(iii) subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoined, barred, suspended or otherwise limited from involvement in any type of business, securities, futures, commodities or banking activities; or42
(iv) found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated
Director Independence
OurWe have determined that our board of directors has determined that it currently has two members who qualify as “independent” as the term is used in Item 407 of Regulation S-K as promulgated by the SecuritiesSEC and Exchange Commission.as that term is defined under NASDAQ Rule 4200(a)(15). The independent directors are Raymond Kazyaka, Sr. and Robert W. Schwartz.
Board Meetings On the basis of information solicited from each director, Raymond Kazyaka, Sr. and Committees; Annual Meeting Attendance
OurRobert W. Schwartz have no material relationship with us and are independent within the meaning of such rules. In making this determination, the board evaluated responses to a questionnaire completed by each director regarding relationships and possible conflicts of interest between each director, the company and management. In its review of director independence, the board considered all commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships any director may have with the company or management. Although we intend to establish an audit committee and compensation committee, our board of directors has not adopted any committees to the board of directors. Our board
Involvement in Certain Legal Proceedings
To our knowledge, none of directors held ten formal meeting during the most recently completed fiscal year. Other proceedings of the board of directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the corporate laws of the State of New York and our bylaws, as valid and effective as if they had been passed at a meeting of the directors duly called and held.
At each annual meeting of shareholders, directors will be elected by the holders of common stock to succeed those directors whose terms are expiring. Directors will be elected annually and will serve until successors are elected and qualified or until a director’s earlier death, resignation or removal. Our bylaws provide that the authorized number of directors may be changed by action of the majority of the board of directors or byofficers is or was a voteparty to any legal proceeding required to be disclosed pursuant to Item 401(f) of the shareholders of our Company. Vacancies in our board of directors may be filled by a majority vote of the board of directors with such newly appointed director to serve until the next annual meeting of shareholders, unless sooner removed or replaced. We currently do not have a policy regarding the attendance of board members at the annual meeting of shareholders.
A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our Chief Executive Officer at the address appearing on page 30 of this prospectus.
Code of Ethics
The Company has not adopted a code of ethics, but we plan to adopt a code of ethics shortly.
Compliance with Section 16(a) of the Exchange ActRegulation S-K.
Section 16(a) of the Securities Exchange Act of 1934, DIRECTOR COMPENSATIONas amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Once we have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, we intend to file all such forms in a timely manner and if not, to disclose any untimely filings in accordance with Item 405 Regulation S-K.
Director Compensation
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
The following executive compensation disclosure reflects alltable sets forth the compensation awarded to, earned by or paid to the executive officers below fornonemployee directors during the fiscal yearsyear ended December 31, 20072011, 2010 and 2006. The following table summarizes all compensation for fiscal years 2007 and 2006 received by our Chief Executive Officer, and most highly compensated executive officers in fiscal year 2007.2009.
SUMMARY COMPENSATION TABLE | | | | Fees Earned or Paid in Cash | | Stock Awards | | | Option Awards | | | Non-Equity Incentive Plan Compensation | | | Change in Pension Value and Non-qualified Deferred Compensation Earnings | | | All Other Compensation | | | | |
| | | | ($) | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | | | Total ($) | |
Name (a) | | | | (b) | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | |
Raymond Kazyaka Sr., Director(1) | | 2011 | | — | | | — | | | $ | 79,583 | | | | — | | | | — | | | | — | | | $ | 79,583 | |
| | 2010 | | — | | | — | | | $ | 95,869 | | | | — | | | | — | | | | — | | | $ | 95,869 | |
| | 2009 | | — | | | — | | | $ | 31,165 | | | | — | | | | — | | | | — | | | $ | 31,165 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Robert W. Schwartz, Director(2) | | 2011 | | — | | | — | | | $ | 79,583 | | | | — | | | | — | | | | — | | | $ | 79,583 | |
| | 2010 | | — | | | — | | | $ | 95,869 | | | | — | | | | — | | | | — | | | $ | 95,869 | |
| | 2009 | | — | | | — | | | $ | 31,165 | | | | — | | | | — | | | | — | | | $ | 31,165 | |
Summary Compensation Table |
Name and principal position
(a)
| Year
(b)
| Salary
($)
(c)
| Bonus
($)
(d)
| Stock Awards
($)
(e)
| Option Awards
($)
(f)
| Non-Equity Incentive Plan
($)
(g)
| Non-qualified Deferred Compen-
sation Earnings ($)
(h)
| All other compen-sation
($)
(i)
| Total
($)
(j)
|
Timothy N. Tangredi
Chief Executive Officer, President, Treasurer and Chairman of the Board of Directors(1)
| 2007
2006
| 65,833
64,850
| -
87,500
| -
-
| 140,000
72,500
| -
-
| -
-
| 104,167
105,150
| 310,000
330,000
|
Robert W. Brown
Secretary and Vice President of Marketing
| 2007
2006
| 83,451
80,766
| -
-
| -
-
| 10,500
39,875
| -
-
| -
-
| -
-
| 93,951
120,641
|
Scott G. Ehrenberg, Chief Technology Officer
| 2007
2006
| 60,000
60,000
| -
-
| -
-
| 116,000
22,000
| -
-
| -
-
| -
-
| 176,000
82,800
|
_______________
(1) | At December 31, 2011, Mr. Kazyaka had options to purchase 1,174,600 shares and no stock awards outstanding. |
(2) | At December 31, 2011, Mr. Schwartz had options to purchase 1,144,600 shares and no stock awards outstanding. |
We do not have a plan pursuant to which our directors are compensated and directors currently do not receive cash compensation for their services on the Board of Directors although they do receive stock options as determined by the full board of directors with each director abstaining from any such vote involving himself or a member of his immediate family. Timothy N. Tangredi, Raymond Kazyaka Sr. and Robert W. Schwartz were each granted an option on June 25, 2010 to purchase 400,000 shares of common stock at an exercise price of $0.30 per share, vesting immediately upon issuance and exercisable for a period of ten years. This option grant to Mr. Tangredi as a director is contained in the table summarizing grants made to our officers.
Our non-employee directors are currently compensated with the issuance of stock options, which generally become exercisable upon the date of grant, and which generally expire on the earlier of ten years from the date of grant or up to three years after the date that the optionee ceases to serve as a director. Non-employee directors are also reimbursed for out-of-pocket expenses associated with attending to our business.
EXECUTIVE COMPENSATION
The table below summarizes the total compensation paid to or earned by our principal executive officer, our principal financial officer and each of our two other executive officers other than our principal executive officer and principal financial officer in the last two fiscal years. The amounts represented in the “Option Awards” column reflect the stock compensation expense recorded by the Company under GAAP and does not necessarily equate to the income that will ultimately be realized by the named executive officers for such awards.
Summary Compensation Table
Name and principal position (a) | Year (b) | | | Salary ($) (c) | | | Bonus ($) (d) | | Stock Awards ($)(2) (e) | | | Option Awards ($)(2) (f) | | | Non-Equity Incentive Plan (g) | | | Non-qualified Deferred Compensation Earnings ($) (h) | | All other compensation ($) (i) | | Total ($) (j) | |
| | | | | | | | | |
Timothy N. Tangredi Chief Executive Officer, President, and Chairman of the Board of Directors(1) | 2011 2010 2009 |
| | $ $ $ | 170,000 170,000
170,000 |
| |
| —
— — |
|
| — — — |
| | $
$ $ | 79,583 95,869 1,134,425 |
| |
| — — — |
| |
| — — — |
|
| — — — | | $
$ $ | 249,583 265,869 1,304,425 |
|
| | | | | | | | | |
Robert W. Brown Vice President of Marketing (3) | 2009 | | | $ | 57,187 | | | | — | | | — | | | | — | | | | — | | | | — | | | — | | $ | 57,187 | |
| | | | | | | | | |
David E. Longacre Vice President of Sales and Marketing | 2011 2010 | | | $ $ | 125,000 125,000 | | | $ | — 10,000 | | | — — | | | $ $ | 24,565 80,186 | | | | — — | | | | — — | | | — — | | $ $ | 149,565 215,186 | |
| | | | | | | | | |
Scott G. Ehrenberg Chief Technology Officer and Secretary | 2011 2010 2009 |
| | $
$ $ | 105,000 74,808 67,100 |
| | | — — — | |
| —
— — |
| | $
$ | 178,380 89,877 — |
| |
| — — — |
| |
| — — — |
|
| — — — | | $
$ $ | 283,380 164,685 67,100 |
|
|
| | | | | | | | | |
Judith C. Norstrud Chief Financial Officer and Treasurer | 2011 2010 2009 |
| | $
$ $ | 68,333 50,000 13,447 |
| |
| — — — |
|
| — — — |
| | $
$ $ | 82,365 82,930 |
| |
| —
|
| |
| —
|
|
| —
| | $
$ $ | 150,698 96,377 |
|
________________
(1) | Mr. Tangredi receivesreceive d a salary of $170,000 per year, and may receive a bonus in an amount not to exceed 100% of his salary, which bonus shall be measured by meeting certain performance goals which shall be set by our board of directors, and stock options as determined byin the sole discretion of our board of directors. In 2010 and 2009, Mr. Tangredi was paid $110,833 and $55,350, respectively and has accrued unpaid salary of $104,167$59,167 for 2007,$105, 1452010 and $114,650 for 20062009. Additional accruals have been made for the years prior to 2009. As of February 6 , 2012, we owed Mr. Tangredi accrued compensation in the aggregate amount of $1,047,884. |
(2) | The amounts included in these columns are the aggregate dollar amounts of the grant date fair value of option awards granted in the indicated year as adjusted to disregard the effects of any estimate of forfeitures related to service-based vesting, in accordance with Accounting Standards Codification 718, Compensation-Stock Compensation, for the fiscal years ended December 31, 2010 and $116,166December 31, 2009, and thus include amounts from option awards granted in and prior to the indicated year. For information on the valuation assumptions used in calculating these dollar amounts, see Note 1 to our audited financial statements included in this Registration Statement for 2005the fiscal years ended December 31, 2010 and accrued bonusDecember 31, 2009, each as filed with the SEC. These amounts reflect our accounting expense for these awards and do not correspond to the actual value that may be recognized by the individuals upon option exercise. During the fiscal year ended December 31, 2010, there were forfeitures of $87,500options for year 2006.the purchase of up to 371,125 shares related to service-based vesting conditions. |
(3) | Mr. Brown’s employment with us terminated on July 6, 2010. |
Narrative Disclosure to Summary Compensation Table
Timothy N. Tangredi. We are party to an employment agreement with Mr. Tangredi, our President, Chief Executive Officer, and director, which was amended and restated on September 14, 2011. Mr. Tangredi’s employment agreement provides for an initial term of three years commencing on September 14, 2011 with the term extending on the second anniversary thereof for an additional two-year period and on each subsequent anniversary of the commencement date for an additional year period. Mr. Tangredi’s initial base salary is $200,000. Mr. Tangredi’s base salary shall be increased annually, if applicable, by a sum equal to his current base salary multiplied by one third of the percentage increase in our yearly revenue compared to our prior fiscal year revenue; provided however any annual increase in Mr. Tangredi’s base salary shall not exceed a maximum of 50% for any given year. Any further increase in Mr. Tangredi’s base salary shall be at the sole discretion of our board of directors or compensation committee (if applicable). In addition, Mr. Tangredi will be eligible for bonus compensation at the discretion of board of directors, as well as option-based compensation under our 2009 Plan. Among the option grants Mr. Tangredi is eligible to receive under this agreement is a grant to purchase up to 520,000 shares of common stock upon the successful completion of this offering. For a full description of the terms of our agreement with Mr. Tangredi, please refer to the section below entitled “Certain Relationships and Related Party Transactions —Employment Agreements.”
Scott G. Ehrenberg.In 2010, Mr. Ehrenberg, our Chief Technology Officer and Secretary, received a salary of $ 74,808 and he was granted an option to purchase up to 375,000 shares of common stock at an exercise price of $0.30 per share. The value of this option is approximately $89,877. In January and April of 2011, our Board granted Mr. Ehrenberg an option to purchase 625,000 shares at an exercise price of $.30 per share and 75,000 shares of our common stock at an exercise price of $0.40. The value of these options were $153,535 and $24,845, respectively. The above options were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan. On May 24, 2011 we entered into an employment agreement with Mr. Ehrenberg. Mr. Ehrenberg’s employment agreement provides for an initial term of two years with the term extending on the second anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. Mr. Ehrenberg’s initial base salary is $110,000, with an increase to $165,000 per annum after the date on which we obtain $10 million or more in equity financing . Additionally, at the discretion of our board of directors and its compensation committee, Mr. Ehrenberg may be eligible for an annual bonus which amount, if any, will not be below 50% of his effective base salary and not exceeding 100% of his then effective base salary; provided that, under certain extraordinary circumstances, Mr. Ehrenberg may be eligible for an annual bonus greater than 150% of his then effective base salary. After the completion of this offering, Mr. Ehrenberg is eligible to receive a one-time payment of $20,000 for each U.S. patent of which he is the originator and the first name listed on the patent as inventor of the intellectual property described in such patent. In addition to any other compensation which Mr. Ehrenberg may receive under the agreement, he will be granted a stock option to purchase 40,000 shares of common stock at the end of each year or on the annual anniversary of the agreement, whichever is mutually acceptable to the Company and Mr. Ehrenberg. For a full description of the terms of our agreement with Mr. Ehrenberg, please refer to the section below entitled “Certain Relationships and Related Party Transactions — Employment Agreements.”
David Longacre. Mr. Longacre receives a salary of $125,000 per year and may receive a bonus which is measured by meeting certain performance goals. In 2010, received a bonus of 10,000 and was granted two options which permit him to purchase up to 200,000 shares of common stock at an exercise price of $0.28 per share and 100,000 shares of common stock at an exercise price of $0.30 per share. The value of each option is $51,785 and $28,401 respectively. In January of 2011, Mr. Longacre was granted an option to purchase up to 100,000 shares of common stock at an exercise price of $0.30 per shares and a value of $34,576. All options granted to Mr. Longacre were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan.
Judith Norstrud. In 2011, Ms. Norstrud salary was increased to $72,000. In addition, during that year, Ms. Norstrud received three option awards to purchase 100,000, 137,500 and 35,000 shares of our common stock at exercise prices of $0.30, $0.40 and $0.35 per share, respectively. The value of these options are $24,566, $45,549 and $12,250, respectively. The options were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan
Patricia K. Tangredi. We are a party to an employment agreement with Patricia Tangredi, our general counsel and wife of Timothy Tangredi, our Chief Executive Officer, which agreement was amended and restated on April 8, 2011. Ms. Tangredi’s employment agreement provides for an initial term of four years with the term extending on the fourth anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. Ms. Tangredi’s initial base salary is $120,000, with an increase to $150,000 per annum or such higher sum as our board of directors may set after the date on which we obtain $10 million or more in equity or debt financing. In addition to any other compensation which she may receive under the agreement, Ms. Tangredi shall be granted options to purchase a minimum of 50,000 shares of our common stock which shall be issued at year end or upon the anniversary of this agreement, as the parties shall agree. For a full description of the terms of our agreement with Ms. Tangredi, please refer to the section below entitled “Certain Relationships and Related Party Transactions — Employment Agreements.”Outstanding Equity Awards
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the outstanding equity awards for the year ended December 31, 2011 and 2010:
OPTION AWARDS | | | STOCK AWARDS | |
Name (a) | | Number of securities underlying unexercised options (#) Exercisable (b) | | | Number of securities underlying unexercised options (#) Unexercisable (c) | | | Equity Incentive Plan Awards: Number of Securities underlying unexercised unearned options (#) (d) | | | Option exercise price ($) (e) | | | Option expiration date (f) | | | Number of shares or units of stock that have not vested (#) (g) | | | Market value of shares or units of stock that have not vested ($) (h) | | | Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#) (i) | | | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) (j) | |
Timothy N. Tangredi (1) | | | 825,000 | | | | — | | | | — | | | $ | 0.26 | | | | 9/23/2014 | | | | — | | | | — | | | | — | | | | — | |
| | | 150,000 | | | | — | | | | — | | | $ | 0.10 | | | | 5/10/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 120,000 | | | | — | | | | — | | | $ | 0.10 | | | | 10/1/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 40,000 | | | | — | | | | — | | | $ | 0.30 | | | | 5/2/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 110,000 | | | | — | | | | — | | | $ | 0.55 | | | | 11/1/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 140,000 | | | | — | | | | — | | | $ | 0.55 | | | | 2/20/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 300,000 | | | | — | | | | — | | | $ | 0.21 | | | | 8/18/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 350,000 | | | | — | | | | — | | | $ | 0.21 | | | | 1/30/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 3,000,000 | * | | | — | | | | — | | | $ | 0.36 | | | | 8/4/2013 | | | | — | | | | — | | | | — | | | | — | |
| | | 75,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.42 | | | | 11/12/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 3,540,058 | | | | — | | | | — | | | $ | 0.42 | | | | 11/12/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 400,000 | | | | — | | | | — | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 125,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 45,000 | | | | — | | | | — | | | $ | 0.35 | | | | 10/7/2021 | | | | — | | | | — | | | | — | | | | — | |
______
Scott G. Ehrenberg (2) | | | 140,000 | | | | — | | | | — | | | $ | 0.26 | | | | 9/23/2014 | | | | — | | | | — | | | | — | | | | — | |
| | | 110,000 | | | | — | | | | — | | | $ | 0.10 | | | | 5/10/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 80,000 | | | | — | | | | — | | | $ | 0.10 | | | | 10/1/2015 | | | | ��� | | | | — | | | | — | | | | — | |
| | | 40,000 | | | | — | | | | — | | | $ | 0.55 | | | | 11/1/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 120,000 | | | | — | | | | — | | | $ | 0.55 | | | | 2/20/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 50,000 | | | | — | | | | — | | | $ | 0.21 | | | | 8/18/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 250,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | *250,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2013 | | | | — | | | | — | | | | — | | | | — | |
| | | 125,000 | | | | 250,000 | | | | 250,000 | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 625,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 75,000 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
________ | | | | | | | | | |
* Warrant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Judith C. Norstrud (3) | | | 200,000 | | | | — | | | | — | | | $ | 0.45 | | | | 10/15/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 50,000 | | | | 100,000 | | | | 100,000 | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 137,500 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 35,000 | | | | — | | | | — | | | $ | 0.35 | | | | 10/7/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
David E. Longacre (4) | | | — | | | | 200,000 | | | | — | | | $ | 0.28 | | | | 1/20/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | — | | | | 100,000 | | | | — | | | $ | 0.30 | | | | 7/06/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | — | | | | 100,000 | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
(1) | The April 2008 warrant grant to Mr. Tangredi for 3,000,000 shares was made by the Board of Directors in recognition for Mr. Tangredi’s achievement of the following goals: negotiating conversion of the convertible notes issued in the Additional Financing, securing a release with respect to the consulting agreement with Gray Capital Partners, Inc., securing and closing upon the Financing. All stock options issued to Mr. Tangredi prior to December 31, 2009 were issued under the 2000 Plan. The remaining options were issued under the 2009 Plan. |
(2) | All stock options issued to Mr. Ehrenberg prior to December 31, 2009 were issued under the 2000 Plan. The remaining options issued under the 2009 Plan. |
(3) | All stock options issued to Ms. Norstrud prior to December 31, 2009 were issued under the 2000 Plan. The remaining options were issued under the 2009 Plan. |
(4) | All stock options issued to Mr. Longacre were issued under the 2009 Plan. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the date of this prospectus as to each person or group who is known to us to be the beneficial owner of more than 5% of our outstanding voting securities and as to the security and percentage ownership of each of our executive officers, directors and nominees and of all of our officers, directors and nominees as a group.
Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. The number of shares shown as beneficially owned in the tables below are calculated pursuant to Rule 13d-3(d)(1) of the Exchange Act. Under Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each shareholder identified in the table possesses sole voting and investment power over all of the shares of common stock shown as beneficially owned by the shareholder.
The address for each of the persons named below is 11552 Prosperous Drive, Odessa, FL 33556, unless otherwise indicated.
Applicable percentage ownership in the following table is based on approximately 37,517,604 shares of common stock outstanding as of February 6 , 2012 plus, for each individual, any securities that individual has the right to acquire within 60 days of February 6 , 2012. The following table does not reflect any conversion of notes or accrued compensation which may occur within the above-mentioned 60 day period.
Name of Beneficial Owner | | Common StockBeneficially OwnedNumber of Sharesof CommonStock | | | Percentage ofClass | |
| | | | | | | | |
Timothy N. Tangredi | | | | | | | | |
(Officer and Chairman) (1) | | | 12,310,477 | | | | 25.0 | % |
David Longacre (Officer) (2) | | | 100,001 | | | | .3 | % |
Scott G. Ehrenberg (3) (Officer) | | | 2,077,800 | | | | 5.3 | % |
Judith Norstrud (Officer) (4) | | | 572,500 | | | | 1.5 | % |
Raymond Kazyaka Sr. (Director) (5) | | | 1,174,600 | | | | 3.0 | % |
Robert W. Schwartz (Director) (6) | | | 1,144,600 | | | | 3.0 | % |
Peter Termyn (Director Nominee) | | | 0 | | | | 0.0 | % |
Executive officers, directors and nominees, as a group (9 persons) | | | 17,379,978 | | | | 31.8 | % |
Brian A. Kelly | | | | | | | | |
181C Hague Blvd. Glenmont, N.Y. 12077 | | | 2,254,085 | | | | 6.0 | % |
Michael Gostomski (7) | | | | | | | | |
1666 Valley View Dr. Winnona, MN 55987 | | | 3,355,535 | | | | 8.8 | % |
Louis M. Jaffe (8) | | | | | | | | |
1500 S. Ocean Blvd #5201 Boca Raton, FL 33432 | | | 3,684,300 | | | | 9.5 | % |
Mark Nordlicht (9) | | | | | | | | |
152 West 575th St. 4th Floor New York, NY 10019 | | | 3,793,240 | | | | 9.99 | % |
Leonard Samuels (10) | | | | | | | | |
1011 Centennial Road Penn Valley, PA 19072 | | | 13,478,165 | | | | 31.8 | % |
Leah Kaplan Samuels (11) | | | | | | | | |
1011 Centennial Road Penn Valley, PA 19072 | | | 3,629,696 | | | | 9.4 | % |
_________________
(1) | Includes 9,420,058 shares of common stock issuable upon exercise of stock options and warrants and 2,863,358 shares beneficially owned by Mr. Tangredi’s wife, Patricia Tangredi. 2,735,558 of Ms. Tangredi’s shares are issuable upon the exercise of stock options. Excludes an estimated 2,087,138 shares of common stock that would be issued in partial payment of Mr. Tangredi’s accrued unpaid compensation (assuming completion of the offering and receipt by us of gross proceeds of $6 million or more at a public offering price of $0.3 2 per share and cash payment of approximately $380,000). |
(2) | Includes 100,001 shares of common stock issuable upon exercise of stock options. |
(3) | Includes 1,990,000 shares of common stock issuable upon the exercise of stock options and warrants and 41,400 shares beneficially owned by Mr. Ehrenberg’s wife, Linda Ehrenberg. |
(4) | Includes 572,500 shares of common stock issuable upon exercise of stock options. |
(5) | Includes 1,174,600 shares of common stock issuable upon exercise of stock options. |
(6) | Includes 1,144,600 shares of common stock issuable upon exercise of stock options. |
(7) | Includes 807,087 common shares issuable upon exercise of certain warrants. |
(8) | Includes 666,500 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing to Louis M. Jaffe 2004 Intangible Asset Mgmt. TR U/A DTD 5/24/04 and 298,077 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with a purchase of Company’s common stock in 2009. Also includes 1,819,715 shares held by the aforementioned trust, 250,004 shares held by the Louis Jaffe TTEE Irrevocable Trust – Jennifer Jaffe and 250,004 shares held by the Louis Jaffe TTEE Irrevocable Trust – Lara Jaffe Taylor. The natural person with voting power and investment power on behalf each of the aforementioned trusts is Louis M. Jaffe. Also includes 100,000 shares held by the Diana G. Jaffe Revocable Trust Dated 8/4/99 and 50,000 shares held by Ashlin Trevor Jaffe under the Florida Uniform Gift to Minors Act for which Diana G. Jaffe, Louis M. Jaffe’s wife, is the natural person with voting power and investment power on behalf of the trusts and 250,000 shares of common stock issuable on exercise of a certain outstanding warrant issued to Louis M. Jaffe pursuant to a consulting agreement. |
(9) | Includes 3,324,740 shares of common stock, and 468,500 shares issuable upon the exercise of certain outstanding warrants. The natural person with voting power and investment power on behalf of Platinum Montaur Life Sciences, LLC is Mark Nordlicht. Platinum Montaur Life Sciences, LLC holds warrants for the purchase of up to 7,999,000 shares of common stock. Among these warrants, excluded from the above table are 7,530,500 shares of common stock issuable upon exercise of those warrants, and two convertible notes which would (as of February 6 , 2012 ) result in the issuance of 10,9 45,732 shares if fully converted. The warrants as amended and the convertible notes, have certain limitations on exercise and conversion to the extent the shares resulting from such exercise, when aggregated with its other holdings, would result in Platinum Montaur Life Sciences, LLC holding in excess of 9.99% of all our common stock on a beneficially converted basis. These limitations on exercise of certain warrants and conversion of both notes may be waived by the holder. For purposes of this beneficial ownership table, we have assumed the exercise by Platinum Montaur Life Sciences, LLC of its warrants for the maximum number of shares it may acquire and hold at one time (9.99%), without conversion of the notes. As of February 6 , 2012 we estimate that at the closing of the contemplated offering, approximately $2.8 5 million of net proceeds from the offering will be used to repay principal and interest under these notes, (see sections titled “Use of Proceeds” and “Capitalization” below in this prospectus). |
(10) | Includes 905,000 shares of common stock issuable upon exercise of certain outstanding warrants. All of the foregoing warrants are held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWROS. The natural persons with voting power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard Samuels. Also includes 5,860,969 shares of common stock and 3,987,500 shares of common stock issuable upon exercise of certain outstanding warrants issued to shareholder RBC Dain – Custodian for Leonard Samuels IRA. |
(11) | Includes 905,000 shares of common stock issuable upon exercise of warrants. All of the foregoing warrants are held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWROS. The natural persons with voting power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard Samuels. |
Securities Authorized for Issuance under Equity Compensation Plans
In June 2000 and November 2009, our Board of Directors adopted, and our shareholders approved, the 2000 Incentive Compensation Plan and 2009 Long-Term Incentive Plan, respectively (together the “Plans”). The Plans provide for the granting of options to our qualified employees, independent contractors, consultants, directors and other individuals. The Company’s Board of Directors approved and made available 15,000,000 shares of common stock to be issued pursuant to the 2009 Plan. The Plans permit grants of options to purchase common shares authorized and approved by our Board of Directors.
The following summarizes the information relating to outstanding stock options activity with employees during 2011, 2010 and 2009:
| | Common Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2008 | | | 8,606,556 | | | $ | 0.26 | | | | 7.58 | | | $ | 38,294 | |
Granted | | | 4,240,058 | | | $ | 0.21 | | | | — | | | | — | |
Exercised | | | (25,000 | ) | | $ | 0.17 | | | | — | | | $ | 3,250 | |
Forfeited or expired | | | (472,732 | ) | | $ | 0.58 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2009 | | | 12,348,882 | | | $ | 0.26 | | | | 7.64 | | | $ | 1,052,839 | |
Granted | | | 2,970,000 | | | $ | 0.30 | | | | — | | | | — | |
Forfeited or expired | | | (371,125 | ) | | $ | 0.32 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 14,947,757 | | | $ | 0.25 | | | | 7.19 | | | $ | 946,754 | |
Granted | | | 2,535,000 | | | $ | 0.33 | | | | — | | | | — | |
Forfeited or expired | | | (136,667 | ) | | $ | 0.11 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at September 30, 2011 | | | 17,296,090 | | | $ | 0.32 | | | | 6.79 | | | $ | 1,516,086 | |
| | | | | | | | | | | | | | | | |
Exercisable at September 30, 2011 | | | 16,061,854 | | | $ | 0.32 | | | | 6.62 | | | $ | 1,433,926 | |
Stock compensation expense was approximately $651,000 for the year ended December 31, 2010 and $1,580,000 for the year ended December 31, 2009, including approximately $75,000 that was accrued for warrants issued subsequent to year end. The total fair value of shares vested during the years ended December 31, 2010 and 2009 was approximately $556,000 and $1,549,000, respectively.
As of December 31, 2010, there was approximately $222,000 of unrecognized employee stock-based compensation expense related to non-vested stock options, of which $129,000, $81,000 and $12,000 is expected to be recognized for the years ended December 31, 2011, 2012 and 2013, respectively.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of transactions, or proposed transactions, since January 1, 2008, to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of our total assets at year end for the last two completed fiscal years and in which any of our directors, nominees, executive officers, beneficial holders of more than 5% of our capital stock, or entities affiliated with them, had or will have a direct or indirect material interest.
We rent a building on a month to month basis from a related party which is wholly-owned by two shareholders of the Company, one of which is Timothy N. Tangredi, our Chief Executive Officer. The base monthly rent expense is $3,800 per month. We also pay the taxes, insurance and most repairs on the building. For the years ended December 31, 2011, 2010 and 2009, we recorded $48,792, $48,792 and $49,604, in rent expense to this related party, respectively. The Company recognized rent expense of $12,198, $36,594, $12,198 and $36,594 for each of the three and nine months ended September 30, 2011 and the three and nine months ended September 30, 2010, respectively. At December 31, 2011 and December 31, 2010, $52,858 and $151,440, respectively, were included in accounts payable for amounts owed to these shareholders for rent.
Timothy N. Tangredi, our Chief Executive Officer and Chairman, is a founder and a member of the board of directors of Aegis BioSciences, LLC (“Aegis”). Mr. Tangredi currently owns 52% of Aegis’ outstanding equity and spends approximately one to two days per month on Aegis business for which he is compensated by Aegis. Aegis has two exclusive, world-wide licenses from us under which it has the right to use and sell products containing our polymer technologies in biomedical and health care applications. As a result of a $150,000 payment made by Aegis, the first license is considered fully paid and as such no additional license revenue will be forthcoming. Pursuant to the second license Aegis made an initial one-time payment of $50,000 and is to make royalty payments of 1.5% of the net sales price it receives with respect to any personal hygiene product, surgical drape or clothing products (the latter when employed in medical and animal related fields) and license revenue it receives should Aegis grant a sublicense to a third party. To date Aegis has sold no such products nor has it received any licensing fees requiring a royalty payment be made to us.
E. Todd Tracy and Michael Stone, two individuals holding warrants as a result of the Financing exercised and tendered their warrants on September 13, 2011 and received 537,037 and 145,832 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act
On September 6, 2011, RP Capital and Richardson and Patel, LLP, two entities holding warrants (one as a result of the Financing and the other as a part of a payment arrangement for services) tendered and exercised their warrants and received 244,897 and 188,225 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act.
On September 6, 2011, the Company issued 202,703 shares of common stock to legal counsel, Richardson and Patel, LLP, in settlement of accounts payable for services rendered. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On November 4, 2010, RP Capital elected to convert the balance of its 9% secured convertible note in the amount of $100,000 into 625,384 shares of our common stock. RP Capital also received an additional five-year warrant to purchase up to 62,538 shares of common stock, at an exercise price of $0.75 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On February 19, 2010, we obtained $620,000 of financing from RBC Capital Markets Corporation Custodian for Leonard Samuels IRA (“RBC”) in the form of an unsecured, interest-bearing note, due May 31, 2011 (the “Note”). The Note bears interest at 10% per annum. In connection with the loan, we granted RBC the right to participate in our subsequent financings until the maturity date (the “Right of Participation”). The Right of Participation entitles RBC the right to participate in subsequent financings up to the unpaid amount of the Note in such applicable subsequent financing. We agreed not to incur additional debt exceeding $500,000 during the Term of the Note without the note holder’s consent. On May 12, 2011, RBC elected to apply all of the proceeds due and payable pursuant to this note, in the principal amount of $620,000 plus accrued interest, to purchase our common stock. Pursuant to this transaction, RBC subscribed for and purchased 2,667,503 shares of common stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $693,550 (the principal amount and related accrued interest under the note). As part of the purchase, RBC also received a five-year warrant to purchase 962,500 shares of Common Stock, at an exercise price of $0.45 per share. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events, including but not limited to stock dividends, split-up, reclassification or combination of our shares, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all our assets. In addition, as part of this transaction, the warrants issued to this investor on December 20, 2007 and December 31, 2007 were amended to include a cashless exercise provision.
On February 19, 2010, we obtained $250,000 of financing from Leah-Kaplan and Leonard Samuels (“Samuels”) in the form of an unsecured, interest bearing note, payable in full on June 30, 2010 (the “Note”). The Note bears interest at 10% per annum. In connection with the loan, we granted Samuels the right to participate in our subsequent financings until the maturity date. The maturity date of the note was extended to December 31, 2010. On December 27, 2010, the holders elected to apply all of the proceeds due and payable under the Note, including all accrued interest, to purchase our common stock. Pursuant to this transaction, the Samuels subscribed for and purchased 1,052,950 shares of common stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $273,767 (the principal amount and related accrued interest under the note).
In December, 2009, we obtained $1,000,000 of financing from Platinum-Montaur Life Sciences, LLC (“Investor”). Mark Nordlicht, who is a significant beneficial holder of our securities, is a control person with respect to the Investor. Pursuant to the terms of the note, we are to pay the holder simple interest at the rate of ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 17, 2010. The note’s maturity date was extended to April 30, 2011. On March 22, 2011, the Company entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note (“2011 Convertible Note”, collectively “Exchange Agreements”) with this investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the Investor amended and restated the $1,000,000 unsecured promissory note issued by the Company to Investor on or about December 17, 2009 (“Original Note”) to, among other things, extend the term to March 22, 2012. Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 will be paid on March 22, 2012. Subject to the terms and conditions of the 2011 Convertible Note, including limitations on conversion, the outstanding principal and interest under the 2011 Convertible Note will automatically convert into shares of the Company’s common stock at the then-effective conversion price upon the closing of a qualified firm commitment underwritten public offering or may be voluntarily converted by the investor at anytime during the term. The initial conversion price is $0.26 per share . Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering, (as defined in the 2011 Convertible Note which is filed as an exhibit to the Form 8K filed with the Securities and Exchange Commission on March 28, 2011), or March 22, 2012. Pursuant to and during the term of the 2011 Convertible Note, the Company will not issue or allow to exist any obligation for borrowed money, except for subordinate indebtedness in payment and priority, trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate, or unsecured and subordinate working capital guarantees provided by, the Export Import Bank of the United States (the “EXIM Bank”), and indebtedness evidenced by the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000. In addition, on March 22, 2011, in connection with the above Exchange Agreements, the Company entered into an Amendment to 2007 Warrant and an Amendment to 2009 Warrant to extend the terms of the Stock Purchase Warrant, dated on or about December 31, 2007, and Stock Purchase Warrant, dated on or about March 12, 2009, respectively, to March 22, 2016 and to provide for cashless exercise unless such warrant shares are registered for resale under a registration statement. In addition, on March 22, 2011, the Company issued a Stock Purchase Warrant to the Investor to purchase 1,000,000 shares of the Company’s common stock at $0.45 per share, exercisable commencing on the earliest of the consummation of the qualified offering (as defined in the Exchange Agreements), the date of conversion of the 2011 Convertible Note in full, or the date of conversion of the 2011 Convertible Note by the Investor in the greatest number of shares of the Company’s common stock not to exceed 9.99% beneficial ownership of Company outstanding common stock and terminating on March 22, 2016.
Also, on March 22, 2011, the Company entered into a 10% Note and Warrant Purchase Agreement, Secured Convertible Promissory Note and Patent Security Agreement (“Financing Agreements”) with the above Investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the Investor has provided a bridge loan in the amount of $1,500,000 (“Loan”) to the Company, which is secured by all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and “accounts” with respect to such intellectual property assets. Pursuant to the Secured Convertible Promissory Note (“Secured Note”), interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 is due and payable on March 22, 2012, but repayment is accelerated upon a qualified firm commitment underwritten public offering (as defined in the note). In the event of such qualified offering, and subject to the terms and conditions of the Secured Note, the outstanding principal and interest under the Secured Note will automatically convert, subject to the limitations on conversion described in the note, into shares of the Company’s common stock at the then-effective conversion price upon the closing of such qualified offering. The initial conversion price is $0.26 per share which is subject to adjustment for standard anti-dilution provisions. Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering or March 22, 2012. No cash fees were paid to any party to the transaction in exchange for lending the money.
On March 22, 2011, in connection with the Financing Agreements, the Company issued a Stock Purchase Warrant to the Investor to purchase 3,000,000 shares of the Company’s common stock at $0.45 per share, exercisable until March 22, 2016. Pursuant to and during the term of the Secured Note, the Company will not issue or permit to exist any obligation for borrowed money, except for trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate indebtedness to, or unsecured and subordinate working capital guarantees provided by, the EXIM Bank, the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000, the Amended and Restated Convertible Promissory Note, dated March 22, 2011, issued to the Investor in the principal amount of $1,000,000 and other unsecured indebtedness for borrowed money in an amount not to exceed $750,000.
Pursuant to the Patent Security Agreement issued in connection with the Note and Warrant Purchase of March 22, 2011, the Company shall not, without the Investor’s prior consent, sell, dispose or otherwise transfer all or any portion of the Collateral, except for license grants in the ordinary course of business. In addition, the Company will take all actions reasonably necessary to prosecute applications for patents and maintain all patents, and to seek to recover damages for infringement, misappropriation or dilution of the Collateral with limited exceptions.
On December 8, 2009, Company obtained $300,000 of financing from Michael Gostomski (“Gostomski”) in the form of an unsecured, interest bearing note, due January 16, 2011 (the “Note”). The Note bears interest at 7% per annum. On December 30, 2010, the holder elected to apply all of the proceeds due and payable under the Note, including all accrued interest, to purchase the Company’s Common Stock. Pursuant to this transaction, Gostomski subscribed for and purchased 1,268,472 shares of Common Stock at a purchase price of $0.26 per share, resulting in an aggregate purchase price of $329,402.
On November 23, 2009, Michael Stone elected to convert the interest accrued on his 9% secured convertible note in the amount of $34,027 into 170,137 shares of our common stock . The note was modified so as to end accrual of interest on November 20, 2009.
On October 9, 2009, Leonard and Leah Kaplan Samuels JTWROS and RBC Capital- Custodian for Leonard Samuels IRA elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $174,349 and $638,693 into 871,746 and 3,193,466 shares of our common stock, respectively. Said investors also received an additional five-year warrant to purchase up to 75,000 and 275,000 shares, respectively, of common stock, at an exercise price of $0.75 per share in consideration for converting their 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On September 17, 2009, we entered into subscription agreements with Leonard and Leah Kaplan Samuels pursuant to which the investors purchased 800,000 shares of our common stock. As part of the purchase, the Samuels received a five year warrant to purchase 80,000 shares of Common Stock, at an exercise price of $0.75 per share . The aggregate gross proceeds received by us for the sale was $200,000. The warrants are immediately exercisable and subject to adjustment for standard anti-dilutions events.
On September 11, 2009, to evidence a loan, we issued Timothy N. Tangredi a promissory note in the principal amount of $124,000. The note is unsecured and bears a simple interest rate of 9% per annum. This note was paid in full prior to October 15, 2009.
On September 11, 2009, to evidence a loan, we issued a promissory note in the principal amount of $37,000 to Ethos Business Ventures. Our CEO, Mr. Tangredi, is a principal owner of this entity. The note is unsecured and bears a simple interest rate of 9% per annum. This note was paid in full prior to October 15, 2009.
On June 30, 2009, we entered into a subscription agreement with the Louis M. Jaffe 2004 Intangible Asset Trust U/A DTD 5/24/04 pursuant to which the trust purchased 596,154 shares of Company’s Common Stock and a five year warrant to purchase an additional 298,078 shares of Common Stock at an exercise price of $0.26 per share. The aggregate gross proceeds received by Company for this sale was $155,000. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
On June 10, 2009, to evidence a loan, we issued a promissory note in the principal amount of $10,000 to Ethos Business Ventures, an entity in which our Chief Executive Officer holds a position. The note is unsecured and bears a simple interest rate of 9% per annum. The note was paid in full July of 2009.
On May 21, 2009, to evidence a loan, we issued our Chief Executive Officer a promissory note in the principal amount of $51,900. The note is unsecured and bears a simple interest rate of 9% per annum. The note was paid in full prior to July 31, 2009. On April 30, 2009, the Company issued a five year warrant to purchase 250,000 shares of Common Stock at an exercise price of $0.26 per share pursuant to Louis Jaffe pursuant to a consulting agreement. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
On April 30, 2009, MSSRPS, Inc. elected to convert its 9% secured convertible note and the related accrued interest in the amounts of $167,125 into 835,623 shares of common stock . This investor also received an additional warrant to purchase up to 249,750 shares of common stock at an exercise price of $0.25 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On April 6, 2009 the Louis M. Jaffe 2004 Intangible Asset Trust U/A DTD 5/24/04 elected to convert its 9% secured convertible notes and the related accrued interest in the amounts of $110,849 into 554,247 shares of common stock. This investor also received an additional warrant to purchase up to 166,500 shares of common stock at an exercise price of $0.25 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On March 9, 2009, we entered into a subscription agreement Michael Gostomski pursuant to which Mr. Gostomski purchased 576,923 shares of common stock and a five year warrant to purchase an additional 288,462 shares of common stock at an exercise price of $0.26 per share. The aggregate gross proceeds received by us for this sale was $150,000. The warrant is immediately exercisable and subject to adjustment for standard anti-dilutions events.
On February 16, 2009, and March 12, 2009, Michael Gostomski and Platinum Montaur Life Sciences, L.L.C.; respectively, elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $83,007 and $664,948 into 415,038 and 3,324,740 shares of common stock, respectively. Such investors also received an additional warrant to purchase up to 124,875 and 999,000 shares of common stock, respectively, at an exercise price of $0.25 per share in consideration for converting their 9% secured convertible note. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
In August 2008, we issued a five year warrant to purchase 250,000 shares of common stock) to Scott Ehrenberg our Chief Technology Officer and Secretary, in recognition for Mr. Ehrenberg’s achievement of certain company goals. The fair value of the warrant issued is approximately $49,000. The warrant vested upon issuance and has an exercise price of $0.30 per share.
In April 2008, we issued a warrant to purchase 3,000,000 shares of common stock at an exercise price of $0.36 per share to Mr. Tangredi in recognition for Mr. Tangredi’s achievement of the following goals: negotiating conversion of the convertible notes issued in the Additional Financing, securing a release with respect to the consulting agreement with Gray Capital Partners, Inc. and securing and closing upon the Financing. The fair value of the warrant issued is approximately $687,000.
In June 2008 we agreed to issue and have since issued 100,000 shares of common stock to Gemini Strategies, LLC in connection with consulting services. The fair value of the equity instruments issued for these services is approximately $51,000. Gemini Strategies, LLC is related to Gemini Master Fund Ltd., a convertible note holder.
In February of 2008, we issued 20,000 shares of our common stock to an employee for cash consideration of $2,000 upon the exercise of a stock option granted under our 2000 Plan. The shares were issued in reliance upon an exemption for registration under Rule 701.
In January 2008 we closed on an aggregate of $2,950,000 in gross proceeds from the private sale to 21 accredited investors of 9% secured convertible notes and warrants to purchase 14,750,000 shares of our Common Stock at an exercise price of $0.25 per share. Pursuant to the terms of this financing we granted the investors a security interest in certain of our assets. We entered into an agreement with placement agent, Legend Merchant Group, Inc. on October 5, 2007 pursuant to which, Legend Merchant Group, Inc. received a cash commission equal to 8% of the gross proceeds raised by Legend Merchant (and its subagent), which totaled $2,800,000, plus a warrant equal to 10% of the number of shares of common stock underlying certain warrants issued to convertible note holders, or 1,400,000 at $0.25 per share.
We also have accrued compensation due to the Chief Executive Officer and one other employee for deferred salaries earned and unpaid as of September 30, 2011 and December 31, 2011, 2010, 2009 and 2008 of $1,405,190, $1,405,190, $1,426,022, $1,314,356 and $1,147,389, respectively.
Employment AgreementsDirector Compensation
Officer Employment AgreementThe following table sets forth the compensation awarded to, earned by or paid to the nonemployee directors during the fiscal year ended December 31, 2011, 2010 and 2009.
| | | | Fees Earned or Paid in Cash | | Stock Awards | | | Option Awards | | | Non-Equity Incentive Plan Compensation | | | Change in Pension Value and Non-qualified Deferred Compensation Earnings | | | All Other Compensation | | | | |
| | | | ($) | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | | | Total ($) | |
Name (a) | | | | (b) | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | |
Raymond Kazyaka Sr., Director(1) | | 2011 | | — | | | — | | | $ | 79,583 | | | | — | | | | — | | | | — | | | $ | 79,583 | |
| | 2010 | | — | | | — | | | $ | 95,869 | | | | — | | | | — | | | | — | | | $ | 95,869 | |
| | 2009 | | — | | | — | | | $ | 31,165 | | | | — | | | | — | | | | — | | | $ | 31,165 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Robert W. Schwartz, Director(2) | | 2011 | | — | | | — | | | $ | 79,583 | | | | — | | | | — | | | | — | | | $ | 79,583 | |
| | 2010 | | — | | | — | | | $ | 95,869 | | | | — | | | | — | | | | — | | | $ | 95,869 | |
| | 2009 | | — | | | — | | | $ | 31,165 | | | | — | | | | — | | | | — | | | $ | 31,165 | |
_______________
(1) | At December 31, 2011, Mr. Kazyaka had options to purchase 1,174,600 shares and no stock awards outstanding. |
(2) | At December 31, 2011, Mr. Schwartz had options to purchase 1,144,600 shares and no stock awards outstanding. |
We do not have a plan pursuant to which our directors are compensated and directors currently do not receive cash compensation for their services on the Board of Directors although they do receive stock options as determined by the full board of directors with each director abstaining from any such vote involving himself or a member of his immediate family. Timothy N. Tangredi, Raymond Kazyaka Sr. and Robert W. Schwartz were each granted an option on June 25, 2010 to purchase 400,000 shares of common stock at an exercise price of $0.30 per share, vesting immediately upon issuance and exercisable for a period of ten years. This option grant to Mr. Tangredi as a director is contained in the table summarizing grants made to our officers.
Our non-employee directors are currently compensated with the issuance of stock options, which generally become exercisable upon the date of grant, and which generally expire on the earlier of ten years from the date of grant or up to three years after the date that the optionee ceases to serve as a director. Non-employee directors are also reimbursed for out-of-pocket expenses associated with attending to our business.
EXECUTIVE COMPENSATION
The table below summarizes the total compensation paid to or earned by our principal executive officer, our principal financial officer and each of our two other executive officers other than our principal executive officer and principal financial officer in the last two fiscal years. The amounts represented in the “Option Awards” column reflect the stock compensation expense recorded by the Company under GAAP and does not necessarily equate to the income that will ultimately be realized by the named executive officers for such awards.
Summary Compensation Table
Name and principal position (a) | Year (b) | | | Salary ($) (c) | | | Bonus ($) (d) | | Stock Awards ($)(2) (e) | | | Option Awards ($)(2) (f) | | | Non-Equity Incentive Plan (g) | | | Non-qualified Deferred Compensation Earnings ($) (h) | | All other compensation ($) (i) | | Total ($) (j) | |
| | | | | | | | | |
Timothy N. Tangredi Chief Executive Officer, President, and Chairman of the Board of Directors(1) | 2011 2010 2009 |
| | $ $ $ | 170,000 170,000
170,000 |
| |
| —
— — |
|
| — — — |
| | $
$ $ | 79,583 95,869 1,134,425 |
| |
| — — — |
| |
| — — — |
|
| — — — | | $
$ $ | 249,583 265,869 1,304,425 |
|
| | | | | | | | | |
Robert W. Brown Vice President of Marketing (3) | 2009 | | | $ | 57,187 | | | | — | | | — | | | | — | | | | — | | | | — | | | — | | $ | 57,187 | |
| | | | | | | | | |
David E. Longacre Vice President of Sales and Marketing | 2011 2010 | | | $ $ | 125,000 125,000 | | | $ | — 10,000 | | | — — | | | $ $ | 24,565 80,186 | | | | — — | | | | — — | | | — — | | $ $ | 149,565 215,186 | |
| | | | | | | | | |
Scott G. Ehrenberg Chief Technology Officer and Secretary | 2011 2010 2009 |
| | $
$ $ | 105,000 74,808 67,100 |
| | | — — — | |
| —
— — |
| | $
$ | 178,380 89,877 — |
| |
| — — — |
| |
| — — — |
|
| — — — | | $
$ $ | 283,380 164,685 67,100 |
|
|
| | | | | | | | | |
Judith C. Norstrud Chief Financial Officer and Treasurer | 2011 2010 2009 |
| | $
$ $ | 68,333 50,000 13,447 |
| |
| — — — |
|
| — — — |
| | $
$ $ | 82,365 82,930 |
| |
| —
|
| |
| —
|
|
| —
| | $
$ $ | 150,698 96,377 |
|
________________
(1) | Mr. Tangredi receive d a salary of $170,000 per year, and may receive a bonus in an amount not to exceed 100% of his salary, which bonus shall be measured by meeting certain performance goals as determined in the sole discretion of our board of directors. In 2010 and 2009, Mr. Tangredi was paid $110,833 and $55,350, respectively and has accrued unpaid salary of $59,167 for 2010 and $114,650 for 2009. Additional accruals have been made for the years prior to 2009. As of February 6 , 2012, we owed Mr. Tangredi accrued compensation in the aggregate amount of $1,047,884. |
(2) | The amounts included in these columns are the aggregate dollar amounts of the grant date fair value of option awards granted in the indicated year as adjusted to disregard the effects of any estimate of forfeitures related to service-based vesting, in accordance with Accounting Standards Codification 718, Compensation-Stock Compensation, for the fiscal years ended December 31, 2010 and December 31, 2009, and thus include amounts from option awards granted in and prior to the indicated year. For information on the valuation assumptions used in calculating these dollar amounts, see Note 1 to our audited financial statements included in this Registration Statement for the fiscal years ended December 31, 2010 and December 31, 2009, each as filed with the SEC. These amounts reflect our accounting expense for these awards and do not correspond to the actual value that may be recognized by the individuals upon option exercise. During the fiscal year ended December 31, 2010, there were forfeitures of options for the purchase of up to 371,125 shares related to service-based vesting conditions. |
(3) | Mr. Brown’s employment with us terminated on July 6, 2010. |
Narrative Disclosure to Summary Compensation Table
Timothy N. TangrediTangredi.. We are party to an employment agreement with Mr. Tangredi, our President, Chief Executive Officer, Treasurer and director. The employment agreement, asdirector, which was amended and restated on July 29,2008, and sets forth Mr. Tangredi’s compensation level and eligibility for salary increases, bonuses, benefits, royalty sharing for newer applications, and option grants.September 14, 2011. Mr. Tangredi’s employment agreement providedprovides for an initial term of three years commencing on September 14, 2011 with the term extending on the second anniversary thereof for an additional two-year period and on each subsequent anniversary of the commencement date for an additional year period. Mr. Tangredi’s initial base salary is $200,000. Mr. Tangredi’s base salary shall be increased annually, if applicable, by a sum equal to his current base salary multiplied by one third of the percentage increase in our yearly revenue compared to our prior fiscal year revenue; provided however any annual increase in Mr. Tangredi’s base salary shall not exceed a maximum of 50% for any given year. Any further increase in Mr. Tangredi’s base salary shall be at the sole discretion of our board of directors or compensation committee (if applicable). In addition, Mr. Tangredi will be eligible for bonus compensation at the discretion of board of directors, as well as option-based compensation under our 2009 Plan. Among the option grants Mr. Tangredi is eligible to receive under this agreement is a grant to purchase up to 520,000 shares of common stock upon the successful completion of this offering. For a full description of the terms of our agreement with Mr. Tangredi, please refer to the section below entitled “Certain Relationships and Related Party Transactions —Employment Agreements.”
Scott G. Ehrenberg.In 2010, Mr. Ehrenberg, our Chief Technology Officer and Secretary, received a salary of $ 74,808 and he was granted an option to purchase up to 375,000 shares of common stock at an exercise price of $0.30 per share. The value of this option is approximately $89,877. In January and April of 2011, our Board granted Mr. Ehrenberg an option to purchase 625,000 shares at an exercise price of $.30 per share and 75,000 shares of our common stock at an exercise price of $0.40. The value of these options were $153,535 and $24,845, respectively. The above options were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan. On May 24, 2011 we entered into an employment agreement with Mr. Ehrenberg. Mr. Ehrenberg’s employment agreement provides for an initial term of two years with the term extending on the second anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. The contract sets forth Mr. Tangredi’s compensation level, conditions for certain option grants, benefits and the obligations of the Company in the event of termination. Mr. Tangredi’sEhrenberg’s initial base salary is $170,000 plus$110,000, with an increase to $165,000 per annum after the date on which we obtain $10 million or more in equity financing . Additionally, at the discretion of our board of directors and its compensation committee, Mr. Ehrenberg may be eligible for an annual bonus which amount, if any, will not be below 50% of his effective base salary and not exceeding 100% of his then effective base salary; provided that, under certain allowancesextraordinary circumstances, Mr. Ehrenberg may be eligible for an annual bonus greater than 150% of his then effective base salary. After the completion of this offering, Mr. Ehrenberg is eligible to receive a one-time payment of $20,000 for each U.S. patent of which he is the originator and the first name listed on the patent as well as performance related payments,inventor of the intellectual property described in such patent. In addition to any other compensation which Mr. Ehrenberg may receive under the agreement, he will be granted a stock option to purchase 40,000 shares of common stock at the end of each year or on the annual anniversary of the agreement, whichever is mutually acceptable to the Company and option issuances.Mr. Ehrenberg. For a full description of the terms of our agreement with Mr. Ehrenberg, please refer to the section below entitled “Certain Relationships and Related Party Transactions — Employment Agreements.”
William B. NewmanDavid Longacre. Mr. Longacre receives a salary of $125,000 per year and may receive a bonus which is measured by meeting certain performance goals. In 2010, received a bonus of 10,000 and was granted two options which permit him to purchase up to 200,000 shares of common stock at an exercise price of $0.28 per share and 100,000 shares of common stock at an exercise price of $0.30 per share. The value of each option is $51,785 and $28,401 respectively. In January of 2011, Mr. Longacre was granted an option to purchase up to 100,000 shares of common stock at an exercise price of $0.30 per shares and a value of $34,576. All options granted to Mr. Longacre were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan.
Judith Norstrud. In 2011, Ms. Norstrud salary was increased to $72,000. In addition, during that year, Ms. Norstrud received three option awards to purchase 100,000, 137,500 and 35,000 shares of our common stock at exercise prices of $0.30, $0.40 and $0.35 per share, respectively. The value of these options are $24,566, $45,549 and $12,250, respectively. The options were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan
Patricia K. Tangredi. We are a party to an employment agreement with Mr. Newman,Patricia Tangredi, our general counsel and wife of Timothy Tangredi, our Chief Executive Vice President. TheOfficer, which agreement was amended and restated on April 8, 2011. Ms. Tangredi’s employment agreement was entered into on March 31, 2008, and sets forth Mr. Newman’s compensation level and eligibility for salary increases, bonuses, benefits, royalty sharing for newer applications, and option grants. Mr. Newman’s employment agreement providedprovides for an initial term of one yearfour years with the term extending on the fourth anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. The contract sets forth Mr. Newman’s compensation level, conditions for certain option grants, benefits and the obligations of the Company in the event of termination. Mr. Newman’sMs. Tangredi’s initial base salary is $120,000, with an increase to $150,000 plus certain allowancesper annum or such higher sum as wellour board of directors may set after the date on which we obtain $10 million or more in equity or debt financing. In addition to any other compensation which she may receive under the agreement, Ms. Tangredi shall be granted options to purchase a minimum of 50,000 shares of our common stock which shall be issued at year end or upon the anniversary of this agreement, as performance related payments, and option issuances.
