements, we issued to these parties an aggregate 1,562,430 shares of common stock in consideration of placement of the notes. The convertible notes bear interest at a rate of 20% per annum and are secured by a security interest in the Company’s accounts receivable, patents and certain patent rights and are convertible into common stock upon certain mergers or other fundamental transactions at a conversion price based on the trading price prior to the transaction. The proceeds from this financing were used to pay off approximately $155,000 in principal amount of secured indebtedness.
The Company also raised an additional $300,000 from the sale of convertible notes in January 2013. Also, in January and March 2013, the Company raised an additional $500,000 from a second private sale of equity securities. In addition, in March 2013, the Company completed a further private sale of common stock for an aggregate purchase price of $500,000. In June 2013, the Company raised an additional $1,000,000 from the sale of convertible notes. See Note 3 to the Financial Statements.
Plan of Financing; Going Concern Qualification
We have not achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our operations, sales and marketing, and general and administrative expenses will increase, and as a result we will need to generate significant revenue to achieve profitability.
We are currently incurring operating expenses of approximately $150,000 per month. Although we are attempting to curtail our expenses, there is no guarantee that we will be able to reduce these expenses significantly, and expenses for some periods may be higher as we prepare our product for broader sales, increase our sales efforts and maintain adequate inventories. Further, we have approximately $3,386,000 in debts, liabilities and cash obligations that become due over the next 12 months.
We may default on significant debt that becomes due on August 31, 2013 and may be unable to continue in business. We are currently indebted to Dr. Samuel Herschkowitz and SOK Partners, LLC pursuant to convertible promissory notes with balances of $240,000 and approximately $357,000, respectively, as of June 30, 2013. Pursuant to a Forbearance and Settlement Agreement with these parties dated August 15, 2012, as subsequently amended, the due date of these notes has been extended to August 31, 2013. Dr. Herschkowitz’ note is secured by substantially all of the assets of the Company. If we are unable to repay these notes as of August 31, 2013 and these parties do not convert their notes, we will be in default under the notes. In that case, Dr. Herschkowitz will have rights as a secured creditor with respect to the Company’s assets, which would include the right to seize the Company’s assets. Further, the Company also has other significant indebtedness. If the Company defaults on its debt, it may be forced to seek bankruptcy protection and may be unable to continue in business.
We believe that we will need to raise at least an aggregate of $1 million from future financing in order to have sufficient financial resources to fund our operations for the next 6 months because of our cash flow deficit. We will attempt to raise these funds through equity or debt financing, alternative offerings or other means. We will also continue to endeavor to negotiate to extend the maturity dates of our indebtedness, convert existing obligations into equity, settle such obligations or otherwise reduce their amounts. If we are planning significant capital investments, and we will have human resources additions over the next 6 months. If we are unable to attend additional funds at reasonable rates or at all we will be required to substantially curtail our operations and could cease to operate in our current form.
The Company has suffered recurring losses from operations and has a stockholders’ deficit. Although we have been able to fund our current working capital requirements, principally through debt and equity financing, there is no assurance that we will be able to do so in the future. If financing is available, it may be highly dilutive to our existing shareholders and may otherwise include burdensome or onerous terms. Our inability to raise additional working capital at all or to raise it in a timely manner would negatively impact our ability to fund our operations, to generate revenues, and to otherwise execute our business plan, leading to the reduction or suspension of our operations and ultimately forcing us to declare bankruptcy, reorganize or to go out of business. Should this occur, the value of any investment in our securities could be adversely affected, and an investor would likely lose all or a significant portion of their investment. These factors raise substantial doubt about our ability to continue as a going concern.
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As a result of the above factors, our independent registered public accountant firm has indicated in their audit opinion, contained in our financial statements included our annual report on Form 10-K for the year ended December 31, 2012, that they have serious doubts about our ability to continue as a going concern. The financial statements in the Form 10-K and in this Form 10-Q report have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Inflation
We do not believe that inflation has had a material impact on our business and operating results during the periods presented.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates and Recent Accounting Developments
The discussion and analysis of our financial condition and results of operations are based upon our audited Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our financial statements, the reported amounts of revenues and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, fair value of stock-based compensation, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingencies and litigation.
