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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 March 31, 2014
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:
Skyline Medical Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 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)
| (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 May 2, 2014, the registrant had 222,213,697 shares of common stock, par value $.01 per share, outstanding.
| 2 |
TABLE OF CONTENTS
| 3 |
Item 1. Condensed Financial Statements
(A DEVELOPMENT STAGE COMPANY)
(Unaudited)
| March 31, 2014 | December 31, 2013 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 130,738 | $ | 101,953 | ||||
| Accounts Receivable | 63,854 | 97,245 | ||||||
| Inventories | 391,567 | 122,175 | ||||||
| Prepaid Expense and other assets | 122,645 | 60,588 | ||||||
| Total Current Assets | 708,804 | 381,961 | ||||||
| Fixed Assets, net | 221,102 | 158,110 | ||||||
| Intangibles, net | 67,581 | 53,355 | ||||||
| Total Assets | $ | 997,487 | $ | 593,426 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,102,643 | $ | 1,062,108 | ||||
| Accrued expenses | 1,176,277 | 2,057,957 | ||||||
| Short-term note payable (See Note 8) | - | 280,000 | ||||||
| Deferred Revenue | 69,000 | 69,000 | ||||||
| Total Current Liabilities | 2,347,920 | 3,469,065 | ||||||
| Accrued Expenses | 306,216 | 331,216 | ||||||
| Liability for equity-linked financial instruments (See Note 7) | 130 | 11,599 | ||||||
| Total Liabilities | $ | 2,654,266 | $ | 3,811,880 | ||||
| Commitments and Contingencies | - | - | ||||||
| Stockholders' Deficit: | ||||||||
| Series A Convertible Preferred Stock, $.01 par value, $100 Stated Value, 40,000 authorized, 20,550 outstanding | 206 | - | ||||||
| Common stock, $.01 par value, 800,000,000 authorized, 222,213,697 and 219,937,619 outstanding | 2,222,137 | 2,199,376 | ||||||
| Additional paid-in capital | 26,454,204 | 23,279,585 | ||||||
| Deficit accumulated during development stage | (30,333,327 | ) | (28,697,415 | ) | ||||
| Total Stockholders' Deficit | (1,656,779 | ) | (3,218,454 | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | 997,487 | $ | 593,426 | ||||
See Notes to Condensed Financial Statements
| 4 |
(A DEVELOPMENT STAGE COMPANY)
(Unaudited)
| Three Months Ended March 31, |
Period from
April 23, 2002 (Inception) to March 31, |
|||||||||||
| 2014 | 2013 | 2014 | ||||||||||
| Revenue | $ | 70,220 | $ | 127,727 | $ | 839,779 | ||||||
| Cost of Goods Sold | 31,083 | 41,604 | 412,550 | |||||||||
| Gross Margin | 39,137 | 86,123 | 427,229 | |||||||||
| General and administrative expenses | 1,179,281 | 1,823,082 | 24,459,681 | |||||||||
| Operations expense | 265,274 | 204,467 | 3,652,824 | |||||||||
| Sales and marketing expense | 204,920 | 83,969 | 1,845,168 | |||||||||
| Interest expense | 18,123 | 95,552 | 1,581,082 | |||||||||
| Loss (gain) on valuation of equity-linked financial instruments | (11,468 | ) | (19,422 | ) | (797,118 | ) | ||||||
| Total expense | 1,656,130 | 2,187,648 | 30,741,637 | |||||||||
| Net loss available to common shareholders | $ | (1,616,993 | ) | $ | (2,101,525 | ) | $ | (30,314,408 | ) | |||
| Loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (1.37 | ) | |||
| Weighted average shares used in computation - basic and diluted | 221,223,793 | 107,824,939 | 22,187,340 | |||||||||
See Notes to Condensed Financial Statements
| 5 |
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM APRIL 23, 2002 (INCEPTION)
TO MARCH 31, 2014
(UNAUDITED)
| Preferred Stock | 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 | ) | |||||||||||||
| 6 |
| 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 | ) |
| 7 |
| 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 |
| 8 |
| 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 | ||||||||||||||||||||||
| 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 | ||||||||||||||||||||
| Shares issued for cashless exercise of warrants at $.12 per share | 277,778 | 2,778 | 2,778 | |||||||||||||||||||||
| Shares issued for cashless exercise of warrants at $.16 per share | 163,334 | 1,633 | 1,633 | |||||||||||||||||||||
| Shares issued for cashless exercise of warrants at $.15 per share | 632,708 | 6,327 | 6,327 | |||||||||||||||||||||
| Shares issued for cashless exercise of warrants at $.20 per share | 261,848 | 2,618 | 2,618 | |||||||||||||||||||||
| Shares issued to 24 warrant holders exercised at a reduced price for $.10 per share | 10,444,898 | 104,449 | 940,041 | 1,044,490 | ||||||||||||||||||||
| Shares issued to 4 PPM investors converting notes at $.12 per share | 2,637,534 | 26,375 | 290,129 | 316,504 | ||||||||||||||||||||
| Shares issued to 10 PPM investors converting notes at $.18 per share | 5,405,431 | 54,054 | 966,146 | 1,020,200 | ||||||||||||||||||||
| Shares issued to consultant as compensation at $.38 per share | 150,000 | 1,500 | 55,500 | 57,000 | ||||||||||||||||||||
| Shares issued for two note conversions at $.014 per share | 71,066,331 | 710,663 | 284,265 | 994,928 | ||||||||||||||||||||
| Shares issued for warrant exercise at $.15 per share | 1,071,429 | 10,715 | 150,000 | 160,715 | ||||||||||||||||||||
| Shares issued for a cashless exercise of warrants at $.10 per share | 3,024,390 | 30,244 | 30,244 | |||||||||||||||||||||
| Shares issued to an investor for a cashless exercise of warrants at $.17 per share | 204,306 | 2,044 | 2,044 | |||||||||||||||||||||
| Shares issued for a cashless exercise of warrants at $.075 per share | 544,714 | 5,447 | 5,447 | |||||||||||||||||||||
| Shares issued to former Board Directors as compensation at $.325 per share | 100,000 | 1,000 | 99,000 | 100,000 | ||||||||||||||||||||
| Reduced warrant exercise compensation expense | 2,140,946 | 2,140,946 | ||||||||||||||||||||||
| Options issued as part of employee bonus | 147,500 | 147,500 | ||||||||||||||||||||||
| Shares issued to one investor for cashless warrant exercised at $.12 per share | 277,778 | 2,778 | 2,778 | |||||||||||||||||||||
| Shares issued for cashless warrant exercise at $.13 per share | 159,722 | 1,597 | 1,597 | |||||||||||||||||||||
| Shares issued for interest on two note conversions at $.18 per share | 40,918 | 409 | 6,956 | 7,365 | ||||||||||||||||||||
| Shares issued in settlement with a former noteholder at $.27 per share | 378,000 | 3,780 | 98,280 | 102,060 | ||||||||||||||||||||
| Shares issued for a stock option exercise at $.065 per share | 10,000 | 100 | 550 | 650 | ||||||||||||||||||||
| Shares issued to one warrant holder executed at a reduced price of $.125 per share | 1,000,000 | 10,000 | 115,000 | 125,000 | ||||||||||||||||||||
| Shares issued for option exercise at $.07 per share | 17,000 | 170 | 1,020 | 1,190 | ||||||||||||||||||||
| Shares issued for cashless warrant exercise at $.075 per share | 116,667 | 1,167 | 1,167 | |||||||||||||||||||||