Significant Employee
Patricia K. Tangredi. We arethe parties shall agree. For a party to an employmentfull description of the terms of our agreement with Ms. Tangredi. The agreement, which was amendedTangredi, please refer to the section below entitled “Certain Relationships and restated on July 29, 2008, provides for her employment as the Company’s counsel for a three year term beginning on January 1, 2001 and ending December 31, 2005, with automatic extensions for subsequent one year terms, unless the Company or Ms. Tangredi provides the other party with written notice of intent not to renew. The employment agreement set forth Ms. Tangredi’s compensation level and eligibility for salary increases, options, royalty sharing for newer applications, benefits and the obligations of the Company in the event of termination. A portion of Patricia’s salary has been accrued and carried on the Company’s books since 2002.Related Party Transactions — Employment Agreements.”
Outstanding Equity Awards
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information concerning unexercised stock optionssummarizes the outstanding equity awards for each named executive officer. There were no stock awards outstanding as of the end of the fiscal year 2007.ended December 31, 2011 and 2010:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDOPTION AWARDS | | | STOCK AWARDS | |
Name (a) | | Number of securities underlying unexercised options (#) Exercisable (b) | | | Number of securities underlying unexercised options (#) Unexercisable (c) | | | Equity Incentive Plan Awards: Number of Securities underlying unexercised unearned options (#) (d) | | | Option exercise price ($) (e) | | | Option expiration date (f) | | | Number of shares or units of stock that have not vested (#) (g) | | | Market value of shares or units of stock that have not vested ($) (h) | | | Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#) (i) | | | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) (j) | |
Timothy N. Tangredi (1) | | | 825,000 | | | | — | | | | — | | | $ | 0.26 | | | | 9/23/2014 | | | | — | | | | — | | | | — | | | | — | |
| | | 150,000 | | | | — | | | | — | | | $ | 0.10 | | | | 5/10/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 120,000 | | | | — | | | | — | | | $ | 0.10 | | | | 10/1/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 40,000 | | | | — | | | | — | | | $ | 0.30 | | | | 5/2/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 110,000 | | | | — | | | | — | | | $ | 0.55 | | | | 11/1/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 140,000 | | | | — | | | | — | | | $ | 0.55 | | | | 2/20/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 300,000 | | | | — | | | | — | | | $ | 0.21 | | | | 8/18/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 350,000 | | | | — | | | | — | | | $ | 0.21 | | | | 1/30/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 3,000,000 | * | | | — | | | | — | | | $ | 0.36 | | | | 8/4/2013 | | | | — | | | | — | | | | — | | | | — | |
| | | 75,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.42 | | | | 11/12/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 3,540,058 | | | | — | | | | — | | | $ | 0.42 | | | | 11/12/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 400,000 | | | | — | | | | — | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 125,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 45,000 | | | | — | | | | — | | | $ | 0.35 | | | | 10/7/2021 | | | | — | | | | — | | | | — | | | | — | |
______
OPTION AWARDS | | STOCK AWARDS | |
Name | | Number of securities underlying unexercised options (#) Exercisable | | | Number of securities underlying unexercised options (#) Unexercis-able | | | Equity Incentive Plan Awards: Number of Securities underlying unexercised unearned options (#) | | | Option exercise price ($) | | Option expiration date | | Number of shares or units of stock that have not vested (#) | | | Market value of shares or units of stock that have not vested ($) | | | Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#) | | | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) | |
(a) | | (b) | | | (c) | | | (d) | | | (e) | | (f) | | (g) | | | (h) | | | (i) | | | (j) | |
Timothy N. Tangredi (1) | | | 825,000 | | | | 0 | | | | 0 | | | $ | .26 | | 9/23/14 | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | 150,000 | | | | 0 | | | | 0 | | | $ | .10 | | 5/10/15 | | | | | | | | | | | | | | | | |
| | | 120,000 | | | | 0 | | | | 0 | | | $ | .10 | | 10/1/15 | | | | | | | | | | | | | | | | |
| | | 40,000 | | | | 0 | | | | 0 | | | $ | .30 | | 5/2/16 | | | | | | | | | | | | | | | | |
| | | 110,000 | | | | 0 | | | | 0 | | | $ | .55 | | 11/1/16 | | | | | | | | | | | | | | | | |
| | | 140,000 | | | | 0 | | | | 0 | | | $ | .55 | | 2/20/17 | | | | | | | | | | | | | | | | |
| | | 300,000 | | | | 0 | | | | 0 | | | $ | .21 | | 8/10/17 | | | | | | | | | | | | | | | | |
| | | 350,000 | | | | 0 | | | | 0 | | | $ | .21 | | 1/30/18 | | | | | | | | | | | | | | | | |
| | | 3,000,000 | * | | | 0 | | | | 0 | | | $ | .36 | | 4/18/18 | | | | | | | | | | | | | | | | |
| | *warrant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Robert W. Brown | | | 106,416 | | | | 0 | | | | 0 | | | $ | .26 | | 9/23/14 | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | 120,000 | | | | 0 | | | | 0 | | | $ | .10 | | 5/10/15 | | | | | | | | | | | | | | | | |
| | | 80,000 | | | | 40,000 | | | | 40,000 | | | $ | .10 | | 10/1/15 | | | | | | | | | | | | | | | | |
| | | 24,167 | | | | 48,333 | | | | 48,333 | | | $ | .55 | | 11/1/16 | | | | | | | | | | | | | | | | |
| | | 0 | | | | 50,000 | | | | 50,000 | | | $ | .21 | | 8/18/17 | | | | | | | | | | | | | | | | |
Scott G. Ehrenberg | | | 140,000 | | | | 0 | | | | 0 | | | $ | .26 | | 9/23/14 | | | | | | | | | | | | | | | | |
| | | 110,000 | | | | 0 | | | | 0 | | | $ | .10 | | 5/10/15 | | | | | | | | | | | | | | | | |
| | | 53,333 | | | | 26,667 | | | | 26,667 | | | $ | .10 | | 10/1/15 | | | | | | | | | | | | | | | | |
| | | 13,333 | | | | 26,667 | | | | 26,667 | | | $ | .55 | | 11/1/16 | | | | | | | | | | | | | | | | |
| | | 80,000 | | | | 40,000 | | | | 40,000 | | | $ | .55 | | 2/20/17 | | | | | | | | | | | | | | | | |
| | | 0 | | | | 50,000 | | | | 50,000 | | | $ | .21 | | 8/18/17 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Mr. Tangredi receives a salary of $170,000 per year, and a bonus in an amount not to exceed 100% of his salary, which bonus shall be measured by meeting certain performance goals, which shall be set by our board of directors, and stock options as determined by our board of directors. Mr. Tangredi has accrued unpaid salary of $104,167 for 2007,$105, 150 for 2006 and $116,166 for 2005 and accrued bonus of $87,500 for year 2006. |
Scott G. Ehrenberg (2) | | | 140,000 | | | | — | | | | — | | | $ | 0.26 | | | | 9/23/2014 | | | | — | | | | — | | | | — | | | | — | |
| | | 110,000 | | | | — | | | | — | | | $ | 0.10 | | | | 5/10/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 80,000 | | | | — | | | | — | | | $ | 0.10 | | | | 10/1/2015 | | | | ��� | | | | — | | | | — | | | | — | |
| | | 40,000 | | | | — | | | | — | | | $ | 0.55 | | | | 11/1/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 120,000 | | | | — | | | | — | | | $ | 0.55 | | | | 2/20/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 50,000 | | | | — | | | | — | | | $ | 0.21 | | | | 8/18/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 250,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | *250,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2013 | | | | — | | | | — | | | | — | | | | — | |
| | | 125,000 | | | | 250,000 | | | | 250,000 | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 625,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 75,000 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
________ | | | | | | | | | |
* Warrant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Judith C. Norstrud (3) | | | 200,000 | | | | — | | | | — | | | $ | 0.45 | | | | 10/15/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 50,000 | | | | 100,000 | | | | 100,000 | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 137,500 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 35,000 | | | | — | | | | — | | | $ | 0.35 | | | | 10/7/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
David E. Longacre (4) | | | — | | | | 200,000 | | | | — | | | $ | 0.28 | | | | 1/20/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | — | | | | 100,000 | | | | — | | | $ | 0.30 | | | | 7/06/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | — | | | | 100,000 | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
(1) | The April 2008 warrant grant to Mr. Tangredi for 3,000,000 shares was made by the Board of Directors in recognition for Mr. Tangredi’s achievement of the following goals: negotiating conversion of the convertible notes issued in the Additional Financing, securing a release with respect to the consulting agreement with Gray Capital Partners, Inc., securing and closing upon the Financing. All stock options issued to Mr. Tangredi prior to December 31, 2009 were issued under the 2000 Plan. The remaining options were issued under the 2009 Plan. |
(2) | All stock options issued to Mr. Ehrenberg prior to December 31, 2009 were issued under the 2000 Plan. The remaining options issued under the 2009 Plan. |
(3) | All stock options issued to Ms. Norstrud prior to December 31, 2009 were issued under the 2000 Plan. The remaining options were issued under the 2009 Plan. |
(4) | All stock options issued to Mr. Longacre were issued under the 2009 Plan. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the date of this prospectus as to each person or group who is known to us to be the beneficial owner of more than 5% of our outstanding voting securities and as to the security and percentage ownership of each of our executive officers, directors and nominees and of all of our officers, directors and nominees as a group.
Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. The number of shares shown as beneficially owned in the tables below are calculated pursuant to Rule 13d-3(d)(1) of the Exchange Act. Under Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each shareholder identified in the table possesses sole voting and investment power over all of the shares of common stock shown as beneficially owned by the shareholder.
The address for each of the persons named below is 11552 Prosperous Drive, Odessa, FL 33556, unless otherwise indicated.
Applicable percentage ownership in the following table is based on approximately 37,517,604 shares of common stock outstanding as of February 6 , 2012 plus, for each individual, any securities that individual has the right to acquire within 60 days of February 6 , 2012. The following table does not reflect any conversion of notes or accrued compensation which may occur within the above-mentioned 60 day period.
Name of Beneficial Owner | | Common StockBeneficially OwnedNumber of Sharesof CommonStock | | | Percentage ofClass | |
| | | | | | | | |
Timothy N. Tangredi | | | | | | | | |
(Officer and Chairman) (1) | | | 12,310,477 | | | | 25.0 | % |
David Longacre (Officer) (2) | | | 100,001 | | | | .3 | % |
Scott G. Ehrenberg (3) (Officer) | | | 2,077,800 | | | | 5.3 | % |
Judith Norstrud (Officer) (4) | | | 572,500 | | | | 1.5 | % |
Raymond Kazyaka Sr. (Director) (5) | | | 1,174,600 | | | | 3.0 | % |
Robert W. Schwartz (Director) (6) | | | 1,144,600 | | | | 3.0 | % |
Peter Termyn (Director Nominee) | | | 0 | | | | 0.0 | % |
Executive officers, directors and nominees, as a group (9 persons) | | | 17,379,978 | | | | 31.8 | % |
Brian A. Kelly | | | | | | | | |
181C Hague Blvd. Glenmont, N.Y. 12077 | | | 2,254,085 | | | | 6.0 | % |
Michael Gostomski (7) | | | | | | | | |
1666 Valley View Dr. Winnona, MN 55987 | | | 3,355,535 | | | | 8.8 | % |
Louis M. Jaffe (8) | | | | | | | | |
1500 S. Ocean Blvd #5201 Boca Raton, FL 33432 | | | 3,684,300 | | | | 9.5 | % |
Mark Nordlicht (9) | | | | | | | | |
152 West 575th St. 4th Floor New York, NY 10019 | | | 3,793,240 | | | | 9.99 | % |
Leonard Samuels (10) | | | | | | | | |
1011 Centennial Road Penn Valley, PA 19072 | | | 13,478,165 | | | | 31.8 | % |
Leah Kaplan Samuels (11) | | | | | | | | |
1011 Centennial Road Penn Valley, PA 19072 | | | 3,629,696 | | | | 9.4 | % |
_________________
(1) | Includes 9,420,058 shares of common stock issuable upon exercise of stock options and warrants and 2,863,358 shares beneficially owned by Mr. Tangredi’s wife, Patricia Tangredi. 2,735,558 of Ms. Tangredi’s shares are issuable upon the exercise of stock options. Excludes an estimated 2,087,138 shares of common stock that would be issued in partial payment of Mr. Tangredi’s accrued unpaid compensation (assuming completion of the offering and receipt by us of gross proceeds of $6 million or more at a public offering price of $0.3 2 per share and cash payment of approximately $380,000). |
(2) | Includes 100,001 shares of common stock issuable upon exercise of stock options. |
(3) | Includes 1,990,000 shares of common stock issuable upon the exercise of stock options and warrants and 41,400 shares beneficially owned by Mr. Ehrenberg’s wife, Linda Ehrenberg. |
(4) | Includes 572,500 shares of common stock issuable upon exercise of stock options. |
(5) | Includes 1,174,600 shares of common stock issuable upon exercise of stock options. |
(6) | Includes 1,144,600 shares of common stock issuable upon exercise of stock options. |
(7) | Includes 807,087 common shares issuable upon exercise of certain warrants. |
(8) | Includes 666,500 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing to Louis M. Jaffe 2004 Intangible Asset Mgmt. TR U/A DTD 5/24/04 and 298,077 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with a purchase of Company’s common stock in 2009. Also includes 1,819,715 shares held by the aforementioned trust, 250,004 shares held by the Louis Jaffe TTEE Irrevocable Trust – Jennifer Jaffe and 250,004 shares held by the Louis Jaffe TTEE Irrevocable Trust – Lara Jaffe Taylor. The natural person with voting power and investment power on behalf each of the aforementioned trusts is Louis M. Jaffe. Also includes 100,000 shares held by the Diana G. Jaffe Revocable Trust Dated 8/4/99 and 50,000 shares held by Ashlin Trevor Jaffe under the Florida Uniform Gift to Minors Act for which Diana G. Jaffe, Louis M. Jaffe’s wife, is the natural person with voting power and investment power on behalf of the trusts and 250,000 shares of common stock issuable on exercise of a certain outstanding warrant issued to Louis M. Jaffe pursuant to a consulting agreement. |
(9) | Includes 3,324,740 shares of common stock, and 468,500 shares issuable upon the exercise of certain outstanding warrants. The natural person with voting power and investment power on behalf of Platinum Montaur Life Sciences, LLC is Mark Nordlicht. Platinum Montaur Life Sciences, LLC holds warrants for the purchase of up to 7,999,000 shares of common stock. Among these warrants, excluded from the above table are 7,530,500 shares of common stock issuable upon exercise of those warrants, and two convertible notes which would (as of February 6 , 2012 ) result in the issuance of 10,9 45,732 shares if fully converted. The warrants as amended and the convertible notes, have certain limitations on exercise and conversion to the extent the shares resulting from such exercise, when aggregated with its other holdings, would result in Platinum Montaur Life Sciences, LLC holding in excess of 9.99% of all our common stock on a beneficially converted basis. These limitations on exercise of certain warrants and conversion of both notes may be waived by the holder. For purposes of this beneficial ownership table, we have assumed the exercise by Platinum Montaur Life Sciences, LLC of its warrants for the maximum number of shares it may acquire and hold at one time (9.99%), without conversion of the notes. As of February 6 , 2012 we estimate that at the closing of the contemplated offering, approximately $2.8 5 million of net proceeds from the offering will be used to repay principal and interest under these notes, (see sections titled “Use of Proceeds” and “Capitalization” below in this prospectus). |
(10) | Includes 905,000 shares of common stock issuable upon exercise of certain outstanding warrants. All of the foregoing warrants are held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWROS. The natural persons with voting power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard Samuels. Also includes 5,860,969 shares of common stock and 3,987,500 shares of common stock issuable upon exercise of certain outstanding warrants issued to shareholder RBC Dain – Custodian for Leonard Samuels IRA. |
(11) | Includes 905,000 shares of common stock issuable upon exercise of warrants. All of the foregoing warrants are held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWROS. The natural persons with voting power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard Samuels. |
Securities Authorized for Issuance under Equity Compensation Plans
In June 2000 and November 2009, our Board of Directors adopted, and our shareholders approved, the 2000 Incentive Compensation Plan and 2009 Long-Term Incentive Plan, respectively (together the “Plans”). The Plans provide for the granting of options to our qualified employees, independent contractors, consultants, directors and other individuals. The Company’s Board of Directors approved and made available 15,000,000 shares of common stock to be issued pursuant to the 2009 Plan. The Plans permit grants of options to purchase common shares authorized and approved by our Board of Directors.
The following summarizes the information relating to outstanding stock options activity with employees during 2011, 2010 and 2009:
| | Common Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2008 | | | 8,606,556 | | | $ | 0.26 | | | | 7.58 | | | $ | 38,294 | |
Granted | | | 4,240,058 | | | $ | 0.21 | | | | — | | | | — | |
Exercised | | | (25,000 | ) | | $ | 0.17 | | | | — | | | $ | 3,250 | |
Forfeited or expired | | | (472,732 | ) | | $ | 0.58 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2009 | | | 12,348,882 | | | $ | 0.26 | | | | 7.64 | | | $ | 1,052,839 | |
Granted | | | 2,970,000 | | | $ | 0.30 | | | | — | | | | — | |
Forfeited or expired | | | (371,125 | ) | | $ | 0.32 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 14,947,757 | | | $ | 0.25 | | | | 7.19 | | | $ | 946,754 | |
Granted | | | 2,535,000 | | | $ | 0.33 | | | | — | | | | — | |
Forfeited or expired | | | (136,667 | ) | | $ | 0.11 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at September 30, 2011 | | | 17,296,090 | | | $ | 0.32 | | | | 6.79 | | | $ | 1,516,086 | |
| | | | | | | | | | | | | | | | |
Exercisable at September 30, 2011 | | | 16,061,854 | | | $ | 0.32 | | | | 6.62 | | | $ | 1,433,926 | |
Stock compensation expense was approximately $651,000 for the year ended December 31, 2010 and $1,580,000 for the year ended December 31, 2009, including approximately $75,000 that was accrued for warrants issued subsequent to year end. The total fair value of shares vested during the years ended December 31, 2010 and 2009 was approximately $556,000 and $1,549,000, respectively.
As of December 31, 2010, there was approximately $222,000 of unrecognized employee stock-based compensation expense related to non-vested stock options, of which $129,000, $81,000 and $12,000 is expected to be recognized for the years ended December 31, 2011, 2012 and 2013, respectively.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of transactions, or proposed transactions, since January 1, 2008, to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of our total assets at year end for the last two completed fiscal years and in which any of our directors, nominees, executive officers, beneficial holders of more than 5% of our capital stock, or entities affiliated with them, had or will have a direct or indirect material interest.
We rent a building on a month to month basis from a related party which is wholly-owned by two shareholders of the Company, one of which is Timothy N. Tangredi, our Chief Executive Officer. The base monthly rent expense is $3,800 per month. We also pay the taxes, insurance and most repairs on the building. For the years ended December 31, 2011, 2010 and 2009, we recorded $48,792, $48,792 and $49,604, in rent expense to this related party, respectively. The Company recognized rent expense of $12,198, $36,594, $12,198 and $36,594 for each of the three and nine months ended September 30, 2011 and the three and nine months ended September 30, 2010, respectively. At December 31, 2011 and December 31, 2010, $52,858 and $151,440, respectively, were included in accounts payable for amounts owed to these shareholders for rent.
Timothy N. Tangredi, our Chief Executive Officer and Chairman, is a founder and a member of the board of directors of Aegis BioSciences, LLC (“Aegis”). Mr. Tangredi currently owns 52% of Aegis’ outstanding equity and spends approximately one to two days per month on Aegis business for which he is compensated by Aegis. Aegis has two exclusive, world-wide licenses from us under which it has the right to use and sell products containing our polymer technologies in biomedical and health care applications. As a result of a $150,000 payment made by Aegis, the first license is considered fully paid and as such no additional license revenue will be forthcoming. Pursuant to the second license Aegis made an initial one-time payment of $50,000 and is to make royalty payments of 1.5% of the net sales price it receives with respect to any personal hygiene product, surgical drape or clothing products (the latter when employed in medical and animal related fields) and license revenue it receives should Aegis grant a sublicense to a third party. To date Aegis has sold no such products nor has it received any licensing fees requiring a royalty payment be made to us.
E. Todd Tracy and Michael Stone, two individuals holding warrants as a result of the Financing exercised and tendered their warrants on September 13, 2011 and received 537,037 and 145,832 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act
On September 6, 2011, RP Capital and Richardson and Patel, LLP, two entities holding warrants (one as a result of the Financing and the other as a part of a payment arrangement for services) tendered and exercised their warrants and received 244,897 and 188,225 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act.
On September 6, 2011, the Company issued 202,703 shares of common stock to legal counsel, Richardson and Patel, LLP, in settlement of accounts payable for services rendered. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On November 4, 2010, RP Capital elected to convert the balance of its 9% secured convertible note in the amount of $100,000 into 625,384 shares of our common stock. RP Capital also received an additional five-year warrant to purchase up to 62,538 shares of common stock, at an exercise price of $0.75 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On February 19, 2010, we obtained $620,000 of financing from RBC Capital Markets Corporation Custodian for Leonard Samuels IRA (“RBC”) in the form of an unsecured, interest-bearing note, due May 31, 2011 (the “Note”). The Note bears interest at 10% per annum. In connection with the loan, we granted RBC the right to participate in our subsequent financings until the maturity date (the “Right of Participation”). The Right of Participation entitles RBC the right to participate in subsequent financings up to the unpaid amount of the Note in such applicable subsequent financing. We agreed not to incur additional debt exceeding $500,000 during the Term of the Note without the note holder’s consent. On May 12, 2011, RBC elected to apply all of the proceeds due and payable pursuant to this note, in the principal amount of $620,000 plus accrued interest, to purchase our common stock. Pursuant to this transaction, RBC subscribed for and purchased 2,667,503 shares of common stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $693,550 (the principal amount and related accrued interest under the note). As part of the purchase, RBC also received a five-year warrant to purchase 962,500 shares of Common Stock, at an exercise price of $0.45 per share. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events, including but not limited to stock dividends, split-up, reclassification or combination of our shares, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all our assets. In addition, as part of this transaction, the warrants issued to this investor on December 20, 2007 and December 31, 2007 were amended to include a cashless exercise provision.
On February 19, 2010, we obtained $250,000 of financing from Leah-Kaplan and Leonard Samuels (“Samuels”) in the form of an unsecured, interest bearing note, payable in full on June 30, 2010 (the “Note”). The Note bears interest at 10% per annum. In connection with the loan, we granted Samuels the right to participate in our subsequent financings until the maturity date. The maturity date of the note was extended to December 31, 2010. On December 27, 2010, the holders elected to apply all of the proceeds due and payable under the Note, including all accrued interest, to purchase our common stock. Pursuant to this transaction, the Samuels subscribed for and purchased 1,052,950 shares of common stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $273,767 (the principal amount and related accrued interest under the note).
In December, 2009, we obtained $1,000,000 of financing from Platinum-Montaur Life Sciences, LLC (“Investor”). Mark Nordlicht, who is a significant beneficial holder of our securities, is a control person with respect to the Investor. Pursuant to the terms of the note, we are to pay the holder simple interest at the rate of ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 17, 2010. The note’s maturity date was extended to April 30, 2011. On March 22, 2011, the Company entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note (“2011 Convertible Note”, collectively “Exchange Agreements”) with this investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the Investor amended and restated the $1,000,000 unsecured promissory note issued by the Company to Investor on or about December 17, 2009 (“Original Note”) to, among other things, extend the term to March 22, 2012. Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 will be paid on March 22, 2012. Subject to the terms and conditions of the 2011 Convertible Note, including limitations on conversion, the outstanding principal and interest under the 2011 Convertible Note will automatically convert into shares of the Company’s common stock at the then-effective conversion price upon the closing of a qualified firm commitment underwritten public offering or may be voluntarily converted by the investor at anytime during the term. The initial conversion price is $0.26 per share . Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering, (as defined in the 2011 Convertible Note which is filed as an exhibit to the Form 8K filed with the Securities and Exchange Commission on March 28, 2011), or March 22, 2012. Pursuant to and during the term of the 2011 Convertible Note, the Company will not issue or allow to exist any obligation for borrowed money, except for subordinate indebtedness in payment and priority, trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate, or unsecured and subordinate working capital guarantees provided by, the Export Import Bank of the United States (the “EXIM Bank”), and indebtedness evidenced by the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000. In addition, on March 22, 2011, in connection with the above Exchange Agreements, the Company entered into an Amendment to 2007 Warrant and an Amendment to 2009 Warrant to extend the terms of the Stock Purchase Warrant, dated on or about December 31, 2007, and Stock Purchase Warrant, dated on or about March 12, 2009, respectively, to March 22, 2016 and to provide for cashless exercise unless such warrant shares are registered for resale under a registration statement. In addition, on March 22, 2011, the Company issued a Stock Purchase Warrant to the Investor to purchase 1,000,000 shares of the Company’s common stock at $0.45 per share, exercisable commencing on the earliest of the consummation of the qualified offering (as defined in the Exchange Agreements), the date of conversion of the 2011 Convertible Note in full, or the date of conversion of the 2011 Convertible Note by the Investor in the greatest number of shares of the Company’s common stock not to exceed 9.99% beneficial ownership of Company outstanding common stock and terminating on March 22, 2016.
Also, on March 22, 2011, the Company entered into a 10% Note and Warrant Purchase Agreement, Secured Convertible Promissory Note and Patent Security Agreement (“Financing Agreements”) with the above Investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the Investor has provided a bridge loan in the amount of $1,500,000 (“Loan”) to the Company, which is secured by all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and “accounts” with respect to such intellectual property assets. Pursuant to the Secured Convertible Promissory Note (“Secured Note”), interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 is due and payable on March 22, 2012, but repayment is accelerated upon a qualified firm commitment underwritten public offering (as defined in the note). In the event of such qualified offering, and subject to the terms and conditions of the Secured Note, the outstanding principal and interest under the Secured Note will automatically convert, subject to the limitations on conversion described in the note, into shares of the Company’s common stock at the then-effective conversion price upon the closing of such qualified offering. The initial conversion price is $0.26 per share which is subject to adjustment for standard anti-dilution provisions. Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering or March 22, 2012. No cash fees were paid to any party to the transaction in exchange for lending the money.
On March 22, 2011, in connection with the Financing Agreements, the Company issued a Stock Purchase Warrant to the Investor to purchase 3,000,000 shares of the Company’s common stock at $0.45 per share, exercisable until March 22, 2016. Pursuant to and during the term of the Secured Note, the Company will not issue or permit to exist any obligation for borrowed money, except for trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate indebtedness to, or unsecured and subordinate working capital guarantees provided by, the EXIM Bank, the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000, the Amended and Restated Convertible Promissory Note, dated March 22, 2011, issued to the Investor in the principal amount of $1,000,000 and other unsecured indebtedness for borrowed money in an amount not to exceed $750,000.
Pursuant to the Patent Security Agreement issued in connection with the Note and Warrant Purchase of March 22, 2011, the Company shall not, without the Investor’s prior consent, sell, dispose or otherwise transfer all or any portion of the Collateral, except for license grants in the ordinary course of business. In addition, the Company will take all actions reasonably necessary to prosecute applications for patents and maintain all patents, and to seek to recover damages for infringement, misappropriation or dilution of the Collateral with limited exceptions.
On December 8, 2009, Company obtained $300,000 of financing from Michael Gostomski (“Gostomski”) in the form of an unsecured, interest bearing note, due January 16, 2011 (the “Note”). The Note bears interest at 7% per annum. On December 30, 2010, the holder elected to apply all of the proceeds due and payable under the Note, including all accrued interest, to purchase the Company’s Common Stock. Pursuant to this transaction, Gostomski subscribed for and purchased 1,268,472 shares of Common Stock at a purchase price of $0.26 per share, resulting in an aggregate purchase price of $329,402.
On November 23, 2009, Michael Stone elected to convert the interest accrued on his 9% secured convertible note in the amount of $34,027 into 170,137 shares of our common stock . The note was modified so as to end accrual of interest on November 20, 2009.
On October 9, 2009, Leonard and Leah Kaplan Samuels JTWROS and RBC Capital- Custodian for Leonard Samuels IRA elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $174,349 and $638,693 into 871,746 and 3,193,466 shares of our common stock, respectively. Said investors also received an additional five-year warrant to purchase up to 75,000 and 275,000 shares, respectively, of common stock, at an exercise price of $0.75 per share in consideration for converting their 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On September 17, 2009, we entered into subscription agreements with Leonard and Leah Kaplan Samuels pursuant to which the investors purchased 800,000 shares of our common stock. As part of the purchase, the Samuels received a five year warrant to purchase 80,000 shares of Common Stock, at an exercise price of $0.75 per share . The aggregate gross proceeds received by us for the sale was $200,000. The warrants are immediately exercisable and subject to adjustment for standard anti-dilutions events.
On September 11, 2009, to evidence a loan, we issued Timothy N. Tangredi a promissory note in the principal amount of $124,000. The note is unsecured and bears a simple interest rate of 9% per annum. This note was paid in full prior to October 15, 2009.
On September 11, 2009, to evidence a loan, we issued a promissory note in the principal amount of $37,000 to Ethos Business Ventures. Our CEO, Mr. Tangredi, is a principal owner of this entity. The note is unsecured and bears a simple interest rate of 9% per annum. This note was paid in full prior to October 15, 2009.
On June 30, 2009, we entered into a subscription agreement with the Louis M. Jaffe 2004 Intangible Asset Trust U/A DTD 5/24/04 pursuant to which the trust purchased 596,154 shares of Company’s Common Stock and a five year warrant to purchase an additional 298,078 shares of Common Stock at an exercise price of $0.26 per share. The aggregate gross proceeds received by Company for this sale was $155,000. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
On June 10, 2009, to evidence a loan, we issued a promissory note in the principal amount of $10,000 to Ethos Business Ventures, an entity in which our Chief Executive Officer holds a position. The note is unsecured and bears a simple interest rate of 9% per annum. The note was paid in full July of 2009.
On May 21, 2009, to evidence a loan, we issued our Chief Executive Officer a promissory note in the principal amount of $51,900. The note is unsecured and bears a simple interest rate of 9% per annum. The note was paid in full prior to July 31, 2009. On April 30, 2009, the Company issued a five year warrant to purchase 250,000 shares of Common Stock at an exercise price of $0.26 per share pursuant to Louis Jaffe pursuant to a consulting agreement. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
On April 30, 2009, MSSRPS, Inc. elected to convert its 9% secured convertible note and the related accrued interest in the amounts of $167,125 into 835,623 shares of common stock . This investor also received an additional warrant to purchase up to 249,750 shares of common stock at an exercise price of $0.25 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On April 6, 2009 the Louis M. Jaffe 2004 Intangible Asset Trust U/A DTD 5/24/04 elected to convert its 9% secured convertible notes and the related accrued interest in the amounts of $110,849 into 554,247 shares of common stock. This investor also received an additional warrant to purchase up to 166,500 shares of common stock at an exercise price of $0.25 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On March 9, 2009, we entered into a subscription agreement Michael Gostomski pursuant to which Mr. Gostomski purchased 576,923 shares of common stock and a five year warrant to purchase an additional 288,462 shares of common stock at an exercise price of $0.26 per share. The aggregate gross proceeds received by us for this sale was $150,000. The warrant is immediately exercisable and subject to adjustment for standard anti-dilutions events.
On February 16, 2009, and March 12, 2009, Michael Gostomski and Platinum Montaur Life Sciences, L.L.C.; respectively, elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $83,007 and $664,948 into 415,038 and 3,324,740 shares of common stock, respectively. Such investors also received an additional warrant to purchase up to 124,875 and 999,000 shares of common stock, respectively, at an exercise price of $0.25 per share in consideration for converting their 9% secured convertible note. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
In August 2008, we issued a five year warrant to purchase 250,000 shares of common stock) to Scott Ehrenberg our Chief Technology Officer and Secretary, in recognition for Mr. Ehrenberg’s achievement of certain company goals. The fair value of the warrant issued is approximately $49,000. The warrant vested upon issuance and has an exercise price of $0.30 per share.
In April 2008, we issued a warrant to purchase 3,000,000 shares of common stock at an exercise price of $0.36 per share to Mr. Tangredi in recognition for Mr. Tangredi’s achievement of the following goals: negotiating conversion of the convertible notes issued in the Additional Financing, securing a release with respect to the consulting agreement with Gray Capital Partners, Inc. and securing and closing upon the Financing. The fair value of the warrant issued is approximately $687,000.
In June 2008 we agreed to issue and have since issued 100,000 shares of common stock to Gemini Strategies, LLC in connection with consulting services. The fair value of the equity instruments issued for these services is approximately $51,000. Gemini Strategies, LLC is related to Gemini Master Fund Ltd., a convertible note holder.
In February of 2008, we issued 20,000 shares of our common stock to an employee for cash consideration of $2,000 upon the exercise of a stock option granted under our 2000 Plan. The shares were issued in reliance upon an exemption for registration under Rule 701.
In January 2008 we closed on an aggregate of $2,950,000 in gross proceeds from the private sale to 21 accredited investors of 9% secured convertible notes and warrants to purchase 14,750,000 shares of our Common Stock at an exercise price of $0.25 per share. Pursuant to the terms of this financing we granted the investors a security interest in certain of our assets. We entered into an agreement with placement agent, Legend Merchant Group, Inc. on October 5, 2007 pursuant to which, Legend Merchant Group, Inc. received a cash commission equal to 8% of the gross proceeds raised by Legend Merchant (and its subagent), which totaled $2,800,000, plus a warrant equal to 10% of the number of shares of common stock underlying certain warrants issued to convertible note holders, or 1,400,000 at $0.25 per share.
We also have accrued compensation due to the Chief Executive Officer and one other employee for deferred salaries earned and unpaid as of September 30, 2011 and December 31, 2011, 2010, 2009 and 2008 of $1,405,190, $1,405,190, $1,426,022, $1,314,356 and $1,147,389, respectively.
Director Compensation
The following table sets forth the compensation awarded to, earned by or paid to the nonemployee directors during the fiscal year ended December 31, 2007.2011, 2010 and 2009.
| | | | Fees Earned or Paid in Cash | | Stock Awards | | | Option Awards | | | Non-Equity Incentive Plan Compensation | | | Change in Pension Value and Non-qualified Deferred Compensation Earnings | | | All Other Compensation | | | | |
| | | | ($) | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | | | Total ($) | |
Name (a) | | | | (b) | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | |
Raymond Kazyaka Sr., Director(1) | | 2011 | | — | | | — | | | $ | 79,583 | | | | — | | | | — | | | | — | | | $ | 79,583 | |
| | 2010 | | — | | | — | | | $ | 95,869 | | | | — | | | | — | | | | — | | | $ | 95,869 | |
| | 2009 | | — | | | — | | | $ | 31,165 | | | | — | | | | — | | | | — | | | $ | 31,165 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Robert W. Schwartz, Director(2) | | 2011 | | — | | | — | | | $ | 79,583 | | | | — | | | | — | | | | — | | | $ | 79,583 | |
| | 2010 | | — | | | — | | | $ | 95,869 | | | | — | | | | — | | | | — | | | $ | 95,869 | |
| | 2009 | | — | | | — | | | $ | 31,165 | | | | — | | | | — | | | | — | | | $ | 31,165 | |
DIRECTOR COMPENSATION |
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compen-sation ($) | Change in Pension Value and Non-qualified Deferred Compensation Earnings ($) | All Other Compen-sation ($) | Total ($) |
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) |
Timothy N. Tangredi, Chairman | - | - | - | - | | - | - |
Raymond Kazyaka Sr., Director | - | - | 12,600 | - | - | - | 12,600 |
Robert W. Schwartz, Director | - | - | 12,600 | - | - | - | 12,600 |
_______________(1) | At December 31, 2011, Mr. Kazyaka had options to purchase 1,174,600 shares and no stock awards outstanding. |
(2) | At December 31, 2011, Mr. Schwartz had options to purchase 1,144,600 shares and no stock awards outstanding. |
We do not have a plan pursuant to which our directors are compensated and directors currently do not receive cash compensation for their services on the Board of Directors although they do receive stock options as determined by the full Boardboard of Directors.directors with each director abstaining from any such vote involving himself or a member of his immediate family. Timothy N. Tangredi, Raymond Kazyaka Sr. and Robert W. Schwartz were each granted an option on August 18, 2007June 25, 2010 to purchase 60,000400,000 shares of common stock at an exercise price of $0.21$0.30 per share, vesting immediately upon issuance and exercisable for a period of ten years. This option grant to Mr. Tangredi as a director is contained in the table summarizing grants made to our officers.
Our non-employee directors are currently compensated with the issuance of stock options, which generally become exercisable upon the date of grant, and which generally expire on the earlier of ten years from the date of grant or up to three years after the date that the optionee ceases to serve as a director. Non-employee directors are also reimbursed for out-of-pocket expenses associated with attending to our business.
EXECUTIVE COMPENSATION
The table below summarizes the Company’s business.total compensation paid to or earned by our principal executive officer, our principal financial officer and each of our two other executive officers other than our principal executive officer and principal financial officer in the last two fiscal years. The amounts represented in the “Option Awards” column reflect the stock compensation expense recorded by the Company under GAAP and does not necessarily equate to the income that will ultimately be realized by the named executive officers for such awards.
Summary Compensation Table
Name and principal position (a) | Year (b) | | | Salary ($) (c) | | | Bonus ($) (d) | | Stock Awards ($)(2) (e) | | | Option Awards ($)(2) (f) | | | Non-Equity Incentive Plan (g) | | | Non-qualified Deferred Compensation Earnings ($) (h) | | All other compensation ($) (i) | | Total ($) (j) | |
| | | | | | | | | |
Timothy N. Tangredi Chief Executive Officer, President, and Chairman of the Board of Directors(1) | 2011 2010 2009 |
| | $ $ $ | 170,000 170,000
170,000 |
| |
| —
— — |
|
| — — — |
| | $
$ $ | 79,583 95,869 1,134,425 |
| |
| — — — |
| |
| — — — |
|
| — — — | | $
$ $ | 249,583 265,869 1,304,425 |
|
| | | | | | | | | |
Robert W. Brown Vice President of Marketing (3) | 2009 | | | $ | 57,187 | | | | — | | | — | | | | — | | | | — | | | | — | | | — | | $ | 57,187 | |
| | | | | | | | | |
David E. Longacre Vice President of Sales and Marketing | 2011 2010 | | | $ $ | 125,000 125,000 | | | $ | — 10,000 | | | — — | | | $ $ | 24,565 80,186 | | | | — — | | | | — — | | | — — | | $ $ | 149,565 215,186 | |
| | | | | | | | | |
Scott G. Ehrenberg Chief Technology Officer and Secretary | 2011 2010 2009 |
| | $
$ $ | 105,000 74,808 67,100 |
| | | — — — | |
| —
— — |
| | $
$ | 178,380 89,877 — |
| |
| — — — |
| |
| — — — |
|
| — — — | | $
$ $ | 283,380 164,685 67,100 |
|
|
| | | | | | | | | |
Judith C. Norstrud Chief Financial Officer and Treasurer | 2011 2010 2009 |
| | $
$ $ | 68,333 50,000 13,447 |
| |
| — — — |
|
| — — — |
| | $
$ $ | 82,365 82,930 |
| |
| —
|
| |
| —
|
|
| —
| | $
$ $ | 150,698 96,377 |
|
________________
(1) | Mr. Tangredi receive d a salary of $170,000 per year, and may receive a bonus in an amount not to exceed 100% of his salary, which bonus shall be measured by meeting certain performance goals as determined in the sole discretion of our board of directors. In 2010 and 2009, Mr. Tangredi was paid $110,833 and $55,350, respectively and has accrued unpaid salary of $59,167 for 2010 and $114,650 for 2009. Additional accruals have been made for the years prior to 2009. As of February 6 , 2012, we owed Mr. Tangredi accrued compensation in the aggregate amount of $1,047,884. |
(2) | The amounts included in these columns are the aggregate dollar amounts of the grant date fair value of option awards granted in the indicated year as adjusted to disregard the effects of any estimate of forfeitures related to service-based vesting, in accordance with Accounting Standards Codification 718, Compensation-Stock Compensation, for the fiscal years ended December 31, 2010 and December 31, 2009, and thus include amounts from option awards granted in and prior to the indicated year. For information on the valuation assumptions used in calculating these dollar amounts, see Note 1 to our audited financial statements included in this Registration Statement for the fiscal years ended December 31, 2010 and December 31, 2009, each as filed with the SEC. These amounts reflect our accounting expense for these awards and do not correspond to the actual value that may be recognized by the individuals upon option exercise. During the fiscal year ended December 31, 2010, there were forfeitures of options for the purchase of up to 371,125 shares related to service-based vesting conditions. |
(3) | Mr. Brown’s employment with us terminated on July 6, 2010. |
Narrative Disclosure to Summary Compensation Table
Timothy N. Tangredi. We are party to an employment agreement with Mr. Tangredi, our President, Chief Executive Officer, and director, which was amended and restated on September 14, 2011. Mr. Tangredi’s employment agreement provides for an initial term of three years commencing on September 14, 2011 with the term extending on the second anniversary thereof for an additional two-year period and on each subsequent anniversary of the commencement date for an additional year period. Mr. Tangredi’s initial base salary is $200,000. Mr. Tangredi’s base salary shall be increased annually, if applicable, by a sum equal to his current base salary multiplied by one third of the percentage increase in our yearly revenue compared to our prior fiscal year revenue; provided however any annual increase in Mr. Tangredi’s base salary shall not exceed a maximum of 50% for any given year. Any further increase in Mr. Tangredi’s base salary shall be at the sole discretion of our board of directors or compensation committee (if applicable). In addition, Mr. Tangredi will be eligible for bonus compensation at the discretion of board of directors, as well as option-based compensation under our 2009 Plan. Among the option grants Mr. Tangredi is eligible to receive under this agreement is a grant to purchase up to 520,000 shares of common stock upon the successful completion of this offering. For a full description of the terms of our agreement with Mr. Tangredi, please refer to the section below entitled “Certain Relationships and Related Party Transactions —Employment Agreements.”
Scott G. Ehrenberg.In 2010, Mr. Ehrenberg, our Chief Technology Officer and Secretary, received a salary of $ 74,808 and he was granted an option to purchase up to 375,000 shares of common stock at an exercise price of $0.30 per share. The value of this option is approximately $89,877. In January and April of 2011, our Board granted Mr. Ehrenberg an option to purchase 625,000 shares at an exercise price of $.30 per share and 75,000 shares of our common stock at an exercise price of $0.40. The value of these options were $153,535 and $24,845, respectively. The above options were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan. On May 24, 2011 we entered into an employment agreement with Mr. Ehrenberg. Mr. Ehrenberg’s employment agreement provides for an initial term of two years with the term extending on the second anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. Mr. Ehrenberg’s initial base salary is $110,000, with an increase to $165,000 per annum after the date on which we obtain $10 million or more in equity financing . Additionally, at the discretion of our board of directors and its compensation committee, Mr. Ehrenberg may be eligible for an annual bonus which amount, if any, will not be below 50% of his effective base salary and not exceeding 100% of his then effective base salary; provided that, under certain extraordinary circumstances, Mr. Ehrenberg may be eligible for an annual bonus greater than 150% of his then effective base salary. After the completion of this offering, Mr. Ehrenberg is eligible to receive a one-time payment of $20,000 for each U.S. patent of which he is the originator and the first name listed on the patent as inventor of the intellectual property described in such patent. In addition to any other compensation which Mr. Ehrenberg may receive under the agreement, he will be granted a stock option to purchase 40,000 shares of common stock at the end of each year or on the annual anniversary of the agreement, whichever is mutually acceptable to the Company and Mr. Ehrenberg. For a full description of the terms of our agreement with Mr. Ehrenberg, please refer to the section below entitled “Certain Relationships and Related Party Transactions — Employment Agreements.”
David Longacre. Mr. Longacre receives a salary of $125,000 per year and may receive a bonus which is measured by meeting certain performance goals. In 2010, received a bonus of 10,000 and was granted two options which permit him to purchase up to 200,000 shares of common stock at an exercise price of $0.28 per share and 100,000 shares of common stock at an exercise price of $0.30 per share. The value of each option is $51,785 and $28,401 respectively. In January of 2011, Mr. Longacre was granted an option to purchase up to 100,000 shares of common stock at an exercise price of $0.30 per shares and a value of $34,576. All options granted to Mr. Longacre were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan.
Judith Norstrud. In 2011, Ms. Norstrud salary was increased to $72,000. In addition, during that year, Ms. Norstrud received three option awards to purchase 100,000, 137,500 and 35,000 shares of our common stock at exercise prices of $0.30, $0.40 and $0.35 per share, respectively. The value of these options are $24,566, $45,549 and $12,250, respectively. The options were granted pursuant to the terms and conditions of the 2009 Long Term Incentive Plan
Patricia K. Tangredi. We are a party to an employment agreement with Patricia Tangredi, our general counsel and wife of Timothy Tangredi, our Chief Executive Officer, which agreement was amended and restated on April 8, 2011. Ms. Tangredi’s employment agreement provides for an initial term of four years with the term extending on the fourth anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. Ms. Tangredi’s initial base salary is $120,000, with an increase to $150,000 per annum or such higher sum as our board of directors may set after the date on which we obtain $10 million or more in equity or debt financing. In addition to any other compensation which she may receive under the agreement, Ms. Tangredi shall be granted options to purchase a minimum of 50,000 shares of our common stock which shall be issued at year end or upon the anniversary of this agreement, as the parties shall agree. For a full description of the terms of our agreement with Ms. Tangredi, please refer to the section below entitled “Certain Relationships and Related Party Transactions — Employment Agreements.”Outstanding Equity Awards
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the outstanding equity awards for the year ended December 31, 2011 and 2010:
OPTION AWARDS | | | STOCK AWARDS | |
Name (a) | | Number of securities underlying unexercised options (#) Exercisable (b) | | | Number of securities underlying unexercised options (#) Unexercisable (c) | | | Equity Incentive Plan Awards: Number of Securities underlying unexercised unearned options (#) (d) | | | Option exercise price ($) (e) | | | Option expiration date (f) | | | Number of shares or units of stock that have not vested (#) (g) | | | Market value of shares or units of stock that have not vested ($) (h) | | | Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#) (i) | | | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) (j) | |
Timothy N. Tangredi (1) | | | 825,000 | | | | — | | | | — | | | $ | 0.26 | | | | 9/23/2014 | | | | — | | | | — | | | | — | | | | — | |
| | | 150,000 | | | | — | | | | — | | | $ | 0.10 | | | | 5/10/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 120,000 | | | | — | | | | — | | | $ | 0.10 | | | | 10/1/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 40,000 | | | | — | | | | — | | | $ | 0.30 | | | | 5/2/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 110,000 | | | | — | | | | — | | | $ | 0.55 | | | | 11/1/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 140,000 | | | | — | | | | — | | | $ | 0.55 | | | | 2/20/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 300,000 | | | | — | | | | — | | | $ | 0.21 | | | | 8/18/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 350,000 | | | | — | | | | — | | | $ | 0.21 | | | | 1/30/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 3,000,000 | * | | | — | | | | — | | | $ | 0.36 | | | | 8/4/2013 | | | | — | | | | — | | | | — | | | | — | |
| | | 75,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.42 | | | | 11/12/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 3,540,058 | | | | — | | | | — | | | $ | 0.42 | | | | 11/12/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 400,000 | | | | — | | | | — | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 125,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 45,000 | | | | — | | | | — | | | $ | 0.35 | | | | 10/7/2021 | | | | — | | | | — | | | | — | | | | — | |
______
Scott G. Ehrenberg (2) | | | 140,000 | | | | — | | | | — | | | $ | 0.26 | | | | 9/23/2014 | | | | — | | | | — | | | | — | | | | — | |
| | | 110,000 | | | | — | | | | — | | | $ | 0.10 | | | | 5/10/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 80,000 | | | | — | | | | — | | | $ | 0.10 | | | | 10/1/2015 | | | | ��� | | | | — | | | | — | | | | — | |
| | | 40,000 | | | | — | | | | — | | | $ | 0.55 | | | | 11/1/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 120,000 | | | | — | | | | — | | | $ | 0.55 | | | | 2/20/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 50,000 | | | | — | | | | — | | | $ | 0.21 | | | | 8/18/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 250,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | *250,000 | | | | — | | | | — | | | $ | 0.30 | | | | 8/4/2013 | | | | — | | | | — | | | | — | | | | — | |
| | | 125,000 | | | | 250,000 | | | | 250,000 | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 625,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 75,000 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
________ | | | | | | | | | |
* Warrant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Judith C. Norstrud (3) | | | 200,000 | | | | — | | | | — | | | $ | 0.45 | | | | 10/15/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 50,000 | | | | 100,000 | | | | 100,000 | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | 100,000 | | | | — | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 137,500 | | | | — | | | | — | | | $ | 0.40 | | | | 4/5/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | 35,000 | | | | — | | | | — | | | $ | 0.35 | | | | 10/7/2021 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
David E. Longacre (4) | | | — | | | | 200,000 | | | | — | | | $ | 0.28 | | | | 1/20/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | — | | | | 100,000 | | | | — | | | $ | 0.30 | | | | 7/06/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | — | | | | 100,000 | | | | — | | | $ | 0.30 | | | | 1/18/2021 | | | | — | | | | — | | | | — | | | | — | |
(1) | The April 2008 warrant grant to Mr. Tangredi for 3,000,000 shares was made by the Board of Directors in recognition for Mr. Tangredi’s achievement of the following goals: negotiating conversion of the convertible notes issued in the Additional Financing, securing a release with respect to the consulting agreement with Gray Capital Partners, Inc., securing and closing upon the Financing. All stock options issued to Mr. Tangredi prior to December 31, 2009 were issued under the 2000 Plan. The remaining options were issued under the 2009 Plan. |
(2) | All stock options issued to Mr. Ehrenberg prior to December 31, 2009 were issued under the 2000 Plan. The remaining options issued under the 2009 Plan. |
(3) | All stock options issued to Ms. Norstrud prior to December 31, 2009 were issued under the 2000 Plan. The remaining options were issued under the 2009 Plan. |
(4) | All stock options issued to Mr. Longacre were issued under the 2009 Plan. |
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the date of this prospectus as to each person or group who is known to us to be the beneficial owner of more than 5% of our outstanding voting securities and as to the security and percentage ownership of each of our executive officers, directors and directorsnominees and of all of our officers, directors and directorsnominees as a group.
Beneficial ownership is determined under the rules of the Securities and Exchange CommissionSEC and generally includes voting or investment power over securities. The number of shares shown as beneficially owned in the tables below are calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934.Act. Under Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each shareholder identified in the table possesses sole voting and investment power over all of the shares of common stock shown as beneficially owned by the shareholder.
The address for each of the persons named below is 11552 Prosperous Drive, Odessa, FL 33556, unless otherwise indicated.
Applicable percentage ownership in the following table is based on 11,877,184approximately 37,517,604 shares of common stock outstanding as of August 7, 2008,February 6 , 2012 plus, for each individual, any securities that individual has the right to acquire within 60 days of August 7, 2008.February 6 , 2012. The following table does not reflect any conversion of notes or accrued compensation which may occur within the above-mentioned 60 day period.
Name of Beneficial Owner | | Common StockBeneficially OwnedNumber of Sharesof CommonStock | | | Percentage ofClass | |
| | | | | | | | |
Timothy N. Tangredi | | | | | | | | |
(Officer and Chairman) (1) | | | 12,310,477 | | | | 25.0 | % |
David Longacre (Officer) (2) | | | 100,001 | | | | .3 | % |
Scott G. Ehrenberg (3) (Officer) | | | 2,077,800 | | | | 5.3 | % |
Judith Norstrud (Officer) (4) | | | 572,500 | | | | 1.5 | % |
Raymond Kazyaka Sr. (Director) (5) | | | 1,174,600 | | | | 3.0 | % |
Robert W. Schwartz (Director) (6) | | | 1,144,600 | | | | 3.0 | % |
Peter Termyn (Director Nominee) | | | 0 | | | | 0.0 | % |
Executive officers, directors and nominees, as a group (9 persons) | | | 17,379,978 | | | | 31.8 | % |
Brian A. Kelly | | | | | | | | |
181C Hague Blvd. Glenmont, N.Y. 12077 | | | 2,254,085 | | | | 6.0 | % |
Michael Gostomski (7) | | | | | | | | |
1666 Valley View Dr. Winnona, MN 55987 | | | 3,355,535 | | | | 8.8 | % |
Louis M. Jaffe (8) | | | | | | | | |
1500 S. Ocean Blvd #5201 Boca Raton, FL 33432 | | | 3,684,300 | | | | 9.5 | % |
Mark Nordlicht (9) | | | | | | | | |
152 West 575th St. 4th Floor New York, NY 10019 | | | 3,793,240 | | | | 9.99 | % |
Leonard Samuels (10) | | | | | | | | |
1011 Centennial Road Penn Valley, PA 19072 | | | 13,478,165 | | | | 31.8 | % |
Leah Kaplan Samuels (11) | | | | | | | | |
1011 Centennial Road Penn Valley, PA 19072 | | | 3,629,696 | | | | 9.4 | % |
| | Common Stock Beneficially Owned | |
Name of Beneficial Owner | | Number of Shares of Common Stock | | Percentage of Class | |
Timothy N. Tangredi (Officer and Chairman) (1) | | | 7,095,858 | | | 37.7% | |
Robert W. Brown (Officer) (2) | | | 347,249 | | | 2.8% | |
Scott G. Ehrenberg(3) | | | 652,799 | | | 5.2% | |
William B. Newman (Officer) (4) | | | 566,667 | | | 4.6% | |
Raymond Kazyaka Sr. (Director) (5) | | | 404,600 | | | 3.3% | |
Robert W. Schwartz (Director) (6) | | | 374,,600 | | | 3.1% | |
Executive officers and directors as a group (6 persons) | | | 9,441,773 | | | 44.8% | |
Walt Robb (7) 300 Troy Road Schenectady, NY 12309 | | | 1,424,126 | | | 11.7% | |
Brian A. Kelly 181C Hague Blvd. Glenmont, N.Y. 12077 | | | 3,254,085 | | | 27.4% | |
Michael Gotomski (8) 1666 Valley View Dr. Winnona, MN 55987 | | | 1,056,544 | | | 8.4% | |
Andrew Mitchell (9) Furnival Chambers 32 Furnival Street London EC4A 1JQ UK | | | 750,000 | | | 5.9% | |
Larry Hopfenspirger (10) 2025 Nocollet Ave. S. #203 Minneapolis, MN 55404 | | | 1,500,000 | | | 11.2% | |
Louis M. Jaffe (11) 1500 S. Ocean Blvd #5201 Boca Raton, FL 33432 | | | 1,273,334 | | | 9.9% | |
Lawrence D. Isen (12) 4653 Carmel Mtn. Suite 308-402 San Diego, CA 92130 | | | 1,000,000 | | | 7.8% | |
Michael Frederick Stone (13) 18 Ozone Avenue Venice, CA 90291 | | | 2,000,000 | | | 14.4% | |
Michael J. McGrath (14) 1250 West Division Street Chicago, IL 60622 | | | 1,000,000 | | | 7.8% | |
Marisa Stadmauer (15) 26 Columbia Turnpike Florham Park, NJ 07932 | | | 1,500,000 | | | 11.2% | |
Andrew Vickery (16) 8 Airport Park Blvd. Latham, NY 12110 | | | 750,000 | | | 5.9% | |
Mark Nordlich (17) 152 West 575th St. 4th Floor New York, NY 10019 | | | 6,333,333 | | | 35.4% | |
Erick Richardson (18) 10900 Wilshire Blvd. Suite 500 Los Angeles, CA 90024 | | | 1,784,616 | | | 14.0% | |
Leonard Samuels (19) 1011 Centennial Road Penn Valley, PA 19072 | | | 7,250,000 | | | 37.9% | |
Leah Kaplan Samuels (20) 1011 Centennial Road Penn Valley, PA 19072 | | | 1,750,000 | | | 12.8% | |
_________________
(1) | (1) Includes 5,110,0009,420,058 shares of common stock issuable upon exercise of stock options and 1,965,858warrants and 2,863,358 shares beneficially owned by Mr. Tangredi’s wife, Patricia Tangredi. 1,838,0582,735,558 of Ms. Tangredi’s shares are issuable upon the exercise of stock options. Excludes an estimated 2,087,138 shares of common stock that would be issued in partial payment of Mr. Tangredi’s accrued unpaid compensation (assuming completion of the offering and receipt by us of gross proceeds of $6 million or more at a public offering price of $0.3 2 per share and cash payment of approximately $380,000).
|
(2) | Includes 347,249100,001 shares of common stock issuable upon exercise of stock options. |
(3) | Includes 569,9991,990,000 shares of common stock issuable upon the exercise of stock options and warrants and 41,400 shares beneficially owned by Mr. Ehrenberg'sEhrenberg’s wife, Linda Ehrenberg. |
(4) | Includes 66,667572,500 shares of common stock issuable upon exercise of stock options. Also includes 250,000 shares of common stock issuable upon conversion of convertible notes and 250,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. |
(5) | Includes 404,6001,174,600 shares of common stock issuable upon exercise of stock options. |
(6) | Includes 374,6001,144,600 shares of common stock issuable upon exercise of stock options. |
(7) | Includes 249,750807,087 common shares issuable upon exercise of certain warrants issued in connection with the conversion of notes issued in the Additional Financing to CounterPoint Ventures LLC. The natural person with voting power and investment power on behalf of CounterPoint Ventures LLC is Walt Robb.warrants. |
(8) | Includes 18,750 common shares issuable upon exercise of certain warrant issued in connection with the conversion of notes issued in the Additional Financing. Also includes 375,000 shares of common stock issuable upon conversion of convertible notes and 375,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing.(9) Includes 375,000 shares of common stock issuable upon conversion of convertible notes and 375,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing.