We base our estimates and assumptions on our historical experience. We also used any other pertinent information available to us at the time that these estimates and assumptions are made. We believe that these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from our estimates.
Our significant accounting policies are described in “Note 1 – Summary of Significant Accounting Policies,” in Notes to Financial Statements of this Quarterly Report on Form 10-Q. We believe that the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments, and use of estimates and assumptions in the preparation of our Financial Statements.
Revenue Recognition. We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin Topic 13 Revenue Recognition and ASC 605 – Revenue Recognition.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectability is probable. Delivery is considered to have occurred upon either shipment of the product or arrival at its destination based on the shipping terms of the transaction. Our standard terms specify that shipment is FOB Skyline and we will, therefore, recognize revenue upon shipment in most cases. This revenue recognition policy applies to shipments of our STREAMWAY FMS units as well as shipments of cleaning solution kits. When these conditions are satisfied, we recognize gross product revenue, which is the price we charge generally to our customers for a particular product. Under our standard terms and conditions, there is no provision for installation or acceptance of the product to take place prior to the obligation of the customer. The Company recognizes revenue for trial base units when the customer signs a binding contract for the purchase of the trial unit. The customer’s right of return is limited only to our standard one-year warranty, whereby we replace or repair, at our option. We believe it would be rare that the STREAMWAY FMS unit or significant quantities of cleaning solution kits may be returned. Additionally, since we buy both the STREAMWAY FMS units and cleaning solution kits from “turnkey” suppliers, we would have the right to replacements from the suppliers if this situation should occur.
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Stock-Based Compensation . Effective January 1, 2006, we adopted ASC 718- Compensation-Stock Compensation (“ASC 718”). Under ASC 718 stock-based employee compensation cost is recognized using the fair value based method for all new awards granted after January 1, 2006 and unvested awards outstanding at January 1, 2006. Compensation costs for unvested stock options and non-vested awards that were outstanding at January 1, 2006, are being recognized over the requisite service period based on the grant-date fair value of those options and awards, using a straight-line method. We elected the modified-prospective method in adopting ASC 718 under which prior periods are not retroactively restated.
ASC 718 requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. We use the Black-Scholes option-pricing model which requires the input of significant assumptions including an estimate of the average period of time employees and directors will retain vested stock options before exercising them, the estimated volatility of our common stock price over the expected term, the number of options that will ultimately be forfeited before completing vesting requirements and the risk-free interest rate.
Because we do not have significant historical trading data on our common stock we relied upon trading data from a composite of 10 medical companies traded on major exchanges and 15 medical companies quoted by the OTC Bulletin Board to help us arrive at expectations as to volatility of our own stock when broader public trading commences. In the case of options and warrants issued to consultants and investors we used the legal term of the option/warrant as the estimated term unless there was a compelling reason to use a shorter term. The measurement date for employee and non-employee options and warrants is the grant date of the option or warrant. The vesting period for options that contain service conditions is based upon management’s best estimate as to when the applicable service condition will be achieved. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognized. The assumptions we use in calculating the fair value of stock-based payment awards represent our best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future. See “Note 3 – Stockholders’ Deficit, Stock Options and Warrants” in Notes to Financial Statements of this Quarterly Report on Form 10-Q for additional information.
When an option or warrant is granted in place of cash compensation for services, we deem the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or warrant is granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing an option pricing model. For that reason we also use the Black-Scholes option-pricing model to value options and warrants granted to non-employees, which requires the input of significant assumptions including an estimate of the average period that investors or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of our common stock price over the expected term, the number of options and warrants that will ultimately be forfeited before completing vesting requirements and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognizes that. Since we have no trading history in our common stock and no first-hand experience with how our investors and consultants have acted in similar circumstances, the assumptions we use in calculating the fair value of stock-based payment awards represent our best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and we use different assumptions, our equity-based consulting and interest expense could be materially different in the future.
Since our common stock has no significant public trading history we were required to take an alternative approach to estimating future volatility and the future results could vary significantly from our estimates. We compiled historical volatilities over a period of 2 to 7 years of 10 small-cap medical companies traded on major exchanges and 15 medical companies in the middle of the market cap size range on the OTC Bulletin Board and combined the results using a weighted average approach. In the case of standard options to employees we determined the expected life to be the midpoint between the vesting term and the legal term. In the case of options or warrants granted to non-employees, we estimated the life to be the legal term unless there was a compelling reason to make it shorter .