| Vesting expense | 1,505,270 | 1,505,270 | ||||||||||||||||||||||
| Net loss | (9,406,304 | ) | (9,406,304 | ) | ||||||||||||||||||||
| Balance at 12/31/13 | 219,937,619 | $ | 2,199,376 | $ | 23,279,585 | $ | (28,697,415 | ) | $ | (3,218,454 | ) |
| 9 |
| Shares issued for cashless warrant exercise at $.20 per share | 129,630 | 1,296 | 1,296 | |||||||||||||||||||||
| Shares issued for option exercise at $.0167 per share | 325,187 | 3,252 | 2,178 | 5,430 | ||||||||||||||||||||
| Shares issued at $.275 per share as Investor Relations compensation | 150,000 | 1,500 | 39,750 | 41,250 | ||||||||||||||||||||
| Shares issued for cashless warrant exercise at $.17 per share | 249,252 | 2,493 | 2,493 | |||||||||||||||||||||
| Shares issued for a stock option exercise at $.07 per share | 20,000 | 200 | 1,200 | 1,400 | ||||||||||||||||||||
| Shares issued for two warrant holders for cashless warrant at $.01 per share | 163,062 | 1,630 | 1,630 | |||||||||||||||||||||
| Shares issued for warrant exercise at $.18 per share | 200,000 | 2,000 | 34,000 | 36,000 | ||||||||||||||||||||
| Shares issued at $.25 per share as Investor Relations compensation | 100,000 | 1,000 | 24,000 | 25,000 | ||||||||||||||||||||
| Reduction in escrow account per settlement agreement | (333,334 | ) | (3,333 | ) | (3,333 | ) | ||||||||||||||||||
| Shares issued for cashless warrant exercise at $.10 per share | 360,444 | 3,605 | 3,605 | |||||||||||||||||||||
| Shares issued for cashless warrant exercise at $.075 per share |
233,334 |
2,333 |
2,333 |
|||||||||||||||||||||
| Shares issued for cashless warrant exercise at $.17 per share |
22,409 |
224 |
224 |
|||||||||||||||||||||
| Shares issued per to 16 shareholders of Series A Convertible Preferred Stock Dividends payable in common shares at $.26 per share | 72,760 | 728 | 18,191 | (18,919 | ) | - | ||||||||||||||||||
| Vesting Expense | 259,339 | 259,339 | ||||||||||||||||||||||
| Bonus options expense | 694,500 | 694,500 | ||||||||||||||||||||||
| Shares issued for combined cashless and cash warrant exercise @ $.15 per share. | 583,334 | 5,833 | 46,667 | 52,500 | ||||||||||||||||||||
|
Preferred stock |
206 | 206 | ||||||||||||||||||||||
| Additional paid in capital - preferred |
2,054,795 |
2,054,795 |
||||||||||||||||||||||
| Net loss | (1,616,993 | ) | (1,616,993 | ) | ||||||||||||||||||||
| Balance at 3/31/2014 |
206 |
22,213,697 |
$ | 2,222,137 | $ | 26,454,205 | $ | (30,333,327 | ) | $ | (1,656,779 | ) |
(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
| 10 |
(A DEVELOPMENT STAGE COMPANY)
(Unaudited)
|
Year Ended
March 31, |
April 23, 2002 (Inception) |
|||||||||||
| 2014 | 2013 | To March 31, 2014 | ||||||||||
| Cash flow from operating activities: | ||||||||||||
| Net loss | (1,616,993 | ) | (2,101,525 | ) | (30,314,408 | ) | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 9,385 | 311 | 168,790 | |||||||||
| Vested stock options and warrants | 273,420 | 1,329,735 | 7,471,162 | |||||||||
| Equity instruments issued for management and consulting | 62,917 | 67,230 | 6,091,975 | |||||||||
| Stock-based registration payments | - | - | 355,124 | |||||||||
| Capital contributions resulting from waivers of debt | - | - | 476,398 | |||||||||
| Amortization of debt discount | - | 28,521 | 756,497 | |||||||||
| (Gain) loss on valuation of equity-linked instruments | (11,469 | ) | (19,422 | ) | (797,119 | ) | ||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable | 33,391 | (57,001 | ) | (63,854 | ) | |||||||
| Inventories | (269,392 | ) | 3,762 | (391,567 | ) | |||||||
| Prepaid expense and other assets | (62,057 | ) | (28,600 | ) | (122,645 | ) | ||||||
| Notes payable to shareholders | - | - | (14,957 | ) | ||||||||
| Accounts payable | 40,535 | (77,831 | ) | 2,188,407 | ||||||||
| Accrued expenses | (212,180 | ) | (100,465 | ) | 2,282,057 | |||||||
| Deferred Revenue | - | 15,000 | 69,000 | |||||||||
| Net cash used in operating activities: | (1,752,443 | ) | (940,285 | ) | (11,845,140 | ) | ||||||
| Cash flow from investing activities: | ||||||||||||
| Purchase of fixed assets | (72,377 | ) | - | (247,396 | ) | |||||||
| Purchase of intangibles | (14,226 | ) | - | (210,076 | ) | |||||||
| Net cash used in investing activities | (86,603 | ) | - | (457,472 | ) | |||||||
| Cash flow from financing activities: | ||||||||||||
| Proceeds from long-term and convertible debt | 20,000 | 300,000 | 3,955,209 | |||||||||
| Repayment of convertible debt | - | - | (250,000 | ) | ||||||||
| Principal payments on debt | (300,000 | ) | - | (375,667 | ) | |||||||
| Issuance of preferred stock | 2,055,000 | - | 2,055,000 | |||||||||
| Issuance of common stock | 92,831 | 1,000,000 | 7,048,808 | |||||||||
| Net cash provided by (used in) financing activities | 1,867,831 | 1,300,000 | 12,433,350 | |||||||||
| Net increase (decrease) in cash | 28,785 | 359,715 | 130,738 | |||||||||
| Cash at beginning of period | 101,953 | 13,139 | - | |||||||||
| Cash at end of period | 130,738 | 372,854 | 130,738 | |||||||||
| Non cash transactions: | ||||||||||||
| Conversion of debt to accrued liabilities | - | 415,775 | 515,775 | |||||||||
| Common stock issued for accrued interest/bonus | 694,500 | 12,225 | 1,315,339 | |||||||||
| Conversion of accounts payable to convertible debt | - | - | 546,600 | |||||||||
| Common stock issued to satisfy debt | - | 22,325 | 3,538,935 | |||||||||
| Stock/warrant issued to satisfy accounts payable/Liabilities | - | - | 539,165 | |||||||||
See Notes to Condensed Financial Statements
| 11 |
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Amounts presented at and for the three months ended March 31, 2014 and March 31, 2013 are unaudited)
Nature of Operations and Continuance of Operations
BioDrain Medical, Inc. (the "Company") was incorporated under the laws of the State of Minnesota in 2002. Effective August 6, 2013, the Company changed its name to Skyline Medical Inc. Pursuant to an Agreement and Plan of Merger dated effective December 16, 2013, the Company merged with and into a Delaware corporation with the same name that was its wholly-owned subsidiary, with such Delaware Corporation as the surviving corporation of the merger. 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 and filters 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 March 31, 2014, the Company has raised approximately $9,100,000 in equity, inclusive of $2,055,000 from a Series A Convertible Preferred Stock PPM, and $3,955,000 in debt financing. 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.
| 12 |
Accounting Policies and Estimates
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Presentation of Taxes Collected from Customers
Sales taxes are imposed on the Company’s sales to nonexempt customers. The Company collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting policy is to exclude the taxes collected and remitted from revenues and expenses.