(10) Includes 750,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 750,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(11) Includes 500,000 shares of common stock issuable upon conversion of convertible notes and 500,000666,500 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing to Louis M. Jaffe 2004 Intangible Asset Mgmt. TR U/A DTD 5/24/04. Also includes 273,334 shares held by the trust. The natural person with voting power04 and investment power on behalf of Louis M. Jaffe 2004 Intangible Asset Mgmt. TR U/A DTD 5/24/04 is Louis M. Jaffe.
(12) Includes 500,000 shares of common stock issuable upon conversion of convertible notes and 500,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing in the name of Market Byte L.L.C. The natural person with voting power and investment power on behalf of Market Byte L.L.C. Defined Benefit & Trust is Lawrence D. Isen.
(13) Includes 1,000,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 1,000,000298,077 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(14) Includes 500,000 sharesa purchase of Company’s common stock issuable upon conversion of convertible notesin 2009. Also includes 1,819,715 shares held by the aforementioned trust, 250,004 shares held by the Louis Jaffe TTEE Irrevocable Trust – Jennifer Jaffe and 500,000250,004 shares of common stock issuable upon exercise of warrants issued in connection withheld by the Financing.
(15) Includes 750,000 shares of common stock issuable upon conversion of convertible notes and 750,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing in the name of MSSRPS, LLC.Louis Jaffe TTEE Irrevocable Trust – Lara Jaffe Taylor. The natural person with voting power and investment power on behalf each of MSSRPS, LLCthe aforementioned trusts is Marisa Stadmauer.
(16) Includes 375,000Louis M. Jaffe. Also includes 100,000 shares of common stock issuable upon conversion of convertible notesheld by the Diana G. Jaffe Revocable Trust Dated 8/4/99 and 375,00050,000 shares of common stock issuable upon exercise of warrants issued in connection withheld by Ashlin Trevor Jaffe under the FinancingFlorida Uniform Gift to Next Generation Investment LLC. TheMinors Act for which Diana G. Jaffe, Louis M. Jaffe’s wife, is the natural person with voting power and investment power on behalf of Next Generation Investment LLC is Andrew Vickery.
(17) Includes 3,000,000the trusts and 250,000 shares of common stock issuable upon conversionon exercise of convertible notes and 3,000,000a certain outstanding warrant issued to Louis M. Jaffe pursuant to a consulting agreement.
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(9) | Includes 3,324,740 shares of common stock, and 468,500 shares issuable upon the exercise of warrants issued in connection with the Financing to Platinum Montaur Life Sciences LLC.certain outstanding warrants. The natural person with voting power and investment power on behalf of Platinum Montaur Life Sciences, LLC is Mark Nordlich. (18) Includes 500,000Nordlicht. Platinum Montaur Life Sciences, LLC holds warrants for the purchase of up to 7,999,000 shares of common stock. Among these warrants, excluded from the above table are 7,530,500 shares of common stock issuable upon exercise of those warrants, and two convertible notes which would (as of February 6 , 2012 ) result in the issuance of 10,9 45,732 shares if fully converted. The warrants as amended and the convertible notes, have certain limitations on exercise and conversion to the extent the shares resulting from such exercise, when aggregated with its other holdings, would result in Platinum Montaur Life Sciences, LLC holding in excess of 9.99% of all our common stock on a beneficially converted basis. These limitations on exercise of certain warrants and conversion of certain outstanding convertibleboth notes may be waived by the holder. For purposes of this beneficial ownership table, we have assumed the exercise by Platinum Montaur Life Sciences, LLC of its warrants for the maximum number of shares it may acquire and 500,000hold at one time (9.99%), without conversion of the notes. As of February 6 , 2012 we estimate that at the closing of the contemplated offering, approximately $2.8 5 million of net proceeds from the offering will be used to repay principal and interest under these notes, (see sections titled “Use of Proceeds” and “Capitalization” below in this prospectus).
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(10) | Includes 905,000 shares of common stock issuable upon exercise of certain outstanding warrants. All of the foregoing warrants issued in connection with the Financing in the name of RP Capital LLC. Erick Richardson and Nimish Patel of Richardson & Patel LLP own RP Capital LLC. Also includes 392,308 shares in the name of Richardson & Patel LLP and warrants to purchase an additional 392,308 shares. Mr. Richardson is a partner at Richardson & Patel LLP, our legal counsel. The natural person with voting and investment control over the shares held by these entities is Erick Richardson.(19) Includes 875,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 875,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWTOS. The natural persons with voting power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard Samuels. Also includes 5,500,000 shares of common stock underlying the convertible notes and warrants in the Financing issued to shareholder RBC Dain – Custodian for Leonard Samuels IRA and which are also registered under this prospectus.
(20) Includes 875,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 875,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWROS. The natural persons with voting power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard Samuels. Also includes 5,860,969 shares of common stock and 3,987,500 shares of common stock issuable upon exercise of certain outstanding warrants issued to shareholder RBC Dain – Custodian for Leonard Samuels IRA.
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(11) | Includes 905,000 shares of common stock issuable upon exercise of warrants. All of the foregoing warrants are held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWROS. The natural persons with voting power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard Samuels. |
Securities Authorized for Issuance under Equity Compensation Plans
In June 2000 and November 2009, our Board of Directors adopted, and our shareholders approved, the 2000 Incentive Compensation Plan and 2009 Long-Term Incentive Plan, respectively (together the “Plans”). The Plans provide for the granting of options to our qualified employees, independent contractors, consultants, directors and other individuals. The Company’s Board of Directors approved and made available 15,000,000 shares of common stock to be issued pursuant to the 2009 Plan. The Plans permit grants of options to purchase common shares authorized and approved by our Board of Directors.
The following summarizes the information relating to outstanding stock options activity with employees during 2011, 2010 and 2009:
| | Common Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2008 | | | 8,606,556 | | | $ | 0.26 | | | | 7.58 | | | $ | 38,294 | |
Granted | | | 4,240,058 | | | $ | 0.21 | | | | — | | | | — | |
Exercised | | | (25,000 | ) | | $ | 0.17 | | | | — | | | $ | 3,250 | |
Forfeited or expired | | | (472,732 | ) | | $ | 0.58 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2009 | | | 12,348,882 | | | $ | 0.26 | | | | 7.64 | | | $ | 1,052,839 | |
Granted | | | 2,970,000 | | | $ | 0.30 | | | | — | | | | — | |
Forfeited or expired | | | (371,125 | ) | | $ | 0.32 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 14,947,757 | | | $ | 0.25 | | | | 7.19 | | | $ | 946,754 | |
Granted | | | 2,535,000 | | | $ | 0.33 | | | | — | | | | — | |
Forfeited or expired | | | (136,667 | ) | | $ | 0.11 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Outstanding at September 30, 2011 | | | 17,296,090 | | | $ | 0.32 | | | | 6.79 | | | $ | 1,516,086 | |
| | | | | | | | | | | | | | | | |
Exercisable at September 30, 2011 | | | 16,061,854 | | | $ | 0.32 | | | | 6.62 | | | $ | 1,433,926 | |
Stock compensation expense was approximately $651,000 for the year ended December 31, 2010 and $1,580,000 for the year ended December 31, 2009, including approximately $75,000 that was accrued for warrants issued subsequent to year end. The total fair value of shares vested during the years ended December 31, 2010 and 2009 was approximately $556,000 and $1,549,000, respectively.
As of December 31, 2010, there was approximately $222,000 of unrecognized employee stock-based compensation expense related to non-vested stock options, of which $129,000, $81,000 and $12,000 is expected to be recognized for the years ended December 31, 2011, 2012 and 2013, respectively.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
DuringThe following is a description of transactions, or proposed transactions, since January 1, 2008, to which we have been a party in which the year ended December 31, 2007, Timothy N. Tangredi, a shareholder and officeramount involved exceeded or will exceed the lesser of the Company loaned the Company an aggregate$120,000 or one percent of $156,500 pursuant to three loan agreements. One loan was unsecured, due on demand and did not accrue interest. The other two loans were unsecured, due in one and two months respectively, and accrued interestour total assets at 12 percent, increasing by 1 percent for every 30 days the principle balance is outstanding. Prior to year end for the Company repaid the loans.last two completed fiscal years and in which any of our directors, nominees, executive officers, beneficial holders of more than 5% of our capital stock, or entities affiliated with them, had or will have a direct or indirect material interest.
The Company rentsWe rent a building on a month to month basis from a related party which is wholly ownedwholly-owned by two shareholders of the Company, one of which is Timothy N. Tangredi, our Chief Executive Officer. The base monthly rent expense is $3,800 per month. CompanyWe also payspay the taxes, insurance and somemost repairs on the building. For the year three monthsyears ended MarchDecember 31, 20082011, 2010 and 2007, the Company has2009, we recorded $12,198$48,792, $48,792 and $12,198, respectively,$49,604, in rent expense to this related party, respectively. The Company recognized rent expense of $12,198, $36,594, $12,198 and $36,594 for each of the three and nine months ended September 30, 2011 and the three and nine months ended September 30, 2010, respectively. At December 31, 2011 and December 31, 2010, $52,858 and $151,440, respectively, were included in accounts payable for amounts owed to these shareholders for rent.
Timothy N. Tangredi, our Chief Executive Officer and Chairman, is a founder and a member of the board of directors of Aegis BioSciences, LLC (“Aegis”). Mr. Tangredi currently owns 52% of Aegis’ outstanding equity and spends approximately one to two days per month on Aegis business for which he is compensated by Aegis. Aegis has two exclusive, world-wide licenses from us under which it has the right to use and sell products containing our polymer technologies in biomedical and health care applications. As a result of a $150,000 payment made by Aegis, the first license is considered fully paid and as such no additional license revenue will be forthcoming. Pursuant to the second license Aegis made an initial one-time payment of $50,000 and is to make royalty payments of 1.5% of the net sales price it receives with respect to any personal hygiene product, surgical drape or clothing products (the latter when employed in medical and animal related fields) and license revenue it receives should Aegis grant a sublicense to a third party. To date Aegis has sold no such products nor has it received any licensing fees requiring a royalty payment be made to us.
E. Todd Tracy and Michael Stone, two individuals holding warrants as a result of the Financing exercised and tendered their warrants on September 13, 2011 and received 537,037 and 145,832 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act
On September 6, 2011, RP Capital and Richardson and Patel, LLP, two entities holding warrants (one as a result of the Financing and the other as a part of a payment arrangement for services) tendered and exercised their warrants and received 244,897 and 188,225 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act.
On September 6, 2011, the Company issued 202,703 shares of common stock to legal counsel, Richardson and Patel, LLP, in settlement of accounts payable for services rendered. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On November 4, 2010, RP Capital elected to convert the balance of its 9% secured convertible note in the amount of $100,000 into 625,384 shares of our common stock. RP Capital also received an additional five-year warrant to purchase up to 62,538 shares of common stock, at an exercise price of $0.75 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On February 19, 2010, we obtained $620,000 of financing from RBC Capital Markets Corporation Custodian for Leonard Samuels IRA (“RBC”) in the form of an unsecured, interest-bearing note, due May 31, 2011 (the “Note”). The Note bears interest at 10% per annum. In connection with the loan, we granted RBC the right to participate in our subsequent financings until the maturity date (the “Right of Participation”). The Right of Participation entitles RBC the right to participate in subsequent financings up to the unpaid amount of the Note in such applicable subsequent financing. We agreed not to incur additional debt exceeding $500,000 during the Term of the Note without the note holder’s consent. On May 12, 2011, RBC elected to apply all of the proceeds due and payable pursuant to this note, in the principal amount of $620,000 plus accrued interest, to purchase our common stock. Pursuant to this transaction, RBC subscribed for and purchased 2,667,503 shares of common stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $693,550 (the principal amount and related accrued interest under the note). As part of the purchase, RBC also received a five-year warrant to purchase 962,500 shares of Common Stock, at an exercise price of $0.45 per share. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events, including but not limited to stock dividends, split-up, reclassification or combination of our shares, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all our assets. In addition, as part of this transaction, the warrants issued to this investor on December 20, 2007 and December 31, 2007 were amended to include a cashless exercise provision.
On February 19, 2010, we obtained $250,000 of financing from Leah-Kaplan and Leonard Samuels (“Samuels”) in the form of an unsecured, interest bearing note, payable in full on June 30, 2010 (the “Note”). The Note bears interest at 10% per annum. In connection with the loan, we granted Samuels the right to participate in our subsequent financings until the maturity date. The maturity date of the note was extended to December 31, 2010. On December 27, 2010, the holders elected to apply all of the proceeds due and payable under the Note, including all accrued interest, to purchase our common stock. Pursuant to this transaction, the Samuels subscribed for and purchased 1,052,950 shares of common stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $273,767 (the principal amount and related accrued interest under the note).
In December, 2009, we obtained $1,000,000 of financing from Platinum-Montaur Life Sciences, LLC (“Investor”). Mark Nordlicht, who is a significant beneficial holder of our securities, is a control person with respect to the Investor. Pursuant to the terms of the note, we are to pay the holder simple interest at the rate of ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 17, 2010. The note’s maturity date was extended to April 30, 2011. On March 22, 2011, the Company entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note (“2011 Convertible Note”, collectively “Exchange Agreements”) with this investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the Investor amended and restated the $1,000,000 unsecured promissory note issued by the Company to Investor on or about December 17, 2009 (“Original Note”) to, among other things, extend the term to March 22, 2012. Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 will be paid on March 22, 2012. Subject to the terms and conditions of the 2011 Convertible Note, including limitations on conversion, the outstanding principal and interest under the 2011 Convertible Note will automatically convert into shares of the Company’s common stock at the then-effective conversion price upon the closing of a qualified firm commitment underwritten public offering or may be voluntarily converted by the investor at anytime during the term. The initial conversion price is $0.26 per share . Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering, (as defined in the 2011 Convertible Note which is filed as an exhibit to the Form 8K filed with the Securities and Exchange Commission on March 28, 2011), or March 22, 2012. Pursuant to and during the term of the 2011 Convertible Note, the Company will not issue or allow to exist any obligation for borrowed money, except for subordinate indebtedness in payment and priority, trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate, or unsecured and subordinate working capital guarantees provided by, the Export Import Bank of the United States (the “EXIM Bank”), and indebtedness evidenced by the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000. In addition, on March 22, 2011, in connection with the above Exchange Agreements, the Company entered into an Amendment to 2007 Warrant and an Amendment to 2009 Warrant to extend the terms of the Stock Purchase Warrant, dated on or about December 31, 2007, and Stock Purchase Warrant, dated on or about March 12, 2009, respectively, to March 22, 2016 and to provide for cashless exercise unless such warrant shares are registered for resale under a registration statement. In addition, on March 22, 2011, the Company issued a Stock Purchase Warrant to the Investor to purchase 1,000,000 shares of the Company’s common stock at $0.45 per share, exercisable commencing on the earliest of the consummation of the qualified offering (as defined in the Exchange Agreements), the date of conversion of the 2011 Convertible Note in full, or the date of conversion of the 2011 Convertible Note by the Investor in the greatest number of shares of the Company’s common stock not to exceed 9.99% beneficial ownership of Company outstanding common stock and terminating on March 22, 2016.
Also, on March 22, 2011, the Company entered into a 10% Note and Warrant Purchase Agreement, Secured Convertible Promissory Note and Patent Security Agreement (“Financing Agreements”) with the above Investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the Investor has provided a bridge loan in the amount of $1,500,000 (“Loan”) to the Company, which is secured by all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and “accounts” with respect to such intellectual property assets. Pursuant to the Secured Convertible Promissory Note (“Secured Note”), interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 is due and payable on March 22, 2012, but repayment is accelerated upon a qualified firm commitment underwritten public offering (as defined in the note). In the event of such qualified offering, and subject to the terms and conditions of the Secured Note, the outstanding principal and interest under the Secured Note will automatically convert, subject to the limitations on conversion described in the note, into shares of the Company’s common stock at the then-effective conversion price upon the closing of such qualified offering. The initial conversion price is $0.26 per share which is subject to adjustment for standard anti-dilution provisions. Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering or March 22, 2012. No cash fees were paid to any party to the transaction in exchange for lending the money.
On March 22, 2011, in connection with the Financing Agreements, the Company issued a Stock Purchase Warrant to the Investor to purchase 3,000,000 shares of the Company’s common stock at $0.45 per share, exercisable until March 22, 2016. Pursuant to and during the term of the Secured Note, the Company will not issue or permit to exist any obligation for borrowed money, except for trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate indebtedness to, or unsecured and subordinate working capital guarantees provided by, the EXIM Bank, the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000, the Amended and Restated Convertible Promissory Note, dated March 22, 2011, issued to the Investor in the principal amount of $1,000,000 and other unsecured indebtedness for borrowed money in an amount not to exceed $750,000.
Pursuant to the Patent Security Agreement issued in connection with the Note and Warrant Purchase of March 22, 2011, the Company shall not, without the Investor’s prior consent, sell, dispose or otherwise transfer all or any portion of the Collateral, except for license grants in the ordinary course of business. In addition, the Company will take all actions reasonably necessary to prosecute applications for patents and maintain all patents, and to seek to recover damages for infringement, misappropriation or dilution of the Collateral with limited exceptions.
On December 8, 2009, Company obtained $300,000 of financing from Michael Gostomski (“Gostomski”) in the form of an unsecured, interest bearing note, due January 16, 2011 (the “Note”). The Note bears interest at 7% per annum. On December 30, 2010, the holder elected to apply all of the proceeds due and payable under the Note, including all accrued interest, to purchase the Company’s Common Stock. Pursuant to this transaction, Gostomski subscribed for and purchased 1,268,472 shares of Common Stock at a purchase price of $0.26 per share, resulting in an aggregate purchase price of $329,402.
On November 23, 2009, Michael Stone elected to convert the interest accrued on his 9% secured convertible note in the amount of $34,027 into 170,137 shares of our common stock . The note was modified so as to end accrual of interest on November 20, 2009.
On October 9, 2009, Leonard and Leah Kaplan Samuels JTWROS and RBC Capital- Custodian for Leonard Samuels IRA elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $174,349 and $638,693 into 871,746 and 3,193,466 shares of our common stock, respectively. Said investors also received an additional five-year warrant to purchase up to 75,000 and 275,000 shares, respectively, of common stock, at an exercise price of $0.75 per share in consideration for converting their 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On September 17, 2009, we entered into subscription agreements with Leonard and Leah Kaplan Samuels pursuant to which the investors purchased 800,000 shares of our common stock. As part of the purchase, the Samuels received a five year warrant to purchase 80,000 shares of Common Stock, at an exercise price of $0.75 per share . The aggregate gross proceeds received by us for the sale was $200,000. The warrants are immediately exercisable and subject to adjustment for standard anti-dilutions events.
On September 11, 2009, to evidence a loan, we issued Timothy N. Tangredi a promissory note in the principal amount of $124,000. The note is unsecured and bears a simple interest rate of 9% per annum. This note was paid in full prior to October 15, 2009.
On September 11, 2009, to evidence a loan, we issued a promissory note in the principal amount of $37,000 to Ethos Business Ventures. Our CEO, Mr. Tangredi, is a principal owner of this entity. The note is unsecured and bears a simple interest rate of 9% per annum. This note was paid in full prior to October 15, 2009.
On June 30, 2009, we entered into a subscription agreement with the Louis M. Jaffe 2004 Intangible Asset Trust U/A DTD 5/24/04 pursuant to which the trust purchased 596,154 shares of Company’s Common Stock and a five year warrant to purchase an additional 298,078 shares of Common Stock at an exercise price of $0.26 per share. The aggregate gross proceeds received by Company for this sale was $155,000. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
On June 10, 2009, to evidence a loan, we issued a promissory note in the principal amount of $10,000 to Ethos Business Ventures, an entity in which our Chief Executive Officer holds a position. The note is unsecured and bears a simple interest rate of 9% per annum. The note was paid in full July of 2009.
On May 21, 2009, to evidence a loan, we issued our Chief Executive Officer a promissory note in the principal amount of $51,900. The note is unsecured and bears a simple interest rate of 9% per annum. The note was paid in full prior to July 31, 2009. On April 30, 2009, the Company issued a five year warrant to purchase 250,000 shares of Common Stock at an exercise price of $0.26 per share pursuant to Louis Jaffe pursuant to a consulting agreement. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
On April 30, 2009, MSSRPS, Inc. elected to convert its 9% secured convertible note and the related accrued interest in the amounts of $167,125 into 835,623 shares of common stock . This investor also received an additional warrant to purchase up to 249,750 shares of common stock at an exercise price of $0.25 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On April 6, 2009 the Louis M. Jaffe 2004 Intangible Asset Trust U/A DTD 5/24/04 elected to convert its 9% secured convertible notes and the related accrued interest in the amounts of $110,849 into 554,247 shares of common stock. This investor also received an additional warrant to purchase up to 166,500 shares of common stock at an exercise price of $0.25 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events.
On March 9, 2009, we entered into a subscription agreement Michael Gostomski pursuant to which Mr. Gostomski purchased 576,923 shares of common stock and a five year warrant to purchase an additional 288,462 shares of common stock at an exercise price of $0.26 per share. The aggregate gross proceeds received by us for this sale was $150,000. The warrant is immediately exercisable and subject to adjustment for standard anti-dilutions events.
On February 16, 2009, and March 12, 2009, Michael Gostomski and Platinum Montaur Life Sciences, L.L.C.; respectively, elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $83,007 and $664,948 into 415,038 and 3,324,740 shares of common stock, respectively. Such investors also received an additional warrant to purchase up to 124,875 and 999,000 shares of common stock, respectively, at an exercise price of $0.25 per share in consideration for converting their 9% secured convertible note. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events.
In August 2008, we issued a five year warrant to purchase 250,000 shares of common stock) to Scott Ehrenberg our Chief Technology Officer and Secretary, in recognition for Mr. Ehrenberg’s achievement of certain company goals. The fair value of the warrant issued is approximately $49,000. The warrant vested upon issuance and has an exercise price of $0.30 per share.
In April 2008, we issued a warrant to purchase 3,000,000 shares of common stock at an exercise price of $0.36 per share to Mr. Tangredi in recognition for Mr. Tangredi’s achievement of the following goals: negotiating conversion of the convertible notes issued in the Additional Financing, securing a release with respect to the consulting agreement with Gray Capital Partners, Inc. and securing and closing upon the Financing. The fair value of the warrant issued is approximately $687,000.
In June 2008 we agreed to issue and have since issued 100,000 shares of common stock to Gemini Strategies, LLC in connection with consulting services. The fair value of the equity instruments issued for these services is approximately $51,000. Gemini Strategies, LLC is related to Gemini Master Fund Ltd., a convertible note holder.
In February of 2008, we issued 20,000 shares of our common stock to an employee for cash consideration of $2,000 upon the exercise of a stock option granted under our 2000 Plan. The shares were issued in reliance upon an exemption for registration under Rule 701.
In January 2008 we closed on an aggregate of $2,950,000 in gross proceeds from the private sale to 21 accredited investors of 9% secured convertible notes and warrants to purchase 14,750,000 shares of our Common Stock at an exercise price of $0.25 per share. Pursuant to the terms of this financing we granted the investors a security interest in certain of our assets. We entered into an agreement with placement agent, Legend Merchant Group, Inc. on October 5, 2007 pursuant to which, Legend Merchant Group, Inc. received a cash commission equal to 8% of the gross proceeds raised by Legend Merchant (and its subagent), which totaled $2,800,000, plus a warrant equal to 10% of the number of shares of common stock underlying certain warrants issued to convertible note holders, or 1,400,000 at $0.25 per share.
We also have accrued compensation due to the Chief Executive Officer and one other employee for deferred salaries earned and unpaid as of September 30, 2011 and December 31, 2011, 2010, 2009 and 2008 of $1,405,190, $1,405,190, $1,426,022, $1,314,356 and $1,147,389, respectively.
Employment Agreements
In addition we have the following employment agreements with our officers and significant employees:
Timothy N. Tangredi. We are party to an employment agreement with Mr. Tangredi, our President, Chief Executive Officer, and director. The employment agreement, as amended and restated on September 14, 2011, sets forth Mr. Tangredi’s compensation level and eligibility for salary increases, bonuses, benefits, and option grants. Mr. Tangredi’s employment agreement provides for an initial term of three years commencing on September 14, 2011 with the term extending on the second anniversary thereof for an additional two-year period and on each subsequent anniversary of the commencement date for an additional year period. Mr. Tangredi’s initial base salary is $200,000. Mr. Tangredi’s base salary shall be increased annually, if applicable, by a sum equal to his current base salary multiplied by one third of the percentage increase in our yearly revenue compared to our prior fiscal year revenue; provided however any annual increase in Mr. Tangredi’s base salary shall not exceed a maximum of 50% for any given year. Any further increase in Mr. Tangredi’s base salary shall be at the sole discretion of our board of directors or compensation committee (if applicable). Additionally, at the discretion of our board of directors and its compensation committee, Mr. Tangredi may be eligible for an annual bonus, if any, of up to 100% of his then-effective base salary, if he meets or exceeds certain annual performance goals established by the board of directors. In addition to this bonus, Mr. Tangredi may be eligible for a separate merit bonus if approved by the board of directors, for specific extraordinary events or achievements such as a sale of a division, major license or distribution arrangement or merger. Mr. Tangredi is entitled to medical, disability and life insurance, as well as four weeks of paid vacation annually, an automobile allowance, reimbursement of all reasonable business expenses, automobile insurance and maintenance, and executive conference or educational expenses.
Under his employment agreement, in addition to any other compensation which he may receive, if we complete the offering Mr. Tangredi will be granted an option under our 2009 Plan to purchase up to 520,000 shares of our common stock with an exercise price equal to the fair market value per share on the date of grant. This option will become vested and exercisable in thirds, with one third vested upon grant, another third at the one-year anniversary of the grant, and another third upon the second anniversary of the grant. The option shall have a term of ten years, shall be exercisable for up to three years after termination of employment (unless termination is for cause, in which event it shall expire on the date of termination), shall have a “cashless” exercise feature, and shall be subject to such additional terms and conditions as are then applicable to options granted under such plan provided they do not conflict with the terms set forth in the agreement.
If Mr. Tangredi’s employment is terminated for any reason, we will be obligated to pay him his accrued but unpaid base salary, bonus and accrued vacation pay, and any unreimbursed expenses (“Accrued Sums”).
In addition to any Accrued Sums owed, if Mr. Tangredi’s employment is terminated by us in the event of his disability or without cause or by Mr. Tangredi for good reason, he shall be entitled to:
(i) | an amount equal to the sum of (A) the greater of 150% of the base salary then in effect or $320,000 plus (B) the cash bonus and/or merit bonus, if any, awarded for the most recent year; |
(ii) | health and life insurance, a car allowance and other benefits set forth in the agreement until two years following termination of employment, and thereafter to the extent required by COBRA or similar statute; and |
(iii) | all stock options, to the extent they were not exercisable at the time of termination of employment, shall become exercisable in full. |
In addition to any Accrued Sum owed, in the event of termination upon death, Mr. Tangredi shall be entitled to (i) and (iii) above.
In addition to any Accrued Sums owed, in the event that Mr. Tangredi elects to terminate employment within one year following a change in control, he shall receive a lump sum payment equal to the sum of (a) the greater of his then current base salary or $210,000 plus (b) the cash bonus and merit bonus, if any, awarded in the most recent year. In addition, he will be entitled to (ii) and (iii) above.
The above amountsemployment agreement also contains customary covenants restricting the use of our confidential information and solicitation of employees, which are not necessarily indicativesimilarly applicable to our other executive officers. In addition we are obligated to indemnify Mr. Tangredi for any claims made against him in connection with his employment with us, to advance indemnification expenses, and maintain his coverage under our directors’ and officers’ liability insurance policy.
Under the employment agreement, we and Mr. Tangredi have agreed that we will retain an independent compensation consultant, whose recommendations shall be obtained by January 31, 2012 which may modify the compensation program for Mr. Tangredi and other officers, subject to certain conditions including approval of the amountsboard of directors. Notwithstanding the recommendation and board consideration, Mr. Tangredi has the right to continue the current terms of the employment agreement.
Scott G. Ehrenberg.We are party to an employment agreement with Mr. Ehrenberg, our Chief Technology Officer and Secretary. The employment agreement, dated May 24, 2011, sets forth Mr. Ehrenberg’s compensation level and eligibility for salary increases, bonuses, benefits, and option grants. Mr. Ehrenberg’s employment agreement provides for an initial term of two years with the term extending on the second anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. Mr. Ehrenberg’s initial base salary is $110,000, with an increase to $165,000 per annum after the date on which we obtain $10 million or more in equity financing . Additionally, at the discretion of our board of directors and its compensation committee, Mr. Ehrenberg may be eligible for an annual bonus which amount, if any, will not be below 50% of his effective base salary and not exceeding 100% of his then effective base salary; provided that, wouldunder certain extraordinary circumstances, Mr. Ehrenberg may be eligible for an annual bonus greater than 150% of his then-effective base salary. Mr. Ehrenberg is entitled to medical, disability and life insurance as generally offered to other and made available to other executive officers of the Company, and after the completion of this offering, 75% of the regular portion of Executive’s Health Benefit. In addition, Mr. Ehrenberg is entitled to four weeks of paid vacation annually, and reimbursement of certain business expenses including expenses for executive conferences or education.
After the completion of this offering, Mr. Ehrenberg is eligible to receive a one-time payment of $20,000 for each U.S. patent of which he is the originator and the first name listed on the patent as inventor of the intellectual property described in such patent. In addition to any other compensation which Mr. Ehrenberg may receive under the agreement, he will be granted options to purchase 40,000 shares of common stock at the end of each year or on the annual anniversary of the agreement, whichever is mutually acceptable to the Company and Mr. Ehrenberg. These options will be immediately exercisable, have been incurred had comparable transactions beena term of ten years, shall be exercisable for up to three years after termination of or resignation from employment (unless termination is for cause, in which event they shall expire on the date of termination).
If Mr. Ehrenberg’s employment is terminated for any reason, we will be obligated to pay him his accrued but unpaid base salary, bonus and accrued vacation pay, and any unreimbursed expenses (“Accrued Sums”).
In addition to any Accrued Sums owed, if Mr. Ehrenberg’s employment is terminated by us in the event of his disability or without cause or by Mr. Ehrenberg for good reason, he shall be entitled to:
(i) | an amount equal to the greater of the base salary then in effect or $175,000; |
(ii) | continuation of medical benefits set forth in the agreement until one year following termination of employment or resignation, and beyond such one year period to the extent required by COBRA or similar statute; and |
(iii) | all stock options, to the extent they were not exercisable at the time of termination of employment, shall become exercisable in full, and shall remain exercisable for a period of three years following the date of termination or resignation. |
In addition to any Accrued Sum owed, in the event of termination upon death, Mr. Ehrenberg shall be entitled to (i) and (iii) above.
In addition to any Accrued Sums owed, in the event that Mr. Ehrenberg elects to terminate employment within 6 months following a change in control, he shall be entitled to receive, within the later of ten days following the date on which the change in control occurs or the date on which he gives notice of his election to resign from employment, a lump sum payment equal to $400,000 plus cash bonus and equity, if any, awarded to Mr. Ehrenberg for the most recent year. In addition, he will be entitled to (ii) and (iii) above.
The employment agreement also contains customary covenants restricting the use of our confidential information and solicitation of employees, which are similarly applicable to our other executive officers. In addition we are obligated to indemnify Mr. Ehrenberg for any claims made against him in connection with his employment with us, to advance indemnification expenses, and maintain his coverage under our directors’ and officers’ liability insurance policy.
Patricia K. Tangredi.We are a party to an employment agreement with Patricia Tangredi, wife of Timothy Tangredi, our Chief Executive Officer. The employment agreement, as amended and restated on April 8, 2011, sets forth Ms. Tangredi’s compensation level and eligibility for salary increases, bonuses, benefits, and option grants. Ms. Tangredi’s employment agreement provides for an initial term of four years with the term extending on the fourth anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. Ms. Tangredi’s initial base salary is $120,000, with an increase to $150,000 per annum or such higher sum as our board of directors may set after the date on which we obtain $10 million or more in equity or debt financing. Ms. Tangredi is entitled to, and we will pay 50% of her, medical, vision, dental, accidental death and travel insurance as provided under company plans. In addition, Ms. Tangredi is eligible to receive four weeks of paid vacation annually.
In addition to any other compensation which she may receive under the agreement, Ms. Tangredi shall be granted options to purchase a minimum of 50,000 shares of our common stock which shall be issued at year end or upon the anniversary of this agreement, as the parties shall agree. These options shall be immediately exercisable, have a term of ten years, shall be exercisable for up to three years after termination of employment (unless termination is for cause, in which event they shall expire on the date of termination), and shall be subject to such additional terms and conditions as are then applicable to options granted under such plan provided they do not conflict with the terms set forth in the agreement.
If Ms. Tangredi’s employment is terminated for any reason, we will be obligated to pay her accrued but unpaid base salary, bonus and accrued vacation pay, and any unreimbursed expenses (“Accrued Sums”).
In addition to any Accrued Sums owed, if Ms. Tangredi’s employment is terminated by us in the event of her disability or without cause or by Ms. Tangredi for good reason, Ms. Tangredi shall also be entitled to:
(i) | an amount equal to the greater of the base salary then in effect or $150,000; |
(ii) | continuation of the health and other insurance coverage and other benefits set forth in the agreement until one year following termination of employment or resignation, and beyond such one year period to the extent required by COBRA or similar statute; and |
(iii) | all stock options, to the extent they were not exercisable at the time of termination of employment, shall become exercisable in full and shall remain exercisable for a period of three years following the date of termination or resignation. |
In addition to any Accrued Sum owed, in the event of termination upon death, Ms. Tangredi shall be entitled to (i) and (iii) above.
In addition to any Accrued Sums owed, in the event that Ms. Tangredi elects to terminate employment within six months following a change in control, she shall receive a lump sum payment equal to three times the sum of the greater of her then current base salary or $150,000. In addition, she will be entitled to (ii) and (iii) above.
The employment agreement also contains customary covenants restricting the use of our confidential information and solicitation of employees, which are similarly applicable to our other executive officers. In addition we are obligated to indemnify Ms. Tangredi for any claims made against her in connection with her employment with us, to advance indemnification expenses, and maintain her coverage under our directors’ and officers’ liability insurance policy.
Executive Compensation Agreement
On January 11, 2012, we entered into an Executive Compensation Agreement with independent parties. We believe thatTim Tangredi. Under this agreement, upon closing of the foregoing transactionsoffering and receipt by us of gross proceeds of $6 million or more , Mr. Tangredi’s accrued compensation through the closing date in the approximate amount of $1.05 million shall be paid with werea combination of (a) cash, which we estimate at this time to be approximately $380,000, which is intended to cover payment of income and other taxes due from the payment of such accrued compensation, and (b) shares of restricted common stock at a price equal to the price per share paid by investors in the public offering (which is assumed for purposes of this calculation to be $0.3 2 per share and which based on terms no less favorable than could have been obtained from independent third parties. this assumption would consist of an estimated 2,087,138 shares of common stock).
There are no material relationships between us and our directors or executive officers except as previously discussed herein.
Since the beginning of our last2008 fiscal year, we arehave not been a participant in any transaction, or proposed transaction, not disclosed herein in which any related person had or will have a direct or indirect material interest and in which the amount involved exceeds the lesser of $120,000 or one percent of our total assets at year end for the last two completed fiscal years.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Summary Financial Data” and our consolidated financial statements and therelated notes thereto includedappearing elsewhere in this prospectus. ThisIn addition to historical information, this discussion includesand analysis contains forward-looking statements that are subject toinvolve risks, uncertainties and other factors described under the captions “Risk Factors” and “Forward Looking Statements.” These factors could cause ourassumptions. Our actual results in 2008 and beyond tomay differ materially from those expressedanticipated in or implied by,these forward-looking statements as a result of certain factors, including, but not limited, to those forward-looking statements.
set forth under “Risk Factors” and elsewhere in this prospectus.We have developed and patented a nano-structure polymer technology, which is being commercialized in products based on the functionality of these materials. TheWe believe the applications of which hasour technology have promise in a number of diverse market segments and applications.products.
The initial product focus of the Company is ConsERV™, an energy recovery ventilator. Our primary focus is to expand our marketing and sales of our ConsERV™ product.
Our growthWe also have new product vehicleapplications in various stages of developmental. We believe that three of these product applications, including an advanced air conditioning system which is projected to be more energy efficient and have lower emissions compared to current HVAC equipment, a sea-water desalination product and an electrical energy storage device, may be brought to market in the foreseeable future if we receive adequate capital funding.
REVENUES
We generate our revenues primarily from the sale of our ConsERV™ products in largely commercial HVAC markets with a small amount of revenues coming from residential sales to consumers and HVAC distributors. Sales channels for our ConsERV™ products include OEMs, distributors, retailers, and consumers. We also occasionally look to license our technology to strategic partners and sell various prototypes of other product applications that use our polymer technology.
Our near term revenue growth is dependent on continued sales from (i) more seasoned independent sales representatives, (ii) a greater number of independent sales representatives, (iii) fulfilling the continued expansionventilation needs of the commercializationgrowing “energy consultant” marketplace which work to lower their client’s energy costs and emissions, and (iv) from the Company’s own ‘customer direct’ sales activities, all of which focus on the sale of products primarily to commercial users with a multiple time, industry award winning Heating, Ventilationgrowing emphasis on low rise structures (small commercial buildings, multi-purpose structures, and Air Conditioning (“HVAC”) productresidences). In addition, we call “ConsERV". ConsERV8 has been validated byand our independent sales representative sales force will work to secure orders for ConsERV™ “core only” sales from HVAC equipment manufacturers, and from distribution firms servicing the equipment needs of the HVAC installer community. We will also work to create license/supply relationships with HVAC or ERV OEMs preferably having a dominant presence in existing direct related sales channels.
COST OF SALES
Our cost of sales consists primarily of materials (including freight), direct labor, and outsourced manufacturing expenses incurred to produce our ConsERV™ products.
We are dependent on third parties to reduce,manufacture the key components needed for our nano-structured based materials and value added products made with these materials. Accordingly, a supplier’s failure to supply components in most cases, initial HVAC capital equipment costs, lower on-going operating costs, reduce peak energy usage, improvea timely manner, or to supply components that meet our quality, quantity and cost requirements or our technical specifications, or the environment by reducing theinability to obtain alternative sources of these components on a timely basis or on terms acceptable to us, would create delays in production of harmful CO2 gases, and improve Indoor Air Quality (“IAQ”)our products or increase our unit costs of production. Certain of the components contain proprietary products of our suppliers, or the processes used by our suppliers to meet or exceed the current American Societymanufacture these components are proprietary. If we are required to replace any of Heating, Refrigerating and Air-Conditioning Engineers ("ASHRAE") building guidelines outlinedour suppliers, while we should be able to obtain comparable components from alternative suppliers at comparable costs, this would create a delay in their Standard 62.1 and 62.2.
8The ConsERV product has received the “2006 Innovation Award” presented byAHRI and ASHRAE. ConsERV was presented a first place award in July 2007 by ASHRAE for “Nanotechnology in Public Building Application” for the ConsERV installation at the Tampa, FL. Museum of Science and Industry.production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses consist primarily of payroll and related benefits, share-based compensation, professional fees, marketing and other infrastructure costs such as insurance, information technology and occupancy expenses.
RESULTS OF OPERATIONS
December 31, 2010 Compared to December 31, 2009
The following table sets forth, for the periods indicated, certain data derived from our Statements of Operations:
| | Year Ended December 31, | |
| | 2010 | | | 2009 | |
| | | | | as restated | |
Revenues | | $ | 3,342,468 | | | $ | 1,531,215 | |
Percentage of revenues | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | |
Cost of goods sold | | $ | 2,290,041 | | | $ | 1,071,098 | |
Percentage of revenues | | | 68.5 | % | | | 70.0 | % |
| | | | | | | | |
Research and development expenses, net grant revenue | | $ | 238,182 | | | | 6,600 | |
Percentage of revenues | | | 7.1 | % | | | .4 | % |
| | | | | | | | |
Selling, general and administrative expenses | | $ | 2,693,092 | | | $ | 3,217,992 | |
Percentage of revenues | | | 80.6 | % | | | 210.2 | % |
| | | | | | | | |
Interest expense | | $ | 209,550 | | | $ | 621,574 | |
Percentage of revenues | | | 6.3 | % | | | 40.6 | % |
| | | | | | | | |
Change in fair value of warrant liability | | $ | (618,801 | ) | | $ | 3,731,694 | |
Percentage of revenues | | | 18.5 | % | | | 243.7 | % |
| | | | | | | | |
Net loss | | $ | (1,433,593 | ) | | $ | (7,117,076 | ) |
Percentage of revenues | | | (42.9 | )% | | | (464.8 | )% |
Revenues: Total revenues for the year ended December 31, 2010 and 2009 were $3,342,468 and $1,531,215 respectively, an increase of $1,811,253, or 118.3%. The increase in revenues for 2010 is primarily attributable to the 6% increase in the sales price of our ConsERV™ product, introducing new products (C-series and semi-custom units) to the ConsERV™ line, generating additional sales in new price categories and an increase in the number and size of its sales transactions in 2010 compared to 2009. We currently generatealso attribute the sales increase to a realignment of and an increase in the number of our independent sales representatives. During the year ended December 31, 2010 and 2009, seven and five customers accounted for approximately 61% and 66% of revenues, respectively.
Cost of Goods Sold: Cost of goods sold was $2,290,041 and $1,071,098 or 68.5% and 70.0% of revenues for the years ended December 31, 2010 and 2009, respectively. The increase in 2010 of $1,218,943 is primarily due an increase in sales. Gross profit margin increased from 30% in 2009 to 31.4% in 2010. The increase in the gross profit margin was due to a decrease in the cost of materials due to improved production processes, volume pricing and new suppliers. We also were able to reduce labor costs by approximately 10% through the salesimplementation of our ConsERV product,lean manufacturing and licensingQRM processes. The effect of our nano-structed polymer materials/processes.these cost savings that were achieved through these measures was partially offset by an increase in contract labor of approximately $80,000 and an overall increase in freight costs by approximately $100,000.
Our main external focus is to continue to expand the sales channels for ConsERV while the main internal focus is to continue to improve ConsERV’s performance in its current application (HVAC air-side ventilation) while expanding its use into a complete heating/cooling system which is expected to use less energy than consumed in today’s commercial HVAC equipment.
Other projected uses include – but are not limited to - providing in sea water desalination, and allow for the storage of electrical energy in form factors with energy densities which are anticipated to exceed products currently available.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were $2,693,092 for the year ended December 31, 2010, compared to $3,217,992 for the year ended December 31, 2009, a decrease of $524,900 or 16.3%. This decrease is primarily due to a decrease in stock-based compensation of approximately $785,000 which was partially offset by an increase in professional fees of approximately $174,000 which was due to hiring an investor relations firm in 2010 and additional consultants. The Company also had an increase in payroll expenses of approximately $106,700 for the addition of two new managerial employees.
Interest Expense: Interest expense was $209,550 for the year ended December 31, 2010 compared to $621,574 for the same period of 2009, a decrease of $412,024 or 66.3%. During the year ended December 31, 2009, interest expense was primarily related to convertible notes issued from December 2007 to January 2008, and comprised of approximately $172,000 of stated interest expense on the notes, approximately $413,000 in expense relating to warrants issued to induce conversion of principal and $30,100 in expense related to the amortization of the discount and embedded beneficial conversion feature. The decrease in interest expense is due to the fact that the beneficial conversion feature and discount on the notes payable became fully amortized in January 2009 and outstanding convertible debt was reduced by $275,000 in 2010.
Change in Fair Value of Warrant Liability: The change in the fair value of warrant liability increased by $4,350,495 for the year ended December 31, 2010 to income of ($618,801) from expense of $3,731,694 in the prior year due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model.
Net Loss: Net loss for the year ended December 31, 2010 decreased by $5,683,483 to $1,433,593 from $7,117,076 for the year ended December 31, 2009. The decrease in net loss is primarily due to the increases in sales and the change in fair value of the warrant liability net of decreases in interest expense and selling, general and administrative expenses.
| |
| THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED MARCH 31, 2007 |
66
Summary of Three Months Ended September 30, 2011 Results of Operations
The following table sets forth, for the periods indicated, certain data derived from our Statements of Operations and certain of such data expressed as a percentage of revenues:
| | Three Months Ended September 30, | |
| | 2011 | | | 2010 | |
| | | | | as restated | |
Revenues | | $ | 625,949 | | | $ | 952,374 | |
Percentage of revenues | | | 100.0 | % | | | 100.0 | % |
Cost of goods sold | | $ | 466,271 | | | $ | 755,034 | |
Percentage of revenues | | | 74.5 | % | | | 79.3 | % |
Research and development expenses, net of grant proceeds | | $ | (3,838 | ) | | $ | - | |
Percentage of revenues | | | 0.6 | % | | | 0.0 | % |
Selling, general and administrative expenses | | $ | 487,961 | | | $ | 697,099 | |
Percentage of revenues | | | 78.0 | % | | | 73.2 | % |
Interest expense | | $ | 446,505 | | | $ | 55,933 | |
Percentage of revenues | | | 71.3 | % | | | 5.9 | % |
Change in fair value of warrant liability | | $ | 126,008 | | | $ | 611,231 | |
Percentage of revenues | | | 20.1 | % | | | 64.2 | % |
Net loss | | $ | 895,384 | | | $ | 1,166,923 | |
Percentage of revenues | | | 143.0 | % | | | 122.5 | % |
REVENUES: Total revenues for the three months ended March 31, 2008September 30, 2011 and 20072010 were $224,267$625,949 and $184,208,$952,374, respectively, an increasea decrease of $40,059,$326,425 or 21.7%34%. The increasedecrease in revenues in the 2011 period is primarily attributabledue to highera decrease in sales of our ConsERV productsthe ConsERV™ cores of approximately $250,000 and interest income earneda decrease in ConsERV™ System sales of approximately $77,000 as a result fluctuations in the financial markets in late July thru mid August which found equipment decisions being postponed or placed on proceeds fromhold thus lengthening the private offering that closed in January 2008.“quote to ship” timeline.
COST OF GOODS SOLD: Cost of goods sold increased $27,285decreased $288,763 to $159,933$466,271, as a result of lower sales and lower costs, and represented 71.3%74% of revenues, for the three months ended March 31, 2008September 30, 2011 compared to $132,648$755,034 or 72.0%79% of revenues for the three months ended March 31, 2007.September 30, 2010. Gross profit margin increased from 21% in 2010 to 26% in 2011. The decreaseincrease in percentage in 2008gross profit margin is primarily the result of lower polymer costs.due to reduced material costs due to improved vendor pricing and an increase in unit productivity per labor hour.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $1,405,749$487,961 for the three months ended March 31, 2008 increased $693,506September 30, 2011 decreased $209,138 from $712,243$697,099 in the same period of 2007. This increase is2010 or 30%. The decrease was primarily attributabledue to a decrease in consulting expenses of approximately $39,400, a decrease of approximately $32,500 in stock based compensation and a $125,000 decrease in payroll expenses due to an assignment of staff to research and development activities resulting in a reallocation of payroll costs. The research and development expense associated with a warrant granted to an executive as discussed in Note 9 to the accompanying financial statements for the period ended March 31, 2008, partiallyreassignment of these employees was offset by lower consulting fees.grants received for research purposes.
INTEREST EXPENSE: Interest expense was $859,220$446,505 for the three months ended March 31, 2008, an increase of $828,301September 30, 2011 compared to $30,919$55,933 for the same period of 2007. This2010, an increase is primarilyof $390,572. During the resultthree months ended September 30, 2011, $341,139 of additionalinterest expense was related to the amortization of the note discount and embedded beneficial conversion feature and discount on outstanding notes payable.a convertible note.
CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability decreased by $485,223 for the three months ended September 30, 2011 to $126,008 from $611,231 in the prior period ended September 30, 2010 due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model. See Note 10 in the accompanying Financial Statements.NET LOSS: Net loss for the three months ended March 31, 2008 increasedSeptember 30, 2011 decreased by $1,509,033$271,539 to $2,200,635,$895,384 from $691,602$1,166,923 for the three months ended March 31, 2007.September 30, 2010. The increasedecrease in net lossincome is primarily due to increasesthe decrease in compensation expense and interest expense.the change in the fair value of the warrant liability as discussed above.
| |
| YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006 |
Summary of Nine Months Ended September 30, 2011 Results of Operations
The following table sets forth, for the periods indicated, certain data derived from our Statements of Operations and certain of such data expressed as a percentage of revenues:
| | Nine Months Ended September 30, | |
| | 2011 | | | 2010 | |
| | | | | as restated | |
Revenues | | $ | 2,608,722 | | | $ | 2,369,828 | |
Percentage of revenues | | | 100.0 | % | | | 100.0 | % |
Cost of goods sold | | $ | 1,973,835 | | | $ | 1,626,556 | |
Percentage of revenues | | | 75.7 | % | | | 68.6 | % |
Research and development expenses, net of grant proceeds | | $ | 9,317 | | | $ | - | |
Percentage of revenues | | | 0.4 | % | | | 0.0 | % |
Selling, general and administrative expenses | | $ | 2,202,771 | | | $ | 2,286,013 | |
Percentage of revenues | | | 84.4 | % | | | 96.5 | % |
Interest expense | | $ | 1,026,945 | | | $ | 157,669 | |
Percentage of revenues | | | 39.4 | % | | | 6.7 | % |
Change in fair value of warrant liability | | $ | 783,944 | | | $ | 284,165 | |
Percentage of revenues | | | 30.1 | % | | | 12.0 | % |
Net loss | | $ | 3,385,852 | | | $ | 1,948,575 | |
Percentage of revenues | | | 129.8 | % | | | 82.2 | % |
REVENUES: Total revenues for the yearnine months ended December 31, 2007September 30, 2011 and 20062010 were $870,153$2,608,722 and $913,334,$2,369,828, respectively, a decreasean increase of $43,181,$238,894 or 4.7%10%. The decreaseincrease in revenues in the 2011 period is primarily attributable to a reductionan increase in grant income associated with a one-time grant that we receivedConsERV™ System sales by 23%. The increases were due to generating additional sales in 2006product enhancements and loweran increase in the number and size of its sales transactions in 2011 compared to 2010. During the nine months ended September 30, 2011 and 2010, four and six customers accounted for approximately 55% and 61% of our ConsERV product, partially offset by the sale of a water desalination prototype.revenues, respectively.
COST OF GOODS SOLD: Cost of goods sold decreased $11,035increased $347,279 to $637,032$1,973,835, as a result of increased sales and costs, and represented 73.2%76% of revenues, for the yearnine months ended December 31, 2007September 30, 2011 compared to $648,067$1,626,556 or 71.0%69% of revenues for the yearnine months ended December 31, 2006.September 30, 2010. Gross profit margin decreased from 31% in 2010 to 24% in 2011. The decrease in the gross profit margin was due to an increase in the percentagecost of materials of approximately $351,000. The Company also had an increase in 2007 is primarily the resultcost of incurring comparable direct payroll expenses in both periods with lower sales in 2007.labor by approximately $47,700.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $1,871,030$2,202,771 for the yearnine months ended December 31, 2007 decreased $213,513September 30, 2011 represented a decrease of $83,242 from $2,084,543 for$2,286,013 in the year ended December 31, 2006. Thissame period of 2010 or 4%. The decrease iswas primarily attributabledue to lower legal fees associated with the patent interference proceeding discusseda decrease in Note 11 to the accompanying financial statements for the period ending December 31, 2007.consulting expenses by approximately $142,000.
INTEREST EXPENSE: Interest expense was $596,083$1,026,945 for the yearnine months ended December 31, 2007,September 30, 2011 compared to $157,669 for the same period of 2010, an increase of $476,193 compared$869,276. During the nine months ended September 30, 2011, $791,707 of interest expense was related to $119,890 for the year ended December 31, 2006. This increase is primarily the result of additional amortization of the note discount and embedded beneficial conversion feature and discount on outstanding notes payable.a convertible note.
CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability increased by $499,779 for the nine months ended September 30, 2011 to $783,944 from $284,165 in the prior period ended September 30, 2010 due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model. See Note 10 in the accompanying Financial Statements.