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Valuation of Intangible Assets. We review identifiable intangible assets for impairment in accordance with ASC 350 – Intangibles – Goodwill and Other, whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Our intangible assets are currently solely the costs of obtaining trademarks and patents. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant change in the medical device marketplace and a significant adverse change in the business climate in which we operate. If such events or changes in circumstances are present, the undiscounted cash flows method is used to determine whether the intangible asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. If the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, the asset is considered impaired, and the impairment is measured by reducing the carrying value of the asset to its fair value using the discounted cash flows method. The discount rate utilized is based on management's best estimate of the related risks and return at the time the impairment assessment is made. The Company wrote off the entire STREAMWAY One product patent of $140,588 in June 2013. The balance represented intellectual property in the form of patents for our STREAMWAY One product. The Company’s new STREAMWAY Two product has a new provisional patent, see “Patents and Intellectual Property”.
Recent Accounting Developments
See Note 1 - “Summary of Significant Accounting Policies” to the Condensed Financial Statements of this Quarterly Report on Form 10-Q for a discussion of recent accounting developments.
Information Regarding Forward-Looking Statements
This Form 10-Q contains “forward-looking statements” that indicate certain risks and uncertainties related to the Company, many of which are beyond the Company’s control. The Company’s actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this report. Important factors that may cause actual results to differ from projections include:
| · | Possible inability to raise sufficient additional capital to operate our business, causing our independent registered public accountant firm to indicate in their audit opinion, contained in our financial statements included our annual report on Form 10-K for the year ended December 31, 2012, that they have serious doubts about our ability to continue as a going concern ; |
| · | We have approximately $3.4 million in debts, liabilities and cash obligations that become due over the next twelve months, including notes to major shareholders with aggregate balances of approximately $597,000 that are currently due August 31, 2013 and are secured by the Company’s patents and other assets; |
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We are subject to potential claims for past violations of shareholders’ preemptive rights, the amount of which claims is impossible to determine; |
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| · | Unexpected costs and operating deficits, and lower than expected sales and revenues, if any; |
| · | Adverse economic conditions; |
| · | Adverse results of any legal proceedings; |
| · | The volatility of our operating results and financial condition; |
| · | Inability to attract or retain qualified senior management personnel, including sales and marketing personnel; and |
| · | Other specific risks that may be alluded to in this report. |
All statements, other than statements of historical facts, included in this report regarding the Company’s growth strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-looking statements. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. The Company does not undertake any obligation to update any forward-looking statements or other information contained herein. Potential investors should not place undue reliance on these forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, the Company cannot assure potential investors that these plans, intentions or expectations will be achieved. The Company discloses important factors that could cause the Company’s actual results to differ materially from its expectations in the “Risk Factors” section of the Form 10-K and Form 10-K/A filed with the Securities and Exchange Commission on March 22, 2013, and April 8, 2013, respectively. These cautionary statements qualify all forward-looking statements attributable to the Company or persons acting on its behalf.
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Not required.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the rules promulgated under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
With the participation of the Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2013.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three months ended June 30, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The former CEO and the Company had a dispute concerning stock options negated under the former CEO’s settlement agreement. The Company and the former CEO have entered into an amended settlement agreement whereby he will retain the 333,330 shares of common stock already exercised and the right to exercise options with respect to an additional 325,187 shares of common stock at $.01 per share. Additionally, the Company agreed to pay the former CEO $20,000 in cash. In exchange the former CEO agreed to relinquish warrants to purchase an aggregate 800,000 shares of common stock.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 with the exception of the additional item described below.
Since our inception, a majority of our shares and other securities have been issued in violation of the preemptive rights of existing shareholders, which could result in claims against us.