Shipping and Handling
Shipping and handling charges billed to customers are recorded as revenue. Shipping and handling costs are recorded within cost of goods sold on the statement of operations.
Advertising
Advertising costs are expensed as incurred. Advertising expenses were $6,543 in the three months ended March 31, 2014 and there were no advertising expenses in the three months ended March 31, 2013.
Research and Development
Research and development costs are charged to operations as incurred. Research and development expenses were $118,351 in the three months ended March 31, 2014 and $58,277 for March 31, 2013.
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. 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.
| 13 |
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:
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Finished goods | $ | 77,125 | $ | 56,818 | ||||
| Raw materials | 235,048 | 18,603 | ||||||
| Work-In-Process | 79,394 | 46,754 | ||||||
| Total | $ | 391,567 | $ | 122,175 | ||||
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 - 7 | |
| Leasehold improvements | 5 | |
| Manufacturing tooling | 3 - 7 |
The Company’s investment in Fixed Assets consists of the following:
|
March 31,
2014 |
December 31,
2013 |
|||||||
| Computers and office equipment | $ | 126,234 | $ | 61,505 | ||||
| Leasehold improvements | 23,874 | 23,614 | ||||||
| Manufacturing tooling | 97,288 | 89,900 | ||||||
| Total | 247,396 | 175,019 | ||||||
| Less: Accumulated depreciation | 26,294 | 16,909 | ||||||
| Total Fixed Assets, Net | $ | 221,102 | $ | 158,110 | ||||
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 trademarks and 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 original STREAMWAY System patent of $140,588 in 2013.
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 2010 remain open to examination by federal and state tax authorities.
| 14 |
Patents and Intellectual Property
On January 25th, 2014 the Company filed a non-provisional PCT Application No. PCT/US2014/013081 claiming priority from the U.S. Provisional Patent Application, number 61756763 which was filed one year earlier on January 25th, 2013. The PCT makes it possible to seek patent protection for an invention simultaneously in each of 148 countries, including the United States, by filing this “international” patent application instead of filing several separate national or regional patent applications.
Our PCT patent application is for the 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 PCT Application adds features that are novel and non-obvious over all the Company’s previously filed applications. A feature claimed in the Patent is the ability to maintain continuous suction to the surgical field while simultaneously measuring, recording and evacuating fluid to the facilities sewer drainage system. This provides for continuous operation of the STREAMWAY System unit in suctioning waste fluids, which means that the unit never has to be shut off or paused during a surgical operation, for example, to empty a fluid collection container or otherwise dispose of the collected fluid.
Subsequent Events
The Company has evaluated all subsequent events through the date of this filing. The Company does not believe there are any 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 27, 2014. 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 May 2, 2014, 222,213,697 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 affected 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.
| 15 |
On February 4, 2014, (the “Closing Date”) we raised $2,055,000 in gross proceeds from a private placement of Series A Convertible Preferred Stock, par value $0.01 (the “Preferred Shares”) pursuant to a Securities Purchase Agreement with certain investors (the “Purchasers”) purchased 20,550 Preferred Shares, and warrants (the “Warrants”) to acquire an aggregate of approximately 1,600,000 shares of Common Stock. The Preferred Shares are convertible into shares of Common Stock at an initial conversion price of $0.26 per share of Common Stock. The Warrants are exercisable at an exercise price of $0.325 per share and expire five years from the Closing Date. If the Common Stock is not listed on the Nasdaq Stock Market, the New York Stock Exchange, or the NYSE MKT within 180 days of the Closing, the Company shall issue additional Warrants to purchase additional shares of Common Stock, equal to 30% of the shares of Common Stock which the Preferred Shares each Purchaser purchased are convertible into.
The Securities Purchase Agreement requires the Company to register the resale of the shares of Common Stock underlying the Preferred Shares (the “Underlying Shares”) and the Common Stock underlying the Warrants (the “Warrant Shares”). The Company is required to prepare and file a registration statement with the Securities and Exchange Commission within 132 days of the Closing Date (as extended by subsequent consent of the Purchasers), and to use commercially reasonable efforts to have the registration statement declared effective within 147 days if there is no review by the Securities and Exchange Commission, and within 192 days in the event of such review.
The Preferred Shares are convertible at the option of the holder into the number of shares of Common Stock determined by dividing the stated value of the Preferred Shares being converted by the conversion price of $0.26, subject to adjustment for stock splits, reverse stock splits and similar recapitalization events. If the Company issues additional shares of Common Stock, other than certain stock that is excluded under the terms of the Securities Purchase Agreement, in one or more capital raising transactions with an aggregate purchase price of at least $100,000 for a price less than the then existing conversion price for the Preferred Shares (the “New Issuance Price”), then the then existing conversion price shall be reduced to the New Issuance Price, provided, however, that under no circumstances shall the New Issuance Price be less than $0.13 or reduced to a price level that would be in breach of the listing rules of any stock exchange or that would have material adverse effect on the Corporation’s ability to list its Common Stock on a stock exchange, including but not limited to the change of accounting treatment of the Preferred Stock. The Preferred Shares contain certain limitations on conversion so that the holder will not own more than 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of Preferred Shares held by the applicable holder, with the percentage subject to increase in certain circumstances. The Preferred Shares are eligible to vote with the Common Stock on an as-converted basis, but only to the extent that the Preferred Shares are eligible for conversion without exceeding the Beneficial Ownership Limitation. The Preferred Shares are entitled to receive dividends on a pari passu basis with the Common Stock, when, and if declared. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), after the satisfaction in full of the debts of the Company and the payment of any liquidation preference owed to the holders of shares of Common Stock ranking prior to the Preferred Shares upon liquidation, the holders of the Preferred Shares shall receive, prior and in preference to the holders of any junior securities, an amount equal to $2,055,000 times 1.2, plus all declared but unpaid dividends.
The Warrants are exercisable on any day on or after the date of issuance, have an exercise price of $0.325 per share, subject to adjustment, and a term of five years from the date they are first exercisable. However, a holder will be prohibited from exercising a Warrant if, as a result of such exercise, the holder, together with its affiliates, would exceed the Beneficial Ownership Limitation as described above for the Preferred Shares. If any Warrant has not been fully exercised prior to the first anniversary of the Closing and if during such period the Company has not installed or received firm purchase orders (accepted by the Company) for at least 500 STREAMWAY ® Automated Surgical Fluid Disposal Systems, then, the number of shares of Common Stock for which such Warrant may be exercised shall be increased 2.5 times.
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.
| 16 |
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.
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 7) 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.
| 17 |
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.
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 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 $.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 3013, 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.
| 18 |
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, 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 was Dr. Samuel Horowitz 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 net of discount was $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.
In August and September 2013 the Company entered into agreements with holders of certain of its outstanding warrants to purchase the Company’s common stock to amend the exercise price of the warrant to $0.10 per share in connection with the agreement of each such holder to exercise the warrants in full. Prior to the amendments, the exercise prices of such warrants ranged from $0.15 to $0.46 per share. Twenty-four warrants were exercised with a reduced exercise price, and nineteen warrants were exercised pursuant to a net exercise provision. Together such warrant exercises resulted in aggregate cash proceeds of $1,044,490 to the Company, and the issuance of an aggregate 10,444,898 shares of common stock through the reduced warrant exercise and 6,533,788 shares which were issued pursuant to a net exercise provision.