NET LOSS: Net loss for the yearnine months ended December 31, 2007September 30, 2011 increased by $294,826$1,437,277 to $2,233,992,$3,385,852 from $1,939,166$1,948,575 for the yearnine months ended December 31, 2006September 30, 2010. The increase in net loss is primarily due to lower revenues and anthe increase in interest expense partially offset by a decreaseand the change in legal expenses.fair value of warrant liability as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed itsWe finance our operations since inception primarily through private sales of itsour ConsERV™ products, sales of our common and preferred stock, the issuance of convertible promissory notes, unsecured promissory notes and license agreements,agreements.
Our historical revenues have not been sufficient to sustain our operations. We have not achieved profitability in any year since inception and we expect to continue to incur net losses and negative cash it receivedflow from operations until we can produce sufficient revenues to cover our costs, which are not expected for several years. Furthermore, even if we achieve our goal of selling a greater number of ConsERV™ units, we anticipate that we will continue to incur losses until we can cost-effectively produce and sell our products to a wider market. Our profitability will require the successful commercialization of our ConsERV™ products and any future products we develop. No assurances can be given when this will occur.
We have filed a registration statement on Form S-1 of which this prospectus is a part of with the SEC for a contemplated public offering of common stock for gross proceeds, based on an assumed midpoint offering price of $0.3 2 per share, of $10 .5 million dollars. As disclosed in our registration statement, we intend to use the proceeds of the public offering for working capital, general corporate purposes and repayment of certain outstanding indebtedness.
During the year ended December 31, 2009 eighteen holders converted their convertible notes, having an aggregate outstanding principal balance of $2,350,000 plus accrued interest of $361,600, into 13,553,822 shares of common stock. Some of the holders converted during periods in which we were offering an additional warrant as an inducement to convert. In accordance with said offers we issued additional warrants to purchase 1,665,000 shares of common stock, exercisable immediately at $0.25 per share and valued at $126,367, and 575,000 warrants, exercisable immediately at $0.75 per share valued at $286,641 which was recorded as interest expense during the twelve months ended December 31, 2009.During 2009, four investors holding convertible notes with an aggregate outstanding principal balance of approximately $450,000 at December 31, 2008 notified us that they were asserting their rights to receive payment of the principal and interest pursuant to the terms of the convertible notes. In June of 2009, three of these investors, holding an aggregate principal note balance of $250,000, entered into a confession of judgment with us. Under that agreement, the three investors had the right, should we fail to pay all principal and interest due pursuant to their convertible notes on or before September 11, 2009, to file the confession of judgment with the court and seek to secure a judgment against us in the amount of all principal and interest due under their convertible notes together with the reasonable cost and expense of collection. All accrued interest and principal related to the three convertible notes, $289,600 in the aggregate, was paid in full by us on or before September 11, 2009. In July 2009, the fourth investor, holding a convertible note in the principal amount of $200,000, agreed to extend said note to September 2009. In November 2009, we modified the convertible note with this investor to extend the maturity date of said note to July 2010, pay the principal amount due in eight monthly installments commencing December of 2009, end the accrual of interest as of November 20, 2009 and convert the $34,861 in interest due under the convertible note as of November 20, 2009 into 170,137 shares of our common stock. During the year ended December 31, 2010, $75,000 of the outstanding balance was repaid and $75,000 was converted into 325,000 shares of common stock.
As of December 31, 2010, $50,000 of principal on the convertible notes was outstanding, in default and due and payable in full. On March 23, 2011 this note was paid in full by us. As of the date of this filing all convertible notes issued under the Financing have been paid in full or converted.
In July 2009, we secured a loan of $300,000 from an investor. Pursuant to the terms of the note, we are to pay the note holder simple interest at the rate of seven percent per annum commencing on July 17, 2009 with all interest and principal due there under payable in cash on or before January 16, 2011. On December 30, 2010, the investor elected to apply all of the proceeds due and payable under the note, including all accrued interest, to purchase our common stock. Pursuant to this transaction, the investor subscribed for and purchased 1,268,472 shares of Common Stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $329,803.
In December 2009, we secured a loan in the principal amount of $1,000,000 from an investor. Pursuant to the terms of this note, we are to pay the holder simple interest at the rate of ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 17, 2010. The note’s maturity date was extended to April 30, 2011. On March 22, 2011, we entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note (“2011 Convertible Note”, collectively “Exchange Agreements”) with the this investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the Investor amended and restated the $1,000,000 unsecured promissory note issued by us to the Investor on or about December 17, 2009 (“Original Note”) to, among other things, extend the term to March 22, 2012. Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 will be paid on March 22, 2012. Subject to the terms and conditions of the 2011 Convertible Note, including limitations on conversion, the outstanding principal and interest under the 2011 Convertible Note will automatically convert into shares of our common stock at the then-effective conversion price upon the closing of a qualified firm commitment underwitten public offering or may be voluntarily converted by the investor at anytime during the term. The initial conversion price is $0.26 per share. Any principal or interest which is not converted will be repaid by us at the earlier of a qualified offering, (as defined in the “2011 Convertible Note” which is filed as an exhibit to the Form 8K filed with the Securities and Exchange Commission on March 28, 2011 and is incorporated by reference to this annual report on Form 10K), or March 22, 2012. Pursuant to and during the term of the 2011 Convertible Note, we will not issue or allow to exist any obligation for borrowed money, except for subordinate indebtedness in payment and priority, trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate, or unsecured and subordinate working capital guarantees provided by, the Export Import Bank of the United States (the “EXIM Bank”), and indebtedness evidenced by the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000.
On March 22, 2011, in connection with the exerciseabove Exchange Agreements, we entered into an Amendment to 2007 Warrant and an Amendment to 2009 Warrant to extend the term of warrantsthe Stock Purchase Warrant, dated on or about December 31, 2007, and the sale of certain fuel cell assets. The Company also received proceeds from various fuel cell contracts.
From 2000 through 2008, the Company has received funding of approximately $6,000,000 from private sales of its common and preferred stock to individuals and corporations, approximately $4,216,000 from the issuance of convertible notes and approximately $2,000,000 from licensing of its ConsERV product.
During 2005 and 2006, the Company received funding of approximately $1,265,600, from the issuance of 8% convertible promissory notes, secured by certain tangible assets. The Company settled these notes during 2007 by converting $840,547term of the notesStock Purchase Warrant, dated on or about March 12, 2009, respectively, to March 22, 2016 and to provide for cashless exercise unless such warrant shares are registered for resale under a registration statement. In addition, on March 22, 2011, we issued an additional Stock Purchase Warrant to the related interest into 3,258,323Investor to purchase 1,000,000 shares of our common stock at $0.45 per share, exercisable commencing on the earliest of the consummation of the qualified offering (as defined in the Exchange Agreements), the date of conversion of the 2011 Convertible Note in full, or the date of conversion of the 2011 Convertible Note by the Investor in the greatest number of shares of our common stock not to exceed 9.99% beneficial ownership of our outstanding common stock and repaying $425,000terminating on March 22, 2016.
The 2011 Convertible Note is a hybrid financial instrument that blends characteristics of both debt and equity securities. The note embodies settlement alternatives to the notesholder providing for either redemption of principal and interest in cash.
From November 2007 through January 2008,cash (forward component) or conversion into our common stock (embedded conversion feature). The forward component was valued using the Company consummated a private placement offering and received fundingpresent value of $2,950,000discounted cash flows arising from the issuance of 9% convertible promissory notes, secured by patents, with maturity dates from December 2008 through January 2009. Warrants with acontractual principal and interest payment terms and the embedded conversion feature was valued using the Monte Carlo simulation method. The fair value of $1,566,563the 2011 Convertible Note was estimated to be $1,964,905 on the date of the exchange, which resulted in a loss on extinguishment of debt of $964,905. Further, in accordance with ASC 470-20-25 and ASC 470-50-40, the net premium of $964,905 associated with the 2011 Convertible Note was reclassified to capital in excess of par value under the presumption that such net premium represented a capital contribution. Consequently, the 2011 Convertible Note is being carried at face value. The fair value of the additional warrant to purchase 1,000,000 shares and the value associated with the previously issued warrants that were amended was determined to be $716,890 using the Black-Scholes option model and is included in the aggregate loss on extinguishment of $1,681,795. Since the loan is held by a related party, the loss on extinguishment has been treated as a capital transaction and, as a result, this transaction had no net effect on capital in excess of par value.
Also, on March 22, 2011, we entered into a 10% Note and Warrant Purchase Agreement, Secured Convertible Promissory Note and Patent Security Agreement (“Financing Agreements”) with the Investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the Investor has provided a bridge loan in the amount of $1,500,000 (“Loan”) to us, which will is secured by all patents, patent applications and similar protections and all rents, royalties, license fees and “accounts” with respect to such intellectual property assets (“Collateral”). Pursuant to the Secured Convertible Promissory Note (“Secured Note”), interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 is due and payable on March 22, 2012, but repayment is accelerated upon a qualified firm commitment underwritten public offering (as defined in the note). In the event of such qualified offering, and subject to the terms and conditions of the Secured Note, the outstanding principal and interest under the Secured Note will automatically convert, subject to the limitations on conversion described in the note, into shares of our common stock at the then-effective conversion price upon the closing of such qualified offering. The initial conversion price is $0.26 per share. Any principal or interest which is not converted will be repaid by us at the earlier of a qualified offering or March 22, 2012. No cash fees were paid to any party to the transaction in exchange for lending the money.
On March 22, 2011, in connection with the Financing Agreements, we issued a Stock Purchase Warrant to the Investor to purchase 3,000,000 shares of our common stock at $0.45 per share exercisable until March 22, 2016. The Warrant was fair valued on the date of issuance, which amounted to $1,204,787. The warrant value was recorded as a debt discount based on the relative fair value of the warrant to the total proceeds received, which amounted to $668,142. The Warrant was fair valued using the Black-Scholes valuation model. In addition, the debt contained a beneficial conversion feature, which was valued at the date of issuance at $2,019,231; however, since this amount is in excess of the net value of the debt less the warrant discount, the beneficial conversion feature will be limited to $831,859 and recorded as a discount on the loan. The total debt discount of $1,500,000 is being amortized using the effective interest method over the 12-month term of the Secured Note. For the three and nine month periods ended September 30, 2011, we recognized $341,139 and $791,707, respectively, in additional interest expense representing amortization of this debt discount.
Pursuant to and during the term of the Secured Note, we will not issue or permit to exist any obligation for borrowed money, except for trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate indebtedness to, or unsecured and subordinate working capital guarantees provided by, the EXIM Bank, the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000, the Amended and Restated Convertible Promissory Note, dated March 22, 2011, issued to the investor in the principal amount of $1,000,000 and other unsecured indebtedness for borrowed money in an amount not to exceed $750,000.
Pursuant to the Patent Security Agreement issued in connection with the Note and Warrant Purchase of March 22, 2011, we will not, without the investor’s prior consent, sell, dispose or otherwise transfer all or any portion of the Collateral, except for license grants in the ordinary course of business. In addition, we will take all actions reasonably necessary to prosecute to allowance applications for patents and maintain all patents, and to seek to recover damages for infringement, misappropriation or dilution of the Collateral with limited exceptions.
In connection with such qualified offering, and subject to the terms and conditions of the Convertible Note, we will use reasonable efforts to include the Investor’s securities in such offering.
We secured a loan from an investor in the principal amount of $620,000. Pursuant to the terms of the note, we are to pay the holder simple interest at the rate ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before August 10, 2010, which has been extended to May 31, 2011. May 12, 2011, the investor elected to apply all of the proceeds due and payable under the promissory note, including all accrued interest, to the purchase of the Company’s Common Stock. Pursuant to this transaction, the investor subscribed for and received 2,667,503 shares of Common Stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $693,550. As part of the purchase, the investor also received a five-year warrant to purchase 962,500 shares of Common Stock, at an exercise price of $0.25$0.45 per share accompanied the promissory notes. These warrants vestshare. The warrant is immediately exercisable and expire December 2012 through January 2013. At maturity, the lender has the optionsubject to adjustment for standard anti-dilution events, including but not limited to stock dividends, split-up, reclassification or combination of receiving paymentCompany’s shares, exchange of any principal and accrued interest due under the notes in either cashstock for other Company stock, or common stockcertain capital reorganizations or reclassification of the Company. Ifcapital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, as part of this transaction, the lender opts for payment in the form of common stock, it will bewarrants issued at the rate of one share per $0.20 of outstanding principalto this investor on December 20, 2007 and interest. The Company may, at any time prior to maturity, pay all interest and principal due under the note in cash. During the three months ended March 31, 2008, the Company issued common stock and warrants of $35,000 to pay for certain offering costs.
The Company has also issued stock options and warrants to certain employees and third party consultants for payment of services in lieu of cash. During the years ended December 31, 2007 and 2006,were amended to include a cashless exercise provision.
We expect to repay all of our outstanding convertible notes, in cash secured from the Company issued options and warrantsclosing of $358,863 and $558,521, respectively,this offer . If we do not consummate this offering, or do not sell a sufficient number of our shares pursuant to employees and consultants in lieu of cash for services rendered. During the years ended December 31, 2007 and 2006, the Company issued common stock of $217,000 and $33,000, respectively, in lieu of cash for services received. Subsequentthis offering, at maturity, we may not be able to March 31, 2008, the Company granted an executive a fully vested warrant to purchase 3,000,000 sharesrepay all or any of the Company’s common stockoutstanding notes when due without severely impacting our ability to continue operations and we may not be able to secure additional financing to repay the notes on acceptable terms, if at all. Should we be unable to repay or renegotiate the notes, as an exercise pricealternative, management could attempt to renegotiate the repayment terms of $.36 per share for services performed.the notes and seek extension of the maturity dates. There is no guarantee that, if we should need to renegotiate these notes, any negotiated terms we may be able to secure would be favorable to us. Unfavorable terms, in either a financing transaction or a debt renegotiation, could adversely impact our business, financial condition and/or results of operations. Should we be unable to repay the loan and unsuccessful in securing additional financing or renegotiating the $1.5 million dollar secured convertible note the holder would have the option to foreclose on all of our patents and patent applications which would likely result in the failure of our business.
Any future financing may result in substantial dilution to existing shareholders, and future debt financing, if available, may include restrictive covenants or may require us to grant a lender a security interest in any of our assets not already subject to an existing security interest. To the extent that we attempt to raise additional funds through third party collaborations and/or licensing arrangements, we may be required to relinquish some rights to our technologies or products currently in various stages of development, or grant licenses or other rights on terms that are not favorable to us. Any failure by us to timely procure additional financing or investment adequate to fund our ongoing operations, including planned product development initiatives and commercialization efforts, will have material adverse consequences on our financial condition, results of operations and cash flows.
If we do not consummate this offering, we will be dependent upon our existing cash of $423,908 at September 30, 2011, cash generated from product sales, and additional issuances of our securities, in order to finance our operations through the next 12 months. These operational expenses include debt service on a principal amount of $2,500,000 in outstanding indebtedness, and other contractual obligations amounting to $276,695. We must raise additional capital in the amount of approximately $8.9 million, net of expenses, during the next eighteen months in order to pay down existing debt, secure new patents for innovative applications of our core technology, purchase equipment, and fund our working capital requirements in accordance with our existing plans through July 2013. This additional capital would be provided by the successful completion of the offering under this prospectus. If we are unable to raise these funds, we may be required to delay our development plans and curtail our expenditures.
WeThe accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the nine months ended September 30, 2011, the Company incurred a net loss of $3,385,852 and has incurred significant losses since inceptioninception. As of September 30, 2011, the Company has an accumulated deficit of $39,023,814, negative working capital of $2,532,426 and expect to incur substantial lossesa stockholders’ deficit of $6,097,657. The Company used $787,910 and $1,332,591 of cash from operations during the nine months ended September 30, 2011 and 2010, respectively, which was funded by proceeds from debt and equity financings. There is no assurance that such financing will be available in the future. In view of these matters, there is substantial doubt that the Company will continue as a going concern. The Company is currently pursuing the following sources of short and long-term working capital:
| 1. | We are currently holding preliminary discussions with parties who are interested in licensing, purchasing the rights to, or establishing a joint venture to commercialize, certain applications of our technology. |
| 2. | We are seeking growth capital from certain strategic and/or government (grant) related sources. In addition to said capital, these sources may, pursuant to any agreements that may be developed in conjunction with such funding, assist in the product definition and design, roll-out, and channel penetration of our products. As part of this step we will attempt to take advantage of key programs associated with the recently enacted American Recovery and Reinvestment Act of 2009. |
Our ability to continue as a going concern is highly dependent on our ability to obtain additional sources of financingcash flow sufficient to fund our working capital requirements, which primarily include payroll, product development and product commercialization-related costs.requirements. However, there can be no assurance that we will be successful in our efforts to secure such cash flow. Any failure by us to timely procure additional financing or investment adequate to fund our ongoing operations, including planned product development initiatives and commercialization efforts, will have a materiallymaterial adverse consequenceconsequences on our business operations and our consolidated financial position,condition, results of operations and cash flows.
Our financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.
As of and for the Three Months Ended March 31, 2008
Cash and cash equivalents and cash held in escrow at Marchas of December 31, 2008 were $1,288,6222010 was $304,656 compared to $1,504,232 at$1,085,628 as of December 31, 2007.2009. Cash is primarily used to fund our working capital requirements and net operating losses. Atrequirements.
As of December 31, 2007,2010, we had an increase in working capital of $596,118, resulting in a working capital deficit of $2,861,488 compared to $2,265,370 of working capital deficit as of December 31, 2009. During the year ended 2010, we used approximately $1,180,800 of cash held in escrow represented $1,000,000to fund our operations, approximately $100,000 to repay debt, and approximately $113,300 to purchase property and equipment. These uses of cash are partially offset by approximately $620,000 of proceeds fromreceived during 2010 in connection with the private offering, whichissuance of debt.
Net cash used in operating activities was released from escrow whenapproximately $1,180,800 for the transaction closedyear ended December 31, 2010 compared to approximately $818,000 for the same period in January 2008.
2009. During the three monthsyear ended MarchDecember 31, 2008,2010, we used additional cash to fund operating losses of approximately $1,879,000 and working capital requirements of approximately $2,861,500 compared to the same period in 2009.
Net cash used in investing activities was approximately $120,000 for the year ended December 31, 2010 compared to approximately $41,000 for the same period in 2009. During the year ended December 31, 2010, we used additional cash to purchase equipment.
Net cash provided by financing activities was approximately $520,000 for the year ended December 31, 2010 compared to approximately $1,918,000 for the same period in 2009. During the year ended December 31, 2010, we received net proceeds of $466,000 after expenses$620,000 from the issuance of $34,000 in connection with the fourth and final closingdebt net of our private offering.
As$100,000 of March 31, 2008, we had a working capital deficit of $871,415compared to a working capital deficit of $334,449 as of December 31, 2007. The decrease in working capital was primarily due an increase in current debt, partially offset by timing differences in customer collections and vendor payments.
We used $581,610 of cash to fund our operating activities in the three months ended March 31, 2008 compared to $221,674 of cash used to fund our operating activities in three months ended March 31, 2007. The increase in cash used to fund our operating activities was primarily due to timing differences in customer collections and vendor payments.
During the three months ended March 31, 2008, financing activities provided $1,366,000 of cash primarily due to net proceeds received from our private placement offering of $1,466,000s, partially offset by payments on our outstanding notes payable.
As of andCash Flows for the Fiscal YearNine Months Ended December 31, 2007September 30, 2011 Compared to September 30, 2010
The following table sets forth, for the periods indicated, selected cash flow information:
| | Nine Months Ended September 30, | |
| | 2011 | | | 2010 | |
| | | | | as restated | |
Cash flows used in operating activities | | $ | (787,910 | ) | | $ | (1,332,591 | ) |
Cash flows used in investing activities | | | (92,442 | ) | | | (23,981 | ) |
Cash flows provided by financing activities | | | 999,604 | | | | 520,000 | |
Net increase (decrease) in cash and cash equivalents | | $ | 119,252 | | | $ | (836,572 | ) |
Cash and cash equivalents and cash held in escrow as of December 31, 2007 were $1,504,232September 30, 2011 was $423,908 compared to $204,799$249,056 as of December 31, 2006.September 30, 2010. Cash is primarily used to fund our working capital requirements.
Net cash used in operating activities was approximately $787,900 for the nine months ended September 30, 2011 compared to approximately $1,332,600 for the same period in 2010. During the nine months ended September 30, 2011, we used additional cash to fund operating losses of approximately $3,385,900 (of this amount approximately $2,530,400 related to non-cash expenses) and working capital requirements of approximately $2,532,400 compared to the same period in 2010.
Net cash used in investing activities was approximately $92,400 for the nine months ended September 30, 2011 compared to approximately $24,000 for the same period in 2010. During the nine months ended September 30, 2011, we used additional cash for patents and to purchase equipment.
Net cash provided by financing activities was approximately $999,600 for the nine months ended September 30, 2011 compared to approximately $520,000 for the same period in 2010. During the nine months ended September 30, 2011, we received net operating losses. At December 31, 2007, cash held in escrow represented $1,000,000proceeds of proceeds from the private placement offering, which was released from escrow when the transaction closed in January 2008.
In December 2007, we consummated a private offering and received funds of $2,260,000 net of expenses of $190,000$1,500,000 from the issuance of convertible promissory notes. Asdebt net of December 31, 2007, proceeds$50,000 of $1,000,000 from the private offering were held in escrow until the final closing of the transaction which occurred in January 2008.
As of December 31, 2007, we had a working capital deficit of $334,449 compared to a working capital deficit of $2,264,546 as of December 31, 2006. The increase in working capital was primarily due to an increase in cash from funds received in connection with our private offering, a decrease in net losses (exclusive of non-cash charges) and a conversion of outstandingpayments on notes payable which reduced our currentand approximately $450,400 of debt partially offset by timing differences in customer collectionsissue costs and vendor payments.deferred offering costs.
We used $915,682 of cash to fund our operating activities in the year ended December 31, 2007 compared to $753,727 of cash used to fund our operating activities in the year ended December 31, 2006. The increase in cash used to fund our operating activities was primarily due to timing differences in customer collections and vendor payments, partially offset by a decrease in net losses (exclusive of non-cash charges).
During the year ended December 31, 2007, financing activities provided $1,224,325Economy and Inflation
Except as disclosed herein, we have not experienced any significant cancellation of cash primarilyorders due to net proceeds received from our private placement offeringthe downturn in the economy and only a few customers have requested delays in delivery or production of $1,260,000 and the issuance of 150,909 shares of common stock, partially offset by payments on our outstanding notes payable.
orders in process. Our management believes that inflation has not had a material effect on our results of operations.
Contractual Obligations
As of February 6 , 2012, we have contractual obligations of $2,7 30,125 as indicated below:
OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations | | Total | | | Less than 1 Year | | | 1-3 Years | | | 3-5 Years | |
| | | | | | | | | | | | | | | | |
Long – term debt | | $ | 2,500,000 | | | $ | 2,500,000 | | | $ | 0 | | | $ | 0 | |
Purchase Obligations | | $ | 2 30,125 | | | $ | 2 30,125 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 2,7 30,125 | | | $ | 2,7 30,125 | | | $ | 0 | | | $ | 0 | |
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
Critical Accounting Policies and EstimatesAs of March 31, 2008, we have contractual obligations of $3,064,670 as indicated below:
| | | | | | | | | | | | | | | | |
| | | | Less than 1 | | | | | |
Contractual Obligations | | Total | | | Year | | | 1-3 Years | | | 3-5 Years | |
| | | | | | | | | | | | |
Long-term debt | | $ | 2,950,000 | | | $ | - | | | $ | 2,950,000 | | | $ | - | |
Purchase Obligations | | | 114,670 | | | | 114,670 | | | | - | | | | - | |
Total | | $ | 3,064,670 | | | $ | 114,670 | | | $ | 2,950,000 | | | $ | - | |
| | | | | | | | | | | | |
CRITICAL ACCOUNTING POLICIES
The preparation of the accompanying financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the accompanying financial statements and the accompanying notes. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements:
statements.Revenue Recognition
Generally, we recognize revenue upon shipment of our products to customers, provided no significant obligations remain and collection is probable. This policy applies to all of our customers, including Genertec America (a distribution agreement) and CAST Systems Control Technology Co. (an agreement for the purchase of specific goods).
Revenues
Our ConsERV™ product typically carries a warranty of two years for all parts contained therein with the exception of the energy recovery ventilator core which typically carries a 10 year warranty. The warranty includes replacement of defective parts. We have recorded an accrual of approximately $36,000 and $11,500 for future warranty expenses at September 30, 2011 and December 31, 2010, respectively.
Revenue derived from product sales are recorded when the products are shipped to the customer, netsale of allowances for warranties and returns, which are immaterial based on our historical experience.
Revenues from license sales arelicenses is deferred and recognized as revenue on a straight-line basis over the life of the agreements on a straight-line basis.license, or until the license arrangement is terminated.
Impairment of Long-Lived and Intangible Assets
We review our long-livedLong-lived and intangible assets such as property and equipment and patents,are reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144) whenever events or changes in circumstances indicate that the carryingbook value of the asset may not be recoverable. We compareperiodically evaluate whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, we use market quotes, if available or an estimate of the carrying value of long-lived assets to the expectedfuture undiscounted net cash flows thatof the assets will generaterelated asset or asset group over theirthe remaining useful lives. In calculatinglife in measuring whether or not the estimated undiscounted cash flows, we make assumptions thatasset values are subject to a high degree of judgment.recoverable.
Stock-Based Compensation
On January 1, 2006, we adopted SFAS No. 123(R), which requires the measurement and recognitionWe recognize all share-based payments to employees, including grants of employee stock options, as compensation expense for all share-based payment awardsin the financial statements based on estimatedtheir fair values. Pre-tax stock-based compensationThat expense is recognized under SFAS No. 123(R) was $575,863 and $591,521over the period during which an employee is required to provide services in exchange for the years ended December 31, 2007 and 2006, respectively.award, known as the requisite service period (usually the vesting period).
We currently useThe value of each grant is estimated at the grant date using the Black-Scholes option pricing model to determinemodel.
The basis for the fair valueBlack-Scholes assumptions are as follows: the dividend rate is based upon our history of stock options and warrants. The Black-Scholes option-pricing model was developed for use in estimatingdividends; the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our stock options and warrants. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee equity award exercise behaviors, risk-free interest rates, expected forfeiture rates and expected dividends.
We estimaterate for periods within the expected term of options and warrants granted based on the Company’s historical pattern of exercise behavior. We estimate the expected volatility based on comparison to a peer company’s historical activity. The dividend rate is based on the Company’s actual historical dividend experience and the risk free interest rateoption is based on the U.S. Treasury yield curve in effect forat the time of grant; the expected term was calculated based on our historical pattern of options granted and the period of time they are expected to be outstanding; and expected volatility was calculated by review of a peer company’s historical stock prices.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Non-employee stock-based compensation
Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” now ASC 505 and EITF 00- 18 “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees,” now ASC 505. The measurement date for the fair value of the optionequity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. Stock-based compensation related to non-employees is accounted for based on the grant date. fair value of the related stock or options or the fair value of the services, whichever is more readily determinable in accordance with ASC 718.
Derivative Financial Instruments
We estimate forfeituresdo not use derivative instruments to hedge exposure to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 “Derivative and Hedging” (ASC 815) to be accounted for separately from the host contract, and recorded on the balance sheet at the grantfair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, based on historical experience. If factors change and we employ different assumptions for estimating stock-based compensation expensewith corresponding changes in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we havefair value recorded in the current period and could materially affect our results of operations.operating results.
Freestanding warrants issued by us in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether fair value of warrants issued is required to be classified as equity or as a derivative liability.
Taxes
The Company adopted FASB Interpretation 48 ("FIN 48"), AccountingIncome taxes are provided for Uncertaintythe tax effects of transactions reported in Income Taxes, in January 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in accordance with SFAS 109the carrying value of assets and prescribes a recognition thresholdliabilities for tax and measurement attribute forfinancial reporting purposes. The deferred tax assets and liabilities represent the financial statement recognitionfuture tax consequences of those differences, which will either be taxable or deductible when the assets and measurement of aliabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax position taken orassets to the amount expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interestrealized.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by FASB (including EITF), the AICPA and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48the SEC did not or are not believed by management to have a material impact on the Company'sour present or future financial position and results of operations.statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115". Under SFAS No. 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The adoption of this statement on January 1, 2008, did not have a material effect on the Company’s consolidated financial statements as the Company did not elect the fair value option.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," a replacement of SFAS No. 141, "Business Combinations." The objective of this Statement is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement establishes principles and requirements for how the acquirer recognizes and measures the identifiable assets acquired and liabilities assumed, measures the goodwill acquired or gain from a bargain purchase, and determines what information to disclose. The Company has not yet determined what impact the adoption of this requirement, which becomes effective January 1, 2009, will have on its consolidated financial statements with respect to future acquisitions.
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements – An amendment of ARB No. 51". SFAS 160 requires companies with non-controlling interests to disclose such interests clearly as a portion of equity but separate from the parent's equity. The non-controlling interest's portion of net income must also be separately presented in the statement of operations. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations.
There are other pronouncements existing that are not discussed above but we do not believe such pronouncements will have a material effect on Company’s financial position or results of operation.
Our common stock has beenwas traded from November 15, 2005 to November 23, 2008 on the Pink Sheets sinceand from November 15, 200524, 2008 to present on the Over the Counter Bulletin Board under the trading symbol “DYLT.PK”.“DLYT.” The following table sets forth the range of reported high and low bidsales prices of our common stock reported during the periods indicated. Such quotations reflect prices between dealers in securities and do not include any retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Trading in our common stock should not be deemed to constitute an “established trading market.”
| | High | | | Low | | | | | | |
For the year ending December 31, 2008: | | | | | | | |
First Quarter | | | .51 | | | | .15 | | |
Second Quarter | | | .51 | | | | .24 | | |
| | | | | | | | | | High | | Low | |
For the year ending December 31, 2007: | | | | | | | | | |
| | | | | | |
For the year ending December 31, 2011: | | | | | | |
First Quarter | | | 1.45 | | | | .20 | | | $ | 0.50 | | $ | 0.27 | |
Second Quarter | | | .60 | | | | .12 | | | $ | 0.44 | | $ | 0.35 | |
Third Quarter | | | .51 | | | | .21 | | | $ | 0.60 | | $ | 0.22 | |
Fourth Quarter | | | .88 | | | | .15 | | | $ | 0.48 | | $ | 0.25 | |
| | | | | | | | | | | | | |
For the year ended December 31, 2006: | | | | | | | | | |
For the year ending December 31, 2010: | | | | | | |
First Quarter | | | 1.75 | | | | .95 | | | $ | 0.44 | | $ | 0.22 | |
Second Quarter | | | 1.75 | | | | .10 | | | $ | 0.50 | | $ | 0.23 | |
Third Quarter | | | .70 | | | | .50 | | | $ | 0.40 | | $ | 0.27 | |
Fourth Quarter | | | .70 | | | | .50 | | | $ | 0.37 | | $ | 0.24 | |
| | |
For the year ending December 31, 2009: | | | | | | |
First Quarter | | | $ | 0.20 | | $ | 0.08 | |
Second Quarter | | | $ | 0.19 | | $ | 0.13 | |
Third Quarter | | | $ | 0.26 | | $ | 0.10 | |
Fourth Quarter | | | $ | 0.95 | | $ | 0.22 | |
| | |
For the year ending December 31, 2008: | | | | | | |
First Quarter | | | $ | 0.51 | | $ | 0.15 | |
Second Quarter | | | $ | 0.51 | | $ | 0.24 | |
Third Quarter | | | $ | 0.45 | | $ | 0.16 | |
Fourth Quarter | | | $ | 0.20 | | $ | 0.07 | |
The above prices represent inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.
Transfer Agent
Our transfer agent is Island StockClear Trust Transfer located at 100 Second Avenue South,16540 Pointe Village Dr., Suite 104N St. Petersburg,201, Lutz, Florida 33701,33558, telephone (727) 289-0010.(813) 235- 4490.
Holders
As of August 7, 2008February 6 , 2012 there were approximately 149200 shareholders of record of our common stock. This does not include an indeterminate number of shareholders whose shares are held by brokers in street name.
Dividend Policy
We have not declared or paid any dividends and do not intend to pay any dividends in the foreseeable future to the holders of our common stock. We intend to retain future earnings, if any, for use in the operation and expansion of our business. Any future decision to pay dividends on common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors our board of directors may deem relevant.
Equity Compensation Plan Information
The following table sets forth information regarding equity compensation plansour 2000 Incentive Compensation Plan (the “2000 Plan”) and the 2009 Long-Term Incentive Plan (the “2009 Plan”) under which our securities are authorized for issuance as of December 31, 2007.September 30, 2011:
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | (b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a) | |
| | | | | | | | | | |
Equity compensation plans approved by security holders: | 6,376,889 | .244 | 1,056,993 | | | 17,346,090 | | $ | 0.32 | | | | 9,505,000 | |
Equity compensation plans not approved by security holders: | 0 | 0 | 0 | |
| | | | | | | | |
In June 2000 and November 2009, our Boardboard of Directorsdirectors adopted, and our shareholders approved, the 2000 Plan which providesand 2009 Plan, respectively (together the “Plans”). The Plans provide for the grant of stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and bonus stock and other awards to eligible persons, as defined in said plan,plans, including, but not limited to, our officers, directors and employees of the Company.employees. Certain awards under the 2000 PlanPlans may be subject to performance conditions.
Number of Shares of Common Stock Available Under the 2000 PlanPlans. As of December 31, 2007, the Company's Boardour board of Directorsdirectors approved and made available 6,093,882 shares of common stock to be issued pursuant to said plan. During the period ended March 31, 2008, the Company's Board2000 Plan. Subsequently, our board of Directorsdirectors approved and made available an additional 5,000,000 shares of Company'sour common stock for issuance under the 2000 Plan. The 2000 Plan permits grants of options ofto purchase common shares authorized and approved by the Company’sour Board of Directors and shareholders for issuance prior to the enactment of the 2000 plan.Plan. On November 5, 2009, our board of directors approved and made available a total of 15,000,000 shares of common stock to be issued pursuant to the 2009 Plan.
Exercise Price. The 2000 Plan requires the Committee to grant options with an exercise price per share not less than the fair market price of a share of Common Stock on the date of grant of the option.Administration of the 2000 PlanPlans.. The 2000 Plan isPlans are administered by a committee of two or more directors designated by the Boardboard of directors to administer the PlanPlans (the “Committee”) or, in the absence of such Committee, by the Board.full board of directors. Currently, the 2000 Plan isPlans are administered by our Board.board of directors. The board of directors has the authority to select the participants to whom awards under the 2000 PlanPlans will be granted, grant awards, determine the type, number and other terms and conditions of, and all other matters relating to, awards granted under the 2000 PlanPlans and to prescribe the rules and regulations for the administration of the 2000 Plan.Plans. No option or stock appreciation rights granted under the 2000 PlanPlans shall be exercisable, however, more than ten years after the date of the grant.
Exercise Price. The Plans require the Committee to grant qualified options with an exercise price per share not less than the fair market price of a share of common stock on the date of grant of the option.
Transferability.Awards granted under the 2000 PlanPlans are generally not transferable by the optionee otherwise than by will or the laws of descent and distribution and generally are exercisable during the lifetime of the optionee only by the optionee.
Change in Control.All awards granted under the 2000 Plan carrying a right to exercise that waswhich were not previously exercisable and vested shall become fully exercisable and vested upon a change of control, of the Company, which includes the consummation of a merger or consolidation of the Company with or into any other entity, the sale of all or substantially all of our assets, the replacement of a majority of our Boardboard of Directors, thedirectors, acquisition by any person of securities representing 20% or more of the voting power of our then outstanding securities (other than securities issued by us) or any other event which the Boardboard of directors determines would materially alter our structure or ownership.
Options Granted to Non-Employee Directors. Non-employee directors of the Company are usually granted options each year, which generally become exercisable upon the date of grant, and which generally expire on the earlier of ten years from the date of grant or up to three years after the date that the optionee ceases to serve as a director.
Stand-Alone Grants
Our board of directors may grant common share purchase options or warrants to selected directors, officers, employees, consultants and advisors in payment of goods or services provided by such persons on a stand-alone basis outside of any of our 2000 Incentive Compensation Plan.Plans. The terms of these grants may be individually negotiated.
DILUTION
Our net tangible book value as of September 30, 2011 was approximately ($6,179,296), or ($0.16) per share of our common stock. Our net tangible book value per share represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding on September 30, 2011. Assuming that we (i) issue all of the shares of our common stock offered by us at an assumed public offering price of $0.3 2 per share, (ii) repayment of all convertible notes outstanding in the aggregate principal amount of $2,500,000 plus accrued interest, discharged by repayment using proceeds from the offering, which as of February 6 , 2012 we estimate will be approximately $2.8 5 million of net proceeds from the offering, (iii ) issue an estimated 2,087,138 shares of common stock pursuant to the executive compensation agreement, as described in “Certain Relationships and Related Party Transactions,” and after deducting the estimated offering expenses payable by us, our net tangible book value as of September 30, 2011 would have been approximately $ 3,280,846 or $0.0 5 per share of our common stock. This amount represents an immediate increase in net tangible book value of $0.2 1 per share for our existing stockholders and an immediate dilution in net tangible book value of $0. 27 per share to new investors purchasing shares of our common stock in this offering.
We determine dilution by subtracting the adjusted net tangible book value per share after this offering from the public offering price per share of our common stock. The following table illustrates the dilution in net tangible book value per share to new investors if all shares in the offering are sold:
Public offering price per share | | | | | $ | 0.3 2 | |
Net tangible book deficit per share available to common shareholders as of September 30, 2011 | | $ | (0.16 | ) | | | | |
Increase attributable to pro forma adjustments before the offering | | $ | 0. 08 | | | | | |
Pro forma net tangible book value per share before the offering | | $ | (0.0 8 | ) | | | | |
Increase per share attributable to new investors in the offering | | $ | 0. 13 | | | | | |
Pro forma net tangible book value per share after the offering | | | | | | $ | 0.0 5 | |
Dilution per share to new investors in the offering | | | | | | $ | 0. 27 | |
There is not a minimum number of shares that must be sold in this offering. Therefore, the proceeds of this offering will be immediately available for use by us and we do not have to wait until a minimum number of shares have been sold to use the proceeds from any sales. In the event we sell less than the total number of shares offered, the following table indicates the dilution in net tangible book value per share to new investors based on the percentage sold under the offering:
| | | 25% | | | | 50% | | | | 75% | |
Public offering price per share | | $ | 0.3 2 | | | $ | 0.3 2 | | | $ | 0.3 2 | |
Net tangible book deficit per share available to common shareholders as of September 30, 2011 | | $ | (0.16 | ) | | $ | (0.16 | ) | | $ | (0.16 | ) |
Increase attributable to pro forma adjustments before the offering | | $ | 0.0 4 | | | $ | 0.0 5 | | | $ | 0.0 8 | |
Pro forma net tangible book value per share before the offering | | $ | (0.1 2 | ) | | $ | (0. 11 | ) | | $ | (0.0 8 | ) |
Increase per share attributable to new investors in the offering | | $ | 0.0 4 | | | $ | 0.0 7 | | | $ | 0.0 9 | |
Pro forma net tangible book value per share after the offering | | $ | (0.08 | ) | | $ | (0.04 | ) | | $ | 0.01 | |
Dilution per share to new investors in the offering | | $ | 0.4 0 | | | $ | 0. 28 | | | $ | 0.3 1 | |
The following shares were not included in the above calculations:
Shares of our common stock issuable upon exercise of stock options under our stock plans, which includes (as of September 30, 2011) 17,346,090 shares of common stock;
Shares of our common stock reserved for issuance under various outstanding warrant agreements, which includes (as of September 30, 2011) 26,575,333 shares of our common stock; and
Shares of our common stock reserved for future issuance under our stock plans, which includes as of September 30, 2011 9,505,000 shares of our common stock.
To the extent that any outstanding options or warrants are exercised, new investors will experience further dilution.
Unless otherwise specifically stated, information throughout this prospectus assumes that none of our outstanding options or warrants to purchase shares of our common stock are exercised and no shares have been issued from the exercise of any warrant that may be issued to a placement agent with respect to this offering.
CAPITALIZATION
The table below sets forth our capitalization as of September 30, 2011. You should read this table together with Management’s Discussion and Analysis of Financial Condition and Results of Operation, and our financial statements and the related notes, appearing elsewhere in this prospectus.
| | As of September 30, 2011 | |
| | | |
Common stock issued and outstanding | | | 37,517,604 | |
Common stock underlying warrants | | | 26,575,332 | |
Common stock underlying convertible promissory notes | | | 10,605,900 | |
Options authorized and issued | | | 17 ,346,090 | |
| | | 92,044,926 | |
DESCRIPTION OF SECURITIES BEING REGISTEREDCAPITAL STOCK
The following is a brief description of our capital stock, including their material terms and provisions and as such terms and provisions are applied to our certificate of incorporation, as amended and our restated bylaws, copies of which have been filed with the SEC and are also available upon request from us, and applicable corporate laws of the State of New York.
Authorized Capital
We are authorized to issue shares of stock to be designated respectively “common stock” and “preferred stock” and collectively referred to herein as “capital stock.” The total number of shares of capital stock which we have the authority to issue are 110,000,000,210,000,000, consisting of 100,000,000200,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share.
Securities Being Registered Hereunder
Common Stock
We have 11,877,18437,517,604 shares of common stock issued and outstanding as of August 7, 2008.February 6 , 2012. We also have 257,213 shares held in our treasury. Each shareholder of our common stock is entitled to a pro rata share of cash distributions made to shareholders, including dividend payments. The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by shareholders. There is no cumulative voting with respect to the election of our directors or any other matter. The holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors from funds legally available therefore. Cash dividends are at the sole discretion of our board of directors. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock. Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock.
9% Secured Convertible Note
Of the 32,753,090 shares of common stock being registered, 14,750,000 are issuable upon the conversion by Selling Shareholders of 9% secured convertible notes issued in the Financing transaction. The notes have a twelve month termStock Options and earn 9% interest during the term. Conversion of the note into common stock is at the holder’s option during the term. The conversion price is $0.20 per share of common stock.
Warrants
Of the 32,753,090 shares of common stock being registered, 17,133,484 shares are issuable upon exercise by Selling Shareholders of certain warrants.
Cashless Warrants
The warrants issued in the Financing have a five-year term, cashless exercise provisions and anti-dilution protection. The anti-dilution protection includes standard protection for stock dividends or splits, reclassification or capital reorganization as well as protection with regards to additional issuances of common stock or common stock equivalents. The exercise price is $0.25 per share of common stock. Warrants issued to Legend Merchant Group, Inc. and Richardson & Patel LLP are substantially similar to the cashless warrants issued in the Financing, with the exception that the amount that may be exercised is tied to the percentage converted bears to the total of all notes issued.
Cash Exercise Only Warrants
The warrants issued in the Additional Financing have a five-year term and anti-dilution protection for stock dividends or splits, mergers, consolidation, reclassification, capital reorganization or a sale of substantially all of the Company’s assets. The exercise price is $0.55 per share of common stock and they do not provide for cashless exercise. Warrants issued to the Robb Charitable Trust are identical to warrants issued in the Additional Financing. Warrants issued in the Daily Financing are substantially similar to those issued in the Additional Financing but permit immediate exercise and contain no provision permitting the Company to compel exercise based on Company’s stock price.
SELLING SHAREHOLDERS
The Selling Shareholders listed in the table below may use this prospectus for the resaleAs of shares of common stock being registered hereunder, although no Selling Shareholder is obligated to sell any such shares. Of the 32,753,090 shares of common stock offered by this prospectus, 869,606 shares of common stock are outstanding as of the date hereof.
The first column of the table below lists the name of each Selling Shareholder. The second column lists the number of common shares beneficially owned by each Selling Shareholder as of August 7, 2008. The third column lists the number of common shares that may be resold under this prospectus. The fourth and fifth columns list the number of common shares owned and the percentage of common shares owned after the resale of the common shares registered under this prospectus. Except as noted in the table below, none of the Selling Shareholders have had any material relationship with us within the past three years. The total number of common shares outstanding as of August 7, 2008 was 11,877,184.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting and investment power with respect to our common stock. Common stock subject to convertible debentures, warrants or options that are currently convertible or exercisable or convertible or exercisable within 60 days after August 7, 2008 are deemed to be beneficially owned by the person holding those securities for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other shareholder.
The inclusion of any securities inFebruary 6 , 2012, the following table does not constitute an admission of beneficial ownership by the persons named below. Except as indicated in the footnotes to the table, no selling shareholder has had any material relationship with us or our predecessors or affiliates during the last three years. We may amend or supplement this prospectus from time to time to update the disclosure set forth herein. Of the Selling Shareholders, Legend Merchant Group Inc. and Aegis Capital Corp. are broker-dealers and may be deemed underwriters of the shares they are offering. Pali Performance, LLC, Jason Adelman, Robert J. Eide, Thomas Masterson, Steve Maurer, Meaghan Manning, Mathew Balk, Hilary Bergman, Daniel Schneiderman and Craig Pierson are affiliates of a broker dealer and (1) purchased the shares in the ordinary course of business and, (2) at the time of the purchase of the securities to be resold, the had no agreements or understandings, directly or indirectly, with any person to distribute the securities.
Selling Shareholder Table
Name | | Number of Shares Beneficially Owned Before Offering | | Number of Shares Being Offered | | Number of Shares Beneficially Owned Offering (1) | | Percentage Owned After Offering (2) | |
David Ehrenberg (3) | | | 323,579 | | | 15,000 | | | 308,579 | | | 2.60% | |
Harris K. Weston (4) | | | 149,511 | | | 9,100 | | | 140,411 | | | 1.18% | |
Howard Rubinstein (5) | | | 41,753 | | | 2,500 | | | 39,253 | | | * | |
Mark Smith (6) | | | 145,823 | | | 8,750 | | | 137,073 | | | 1.15% | |
Randolph Blum (7) | | | 446,743 | | | 28,743 | | | 418,000 | | | 3.52% | |
Sussman Sales Co, Inc. Profit Sharing Plan (8) | | | 304,251 | | | 18,650 | | | 285,601 | | | 2.40% | |
Michael M. Gostomski (9) | | | 1,056,544 | | | 768,750 | | | 287,794 | | | 2.42% | |
Alan & Janet Leisen (10) | | | 53,073 | | | 2,500 | | | 50,573 | | | * | |
Charles B. Buchanan Trustee U/A DTD 5.12.1999 (11) | | | 335,227 | | | 62,500 | | | 272,727 | | | 2.30% | |
CounterPoint Ventures, L.L.C. (12) | | | 1,424,126 | | | 249,750 | | | 1,174,376 | | | 10.89% | |
Vision Opportunity Master Fund (13) | | | 38,005 | | | 38,005 | | | 0 | | | * | |
Teresina De Caravahlo (14) | | | 2,994 | | | 2,994 | | | 0 | | | * | |
Peter Farrand (15) | | | 201,353 | | | 9,440 | | | 191,913 | | | 1.62% | |
Robb Charitable Trust (16) | | | 489,293 | | | 489,293 | | | 0 | | | * | |
William B. Newman (17) | | | 566,667 | | | 500,000 | | | 66,667 | | | * | |
Andrew J. Maffey (18) | | | 500,000 | | | 500,000 | | | 0 | | | * | |
Andrew Mitchell (19) | | | 750,000 | | | 750,000 | | | 0 | | | * | |
Bruce S. Mora (20) | | | 500,000 | | | 500,000 | | | 0 | | | * | |
Craig Laughlin (21) | | | 500,000 | | | 500,000 | | | 0 | | | * | |
E. Todd Tracey (22) | | | 500,000 | | | 500,000 | | | 0 | | | * | |
Gemini Master Fund Ltd. (23) | | | 500,000 | | | 500,000 | | | 0 | | | * | |
Larry Hopfenspirger (24) | | | 1,500,000 | | | 1,500,000 | | | 0 | | | * | |
Lawrence T. Jaffe (25) | | | 500,000 | | | 500,000 | | | 0 | | | * | |
Louis M. Jaffe 2004 Intangible Asset Mgmt. TR U/A DTD 5/24/04 (26) | | | 1,273,334 | | | 1,000,000 | | | 273,334 | | | 2.3% | |
Market Byte L.L.C. Defined Benefit & Trust (27) | | | 1,000,000 | | | 1,000,000 | | | 0 | | | * | |
were outstanding:
Michael Frederick Stone (28) | | | 2,000,000 | | | 2,000,000 | | | 0 | | | * | |
Michael J. McGrath (29) | | | 1,000,000 | | | 1,000,000 | | | 0 | | | * | |
MSSRPS, LLC (30) | | | 1,500,000 | | | 1,500,000 | | | 0 | | | * | |
Next Generation Investment LLC (31) | | | 750,000 | | | 750,000 | | | 0 | | | * | |
Platinum Montaur Life Sciences LLC (32) | | | 6,333,333 | | | 6,000,000 | | | 333,333 | | | 2.81% | |
RBC Dain Custodian for Leonard Samuels IRA (33) | | | 5,500,000 | | | 5,500,000 | | | 0 | | | * | |
Robert Melnick (34) | | | 639,333 | | | 500,000 | | | 139,333 | | | 1.17% | |
RP Capital LLC (35) | | | 1,000,000 | | | 1,000,000 | | | 0 | | | * | |
Sharon Youcha (36) | | | 500,000 | | | 500,000 | | | 0 | | | * | |
Sheldon T. Fleck (37) | | | 500,000 | | | 500,00 | | | 0 | | | * | |
Leah Kaplan-Samuels and Leonard Sameuls JTWROS (38) | | | 1,750,000 | | | 1,750,000 | | | 0 | | | * | |
Aegis Capital Corp. (39) ** | | | 25,000 | | | 25,000 | | | 0 | | | * | |
Legend Merchant Group, Inc. (40) ** | | | 288,083 | | | 288,083 | | | 0 | | | * | |
Robert Nathan (41) ** | | | 219,000 | | | 119,000 | | | 100,000 | | | * | |
Craig Pierson (42) ** | | | 297,862 | | | 295,862 | | | 2,000 | | | * | |
Daniel Schneiderman (43) ** | | | 25,000 | | | 25,000 | | | 0 | | | * | |
Hillary Bergman (44) ** | | | 15,000 | | | 15,000 | | | 0 | | | * | |
Mathew Balk (45) ** | | | 263,333 | | | 190,000 | | | 73,333 | | | * | |
Matthew Waxelbaum (46) ** | | | 2,250 | | | 2,250 | | | 0 | | | * | |
Meaghan Manning (47) ** | | | 17,943 | | | 17,943 | | | 0 | | | * | |
| | | | | | | | | | | | | |
Pali Performance LLC (48) ** | | | 15,000 | | | 15,000 | | | 0 | | | * | |
Steve Maurer (49) ** | | | 30,000 | | | 30,000 | | | 0 | | | * | |
Thomas Masterson (50) ** | | | 295,862 | | | 295,862 | | | 0 | | | * | |
Robert Eide (51) ** | | | 25,500 | | | 25,500 | | | 0 | | | * | |
Jason Adelman (52) ** | | | 55,000 | | | 55,000 | | | 0 | | | * | |
Richardson & Patel LLP (53) | | | 392,308 | | | 392,308 | | | 0 | | | * | |
Arthur M. and Elva R. Daily Trust GST Trust Dtd 09/13/1982 FBO Carrie N. Daily, Sun Trust Bank, Trustee (54) | | | 68,939 | | | 8,333 | | | 60,606 | | | * | |
Arthur M. and Elva R. Daily Trust GST Trust Dtd 09/13/1982 FBO Travis D. Bjork, Sun Trust Bank, Trustee (55) | | | 68,939 | | | 8,333 | | | 60,606 | | | * | |
Arthur M. and Elva R. Daily Trust GST Trust Dtd 09/13/1982 FBO Troy S. Daily, Sun Trust Bank, Trustee (56) | | | 68,939 | | | 8,333 | | | 60,606 | | | * | |
Arthur M. Daily Family Trust Dated May 8, 1995, FBO Cleora Daily, Sun Trust Bank, Trustee (57) | | | 103,409 | | | 12,500 | | | 90,909 | | | * | |
Carrie Daily (58) | | | 103,409 | | | 12,500 | | | 90,909 | | | * | |
Cleora Daily (59) | | | 103,409 | | | 12,500 | | | 90,909 | | | * | |
James Daily (60) | | | 206,818 | | | 25,000 | | | 181,818 | | | 1.53% | |
James T. Daily Revocable Trust Dated 10/1/1975 (61) | | | 310,227 | | | 12,500 | | | 297,727 | | | 2.51% | |
Troy Daily (62) | | | 297,727 | | | 12,500 | | | 285,227 | | | 2.40% | |
__________
* | Indicates less than one percent. |
** Denotes broker-dealer or affiliate of a broker-dealer.
(1) Assumes that all shares offered hereby will be resold by the selling security holders after this offering.
(2) Percentage based on 11,877,18417,402,757 shares of common stock outstanding as of August 7, 2008.
(3) Includes 15,000 common shares issuable upon exercise of certain warrants issued in connection with the conversion of the notes issued in the Additional Financing.
(4) Includes 9,100 common shares issuable upon exercise of certain warrants issued in connection with the conversion of the notes issued in the Additional Financing.
(5) Includes 2,500 common shares issuable upon exercise of certain warrants issued in connection with the conversion of notes issued in the Additional Financing.
(6) Includes 8,750 common shares issuable upon exercise of certain warrants issued in connection with the conversion of notes issued in the Additional Financing. Mr. Smith is an independent sales representative for the ConsERV line.
(7) Includes 28,743 common shares issuable upon exercise of certain warrants issued in connection with the conversion of notes issued in the Additional Financing.
(8) Includes 18,650 common shares issuable upon exercise of certain warrants issued in connection with the conversion of notes issued in the Additional Financing. The natural person with voting power and investment power on behalf of Sussman Sales Co, Inc. Profit Sharing Plan is Mr. Joe Sussman.
(9) Includes 18,750 common shares issuable upon exercise of certain warrant issued in connection with the conversion of notes issued in the Additional Financing. Also includes 375,000 shares of common stock issuable upon conversion of convertible notes and 350,000 shares ofour common stock issuable upon exercise of stock options under our stock plans at a weighted average exercise price of $0.32 per share;
26,390,778 shares of our common stock reserved for issuance under various outstanding warrant agreements, at a weighted average exercise price of $0.33 per share.
Assuming the full exercise of the above options and warrants issuedfor cash in accordance with the respective terms of these securities (and assuming no cancellation, termination, forfeiture or adjustment), we would realize gross proceeds in the amount of $5,509,863 from the exercise of outstanding options and $8,606,585 from the exercise of outstanding warrants, which would add up to an aggregate amount of $14,116,448. We note however, that no assurance can be provided that these options or warrants will ever be exercised by their holders, and that some of the above-mentioned warrants may be exercised on a cashless basis, if at all.
None of our securities included in this offering may be offered or sold, directly or indirectly, nor may this prospectus and any other offering material or advertisements in connection with the Financing.
(10) Includes 2,500offer and sales of any of our common shares issuable upon exercise of certain warrants issuedstock be distributed or published in connectionany jurisdiction, except under circumstances that will result in compliance with the conversionapplicable rules and regulations of notes issuedthat jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to this offering of our common stock and the distribution of this prospectus.
This prospectus is neither an offer to sell nor a solicitation of any offer to buy any of our common stock included in this offering in any jurisdiction where that would not be permitted or legal.