It was recently brought to the attention of our management and board of directors that our company is subject to preemptive rights. The Minnesota Business Corporation Act (the “Act”) provides such rights to shareholders of a corporation, unless the corporation’s articles of incorporation “opt out” and deny them. Our company’s articles of incorporation have never denied preemptive rights or mentioned them in any way. Since our inception in 2002, our company has issued shares of common stock and other equity securities on numerous occasions to raise capital and for other purposes and, to our knowledge; we have never complied with the Minnesota preemptive rights statute in connection with such issuances. At our annual meeting scheduled for September 2013, we are seeking shareholder approval of a merger to reincorporate our company in Delaware. Upon the completion of that merger, shareholders will no longer have preemptive rights relating to any future issuances of securities.
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In connection with previous issuances of securities, we may be subject to the claims of previous and current shareholders based on violations of their preemptive rights. With certain exceptions, each time our company has issued common stock, rights to purchase common stock or securities convertible into common stock, we were required to provide notice to existing shareholders of their preemptive rights and to afford them the opportunity to purchase their pro rata share of such securities before they were sold to other purchasers. The Act provides exemptions for specified types of issuances; however, management believes that such exemptions did not apply to most of the issuances of equity securities by our company. Therefore, we believe that since our inception, a majority of our shares and other equity securities have been issued in violation of the preemptive rights of then-existing shareholders. Management does not believe that it would be practicable to offer preemptive rights retroactively or to seek waivers of such rights, because we have been a publicly traded company since November 2009.
Shareholders who were denied preemptive rights in connection with the issuance of equity securities could seek various remedies, including issuing to such holders the right to purchase securities on the same terms such securities were sold to other purchasers or monetary damages based on the loss of the opportunity to purchase such securities . Further, the shareholders whose preemptive rights were not honored or the holders of the securities issued in violation of the rights could claim that such securities are invalid or could seek other remedies based on the courts’ powers to grant equitable remedies. The risk and magnitude of these claims are uncertain, because there is little legal authority on the application of the Minnesota preemptive rights statute. Further, there is little authority on the application of preemptive rights in cases involving public companies. We believe shareholders would have difficulty asserting claims relating to issuances more than six years ago, because a six year statute of limitations would generally apply under Minnesota law, subject to potential claims that certain transactions were not subject to the statute of limitations or that the six year period started at a later time. Although litigation is inherently uncertain and the strength of any defenses cannot be predicted with certainty, we intend to vigorously defend any potential claims, based in part on the following factors: (a) since November 2009, existing shareholders have had the ability to purchase freely tradable shares on the public markets, which has allowed them to purchase additional shares to maintain their percentage interests; (b) we would emphasize that any discount to the prevailing market prices or value of our shares on the dates of issuance of our equity securities related to lack of marketability, or in some cases to transactions expressly exempted from the Minnesota preemptive rights statute; (c) existing shareholders had knowledge of past issuances of securities, based on the public availability of our financial information since our first filing of a registration statement in November 2008 and our regular filing of periodic reports; and (d) we believe preemptive rights are intended to protect the rights of shareholders in privately held corporations. However, if current or former shareholders bring claims against the company for violations of preemptive rights, there can be no assurance that our company will not be subject to liability. Further, any other remedies granted by a court could have a material adverse effect on our company’s financial condition or results of operations, or could result in dilution to some existing shareholders if other shareholders are granted rights to purchase additional securities.
The following is a summary of our transactions since January 1, 2013 involving sales of our securities that were not registered under the Securities Act:
In January, 2013, in connection with a private placement offering we issued 8% convertible one year promissory notes in an aggregate principal amount of $300,000 convertible into 2,500,000 shares of common stock assuming a conversion rate of $.12 per share and five year warrants to purchase up to an aggregate of 2,500,000 shares of the corporation’s common stock at an exercise price of $0.15 per share. In addition, we issued to the placement agent for these sales five year warrants to purchase an aggregate of 200,000 shares of Common Stock at an exercise price of $.12 per share.
In January and March, 2013, in connection with a separate and new private placement offering we issued 7,142,857 shares of common stock at $.07 per share and warrants to purchase 7,142,857 shares of common stock at $.15 per share to 5 investors in return for their $500,000 investment in the Company.
In January 2013, the Company issued 290,143 shares of common stock at $.15 per share in payment to a vendor for $43,521.39 including principal and interest.