In October 2013 the Company entered into agreements with a holder of certain of its outstanding warrants to purchase the Company’s common stock to amend the exercise price of the warrant to $.125 per share in connection with the agreement of the holder to exercise the warrants in full. Prior to the amendments, the exercise price of such warrants was $.25 per share. Two warrants were exercised with a reduced exercise price. Together the warrant exercises resulted in aggregate cash proceeds of $125,000 to the Company, and the issuance of an aggregate 1,000,000 shares of common stock.
For grants of stock options and warrants in 2013 the Company used a 0.78% to 2.04% risk-free interest rate, 0% dividend rate, 59% or 66% volatility and estimated terms of 5 or 10 years. Value computed using these assumptions ranged from $0.119 to $0.242 per share.
In January 2014 the Company issued 325,187 shares of common stock to the former CEO at $.0167 per share upon his exercising options.
In January through March 2014, 9 warrant holders exercised warrants through a cashless exercise for a total of 1,158,131 shares of common stock.
In January and February 2014 the Company issued warrants to purchase 1,615,383 shares pursuant to a February 4, 2014 private placement whereby the Company issued 20,550 shares of Series A Convertible Preferred Stock raising gross proceeds of $2,055,000. The warrants are at an exercise price of $0.325.
In February 2014 the Company issued a warrant to purchase 111,111 shares of common stock at an exercise price of $0.27 to a major shareholder Dr. Samuel Herschkowitz. The warrant is in consideration for a bridge loan extended in December 2013 that has been paid in February 2014.
On March 31, 2014, the Company issued dividends to the Purchasers of the Preferred Shares as described above. The dividends are at an annual rate of 6% of the stated value of the Preferred Shares paid on a quarterly basis in the form of common stock per a stipulated $0.26 per share. As a result 72,760 shares of common stock were issued to 16 holders of Preferred Shares.
In March 2014, the Company issued 333,334 shares of common stock to a warrant holder for a partial cash exercise at $0.15 per share; issued 250,000 shares to the holder via the cashless exercise of the remainder of the warrant.
For grants of stock options and warrants in 2014 the Company used a 1.44% to 2.75% risk-free interest rate, 0% dividend rate, 59% to 66% volatility and estimated terms of 5 to 10 years. Value computed using these assumptions ranged from $0.0905 to $0.1856 per share.
| 19 |
The following summarizes transactions for stock options and warrants for the periods indicated:
| Stock Options (1) | Warrants (1) | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Number of | Exercise | |||||||||||||
| Shares | Price | Shares | 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 | 0.2 | 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 | 17,986,157 | 0.09 | 25,739,682 | 0.12 | ||||||||||||
| Expired | (1,159,995 | ) | 0.24 | (8,326,862 | ) | 0.18 | ||||||||||
| Exercised | (560,330 | ) | 0.01 | (17,901,127 | ) | 0.11 | ||||||||||
| Outstanding at December 31, 2013 | 28,929,398 | 0.09 | 34,643,829 | 0.14 | ||||||||||||
| Issued | 3,931,727 | 0.23 | 1,726,494 | 0.33 | ||||||||||||
| Expired | - | - | (2,984,291 | ) | 0.17 | |||||||||||
| Exercised | (345,187 | ) | 0.02 | (1,941,465 | ) | 0.13 | ||||||||||
| Outstanding at March 31, 2014 | 32,515,938 | $ | 0.10 | 31,444,567 | $ | 0.15 | ||||||||||
| (1) | Adjusted for the reverse stock splits in total at June 6, 2008 and October 20, 2008. |
At March 31, 2014, 30,502,291 stock options are fully vested and currently exercisable with a weighted average exercise price of $0.11 and a weighted average remaining term of 9.40 years. All warrants are fully vested and exercisable. Stock-based compensation recognized for the three months ending March 2014 and March 2013 was $259,339 and $1,329,735, respectively. The Company has $264,224 of unrecognized compensation expense related to non-vested stock options that are expected to be recognized over a weighted average period of approximately 18 months.
| 20 |
The following summarizes the status of options and warrants outstanding at March 31, 2014:
| Range of Exercise Prices | Shares |
Weighted Average Remaining Life |
||||||||
| Options: | ||||||||||
| $ | 0.01 | 550,000 | 7.27 | |||||||
| $ | 0.065 | 10,000 | 8.95 | |||||||
| $ | 0.07 | 177,286 | 8.44 | |||||||
| $ | 0.075 | 14,400,000 | 8.96 | |||||||
| $ | 0.079 | 1,740,508 | 8.97 | |||||||
| $ | 0.08 | 9,300,000 | 8.38 | |||||||
| $ | 0.088 | 400,000 | 7.82 | |||||||
| $ | 0.1325 | 226,415 | 9.29 | |||||||
| $ | 0.14 | 242,857 | 9.29 | |||||||
| $ | 0.15 | 676,666 | 6.91 | |||||||
| $ | 0.17 | 5,000 | 9.11 | |||||||
| $ | 0.185 | 162,162 | 10.00 | |||||||
| $ | 0.20 | 250,000 | 9.97 | |||||||
| $ | 0.23 | 3,019,565 | 9.94 | |||||||
| $ | 0.25 | 500,000 | 9.91 | |||||||
| $ | 0.27 | 370,373 | 9.76 | |||||||
| $ | 0.29 | 100,000 | 9.53 | |||||||
| $ | 0.318 | 94,338 | 9.51 | |||||||
| $ | 0.33 | 100,000 | 9.49 | |||||||
| $ | 0.3415 | 20,000 | 9.50 | |||||||
| $ | 0.35 | 75,000 | 0.12 | |||||||
| $ | 0.585 | 95,768 | 0.20 | |||||||
| Total | 32,515,938 | |||||||||
| Warrants: | ||||||||||
| $ | 0.01 | 30,000 | 1.69 | |||||||
| $ | 0.075 | 2,333,333 | 0.31 | |||||||
| $ | 0.08 | 7,714,286 | 3.96 | |||||||
| $ | 0.10 | 628,572 | 0.28 | |||||||
| $ | 0.12 | 200,000 | 3.82 | |||||||
| $ | 0.15 | 15,314,951 | 3.77 | |||||||
| $ | 0.17 | 588,236 | 0.11 | |||||||
| $ | 0.18 | 333,333 | 4.22 | |||||||
| $ | 0.198 | 1,770,833 | 4.17 | |||||||
| $ | 0.20 | 87,500 | 0.85 | |||||||
| $ | 0.25 | 375,000 | 0 .52 | |||||||
| $ | 0.27 | 111,111 | 4 .88 | |||||||
| $ | 0.325 | 1,615,383 | 4.85 | |||||||
| $ | 0.769 | 342,029 | 0.25 | |||||||
| Total | 31,444,567 | |||||||||
Stock options and warrants expire on various dates from April 2014 to March 2024.
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.
| 21 |
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.
An increase from 300 million to 800 million authorized shares, and an amendment of the Company’s 2012 Stock Incentive Plan to increase the reserve of shares authorized for issuance to 100 million shares was approved at the September 10, 2013 annual meeting.