Distribution
This is a public offering of up to 33,000,000 shares of our common stock. The offering will be made by us to accredited investors with an existing relationship with us or a placement agent which is registered with FINRA. Funds to purchase shares of our common stock will be deposited by subscribers into an escrow account. If we terminate this offering, all funds received will be returned promptly without deduction or any interest earned thereon.
Compensation
Placement agents will receive cash compensation of 6% of the Additional Financing.
(11) Includes 62,500 common shares issuable upon exercise of certain warrants issued in connection withaggregate proceeds from the conversion of notes issued in the Additional Financing. The natural person with voting power and investment power on behalf of Charles B. Buchanan Trustee U/A DTD 5.12.1999 is Mr. Charles Buchanan.
(12) Includes 249,750 common shares issuable upon exercise of certain warrants issued in connection with the conversion of notes issued in the Additional Financing. The natural person with voting power and investment power on behalf of CounterPoint Ventures, LLC is Walt Robb.
(13) Includes 38,005 sharessale of common stock issued upon conversion of interest under notes issued in the Additional Financing into shares of common stock. Vision Opportunity Master Fund, initially elected not to convert its principalinvestors secured by said placement agent and interest into common stock and warrants and instead received cash. At the time of paymenta warrant to purchase 6% of the cash, the parties agreed to convert the interest only into 38,005 sharesaggregate number of common stock. The principal was paid out in cash and therefore no warrant was issued since issuance of warrant was tied to conversion of the principal into common stock.
(14) Includes 2,994 shares of common stock issued upon conversion of the interest under of notes issued in the Additional Financing into shares of common stock.
(15) Includes 9,440 shares of common stock issued upon conversion of the interest of notes issued in the Additional Financing into shares of common stock.
(16) Includes 50,000 shares of common stock issuable upon conversion of warrants issued in connection with Robb Charitable Trust Note. Also includes 439,292 shares of common stock issued in connection with an amendment to the Robb Charitable Trust Note dated January 20, 2008 pursuant to which one half of the principal and interest was payable in cash and one half of the principal and interest was payable in common stock. The natural person with voting power and investment power on behalf of Robb Charitable Trust is Lindsey Robb.
(17) Includes 250,000 shares of common stock issuable upon conversion of convertible notes and 250,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. Number of shares held after offering includes 66,667 option shares vested of June 30, 2008. A total of 800,000 option shares were granted on March 31, 2008. 66,667 option shares vests every three months for lesser of term of employment or 800,000 option shares. Mr. Newman has been the Executive Vice President of the Company since March 31, 2008.
(18) Includes 250,000 shares of common stock issuable upon conversion of convertible notes and 250,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing.
(19) Includes 375,000 shares of common stock issuable upon conversion of convertible notes and 375,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing.
(20) Includes 250,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 250,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(21) Includes 250,000 shares of common stock issuable upon conversion of convertible notes and 250,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing.
(22) Includes 250,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 250,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(23) Includes 250,000 shares of common stock issuable upon conversion of convertible notes and 250,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The natural person with voting power and investment power on behalf of Gemini Master Fund Ltd. is Steven Winters.
(24) Includes 750,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 750,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(25) Includes 250,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 250,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(26) Includes 500,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 500,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing. Number of shares held after offering includes 273,334 held by the trust. The natural person with voting power and investment power on behalf of Louis M. Jaffe 2004 Intangible Asset Mgmt. TR U/A DTD 5/24/04 is Louis M. Jaffe.
(27) Includes 500,000 shares of common stock issuable upon conversion of convertible notes and 500,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The natural person with voting power and investment power on behalf of Market Byte L.L.C. Defined Benefit & Trust is Lawrence D. Isen.
(28) Includes 1,000,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 1,000,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(29) Includes 500,000 shares of common stock issuable upon conversion of convertible notes and 500,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing.
(30) Includes 750,000 shares of common stock issuable upon conversion of convertible notes and 750,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The natural person with voting power and investment power on behalf of MSSRPS, LLC is Marisa Stadmauer.
(31) Includes 375,000 shares of common stock issuable upon conversion of convertible notes and 375,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The natural person with voting power and investment power on behalf of Next Generation Investment LLC is Andrew Vickery.
(32) Includes 3,000,000 shares of common stock issuable upon conversion of convertible notes and 3,000,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The natural person with voting power and investment power on behalf of Platinum Montaur Life Sciences LLC is Mark Nordlich.
(33) Includes 2,750,000 shares of common stock issuable upon conversion of convertible notes and 2,750,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The natural person with voting power and investment power on behalf of RBC Dain Custodian for Leonard Samuels IRA is Peter Hancuh. Leonard Samuels also beneficially owns 1,750,000 shares of common stock underlying convertible notes and warrants issued in the Financing held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWROS and which are also registered under this prospectus.
(34) Includes 250,000 shares of common stock issuable upon conversion of convertible notes and 250,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing.
(35) Includes 500,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 500,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing. The natural person with voting and investment control over the shares is Erick Richardson. Erick Richardson and Nimish Patel of Richardson & Patel LLP own RP Capital LLC. Mr. Richardson is a partner at Richardson & Patel LLP, our legal counsel. (See footnote 53 below).
(36) Includes 250,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 250,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(37) Includes 250,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 250,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing.
(38) Includes 875,000 shares of common stock issuable upon conversion of certain outstanding convertible notes and 875,000 shares of common stock issuable upon exercise of certain outstanding warrants issued in connection with the Financing. The natural persons with voting power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard Samuels. Leonard Samuels also holds 5,500,000 shares of common stock underlying the convertible notes and warrants in the Financing issued to shareholder RBC Dain – Custodian for Leonard Samuels IRA and which are also registered under this prospectus.
(39) Includes 25,000 shares of common stock issuable upon exercise of warrants issued in connection with the Dec 07-Jan 08 Financing. The natural person with voting power and investment power on behalf of Aegis Capital Corp. is Mr. Robert Eide. The warrant was issued pursuant to a transfer from the warrant issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Rober Eide holds a warrants for the 25,000 shares of common stock issued to himsaid purchasers. Any such warrant shall have an exercise price equal to 125% of the price per share paid by investors in connection with the Financing. Aegis Capital Corp. is a broker-dealer.
(40) Includes 288,083 shares of common stock issuable upon exercise of warrants issuedthis offering, be exercisable at any time, in connection with the Financing. The natural person with voting power and investment power on behalf of Legend Merchant Group, Inc. is Thomas J. Gallagher. The warrant was issued pursuant to the placement agent agreement. Legend Merchant Group, Inc. is a broker-dealer.
(41) Includes 119,000 shares of common stock issuable upon exercise of warrants issuedwhole or in connection with the Financing. The warrants were issued pursuant to a transferpart, for five years from the warrants issued to Legend Merchant for 1,400,000 under the termsdate of the placement agent agreement. Robert Nathan is an affiliateeffectiveness of a broker-dealer.
(42) Includes 295,862 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Craig Pierson is an affiliate of a broker-dealer.
(43) Includes 25,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Daniel Schneiderman is an affiliate of a broker-dealer.
(44) Includes 15,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Hillary Bergman is an affiliate of a broker-dealer.
(45) Includes 190,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Mathew Balk is an affiliate of a broker-dealer.
(46) Includes 2,250 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Matthew Waxelbaum is an affiliate of a broker-dealer.
(47) Includes 17,943 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Meaghan Manning is an affiliate of a broker-dealer.
(48) Includes 15,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. The natural person with voting power and investment power on behalf of Legend Merchant Group, Inc. is Thomas J. Gallagher. Legend Merchant Group, Inc. is a broker-dealer.
(49) Includes 30,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Steve Maurer is an affiliate of a broker-dealer.
(50) Includes 295,862 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Thomas Masterson is an affiliate of a broker-dealer.
(51) Includes 25,000 shares of common stock issuable upon exercise of warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Robert Eide is an affiliate of a broker-dealer. Robert Eide is also the natural person with voting power and investment power on behalf of Aegis Capital Corp. which was also issued warrant pursuant to a transfer from the warrant issued to Legend Merchant for 1,400,000 under the terms of the placement agent agreement.
(52) Includes 55,000 shares of common stock issuable upon exercise of s warrants issued in connection with the Financing. The warrants were issued pursuant to a transfer from the warrants issued to Legend Merchant Group, Inc. for 1,400,000 under the terms of the placement agent agreement. Jason Adelman is an affiliate of a broker-dealer.
(53) Includes 392,308 shares of common stock and 392,308 shares of common stock issuable upon exercise of warrants issued in connection with performance of legal services. The natural person with voting power and investment power on behalf of Richardson & Patel LLP is Erick Richardson. Erick Richardson and Nimish Patel of Richardson & Patel LLP own RP Capital LLC. (See footnote 35 above).
(54) Includes 8,333 shares of common stock issuable upon exercise of warrants issued in connection with the Daily Financing. The natural person with voting power and investment power on behalf of Arthur M. and Elva R. Daily Trust GST Trust Dtd 09/13/1982 FBO Carrie N. Daily, Sun Trust Bank, Trustee is Anne Hoofnaglel.
(55) Includes 8,333 shares of common stock issuable upon exercise of warrants issued in connection with the Dec 06-Mar 07 Daily Offering. The natural person with voting power and investment power on behalf of Arthur M. and Elva R. Daily Trust GST Trust Dtd 09/13/1982 FBO Travis D. Bjork, Sun Trust Bank, Trustee is Anne Hoofnaglel.
(56) Includes 8,333 shares of common stock issuable upon exercise of warrants issued in connection with the Daily Financing. The natural person with voting power and investment power on behalf of Arthur M. and Elva R. Daily Trust GST Trust Dtd 09/13/1982 FBO Troy S. Daily, Sun Trust Bank, Trustee is Anne Hoofnaglel.
(57) Includes 8,333 shares of common stock issuable upon exercise of warrants issued in connection with the Daily Financing. The natural person with voting power and investment power on behalf of Arthur M. Daily Family Trust Dated May 8, 1995, FBO Cleora Daily, Sun Trust Bank, Trustee is Anne Hoofnaglel.
(58) Includes 12,500 shares of common stock issuable upon exercise of warrants issued in connection with the Daily Financing.
(59) Includes 12,500 shares of common stock issuable upon exercise of warrants issued in connection with the Daily Financing.
(60) Includes 25,000 shares of common stock issuable upon exercise of warrants issued in connection with the Daily Financing.
(61) Includes 12,500 shares of common stock issuable upon exercise of warrants issued in connection with the Daily Financing.
(62) Includes 12,500 shares of common stock issuable upon exercise of warrants issued in connection with the Daily Financing.
PLAN OF DISTRIBUTION
We are registering shares of our common stock for resale by the Selling Shareholders identified in the section above entitled “Selling Shareholders.” We will receive none of the proceeds from the sale of these shares by the Selling Shareholders. The common stock may be sold from time to time to purchasers:
| ·
| through the Pink Sheets at prevailing market prices; or
|
| ·
| through underwriters, broker-dealers or agents who may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders or the purchasers of the common stock.
|
The Selling Shareholders may use any one or more of the following methods when selling shares:
| ·
| ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
| ·
| a block trade in which the broker-dealer so engaged will attempt to sell such shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;
|
| ·
| purchases by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this prospectus;
|
| ·
| an exchange distribution in accordance with the rules of the applicable exchange;
|
| ·
| privately negotiated transactions;
|
| ·
| settlement of short sales;
|
| ·
| broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share;
|
| ·
| a combination of any such methods of sale;
|
| ·
| through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or
|
| ·
| any other method permitted pursuant to applicable law.
|
Neither the Selling Shareholders nor the Company can presently estimate the amount of compensation in the form of discounts, concessions or commissions that underwriters, broker-dealers or agents may receive from the Selling Shareholders or the purchasers of the common stock. We know of no existing arrangements between the Selling Shareholders, broker-dealers, underwriters or agents relating to the sale or distribution of the shares.
The Selling Shareholders may also enter into hedging transactions and persons with whom they effect such transactions, including broker-dealers, may engage in short sales of our common shares. Our Selling Shareholders may also engage in short sales and short sales against the box, and in options, swaps, derivatives and other transactions in our securities, and may sell and deliver the shares covered by this prospectus in connection with such transactions or in settlement of securities loans. These transactions may be entered into with broker-dealers or other financial institutions that may resell those shares pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The Selling Shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of section 2(11) of the Securities Act in connection with the sales and distributions contemplated under this prospectus and may have civil liability under Sections 11 and 12 of the Securities Act for any omissions or misstatements in this prospectus and the registration statement of which itthis prospectus is a part. Additionally, any profits which our Selling Shareholders maypart, and shall contain a cashless exercise provision
| | Per Share | | | Total | |
Public Offering Price | | $ | 0.32 | | | $ | 10,560,000 | |
Placement agent commission (1) | | $ | 0.0192 | | | $ | 633,600 | |
Offering Proceeds to Dais, before expenses(2) | | $ | 0.3008 | | | $ | 9,926,400 | |
(1) For the purpose of estimating the placement agent’s fees, we have assumed that they will receive might be deemedtheir maximum commission on all sales made in the offering. Does not include additional compensation to be underwriting compensation under the Securities Act. Becauseplacement agent consisting of warrants entitling the Selling Shareholders may deemedplacement agent to be underwriters under Section 2(11)purchase the number of shares of common stock equal to 6% of the Securities Act,number of shares of common stock sold by the Selling Shareholdersplacement agent in this offering.
(2) We estimate the total expenses of this offering, excluding the placement agent's commissions, will be subjectapproximately $277,804. Because there is no minimum offering amount required as a condition to closing in this offering, the prospectus delivery requirementsactual public offering amount, the placement agent's commissions, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering set forth above. Once the offering price has been determined, the common stock offering price will remain fixed for the duration of the Securities Act. Any profits realizedoffering.
Our officers and directors will not receive any compensation for their role in offering or selling the shares.
Placement Agent Warrants
We have also agreed to issue to placement agents a warrant to purchase a number of our shares of common stock equal to an aggregate of 6% of the shares of common stock sold by any placement agent in this offering. The warrant will have an exercise price equal to 125% of the Selling Shareholdersoffering price of the shares sold in this offering and the compensation of any broker-dealer may be deemed to be underwriting discounts and commissions.
exercised on a cashless basis. The resale shares will be sold only through registered or licensed broker-dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirementwarrant is available and is complied with.
We will bear all expenses relating to the sale of our common shares under this prospectus, except that the Selling Shareholders will pay any applicable underwriting commissions and expenses, brokerage fees and transfer taxes, as well as the fees and disbursements of counsel to and experts for the Selling Shareholders.
Any common shares offered under this prospectus that qualify for sale pursuant to Rule 144 of the Securities Act may also be sold under Rule 144 rather than pursuant to this prospectus.
Under applicable rules and regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to our common stockexercisable for a period of two business days prior tofive years commencing after the commencementeffective date of the distribution. In addition, the Selling Shareholders will be subjectregistration statement related to applicable provisionsthis offering. The warrant is not redeemable by us.
Pricing of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of ourthis Offering
Our common stock byis currently quoted on the Selling ShareholdersOTC Bulletin Board. We cannot provide any assurance that an active and liquid trading market in our securities will develop or, any other person. Weif developed, that the market will make copies of this prospectus available to the Selling Shareholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.continue.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The financial statements of Dais Analytic included in this prospectus have been audited by Pender Newkirk & Company LLP, Certified Public Accountants (“Pender”), to the extent and for the periods set forth in their report appearing elsewhere herein and are included in reliance upon such report given upon the authority of that firm as experts in auditing and accounting. The validity of the issuance of the common shares to be sold by the Selling Shareholders under this prospectus will be passed upon for our Company by Richardson & Patel, LLP (“R&P”). Neither Pender nor R&P have been employed by us on a contingent basis with respect to the sale or registration under this prospectus of the securities to be sold by the Selling Shareholders. Pender does not own a substantial interest in us. R&P and its partners beneficially own 1,784,616shares of our common stock, all of which are being registered hereunder.
The public offering price of the shares offered by this prospectus has been determined by us. Among the factors we considered in determining the public offering price of the shares were:
| • | | our history and our prospects; |
| • | | the industry in which we operate including industry comparable information; |
| • | | our past and present operating results; |
| • | | our outstanding debt, and the value of the various option grants and warrants at the time of pricing; |
| • | | the previous experience of our executive officers; and |
| • | | the general condition of the securities markets at the time of this offering. |
The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the shares can be resold at or above the public offering price.
Foreign Sales
Notice to Investors in the United Kingdom
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any securities which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any such securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;
(c) by the placement agent to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or
(d) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares shall result in a requirement for the publication by the issuer or the placement agent of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer to the public” in relation to any security in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any securities to be offered so as to enable an investor to decide to purchase such securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Each placement agent has represented, warranted and agreed that:
(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by it in connection with the issue or sale of any of our securities in circumstances in which section 21(1) of the FSMA does not apply to the issuer; and
(b) it has complied with and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to our securities in, from or otherwise involving the United Kingdom.
European Economic Area
In particular, this document does not constitute an approved prospectus in accordance with European Commission’s Regulation on Prospectuses no. 809/2004 and no such prospectus is to be prepared and approved in connection with this offering. Accordingly, in relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (being the Directive of the European Parliament and of the Council 2003/71/EC and including any relevant implementing measure in each Relevant Member State) (each, a Relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) an offer of securities to the public may not be made in that Relevant Member State prior to the publication of a prospectus in relation to such securities which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that any placement agent may, with effect from and including the Relative Implementation Date, make an offer of securities to the public in that Relevant Member State at any time:
• to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
• to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 euros; and (3) an annual net turnover of more than 50,000,000 euros, as shown in the last annual or consolidated accounts; or
• in any other circumstances which do not require the publication by the issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer of securities to the public” in relation to any common shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe such securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State. For these purposes the shares of common stock are “securities.”
We do not make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock.
INDEMNIFICATION, LIMITATION OF LIABILITY, AND
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
As permitted under the Business Corporation Law of the State of New York, our Certificate of Incorporation provides that all our directors shall be entitled to be indemnified for any breach of duty, provided that no indemnification maybe made to or on behalf of any director if a judgment or other final adjudication adverse to the director establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled.
Our Certificate of Incorporation further provides for indemnification of any person for actions as a director, officer, employee or agent of the Company to the fullest extent permitted by law with regards to fines, judgments fees and amounts paid in a settlement in an action or proceeding if the person acted in good faith and in a manner the person reasonably believed in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.
Our Certificate of Incorporation, as amended, provides thatUnder our directors are not to be liable for any breach of their directors’ duties, except for acts or omissions involving bad faith, intentional misconduct, knowing violation of the law or personal financial gain or advantage. Our Certificate of Incorporation also provides a right of indemnification in specified circumstances to our directors, officers, employees or agents to the fullest extent permitted by law. These provisions cannot be amended without the affirmative vote of the holders of at least a majority in interest of the outstanding shares entitled to vote.
Under the Company’s Director and Officer Insurance Policy, the Company’sour directors and officers are provided liability coverage of $3$5 million (subjectsubject to retention) whileretention. In addition, we have secured a form following excess Director and Officer Insurance Policy in the Company itself is covered for securities claims only.amount of $2.5 million. The policy haspolicies have a one year term with annual renewal possible. The policypolicies can be terminated by the insuredinsurer if there is a merger or acquisitionconsolidation which includes a change in ownership of 50% of the voting shares. AtUpon such time,an occurrence the insurer may elect to cancel the policy and the total premium would be due. The Companypolicies. We may elect to then obtain “run off” insurance for a period of between one and six years at a cost of 150%between 125% and 225% of the initial policy premium.premiums. The policies are claims made policies. Each policy is a claim made policy. Itcovers only covers those claims relating to acts occurring after the continuity date provided such claims are made during the policy term. If an act giving rise to a claim occurs during the policy term, but the claim is not made until afterreported within 60 days of the termination or expiration policy, terminates, there is no coverage.the claim will not be covered.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for ourto directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, we havethe Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us forthe Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, wethe Registrant will, unless in the opinion of ourits counsel that the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether oursuch indemnification by it is against public policy as expressed in the Securities Act and we will be governed by the final adjudication of such issue.
LEGAL MATTERS
Certain legal matters will be passed upon by Richardson & Patel, LLP, Los Angeles, CA, as counsel to Dais. Certain members of, and investment entities comprised of members of, and persons associated with, Richardson & Patel beneficially hold an aggregate 1,698,747 shares of common stock.
INTEREST OF NAMED EXPERTS AND COUNSEL
Our audited financial statements for the issue byfiscal years ended December 31, 2010 and 2009 have been included in this prospectus in reliance on the court.
reports of Cross, Fernandez and Riley, LLP, independent registered public accounting firm, given on the authority of said firm as an expert in auditing and accounting. The aforesaid reports contain an explanatory paragraph relating to the registrant’s ability to continue as a going concern as described in the footnotes to the financial statements, and an explanatory paragraph related to the restatement of the December 31, 2009 financial statements for the correction of errors in accounting for certain common stock warrants.
Certain members of, and investment entities comprised of members of, and persons associated with, Richardson & Patel beneficially hold an aggregate 1,698,747 shares of common stock, which represents 4.5% of our outstanding shares of common stock.
WHERE YOU CAN FIND FURTHER INFORMATION
We filed with the Securities and Exchange Commission (the “Commission”) a Registration Statement on Form S-1, under the Securities Act with respect to the common stock being offered in this offering. Although this prospectus, which forms a part of the Registration Statement, contains all of the material information set forth in the Registration Statement, parts of the Registration Statement are omitted in accordance with the rules and regulations of the Commission.
The omitted information may be inspected and copied, at prescribed rates, at the public reference facilities maintained by the Commission at Judiciary Plaza, 100 F Street, NE.,NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. For further information with respect to our company and the securities being offered in this offering, reference is hereby made to the Registration Statement, including the exhibits thereto and the financial statements, notes, and schedules filed as a part thereof.
The Registration Statement, including all exhibits and schedules and amendments, has been filed with the Commission through the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. We do not currently file periodic reports with the Commission; however, following the effective date of the Registration Statement relating to this prospectus, we intend to become a reporting company and will be required to file annual, quarterly and current reports, and other information with the Commission. Copies of all of our filings with the Commission may be viewed on the Commission'sCommission’s internet web site at http://www.sec.gov.www.sec.gov. We also maintain a website at http://www.daisanalytic.com.www.daisanalytic.com. We may include our public filings on our website, and will include such information to the extent required by applicable law and the rules and regulations of any exchange on which our shares are listed.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There wereEffective April 23, 2009, Pender Newkirk & Company LLP (“Pender”) notified Dais that it declined to stand for re-election as Dais’ independent registered public accounting firm since “the Company no changes in or disagreements withlonger met Pender’s continuation criteria”.
Effective April 24, 2009, the board of directors of Dais recommended and approved the appointment of Cross, Fernandez and Riley, LLP, Bayshore Center, 2907 Bay to Bay Blvd, Suite 360, Tampa, FL 33629 (“CFR”) as our accountants onnew independent certified public accounting and financial disclosure duringfirm for the lastfiscal year ending December 31, 2009.
During our two most recent fiscal years ended December 31, 2010 and 2009, the audit report of CFR did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles, except as follows: In our Annual Report on Form 10-K for the fiscal years ending December 31, 2010 and 2009, the Audit Report regarding our audited financial statements for the fiscal year ending December 31, 2010 and 2009 contained opinions regarding the significant doubt about our ability to continue as a going concern due to our lack of working capital and no near term prospect to raise additional growth capital, and an explanatory paragraph related to the restatement of the December 31, 2009 financial statements for the correction of errors in accounting for certain common stock warrants.
During our two most recent fiscal years, and any subsequent interim period from January 1, 2008 through the dateprior to engaging Cross, Fernandez and Riley, LLP neither we nor anyone on behalf of this prospectus.us have consulted with Cross, Fernandez and Riley, LLP regarding either:
1. | The application of accounting principles to specified transactions, either completed or proposed or the type of audit opinion that might be rendered on our financial statements, and neither was a written report provided to us nor was oral advice provided that Cross, Fernandez and Riley, LLP concluded was an important factor considered by us in reaching a decision as to an accounting, auditing or financial reporting issue; or |
2. | Any matter that was either the subject of a disagreement or a reportable event, as each term is defined in Items 304(a)(1)(iv) or (v) of Regulation S-K, respectively. |
INTERIM FINANCIAL INFORMATION | | Page No. | |
| |
Balance Sheet as of March 31, 2008 | F-3 |
Statements of Operations for the three months ended March 31, 2008 and 2007 | F-4 |
Statements of Cash Flows for the three months ended March 31, 2008 and 2007 | F-5 |
Condensed Notes to Financial Statements | F-7 |
| |
ANNUAL FINANCIAL INFORMATION | | | | |
| |
Report of Independent Registered Public Accounting Firm for the years ended 2010 and 2009 | F-19 | | F-1 | |
Balance Sheet as ofSheets for the years ended December 31, 2007 2010 and 2006 2009 | F-20 | | F-2 | |
Statements of Operations for the years ended December 31, 20072010 and 20062009 | F-22 | | F-3 | |
StatementStatements of Stockholders’ EquityDeficit for the years ended December 31, 20072010 and 20062009 | F-23 | | F-4 | |
StatementStatements of Cash Flows for the years ended December 31, 20072010 and 20062009 | F-24 | | F-5 | |
Notes to Financial Statements | | | F-7 | |
| |
INTERIM FINANCIAL INFORMATION | | | | |
| |
Balance Sheets September 30, 2011 (Unaudited) and December 31, 2010 | | | F-26 | |
Statements of Operations for the three and nine months periods ended September 30, 2011 and 2010 (Unaudited) | | | F-27 | |
Statement of Stockholders’ Deficit for the nine months ended September 30, 2011 (Unaudited) | | | F-28 | |
Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (Unaudited) | | | F-29 | |
Notes to Financial Statements (Unaudited) | F-26 | | F-30 | |
Financial Statements
Dais Analytic Corporation
As of March 31, 2008 and for the
Three Months Ended March 31, 2008 and 2007
(unaudited)
Dais Analytic Corporation
Balance Sheet
March 31, 2008
(unaudited)
Assets | | | |
Current assets: | | | |
Cash and cash equivalent | | $ | 1,288,622 | |
Accounts receivable | | | 125,197 | |
Inventory | | | 118,223 | |
Loan costs, net of accumulated amortization | | | 79,566 | |
Prepaid expenses and other current assets | | | 10,370 | |
Total current assets | | | 1,621,978 | |
| | | | |
Property and equipment, net of accumulated depreciation of $299,967 | | | 15,399 | |
| | | | |
Other assets: | | | | |
Deposits | | | 2,280 | |
Patents, net of accumulated amortization of $89,442 | | | 49,480 | |
Total other assets | | | 51,760 | |
| | | | |
| | $ | 1,689,137 | |
| | | | |
Liabilities and Stockholders’ Deficit | | | | |
Current liabilities: | | | | |
Accounts payable, including related party payables of $95,016 | | $ | 321,946 | |
Accrued compensation and related benefits, related party | | | 1,103,639 | |
Current portion of deferred revenue | | | 84,145 | |
Current portion of notes payable, net of unamortized discount of | | | | |
$2,175,158, included related party payable of $624 | | | 775,466 | |
Accrued expenses, other | | | 208,197 | |
Total current liabilities | | | 2,493,393 | |
| | | | |
Long-term liabilities: | | | | |
Accrued compensation, related party | | | 836,518 | |
Deferred revenue, net of current portion | | | 356,877 | |
Total long-term liabilities | | | 1,193,395 | |
| | | | |
Stockholders’ deficit: | | | | |
Series A preferred stock; $.01 par value; 10,000,000 shares authorized; | | | | |
0 shares issued and outstanding | | | | |
Common stock; $.01 par value; 100,000,000 shares authorized; 9,316,961 | | | | |
shares issued; and 9,079,748 shares outstanding | | | 93,170 | |
Capital in excess of par value | | | 24,259,483 | |
Deferred non cash offering costs | | | (86,234 | ) |
Accumulated deficit | | | (24,997,958 | ) |
| | | (731,539 | ) |
Treasury stock at cost, 237,213 shares | | | (1,266,112 | ) |
Total stockholders’ deficit | | | (1,997,651 | ) |
| | | | |
| | $ | 1,689,137 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Operations
| | Three Months Ended March 31, | |
Revenue: | | 2008 | | | 2007 | |
| | (unaudited) | | | (unaudited) | |
Sales | | $ | 192,474 | | | $ | 163,171 | |
License fees | | | 21,037 | | | | 21,037 | |
Interest income | | | 10,756 | | | | | |
| | | | | | | | |
Total revenues | | | 224,267 | | | | 184,208 | |
| | | | | | | | |
Expenses: | | | | | | | | |
| | | | | | | | |
Cost of goods sold | | | 159,933 | | | | 132,648 | |
Selling, general and administrative | | | 1,405,749 | | | | 712,243 | |
Interest expense | | | 859,220 | | | | 30,919 | |
| | | | | | | | |
Total expenses | | | 2,424,902 | | | | 875,810 | |
| | | | | | | | |
| | | | | | | | |
Loss before provision for income taxes | | | (2,200,635 | ) | | | (691,602 | ) |
| | | | | | | | |
Provision for income taxes | | | | | | | | |
| | | | | | | | |
Net loss | | $ | (2,200,635 | ) | | $ | (691,602 | ) |
| | | | | | | | |
Net loss per common share, basic and fully diluted | | $ | (0.24 | ) | | $ | (0.25 | ) |
| | | | | | | | |
Weighted average number of common shares outstanding | | | 9,174,764 | | | | 2,714,565 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Changes in Stockholders’ Deficit
For the Three Months Ended March 31, 2008
| | | | | | | | | | Capital in | | | | | | Deferred | | | | | | | |
| Preferred Stock | | Common Stock | | | Excess of | | | Accumulated | | | Offering | | | Treasury | | | Stockholders’ | |
| Shares | Amount | | Shares | | | Amount | | | Par Value | | | Deficit | | | Costs | | | Stock | | | Deficit | |
Balance, December 31, 2007 | | | | | 8,742,797 | | | $ | 87,428 | | | $ | 23,389,320 | | | $ | (22,797,323 | ) | | $ | (55,000 | ) | | $ | (1,266,112 | ) | | $ | (641,687 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for conversion of notes payable and related accrued interest (unaudited) | | | | | 434,164 | | | | 4,342 | | | | 104,198 | | | | | | | | | | | | | | | | 108,540 | |
Value of beneficial conversion feature for the conversion of notes payable and related accrued interest and for issuance of convertible debt (unaudited) | | | | | | | | | | | | | 266,814 | | | | | | | | | | | | | | | | 266,814 | |
Offering costs (unaudited) | | | | | | | | | | | | | (17,340 | ) | | | | | | | | | | | | | | | (17,340 | ) |
Issuance of warrants with convertible debt (unaudited) | | | | | | | | | | | | | 298,005 | | | | | | | | | | | | | | | | 298,005 | |
Issuance of options (unaudited) | | | | | | | | | | | | | 184,886 | | | | | | | | | | | | | | | | 184,886 | |
Issuance of common stock and warrants for offering costs (unaudited) | | | | | 140,000 | | | | 1,400 | | | | 33,600 | | | | | | | | (35,000 | ) | | | | | | | | |
Amortization of deferred offering costs | | | | | | | | | | | | | | | | | | | | | 3,766 | | | | | | | | 3,766 | |
Net loss for three months ended March 31, 2008 (unaudited) | | | | | | | | | | | | | | | | | (2,200,635 | ) | | | | | | | | | | | (2,200,635 | ) |
Balance, March 31, 2008 (unaudited) | | | | | 9,316,961 | | | $ | 93,170 | | | $ | 24,259,483 | | | $ | (24,997,958 | ) | | $ | (86,234 | ) | | $ | (1,266,112 | ) | | $ | (1,997,651 | ) |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Cash Flows
| | Three Months Ended March 31, | |
| | 2008 | | | 2007 | |
| | (unaudited) | | | (unaudited) | |
Operating activities | | | | | | |
Net loss | | $ | (2,200,635 | ) | | $ | (691,602 | ) |
Adjustments to reconcile net loss to net cash used | | | | | | | | |
by operating activities: | | | | | | | | |
Depreciation and amortization | | | 3,517 | | | | 3,358 | |
Amortization of deferred loan costs | | | 23,854 | | | | 15,694 | |
Amortization of discount on convertible notes | | | 374,506 | | | | | |
Amortization of the beneficial conversion feature on convertible notes | | | 329,467 | | | | 79,030 | |
| | | | | | | | |
Issuance of common stock for services and amortization | | | | | | | | |
of common stock issued for services | | | 3,766 | | | | 217,000 | |
Issuance of common stock warrants for conversion of notes payable | | | 43,111 | | | | | |
| | | | | | | | |
Issuance of common stock options to employees and consultants | | | 184,886 | | | | 23,003 | |
Value of beneficial conversion feature for conversion of notes | | | | | | | | |
payable and related accrued interest | | | 21,708 | | | | | |
(Increase) decrease in: | | | | | | | | |
Accounts receivable | | | (118,447 | ) | | | 86,436 | |
Inventory | | | (44,594 | ) | | | (24,999 | ) |
Prepaid expenses and other current assets | | | 13,547 | | | | (1,783 | ) |
Increase (decrease) in: | | | | | | | | |
Accounts payable and accrued expenses | | | (39,903 | ) | | | 60,726 | |
Accrued compensation and related benefits | | | 844,644 | | | | 32,500 | |
Deferred revenue | | | (21,037 | ) | | | (21,037 | ) |
Net cash used by operating activities | | | (581,610 | ) | | | (221,674 | ) |
| | | | | | | | |
Investing activities | | | | | | | | |
Purchase of property and equipment | | | | | | | (798 | ) |
Net cash used by investing activities | | | | | | | (798 | ) |
| | | | | | | | |
Financing activities | | | | | | | | |
Proceeds from issuance of notes payable | | | 500,000 | | | | 150,000 | |
Proceeds received from escrow | | | 1,000,000 | | | | | |
Payments on notes payable | | | (100,000 | ) | | | | |
Payments for loan costs | | | (34,000 | ) | | | | |
Issuance of common stock for cash | | | | | | | 51,000 | |
Net cash provided by financing activities | | | 1,366,000 | | | | 201,000 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalent | | | 784,390 | | | | (21,472 | ) |
| | | | | | | | |
Cash and cash equivalent, beginning of period | | | 504,232 | | | | 204,799 | |
| | | | | | | | |
Cash and cash equivalent, end of period | | $ | 1,288,622 | | | $ | 183,327 | |
| | | | | | | | |
Supplemental disclosures of cash flow information and noncash | | | | | | | | |
investing and financing activities: | | | | | | | | |
Cash paid during the year for interest | | $ | 15,028 | | | $ | 29,762 | |
During the three months ended March 31, 2008, the Company issued 434,164 shares of common stock in conversion of $100,000 of notes payable and $8,540 of accrued interest.
During the three months ended March 31, 2008 the Company issued 140,000 shares of common stock for future services valued at $35,000.
During the three months ended March 31, 2008, the Company issued convertible notes payable with beneficial conversion features of $245,106 and a discount equivalent to the relative fair value of the accompanying warrants of $254,894.
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
1. Background Information
Dais Analytic Corporation (the “Company”), a New York corporation, has developed and is commercializing applications using its nano-structure polymer technology. The first commercial product is an energy recovery ventilator (“ERV”) (cores and systems) for use in commercial Heating, Ventilating, and Air Conditioning (HVAC) applications. In addition to direct sales, the Company licenses its nano-structured polymer technology to strategic partners in the aforementioned application and is in various stages of development with regard to other applications employing its base technologies. The Company was incorporated in April of 1993 with its corporate headquarters located in Odessa, Florida.
2. Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the three month’s ended March 31, 2008, the Company has a net loss of $2,200,635 and an accumulated deficit of $24,997,958 has negative working capital of $871,415 and a stockholder’s deficit of $1,997,651 at March 31, 2008. In view of these matters, there is substantial doubt that the Company will continue as a going concern. The recoverability of recorded property and equipment, intangible assets, and other asset amounts shown in the accompanying financial statements is dependent upon the Company’s ability to continue as a going concern and to achieve a level of profitability. The Company intends on financing its future activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements. However, there can be no assurance that the Company will be successful in its efforts. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
3. Significant Accounting Policies
In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three month periods ended March 31, 2008 and 2007, (b) the financial position at March 31, 2008, and (c) cash flows for the three month periods ended March 31, 2008 and 2007, have been made.
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
3. Significant Accounting Policies (continued)
The unaudited financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended December 31, 2007. The results of operations for the three month periods ended March 31, 2008 and 2007 are not necessarily indicative of those to be expected for the entire year.
The significant accounting policies followed are:
| The preparation 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. |
Direct loan costs of $103,420 incurred with the issuance of notes payable are deferred and amortized to interest expense over the life of the related notes payable, $15,694 per month for 12 months. For the three months ended March 31, 2008 and 2007, the Company incurred amortization expense of $23,854 and 15,694, respectively.
| Inventory consists of raw materials and is stated at the lower of cost, determined by first-in, first-out method, or market. Market is determined based on the net realizable value, with appropriate consideration given to obsolescence, excessive levels, deterioration and other factors. |
| Revenue derived from the sale of licenses is deferred and recognized as revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated. The Company recognized $21,037 of deferred revenue associated with license agreements for each of the three months ended March 31, 2008 and 2007. |
| In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the financial statements based on their fair values. That expense will be recognized over the period during which an employee is |
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
3. Significant Accounting Policies (continued)
| required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company adopted SFAS 123R effective beginning January 1, 2006 using the Modified Prospective Application Method. Under this method, SFAS 123R applies to new awards and to awards modified, repurchased or cancelled after the effective date. Prior to the adoption of SFAS 123(R) the Company accounted for stock option grants using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and accordingly, recognized no compensation expense for stock option grants. |
| The value of each grant under SFAS 123(R) is estimated at the grant date using the Black-Scholes option model with the following assumptions for options granted during the three months ended March 31, 2008 and 2007: |
| | Three Months Ended March 31, 2008 | | Three Months Ended March 31, 2007 |
Dividend rate | | 0 | | 0 |
Risk free interest rate | | 2.64% – 3.45% | | 4.50% - 4.69% |
Term | | 5 – 10 years | | 5 – 10 years |
Volatility | | 80% – 114% | | 71% – 82% |
| The basis for the above assumptions are as follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was calculated based on the Company’s historical pattern of options granted that are expected to be outstanding; and expected volatility was calculated by review of a peer company’s historical activity. |
| SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on historical experience of forfeitures, the Company estimated future unvested option forfeitures at zero percent for the period ended March 31, 2008 and 2007 and incorporated this rate in the estimated fair value of employee option grants during 2008 and 2007. |
| As of March 31, 2008, there was $542,998 of unrecognized stock-based compensation expense related to nonvested stock options. This expense will be recognized over a weighted average period of three years. |
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
3. Significant Accounting Policies (continued)
| The following table represents our nonvested stock option activity for the period ended March 31, 2008: |
| | | | | Weighted Average | |
| | Number of | | | Grant Date | |
| | Options | | | Fair Value | |
| | | | | | |
Nonvested options - December 31, 2007 | | | 1,036,198 | | | | |
| | | | | | | |
Granted | | | 5,973,500 | | | $ | 0.22 | |
Vested | | | (5,099,273 | ) | | | | |
Forfeited | | | - | | | | | |
| | | | | | | | |
Nonvested options - March 31, 2008 | | | 1,910,425 | | | | | |
| The aggregate intrinsic value of options outstanding and exercisable at March 31, 2008, based on the Company’s closing stock price of $0.31 as of the last business day of the period ended March 31, 2008, which would have been received by the optionees had all options been exercised on that date was $1,709,989 and $1,540,811, respectively. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options. |
| Basic and diluted earnings per share are computed based on the weighted average number of common stock outstanding during the period. Common stock equivalents, which amounted to 5,692,086 and 3,433,230 at March 31, 2008 and 2007, respectively, are not considered in the calculation of the diluted earnings per share for the period presented as their effect would be anti-dilutive due to losses incurred. |
| In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, SFAS No. 160 revises the accounting for both increases and decreases |
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
3. Significant Accounting Policies (continued)
| in a parent’s controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Management is currently evaluating the effect, if any the adoption will have on the Company’s financial position and results of operations. |
Other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
4. Notes Payable
Notes payable consist of the following at March 31, 2008: |
| | | | |
Convertible notes payable; interest at 9%; with notes maturing 12 months from date of issue beginning December 2008, secured by certain patents held by the Company net of unamortized discount and beneficial conversion feature | | $ | 774,842 | |
Note payable to a related party; non-interest bearing; due on demand; unsecured | | | 624 | |
| | | 775,466 | |
Less amounts currently due | | | 775,466 | |
| | $ | 0 | |
Convertible notes payable
During the three months ended March 31, 2008, the Company issued convertible promissory notes and warrants to purchase common stock to individuals in exchange for proceeds totaling $500,000. At March 31, 2008, the Company had $2,950,000 convertible promissory notes outstanding. The convertible promissory notes contained an embedded conversion feature. As such, in accordance with EITF Issue No. 98-5, “Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion Ratio,” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” the difference between the conversion price and the Company’s estimated fair market value of its stock price on the commitment date of the notes was calculated to be $245,106 for notes issued during 2008 and
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
4. Notes Payable (continued)
$1,18,331 for notes issued for the year ended December 31, 2007. The Company is amortizing the beneficial conversion feature over the life of the convertible debt of one year and therefore recognized interest expense resulting from the amortization of the beneficial conversion feature for all of the outstanding notes of $329,467 for the three months ended March 31, 2008.
The notes bear interest at nine percent per annum and mature beginning in December 2008 through January 2009. At maturity, lender has the option of receiving payment of any principal and accrued interest due under the note in either cash or common stock of the Company. If lender opts for payment in the form of common stock the stock will be issued at the rate of one share per $0.20 of principal and interest. Company may, at any time prior to maturity, pay all interest and principal due under the note in cash. Accrued interest on the notes totaled $69,510 at March 31, 2008.
The warrants to purchase common stock which accompanied the convertible promissory notes are, subject to certain limitations, exercisable at $0.25 per share, vest immediately, and expire in December 2012. Pursuant to APB No. 14, the Company valued the warrants issued in 2008 and 2007 at their relative fair value of $254,894 and $1,311,669, respectively. To recognize the relative fair value of the warrants, the Company discounted the notes and increased additional paid in capital in the financial statements. The discount is amortized over the term of the notes and resulted in a $374,506 charge to interest expense for the three months ended March 31, 2008.
The following table presents the allocation of proceeds from the financing: | | | |
| | | |
Principal balance of convertible notes | | $ | 2,950,000 | |
Relative fair value of the warrants | | | (1,566,563 | ) |
Beneficial conversion feature | | | (1,383,437 | ) |
Amortization of the discount | | | 415,327 | |
Amortization of the beneficial conversion feature | | | 359,515 | |
Carrying value at March 31, 2008 | | $ | 774,842 | |
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
5. Related Party Transactions
The Company rents a building on a month to month basis from a related party which is wholly owned by two stockholders of the Company, one of which is the Chief Executive Officer. The monthly rent expense is $3,800 per month. For the year three months ended March 31, 2008 and 2007, the Company has recorded $12,198 and $12,198, respectively, in rent expense to this related party.
The above amounts are not necessarily indicative of the amounts that would have been incurred had comparable transactions been entered into with independent parties.
6. Authorized Shares
During the period ended March 31, 2008, the Company’s board of directors approved a proposal to amend the Articles of Incorporation to increase the number of authorized shares of common stock from 50,000,000 to 100,000,000 shares.
7. Stock Options and Warrants
At March 31, 2008, the Company has a stock option plan (the “2000 Plan”) that provides for the granting of options to qualified employees of the Company, independent contractors, consultants, directors and other individuals. As of December 31, 2007, the Company’s Board of Directors approved and made available 6,093,882 shares of common stock to be issued pursuant to said plan. During the period ended March 31, 2008, the Company’s Board of Directors approved and made available an additional 5,000,000 shares of Company’s common stock for issuance under the 2000 Plan. The 2000 Plan permits grants of options of common shares authorized and approved by the Company’s Board of Directors for issuance prior to enactment of the 2000 Plan.
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
7. Stock Options and Warrants (continued)
The following summarizes the information relating to outstanding stock options and warrants and the activity during 2008 and 2007:
| | Number of Shares | | | Per Share Option/Warrant Price | | | Weighted Average Exercise Price | |
| | | | | | | | | |
Shares under option/warrant at January 1, 2007 | | | 6,026,029 | | | $ | 0.05-$5.50 | | | $ | 0.62 | |
Exercised | | | (60,000 | ) | | $ | 0.05 | | | $ | 0.05 | |
Terminated | | | (1,064,585 | ) | | $ | 0.05-$5.50 | | | $ | 2.25 | |
Granted | | | 14,167,637 | | | $ | 0.21-$0.55 | | | $ | 0.26 | |
Shares under option/warrant at December 31, 2007 | | | 19,069,081 | | | $ | 0.05-$5.50 | | | $ | 0.26 | |
Terminated | | | (20,333 | ) | | $ | 0.10 | | | $ | 0.10 | |
Exercised | | | | | | | | | | | | |
Granted | | | 5,973,500 | * | | $ | 0.21-$0.55 | | | $ | 0.25 | |
Shares under option/warrant at March 31, 2008 | | | 25,022,248 | | | $ | 0.05-$5.50 | | | $ | 0.26 | |
Options/warrants exercisable at March 31, 2008 | | | 22,819,123 | | | $ | 0.05-$5.50 | | | $ | 0.27 | |
| | | | | | | | | | | | |
*This amount does not include warrants granted subsequent to March 31, 2008 for services provided during the period ended March 31, 2008.
The weighted average fair value at the date of grant of the options was $0.22 for the three months ended March 31, 2008. The weighted average fair value at the date of grant of the options was $0.39 for the three months ended March 31, 2007.
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
7. Stock Options and Warrants (continued)
The warrants and options expire at various dates ranging April 2008 to March 2018. A further summary of information related to stock options and warrants outstanding and exercisable at March 31, 2008 is as follows:
Range of Exercise Price Per Share | | Shares Under Option/Warrant | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life in Years |
Outstanding: | | | | | | |
$0.05-0.75 | | 24,993,291 | | $0.26 | | 4.84 |
$2.50-5.50 | | 28,957 | | $3.94 | | 2.24 |
$0.05-5.50 | | 25,022,248 | | $0.26 | | 4.84 |
| | | | | | |
Exercisable: | | | | | | |
$0.05-0.75 | | 22,790,166 | | $0.26 | | 4.42 |
$2.50-5.50 | | 28,957 | | $3.94 | | 2.24 |
$0.05-5.50 | | 22,819,123 | | $0.26 | | 5.55 |
8. Commitments and Contingencies
The Company has employment agreements with some of its key employees and executives. These agreements provide for minimum levels of compensation during current and future years. In addition, these agreements call for grants of stock options and for payments upon termination of the agreements.
In May of 2006, the United States Patent Office (“USPTO”) informed the Company that an interference proceeding had been initiated between the Company’s patent number US 6,413,298 and a pending patent application assigned to another corporation.
In the course of the interference the USPTO has permitted the Company to file five motions. Each motion sets forth either the basis upon which the Company believes the other corporation’s patent application is deficient for failing to meet minimum USPTO requirements for a valid patent application or the manner in which the Company believes the patents cited fail to meet the USPTO requirements for interference. The other corporation has been permitted to file a motion seeking benefit of a provisional patent application date and one requesting to add three additional claims to the application. Oppositions and replies have been filed by both parties.
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
8. Commitments and Contingencies (continued)
At this point, a possible financial outcome cannot be determined. However, the interference will not effect the validity of Company’s other patents.
The Company entered into a six month financial and strategic consulting agreement dated September 1, 2005 with a financial consulting company. (“Consulting Company”) by which the Consulting Company was to provide the Company with consulting services and assist it in the procurement of equity and debt financing for business expansion and development up to a maximum of $20,000,000. In exchange for these services, two of the shareholders of the Company assigned their Convertible Notes Receivable, valued at $627,723, to the Consulting Company. Per the terms of the Consulting Agreement and its related documents, one half of the first note became vested in the Consulting Company upon the execution of the Consulting Agreement which by the terms of the Agreement resulted in $156,930 of said first note being subject to conversion into the Company’s common stock at the rate of one share per $.10 of note balance. In addition, the agreement states that an additional $156,931 would be potentially eligible for conversion upon the Company raising $1,000,000 in financing from any source during the term of the Consulting Agreement. Conversion rights were subject to pro-rata vesting based on the funding secured. For financial presentation purposes, the Company has accounted for this transaction as a capital contribution by the stockholders of $627,723 for the forgiveness of their notes and as consulting expense for equity given to the Consulting Company. During the year ended December 31, 2005, the Company received funding of $599,972 in the form of bridge loans. On December 23, 2005 the Company terminated the Consulting Agreement subject to the provisions thereof. The Company has no further obligations of any nature to the Consulting Company. The shareholder of one of the notes may contend, and has a possibility of being successful, in having the amendment and assignment declared void requiring his note be reinstated on the Company’s books. The accounting entries made by the Company with regard to the first note are not to be construed as a waiver of any rights the Company may have in law or equity under the consulting agreement or any agreements related thereto, nor as an admission, of an nature, by the Company.
Subsequent to March 31, 2008, the Company was obtained a release of any liability to the Consulting Company and the corresponding liability was assigned to a third party. The vested value of the note that was assigned amounted to $244,000 which converts into the Company’s common stock at a rate of one share per $0.10 of note balance which amounts to 2,440,000 shares. During 2005 and 2006, a total of approximately $244,000 was recorded as consulting expense.
Dais Analytic Corporation
Notes to Financial Statements
Three Months Ended March 31, 2008 and 2007
(unaudited)
9. Subsequent Events
Subsequent to March 31, 2008, the Company granted an executive a fully vested warrant to purchase 3,000,000 shares of the Company’s common stock at an exercise price of $0.36 per share for services personally performed with a five year expiration date. During the period ended March 31, 2008, the Company recorded $836,518 in compensation expense and accrued compensation in connection with these warrants.
Financial Statements
Dais Analytic Corporation
Years Ended December 31, 2007 and 2006
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Dais-AnalyticDais Analytic Corporation
Odessa, Florida
We have audited the accompanying balance sheets of Dais-AnalyticDais Analytic Corporation (“the Company”) as of December 31, 20072010 and 20062009, and the related statements of operations, changes in stockholders'stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the management of Dais-Analytic Corporation.Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The companyCompany is not required at this time, to have, nor were we engaged to perform, an audit of its internal controlcontrols over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dais-AnalyticDais Analytic Corporation as of December 31, 20072010 and 20062009, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United StatesStates.