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In February 2013, the Company issued 1,000,000 shares of common stock to an escrow account to secure a settlement agreement with a former note holder. The escrow agent releases 1/3 of the stock back to the Company once per year until the settlement is paid in full. If the Company prepays the balance due then all the stock remaining in escrow is released back to the Company. If the Company defaults, and cannot cure the default within the contracted time period, then the stock is released to the note holder toward payment of the settlement.
In February 2013, the Company issued 250,000 shares of common stock in agreement with an investor relations firm canceling their services.
In March 2013, the Company issued 230,332 shares of common stock to a vendor as part of a cash/stock settlement of their long term note with the Company.
In March 2013, the Company issued 7,142,858 shares of common stock as an equity bonus. Includes a warrant to purchase 7,142,858 shares of common stock at $.08 per share. Includes a warrant to purchase 3,571,429 shares of common stock at $.15 per share. Includes a warrant to purchase 190,476 shares of common stock at $.08 per share. Includes a warrant to purchase 380,952 shares of common stock at $.08 per share.
On April 22, 2013, the Company issued 200,000 shares of common stock to a former consultant exercising stock options with an exercise price of $.01.
On April 25, 2013, the Company issued 333,330 shares of common stock to the former CEO exercising stock options with an exercise price of $.01.
On May 7, 2013 the Company converted the notes issuing 1,116,082 aggregate shares of common stock at $.15 per share to the note holders. One of the note holder’s is Dr. Herschkowitz, a related party, who received 357,163 shares of common stock.
In May and June 2013, in connection with a private placement offering we issued 8% convertible one year promissory notes in an aggregate principal amount of $1,000,000 convertible into 6,000,000 shares of common stock assuming a conversion rate of $.18 per share and five year warrants to purchase up to an aggregate of 4,611,111 shares of the corporation’s common stock at an exercise price of $.198 per share. The value of the notes is net discounts of $275,640 in 2013; due in May and June 2014. In addition, we issued to the placement agent for these sales five year warrants to purchase an aggregate of 444,444 shares of common stock at an exercise price of $.18 per share.
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.
None.
Not applicable.
None.
See the attached exhibit index.
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SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SKYLINE MEDICAL INC. | ||
| Date: August 14, 2013 | By: |
/s/ Joshua Kornberg Joshua Kornberg |
| President and Chief Executive Officer | ||
| Date: August 14, 2013 | By: |
/s/ Bob Myers Bob Myers |
| Chief Financial Officer |
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EXHIBIT INDEX
SKYLINE MEDICAL INC.
Form 10-Q
The quarterly period ended June 30, 2013
| Exhibit No. | Description | |
| 4.1 | Skyline Medical Inc. Amended and Restated 2012 Stock Incentive Plan (1) | |
| 4.2 | Form of Warrant issued as of June 6, 2013 (2) | |
| 10.1 | Letter agreement, dated April 25, 2013, among Dr. Samuel Herschkowitz, SOK Partners, LLC and Skyline Medical Inc. (3) | |
| 10.2 | Form of Convertible Promissory Note issued as of June 6, 2013 (2) | |
| 10.3 | Amended and Restated Executive Employment Agreement with Joshua Kornberg, signed on June 17, 2013 and effective March 14, 2013 (4) | |
| 31.1* |
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
| 31.2* | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | XBRL Instance Document** | |
| 101.SCH* | XBRL Extension Schema Document** | |
| 101.CAL* | XBRL Extension Calculation Linkbase Document** | |
| 101.DEF* | XBRL Extension Definition Linkbase Document** | |
| 101.LAB* | XBRL Extension Labels Linkbase Document** | |
| 101.PRE* | XBRL Extension Presentation Linkbase Document** |
| * | Filed herewith. |
| ** | In accordance with Rule 406T of Regulation S-T, this information is deemed not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
|
(1) Filed on May 10, 2013 as an exhibit to our Registration Statement on Form S-8 (File No. 333-188510) and incorporated herein by reference. (2) Filed on June 12, 2013 as an exhibit to our Current Report on Form 8-K and incorporated herein by reference. (3) Filed on May 1, 2013 as an exhibit to our Current Report on Form 8-K and incorporated herein by reference. (4) Filed on June 18, 2013 as an exhibit to our Current Report on Form 8-K and incorporated herein by reference. |
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No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
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