Stock Options and Warrants Granted by the Company
The following table is the listing of stock options and warrants as of March 31, 2014 by year of grant:
| Stock Options: | ||||||||
| Year | Shares | Price | ||||||
| 2008 | 95,768 | $ | 0.585 | |||||
| 2009 | 75,000 | 0.35 | ||||||
| 2010 | 410,000 | 0.15 | ||||||
| 2011 | 550,000 | 0.01 | ||||||
| 2012 | 9,477,286 | 0 .07 - 0.08 | ||||||
| 2013 | 17,976,157 | 0 .065 - 0.3415 | ||||||
| 2014 | 3,931,727 | 0.185 – 0.25 | ||||||
| Total | 32,515,938 | $ | .01 - 0.585 | |||||
| Warrants: | ||||||||
| Year | Shares | Price | ||||||
| 2008 | 342,029 | $ | 0.769 | |||||
| 2009 | - | - | ||||||
| 2010 | 30,000 | 0.01 | ||||||
| 2011 | 3,925,141 | 0 .075 - 0.25 | ||||||
| 2012 | 5,352,451 | 0.15 - 0.20 | ||||||
| 2013 | 20,068,452 | 0.08 - 0.198 | ||||||
| 2014 | 1,726,494 | 0.27 – 0.325 | ||||||
| Total | 31,444,567 | $ | 0.01 - 0.769 | |||||
| 22 |
The following table presents the shares used in the basic and diluted loss per common share computations:
| Three Months Ended March 31, |
Period from April 23,
2002 (Inception) to March 31, |
|||||||||||
| 2014 | 2013 | 2014 | ||||||||||
| Numerator: | ||||||||||||
| Net loss available in basic and diluted calculation | $ |
(1,616,993 |
) | $ | (2,101,525 | ) | $ |
(30,314,408 |
) | |||
| Denominator: | ||||||||||||
| Weighted average common shares outstanding-basic | 221,223,793 | 107,824,939 | 22,187,340 | |||||||||
| Effect of diluted stock options and warrants (1) | - | - | - | |||||||||
| Weighted average common shares outstanding-basic | 221,223,793 | 107,824,939 | 22,187,340 | |||||||||
| Loss per common share-basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (1.37 | ) | |||
(1) The number of shares underlying options and warrants outstanding as of March 31, 2014 and March 31, 2013 are 63,960,505 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 March 31, 2014, were approximately $15,332,000 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 March 31, 2014 and December 31, 2013 are as follows:
| March 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Deferred Tax Asset: | ||||||||
| Net Operating Loss | $ | 3,577,000 | $ | 3,259,000 | ||||
| Other | 71,000 | 59,000 | ||||||
| Total Deferred Tax Asset | 3,648,000 | 3,318,000 | ||||||
| Less Valuation Allowance | 3,648,000 | 3,318,000 | ||||||
| Net Deferred Income Taxes | $ | — | $ | — | ||||
| 23 |
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 $17,609 and $17,690 for the three months ended March 31, 2014 and March 31, 2013 respectively.
The Company’s rent obligation for the next five years is as follows:
| 2015 | $ | 37,000 | ||
| 2016 | $ | 38,000 | ||
| 2017 | $ | 39,000 | ||
| 2018 | $ | 3,600 | ||
| 2019 | $ | - |
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. In 2013 there was a significant decrease in the liability primarily due to current expirations and the amount of warrants reaching expiration in the near term. In the first quarter 2014 the liability continues to decrease.
| 24 |
The inputs to the Black-Scholes model during 2009 through 2014 were as follows:
| Stock price | $ .06 to $.50 | |
| Exercise price | $ .01 to $.325 | |
| Expected life | 2.0 to 6.5 years | |
| Expected volatility | 59% | |
| Assumed dividend rate | - % | |
| Risk-free interest rate | .13% to 2.97% |
The original valuations, annual gain/(loss) and end of year valuations are shown below:
| Annual Gain | Value | 2010 Gain | Value | 2011 Gain | Value at | 2012 Gain | Value | 2013 Gain | Value | 2014 Gain | Value | |||||||||||||||||||||||||||||||||||||||||
| Initial Value | (Loss) | at 12/31/09 | (Loss) | at 12/31/10 | (Loss) | 12/31/2011 | (Loss) | at 12/31/2012 | (Loss) | at 12/31/2013 | (Loss) | at 3/31/2014 | ||||||||||||||||||||||||||||||||||||||||
| January 1, 2009 adoption | $ | 479,910 | $ | (390,368 | ) | $ | 870,278 | $ | 868,772 | $ | 1,506 | $ | (88,290 | ) | $ | 89,796 | $ | (21,856 | ) | $ | 111,652 | $ | 100,053 | $ | 11,599 | $ | 11,469 | $ | 130 | |||||||||||||||||||||||
| Warrants issued in quarter ended 6/30/2009 | 169,854 | 20,847 | 149,007 | 147,403 | 1,604 | (4,689 | ) | 6,293 | 6,293 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Warrants issued in quarter ended 9/30/2009 | 39,743 | (738 | ) | 40,481 | 40,419 | 62 | (1,562 | ) | 1,624 | 910 | 714 | 714 | - | - | - | |||||||||||||||||||||||||||||||||||||
| Warrants issued in quarter ended 12/31/2009 | 12,698 | 617 | 12,081 | 12,053 | 28 | (724 | ) | 752 | 415 | 337 | 337 | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Subtotal | 702,205 | 1,071,847 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants issued in quarter ended 3/31/2010 | 25,553 | 25,014 | 539 | (5,570 | ) | 6,109 | 3,701 | 2,408 | 2,408 | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Warrants issued in quarter ended 6/30/2010 | 31,332 | 30,740 | 592 | (6,122 | ) | 6,714 | 6,083 | 631 | 631 | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Warrants issued in quarter ended 9/30/2010 | 31,506 | 20,891 | 10,615 | (44,160 | ) | 54,775 | 1,338 | 53,437 | 53,437 | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | 790,596 | $ | (369,642 | ) | $ | 1,071,847 | $ | 1,145,292 | $ | 14,946 | $ | (151,117 | ) | $ | 166,063 | $ | (3,116 | ) | $ | 169,179 | $ | 157,580 | $ | 11,599 | $ | 11,469 | $ | 130 | |||||||||||||||||||||||
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 Dr. 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 also received a warrant for 30,000 shares at $.15 per share on June 30, 2012 as compensation for service as Chairman. Mr. Gadbaw and Dr. Morawetz have both resigned from the Board in the third quarter of 2013. Both Mr. Gadbaw and Dr. Morawetz received 50,000 shares of common stock each at $.325 per share; 20,000 of these shares were for compensation from serving as Board members and the remaining 30,000 shares were issued to satisfy previous contractual agreements.
Convertible Note Issuances to Dr. Samuel Herschkowitz and SOK Partners, LLC
On September 11, 2013, both the Herschkowitz Note and the SOK Note (each as defined below in this Note 8) were converted in full by the holders thereof at $0.014 per share. The principal and interest balance of the Herschkowitz Note of $314,484 was converted into 22,463,172 shares of common stock. The principal and interest balance of the SOK Note of $680,444 was converted into 48,603,721 shares of common stock. The collateral that secured these notes was released back to the Company.
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The remaining disclosure of this Note 8 provides historical information regarding the Herschkowitz Note, the SOK Note and certain other convertible note issuances.
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”), and 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.
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 Note was $357,282 as of December 31, 2012.
As long as any amount payable under the SOK 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. Samuel 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 Herschkowitz Note and other matters.