As more fully discussed in Note 12, the Company has restated the accompanying financial statements as of America.and for the year ended December 31, 2009 to correct errors in accounting for certain common stock warrants.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has incurred significant losses since inception and has a net loss of $2,233,992 during the year ended December 31, 2007, has an accumulatedworking capital deficit and stockholders’ deficit of $22,797,323, has negative working capital of $334,449,$2,861,448 and a stockholder’s deficit of $641,687$6,722,092 at December 31, 2007.2010. These factors among others, raise substantial doubt about the Company'sCompany’s ability to continue as a going concern. Management'sManagement’s plans in regard to these matters are also describeddiscussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|
Cross, Fernandez & Riley LLP |
|
Orlando, Florida March 31, 2011 |
Pender Newkirk & Company LLP
Certified Public Accountants
Tampa, Florida
March 14, 2008
| Dais Analytic Corporation Balance Sheets
| |
| | December 31, | |
| | 2007 | | | 2006 | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash | | $ | 504,232 | | | $ | 204,799 | |
Cash held in escrow | | | 1,000,000 | | | | | |
Accounts receivable | | | 6,750 | | | | 111,472 | |
Other receivables | | | 12,178 | | | | | |
Inventory | | | 73,629 | | | | 62,678 | |
Loan costs, net of accumulated amortization | | | 86,760 | | | | 23,540 | |
Prepaid expenses and other current assets | | | 11,739 | | | | 3,747 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total current assets | | | 1,695,288 | | | | 406,236 | |
| | | | | | | | |
Property and equipment, net of accumulated depreciation of $298,765 and $295,231 at December 31, 2007 and 2006, respectively | | | 16,600 | | | | 10,924 | |
| | | | | | | | |
Other assets: | | | | | | | | |
Deposits | | | 2,280 | | | | 2,280 | |
Patents, net of accumulated amortization of $87,127 and $77,866 at December 31, 2007 and 2006, respectively | | | 51,796 | | | | 61,057 | |
Total other assets | | | 54,076 | | | | 63,337 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | 1,765,964 | | | $ | 480,497 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Balance Sheets
(continued)
| | December 31, | |
| | 2007 | | | 2006 | |
| | | | | | |
Liabilities and Stockholders’ Deficit | | | | | | |
Current liabilities: | | | | | | |
Accounts payable, including related party payables of $91,320 and $87,098 at December 31, 2007 and 2006, respectively | | $ | 456,341 | | | $ | 532,197 | |
Accrued compensation and related benefits | | | 6,041 | | | | 416 | |
Accrued compensation and related benefits, related party | | | 1,089,472 | | | | 925,629 | |
Current portion of deferred revenue | | | 84,145 | | | | 84,145 | |
Current portion of notes payable, net of unamortized discount of $2,379,131 at December 31, 2007, including related party of $624 and $13,675 at December 31, 2007 and 2006, respectively | | | 271,493 | | | | 1,068,647 | |
Accrued expenses, other | | | 122,245 | | | | 59,748 | |
| | | | | | | | |
Total current liabilities | | | 2,029,737 | | | | 2,670,782 | |
| | | | | | | | |
Long-term liabilities: | | | | | | | | |
Notes payable, net of current portion | | | | | | | 60,574 | |
Deferred revenue, net of current portion | | | 377,914 | | | | 462,057 | |
Total long-term liabilities | | | 377,914 | | | | 522,631 | |
| | | | | | | | |
Stockholders’ deficit: | | | | | | | | |
Series A preferred stock; $.01 par value; 10,000,000 shares authorized; 0 and 305,097 shares issued and outstanding at December 31, 2007 and 2006, respectively | | | | | | | 3,051 | |
Common stock; $.01 par value; 50,000,000 and 20,000,000 shares authorized; 8,742,797 and 2,603,565 shares issued; and 8,505,584 and 2,366,352 shares outstanding at December 31, 2007 and 2006, respectively | | | 87,428 | | | | 26,036 | |
Capital in excess of par value | | | 23,389,320 | | | | 19,142,447 | |
Deferred non-cash offering costs | | | (55,000 | ) | | | (55,000 | ) |
Accumulated deficit | | | (22,797,323 | ) | | | (20,563,338 | ) |
| | | 624,425 | | | | (1,446,804 | ) |
Treasury stock at cost, 237,213 shares | | | (1,266,112 | ) | | | (1,266,112 | ) |
Total stockholders’ deficit | | | (641,687 | ) | | | (2,712,916 | ) |
| | | | | | | | |
| | $ | 1,765,964 | | | $ | 480,497 | |
The accompanying notes are an integral part of the financial statements.
| Dais Analytic Corporation
Statement of Operations
| |
| | Years Ended December 31, | |
| | 2007 | | | 2006 | |
Revenue: | | | | | | |
Sales | | $ | 786,016 | | | $ | 828,991 | |
License fees | | | 84,144 | | | | 84,143 | |
Interest income | | | | | | | 200 | |
| | | 870,160 | | | | 913,334 | |
Expenses: | | | | | | | | |
Cost of goods sold | | | 637,032 | | | | 648,067 | |
Selling, general and administrative | | | 1,871,030 | | | | 2,084,543 | |
Interest expense | | | 596,083 | | | | 119,890 | |
| | | 3,104,145 | | | | 2,852,500 | |
| | | | | | | | |
Loss before provision for income taxes | | | (2,233,985 | ) | | | (1,939,166 | ) |
| | | | | | | | |
Provision for income taxes | | | | | | | | |
| | | | | | | | |
Net loss | | $ | (2,233,985 | ) | | $ | (1,939,166 | ) |
| | | | | | | | |
Net loss per common share, basic and fully diluted | | $ | (0.44 | ) | | $ | (1.07 | ) |
| | | | | | | | |
Weighted average number of common shares outstanding | | | 5,062,725 | | | | 1,808,780 | |
| December 31, | |
| 2010 | | 2009 | |
| | | Restated | |
Assets |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 304,656 | | | $ | 1,085,628 | |
Accounts receivable | | | 828,632 | | | | 187,434 | |
Other receivables | | | 59,526 | | | | | |
Inventory | | | 294,069 | | | | 149,986 | |
Prepaid expenses and other current assets | | | 258,136 | | | | 103,571 | |
| | | | | | | | |
| | | | | |
Total current assets | | | 1,745,019 | | | | 1,526,619 | |
| | | | | | | | |
| | | | | |
Property and equipment, net | | | 147,911 | | | | 19,383 | |
| | | | | | | | |
| | | | | |
Other assets: | | | | | | | | |
| | | | | |
Deposits | | | 3,280 | | | | 2,280 | |
Patents, net of accumulated amortization of $112,240 and $107,319 at December 31, 2010 and 2009, respectively | | | 74,363 | | | | 72,464 | |
| | | | | | | | |
Total other assets | | | 77,643 | | | | 74,744 | |
| | | | | | | | |
| | $ | 1,970,573 | | | $ | 1,620,746 | |
| | | | | | | | |
| | | | | |
Liabilities and Stockholders’ Deficit |
Current liabilities: | | | | | | | | |
Accounts payable, including related party payables of $151,440 and $150,740 at December 31, 2010 and 2009, respectively | | $ | 620,196 | | | $ | 385,955 | |
Accrued compensation and related benefits | | | 1,426,022 | | | | 1,314,356 | |
Accrued expenses, other | | | 241,861 | | | | 223,597 | |
Current portion of deferred revenue | | | 647,804 | | | | 292,457 | |
Current portion of notes payable | | | 50,000 | | | | 150,000 | |
Current portion of notes payable, related party | | | 1,620,624 | | | | 1,425,624 | |
| | | | | | | | |
| | | | | |
Total current liabilities | | | 4,606,507 | | | | 3,791,989 | |
| | | | | |
Long-term liabilities: | | | | | | | | |
| | | | | |
Long-term portion of notes payable, related party | | | — | | | | 300,000 | |
Warrant liability | | | 3,958,318 | | | | 4,577,119 | |
Deferred revenue, net of current portion | | | 127,840 | | | | 207,696 | |
| | | | | | | | |
| | | | | |
Total long-term liabilities | | | 4,086,158 | | | | 5,084,815 | |
| | | | | | | | |
| | | | | |
Stockholders’ deficit: | | | | | | | | |
Preferred stock; $0.01 par value; 10,000,000 shares authorized; 0 shares issued and outstanding | | | — | | | | — | |
Common stock; $0.01 par value; 200,000,000 shares authorized; 33,563,428 and 29,352,930 shares issued and 33,306,215 and 29,095,717 shares outstanding at December 31, 2010 and 2009, respectively | | | 335,635 | | | | 293,530 | |
Capital in excess of par value | | | 29,852,347 | | | | 27,926,893 | |
Accumulated deficit | | | (35,637,962 | ) | | | (34,204,369 | ) |
| | | | | | | | |
| | | (5,449,980 | ) | | | (5,983,946 | ) |
Treasury stock at cost, 257,213 shares | | | (1,272,112 | ) | | | (1,272,112 | ) |
| | | | | | | | |
Total stockholders’ deficit | | | (6,722,092 | ) | | | (7,256,058 | ) |
| | | | | | | | |
| | $ | 1,970,573 | | | $ | 1,620,746 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Changes in Stockholders’ Deficit
Years Ended December 31, 2007 and 2006Operations
| Preferred Stock | | | Common Stock | | | Capital in Excess of Par Value | | | Accumulated Deficit | | | Deffered Non-Cash Offering Costs | | Treasury Stock | | Stockholders' Deficit | |
| Shares | | | Amount | | | Shares | | | Amount | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | 305,097 | | | $ | 3,051 | | | | 1,716,292 | | | $ | 17,163 | | | $ | 18,104,801 | | | $ | (18,624,172 | ) | | | | $ | (1,266,112 | ) | $ | (1,765,269 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock | | | | | | | | | | 727,273 | | | | 7,273 | | | | 392,725 | | | | | | | | | | | | | 399,998 | |
Issuance of options | | | | | | | | | | | | | | | | | | 558,521 | | | | | | | | | | | | | 558,521 | |
Issuance of common stock for services | | | | | | | | | | 60,000 | | | | 600 | | | | 32,400 | | | | | | | | | | | | | 33,000 | |
Deferred offering costs | | | | | | | | | | 100,000 | | | | 1,000 | | | | 54,000 | | | | | | $ | (55,000 | ) | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | (1,939,166 | ) | | | | | | | | (1,939,166 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | 305,097 | | | | 3,051 | | | | 2,603,565 | | | | 26,036 | | | | 19,142,447 | | | | (20,563,338 | ) | | (55,000 | ) | | (1,266,112 | ) | | (2,712,916 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock | | | | | | | | | | 90,9090 | | | | 909 | | | | 49,091 | | | | | | | | | | | | | 50,000 | |
Issuance of common stock for exercise of options | | | | | | | | | | 60,000 | | | | 600 | | | | 2,400 | | | | | | | | | | | | | 3,000 | |
Issuance of common stock for services | | | | | | | | | | 230,000 | | | | 2,300 | | | | 214,700 | | | | | | | | | | | | | 217,000 | |
Issuance of common stock for conversion of notes payable and related accrued interest | | | | | | | | | | 3,220,318 | | | | 32,203 | | | | 849,328 | | | | | | | | | | | | | 881,531 | |
Issuance of options and warrants | | | | | | | | | | | | | | | | | | 358,863 | | | | | | | | | | | | | 358,863 | |
Value of beneficial conversion feature for the conversion of notes payable and related accrued interest | | | | | | | | | | | | | | | | | | 1,576,891 | | | | | | | | | | | | | 1,576,891 | |
Issuance of common stock for conversion of preferred stock | | (305,097 | ) | | | (3,051 | ) | | | 2,500,000 | | | | 25,000 | | | | (21,949 | ) | | | | | | | | | | | | | |
Issuance of warrants with convertible debt | | | | | | | | | | | | | | | | | | 1,311,669 | | | | | | | | | | | | | 1,311,669 | |
Issuance of common stock for accrued interest | | | | | | | | | | 38,005 | | | | 380 | | | | 9,120 | | | | | | | | | | | | | 9,500 | |
Offering costs | | | | | | | | | | | | | | | | | | (103,240 | ) | | | | | | | | | | | | (103,240 | ) |
Net loss | | | | | | | | | | | | | | | | | | | | | | (2,233,985 | ) | | (55,000 | ) | | | | | (2,233,985 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | 0 | | | $ | 0 | | | | 8,742797 | | | $ | 87,428 | | | $ | 23,389,320 | | | $ | (22,797,323 | ) | $ | (55,000 | ) | $ | (1,266,112 | ) | $ | (641,687 | ) |
| Year Ended December 31, | |
| 2010 | | 2009 | |
| | | Restated | |
Revenue: | | | | | | |
Sales | | $ | 3,260,468 | | | $ | 1,447,071 | |
License fees | | | 82,000 | | | | 84,144 | |
| | | | | | | | |
| | | 3,342,468 | | | | 1,531,215 | |
| | | | | | | | |
Cost of goods sold | | | 2,290,041 | | | | 1,071,098 | |
| | | | | | | | |
Gross profit | | | 1,052,427 | | | | 460,117 | |
Expenses: | | | | | | | | |
Research and development expenses, net of government grant proceeds of $99,732 and $0 | | | 238,182 | | | | 6,600 | |
Selling, general and administrative | | | 2,693,092 | | | | 3,217,992 | |
| | | 2,931,274 | | | | 3,224,592 | |
| | |
Loss from operations | | | (1,878,847 | ) | | | (2,764,475 | ) |
| | |
Other expense (income): | | | | | | | | |
| | |
Other (income) | | | (36,003 | ) | | | — | |
Change in fair value of warrant liability | | | (618,801 | ) | | | 3,731,694 | |
Interest expense | | | 209,550 | | | | 621,574 | |
Interest income | | | — | | | | (667 | ) |
| | | | | | | | |
| | | (445,254 | ) | | | 4,352,601 | |
| | | | | | | | |
Net loss | | $ | (1,433,593 | ) | | $ | (7,117,076 | ) |
| | | | | | | | |
Net loss per common share, basic and diluted | | $ | (0.05 | ) | | $ | (0.36 | ) |
| | | | | | | | |
Weighted average number of common shares, basic and diluted | | | 29,985,632 | | | | 19,960,150 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Cash Flows
| | Years Ended December 31, | |
| | 2007 | | | 2006 | |
Operating activities | | | | | | |
Net loss | | $ | (2,233,985 | ) | | $ | (1,939,166 | ) |
Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | |
Depreciation and amortization | | | 12,788 | | | | 17,159 | |
Amortization of deferred loan costs | | | 23,540 | | | | 62,776 | |
Amortization of discount on convertible notes | | | 40,821 | | | | | |
Amortization of the beneficial conversion feature on convertible notes | | | 30,048 | | | | | |
Issuance of common stock for services | | | 217,000 | | | | 33,000 | |
Issuance of common stock options to employees and consultants | | | 358,863 | | | | 558,521 | |
Value of beneficial conversion feature for conversion of notes payable and related accrued interest | | | 438,560 | | | | | |
(Increase) decrease in: | | | | | | | | |
Accounts receivable | | | 104,722 | | | | (34,294 | ) |
Inventory | | | (10,951 | ) | | | (3,820 | ) |
Prepaid expenses and other current assets | | | (20,170 | ) | | | (1,984 | ) |
Increase (decrease) in: | | | | | | | | |
Accounts payable and accrued expenses | | | 37,757 | | | | 395,576 | |
Accrued compensation and related benefits | | | 169,468 | | | | 242,649 | |
Deferred revenue | | | (84,143 | ) | | | (84,144 | ) |
Total adjustments | | | 1,318,303 | | | | 1,185,439 | |
Net cash used by operating activities | | | (915,682 | ) | | | (753,727 | ) |
| | | | | | | | |
Investing activities | | | | | | | | |
Purchase of property and equipment | | | (9,210 | ) | | | (5,099 | ) |
Financing activities | | | | | | | | |
Proceeds from issuance of notes payable | | | 1,800,000 | | | | 515,575 | |
Payments on notes payable | | | (425,000 | ) | | | (230 | ) |
Payments for offering costs | | | (190,000 | ) | | | | |
Proceeds from advance from related party | | | 156,000 | | | | | |
Repayment of advance from related party | | | (169,675 | ) | | | | |
Issuance of common stock for cash | | | 53,000 | | | | 399,998 | |
Net cash provided by financing activities | | | 1,224,325 | | | | 915,343 | |
The accompanying notes are an integral part of the financial statements. Dais Analytic Corporation
Statements of Cash Flows
| | Years Ended December 31, | |
| | 2007 | | | 2006 | |
Net increase in cash | | | 299,433 | | | | 156,517 | |
Cash, beginning of period | | | 204,799 | | | | 48,282 | |
Cash, end of period | | $ | 504,232 | | | $ | 204,799 | |
Supplemental disclosures of cash flow information and noncash investing and financing activities: | | | | | | | | |
Cash paid during the year for interest | | $ | 38,479 | | | $ | 15,144 | |
During the year ended December 31, 2007, the Company issued 3,220,318 shares of common stock in conversion of $840,547 of notes payable and $40,984 of accrued interest.
During the year ended December 31, 2007, the Company issued 230,000 shares of common stock for services valued at $217,000.
During the year ended December 31, 2007, the Company issued 38,005 shares of common stock for $9,500 of accrued interest
During the year ended December 31, 2007, the Company issued $1,000,000 of convertible notes payable for which the proceeds are held in escrow at December 31, 2007.
During the year ended December 31, 2007, the Company issued convertible notes payable with a beneficial conversion feature of $1,138,331 and a discount equivalent to the relative fair value of the accompanying warrants of $1,311,669.
During the year ended December 31, 2007, the Company exchanged 305,097 preferred stock shares for 2,500,000 common stock shares.
During the year ended December 31, 2006, the Company issued 100,000 shares of common stock valued at $55,000 in exchange for offering costs.
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Notes to Financial Statements
of Stockholders’ Deficit
Years Ended December 31, 20072010 and 2006
2009
| Common Stock | | | Capital in Excess of Par Value | | | Accumulated Deficit | | | Prepaid Services Paid for with Common Stock | | | Treasury Stock | | | Total Stockholders’ Deficit | |
Shares | | Amount | | | | | | |
Balance, December 31, 2008 | 12,162,398 | | | 121,624 | | | | 25,253,196 | | | | (28,776,769 | ) | | | (23,375 | ) | | | (1,272,112 | ) | | | (4,697,436 | ) |
Issuance of common stock for conversion of notes payable and related accrued interest | 13,553,822 | | | 135,538 | | | | 2,576,062 | | | | — | | | | — | | | | — | | | | 2,711,600 | |
Issuance of common stock and warrant for services | 344,692 | | | 3,448 | | | | 105,029 | | | | — | | | | 23,375 | | | | — | | | | 131,852 | |
Stock-based compensation expense | — | | | — | | | | 1,504,669 | | | | — | | | | — | | | | — | | | | 1,504,669 | |
Issuance of warrants for debt conversion | — | | | — | | | | 413,008 | | | | — | | | | — | | | | — | | | | 413,008 | |
Issuance of common stock and warrants for cash | 2,490,385 | | | 24,904 | | | | 613,596 | | | | — | | | | — | | | | — | | | | 638,500 | |
Cumulative effect of change in accounting principle for warrant classification | — | | | — | | | | (3,623,448 | ) | | | 1,689,476 | | | | — | | | | — | | | | (1,933,972 | ) |
Exercise of warrants and options | 801,633 | | | 8,016 | | | | 1,084,781 | | | | — | | | | — | | | | — | | | | 1,092,797 | |
Net loss, restated | — | | | — | | | | — | | | | (7,117,076 | ) | | | — | | | | — | | | | (7,117,076 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2009, restated | 29,352,930 | | $ | 293,530 | | | $ | 27,926,893 | | | $ | (34,204,369 | ) | | $ | — | | | $ | (1,272,112 | ) | | $ | (7,256,058 | ) |
Issuance of common stock and warrants for services | 888,692 | | | 8,887 | | | | 503,993 | | | | — | | | | — | | | | — | | | | 512,880 | |
Issuance of common stock for conversion of notes payable | 1,000,384 | | | 10,004 | | | | 190,073 | | | | — | | | | — | | | | — | | | | 200,077 | |
Stock based compensation | — | | | — | | | | 651,032 | | | | — | | | | — | | | | — | | | | 651,032 | |
Issuance of common stock in exchange for debt settlement | 2,321,422 | | | 23,214 | | | | 580,356 | | | | — | | | | — | | | | — | | | | 603,570 | |
Net loss | — | | | — | | | | — | | | | (1,433,593 | ) | | | — | | | | — | | | | (1,433,593 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2010 | 33,563,428 | | $ | 335,635 | | | $ | 29,852,347 | | | $ | (35,637,962 | ) | | $ | — | | | $ | (1,272,112 | ) | | $ | (6,722,092 | ) |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Cash Flows
| | Years Ended December 31, | |
| | 2010 | | | 2009 | |
| | | | | (restated) | |
Operating activities | | | | | | |
Net loss | | $ | (1,433,593 | ) | | $ | (7,117,076 | ) |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | |
Depreciation and amortization | | | 15,276 | | | | 19,826 | |
Amortization of deferred loan costs | | | — | | | | 1,004 | |
Amortization of discount on convertible notes | | | — | | | | 144 | |
Amortization of the beneficial conversion feature on convertible notes | | | — | | | | 29,992 | |
Issuance of common stock, stock options and stock warrants for services and amortization of common stock issued for services | | | 287,035 | | | | 110,316 | |
Stock based compensation expense | | | 651,034 | | | | 1,504,669 | |
Issuance of common stock warrants to induce conversion of notes payable | | | — | | | | 413,008 | |
Change in fair value of warrant liability | | | (618,801 | ) | | | 3,731,694 | |
(Increase) decrease in: | | | | | | | | |
Accounts receivable | | | (641,198 | ) | | | 1,536 | |
Other receivables | | | (59,526 | ) | | | — | |
Inventory | | | (144,083 | ) | | | (2,858 | ) |
Prepaid expenses and other current assets | | | (4,984 | ) | | | (50,853 | ) |
Increase (decrease) in: | | | | | | | | |
Accounts payable and accrued expenses | | | 380,835 | | | | 251,014 | |
Accrued compensation and related benefits | | | 111,666 | | | | 166,967 | |
Deferred revenue | | | 275,491 | | | | 122,239 | |
| | | | | | | | |
Net cash used by operating activities | | | (1,180,848 | ) | | | (818,378 | ) |
| | | | | | | | |
Investing activities | | | | | | | | |
Increase in patent costs | | | (6,819 | ) | | | (39,265 | ) |
Purchase of property and equipment | | | (113,305 | ) | | | (1,346 | ) |
| | | | | | | �� | |
Net cash used by investing activities | | | (120,124 | ) | | | (40,611 | ) |
| | | | | | | | |
Financing activities | | | | | | | | |
Proceeds from issuance of notes payable, related party | | | 620,000 | | | | 1,565,000 | |
Payments on notes payable, related party | | | (100,000 | ) | | | (290,000 | ) |
Proceeds from advance from related party | | | — | | | | 222,900 | |
Repayments of advance from related party | | | — | | | | (222,900 | ) |
Issuance of common stock and exercise of warrants for cash | | | — | | | | 642,750 | |
| | | | | | | | |
Net cash provided by financing activities | | | 520,000 | | | | 1,917,750 | |
| | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (780,972 | ) | | | 1,058,761 | |
Cash and cash equivalents, beginning of period | | | 1,085,628 | | | | 26,867 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 304,656 | | | $ | 1,085,628 | |
| | | | | | | | |
Cash paid during the year for interest | | $ | — | | | $ | 42,651 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Cash Flows
Supplemental disclosures of cash flow information and noncash investing and financing activities:
During the years ended December 31, 2010 and 2009, the Company issued 1,000,384 and 13,553,822 shares of common stock in conversion of $175,000 and $2,350,000 of notes payable and $25,077 and $361,600 of accrued interest, respectively.
During the year ended December 31, 2010, two note holders elected to apply all of the proceeds due and payable under their notes, including all accrued interest, to purchase 2,321,422 shares of the Company’s Common Stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $603,570.
During the years ended December 31, 2010 and 2009, the Company issued 888,692 and 344,692 shares of common stock and warrants for services valued at $512,880 and $110,316, respectively.
The cumulative effect for the change in accounting principle related to warrant classification resulted in an increase of $1,689,476 to retained earnings and a $3,623,448 decrease to capital in excess of par value at January 1, 2009. Additionally, the exercise of certain warrants during the year ended December 31, 2009 resulted in the reclassification of $1,088,547 from warranty liability to capital in excess of par value.
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2010 and 2009
1. Background Information and Certain Concentrations
Dais Analytic Corporation (the “Company”), a New York corporation, has developed and is commercializing applications using its nano-structure polymer technology. The first commercial product is an energy recovery ventilator (“ERV”) (cores and systems) for use in commercial Heating, Ventilating, and Air Conditioning (HVAC) applications. In addition to direct sales, the Company licenses its nano-structured polymer technology to strategic partners in the aforementioned application and is in various stages of development with regard to other applications employing its base technologies. The Company was incorporated in April of 1993 with its corporate headquarters located in Odessa, Florida.
SomeThe Company is dependent on third parties to manufacture the key components needed for our nano-structured based materials and value added products made with these materials. Accordingly, a supplier’s failure to supply components in a timely manner, or to supply components that meet our quality, quantity and cost requirements or our technical specifications, or the inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us, would create delays in production of our products or increase our unit costs of production. Certain of the Company’s ConServ product, such ascomponents contain proprietary products of our suppliers, or the substrateprocesses used in concert with the Company’s nano-structured materials,by our suppliers to manufacture these components are currently purchasedproprietary. If we are required to replace any of our suppliers, while we should be able to obtain comparable components from a single source or processed for the Company by a single entity. Although the number of manufacturers ofalternative suppliers at comparable materials or processors of said materials may be somewhat limited, management believes that other suppliers/processors exist who can provide similar components/processing capabilities on comparable terms and is in the process of identifying said sources and qualifying them. A change in suppliers, however, could causecosts, this would create a delay in manufacturing and a possible loss of sales, which would affect operating results adversely.production.
For the years ended December 31, 20072010 and 2006, three and two2009, seven five customers accounted for 65approximately 61% (seven customers represented the following percentages of sales 13%, 13%, 9%, 7%, 7%, 6% and 53 percent6%) and 66% (five customers represented the following percentages of sales 27%, 16%, 12%, 7% and 4%) of the Company’s total revenue, respectively. No other customer accounted for 10 percent or moreAt December 31, 2010 and 2009 amounts due from these customers was approximately 61% and 25% of the Company’s total revenue.
accounts receivable, respectively.
2. Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the year ended December 31, 2007,2010, the Company hasincurred a net loss of $2,233,985$1,433,593 and has incurred significant losses since inception. As of December 31, 2010, the Company has an accumulated deficit of $22,797,323 has$35,673,962, negative working capital of $334,449$2,861,488 and a stockholder’sstockholders’ deficit of $641,687 at December 31, 2007.$6,722,092. The Company used $1,180,848 and $818,378 of cash from operations during 2010 and 2009, respectively, which was funded by proceeds from debt and equity financings. There is no assurance that such financing will be available in the future. In view of these matters, there is substantial doubt is raised aboutthat the Company’s ability toCompany will continue as a going concern. The recoverabilityCompany is currently pursuing the following sources of recorded propertyshort and equipment, intangible assets, and other asset amounts shown in the accompanying financial statements is dependent uponlong-term working capital:
| 1. | We are currently holding preliminary discussions with parties who are interested in licensing, purchasing the rights to, or establishing a joint venture to commercialize certain applications of our technology. |
| 2. | We are seeking growth capital from certain strategic and/or government (grant) related sources. In addition to said capital, these sources may, pursuant to any agreements that may be developed in conjunction with such funding, assist in the product definition and design, roll-out, and channel penetration of our products. As part of this step we will attempt to take advantage of key programs associated with the recently enacted American Recovery and Reinvestment Act of 2009. |
The Company’s ability to continue as a going concern andis highly dependent on our ability to achieve a levelobtain additional sources of profitability. The Company intends on financing its future activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations arecash flow sufficient to fund our working capital requirements. However, there can be no assurance that the Company will be successful in its efforts. efforts to secure such cash flow. Any failure by us to timely procure additional financing or investment adequate to fund our ongoing operations, including planned product development initiatives and commercialization efforts, will have material adverse consequences on our financial condition, results of operations and cash flows.
The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
3. Significant Accounting Policies
The significant accounting policies followed are:
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
| The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued liabilities and notes payable. The carrying amounts of these financial instruments approximate their fair value, due to the short-term nature of these items and due to the use of market rates of interest. |
| All cash, other than held in escrow, is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. |
| Cash held in escrow consists of convertible note proceeds associated with the December 31, 2007 closings. Such funds were held in escrow pending the receipt of the signed secured convertible promissory notes. These funds were subsequently released from escrow on January 3, 2008. |
| Inventory consists of raw materials and is stated at the lower of cost, determined by the first-in, first-out method, or market. Market is determined based on the net realizable value, with appropriate consideration given to obsolescence, excessive levels, deterioration and other factors. |
Use of estimates - The preparation 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.
Cash and cash equivalents - All cash, other than held in escrow, is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Temporary cash investments with an original maturity of three months or less are considered to be cash equivalents.
Accounts receivable - Accounts receivable consist primarily of receivables from the sale of our ERV products. The Company regularly reviews accounts receivable for any bad debts based on an analysis of the Company’s collection experience, customer credit worthiness, and current economic trends. At December 31, 2010, the days sales outstanding was 93, as compared to 47 at December 31, 2009. The increase in the number of days to collect our receivables is primarily a result of the downturn in the economy and additional approval and certifications that our products had to pass (for a small number of customers) prior to payment being made. Based on management’s review of accounts receivable, no allowance for doubtful accounts is considered necessary at December 31, 2010 and 2009.
Inventory - Inventory consists of raw materials and work-in-process and is stated at the lower of cost, determined by first-in, first-out method, or market. Market is determined based on the net realizable value, with appropriate consideration given to obsolescence, excessive levels, deterioration and other factors. At December 31, 2010 and 2009, the Company had $11,869 and $2,160 of in-process inventory, respectively. A reserve is recorded for any inventory deemed excessive or obsolete. No reserve is considered necessary at December 31, 2010 and 2009.
Property and equipment - Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from 5 to 7 years. Depreciation expense was approximately $10,400 and $8,900 for the years ended December 31, 2010 and 2009, respectively. Gains and losses upon disposition are reflected in the statement of operations in the period of disposition. Maintenance and repair expenditures are charged to expense as incurred.
Intangible assets - Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company’s existing intangible assets consist solely of patents. Patents are amortized over their estimated useful or economic lives of 15 years. Patent amortization expense was approximately $4,900 and $10,100 for the years ended December 31, 2010 and 2009, respectively. Total patent amortization expense for the next five years is estimated to be approximately $15,000 per year.
Long-lived assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, the Company uses market quotes, if available or an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether or not the asset values are recoverable. There have been no significant impairments of long-lived assets during the two-year period ended December 31, 2010.
Dais Analytic CorporationResearch and development expenses, and grant proceeds
Notes to Financial Statements -
Years EndedExpenditures for research, development, and engineering of products are expensed as incurred. For the years ended December 31, 20072010 and 2006
3. Significant Accounting Policies (continued)
| Trade accounts receivable consist primarily of receivables from the sale of ERV core and ERV units. The Company sells to its customers based on its standard credit policies and regularly reviews accounts receivable for any bad debts. The review for bad debts is based on an analysis of the Company’s collection experience, customer credit worthiness, and current economic trends. Based on management’s review of accounts receivable, no allowance for doubtful accounts is considered necessary at December 31, 2007 and 2006. |
| Property and equipment are recorded at cost. Depreciation is calculated using accelerated methods over the estimated useful lives of the assets ranging from 5 to 7 years. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Depreciation expense amounted to approximately $3,500 and $7,900 for the years ended December 31, 2007 and 2006, respectively. |
| Patents are being amortized over their estimated useful or economic lives of 15 years. Amortization expense amounted to approximately $9,300 per year for each of the years ended December 31, 2007 and 2006, continuing until fully amortized in 2013. |
| Expenditures for research, development, and engineering of products are expensed as incurred. For the years ended December 31, 2007 and 2006, the Company did not incur any research and development costs. |
| Direct loan costs of $94,162 incurred with the issuance of notes payable are deferred and amortized to interest expense over the life of the related notes payable, $5,231 per month for 18 months. For the years ended December 31, 2007 and 2006, the Company incurred amortization expense of $23,540 and $62,776, respectively. |
| The Company records all common stock as issued at the time when all of the legal requirements for issuance of the common stock have been met. |
| The Company records amounts billed to customers for shipping and handling costs as sales revenue. Costs incurred by the Company for shipping and handling are included in cost of sales. |
2009, the Company incurred research and development costs of approximately $337,900 and $6,600, respectively. The Company accounts for proceeds received from government grants for research as a reduction in research and development costs. For the year ended December 31, 2010, the Company recorded approximately $99,000 in grant proceeds against research and development expenses on the statement of operations. No such grant proceeds were recognized for the year ended December 31, 2009.
Stock issuance costs - Stock issuance costs are recorded as a reduction of the related proceeds through a charge to stockholders’ equity.
Common stock- The Company records common stock issuances when all of the legal requirements for the issuance of such common stock have been satisfied.
Revenue recognition- Generally, the Company recognizes revenue for its products upon shipment to customers, provided no significant obligations remain and collection is probable. This policy applies to all of our customers, including Genertec America (a distribution agreement) and CAST Systems Control Technology Co. (an agreement for the purchase of specific goods).
Our ConsERV product typically carries a warranty of two years for all parts contained therein with the exception of the energy recovery ventilator core which typically carries a 10 year warranty. The warranty includes replacement of defective parts. The Company has recorded an accrual of approximately $11,500 for future warranty expenses at December 31, 2010.
Revenue derived from the sale of licenses is deferred and recognized as revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated. The Company recognized revenue of approximately $82,000 and $84,000 from license agreements for the years ended December 31, 2010 and 2009, respectively.
Government Grants- Grants are recognized when there is reasonable assurance that the grant will be received and that any conditions associated with the grant will be met. When grants are received related to Property and Equipment, the Company reduces the basis of the assets on the Statement of Financial Position, resulting in lower depreciation expense over the life of the associated asset. Grants received related to expenses are reflected as a reduction of the associated expense in the period in which the expense is incurred.
Stock based compensation- The Company recognizes all share-based payments to employees, including grants of employee stock options, as compensation expense in the financial statements based on their fair values. That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
The value of each grant is estimated at the grant date using the Black-Scholes option model with the following assumptions for options granted during the years ended December 31, 2010 and 2009:
| Years Ended December 31, | |
| 2010 | | 2009 | |
| | |
Dividend rate | | 0 | % | | 0 | % |
| | |
Risk free interest rate | | 1.96%–3.68 | % | | 1.65%–3.49 | % |
| | |
Expected term | | 5 – 6.5 years | | | 5 – 10 years | |
| | |
Expected volatility | | 97%– 112 | % | | 92%– 106 | % |
The basis for the above assumptions are as follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was calculated based on the Company’s historical pattern of options granted and the period of time they are expected to be outstanding; and expected volatility was calculated by review of a peer company’s historical activity.
Dais Analytic Corporation
Notes to Financial Statements
Years EndedForfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on historical experience of forfeitures, the Company estimated forfeitures at 0% for each of the years ended December 31, 20072010 and 2006
3. Significant Accounting Policies (continued)
| Sales are recorded when products are shipped to the customer. No products or parts are delivered with any contingencies except for defects. |
| Amounts collected on behalf of governmental authorities for sales taxes and other similar taxes are reported on a net basis. |
| Revenue derived from the sale of licenses is deferred and recognized as revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated. The Company recognized approximately $84,100 of deferred revenue associated with license agreements for each of the years ended December 31, 2007 and 2006. |
| The Company follows SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial accounting and reporting for the impairment of long-lived assets, excluding goodwill and intangible assets, not subject to amortization, to be held and used or disposed of. In accordance with SFAS No. 144, the carrying values of long-lived assets are periodically reviewed by the Company and impairments would be recognized if the expected future operating non-discounted cash flows derived from an asset were less than its carrying value and if the carrying value is more than the fair value of the asset. At December 31, 2007, the Company did not have any asset that it considered impaired. |
| In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the financial statements based on their fair values. That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company adopted SFAS 123R effective beginning January 1, 2006 using the Modified Prospective Application Method. Under this method, SFAS 123R applies to new awards and to awards modified, repurchased or cancelled after the effective date. Prior to the adoption of SFAS 123(R), the Company accounted for stock option grants using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and accordingly, recognized no compensation expense for stock option grants. |
2009.
Non-employee stock-based compensation - The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring , or in Conjunction with Selling Goods or Services,” now ASC 505 and EITF 00- 18 “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees,” now ASC 505. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. Stock-based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services, whichever is more readily determinable in accordance with ASC 718.]
The fair value of warrants issued in 2010 and 2009 was calculated using the Black-Scholes model with the following assumptions: Expected life in years: 5-10 years and 5-10 years, respectively; Estimated volatility 96% - 100% and 80% - 114%, respectively; Risk-free interest rate: 2.38% - 2.57% and 2.64% - 3.98%, respectively; Dividend yield: 0%.
Financial instruments- In September 2006, the Financial Accounting Standards Board (FASB) introduced a framework for measuring fair value and expanded required disclosure about fair value measurements of assets and liabilities. The Company adopted the standard for those financial assets and liabilities as of the beginning of the 2008 fiscal year and the impact of adoption was not significant. FASB Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures” (ASC 820) which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between
(1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and
(2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2010. The Company uses the market approach to measure fair value for its Level 1 financial assets and liabilities, which include cash equivalents of $10,150 at December 31, 2010. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.
The respective carrying value of certain on-balance sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts receivable, other receivables, accounts payable, accrued compensation and accrued expenses. The fair value of the Company’s notes payable is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value.
The Company’s financial liabilities measured at fair value consisted of the following as of December 31, 2010 and were valued as discussed in Note 12:
| | Fair Value Measurements at December 31, 2010 | |
| | Total carrying value | | | Quoted prices in active markets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
Warrant liability | | | 3,958,318 | | | | — | | | | — | | | | 3,958,318 | |
A reconciliation of the beginning and ending fair values of financial instruments valued using significant unobservable inputs (Level 3) is presented as follows:
| | Warrant Liability | |
| | | | |
Balance at December 31, 2009 | | $ | 4,577,119 | |
Changes in fair value | | | (618,801 | ) |
| | | | |
Balance at December 31, 2010 | | $ | 3,958,318 | |
Dais Analytic CorporationIncome taxes
- Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Notes
The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to Financial Statements
Years Endedbe unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company’s remaining open tax years subject to examination by the Internal Revenue Service include the years ended December 31, 2007 and 2006
3. Significant Accounting Policies (continued)
| As a result of adopting SFAS 123(R), our earnings before income taxes and net earnings for the years ended December 31, 2007 and 2006 was $326,480 and $558,521, respectively, less than if we had continued to account for stock based compensation under APB Opinion No. 25 for our stock option grants. In addition, the effect of adopting SFAS 123(R) on the net loss per share for the years ended December 31, 2007 and 2006 was an increase in the loss of $0.07 and $0.31, respectively, per share. |
| The value of each option granted under SFAS 123(R), as well as warrants issued in connection with debt, is estimated at the grant date using the Black-Scholes option pricing model with the following assumptions: |
through 2009.
| | 2007 | | 2006 | |
Dividend rates | | | 0 | | | 0 | |
Risk free interest rate | | | 3.32% - 5.13 | % | | 4.57% - 5.12 | % |
Term | | 5 - 10 years | | 2 - 10 years | |
Volatility | | | 71% - 90 | % | | 127 | % |
Loss per share - Basic and diluted earnings per share are computed based on the weighted-average common shares and
| The basis for the above assumptions are as follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was calculated based on the Company’s historical pattern of options granted and warrants issued that are expected to be outstanding; and expected volatility was calculated by review of a peer company’s historical activity. |
�� | As of December 31, 2007 and 2006, there was $271,875 and $260,705 of unrecognized stock-based compensation expense related to nonvested stock options, respectively. This expense will be recognized over a weighted average period of three years. |
| The aggregate intrinsic value of options outstanding and exercisable at December 31, 2007 and 2006, based on the Company’s closing stock price of $0.30 and $0.70 as of the last business day of the years ended December 31, 2007 and 2006, respectively, which would have been received by the optionees had all options been exercised on that date was $1,166,908 and $1,009,206 at December 31, 2007, respectively, and $2,368,294 and $1,844,422 at December 31, 2006, respectively. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options. |
common share equivalents outstanding during the period. Common share equivalents consist of stock options, warrants and convertible notes payable. Common share equivalents of 39,026,278 and 30,003,977 were excluded from the computation of diluted earnings per share for the years ended December 31, 2010 and 2009, respectively, because their effect is anti-dilutive.
Dais Analytic CorporationDerivative Financial Instruments
Notes - The Company does not use derivative instruments to Financial Statements
Years Ended December 31, 2007hedge exposure to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 “Derivative and 2006
3. Significant Accounting Policies (continued)
| Taxes on income are provided in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. |
| Basic and diluted earnings per share are computed based on the weighted average number of common stock outstanding during the period. Common stock equivalents, which amounted to 13,612,844 and 10,942,388 at December 31, 2007 and 2006, respectively, are not considered in the calculation of the diluted earnings per share for the period presented as their effect would be anti-dilutive due to losses incurred. |
| In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value has been elected are required to be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. The Company expects to adopt SFAS No. 159 in the first quarter of fiscal 2008. |
| Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” The Company recognized no adjustment in the liability for unrecognized income tax benefits as a result of the adoption of FIN No. 48. |
Hedging” (ASC 815) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether fair value of warrants issued is required to be classified as equity or as a derivative liability.
Recent accounting pronouncements
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
3. Significant Accounting Policies (continued)
| In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, SFAS No. 160 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Management is currently evaluating the effect, if any the adoption will have on the Company’s financial position and results of operations. |
| Other recentRecent accounting pronouncements issued by the FASB (including its EITF), the AICPA and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements. |
| Certain amounts in the 2006 financial statements have been reclassified to conform to the 2007 presentation. |
4. Property and Equipment
| Property and equipment consistsProperty and equipment consist of the following:
|
| | 2007 | | | 2006 | |
Furniture and fixtures | | $ | 33,530 | | | $ | 31,731 | |
Computer equipment | | | 105,114 | | | | 95,903 | |
Office and lab equipment | | | 176,721 | | | | 178,521 | |
| | | 315,365 | | | | 306,155 | |
Less accumulated depreciation and amortization | | | 298,765 | | | | 295,231 | |
| | $ | 16,600 | | | $ | 10,924 | |
| | December 31, | |
| | 2010 | | | 2009 | |
Furniture and fixtures | | $ | 38,764 | | | $ | 33,530 | |
Computer equipment | | | 64,305 | | | | 57,344 | |
Demonstration equipment | | | 104,871 | | | | — | |
Office and lab equipment | | | 216,248 | | | | 194,429 | |
| | | | | | | | |
| | | 424,188 | | | | 285,303 | |
Less accumulated depreciation | | | 276,277 | | | | 265,920 | |
| | | | | | | | |
| | $ | 147,911 | | | $ | 19,383 | |
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| | December 31, | |
| | 2010 | | | 2009 | |
Prepaid expenses | | $ | 31,070 | | | $ | 50,335 | |
Prepaid insurance | | | 29,948 | | | | 31,699 | |
Prepaid services paid for with common stock | | | 172,118 | | | | 21,537 | |
Prepaid loan costs | | | 25,000 | | | | — | |
| | | | | | | | |
| | $ | 258,136 | | | $ | 103,571 | |
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
6. Accrued Expenses, Other
5.Accrued expenses, other consist of the following:
| | December 31, | |
| | 2010 | | | 2009 | |
Accrued expenses, other | | $ | 39,850 | | | $ | 127,768 | |
Accrued registration rights penalty | | | 5,000 | | | | 41,000 | |
Accrued interest | | | 14,676 | | | | 28,127 | |
Accrued interest, related party | | | 157,683 | | | | 13,502 | |
Accrued warranty costs | | | 11,452 | | | | — | |
Contractual obligation | | | 13,200 | | | | 13,200 | |
| | | | | | | | |
| | $ | 241,861 | | | $ | 223,597 | |
7. Notes Payable
Notes payable consist of the following:
| | 2007 | | | 2006 | |
Convertible notes payable; interest at 9.0%; with notes maturing 12 months from date of issue beginning December 2008, collateralized by the Company’s patents and patent applications, net of unamortized discount and beneficial conversion feature of $2,379,131 | | $ | 70,869 | | | | |
Convertible notes payable; interest at 8.0%; with notes maturing 18 months from date of issue beginning April 2007 to February 2008; collateralized by accounts receivable and property and equipment | | | | | | $ | 1,115,546 | |
Note payable; interest at 12.0% for the first 60 days and increases by 1.0% for every 30 days outstanding thereafter up to 18.0% per annum; due January 20, 2008; unsecured | | | 200,000 | | | | | |
Note payable, related party; interest at 8.0%; due on demand; collateralized by the intellectual property | | | 624 | | | | 13,675 | |
| | | 271,493 | | | | 1,129,221 | |
Less amounts currently due | | | 271,493 | | | | 1,068,647 | |
| | $ | 0 | | | $ | 60,574 | |
| | December 31, | |
| | 2010 | | | 2009 | |
Convertible notes payable; interest at 9%; $50,000 currently in default; collateralized by the Company’s patents and patent applications | | $ | 50,000 | | | $ | 150,000 | |
Convertible notes payable, related party; interest at 9%; collateralized by the Company’s patents and patent applications | | | — | | | | 175,000 | |
Note payable, related party; 7% interest; unsecured; settled during 2010 | | | — | | | | 300,000 | |
Note payable, related party; interest at 10% per annum; due April 30, 2011 | | | 1,000,000 | | | | 1,000,000 | |
Note payable, related party; 10% interest; unsecured; due April 30, 2011 | | | 620,000 | | | | 250,000 | |
Note payable; related party | | | 624 | | | | 624 | |
| | | | | | | | |
| | | 1,670,624 | | | | 1,875,624 | |
Less amounts currently due | | | 1,670,624 | | | | 1,575,624 | |
| | | | | | | | |
Long-term portion | | $ | | | | $ | 300,000 | |
Convertible Notes Payable –
December 2007
During the year ended December 31, 2007, and January 2008, the Company issued convertible promissory notes (the “Convertible Notes”) and warrants to purchase common stock to individuals in exchange for proceeds totaling $2,450,000.$2,950,000. The notesConvertible Notes bear interest at nine percent per annum and maturehave stated maturity dates from December 2008 to January 2009. The Convertible Notes are repayable in December 2008. Principalcash or convertible into shares of the Company’s stock at a rate of one share per $0.20 of outstanding principal and accrued interest are payable in any combinationinterest. Warrants to purchase 14,750,000 shares of cash andthe Company’s common stock ofaccompanying the Company at the option of the lender. Assuming that the lender allows the CompanyConvertible Notes are, subject to repay principal and accrued interest in common stock, the number of shares of common stock issuable is determined by dividing the principal amount plus any accrued and unpaid interest by $0.20. Accrued interest on the notes totaled $6,152 at December 31, 2007.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
5. Notes Payable (continued)
The convertible promissory notes contained an embedded conversion feature. As such, in accordance with EITF Issue No. 98-5, “Accounting for Securities with Beneficial Conversion Feature or Contingently Adjustable Conversion Ratio,” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” the difference between the effective conversion price and the Company’s estimated fair market value of its stock price on the commitment date of the notes was calculated to be $1,138,331. The Company is amortizing the beneficial conversion feature over the life of the convertible debt of one year and therefore recognized interest expense resulting from the amortization of the beneficial conversion feature of $30,048 for the year ended December 31, 2007.
The warrants to purchase common stock which accompanied the convertible promissory notes arecertain limitations, exercisable at $0.25 per share, vest immediately, and expire between December 2012 and January 2013. Due to certain adjustments that may be made to the terms of the warrants issued in December 2012. Pursuant to APB No. 14,2007, January 2008 and August 2008, if the Company valuedissues or sell shares below the exercise price, the warrants have been classified as a liability as opposed to equity in accordance with the Derivatives and Hedging Topic of the FASB ASC 815-10-15 as it was determined that these warrants were not indexed to the Company’s stock. As a result, the fair market value of these warrants was remeasured on January 1, 2009 and marked to market at each subsequent financial reporting period. The Company has restated their 2009 Financial Statements to reflect this adjustment, see Note 12.
The Convertible Notes contain an embedded conversion feature. The Company accounted for this conversion feature and the detachable warrants by allocating the proceeds from issuance of the convertible notes to the beneficial conversion feature and the warrants based on their relative fair value of $1,311,669. values.
To recognize the relative fair value of the warrants, the Company discounted the notes and increased additional paid in capital incapital. The fair value of the financial statements. Thebeneficial conversion feature of $1,383,437 and discount isof $1,566,563 related to the warrants were amortized over the term of the notes.
Principal balance of convertible notes | | $ | 2,450,000 | |
Relative fair value of the warrants | | | (1,311,669 | ) |
Beneficial conversion feature | | | (1,138,331 | ) |
Amortization of the discount | | | 40,821 | |
Amortization of the beneficial conversion feature | | | 30,048 | |
Carrying value at December 31, 2007 | | $ | 70,869 | |
As discussed in Note 3, $1,000,000 of these convertible notes payable were executed onConvertible Notes. For the years ended December 31, 2007. Such funds were held in escrow pending2010 and 2009, the receiptCompany recognized interest expense from the amortization of the signed secured convertible promissory notes. These funds were subsequently released from escrow on January 3, 2008.
The Company gave the convertible promissory note holders registration rights to the shares issued to them in connection with the convertible notesbeneficial conversion feature and warrants pursuant to a Registration Rights Agreement (the “Agreement”). Under the Agreement, there are certain damages that will be assessed if the Company does not file a Registration Statement that becomes effective on or prior to the date that is 30 days following the effectiveness date. The damages, as defined in the Agreement, is onediscount of $0 and one-half percent (1.5%) of the amount of the convertible promissory note holders’ initial investment for each calendar month, or portion thereof thereafter from the effectiveness date until cured, up to 8 percent of the amount of the note holder’s initial investment. The effectiveness date is defined as the earlier of A) the 150th day following the Filing Date (the 45th day following the completion of the first conversion of the notes) or B) the date which is within five business days after the date on which the Commission informs the Company that they will not review the Registration Statement or that the Company may request the acceleration of the effectiveness of the Registration Statement, and the Company makes such request. The Company has recorded a liability in the amount of $73,500 at December 31, 2007 related to the Agreement.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
5. Notes Payable (continued)$30,136, respectively.
Convertible Notes Payable – 2006
As of December 31, 2006, the Company had convertible notes payable of $1,115,546 and, together with accrued unpaid interest of 8 percent, was due 18 months from the date of issue beginning April 2007 to February 2008. Interest begins to accrue on the 180th day after the date of the convertible note payable and is paid quarterly in cash. In the event the Company consummates a $2,000,000 to $3,000,000 equity financing, the principal amount plus the accrued unpaid interest would be automatically convertible into shares of equity at a rate of 50 percent of the price per share of the equity financing shares. If the shares sold in the equity financing are sold as units including warrants or other securities, the note holders are entitled to those same securities upon conversion. The Company recorded the interest under the effective interest method.
During the year ended December 31, 2007, the Company2009 eighteen holders converted $840,547their Convertible Notes, having an aggregate principal balance of convertible notes payable, together with$2,350,000 plus accrued interest of $50,484$361,600, into 3,258,32313,553,822 shares of common stock. Some of the holders converted during periods in which we were offering an additional warrant as an inducement to convert. In accordance with said offers we issued additional warrants to purchase 1,665,000 shares of common stock, exercisable immediately at $0.25 per share and valued at $126,367, and 575,000 warrants, exercisable immediately at $0.75 per share valued at $286,641 which was recorded as interest expense during the twelve months ended December 31, 2009.
The value of each of the above groups of warrants was estimated using the Black-Scholes option model with the following assumptions for each of the exercise prices:
| Exercise Prices | |
| $0.25 per share | | $0.75 per share | |
| | |
Fair value of underlying stock on date of award | $ | | $ | 0.09 – 0.19 | | $ | | $ | 0.51 – 1.49 | |
| | |
Dividend rate | | | | 0 | % | | | | 0 | % |
| | |
Risk free interest rate | | | | 1.65%–2.58 | % | | | | 2.20%–2.49 | % |
| | |
Expected term | | | 5 years | | | | 5 years | |
| | |
Expected volatility | | | | 92%–94 | % | | | | 95%–96 | % |
The warrants to purchase 1,665,000 shares of common stock as compared to the warrants to purchase 575,000 shares of common stock resulted in a lower fair value due to the lower fair value of the underlying common stock on the date of the award.
The warrants were issued as follows:
February 2009 | | | 124,875 | |
March 2009 | | | 999,000 | |
April 2009 | | | 416,250 | |
August 2009 | | | 124,875 | |
| | | | |
| | | 1,665,00 | |
| |
September 2009 | | | 162,500 | |
October 2009 | | | 412,500 | |
| | | | |
| | | 575,000 | |
During 2009, four investors holding Convertible Notes with an aggregate outstanding principal balance of approximately $450,000 at December 31, 2008 notified the Company that they were asserting their rights to receive payment of the principal and interest pursuant to the terms of the Convertible Notes. In June of 2009, three of these investors, holding an aggregate principal note balance of $250,000, entered into a confession of judgment with the Company. Under that agreement, the three investors had the right, should the Company fail to pay all principal and interest due pursuant to their Convertible Notes on or before September 11, 2009, to file the confession of judgment with the court and seek to secure a judgment against the Company in the amount of all principal and interest due under their Convertible Notes together with the reasonable cost and expense of collection. All interest and principal related to the three Convertible Notes, $289,803 in the aggregate, was paid in full by the Company on or before September 11, 2009. In July 2009, the fourth investor, holding a Convertible Note in the principal amount of $200,000, agreed to extend said note to September 2009. In November 2009, this investor and the Company modified the Convertible note to extend the maturity date of said note to July 2010, pay the principal amount due in eight monthly installments commencing December of 2009, end the accrual of interest as of November 20, 2009 and convert the $34,861 in interest due under the Convertible Note as of November 20, 2009 into 170,137 shares of Company’s common stock. During the year ended December 31, 2010 the remaining principal balance of said loan of $175,000 was extinguished in full by the Company through cash payments of $100,000 and the conversion of $75,000 into 375,000 shares of common stock based on a per share conversion rate of $0.20. As of December 31, 2010 the outstanding principal balance of said loan was $0.
On November 4, 2010, an investor elected to convert his 9% secured convertible note of $100,000 principal and the related accrued interest $25,077 into 625,384 shares of Company’s Common Stock. Said investor also received an additional five-year warrant to purchase up to 62,538 shares of Common Stock, at an exercise price of $0.75 per share in consideration for converting his 9% secured convertible note.
As of December 31, 2010, $50,000 of principal on the Convertible Notes was outstanding, in default and due and payable in full. On March 23, 2011 this note was paid in full by Company.
Other Notes
In July 2009 we secured a loan of $300,000 from an investor and issued the lender an unsecured promissory note for the principal amount on December 8, 2009. Pursuant to the terms of the note, we are to pay the note holder simple interest at the rate seven percent per annum commencing on July 17, 2009 with all interest and principal due there under payable in cash on or before January 16, 2011. If an event of default were to occur the interest rate would increase to ten percent for the duration of the event. Should we not cure the default within 60 days of receiving notice the note holder may, at his option, declare all interest accrued and unpaid and principal outstanding immediately due and payable. On December 30, 2010, the investor elected to apply all of the proceeds due and payable under the Note, including all accrued interest, to the purchase of the Company’s Common Stock. Pursuant to this transaction, the investor subscribed for and received 1,268,472 shares of Common Stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $329,803. The number of shares issued was based upon the $0.26 fair value of the Company’s common stock on the settlement date.
In December 2009, we secured a loan in the principal amount of $1,000,000 from an investor. Pursuant to the terms of the note, we are to pay the holder simple interest at the rate of ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 17, 2010 the note’s maturity date was extended to April 30, 2011. On March 22, 2011, the Company entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note (“2011 Convertible Note”, collectively “Exchange Agreements”) with the this investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the Investor amended and restated the $1,000,000 unsecured promissory note issued by the Company to Investor on or about December 17, 2009 (“Original Note”) to, among other things, extend the term to March 22, 2012. Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 will be paid on March 22, 2012. Subject to the terms and conditions of the 2011 Convertible Note, including limitations on conversion, the outstanding principal and interest under the 2011 Convertible Note will automatically convert into shares of the Company’s common stock at the then-effective conversion price upon the closing of a qualified firm commitment underwritten public offering (as defined in said note) or may be voluntarily converted by the investor at anytime during the term. The initial conversion price is $0.26 per share. Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering, (as defined in the 2011 Convertible Note which is filed as an exhibit to the Form 8K filed with the Securities and Exchange Commission on March 28, 2011), or March 22, 2012. Pursuant to and during the term of the 2011 Convertible Note, the Company will not issue or allow to exist any obligation for borrowed money, except for subordinate indebtedness in payment and priority, trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate, or unsecured and subordinate working capital guarantees provided by, the Export Import Bank of the United States (the “EXIM Bank”), and indebtedness evidenced by the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000.
The Company secured loans from two investors in the principal amounts of $250,000 and $620,000. The loan amounts were received by the Company on December 31, 2009 and February 18, 2010, respectively, and the Company issued the lenders unsecured promissory notes with respect to said loans on February 19, 2010. Pursuant to the terms of the notes, the Company is to pay the holders simple interest at the rate ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 30, 2010 and August 10, 2010. After receipt of proceeds on the foregoing loans, we may not incur more than $500,000 in debt without the holders’ prior approval and said additional debt may not be senior to these promissory notes without holder’s permission. During the term of the notes, each note holder has the right to participate, by investing additional funds the total amount of which may not exceed the outstanding balance of the holder’s note, in any subsequent financings undertaken by Company. Any such participation shall be upon the same terms as provided for in the subsequent financing. If an event of default were to occur and said default is not cured within the allotted period, the holders may declare all principal and accrued and unpaid interest due and payable without presentment, demand, protest or notice. Further, in addition to all remedies available under law, each holder may in the event of a default opt to convert the principal and interest outstanding under its note into any debt or equity security which Company issued after the date of its note and prior to the date of full payment of its note in accordance with the same terms as the subsequent financing.
On December 27, 2010, one of the investors elected to apply all of the proceeds due and payable under the $250,000 Note, including all accrued interest, to the purchase of our common stock. Pursuant to this transaction, the investors subscribed for and received 1,052,950 shares of common stock at a conversion ratepurchase price of approximately $0.275$0.26 per share.share resulting in an aggregate purchase price of $273,767 (the principal amount and related accrued interest under the note). The debenture holders accepted thesenumber of shares in full consideration forissued was based upon the outstanding convertible notes. The Company recognized additional interest expense of $438,560 as a beneficial conversion feature because$0.26 fair value of the induced conversion toCompany’s common stock on the note holders pursuant to the accounting requirements of SFAS No. 84, “Induced Conversions of Convertible Debt.” An additional warrant may be issued to two of the foregoing note holders in the event Company secures an equity investment or issues convertible notes of $1 million or more and the underlying share price of said securities does not meet a set price.
settlement date.
The $620,000 note’s maturity date was extended to April 30, 2011.
Dais Analytic Corporation
Notes to Financial Statements
Years EndedAccrued interest on the notes was $157,683 and $13,502 at December 31, 20072010 and 2006
2009, respectively.