As long as any amount payable under the Herschkowitz Note remains outstanding, Dr. Herschkowitz or his designee is entitled to appoint a special advisor to the Company’s Board of Directors, to be appointed as a member upon request. Pursuant to this authority, Josh Kornberg was appointed to the Board on March 9, 2012. In addition, pursuant to this authority, Mr. Koenigsberger was appointed to the Board on June 25, 2012.
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Pursuant to a letter dated April 12, 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 Atlantic Partners Alliance LLC (“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 had issued in excess of 16,000,000 shares of common stock to parties other than APA and its affiliates, resulting in significant dilution.
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; (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 agreed 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 agreed 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 under the Herschkowitz Note: (a) that does not constitute an existing default and (b) occurs and accrues after the date of the letter agreement.
Dr. Herschkowitz and the Company acknowledged 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 were 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 forbear 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, respectively was changed to $0.014 per share from $0.065 per share.
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In the event that the Company consummated 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 would have to be required to 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 was also required to reimburse Dr. Herschkowitz at his actual out-of-pocket cost for reasonable expenses incurred in connection with the shell transactions, with a maximum limit of $10,000 for such expenses.
In connection with the extension of the due date for the Herschkowitz Note and the SOK Note on March 6, 2013, the milestone fees were revised. The following fees were 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 or greater 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 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.
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. Such notes were converted in April 2013 in to 1,041,622 shares of common stock at $.10 per share.
In December 2013, the Company received an additional $300,000 in debt financing from SOK Partners under a non-convertible grid note due February 28, 2014, with 10% interest based on a 365 day year. Dr. Herschkowitz received 10% of the gross proceeds in advance, and the Company received $250,000 in three tranches in December 2013. In January 2014, the Company received an additional $20,000 from SOK Partners completing the grid note maximum. Should the company default on the note the interest rate will increase to 20% interest based on a 365 day year. In February 2014, the Company paid $305,589.04 to SOK Partners in complete payment of the grid note, including interest.
In connection with the sale of the Preferred Shares on February 4, 2014 as described in Note 3, Josh Kornberg, our CEO, was one of the Purchasers. Mr. Kornberg purchased 19,231 Preferred Shares for a purchase price of $25,000 and received warrants to purchase 3,846 shares of common stock.
We have a pre-tax salary reduction/profit-sharing plan under the provisions of Section 401(k) of the Internal Revenue Code, which covers employees meeting certain eligibility requirements. In fiscal 2012, 2013 and again in 2014, we matched 100%, of the employee’s contribution up to 4% of their earnings. The employer contribution was $9,123 and $6,557 for the three months ending March 31, 2014 and March 31, 2013, respectively.
Marshall Ryan & Mid-State Stainless, Inc. v. Skyline Medical Inc. & Dr. Samuel Herschkowitz. On March 5, 2014, plaintiffs filed an action in District Court in Hennepin County, Minnesota against the Company and one of its stockholders, Dr. Samuel Herschkowitz. Marshall Ryan, one of the plaintiffs, is an engineer who worked with the Company on design of certain of its products. The action alleges, among other things, breach of a consulting agreement, a manufacturing agreement and a supply agreement between plaintiffs and the Company, various claims of fraud and negligent misrepresentation and breach of the duty of good faith and fair dealing. The Company believes the claims are without merit and is preparing its response.
Cash payments for interest were $18,138 for the three months ended March 31, 2014 and $26,408 for the three months ended March 31, 2013.
Overview
We were incorporated in Minnesota in April 2002 under the name BioDrain Medical, Inc. Effective August 6, 2013, the Company changed its name to Skyline Medical Inc. Pursuant to an Agreement and Plan of Merger dated effective December 16, 2013, the Company merged with and into a Delaware corporation with the same name that was its wholly-owned subsidiary, with such Delaware Corporation as the surviving corporation of the merger. 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.
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We currently have six Regional Sales Managers to sell the STREAMWAY System. In the first quarter of 2014 we have signed a contract with an Independent Distributor covering New York and surrounding areas.
Since inception, we have been unprofitable. We incurred net losses of approximately $1.6 million and $2.1 million for the three months ended March 31, 2014 and for the three months ended March 31, 2013, respectively. As of March 31, 2014 and March 31, 2013, we had an accumulated deficit of approximately $30.3 million and $21.4 million, respectively. 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 original STREAMWAY units in 2011, and another twenty-nine original units to date.
In the first quarter of 2014, the Company commenced sales of an updated version of the STREAMWAY System, which provides 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. This updated version utilizes improved technology, including the capability for continuous flow and continuous suctioning, as covered by our provisional patent application filed in 2013 and our non-provisional patent application filed in January 2014. The Company sold another eight units through April 30, 2014, and another eight units shipped and sold by May 16, 2014. The Company has trials and demonstrations set for 5 major hospital systems and teaching hospitals throughout May 2014. We have purchase orders for approximately 36 STREAMWAY Systems that will be installed in hospitals and surgical centers over the next 12 months beginning in May 2014.
We expect the revenue for STREAMWAY units to increase significantly at such time as the hospitals approve the use of the units for their applications based on trial basis units and place orders for billable units. Trial basis units are either installed in or hung on the hospital room wall. The unit is connected to the hospital plumbing and sewer systems, as well as, the hospital vacuum system. The unit remains on the customer site for 2 – 4 weeks, as contracted, at no cost to the customer. However, the customer does purchase the disposable kits necessary to effectively operate the units. Once the trial period has expired the unit is either returned to the Company or purchased by the customer. If purchased, at that time, the Company invoices the customer based upon a contracted price negotiated prior to the trial.
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 future cash requirements and the adequacy of available funds depend on our ability to sell our products. See “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 $70,000 of revenue in the three months ended March 31, 2014 compared to $127,000 in revenue in the three months ended March 31, 2013. The revenue in the first quarter of 2014 included the sale of 3 STREAMWAY FMS systems plus disposable sales totaling $61,000. The three STREAMWAY Systems were sold under the Company’s pay per procedure plan whereby hardware revenue is recognized on a per procedure basis, therefore, the three unit sales resulted in only $9,000 in aggregate revenue during the quarter. In essence, the Company adds a premium charge on top of the cleaning solution per bottle price representing an amortized amount of the STREAMWAY unit over an agreed upon period between the customer and Skyline.
Cost of sales. Cost of sales in the three months ended March 31, 2014 was $31,000 and $42,000 in the three months ended March 31, 2013. The gross profit margin was approximately 56% in the three months ended March 31, 2014. Our margins still vary as our initial production of the STREAMWAY has been released for sale. We expect our margins to increase over the remainder of the year as our manufacturing production becomes more consistent, and as increased sales allow us to achieve volume purchasing discounts on both equipment components and our cleaning solution. Over the next several quarters, we expect increases in revenues to exceed increases in costs related to increasing manufacturing and sales capabilities.
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.
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General and Administrative (G&A) expenses decreased by $644,000 from the three months ended March 31, 2014 compared to March 31, 2013. The decrease in the three month period was primarily due to cash decreases of $724,000 in stock based compensation and $336,000 in investors stock compensation. Those decreases reflect less funding through private placements of our securities in the first quarter of 2014. There were increased cash expenses that partially offset the decreases. Salaries increased by $88,000 in 2014 due to hiring a Controller and an additional administrative assistant for the CEO. Legal fees increased by $32,000 due to additional litigation, and our fee related expenses increased by $197,000 pursuant to an agreement with Dr. Herschkowitz and SOK Partners, LLC for finder’s fees pertinent to meeting stipulated fund raising levels.