6.8. Related Party Transactions
DuringTimothy Tangredi, the year ended December 31, 2007,Company’s Chief Executive Officer and Chairman, is a stockholderfounder and officer loaneda member of the Company $156,000. One loanBoard of Directors of Aegis Biosciences, LLS (“Aegis”). Aegis, created in 1995, is a licensee of the Company’s nano-structured intellectual property and materials in the biomedical and healthcare fields. Mr. Tangredi spends approximately one to two days per month on Aegis business and is compensated by Aegis for his time and contribution(s). We granted Aegis two exclusive, world-wide licenses, the first in 1995 and the second in 2005. Pursuant to these licenses, Aegis has the right to use and sell products containing our polymer technologies in biomedical and healthcare applications. The first license was unsecured, dueentered into in 1995 has been amended twice. In 2005, we agreed to accept $150,000 as payment in full of all royalties and no further license revenue will be forthcoming. The second license allows Aegis the use of our intellectual property in the field of healthcare. A one-time payment of $50,000 was made under this license in 2005. In addition, under the second license Aegis is to make royalty payments of 1.5% of the net sales price it receives with respect to any personal hygiene product, surgical drape or clothing products (the latter when employed in medical and animal related fields) and license revenue it receives should Aegis grant a sublicense to a third party. To date Aegis has sold no such products nor has it received any licensing fees requiring a royalty payment be made to us. All obligations for such payments will end on demand and did not accrue interest.the earlier of June 2, 2015 or upon the aggregate of all sums paid to us by Aegis under the agreement reaching $1 million. The other two loans were unsecured, due in one and two months, respectively, and accrued interest at 12 percent, increasing by 1 percentterm of each respective license runs for every 30 days the principle balance is outstanding. Prior to year-end,duration of the Company repaid the loans.patented technology.
The Company rents a building on a month to month basis from a related party whichthat is wholly owned by two stockholders of the Company, one of which is the Chief Executive Officer. The minimum lease payments on theRent expense for this building areis $3,800 per month. For theThe Company recognized rent expense of approximately $49,000 in each of years ended December 31, 20072010 and 2006, the Company recorded $48,792 in rent expense to this related party.2009. At December 31, 20072010 and 2006, $91,3202009, $151,440 and $87,098,$150,740, respectively, were included in accounts payable for amounts owed to these stockholders.
The above amounts are not necessarily indicative of the amounts that would have been incurred had comparable transactions been entered into with independent parties.stockholders for rent.
7.The Company also has accrued compensation due to the Chief Executive Officer and one other employee for deferred salaries earned and unpaid as of December 31, 2010 and 2009 of $1,415,606 and $1,314,356, respectively.
On May 21, 2009, to evidence a loan, the Company issued its Chief Executive Officer a promissory note in the principal amount of $51,900. The note is unsecured and bears a simple interest rate of 9% per annum. The principal amount plus all accrued interest is to be paid in full to the holder no later than July 31, 2009. This note was paid in full prior to maturity.
On June 10, 2009, to evidence a loan, the Company issued a promissory note in the principal amount of $10,000 to Ethos Business Ventures, an entity in which the Company’s Chief Executive Officer holds a controlling financial position. The note is unsecured and bears a simple interest rate of 9% per annum. The principal amount plus all interest accrued is to be paid in full to the holder no later than July 31, 2009. This note was paid in full prior to July 31, 2009.
On September 11, 2009, to evidence a loan, Company issued its Chief Executive Officer a promissory note in the principal amount of $124,000. The note is unsecured and bears a simple interest rate of 9% per annum. The principal amount plus all accrued interest is to be paid in full to the holder no later than October 15, 2009. This note was paid in full prior to October 15, 2009.
On September 11, 2009, to evidence a loan, the Company issued a promissory note in the principal amount of $37,000 to Ethos Business Ventures, an entity in which its Chief Executive Officer holds a position. The note is unsecured and bears a simple interest rate of 9% per annum. The principal amount plus all interest accrued is to be paid in full to the holder no later than October 15, 2009. This note was paid in full prior to October 15, 2009.
9. Authorized Shares
During the year ended December 31, 2007,2009, the Company'sCompany’s board of directors approved a proposalproposals to amend the Articles of Incorporation to increase the number of authorized shares of common stock from 20,000,000 shares100,000,000 to 50,000,000 shares.200,000,000, respectively.
8.10. Preferred Stock
The Company’s Board of Directors has authorized 10,000,000 million shares of preferred stock with a par value of $.01$0.01 to be issued in series with terms and conditions to be determined by the Board of Directors. The Company has designated 400,000 shares of Series A convertible preferred stock; 1,000,000 shares of Series B convertible preferred stock; 500,000 shares of Series C convertible preferred stock; and 1,100,000 shares of Series D convertible preferred stock. The Series A through D convertible preferred stock rank senior to the common stock as to dividends and liquidation. Each share of Series A through D convertible preferred stock is convertible into one share of common stock, except in specified circumstances as defined by the Company’s Certificate of Incorporation, and is automatically converted into common stock upon the occurrence of an initial public offering that meets certain criteria. During the year ended December 31, 2007, the preferred stock holders converted all of the outstanding preferred stock into 2,500,000 shares of common stock. No dividend or distribution may be paid on any shares of the Company’s common stock unless an equivalent dividend or distribution is paid on the Series A through D convertible preferred stock.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
9.11. Stock Options and Warrants
At December 31, 2007,In June 2000 and November 2009, our Board of Directors adopted, and our shareholders approved, the Company has a stock option plan (the “2000 Plan”2000 Plan and 2009 Plan, respectively (together the “Plans”) that provides. The Plans provide for the granting of options to qualified employees of the Company, independent contractors, consultants, directors and other individuals. In JuneAs of 2000,December 31, 2009, the Company’s Board of Directors approved and made available 2,350,00015,000,000 shares of common stock to be issued pursuant to said plan. In subsequent years, the Company’s Board of Directors approved and made available an additional 3,743,882 shares of Company’s common stock for issuance under the 20002009 Plan. The 2000 Plan permitsPlans permit grants of options ofto purchase common shares authorized and approved by the Company’s Board of Directors for issuance prior to enactmentDirectors.
The average fair value of options granted at market during 2010 and 2009 was $0.25 and $0.31 per option, respectively. The total intrinsic value of options exercised during the 2000 Plan.
years ended December 31, 2010 and 2009 was $0 and $3,250, respectively.
The following summarizes the information relating to outstanding stock options activity with employees during 2010 and 2009:
| | Common Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value | |
Outstanding at December 31, 2008 | | | 8,606,556 | | | $ | 0.26 | | | | 7.58 | | | $ | 38,294 | |
Granted | | | 4,190,058 | | | $ | 0.21 | | | | | | | | | |
Exercised | | | (25,000 | ) | | $ | 0.17 | | | | | | | $ | 3,250 | |
Forfeited or expired | | | (472,732 | ) | | $ | 0.58 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2009 | | | 12,298,882 | | | $ | 0.26 | | | | 7.64 | | | $ | 1,052,839 | |
Granted | | | 2,970,000 | | | $ | 0.30 | | | | | | | | | |
Forfeited or expired | | | (371,125 | ) | | $ | 0.32 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 14,897,757 | | | $ | 0.25 | | | | 7.19 | | | $ | 946,754 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2010 | | | 13,834,563 | | | $ | 0.25 | | | | 7.02 | | | $ | 940,594 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2009 | | | 11,951,021 | | | $ | 0.24 | | | | 7.61 | | | $ | 1,034,594 | |
Stock compensation expense was approximately $651,000 for the year ended December 31, 2010 and $1,580,000 for the year ended December 31, 2009, including approximately $75,000 that was accrued for warrants and the activity during 2007 and 2006:
| | Number of Shares | | | Per Share Option/Warrant Price | | | Weighted Average Exercise Price | |
Shares under option/warrant at January 1, 2006 | | | 5,495,262 | | | $ | 0.05-$5.50 | | | $ | 1.15 | |
Terminated | | | (698,106 | ) | | $ | 0.10-$5.00 | | | $ | 4.59 | |
Granted | | | 1,228,873 | | | $ | 0.30-$0.55 | | | $ | 0.52 | |
Shares under option/warrant at December 31, 2006 | | | 6,026,029 | | | $ | 0.05-$5.50 | | | $ | 0.55 | |
Terminated | | | (1,064,585 | ) | | $ | 0.05-$5.50 | | | $ | 2.25 | |
Exercised | | | (60,000 | ) | | $ | 0.05 | | | $ | 0.05 | |
Granted | | | 14,167,637 | | | $ | 0.21-$055 | | | $ | 0.26 | |
Shares under option/warrant at December 31, 2007 | | | 19,069,081 | | | $ | 0.05-$5.50 | | | $ | 0.26 | |
Options/warrants exercisable at December 31, 2007 | | | 17,677,304 | | | $ | 0.05-$5.50 | | | $ | 0.27 | |
issued subsequent to year end. The weighted averagetotal fair value atof shares vested during the date of grant of the optionsyears ended December 31, 2010 and 2009 was $.27approximately $556,000 and $.55 for 2007 and 2006,$1,549,000, respectively.
The intrinsic value of options exercised in 2007 was $20,000. No options were exercised in 2006.
Dais Analytic Corporation
Notes to Financial Statements
Years EndedAs of December 31, 20072010, there was approximately $222,000 of unrecognized employee stock-based compensation expense related to non vested stock options, of which $129,000, $81,000 and 2006$12,000 is expected to be recognized for the years ended December 31, 2011, 2012 and 2013, respectively.
9. Stock Options and Warrants (continued)
The warrants and options expire at various dates ranging January 2007 to August 2017. A further summary of information related to stock options and warrants outstanding and exercisable atfollowing table represents our non vested share-based payment activity with employees for the year ended December 31, 20072010 and 2009:
| | Number of Options | | | Weighted Average Grant Date Fair Value | |
Nonvested options - December 31, 2008 | | | 1,276,563 | | | $ | 0.37 | |
Granted | | | 4,190,058 | | | $ | 0.31 | |
Forfeited | | | (30,334 | ) | | $ | 0.17 | |
Vested | | | (5,088,426 | ) | | $ | 0.30 | |
| | | | | | | | |
Nonvested options - December 31, 2009 | | | 347,861 | | | $ | 0.27 | |
Granted | | | 2,970,000 | | | $ | 0.25 | |
Vested | | | (2,244,663 | ) | | $ | 0.25 | |
Forfeited | | | (10,004 | ) | | $ | 0.28 | |
| | | | | | | | |
| | |
Nonvested options - December 31, 2010 | | | 1,063,194 | | | $ | 0.25 | |
Warrants
At December 31, 2010, the Company had outstanding warrants to purchase the Company’s common stock which were issued in connection with multiple financing arrangements and consulting agreements. Information relating to these warrants is summarized as follows:
Range of Exercise Price Per Share | | | Shares Under Option/Warrant | | | Weighted Average Exercise Price Per Share | | | Weighted Average Remaining Contractual Life in Years | |
Outstanding: | | | | | | | | | | |
$ | 0.05-0.75 | | | | 19,040,124 | | | $ | 0.26 | | | | 4.64 | |
$ | 2.50-5.50 | | | | 28,957 | | | $ | 3.94 | | | | 2.49 | |
$ | 0.05-5.50 | | | | 19,069,081 | | | $ | 0.26 | | | | 4.64 | |
| | | | | | | | | | | | | | |
Exercisable: | | | | | | | | | | | | | |
$ | 0.05-0.75 | | | | 17,648,347 | | | $ | 0.26 | | | | 4.34 | |
$ | 2.50-5.50 | | | | 28,957 | | | $ | 3.94 | | | | 2.49 | |
$ | 0.05-5.50 | | | | 17,677,304 | | | $ | 0.27 | | | | 5.55 | |
Warrants | | Remaining Number Outstanding | | | Weighted Average Remaining Life (Years) | | | Weighted Average Exercise Price | |
Warrants-Daily Financing | | | 197,055 | | | | .98 | | | $ | 0.55 | |
Warrants-Additional Financing | | | 428,637 | | | | 1.70 | | | $ | 0.40 | |
Warrants-Robb Trust Note | | | 50,000 | | | | 1.42 | | | $ | 0.55 | |
Warrants-Financing | | | 14,750,000 | | | | 1.99 | | | $ | 0.25 | |
Warrants-Placement Agent Warrants | | | 793,641 | | | | 2.26 | | | $ | 0.25 | |
Warrants-Tangredi | | | 3,000,000 | | | | 2.25 | | | $ | 0.36 | |
Warrants-Ehrenberg | | | 250,000 | | | | 2.59 | | | $ | 0.30 | |
Warrants-Consulting Agreement | | | 825,000 | | | | 3.77 | | | $ | 0.31 | |
Warrants-Note Conversions | | | 2,302,538 | | | | 3.42 | | | $ | 0.39 | |
Warrants-Stock Purchases 2009 | | | 758,270 | | | | 3.40 | | | $ | 0.34 | |
Warrants-Mandelbaum | | | 50,000 | | | | 3.33 | | | $ | 0.19 | |
Warrants-Services | | | 400,000 | | | | 4.06 | | | $ | 0.50 | |
| | | | | | | | | | | | |
Total | | | 23,805,141 | | | | | | | | | |
Common Stock Issued For Services
10. Deferred Revenue
The Company entered into a consulting agreement in September of 2008. In October of 2009, the agreement was amended to extend the term for nine months. Company is to issue the consultant 10,000 shares of common stock in each of said nine months for total shares of 90,000, with no award of stock for January and February 2010. For the year ended December 31, 2010, the Company has issued 106,000 shares of common stock and recorded $44,050 as consulting expense on its statement of operations.
In exchange
The Company entered into an agreement for consulting services in April 2010. The term of the agreement is for twelve months and calls for the Company to issue the consultant 100,000 shares of common stock upon execution of the agreement and an additional 100,000 shares of common stock after six months of service. The agreement also calls for a licensing agreement,monthly cash payment of $6,000 for the first six months and $7,500 per month for the remainder of the agreement. The Company has fair valued the initial 100,000 shares of common stock at $53,000 and the additional 100,000 shares of common stock at $36,000 and is expensing the fair value of those shares over life of the agreement. For the year ended December 31, 2010, the Company received an initial license feehas recorded $68,000 as consulting expense on its statement of $770,000operations and included $21,000 as prepaid expenses in the balance sheet.
The Company issued 207,692 shares of common stock during the year ended December 31, 2003. As of2010 valued at $64,384 for legal services to be provided from January 1, 2010 through December 31, 2007 and 2006,2010. For the year ended December 31, 2010, the Company has recognized $343,653 and $266,654, respectively,recorded $64,384 as legal expense in its statement of operations.
On November 4, 2010, the Company entered into an agreement for legal services in exchange for 375,000 shares of Common Stock valued at $150,000. For the year ended December 31, 2010, the Company has recorded $150,000 as prepaid expenses in the statementsaccompanying balance sheet.
12. Derivative Financial Instruments
In September 2008, the FASB ratified the consensus reached on EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”) (codified as ASC 815-40-15-5). This EITF provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The EITF applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative under ASC 815-10- 15-13 through 15-130, Accounting for Derivative Instruments and Hedging Activities, for purposes of determining whether that instrument or embedded feature qualifies for the first part of the scope exception. The EITF also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative under ASC 815-10-13 through 15-130, for purposes of determining whether the instrument is within the scope of EITF No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00- 19”) (codified as ASC subtopic 815-40). EITF No. 07-5 was effective beginning the first quarter of fiscal 2009.
Due to certain adjustments that may be made to the exercise price of the warrants issued in December 2007, January 2008 and August 2008, if the Company issues or sell shares of its common stock at a price which is less than the then current warrant exercise price, these warrants have been classified as a liability as opposed to equity in accordance with the Derivatives and Hedging Topic of the FASB ASC 815-10-15 as it was determined that these warrants were not indexed to the Company’s stock. As a result, the fair market value of these warrants was remeasured on January 1, 2009 and marked to market at each subsequent financial reporting period. The change in fair value of the warrants is recorded in the statement of operations relativeand is estimated using the Black-Scholes option-pricing model with the following assumptions:
| | For the Years Ended December 31, | |
| | 2010 | | | 2009 | |
Exercise price | | $ | 0.25 | | | $ | 0.25 | |
Market value of stock at end of period | | $ | 0.29 | | | $ | 0.30 | |
Expected dividend rate | | | N/A | | | | N/A | |
Expected volatility | | | 158% – 165 | % | | | 112% – 117 | % |
Risk-free interest rate | | | 0.61% – 0.82 | % | | | 1.70% – 2.20 | % |
Expected life in years | | | 2.00 – 2.58 | | | | 3.00 – 3.58 | |
Shares underlying warrants outstanding classified as liabilities | | | 15,543,641 | | | | 15,543,641 | |
All warrants issued by the Company other than the above noted warrants are classified as equity.
During the fourth quarter of the year ended December 31, 2010, the Company applied the guidance of Accounting Standards Codification 815-40 (ASC 815-40) and recorded a $618,801 gain on the fair value of the warrant liability for the year then ended. The warrants had been issued in December 2007, January 2008 and August 2008, in connection with convertible promissory notes as described in Note 7 and were originally accounted for as an equity instrument. Upon further review of the warrants, it was determined that these warrants were not indexed to thisthe Company’s stock and therefore required derivative accounting treatment. Accordingly, the Company has restated its financial statements for the year ended December 31, 2009 provided herein to reflect the proper accounting treatment. If the Company would have recorded these warrants as a derivative liability upon initial adoption of ASC 815-40, the Company would have recorded the following amounts in the accompanying balance sheet and income statement:
| | Total Liabilities As previously Reported | | | Change | | | Total Liabilities As Restated | | | Stockholders’ Deficit As previously Reported | | | Change | | | Stockholders’ Deficit As Restated | |
March 31, 2009 | | $ | 4,599,317 | | | $ | 2,080,830 | | | $ | 6,680,147 | | | $ | (4,246,075 | ) | | $ | (2,080,830 | ) | | $ | (6,326,905 | ) |
June 30, 2009 | | $ | 4,565,431 | | | $ | 2,425,223 | | | $ | 6,990,654 | | | $ | (3,982,146 | ) | | $ | (2,425,223 | ) | | $ | (6,407,369 | ) |
September 30, 2009 | | $ | 3,968,231 | | | $ | 10,774,888 | | | $ | 14,743,119 | | | $ | (3,158,106 | ) | | $ | (10,774,888 | ) | | $ | (13,932,994 | ) |
December 31, 2009 | | $ | 4,299,685 | | | $ | 4,577,119 | | | $ | 8,876,8045 | | | $ | (2,678,939 | ) | | $ | (4,577,1119 | ) | | $ | (7,256,058 | ) |
March 31, 2010 | | $ | 5,117,253 | | | $ | 6,085,147 | | | $ | 11,202,400 | | | $ | (3,058,161 | ) | | $ | (6,085,147 | ) | | $ | (9,143,308 | ) |
June 30, 2010 | | $ | 5,165,059 | | | $ | 4,250,053 | | | $ | 9,415,112 | | | $ | (3,094,998 | ) | | $ | (4,250,053 | ) | | $ | (7,345,051 | ) |
September 30, 2010 | | $ | 5,147,657 | | | $ | 4,861,284 | | | $ | 10,008,941 | | | $ | (3,428,140 | ) | | $ | (4,861,284 | ) | | $ | (8,289,424 | ) |
| | Other Inc (Exp) As previously Reported | | | Change | | | Other Inc (Exp) As Restated | | | Net Loss As previously Reported | | | Change | | | Net (Loss) Income As Restated | | | EPS As previously Reported | | | EPS As Restated | |
For the Three Months Ended: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2009 | | $ | (156,161 | ) | | $ | (146,858 | ) | | $ | (303,019 | ) | | $ | (648,786 | ) | | $ | (146,858 | ) | | $ | (795,644 | ) | | $ | (0.05 | ) | | $ | (0.06 | ) |
June 30, 2009 | | $ | (95,353 | ) | | $ | (344,392 | ) | | $ | (439,745 | ) | | $ | (344,000 | ) | | $ | (344,392 | ) | | $ | (688,392 | ) | | $ | (0.04 | ) | | $ | (0.04 | ) |
September 30, 2009 | | $ | (203,771 | ) | | $ | (9,438,212 | ) | | $ | (9,641,983 | ) | | $ | (436,927 | ) | | $ | (9,438,212 | ) | | $ | (9,875,139 | ) | | $ | (0.06 | ) | | $ | (0.50 | ) |
For the Year Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2009 | | $ | (620,907 | ) | | $ | (3,731,694 | ) | | $ | (4,352,601 | ) | | $ | (3,385,382 | ) | | $ | (3,731,694 | ) | | $ | (7,117,076 | ) | | $ | (0.17 | ) | | $ | (0.36 | ) |
For the Three Months Ended: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2010 | | $ | (46,504 | ) | | $ | (1,508,027 | ) | | $ | (1,554,531 | ) | | $ | (520,038 | ) | | $ | (1,508,027 | ) | | $ | (2,028,065 | ) | | $ | (0.02 | ) | | $ | (0.07 | ) |
June 30, 2010 | | $ | (55,233 | ) | | $ | 1,835,094 | | | $ | 1,779,861 | | | $ | (624,681 | ) | | $ | 1,835,094 | | | $ | 1,210,413 | | | $ | (0.02 | ) | | $ | 0.04 | |
September 30, 2010 | | $ | (55,933 | ) | | $ | (611,231 | ) | | $ | (667,164 | ) | | $ | (555,692 | ) | | $ | (611,231 | ) | | $ | (1,166,923 | ) | | $ | (0.02 | ) | | $ | (0.04 | ) |
13. Deferred Revenue
The Company entered into a licensing agreement sinceduring the receiptyear ended December 31, 2003 and received an initial fee of $770,000. This fee is deferred and recognized on a straight-line basis over the life of the initial fee. The licensinglicense agreement also included futureof 10 years. In addition, the Company received royalties of between 3% and 5% for each such licensed product sold within Japan. A minimum royalty fee of $100,000 was required in each of the first three years of the agreement. AsThe Company recognized revenue of approximately $77,000 for this agreement during each of the years ended December 31, 20072010 and 2006, the Company has received the minimum royalty fees of $300,000; however, to date no additional fees have been received.2009.
The Company also hadentered into a licensing agreement with a biomedical entity wherebyduring the Companyyear ended December 31, 2005 and received an initial license fee of $50,000$50,000. This fee is deferred and recognized on a straight-line basis over the life of the license agreement of 7 years. The Company recognized revenue of approximately $5,000 for this agreement during each of the yearyears ended December 31, 2005. As of December 31, 20072010 and 2006, the Company has recognized $14,288 and $7,144, respectively, of deferred revenue as licensing fees in the statement of operations in conjunction with this licensing agreement.2009.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
11.14. Commitments and Contingencies
The Company has employment agreements with some of its key employees and executives. These agreements provide for minimum levels of compensation during current and future years. In addition, these agreements call for grants of stock options and for payments upon termination of the agreements.
The Company entered into an agreement with the holders of the Convertible Notes to file a registration statement within 45 days of the first Note conversion and to have the registration statement declared effective within 150 days. The Company will incur penalties and damages of up to approximately $236,000 if it does not file and keep the registration statement effective pursuant to the terms of this agreement. As of December 31, 2010, the Company has recorded a liability of $5,000 in accrued expenses related to this agreement on its balance sheet.
On September 17, 2010, the U.S. Department of Energy approved a grant of up to $681,322 to the Company for the funding of a project to scale up, in size and field trial, a novel dehumidification system similar to the Company’s NanoAir prototype, that is operated by directly manipulating water vapor using a selectively permeable membrane made of a nano-structure solid polymer. The grant is conditioned upon the Company contributing $171,500 of the proposed total project cost of $852,822. The Company will receive the grant amount in phases upon the meeting of certain milestones. As of December 31, 2010, the Company has incurred $79,786 in expenses and recognized the same amount as revenue related to this grant award.
In December 2010, Pasco County Florida approved a grant of $254,500 to the Company for the funding of the NanoAir product into commercialization. The grant from Pasco County requires us to pay the county 2% of the gross sales of products using a certain unique pump assembly for 5 years or for a total of $1,000,000 whichever comes first. As of December 31, 2010, the Company has incurred $19,946 in expenses and recognized the same amount as revenue related to this grant award.
The Company is not currently seekinga party to raise capital from the sale of equity or equity backed securities to accredited investors pursuant to a private sale. To assist it in this effort, Company has retained the services of investment advisors who shall be compensated for services rendered upon the successful closing of the raise. Said compensation, if any shall be equal to a given percentage of the capital raised plus a five year warrant to purchase shares of Company’s $0.01 par value common stock. The warrant shares are set at a given percentage of the shares issued as a result of the raise.
In May of 2006, the United States Patent Office (“USPTO”) informed the Company that an interference proceeding had been initiated between the Company’s patent number US 6,413,298 and a pending patent application assigned to another corporation.
legal proceedings. In the ordinary course of the interference the USPTO has permitted the Company to file five motions. Each motion sets forth either the basis upon which the Company believes the other corporation’s patent application is deficient for failing to meet minimum USPTO requirements for a valid patent application or the manner in which the Company believes the patents cited fail to meet the USPTO requirements for interference. The other corporation has been permitted to file a motion seeking benefit of a provisional patent application date and one requesting to add three additional claims to the application. Oppositions and replies have been filed by both parties.
At this point, a possible financial outcome cannot be determined. However, the interference will not effect the validity of Company’s other patents.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
11. Commitments and Contingencies (continued)
The Company entered into a six month financial and strategic consulting agreement dated September 1, 2005 with a financial consulting company. (“Consulting Company”) by which the Consulting Company was to provide the Company with consulting services and assist it in the procurement of equity and debt financing for business expansion and development up to a maximum of $20,000,000. In exchange for these services, two of the shareholders of the Company assigned their Convertible Notes Receivable, valued at $627,723, to the Consulting Company. Per the terms of the Consulting Agreement and its related documents, one half of the first note became vested in the Consulting Company upon the execution of the Consulting Agreement which by the terms of the Agreement resulted in $156,930 of said first note being subject to conversion into the Company’s common stock at the rate of one share per $.10 of note balance. In addition, the agreement states that an additional $156,931 would be potentially eligible for conversion upon the Company raising $1,000,000 in financing from any source during the term of the Consulting Agreement. Conversion rights were subject to pro-rata vesting based on the funding secured. For financial presentation purposes, the Company has accounted for this transaction as a capital contribution by the stockholders of $627,723 for the forgiveness of their notes and as consulting expense for equity given to the Consulting Company. During the year ended December 31, 2005, the Company received funding of $599,972 in the form of bridge loans. On December 23, 2005 the Company terminated the Consulting Agreement subject to the provisions thereof. The Company has no further obligations of any nature to the Consulting Company. The shareholder of one of the notes may contend, and has a possibility of being successful, in having the amendment and assignment declared void requiring his note be reinstated on the Company’s books. The accounting entries made by the Company with regard to the first note are not to be construed as a waiver of any rights the Company may have in law or equity under the consulting agreement or any agreements related thereto, nor as an admission, of an nature, by the Company.
In 1995, having determined biomedical applications were outside of its expertise, the Company grantedbecome a license permitting the use of its polymer technologiesparty to develop, use sellvarious legal proceedings generally involving contractual matters, infringement actions, product liability claims and lease biomedical devices, inventions and innovations to a biomedical entity (“Entity”). In June of 2004 Company and Entity entered into an amendment to the 1995 license agreement whereby Entity paid Company $150,000 as full and final payment of all sums due to Company under the agreement. In June of 2005 Company and Entity entered into a license agreement whereby the Company granted Entity the exclusive right, license and privilege, including the right to sub-license, to use and have used the Company’s know-how and patent rights to manufacture, use, sell, import, lease and distribute products in the health care field which contain or are derived from the Company’s proprietary or patented polymer. In exchange for the rights granted under said license Entity paid a one time fee of $50,000 and will, for the first ten years of the license or until fees paid pursuant to this agreement reach $1 million dollars, pay Company one and one half percent of the net sub-license price received by Entity as a result of Entity granting a third party a sub-license to sell surgical gowns, certain clothing for use in certain health care settings and personal hygiene products and will also pay one and one half percent of the net sales price it receives with relation to the aforementioned products when Entity sells said products on its own behalf. The Chief Executive Officer is also a member of Entity.
other matters.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
12.15. Income Taxes
There is no current or deferred income tax expense or benefit to continuing operations for the years ended December 31, 20072010 and 2006. 2009.
The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows:
| | | Year ended December 31, | |
| | 2007 | | | 2006 | | | 2010 | | | 2009 | |
Tax benefit at U.S. statutory rate | | $ | (760,000 | ) | | $ | (659,300 | ) | | $ | (487,000 | ) | | $ | (2,420,000 | ) |
State income tax benefit, net of federal benefit | | | (52,100 | ) | | | (50,100 | ) | | | (52,000 | ) | | | (258,000 | ) |
Effect of non-deductible expenses | | | 23,800 | | | | 300 | | | | 1,000 | | | | 1,000 | |
SFAS No. 123(R) expense | | | 98,400 | | | | 189,900 | | |
Non-deductible interest | | | 149,100 | | | | | | |
Employee stock-based compensation | | | | 221,000 | | | | 536,000 | |
Change in warrant valuation | | | | (210,000 | ) | | | 1,269,000 | |
Other adjustments | | | | 154,000 | | | | 994,000 | |
Change in valuation allowance | | | 540,800 | | | | 519,200 | | | | 373,000 | | | | (132,000 | ) |
| | $ | 0 | | | $ | 0 | | | | | | | | | |
| | | $ | — | | | $ | — | |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
| | | December 31, | |
| | 2007 | | | 2006 | | | 2010 | | 2009 | |
Deferred tax assets (liabilities), current: | | | | | | | | | | | | |
Bonus payable (paid more than 75 days after year-end) | | $ | 108,300 | | | $ | 108,300 | | |
Bonus payable | | | $ | 108,300 | | | $ | 108,300 | |
Accrued deferred compensation payable | | | 303,900 | | | | 240,100 | | | | 428,300 | | | 386,300 | |
Accrued contractual expense | | | 5,000 | | | | 5,000 | | |
Stock warrant consideration and other | | | | 84,000 | | | 49,100 | |
Deferred license revenue | | | 31,700 | | | | 31,700 | | | | 30,900 | | | 32,400 | |
Valuation allowance | | | (448,900 | ) | | | (385,100 | ) | | | (651,500 | ) | | (576,100 | ) |
| | $ | 0 | | | $ | 0 | | | | | | | | |
| | | $ | — | | | $ | — | |
| | | | | | | | |
Deferred tax assets (liabilities), noncurrent: | | | | | | | | | | | | | | |
Deferred license revenue | | | $142,200 | | | | $142,200 | | | $ | 48,100 | | | $ | 77,400 | |
Property and equipment | | | 3,400 | | | | 3,400 | | |
Net operating loss | | | 6,171,000 | | | | 5,662,400 | | |
Depreciation | | | | 3,400 | | | 3,400 | |
Net operating loss carryforwards | | | | 7,644,600 | | | 7,261,000 | |
Valuation allowance | | | (6,316,600 | ) | | | (5,839,600 | ) | | | (7,596,100 | ) | | (7,341,800 | ) |
| | $ | 0 | | | $ | 0 | | | | | | | | |
| | | $ | — | | | $ | — | |
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2007 and 2006
12. Income Taxes (continued)
As of December 31, 20072010 and 2006,2009, the Company had federal and state net operating loss carry-forwards totaling approximately $16,400,000$20,100,000 and $15,000,000,$21,400,000, respectively, which begin expiring in 2012. AsThe Company has established a valuation allowance to fully reserve all deferred tax assets at December 31, 2010 and 2009 because it is more likely than not that the Company will not be able to utilize such assets, the Company has established a valuation allowance to fully reserve such assets at December 31, 2007 and 2006.these assets.
As of December 31, 2007,2010, the Company has not performed an IRC Section 382 study to determine the amount, if any, of its net operating losses that may be limited as a result of the ownership change percentages during 2007.2010. However, the Company will complete the study prior to the utilization of any of its recorded net operating losses.
13.
16. Genertec Agreement
On August 21, 2009, we entered into an Exclusive Distribution Agreement with Genertec, under which we are to supply and Genertec is to distribute, on an exclusive basis, three of our nanotechnology-based membrane products and related products in Great China, including mainland China, Hong Kong, Macau and Taiwan. The agreement provides that during the initial term of the agreement, Genertec will order and purchase these products in the aggregate amount of Two Hundred Million U.S. Dollars. A minimum quantity of said products is to be purchased by Genertec during each contract year of the initial term. In the event Genertec fails to purchase the minimum amount of products in any given year, we may convert the exclusivity provided to Genertec to a non-exclusive or terminate the agreement. Genertec has agreed to engage and appoint authorized person(s) or firm(s), to install, engineer, perform maintenance, sell and use the products within the defined distribution area and neither Genertec nor its designated buyer is permitted to alter, decompile or modify our products in any way. As consideration for entering into this agreement, Genertec agreed to pay us a deposit in monthly installments beginning in September 2009 and continuing through April, 2010. All such payments are to be applied to products purchased by Genertec. During the initial term of the agreement, the parties are to negotiate in good faith a royalty bearing license agreement whereby Genertec may be granted a license to manufacture certain portions of the our products in the designated territory. The initial term of the agreement shall be for a period of five (5) years, commencing on August 21, 2009, unless earlier terminated. Unless notice of termination is delivered to the respective parties 180 days prior to the expiration of the initial term, the Agreement will automatically renew for consecutive one year periods. We may terminate this agreement in the event: (1) Genertec fails to pay the deposit as indicated, (2) Genertec does not purchase the minimum amount of our designated products during any contract year, (3) breach by Genertec of its obligations under the Agreement, or (4) at our discretion immediately upon the transfer of fifty percent (50%) or more of either the assets of the voting stock of Genertec to any third party. Genertec may not assign the Agreement to any party without our prior written consent. As of December 31, 2010, the Company has $406,356 in accounts receivable and $500,000 in deferred revenue to be applied against future orders. Genertec America’s partners in China have received the product and are continuing to perform tests; however there have been delays in completing this testing process. As a result, Genertec America has not yet begun to order product from the Company under this agreement. The Company is currently meeting with Genertec to resolve the payment of the receivable and expects that the amounts will be collected.
17. CAST Systems Control Technology
In April 2010, the Company entered into a technical and sales agreement with CAST Systems Control Technology Co., Ltd. (“CAST”) and Genertec with a value of up to approximately $48 million U.S. Dollars over a twelve month period. Under the terms of the Agreement, the Company will supply to CAST, through Genertec, key system components of its nanotechnology clean water process. The Agreement is conditioned upon the Company obtaining a letter of credit from Genertec in the amount as agreed to by the parties on or before April 13, 2010. As of the date of this filing, the Company has received the required letter of credit from Genertec. This Agreement, the terms of which are disclosed in the Company’s Current Report on Form 8-K, filed on April 9, 2010, is made pursuant to and in support of the $200 million distribution agreement made between the Company and Genertec on August 21, 2009, granting Genertec the exclusive right to obtain, distribute and market the Company’s nanotechnology-based membrane and related products in China, including mainland China, Hong Kong, Macau and Taiwan, the terms of which are summarized above and more fully disclosed in the Company’s Current Report on Form 8-K, filed August 27, 2009. For the year ended December 31, 2010, the Company has sold one unit under this agreement and recognized $300,000 in revenue which has been billed and $254,000 of which has been collected. The Company expects the remainder of the $300,000 receivable to be collected in 2011.
18. Subsequent Events
Subsequent to December 31, 2010, the Company issued 121,346 shares of common stock for services.
During January 2011, the Company issued 1,810,000 options under the 2009 Option Plan.
In January 2008,December 2009, we secured a loan in the principal amount of $1,000,000 from an investor. Pursuant to the terms of the note, we are to pay the holder simple interest at the rate of ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 17, 2010 the note’s maturity date was extended to April 30, 2011. On March 22, 2011, the Company entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note (“Convertible Note”, collectively “Exchange Agreements”) with the this investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the Investor amended and restated the $1,000,000 unsecured promissory note issued by the Company to Investor on or about December 17, 2009 (“Original Note”) to, among other things, extend the term to March 22, 2012 (“2011 Convertible Note”). Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 will be paid on March 22, 2012. Subject to the terms and conditions of the 2011 Convertible Note, including limitations on conversion, the outstanding principal and interest under the 2011 Convertible Note will automatically convert into shares of the Company’s common stock at the then-effective conversion price upon the closing of a qualified firm commitment underwritten public offering or may be voluntarily converted by the investor at anytime during the term. The initial conversion price is $0.26 per share. Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering, (as defined in the 2011 Convertible Note which is filed as an exhibit to the Form 8K filed with the Securities and Exchange Commission on March 28, 2011), or March 22, 2012. Pursuant to and during the term of the 2011 Convertible Note, the Company will not issue or allow to exist any obligation for borrowed money, except for subordinate indebtedness in payment and priority, trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate, or unsecured and subordinate working capital guarantees provided by, the Export Import Bank of the United States (the “EXIM Bank”), and indebtedness evidenced by the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000.
On March 22, 2011, in connection with the above Exchange Agreements, the Company entered into Amendment to 2007 Warrant and Amendment to 2009 Warrant to extend the terms of the Stock Purchase Warrant, dated on or about December 31, 2007, and Stock Purchase Warrant, dated on or about March 12, 2009, respectively, to March 22, 2016 and to provide for cashless exercise unless such warrant shares are registered for resale under a registration statement. In addition, on March 22, 2011, the Company issued a Stock Purchase Warrant to the Investor to purchase 1,000,000 shares of the Company’s common stock at $0.45 per share, exercisable commencing on the earliest of the consummation of the qualified offering (as defined in the Exchange Agreements), the date of conversion of the Convertible Note in full, or the date of conversion of the Convertible Note by the Investor in the greatest number of shares of the Company’s common stock not to exceed 9.99% beneficial ownership of Company outstanding common stock and terminating on March 22, 2016.
Also, on March 22, 2011, the Company entered into a Note and Warrant Purchase Agreement, Secured Convertible Promissory Note and Patent Security Agreement (“Financing Agreements”) with the Investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the Investor has provided a bridge loan in the amount of $1,500,000 (“Loan”) to the Company, which will be secured in all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and “accounts” with respect to such intellectual property assets. Pursuant to the Secured Convertible Promissory Note (“Secured Note”), interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 will be paid on March 22, 2012, but repayment is accelerated upon a qualified offering (as defined in the note). In the event of such qualified offering, and subject to the terms and conditions of the Secured Note, the outstanding principal and interest under the Secured Note will automatically convert, subject to the limitations on conversion described in the note, into shares of the Company’s common stock at the then-effective conversion price upon the closing of such qualified offering. The initial conversion price is $0.26 per share. Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering or March 22, 2012. No cash fees were paid to any party to the transaction in exchange for lending the money. On March 22, 2011, in connection with the Financing Agreements, the Company issued a Stock Purchase Warrant to the Investor to purchase 3,000,000 shares of the Company’s common stock at $0.45 per share, exercisable until March 22, 2016.
Pursuant to and during the term of the Secured Note, the Company will not issue or permit to exist any obligation for borrowed money, except for trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate indebtedness to, or unsecured and subordinate working capital guarantees provided by, the EXIM Bank, the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000, the Amended and Restated Convertible Promissory Note, dated March 22, 2011, issued to the Investor in the principal amount of $1,000,000 and other unsecured indebtedness for borrowed money in an amount not to exceed $750,000.
Pursuant to the Patent Security Agreement issued in connection with the Note and Warrant Purchase of March 22, 2011, the Company shall not, without the Investor’s prior consent, sell, dispose or otherwise transfer all or any portion of the Collateral, except for license grants in the ordinary course of business. In addition, the Company will take all actions reasonably necessary to prosecute to allowance applications for patents and maintain all patents, and to seek to recover damages for infringement, misappropriation or dilution of the Collateral with limited exceptions.
In connection with such qualified offering, and subject to the terms and conditions of the Convertible Note, the Company will use reasonable efforts to include the Investor’s securities in such offering. Pursuant to the terms and conditions of the Exchange Agreements, the Investor will not sell, offer to sell or otherwise transfer or dispose of (other than to affiliates) any securities of the Company held by it for a period of 180 days from the date of the final prospectus relating to such qualified offering, except for certain limited sales as more fully described in the Exchange Agreements.
Dais Analytic Corporation
Balance Sheets
| | September 30, 2011 | | | December 31, 2010 | |
| | (unaudited) | | | | |
Assets |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 423,908 | | | $ | 304,656 | |
Accounts receivable, net of allowance for doubtful accounts of $42,263 and $0 at September 30, 2011 and December 31, 2010, respectively | | | 795,940 | | | | 828,632 | |
Other receivables | | | 114,157 | | | | 59,526 | |
Inventory | | | 372,372 | | | | 294,069 | |
Deferred offering costs | | | 592,881 | | | | 175,000 | |
Debt issue costs | | | 32,515 | | | | — | |
Prepaid expenses and other current assets | | | 90,047 | | | | 83,136 | |
Total current assets | | | 2,421,820 | | | | 1,745,019 | |
| | | | | | | | |
Property and equipment, net | | | 194,102 | | | | 147,911 | |
| | | | | | | | |
Other assets: | | | | | | | | |
Deposits | | | 2,280 | | | | 3,280 | |
Patents, net of accumulated amortization of $124,836 and $112,240 at September 30, 2011 and December 31, 2010, respectively | | | 81,636 | | | | 74,363 | |
Total other assets | | | 83,916 | | | | 77,643 | |
| | $ | 2,699,838 | | | $ | 1,970,573 | |
Liabilities and Stockholders’ Deficit |
Current liabilities: | | | | | | | | |
Accounts payable, including related party payables of $423,101 and $151,440 at September 30, 2011 and December 31, 2010, respectively | | $ | 810,923 | | | $ | 620,196 | |
Accrued compensation and related benefits | | | 1,405,606 | | | | 1,426,022 | |
Accrued interest | | | 257,535 | | | | 172,359 | |
Accrued expenses, other | | | 72,646 | | | | 69,502 | |
Current portion of deferred revenue | | | 615,206 | | | | 647,804 | |
Current portion of convertible notes payable | | | — | | | | 50,000 | |
Current portion of notes payable, related party | | | 624 | | | | 1,620,624 | |
Current portion of convertible notes payable, related party net of unamortized discount of $708,294 and $0 at September 30, 2011 and December 31, 2010, respectively | | | 1,791,706 | | | | — | |
| | |
Total current liabilities | | | 4,954,246 | | | | 4,606,507 | |
| | |
Long-term liabilities: | | | | | | | | |
Warrant liability | | | 3,776,909 | | | | 3,958,318 | |
Deferred revenue, less current portion | | | 66,340 | | | | 127,840 | |
Total long-term liabilities | | | 3,843,249 | | | | 4,086,158 | |
| | | | | | | | |
Stockholders’ deficit: | | | | | | | | |
Preferred stock; $0.01 par value; 10,000,000 shares authorized; 0 shares issued and outstanding | | | — | | | | — | |
Common stock; $0.01 par value; 200,000,000 shares authorized; 37,774,817 and 33,563,428 shares issued and 37,517,604 and 33,306,215 shares outstanding at September 30, 2011 and December 31, 2010, respectively | | | 377,749 | | | | 335,635 | |
Capital in excess of par value | | | 33,820,520 | | | | 29,852,347 | |
Accumulated deficit | | | (39,023,814 | ) | | | (35,637,962 | ) |
| | | (4,825,545 | ) | | | (5,449,980 | ) |
Treasury stock at cost, 257,213 shares | | | (1,272,112 | ) | | | (1,272,112 | ) |
Total stockholders’ deficit | | | (6,097,657 | ) | | | (6,722,092 | ) |
| | | | | | | | |
| | $ | 2,699,838 | | | $ | 1,970,573 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Operations
(Unaudited)
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (restated) | | (restated) |
Revenue: | | | | | | | | | | | | | | | | |
Sales | | $ | 605,449 | | | $ | 931,874 | | | $ | 2,547,222 | | | $ | 2,308,298 | |
License fees | | | 20,500 | | | | 20,500 | | | | 61,500 | | | | 61,530 | |
| | | 625,949 | | | | 952,374 | | | | 2,608,722 | | | | 2,369,828 | |
| | | | |
Cost of goods sold | | | 466,271 | | | | 755,034 | | | | 1,973,835 | | | | 1,626,556 | |
Gross profit | | | 159,678 | | | | 197,340 | | | | 634,887 | | | | 743,272 | |
Expenses: | | | | | | | | | | | | | | | | |
Research and development expenses, net of government grant proceeds of $305,425, $0, $592,897 and $0, respectively | | | (3,838 | ) | | | — | | | | 9,317 | | | | — | |
Selling, general and administrative | | | 487,961 | | | | 697,099 | | | | 2,202,771 | | | | 2,286,013 | |
| | | 484,123 | | | | 697,099 | | | | 2,212,088 | | | | 2,286,013 | |
Loss from operations | | | (324,445 | ) | | | (499,759 | ) | | | (1,577,201 | ) | | | (1,542,741 | ) |
| | | | |
Other expense (income): | | | | | | | | | | | | | | | | |
Change in fair value of warrant liability | | | 126,008 | | | | 611,231 | | | | 783,944 | | | | 284,165 | |
Interest expense | | | 446,505 | | | | 55,933 | | | | 1,026,945 | | | | 157,669 | |
Interest income | | | (374 | ) | | | — | | | | (1,038 | ) | | | — | |
Other income | | | (1,200 | ) | | | — | | | | (1,200 | ) | | | — | |
| | | 570,939 | | | | 667,164 | | | | 1,808,651 | | | | 441,834 | |
Net Loss | | $ | (895,384 | ) | | $ | (1,166,923 | ) | | $ | (3,385,852 | ) | | $ | (1,948,575 | ) |
| | | | | | | | | | | | | | | | |
Net loss per common share, basic and diluted | | $ | (0.02 | ) | | $ | (0.04 | ) | | $ | (0.10 | ) | | $ | (0.03 | ) |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares, basic and diluted | | | 36,682,582 | | | | 19,872,184 | | | | 35,126,357 | | | | 29,696,897 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Stockholders’ Deficit
(Unaudited)
For the Nine Months Ended September 30, 2011
| | Common Stock | | | Capital in Excess of | | | Accumulated | | | Treasury | | | Total Stockholders’ | |
| | Shares | | | Amount | | | Par Value | | | Deficit | | | Stock | | | Deficit | |
Balance, December 31, 2010 | | | 33,563,428 | | | $ | 335,635 | | | $ | 29,852,347 | | | $ | (35,637,962 | ) | | $ | (1,272,112 | ) | | $ | (6,722,092 | ) |
Issuance of common stock for services | | | 225,192 | | | | 2,252 | | | | 78,993 | | | | — | | | | — | | | | 81,245 | |
Stock based compensation | | | — | | | | — | | | | 671,099 | | | | — | | | | — | | | | 671,099 | |
Issuance of common stock for settlement of accounts payable | | | 202,703 | | | | 2,027 | | | | 72,973 | | | | — | | | | — | | | | 75,000 | |
Warrant issued with convertible note payable, related party | | | — | | | | — | | | | 435,240 | | | | — | | | | — | | | | 435,240 | |
Beneficial conversion feature on convertible notes payable, related party | | | — | | | | — | | | | 1,064,760 | | | | — | | | | — | | | | 1,064,760 | |
Issuance of common stock in exchange for settlement of debt | | | 2,667,503 | | | | 26,675 | | | | 666,875 | | | | — | | | | — | | | | 693,550 | |
Exercise of warrants | | | 1,115,991 | | | | 11,160 | | | | (11,160 | ) | | | — | | | | — | | | | — | |
Reclassification of warrant liability upon warrant exercise | | | — | | | | — | | | | 965,354 | | | | — | | | | — | | | | 965,354 | |
Revaluation of common stock issued to vendors for services | | | — | | | | — | | | | 24,039 | | | | — | | | | — | | | | 24,039 | |
Net loss | | | — | | | | — | | | | — | | | | (3,385,852 | ) | | | — | | | | (3,385,852 | ) |
Balance, September 30, 2011 | | | 37,774,817 | | | $ | 377,749 | | | $ | 33,820,520 | | | $ | (39,023,814 | ) | | $ | (1,272,112 | ) | | $ | (6,097,657 | ) |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Cash Flows
(Unaudited)
| | For the Nine Months Ended September 30, | |
| | 2011 | | | 2010 | |
| | | | | (restated) | |
Operating activities | | | | | | | | |
Net loss | | $ | (3,385,852 | ) | | $ | (1,948,575 | ) |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | |
Depreciation and amortization | | | 38,979 | | | | 7,879 | |
Amortization of discount and beneficial conversion feature on notes payable | | | 791,707 | | | | — | |
Issuance of common stock, stock options and stock warrants for services and amortization of common stock issued for services | | | 127,400 | | | | 326,060 | |
Stock based compensation | | | 671,099 | | | | 549,330 | |
Change in fair value of warrant liability | | | 783,944 | | | | 248,165 | |
Increase in allowance for doubtful accounts | | | 42,263 | | | | — | |
(Increase) decrease in: | | | | | | | | |
Accounts receivable | | | (9,571 | ) | | | (736,058 | ) |
Other receivables | | | (54,631 | ) | | | — | |
Inventory | | | (78,303 | ) | | | (133,734 | ) |
Prepaid expenses and other current assets | | | (28,027 | ) | | | (48,630 | ) |
Increase (decrease) in: | | | | | | | | |
Accounts payable and accrued expenses | | | 427,596 | | | | 92,369 | |
Accrued compensation and related benefits | | | (20,416 | ) | | | 80,416 | |
Deferred revenue | | | (94,098 | ) | | | 230,187 | |
Net cash used by operating activities | | | (787,910 | ) | | | (1,332,591 | ) |
| | | | | | | | |
| | |
Investing activities | | | | | | | | |
Increase in patent costs | | | (19,869 | ) | | | (4,210 | ) |
Purchase of property and equipment | | | (72,573 | ) | | | (19,771 | ) |
Net cash used by investing activities | | | (92,442 | ) | | | (23,981 | ) |
| | | | | | | | |
| | |
Financing activities | | | | | | | | |
Proceeds from issuance of notes payable, related party | | | 1,500,000 | | | | 620,000 | |
Payments on notes payable | | | (50,000 | ) | | | (100,000 | ) |
Payments for debt issue costs and deferred offering costs | | | (450,396 | ) | | | — | |
Net cash provided by financing activities | | | 999,604 | | | | 520,000 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 119,252 | | | | (836,572 | ) |
| | |
Cash and cash equivalents, beginning of period | | | 304,656 | | | | 1,085,628 | |
Cash and cash equivalents, end of period | | $ | 423,908 | | | $ | 249,056 | |
Supplemental cash flow information: | | | | | | | | |
| | |
Cash paid during the year for interest | | $ | 76,512 | | | $ | — | |
| | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
| | | | | | | | |
Settlement of accounts payable with the issuance of 202,703 shares of common stock | | $ | 75,000 | | | $ | — | |
Reclassification of warrant liability to equity upon warrant exercise | | $ | 965,354 | | | | — | |
Application of proceeds due and payable under note, including accrued interest, to purchase 2,667,503 shares of common stock at $0.26 per share | | $ | 693,550 | | | $ | — | |
Issuance of note payable with a beneficial conversion feature | | $ | 1,064,760 | | | $ | — | |
Issuance of note payable with a discount equivalent to the relative fair value of the accompanying warrant | | $ | 435,240 | | | $ | — | |
Issuance of 375,000 shares of common stock in conversion of notes payable | | $ | — | | | $ | 75,000 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Notes to Financial Statements
Three and Nine Months Ended September 30, 2011
(Unaudited)
The accompanying financial statements of Dais Analytic Corporation (the “Company”) are unaudited, but in the opinion of management, reflect all adjustments necessary to fairly state the Company’s financial position, results of operations, stockholders’ deficit and cash flows as of and for the dates and periods presented. The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.
The unaudited financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted although the Company generally believes that the disclosures are adequate to ensure that the information presented is not misleading. The accompanying financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2011. The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for any future quarters or for the entire year ending December 31, 2011.
Dais Analytic Corporation, a New York corporation, has developed and is commercializing applications using its nano-structure polymer technology. The first commercial product is an energy recovery ventilator (“ERV”) (cores and systems) for use in commercial Heating, Ventilating, and Air Conditioning (HVAC) applications. In addition to direct sales, the Company licenses its nano-structured polymer technology to strategic partners in the aforementioned application and is in various stages of development with regard to other applications employing its base technologies. The Company was incorporated in April 1993 with its corporate headquarters located in Odessa, Florida.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the three and nine months ended September 30, 2011, the Company incurred net losses of $895,384 and $3,385,852, respectively. As of September 30, 2011, the Company has an accumulated deficit of $39,023,814, negative working capital of $2,532,426 and a stockholder’s deficit of $6,097,657. In view of these matters, there is substantial doubt that the Company will continue as a going concern. The recoverability of recorded property and equipment, intangible assets, and other asset amounts shown in the accompanying financial statements is dependent upon the Company’s ability to continue as a going concern and to achieve a level of profitability. The Company intends on financing its future activities and its working capital needs largely from the sale of public equity securities and possible exercise of warrants with some additional funding from other traditional financing sources, including term notes and proceeds from licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements. However, there can be no assurance that the Company will be successful in its efforts. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
3. | Significant Accounting Policies |
In the opinion of management, all adjustments necessary for a fair statement of (a) the results of operations for the three and nine month periods ended September 30, 2011 and 2010, (b) the financial position at September 30, 2011 and December 31, 2010, and (c) cash flows for the nine month periods ended September 30, 2011 and 2010, have been made.
The significant accounting policies followed are:
Use of estimates - The preparation 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.
Accounts receivable - The Company regularly reviews accounts receivable for any bad debts based on an analysis of the Company’s collection experience, customer credit worthiness, and current economic trends. At September 30, 2011, the day’s sales outstanding were 58, as compared to 93 at December 31, 2010. Based on management’s review of accounts receivable, an allowance of $42,263 is considered adequate at September 30, 2011, based on an analysis of accounts receivable balances and no allowance for doubtful accounts was considered necessary at December 31, 2010.
Inventory - Inventory consists primarily of raw materials and is stated at the lower of cost, determined by first-in, first-out method, or market. Market is determined based on the net realizable value, with appropriate consideration given to obsolescence, excessive levels, deterioration and other factors.
Revenue recognition - Generally, the Company recognizes revenue for its products upon shipment to customers, provided no significant obligations remain and collection is probable. This policy applies to all of our customers, including Genertec America (a distribution agreement) and CAST Systems Control Technology Co. (an agreement for the purchase of specific goods). During the nine months ended September 30, 2011 and 2010, four and six customers accounted for approximately 55% and 61% of revenues, respectively.
Our ConsERV product typically carries a warranty of two years for all parts contained therein with the exception of the energy recovery ventilator core which typically carries a 10 year warranty. The warranty includes replacement of defective parts. The Company has recorded an accrual of approximately $36,000 for future warranty expenses at September 30, 2011.
Revenue derived from the sale of licenses is deferred and recognized as revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated. The Company recognized revenue of approximately $20,500 and $61,500 from license agreements for the three and nine months ended September 30, 2011 and 2010, respectively.
Employee stock-based compensation - The Company recognizes all share-based awards to employees, including grants of employee stock options, as compensation expense in the financial statements based on their fair values. That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
The fair value of each award is estimated at the grant date using the Black-Scholes option model with the following assumptions for awards granted severalduring the nine months ended September 30, 2011 and 2010:
| | Nine Months Ended September 30, 2011 | | | Nine Months Ended September 30, 2010 | |
Dividend rate | | | 0 | % | | | 0 | % |
Risk free interest rate | | | 1.45% – 2.93 | % | | | 1.96% - 3.68 | % |
Expected term | | 6.5 years | | | 5 – 10 years | |
Expected volatility | | | 101% - 114 | % | | | 96% - 107 | % |
The basis for the above assumptions is as follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was calculated based on the Company’s historical pattern of options granted and the period of time they are expected to be outstanding; and expected volatility was calculated by review of a peer company’s historical activity. The Company previously used a peer company’s historical activity due to the limited trading volume and historical information of the Company’s own common stock, however, beginning in July 2011, the Company began using their own common stock to determine volatility.