Operations expense. Operations expense primarily consists of expenses related to product development and prototyping and testing in the company’s current stage.
Operations expense increased by $61,000 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The rise in expense in the 2014 first quarter is primarily due to $9,000 more in engineering consulting expense to review our software and system designs. Most of the remaining increase was for $60,000 in research and development expenses. Operations expense in the next several quarters is expected to increase significantly as the Company expects to increase shipments of the Streamway unit as customers complete their evaluations and place orders for billable units. 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.
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 by $121,000 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Some of the increase, $65,000, pertained to the Company hiring additional in-house regional sales managers. As a result of additional sales personnel, our travel expense increased by $18,000. Additionally, our trade show costs increased by $4,000 as we have expanded our presence in the market place. In addition, our advertising expense increased by $7,000 in the first quarter of 2014, predominantly as a result of fees paid to a company that caters to new hospital and surgical center constructions.
Interest expense. Interest dropped significantly in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. There was a decrease of $77,000 in interest expense in the three-month period. The lower interest is due to the elimination of convertible notes and all but one settlement agreement.
The (Gain)/Loss on revaluation of equity-linked financial instruments reflected a gain of $11,500 in the three months ended March 31, 2014 compared to a gain of $19,000 in the three months ended March 31, 2013. 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 $1,752,000 for the three months ended March 31, 2014 compared with net cash used of $940,000 for the 2013 period. The $812,000 increase in cash used in operating activities was due to increases in inventory as our new enhanced STREAMWAY System increases production; increases in prepaid expenses as we signed for three crucial trade shows in April and May as well as additional prepaid amounts to new vendors for purchasing inventory items; and a higher payroll for increasing staff, in particular, hiring our regional sales managers.
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Cash flows used in investing activities was $87,000 for the three months ended March 31, 2014 and zero dollars for the three months ended March 31, 2013. As we have grown our fixed asset acquisitions have increased as well. We have purchased furniture, computers, software and have incurred leasehold improvements.
Net cash provided by financing activities was $1,900,000 for the three months ended March 31, 2014 compared to net cash provided of $1,300,000 for the three months ended March 31, 2013. The increase in 2014 was primarily the result of completing a private placement of for Series A Convertible Preferred Stock resulting in gross proceeds of $2,055,000 to the Company. See Note 3 to the Financial Statements.
Capital Resources
We had a cash balance of $131,000 as of March 31, 2014. Since our inception, we have incurred significant losses. As of March 31, 2014, we had an accumulated deficit of approximately $30,333,000.
From inception to March 31, 2014, our operations have been funded through a bank loan and private convertible debt of approximately $3,955,000 and equity investments totaling approximately $9,104,000. See “Historical Financing” below.
In the first quarter of 2014, we raised $2,055,000 in gross proceeds excluding offering expenses from a private placement of Series A Convertible Preferred Stock and we recognized $70,000 in revenues in the quarter. Our product sales since the end of the first quarter have resulted in approximately $129,000 in revenues.
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 $250,000 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 $2,700,000 in debts, liabilities and cash obligations that predominantly become due in calendar 2014.
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In February 2014, we raised $2 million in gross proceeds from our private placement of convertible preferred stock. We will attempt to secure a credit line with our bank or to factor our purchase orders to support purchasing our cost of goods and to continue to expand our sales program.
We may also need further equity financing to maintain our operations. If such 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.
Based on our current operating plan we believe that we have sufficient cash, cash equivalents and short-term investment balances to last approximately through June 30, 2014 after which additional financing will be needed to continue to satisfy our obligations. While holders of our warrants could exercise and provide cash to us during that time frame, we are not depending on that in our fundraising efforts. We commenced sales of our enhanced STREAMWAY in the first quarter of 2014. Sales of this product are expected to provide additional operating revenues and cash balances that could reduce the need for additional fundraising; however, cash collections for product sales are not immediate, which may result in a delay in positive operating cash flow over the next several quarters.
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, 2013, 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.
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.
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. See Note 2 to the Financial Statements. In June 2013, the Company raised an additional $1,000,000 from the sale of convertible notes. See Note 3 to the Financial Statements. In the third quarter we also borrowed the remaining $243,000 principal amount of our convertible note payable to SOK, Partners, LLC. During the third quarter of 2013, the holders of convertible notes, including Dr. Samuel Herschkowitz and SOK Partners, LLC, converted $1,506,000 of outstanding debt, including principal and interest, into equity. The Company converted the promissory notes totaling $314,484 and $680,444, respectively, including principal and interest, on September 11, 2013 for 22,463,172 and 48,603,159 shares, respectively, at $.014 per share. Also during the third quarter of 2013, we raised approximately $1,044,000 through the cash exercise of warrants by investors who were offered a reduction in the exercise price in connection with the exercise. In December 2013 the Company raised $280,000 in the form of a short term non-convertible note with 10% interest based on a 365 day year from SOK Partners, LLC. In January 2014 an additional $20,000 was raised and added to the original note to SOK, Partners, LLC. Josh Kornberg the CEO, is a 50% managing partner in SOK Partners, LLC.
On February 4, 2014, (the “Closing Date”) we raised $2,055,000 in gross proceeds from a private placement of Series A Convertible Preferred Stock, par value $0.01 (the “Preferred Shares”) pursuant to a Securities Purchase Agreement with certain investors (the “Purchasers”) purchased 20,550 Preferred Shares, and warrants (the “Warrants”) to acquire an aggregate of approximately 1,600,000 shares of Common Stock. The Preferred Shares are convertible into shares of Common Stock at an initial conversion price of $0.26 per share of Common Stock. The Warrants are exercisable at an exercise price of $0.325 per share and expire five years from the Closing Date. If the Common Stock is not listed on the Nasdaq Stock Market, the New York Stock Exchange, or the NYSE MKT within 180 days of the Closing, the Company shall issue additional Warrants to purchase additional shares of Common Stock, equal to 30% of the shares of Common Stock which the Preferred Shares each Purchaser purchased are convertible into.
The Securities Purchase Agreement requires the Company to register the resale of the shares of Common Stock underlying the Preferred Shares (the “Underlying Shares”) and the Common Stock underlying the Warrants (the “Warrant Shares”). The Company is required to prepare and file a registration statement with the Securities and Exchange Commission within 132 days of the Closing Date (as extended by subsequent consent of the Purchasers), and to use commercially reasonable efforts to have the registration statement declared effective within 147 days if there is no review by the Securities and Exchange Commission, and within 192 days in the event of such review.
The Preferred Shares are convertible at the option of the holder into the number of shares of Common Stock determined by dividing the stated value of the Preferred Shares being converted by the conversion price of $0.26, subject to adjustment for stock splits, reverse stock splits and similar recapitalization events. If the Company issues additional shares of Common Stock, other than certain stock that is excluded under the terms of the Securities Purchase Agreement, in one or more capital raising transactions with an aggregate purchase price of at least $100,000 for a price less than the then existing conversion price for the Preferred Shares (the “New Issuance Price”), then the then existing conversion price shall be reduced to the New Issuance Price, provided, however, that under no circumstances shall the New Issuance Price be less than $0.13 or reduced to a price level that would be in breach of the listing rules of any stock exchange or that would have material adverse effect on the Corporation’s ability to list its Common Stock on a stock exchange, including but not limited to the change of accounting treatment of the Preferred Stock. The Preferred Shares contain certain limitations on conversion so that the holder will not own more than 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of Preferred Shares held by the applicable holder, with the percentage subject to increase in certain circumstances. The Preferred Shares are eligible to vote with the Common Stock on an as-converted basis, but only to the extent that the Preferred Shares are eligible for conversion without exceeding the Beneficial Ownership Limitation. The Preferred Shares are entitled to receive dividends on a pari passu basis with the Common Stock, when, and if declared. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), after the satisfaction in full of the debts of the Company and the payment of any liquidation preference owed to the holders of shares of Common Stock ranking prior to the Preferred Shares upon liquidation, the holders of the Preferred Shares shall receive, prior and in preference to the holders of any junior securities, an amount equal to $2,055,000 times 1.2, plus all declared but unpaid dividends.
The Warrants are exercisable on any day on or after the date of issuance, have an exercise price of $0.325 per share, subject to adjustment, and a term of five years from the date they are first exercisable. However, a holder will be prohibited from exercising a Warrant if, as a result of such exercise, the holder, together with its affiliates, would exceed the Beneficial Ownership Limitation as described above for the Preferred Shares. If any Warrant has not been fully exercised prior to the first anniversary of the Closing and if during such period the Company has not installed or received firm purchase orders (accepted by the Company) for at least 500 STREAMWAY ® Automated Surgical Fluid Disposal Systems, then, the number of shares of Common Stock for which such Warrant may be exercised shall be increased 2.5 times.
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.
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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 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.
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 2013 the Company experienced significant exercises of options and warrants. The options raised $6,500 in capital. Warrants exercised for cash produced $1,330,000 of capital. 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.
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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 .
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 original STREAMWAY product patent of $140,588 in June 2013. The balance represented intellectual property in the form of patents for our original STREAMWAY product. The Company’s enhanced STREAMWAY product has a new patent pending, 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:
| · | Inability to raise sufficient additional capital to operate our business; |
| · | 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. |
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All statements, other than statements of historical facts, included in this report regarding the Company’s growth strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-looking statements. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. The Company does not undertake any obligation to update any forward-looking statements or other information contained herein. Potential investors should not place undue reliance on these forward-looking statements. Although Skyline 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 and elsewhere our Annual Report on Form 10-K for the year ended December 31, 2013. These cautionary statements qualify all forward-looking statements attributable to the Company or persons acting on its behalf.
Information regarding market and industry statistics contained in this report is included based on information available to the Company that it believes is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. The Company has not reviewed or included data from all sources, and the Company cannot assure potential investors of the accuracy or completeness of the data included in this report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. The Company has no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements.
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 March 31, 2014.
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 March 31, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Marshall Ryan & Mid-State Stainless, Inc. v. Skyline Medical Inc. & Dr. Samuel Herschkowitz. On March 5, 2014, plaintiffs filed an action in District Court in Hennepin County, Minnesota against the Company and one of its stockholders, Dr. Samuel Herschkowitz. Marshall Ryan, one of the plaintiffs, is an engineer who worked with the Company on design of certain of its products. The action alleges, among other things, breach of a consulting agreement, a manufacturing agreement and a supply agreement between plaintiffs and the Company, various claims of fraud and negligent misrepresentation and breach of the duty of good faith and fair dealing. The Company believes the claims are without merit and is preparing its response.
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In addition to the other information set forth in the 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, 2013. 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, 2013 with the exception of the amendment and replacement of the first risk factor below.
We will require additional financing to sustain our operations, and if adequate financing is not available, we may be forced to go out of business. Such financing will be dilutive and feature restricted terms. Our independent public accounting firm has indicated in their audit opinion, contained in our financial statements, that they have serious doubts about our ability to remain a going concern.
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 future cash requirements and the adequacy of available funds depend on our ability to sell our products. See “Plan of Financing; Going Concern Qualification” below.
In February 2014, we raised $2 million in gross proceeds from our private placement of convertible preferred stock. We will attempt to secure a credit line with our bank or to factor our purchase orders to support purchasing our cost of goods and to continue to expand our sales program.
We may also need further equity financing to maintain our operations. If such 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.
Based on our current operating plan we believe that we have sufficient cash, cash equivalents and short-term investment balances to last approximately through June 30, 2014 after which additional financing will be needed to continue to satisfy our obligations. While holders of our warrants could exercise and provide cash to us during that time frame, we are not depending on that in our fundraising efforts. We commenced sales of our enhanced STREAMWAY in the first quarter of 2014. Sales of this product are expected to provide additional operating revenues and cash balances that could reduce the need for additional fundraising; however, cash collections for product sales are not immediate, which may result in a delay in positive operating cash flows over the next several quarters.
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, 2013, 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.
The following is a summary of our transactions since January 1, 2014 involving sales of our securities that were not registered under the Securities Act:
In January 2014 a warrant holder opted for a cashless warrant exercise resulting in issuing 129,630 shares of common stock pursuant to the warrant instruction for cashless exercise.
On January 6, 2014, the Company issued 325,187 shares of common stock to the former CEO exercising stock options with an exercise price of $.01.
In January 2014 a vendor received 150,000 shares of common stock at $.275 per share in payment for public relations services.
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In January 2014 a warrant holder opted for a cashless warrant exercise resulting in issuing 249,252 shares of common stock pursuant to the warrant instruction for cashless exercise.
In January 2014 a vendor exercised a portion of options received in payment for executive placement. He received 20,000 shares of common stock at $.07 per share.
On February 4, 2014 the Company issued 20,550 shares of Series A Convertible Preferred Stock, par value $.01, and warrants to acquire an aggregate of approximately 1,600,000 shares of common stock to the Purchasers as described in Note 3 to the Financial Statements. The preferred shares are convertible into shares of common stock at an initial conversion price of $.26 per share of common stock. The warrants are exercisable at an exercise price of $.325 per share and expire five years from the closing date. The Company received gross proceeds of $2,055,000, before offering expenses.
In February 2014 two warrant holders opted for a cashless warrant exercise resulting in issuing 163,062 shares of common stock pursuant to the warrant instruction for cashless exercise.
In February 2014 a warrant holder exercised his warrant resulting in issuing 200,000 shares of common stock at an exercise price of $.18 per share for $36,000.
In February 2014 the Company issued 100,000 shares of common stock at $.25 per share to a vendor as part of a contract for investor relations consulting.
In February 2014, as a result of completing payments for the first of three years pursuant to a settlement agreement, 1,000,000 shares of common stock held in escrow was canceled and reissued for 666,667 shares. The shares held in escrow will reduce by 333,333 shares in February 2015 and then again for the remaining 333,334 shares in February 2016 as the settlement is paid without default.
In March 2014 four warrant holders opted for a cashless warrant exercise resulting in issuing 616,187 shares of common stock pursuant to the warrant instruction for cashless exercise.
On March 31, 2014, the Company issued dividends to the holders of Preferred Shares in the form of common stock per a stipulated $0.26 per share. As a result 72,760 shares of common stock were issued to the Preferred Holders.
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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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: May 15, 2014 | By: |
/s/ Joshua Kornberg |
| Joshua Kornberg | ||
| President and Chief Executive Officer | ||
| Date: May 15, 2014 | By: |
/s/ Bob Myers |
| Bob Myers | ||
| Chief Financial Officer |
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SKYLINE MEDICAL INC.
Form 10-Q
The quarterly period ended March 31, 2014
|
Exhibit
No. |
Description | |
| 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. |
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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 |
|---|