Forfeitures of unvested options are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on historical experience of forfeitures, the Company estimated forfeitures at 0% for each of the nine month periods ended September 30, 2011 and 2010, respectively.
Non-employee stock-based compensation - The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of Accounting Standards Codification (ASC) 505-050 – Equity – Based Payments to Non-Employees (ASC 505). The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. Stock-based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services, whichever is more readily determinable in accordance with ASC 718. The fair value of common stock issued for services is based on the closing stock price on the date the common stock was issued. During the nine months ended September 30, 2011, the Company issued 427,895 shares of common stock valued at $156,245 for services rendered. During the nine months ended September 30, 2010, the Company issued 413,692 shares of common stock valued at $326,879 for services rendered.
Research and development expenses and grant proceeds - Expenditures for research, development and engineering of products are expensed as incurred. For the three months ended September 30, 2011 and 2010, the Company incurred research and development costs of $301,587 and $0, respectively. For the nine months ended September 30, 2011 and 2010, the Company incurred research and development costs of $602,215 and $0, respectively. The Company accounts for proceeds received from government grants for research as a reduction in research and development costs. For the three and nine months ended September 30, 2011, the Company recorded approximately $305,400 and $592,900, respectively, in grant proceeds against research and development expenses on the statement of operations. No such grant proceeds were recognized for the three and nine months ended September 30, 2010.
Government grants - Grants are recognized when there is reasonable assurance that the grant will be received and that any conditions associated with the grant will be met. When grants are received related to Property and Equipment, the Company reduces the basis of the assets resulting in lower depreciation expense over the life of the associated asset. Grants received related to expenses are reflected as a reduction of the associated expense in the period in which the expense is incurred.
Financial instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
| • | | Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| | | |
| • | | Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2011. The Company uses the market approach to measure fair value for its Level 1 financial assets and liabilities, which include cash equivalents of approximately $423,900 at September 30, 2011. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.
The respective carrying value of certain on-balance sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts receivable, other receivables, accounts payable, accrued compensation and accrued expenses. The fair value of the Company’s notes payable is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value.
The Company’s financial liabilities measured at fair value consisted of the following as of September 30, 2011:
| | Fair Value Measurements | |
| | Total carrying value | | | Quoted prices in active markets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
Warrant liability | | $ | 3,776,909 | | | | — | | | | — | | | $ | 3,776,909 | |
A reconciliation of the beginning and ending fair values of financial instruments valued using significant unobservable inputs (Level 3) is presented as follows:
| | Warrant Liability | |
Balance at December 31, 2010 | | $ | 3,958,318 | |
Reclassification to equity upon warrant exercise | | | (965,354 | ) |
Changes in fair value | | | 783,945 | |
Balance at September 30, 2011 | | $ | 3,776,909 | |
Income taxes - Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the basis of differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based upon enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company accounts for tax uncertainties under the provisions of FASB ASC 740-10 “Uncertainty in Income Taxes” (ASC 740-10). The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Earnings (Loss) per share - Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings (loss) per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered antidilutive and thus are excluded from the calculation. At September 30, 2011 and 2010, the Company had 54,577,323 and 38,302,769 potentially dilutive common shares, respectively, which were not included in the computation of loss per share.
Derivative financial instruments - The Company does not use derivative instruments to hedge exposure to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 “Derivative and Hedging” (ASC 815) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether fair value of warrants issued is required to be classified as equity or as a derivative liability.
Reclassifications - Certain reclassifications have been made to the financial statements as of and for the periods ended December 31, 2010 and September 30, 2010 to conform to the presentation as of and for the three and nine months ended September 30, 2011.
Recent accounting pronouncements
In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”. This new guidance requires a creditor performing an evaluation of whether a restructuring constitutes a troubled debt restructuring, to separately conclude that both (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. This standard clarifies the guidance on a creditor’s evaluation of whether it has granted a concession as well as the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. The update also requires entities to disclose additional quantitative activity regarding troubled debt restructurings of finance receivables that occurred during the period, as well as additional information regarding troubled debt restructurings that occurred within the previous twelve months and for which there was a payment default during the current period. The new accounting guidance was effective beginning July 1, 2011, and should be applied retrospectively to January 1, 2011. The adoption of this update has not had a material impact on the Company’s financial statements.
Other recent accounting pronouncements issued by the FASB, the AICPA and the SEC did not have, or are not expected to have a material impact on the Company’s present or future financial statements.
Notes payable consist of the following:
| | September 30, 2011 | | | December 31, 2010 | |
| | (unaudited) | | | | | |
Convertible note payable; interest at 9%; collateralized by the Company’s patents and patent applications | | $ | — | | | $ | 50,000 | |
Convertible note payable, related party; interest at 10% per annum; due in full March 22, 2012 | | | 1,000,000 | | | | 1,000,000 | |
Secured convertible note payable, related party; interest at 10% per annum; due March 22, 2012 | | | 1,500,000 | | | | — | |
Note payable, related party; 10% interest; unsecured; paid in full | | | — | | | | 620,000 | |
| | |
Note payable; related party | | | 624 | | | | 624 | |
| | | | | | | | |
| | | 2,500,624 | | | | 1,670,624 | |
| | |
Less unamortized discount | | | (708,294 | ) | | | — | |
| | |
Less amounts currently due, net of unamortized discount | | | 1,792,330 | | | | 1,670,624 | |
Long-term portion | | $ | — | | | $ | — | |
Notes Payable
In December 2009, we secured a 10% loan in the principal amount of $1,000,000 from an investor. Pursuant to the terms of the note, we are to pay the holder simple interest at the rate of ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 17, 2010. The note’s maturity date was extended to April 30, 2011. On March 22, 2011, the Company entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note (“Convertible Note”, collectively “Exchange Agreements”) with this investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the Investor amended and restated the $1,000,000 unsecured promissory note to, among other things, add a conversion option and extend the maturity date to March 22, 2012 (as amended and restated, the “2011 Convertible Note”). Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 will be due in full on March 22, 2012. Subject to the terms and conditions of the 2011 Convertible Note, including limitations on conversion, the outstanding principal and interest under the 2011 Convertible Note will automatically convert into shares of the Company’s common stock at the then-effective conversion price upon the closing of a qualified public offering (as defined in said note) or may be voluntarily converted by the investor at anytime during the debt term. The initial conversion price is $0.26 per share. Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering, (as defined in the 2011 Convertible Note which is filed as an exhibit to the Form 8K filed with the Securities and Exchange Commission on March 28, 2011), or March 22, 2012. Pursuant to and during the term of the 2011 Convertible Note, the Company will not issue or allow to exist any obligation for borrowed money, except for subordinate indebtedness in payment and priority, trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate, or unsecured and subordinate working capital guarantees provided by, the Export Import Bank of the United States (the “EXIM Bank”), and indebtedness evidenced by the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000.
On March 22, 2011, in connection with the above Exchange Agreements, the Company entered into amendments to existing warrant agreements with the investor to extend the terms of the existing Stock Purchase Warrants, dated on or about December 31, 2007 and March 12, 2009, respectively, to March 22, 2016 and to provide for cashless exercise unless such warrant shares are registered for resale under a registration statement. In addition, on March 22, 2011, the Company issued an additional Stock Purchase Warrant to the investor to purchase 1,000,000 shares of the Company’s common stock at $0.45 per share, exercisable commencing on the earliest of the consummation of the qualified offering (as defined in the Exchange Agreements), the date of conversion of the Convertible Note in full, or the date of conversion of the Convertible Note by the investor in the greatest number of shares of the Company’s common stock not to exceed 9.99% beneficial ownership of Company outstanding common stock and terminating on March 22, 2016.
The 2011 Convertible Note is a hybrid financial instruments that blends characteristics of both debt and equity securities. The note embodies settlement alternatives to the holder providing for either redemption of principal and interest in cash (forward component) or conversion into the Company’s common stock (embedded conversion feature). The forward component was valued using the present value of discounted cash flows arising from the contractual principal and interest payment terms and the embedded conversion feature was valued using the Monte Carlo simulation method. The fair value of the 2011 Convertible Note was estimated to be $1,964,905 on the date of the exchange, which resulted in a loss on extinguishment of debt of $964,905. Further, in accordance with ASC 470-20-25 and ASC 470-50-40, the net premium of $964,905 associated with the 2011 Convertible Note was reclassified to capital in excess of par value under the presumption that such net premium represented a capital contribution. Consequently, the 2011 Convertible Note is being carried at face value. The fair value of the additional warrant to purchase 1,000,000 shares and the value associated with the previously issued warrants that were amended was determined to be $716,890 using the Black-Scholes option model and is included in the aggregate loss on extinguishment of $1,681,795. Since the loan is held by a related party, the loss on extinguishment has been treated as a capital transaction and, as a result, this transaction had no effect on capital in excess of par value.
Also, on March 22, 2011, the Company entered into a 10% Note and Warrant Purchase Agreement, Secured Convertible Promissory Note and Patent Security Agreement (“Financing Agreements”) with the investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the investor has provided a bridge loan in the amount of $1,500,000 (“Loan”) to the Company, which is secured by all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and “accounts” with respect to such intellectual property assets (“collateral”). Pursuant to the Secured Convertible Promissory Note (“Secured Note”), interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 is due and payable on March 22, 2012, but repayment is accelerated upon a qualified offering (as defined in the note). In the event of such qualified offering, and subject to the terms and conditions of the Secured Note, the outstanding principal and interest under the Secured Note will automatically convert, subject to the limitations on conversion described in the note, into shares of the Company’s common stock at the then-effective conversion price upon the closing of such qualified offering. The initial conversion price is $0.26 per share. Any principal or interest which is not converted will be repaid by the Company at the earlier of a qualified offering or March 22, 2012. No cash fees were paid to any party to the transaction in exchange for lending the money.
On March 22, 2011, in connection with the above Financing Agreements, the Company issued a Stock Purchase Warrant to the investor to purchase 3,000,000 shares of the Company’s common stock at $0.45 per share, exercisable until March 22, 2016. The warrant was fair valued on the date of issuance, which amounted to $1,204,787. The warrant value was recorded as a debt discount based on the relative fair value of the warrant to the total proceeds received, which amounted to $435,240. The warrant was fair valued using the Black-Scholes-Merton valuation model. In addition, the debt contained a beneficial conversion feature, which was valued at the date of issuance at $1,762,163; however, since this amount is in excess of the net value of the debt less the warrant discount, the beneficial conversion feature will be limited to $1,064,760 and recorded as a discount on the loan. The total debt discount of $1,500,000 is being amortized using the effective interest method over the 12-month term of the Secured Note. For the nine and three months ended September 30, 2011, the Company recognized $791,707 and $341,139, respectively, in additional interest expense representing amortization of this debt discount.
Pursuant to and during the term of the Secured Note, the Company will not issue or permit to exist any obligation for borrowed money, except for trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate indebtedness to, or unsecured and subordinate working capital guarantees provided by, the EXIM Bank, the promissory note dated February 19, 2010 issued to RBC Capital Markets- Custodian of Leonard Samuels IRA (as amended) in the principal amount of $620,000, the Amended and Restated Convertible Promissory Note, dated March 22, 2011, issued to the investor in the principal amount of $1,000,000 and other unsecured indebtedness for borrowed money in an amount not to exceed $750,000.
Pursuant to the Patent Security Agreement issued in connection with the Note and Warrant Purchase of March 22, 2011, the Company shall not, without the investor’s prior consent, sell, dispose or otherwise transfer all or any portion of the collateral, except for license grants in the ordinary course of business. In addition, the Company will take all actions reasonably necessary to prosecute to allowance applications for patents and maintain all patents, and to seek to recover damages for infringement, misappropriation or dilution of the Collateral with limited exceptions.
In connection with such qualified offering, and subject to the terms and conditions of the Convertible Note, the Company will use reasonable efforts to include the investor’s securities in such offering.
On February 19, 2010, the Company issued an unsecured promissory note to RBC Capital Markets- Custodian of Leonard Samuels IRA in the principal amounts of $620,000. Pursuant to the terms of the note, the Company is to pay the holder simple interest at the rate ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before August 10, 2010, which has been extended to May 31, 2011. After receipt of proceeds on the foregoing loans, we may not incur more than $500,000 in debt without the holders’ prior approval and said additional debt may not be senior to these promissory notes without holder’s permission. During the term of the note, the note holder has the right to participate, by investing additional funds the total amount of which may not exceed the outstanding balance of the holder’s note, in any subsequent financings undertaken by the Company. Any such participation shall be upon the same terms as provided for in the subsequent financing. If an event of default were to occur and said default is not cured within the allotted period, the holders may declare all principal and accrued and unpaid interest due and payable without presentment, demand, protest or notice. Further, in addition to all remedies available under law, each holder may in the event of a default opt to convert the principal and interest outstanding under its note into any debt or equity security which Company issued after the date of its note and prior to the date of full payment of its note in accordance with the same terms as the subsequent financing. On May 12, 2011, the investor elected to apply all of the proceeds due and payable under the promissory note, including all accrued interest, to the purchase of the Company’s Common Stock. Pursuant to this transaction, the investor subscribed for and received 2,667,503 shares of Common Stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $693,550. As part of the purchase, the investor also received a five-year warrant to purchase 962,500 shares of Common Stock, at an exercise price of $0.45 per share. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s shares, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, as part of this transaction, the warrants issued to this investor on December 20, 2007 and December 31, 2007 were amended to include a cashless exercise provision.
The number of shares issued was based upon an agreed-upon per share price of $0.26, which was below the underlying fair value of the Company’s common stock on May 12, 2011 of $0.40 resulting in a loss on extinguishment of debt of $373,450. The fair value of the five year warrant that was issued was determined to be $310,652 using the Black-Scholes option model and is included in the aggregate loss on extinguishment of $684,102. Since the investor is a related party, the loss on extinguishment has been recorded as a capital transaction and, as a result, had no effect on capital in excess of par.
Accrued interest on the above outstanding notes was $257,535 and $157,683 at September 30, 2011 and December 31, 2010, respectively.
During the three months ended September 30, 2011, E. Todd Tracy and Michael Stone, two individuals holding warrants as a result of the Financing exercised and tendered their warrants on September 13, 2011 and received 537,037 and 145,832 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act.
On September 6, 2011, RP Capital and Richardson and Patel, LLP, two entities holding warrants (one as a result of the Financing and the other as a part of a payment arrangement for services) tendered and exercised their warrants and received 244,897 and 188,225 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act.
5. | Related Party Transactions |
Timothy N. Tangredi, our Chief Executive Officer and Chairman, is a founder and a member of the board of directors of Aegis BioSciences, LLC (“Aegis”). Mr. Tangredi currently owns 52% of Aegis’ outstanding equity and spends approximately one to two days per month on Aegis business for which he is compensated by Aegis. Aegis has two exclusive, world-wide licenses from us under which it has the right to use and sell products containing our polymer technologies in biomedical and health care applications. As a result of a $150,000 payment made by Aegis, the first license is considered fully paid and as such no additional license revenue will be forthcoming. Pursuant to the second license Aegis made an initial one-time payment of $50,000 and is to make royalty payments of 1.5% of the net sales price it receives with respect to any personal hygiene product, surgical drape or clothing products (the latter when employed in medical and animal related fields) and license revenue it receives should Aegis grant a sublicense to a third party. To date Aegis has sold no such products nor has it received any licensing fees requiring a royalty payment be made to us. We are currently negotiating to purchase all rights Aegis has in its patent applications, including without limitation, any rights it possesses to patent applications it co-owns with us, and potentially terminate the two licenses from us, subject to irrevocable sub-licenses, if any, for a one-time payment of $200,000 in cash and $100,000 in shares of our common stock at the same price per share as the price offered to the public in a proposed offering. As a member of Aegis, Mr. Tangredi will receive approximately $104,000 in cash and $52,000 in shares of our common stock pursuant to the proposed transaction, which we anticipate will be structured as an asset sale and expect will be contemporaneously consummated with the closing of that offering. We anticipate securing most, if not all, of the funds for this proposed purchase from our cash on hand prior to the closing of that proposed offering.
The Company rents a building that is owned by two stockholders of the Company, one of which is the Chief Executive Officer. Rent expense for this building is $3,800 per month. The Company recognized rent expense of approximately $11,400 and $34,200 each of the three and nine months ended September 30, 2011 and 2010. At September 30, 2011 and December 31, 2010, $53,465 and $151,440, respectively, were included in accounts payable for amounts owed to these stockholders for rent.
The Company also has accrued compensation due to the Chief Executive Officer and two other employees for deferred salaries earned and unpaid as of September 30, 2011 and December 31, 2010 of $1,405,606 and $1,426,022, respectively.
The Company has contracted with a law firm who is also a stockholder, for legal services rendered in connection with the Form S-1 Offering. As of September 30, 2011, the Company has included approximately $369,600 in accounts payable due to this law firm.
The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.
6. | Stock Options and Warrants |
Options
In June 2000 and November 2009, our Board of Directors adopted, and our shareholders approved, the 2000 Incentive Compensation Plan (“2000 Plan”) and the 2009 Long-Term Incentive Plan (“2009 Plan”), respectively (together the “Plans”). The Plans provide for the granting of options to qualified employees of the Company, independent contractors, consultants, directors and other individuals. The Company’s Board of Directors approved and made available 11,093,882 and 15,000,000 shares of common stock to be issued pursuant to the 2000 Plan and the 2009 Plan, respectively. The 2000 Plan permits grants of options to purchase common shares authorized and approved by our Board of Directors and shareholders for issuance prior to the enactment of the 2000 Plan. The Plans permit grants of options to purchase common shares authorized and approved by the Company’s Board of Directors.
The average fair value of options granted at market during nine months ended September 30, 2011 and 2010 was $0.27 and $0.22 per option, respectively. There were no options exercised during the nine months ended September 30, 2011 and 2010.
The following summarizes the information relating to outstanding stock options activity with employees during 2011 and 2010:
| | Common Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value | |
Outstanding at December 31, 2010 | | | 14,897,757 | | | $ | 0.25 | | | | 7.19 | | | $ | 946,754 | |
Granted | | | 2,535,000 | | | $ | 0.33 | | | | | | | | | |
Expired/Forfeited | | | (136,667 | ) | | $ | 0.11 | | | | | | | | | |
Outstanding at September 30, 2011 | | | 17,296,090 | | | $ | 0.32 | | | | 6.79 | | | $ | 1,516,086 | |
Exercisable at September 30, 2011 | | | 16,061,854 | | | $ | 0.32 | | | | 6.62 | | | $ | 1,433,926 | |
Stock compensation expense was approximately $41,000 and $671,100 for the three and nine months ended September 30, 2011, respectively, and approximately $70,800 and $549,300 for the three and nine months ended September 30, 2010, respectively. The total fair value of 900,000shares vested during the nine months ended September 30, 2011 and 2010 was approximately $527,200 and $509,943, respectively.
As of September 30, 2011, there was approximately $271,000 of unrecognized employee stock-based compensation expense related to non vested stock options, of which $39,500, $157,000, $70,900 and $3,400 is expected to be recognized for the remainder of the fiscal year ending December 31, 2011, and for the fiscal years ending 2012, 2013 and 2014, respectively.
The following table represents our non-vested share-based payment activity with employees for the nine months ended September 30, 2011:
| | Number of Options | | | Weighted Average Grant Date Fair Value | |
Nonvested options - December 31, 2010 | | | 1,063,194 | | | $ | 0.25 | |
Granted | | | 2,535,000 | | | $ | 0.27 | |
Vested | | | (2,363,958 | ) | | $ | 0.22 | |
Nonvested options – September 30, 2011 | | | 1,234,236 | | | $ | 0.13 | |
Warrants
At September 30, 2011, the Company had outstanding warrants to purchase the Company’s common stock which were issued in connection with multiple financing arrangements and consulting agreements. Information relating to these warrants is summarized as follows:
Warrants | | Remaining Number Outstanding | | | Weighted Average Remaining Life (Years) | | | Weighted Average Exercise Price | |
Warrants-Daily Financing | | | 197,055 | | | | .24 | | | $ | 0.55 | |
Warrants-Additional Financing | | | 428,637 | | | | .96 | | | $ | 0.40 | |
Warrants-Robb Trust Note | | | 50,000 | | | | .68 | | | $ | 0.55 | |
Warrants-Financings (2007, 2008 and 2011) | | | 17,000,000 | | | | 2.01 | | | $ | 0.30 | |
Warrants-Placement Agent Warrants | | | 401,333 | | | | 1.34 | | | $ | 0.25 | |
Warrants-Tangredi | | | 3,000,000 | | | | 1.51 | | | $ | 0.36 | |
Warrants-Ehrenberg | | | 250,000 | | | | 1.85 | | | $ | 0.30 | |
Warrants-Consulting Agreements | | | 825,000 | | | | 3.02 | | | $ | 0.31 | |
Warrants-Note Conversions | | | 2,302,538 | | | | 2.67 | | | $ | 0.39 | |
Warrants-Stock Purchases | | | 1,720,770 | | | | 3.75 | | | $ | 0.40 | |
Warrants-Mandelbaum | | | 50,000 | | | | 2.59 | | | $ | 0.19 | |
Warrants-Services | | | 400,000 | | | | 3.31 | | | $ | 0.50 | |
To | | | 26,625,333 | | | | | | | | | |
Common Stock Issued For Services
The Company issued 207,692 shares of common stock during the nine months ended September 30, 2011 valued at an exercise price$74,769 for legal services. For the three and nine months ended September 30, 2011, the Company has recorded $19,211 and $55,557, respectively, as legal expense related to these services in its statements of $0.21 per share. The fair market value of these shares at the date of grant was approximately $169,000.operations.
In January 2008,On September 6, 2011, the Company issued 202,703 shares of common stock valued at $75,000 to legal counsel, Richardson and Patel, LLP, in settlement of accounts payable for services rendered.
The Company entered into an agreement for consulting services in April 2010. The term of the agreement is for seventeen months and calls for the Company to issue the consultant 100,000 shares of common stock upon execution of the agreement and an additional $500,000100,000 shares of convertible debt with 2,500,000 detachable warrants, which completedcommon stock after six months of service. The agreement also calls for a monthly cash payment of $6,000 for the $2,950,000 private equity placement that began in December 2007. At this time, as discussed in Note 11,first six months and $7,500 per month for the placement agent was issued five-year term warrants for common shares equal in number to ten percentremainder of the agreement. The Company has fair valued the initial 100,000 shares of common stock at $53,000 and the additional 100,000 shares underlyingof common stock at $36,000 and is expensing the warrants issued as a resultfair value of those shares over life of the placement.agreement. For the three and nine months ended September 30, 2010, the Company has recorded $26,500 and $48,583 as consulting expense on its statement of operations.
The Company issued 207,692 shares of common stock during the three months ended September 30, 2010 valued at $64,384 for legal services. For the three and nine months ended September 30, 2010, the Company has recorded $16,096 and $48,288 as legal expense in its statement of operations.
On November 4, 2010, the Company entered into an agreement for legal services relating to our pending public offering in exchange for 375,000 shares of Common Stock valued at $165,000. This cost is included in deferred offering costs in the accompanying balance sheet.
7. | Commitments and Contingencies |
The Company has employment agreements with legal counselsome of its key employees and executives. These agreements provide for minimum levels of compensation during current and future years. In addition, these agreements call for grants of stock options and for payments upon termination of the agreements.
The Company entered into an amended and restated employment agreement with Mr. Timothy N. Tangredi, our President, Chief Executive Officer, and director, dated as of September 14, 2011. Mr. Tangredi’s employment agreement provides for an initial term of three years commencing on September 14, 2011 with the term extending on the second anniversary thereof for an additional two year period and on each subsequent anniversary of the commencement date for an additional year. Mr. Tangredi’s initial base salary is $200,000. Mr. Tangredi’s base salary shall be increased annually, if applicable, by a sum equal to helphis current base salary multiplied by one third of the percentage increase in our yearly revenue compared to our prior fiscal year revenue; provided however any annual increase in Mr. Tangredi’s base salary shall not exceed a maximum of 50% for any given year. Any further increase in Mr. Tangredi’s base salary shall be at the sole discretion of our board of directors or compensation committee (if applicable). Additionally, at the discretion of our board of directors and its compensation committee, Mr. Tangredi may be eligible for an annual bonus, if any, of up to 100% of his then-effective base salary, if he meets or exceeds certain annual performance goals established by the board of directors. In addition to this bonus, Mr. Tangredi may be eligible for a separate merit bonus if approved by the board of directors, for specific extraordinary events or achievements such as a sale of a division, major license or distribution arrangement or merger. Mr. Tangredi is entitled to medical, disability and life insurance, as well as four weeks of paid vacation annually, an automobile allowance, reimbursement of all reasonable business expenses, automobile insurance and maintenance, and executive conference or educational expenses.
Under his employment agreement, in addition to any other compensation which he may receive, if we complete a secondary Public Offering, Mr. Tangredi will be granted an option under our 2009 Plan to purchase up to 520,000 shares of our common stock with an exercise price equal to the fair market value per share on the date of grant. This option will become vested and exercisable in thirds, with one third vested upon grant, another third at the one-year anniversary of the grant, and another third upon the second anniversary of the grant. The option shall have a term of ten years, shall be exercisable for up to three years after termination of employment (unless termination is for cause, in which event it shall expire on the date of termination), shall have a “cashless” exercise feature, and shall be subject to such additional terms and conditions as are then applicable to options granted under such plan provided they do not conflict with the terms set forth in the agreement.
If Mr. Tangredi’s employment is terminated for any reason, we will be obligated to pay him his accrued but unpaid base salary, bonus and accrued vacation pay, and any unreimbursed expenses (“Accrued Sums”).
In addition to any Accrued Sums owed, if Mr. Tangredi’s employment is terminated by us in the event of his disability or without cause or by Mr. Tangredi for good reason, he shall be entitled to:
(i) | an amount equal to the sum of (A) the greater of 150% of the base salary then in effect or $320,000 plus (B) the cash bonus and/or merit bonus, if any, awarded for the most recent year; |
(ii) | health and life insurance, a car allowance and other benefits set forth in the agreement until two years following termination of employment, and thereafter to the extent required by COBRA or similar statute; and |
(iii) | all stock options, to the extent they were not exercisable at the time of termination of employment, shall become exercisable in full. |
In addition to any Accrued Sum owed, in the event of termination upon death, Mr. Tangredi shall be entitled to (i) and (iii) above.
In addition to any Accrued Sums owed, in the event that Mr. Tangredi elects to terminate employment within one year following a change in control, he shall receive a lump sum payment equal to the sum of (a) the greater of his then current base salary or $210,000 plus (b) the cash bonus and merit bonus, if any, awarded in the most recent year. In addition, he will be entitled to (ii) and (iii) above.
In April 2011, the Company in its registrationentered into an employment agreement with the Company’s General Counsel, Patricia Tangredi. The employment term is for four years with automatic renewals. The agreement includes an annual base salary of its shares. As part$120,000 with an increase to $150,000 upon completion of thisa successful Initial Public Offering of at least $10 million. The agreement also provides for a minimum of 50,000 options to be awarded annually along with other standard employment benefits.
In May 2011, the Company agreedentered into an employment agreement with Scott Ehrenberg, our Chief Technology Officer and Secretary. The employment agreement provides for an initial term of two years with the term extending on the second anniversary thereof for an additional one year period and on each subsequent anniversary of the agreement for an additional year period. The agreement includes an initial base salary is $110,000, with an increase to $165,000 per annum. Additionally, at the discretion of our board of directors and its compensation committee, Mr. Ehrenberg may be eligible for an annual bonus which amount, if any, will not be below 50% of his effective base salary and not exceeding 100% of his then effective base salary; provided that, under certain extraordinary circumstances, Mr. Ehrenberg may be eligible for an annual bonus greater than 150% of his then effective base salary. Upon completion of a successful secondary Public Offering, Mr. Ehrenberg is eligible to receive a one-time payment of $20,000 for each U.S. patent of which he is the originator and the first name listed on the patent as inventor of the intellectual property described in such patent. In addition to any other compensation which Mr. Ehrenberg may receive under the agreement, he will be granted a stock option to purchase 40,000 shares of common stock at the end of each year or on the annual anniversary of the agreement, whichever is mutually acceptable to the Company and Mr. Ehrenberg.
On September 17, 2010, the U.S. Department of Energy approved a grant of up to $681,322 to the Company for the funding of a project to scale up, in size and field trial, a dehumidification system similar to the Company’s NanoAir prototype. The grant is conditioned upon the Company contributing $171,500 of the proposed total project cost of $852,822. The Company will receive the grant amount upon submission of reimbursement request for allowable expenses. For the nine months ended September 30, 2011, the Company has incurred $474,550 in expenses and recognized the same amount as revenue related to this grant award.
In December 2010, Pasco County Florida approved a grant of $254,500 to the Company for the funding of the NanoAir product into commercialization. The grant from Pasco County requires us to pay the $50,000 retainer by delivery of a certificate representing 200,000 sharescounty 2% of the Company’s common stockgross sales of products using a certain unique pump assembly for 5 years or for a total of $1,000,000 whichever comes first. For the nine months ended September 30, 2011, the Company has incurred $118,347 in expenses and a warrantrecognized the same amount as revenue related to purchase 200,000 shares of the Company’s common stock.
this grant award.
The Company is not currently a party to any pending legal proceedings. In the ordinary course of business the Company may become a party to various legal proceedings generally involving contractual matters, infringement actions, product liability claims and other matters.
You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.8.
| Genertec Agreement |
On August 21, 2009, we entered into an Exclusive Distribution Agreement with Genertec, under which we are to supply and Genertec is to distribute, on an exclusive basis, three of our nanotechnology-based membrane products and related products in Great China, including mainland China, Hong Kong, Macau and Taiwan. The agreement provides that during the initial term of the agreement, Genertec will order and purchase these products in the aggregate amount of Two Hundred Million U.S. Dollars. A minimum quantity of said products is to be purchased by Genertec during each contract year of the initial term. In the event Genertec fails to purchase the minimum amount of products in any given year, we may convert the exclusivity provided to Genertec to a non-exclusive or terminate the agreement. Genertec has agreed to engage and appoint authorized person(s) or firm(s), to install, engineer, perform maintenance, sell and use the products within the defined distribution area and neither Genertec nor its designated buyer is permitted to alter, decompile or modify our products in any way. As consideration for entering into this agreement, Genertec agreed to pay us a deposit in monthly installments beginning in September 2009 and continuing through April 2010. All such payments are to be applied to products purchased by Genertec. During the initial term of the agreement, the parties are to negotiate in good faith a royalty bearing license agreement whereby Genertec may be granted a license to manufacture certain portions of the our products in the designated territory. The initial term of the agreement shall be for a period of five (5) years, commencing on August 21, 2009, unless earlier terminated. Unless notice of termination is delivered to the respective parties 180 days prior to the expiration of the initial term, the Agreement will automatically renew for consecutive one year periods. We may terminate this agreement in the event: (1) Genertec fails to pay the deposit as indicated, (2) Genertec does not purchase the minimum amount of our designated products during any contract year, (3) breach by Genertec of its obligations under the Agreement, or (4) at our discretion immediately upon the transfer of fifty percent (50%) or more of either the assets of the voting stock of Genertec to any third party. Genertec may not assign the Agreement to any party without our prior written consent. As of September 30, 2011, the Company has $406,356 in accounts receivable and $500,000 in deferred revenue to be applied against future orders. Genertec America’s partners in China have received the product and are continuing to perform tests; however there have been delays in completing this testing process. As a result, Genertec America has not yet begun to order product from the Company under this agreement. The Company is currently meeting with Genertec to resolve the payment of the receivable and expects that the amounts will be collected.
Additional risks and uncertainties not presently known or that are currently deemed immaterial may also impair our business operations. The risks and uncertainties described in this document and other risks and uncertainties which we may face in the future will have a greater impact on those who purchase our common stock. These purchasers will purchase our common stock at the market price or at a privately negotiated price and will run the risk of losing their entire investment.
Until 90 days after the commencement of the offering, all dealers that buy, sell or trade shares, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
9. | DAIS ANALYTIC CORPORATION
32,753,090 Shares of Common Stock
_______________
PROSPECTUS
________________
August 11, 2008 CAST Systems Control Technology |
In April 2010, the Company entered into a technical and sales agreement with CAST Systems Control Technology Co., Ltd. (“CAST”) and Genertec with a value of up to approximately $48 million U.S. Dollars over a twelve month period. Under the terms of the Agreement, the Company will supply to CAST, through Genertec, key system components of its nanotechnology clean water process. The Agreement is conditioned upon the Company obtaining a letter of credit from Genertec in the amount as agreed to by the parties on or before April 13, 2010. As of the date of this filing, the Company has received the required letter of credit from Genertec. This Agreement, the terms of which are disclosed in the Company’s Current Report on Form 8-K, filed on April 9, 2010, is made pursuant to and in support of the $200 million distribution agreement made between the Company and Genertec on August 21, 2009, granting Genertec the exclusive right to obtain, distribute and market the Company’s nanotechnology-based membrane and related products in China, including mainland China, Hong Kong, Macau and Taiwan, the terms of which are summarized above and more fully disclosed in the Company’s Current Report on Form 8-K, filed August 27, 2009. For the year ended December 31, 2010, the Company has sold one unit under this agreement and recognized $300,000 in revenue which has been billed and $254,000 of which has been collected. The Company expects the remainder of the $300,000 receivable to be collected in 2011.
10. | Derivative Financial Instruments |
In September 2008, the FASB ratified the consensus reached on EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”) (codified as ASC 815-40-15-5). This EITF provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The EITF applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative under ASC 815-10-15-13 through 15-130, Accounting for Derivative Instruments and Hedging Activities, for purposes of determining whether that instrument or embedded feature qualifies for the first part of the scope exception. The EITF also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative under ASC 815-10-13 through 15-130, for purposes of determining whether the instrument is within the scope of EITF No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”) (codified as ASC subtopic 815-40). EITF No. 07-5 was effective beginning the first quarter of fiscal 2009.
Due to certain adjustments that may be made to the exercise price of the warrants issued in December 2007, January 2008 and August 2008 if the Company issues or sells shares of its common stock at a price which is less than the then current warrant exercise price, these warrants have been classified as a liability as opposed to equity in accordance with the Derivatives and Hedging Topic of the FASB ASC 815-10-15 as it was determined that these warrants were not indexed to the Company’s stock. As a result, the fair market value of these warrants was remeasured on January 1, 2009 and marked to market at each subsequent financial reporting period. The change in fair value of the warrants is recorded in the statements of operations and is estimated using the Black-Scholes option-pricing model with the following assumptions:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Exercise price | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | |
Market value of stock at end of period | | $ | 0.38 | | | $ | 0.36 | | | $ | 0.38 | | | $ | 0.36 | |
Expected dividend rate | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
Expected volatility | | | 165 | % | | | 135% - 158 | % | | | 164% - 173 | % | | | 135% - 158 | % |
Risk-free interest rate | | | 0.13% – 0.25 | % | | | 0.42% – 0.64 | % | | | 0.13% – 0.25 | % | | | 0.42% – 0.64 | % |
All warrants issued by the Company other than the above noted warrants are classified as equity.
During the fourth quarter of the year ended December 31, 2010, the Company applied the guidance of Accounting Standards Codification 815-40 (ASC 815-40) and recorded a $618,801 gain on the fair value of the warrant liability for the year then ended. The warrants had been issued in December 2007, January 2008 and August 2008, in connection with convertible promissory notes and were originally accounted for as an equity instrument. Accordingly, the Company has restated its financial statements to reflect the proper accounting treatment. If the Company would have recorded these warrants as a derivative liability upon initial adoption of ASC 815-40, the Company would have recorded the following amounts in its balance sheets and income statements in the periods indicated:
| | Total Liabilities As previously Reported | | | Change | | | Total Liabilities As Restated | | | Stockholders’ Deficit As previously Reported | | | Change | | | Stockholders’ Deficit As Restated | |
March 31, 2010 | | $ | 5,117,253 | | | $ | 6,085,147 | | | $ | 11,202,400 | | | $ | (3,058,161 | ) | | $ | (6,085,147 | ) | | $ | (9,143,308 | ) |
June 30, 2010 | | $ | 5,165,059 | | | $ | 4,250,053 | | | $ | 9,415,112 | | | $ | (3,094,998 | ) | | $ | (4,250,053 | ) | | $ | (7,345,051 | ) |
September 30, 2010 | | $ | 5,147,657 | | | $ | 4,861,284 | | | $ | 10,008,941 | | | $ | (3,428,140 | ) | | $ | (4,861,284 | ) | | $ | (8,289,424 | ) |
| | Other Inc (Exp) As previously Reported | | | Change | | | Other Inc (Exp) As Restated | | | Net Loss As previously Reported | | | Change | | | Net (Loss) Income As Restated | | | EPS As previously Reported | | | EPS As Restated | |
For the Three Months Ended: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2010 | | $ | (46,504 | ) | | $ | (1,508,027 | ) | | $ | (1,554,531 | ) | | $ | (520,038 | ) | | $ | (1,508,027 | ) | | $ | (2,028,065 | ) | | $ | (0.02 | ) | | $ | (0.07 | ) |
June 30, 2010 | | $ | (55,233 | ) | | $ | 1,835,094 | | | $ | 1,779,861 | | | $ | (624,681 | ) | | $ | 1,835,094 | | | $ | 1,210,413 | | | $ | (0.02 | ) | | $ | 0.04 | |
September 30, 2010 | | $ | (55,933 | ) | | $ | (611,231 | ) | | $ | (667,164 | ) | | $ | (555,692 | ) | | $ | (611,231 | ) | | $ | (1,166,923 | ) | | $ | (0.02 | ) | | $ | (0.04 | ) |
No other material subsequent events have occurred since September 30, 2011 that requires recognition or disclosure in these financial statements.
33,000,000 Shares of Common Stock
Dais Analytic Corporation
PROSPECTUS
Until , 2012, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimatedfollowing table sets forth the fees and expenses the Company expects to incur in connection with the issuance and distribution of the offering,securities being registered. With the exception of the SEC registration fee, all of whichamounts are to be borne by the Registrant, are as follows:estimates:
SEC Filing Fee# | | $ | 425 | | |
SEC Filing Fee | | | $ | 2,803.82 | |
Printing Expenses* | | $ | 4,375 | | | $ | 40,000 | |
Accounting Fees and Expenses* | | $ | 7,000 | | | $ | 60,000 | |
Legal Fees and Expenses* | | $ | 125,000 | | | $ | 150,000 | |
Transfer Agent and Registrar Expenses* | | | $ | 10,000 | |
Miscellaneous* | | $ | 3,500 | | | $ | 15,000 | |
Total* | | $ | 140,300 | | |
| | | | | |
Total | | | $ | 277,803.82 | |
________________________________
# Paid with the initial filing of this Registration Statement.
Item 14. Indemnification Of Directors And Officers
As permitted under the Business Corporation Law of the State of New York, our Certificate of Incorporation provides that all our directors shall be entitled to be indemnified for any breach of duty, provided that no indemnification maybemay be made to or on behalf of any director if a judgment or other final adjudication adverse to the director establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled.
Our Certificate of Incorporation further provides for indemnification of any person for actions as a director, officer, employee or agent of the Company to the fullest extent permitted by law with regards to fines, judgments fees and amounts paid in a settlement in an action or proceeding if the person acted in good faith and in a manner the person reasonably believed in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.
Under the Company’sour Director and Officer Insurance Policy, the Company’sour directors and officers are provided liability coverage of $3$5 million (subjectsubject to retention) whileretention. In addition, we have secured a form following excess Director and Officer Insurance Policy in the Company itself is covered for securities claims only.amount of $2.5 million. The policy haspolicies have a one year term with annual renewal possible. The policypolicies can be terminated by the insuredinsurer if there is a merger or acquisitionconsolidation which includes a change in ownership of 50% of the voting shares. AtUpon such time,an occurrence the insurer may elect to cancel the policy and the total premium would be due. The Companypolicies. We may elect to then obtain “run off” insurance for a period of between one and six years at a cost of 150%between 125% and 225% of the initial policy premium.premiums. The policies are claims made policies. Each policy is a claim made policy. Itcovers only covers those claims relating to acts occurring after the continuity date provided such claims are made during the policy term. If an act giving rise to a claim occurs during the policy term, but the claim is not made until afterreported within 60 days of the termination or expiration policy, terminates, there is no coverage.the claim will not be covered.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel that the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities
During the past three years, we issued the following securities without registration under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to exemption from registration under Section 4(2) and Regulation D of the Securities Act:Act.
E. Todd Tracy and Michael Stone, two individuals holding warrants as a result of the Financing exercised and tendered their warrants on September 13, 2011 and received 537,037 and 145,832 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act.
On September 6, 2011, RP Capital and Richardson and Patel, LLP, two entities holding warrants (one as a result of the Financing and the other as a part of a payment arrangement for services) tendered and exercised their warrants and received 244,897 and 188,225 shares of the Company’s common stock. The common stock was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act.
On September 6, 2011, the Company issued 202,703 shares of common stock valued at $75,000 for to legal counsel, Richardson and Patel, LLP, in settlement of accounts payable for services rendered. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act
On August 30, 2011, the Company issued 103,846 shares of common stock valued at $38,423 for to legal counsel, Ellenoff, Grossman and Schole PA, for services rendered. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act
On May 12, 2011, a note holder elected to apply all of the proceeds due and payable pursuant to this note, in the principal amount of $620,000 plus accrued interest, to purchase our common stock. Pursuant to this transaction, the investor subscribed for and purchased 2,667,503 shares of common stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $693,550 (the principal amount and related accrued interest under the note). As part of the purchase, the investor also received a five-year warrant to purchase 962,500 shares of Common Stock, at an exercise price of $.45 per share. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
On April 27, 2011, the Company issued 103,846 shares of common stock valued at $45,692 for to legal counsel, Ellenoff, Grossman and Schole PA, for services rendered. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On March 23, 2011, we entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note, in the amount of $1,000,000. Pursuant to the terms of this note, interest in the amount of 10% per annum, calculated on a 365 day year, commencing on December 17, 2009, and the principal amount of $1,000,000 will be paid on March 22, 2012, but repayment is accelerated upon a firm commitment underwritten public offering. The initial conversion price is $0.26 per share. Any principal or interest which is not converted will be repaid by the Company at the earlier of qualified firm commitment underwritten public offering on March 22, 2012. We also issued a warrant to this investor to purchase 1,000,000 shares of our common stock at $0.45 per share terminating on March 22, 2016.
On March 23, 2011, we also issued a secured convertible promissory note to such investor in the amount of $1,500,000, which will be secured by all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and “accounts” with respect to such intellectual property assets. Pursuant to the terms of the secured note, interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 will be paid on March 22, 2012, but repayment is accelerated upon a qualified firm commitment underwitten public offering. The initial conversion price is $.26 per share. Any principal or interest which is not converted will be repaid by the Company at the earlier of the qualified offering or March 22, 2012. We also issued a warrant to the investor to purchase 3,000,000 shares of Company’s common stock at $0.45 per share, exercisable until March 22, 2012. The proceeds from these notes were used for working capital, research and development expenses and general corporate purposes.
On February 18, 2011, the Company issued 17,500 shares of common stock valued at $6,475 for services rendered pursuant to an agreement. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On December 28, 2010, the Company issued 375,000 shares of common stock valued at $165,000 for to our legal counsel, Richardson and Patel LLP, for services rendered in connection with this offering. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On December 27, 2010, an investor elected to apply all of the proceeds due and payable under our promissory note, including all accrued interest, to purchase our common stock. Pursuant to this transaction, the investors subscribed for and purchased 1,052,950 shares of common stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $273,767 (the principal amount and related accrued interest under the note). The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On December 30, 2010, an investor elected to apply all of the proceeds due and payable under our promissory note, including all accrued interest, to purchase our Common Stock. Pursuant to this transaction, the investor subscribed for and purchased 1,266,930 shares of Common Stock at a purchase price of $0.26 per share, resulting in an aggregate purchase price of $329,402. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On November 4, 2010 an investor elected to convert the balance of its 9% secured convertible note in the amount of $100,000 into 625,384 shares of the Company’s Common Stock. The Common Stock was issued pursuant to exemption from registration under Section 3(a)(9) of the Securities Act. The investor also received an additional five-year warrant to purchase up to 62,538 shares of Common Stock, at an exercise price of $0.75 per share in consideration for converting its 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
On November 4, 2010, the Company issued 100,000 shares of Common Stock valued at $36,000 for services provided. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
During the three months ended September 30, 2010, the Company issued 247,692 shares of Common Stock valued at $75,984 for services provided. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On June 25, 2010, the Company issued an option to purchase 15,000 shares of Common Stock valued at $3,595 for services provided. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On April 20, 2010 an investor elected to convert the balance of his 9% secured convertible note in the amount of $75,000 into 375,000 shares of Company’s Common Stock. The Common Stock was issued pursuant to exemption from registration under Section 3(a)(9) of the Securities Act.
In April of 2010, we issued 10,000 shares of the Company’s Common Stock to an individual in connection with performance of services. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act. The fair value of the services for which the equity instruments were issued is approximately $4,800.
During the three months ended March 31, 2010, the Company issued 56,000 shares of Common Stock valued at $24,200 for services provided. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
During the three months ended March 31, 2010, the Company issued warrants to purchase 250,000, 50,000, 50,000 and 60,000 shares of Common Stock at an exercise price of $0.28 per share, respectively. Each warrant was issued for services rendered or to be rendered to the Company, has a five year term, is immediately exercisable and subject to adjustment for standard anti-dilution events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s share, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, subject to certain conditions, upon the per share market price of the Common Stock (as defined in warrant) being $1.50 per share for ten consecutive trading days, the Company may require the holder of the warrant to exercise the warrant or it will automatically terminate. The issuance of these securities was exempt from registration under Section 4 (2) and Regulation D of the Securities Act.
In December of 2009, Company issued 25,000 shares of our Common Stock to an employee for cash consideration of $4,250 upon the exercise of a stock option granted under our 2000 Plan.
From January 1, 2008 to April of 2011 Company granted, pursuant to its 2000 Plan and 2009 Plan, options to purchase a total of 12,786,725 shares. In December of 2009 and in February of 2008 two employees exercised two of the options. Pursuant to these exercises we e issued 25,000 and 20,000 shares, respectively, of our Common Stock for cash consideration of $4,250 and $2,000.
On November 23, 2009 an investor elected to convert the interest accrued on his 9% secured convertible note in the amount of $34,027 into 170,137 shares of Company’s Common Stock. The note was modified so as to end accrual of interest on November 20, 2009. The Common Stock was issued pursuant to exemption from registration under Section 3(a)(9) of the Securities Act.
On October 9, 2009, four investors elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $174,349, $638,693, $28,859 and $57,989 into 871,746, 3,193,466, 144,295 and 289,945 shares of Company’s Common Stock, respectively. Said investors also received an additional five-year warrant to purchase up to 75,000, 275,000, 12,500 and 25,000 shares, respectively, of Common Stock at an exercise price of $0.75 per share in consideration for converting their 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
In September of 2009, seven individuals issued warrants by the Placement Agents as a result of the Financing exercised their warrants and received the 88,643, 225,418, 14,738, 225,418, 20,536, 156,701 and 45,179 shares of Company’s common stock valued at $7,766; respectively. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
On September 30, 2009, an investor elected to convert his 9% secured convertible note and the related accrued interest in the amounts of $57,866 into 289,329 shares of Company’s Common. Said investor also received an additional five-year warrant to purchase up to 25,000 shares of Common Stock, at an exercise price of $0.75 per in consideration for converting his 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
On September 27, 2009, the Company entered into a subscription agreement with an investor pursuant to which the investor purchased 100,000 shares of Company’s Common Stock. As part of the purchase, the investor also received a five year warrant to purchase 10,000 shares of Common Stock, at an exercise price of $0.75 per share. The aggregate gross proceeds received by the Company for the sale was $25,000. The warrants are immediately exercisable and subject to adjustment for standard anti-dilutions events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s shares, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, subject to certain conditions, upon the per share market price of the Common Stock (as defined in warrant) being $1.50 per share for ten consecutive trading days the Company may require the holder of the warrant to exercise the warrant or it will automatically terminate. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On September 23, 2009 and September 27, 2009 the Company entered into subscription agreements with two investors pursuant to which the investors purchased 192,308 and 125,000 shares of Company’s Common Stock, respectively. As part of the purchase, these investors also received a five year warrant to purchase 19,231 and 12,500 shares of Common Stock, respectively, at an exercise price of $0.75 per share. The aggregate gross proceeds received by the Company for each sale was $50,000 and $32,500, respectively. The warrants are immediately exercisable and subject to adjustment for standard anti-dilutions events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s shares, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, subject to certain conditions, upon the per share market price of the Common Stock (as defined in warrant) being $1.50 per share for ten consecutive trading days the Company may require the holder of the warrant to exercise the warrant or it will automatically terminate. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On September 24, 2009, two investors elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $58,026 and $116,052 into 290,130 and 580,260 shares of Company’s Common Stock, respectively. Said investors also received an additional five-year warrant to purchase up to 25,000 and 50,000 shares, respectively of Common Stock, at an exercise price of $0.75 per share in consideration for converting their 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
On September 23, 2009 one investor elected to convert his 9% secured convertible note and the related accrued interest in the amounts of $58,013 into 290,068 shares of Company’s Common Stock. Said investor also received an additional five-year warrant to purchase up to 25,000 shares of Common Stock, at an exercise price of $0.75 per share in consideration for converting their 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
On September 18, 2009, two investors elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $86,928 and $57,866 into 434,640 and 289,329 shares of Company’s Common Stock, respectively. Said investors also received an additional five-year warrant to purchase up to 37,500 and 25,000 shares, respectively of Common Stock, at an exercise price of $0.75 per share in consideration for converting their 9% secured convertible note. The warrant is immediately exercisable and subject to adjustment for standard anti-dilution events. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
On September 17, 2009, the Company entered into subscription agreements with two investors pursuant to which the investors purchased 800,000 and 100,000 shares of Company’s Common Stock, respectively. As part of the purchase, these investors also received a five year warrant to purchase 80,000 and 10,000 shares of Common Stock, respectively, at an exercise price of $0.75 per share. The aggregate gross proceeds received by the Company for each sale was $200,000 and $25,000, respectively. The warrants are immediately exercisable and subject to adjustment for standard anti-dilutions events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s shares, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, subject to certain conditions, upon the per share market price of the Common Stock (as defined in warrant) being $1.50 per share for ten consecutive trading days the Company may require the holder of the warrant to exercise the warrant or it will automatically terminate. The issuance of these securities was exempt from registration under Section 4 (2) and Regulation D of the Securities Act.
On September 2, 2009, September 3, 2009 and September 4, 2009, three investors elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $57,274 and $57,767 and $115,584 into 286,370, 288,836 and 577,918 shares of the Company’s common stock, respectively.
In August of 2009, the Company issued warrants to purchase 200,000 and 50,000 shares of Common Stock at an exercise price of $0.37 and $0.51 per share, respectively. Each warrant was issued for services rendered or to be rendered to the Company, has a five year term, vested equally over a two year period and is subject to adjustment for standard anti-dilution events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s share, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, subject to certain conditions, upon the per share market price of the Common Stock (as defined in warrant) being $1.50 per share for ten consecutive trading days, the Company may require the holder of the warrant to exercise the warrant or it will automatically terminate. As the services of the first warrant holder were terminated prior to all shares vesting, the number of shares subject to exercise of this warrant is 100,000. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On August 13, 2009, an investor elected to convert its 9% secured convertible notes and the related accrued interest in the amount of $85,541 into 427,706 shares of Common Stock. Said investor also received an additional warrant to purchase up to 124,875 shares of Common Stock, at an exercise price of $0.25 per share in consideration for converting their 9% secured convertible note.
On August 3, 2009, we issued 32,000 shares of the Company’s Common Stock an individual in connection with performance of services. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act. The fair value of the services for which the equity instruments were issued is approximately $5,400.
On July 3, 2009, we issued 103,846 shares of the Company’s Common Stock to an entity in connection with performance of services. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act.
On June 30, 2009, the Company entered into a subscription agreement with an investor pursuant to which the investor purchased 596,154 shares of Company’s Common Stock and a five year warrant to purchase an additional 298,078 shares of Common Stock at an exercise price of $0.26 per share. The aggregate gross proceeds received by Company for this sale was $155,000. The warrants are immediately exercisable and subject to adjustment for standard anti-dilution events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s share, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, subject to certain conditions, upon the per share market price of the Common Stock (as defined in warrant) being $1.50 per share for ten consecutive trading days the Company may require the holder of the warrant exercise the warrant or it will automatically terminate. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On June 8, 2009, we issued 32,000 shares of the Company’s Common Stock to an individual in connection with performance of services. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act. The fair value of the services for which the equity instruments were issued is approximately $4,800. In April of 2009, we issued 16,000 shares of the Company’s Common Stock to an entity in connection with performance of services. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act. The fair value of the services for which the equity instruments were issued is approximately $2,240.
On April 30, 2009, Company issued a five year warrant to purchase 250,000 shares of Common Stock at an exercise price of $0.26 per share pursuant to a consulting agreement. The warrants are immediately exercisable and subject to adjustment for standard anti-dilutions events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s share, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, subject to certain conditions, upon the per share market price of the Common Stock (as defined in warrant) being $1.50 per share for ten consecutive trading days the Company may require the holder of the warrant exercise the warrant or it will automatically terminate. The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act.
On April 6, 2009, and April 30, 2009, two investors elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $110,849 and $167,125 into 554,247 and 835,623 shares of Common Stock, respectively. Such investors also received an additional warrant to purchase up to 166,500 and 249,750 shares of Common Stock, respectively, at an exercise price of $0.25 per share in consideration for converting their 9% secured convertible note.
On March 9, 2009, the Company entered into a subscription agreement with an investor pursuant to which the investor purchased 576,923 shares of Company’s Common Stock and a five year warrant to purchase an additional 288,462 shares of Common Stock at an exercise price of $0.26 per share. The aggregate gross proceeds received by Company for this sale was $150,000. On the same date, an additional investor entered into a subscription agreement with Company and purchased 100,000 shares of Company’s Common Stock and a five year warrant to purchase an additional 50,000 shares of Common Stock at a purchase price of $0.26 per share. The aggregate gross proceeds received by Company for this sale was $26,000. The warrants issued to these purchasers are identical in their terms, immediately exercisable and subject to adjustment for standard anti-dilutions events, including but not limited to stock dividends, split-up, reclassification or combination of Company’s share, exchange of stock for other Company stock, or certain capital reorganizations or reclassification of the capital stock or consolidation, merger or sale of substantially all Company’s assets. In addition, subject to certain conditions, upon the per share market price of the Common Stock (as defined in warrant) being $1.50 per share for ten consecutive trading days the Company may require the holder of the warrant exercise the warrant or it will automatically terminate. The issuance of these securities was exempt from registration under Section 4 (2) and Regulation D of the Securities Act.
From October 2008 to March 2009, Company issued a total of 96,000 shares of Common Stock pursuant to a consulting agreement. Said agreement required the Company to issue 16,000 shares per month for each month of the agreement. The fair value of the Common Stock issued for these services is approximately $12,640.
On February 16, 2009, and March 12, 2009, two investors elected to convert their 9% secured convertible notes and the related accrued interest in the amounts of $83,008 and $664,948 into 415,038 and 3,324,740 shares of Common Stock, respectively. Such investors also received an additional warrant to purchase up to 124,875 and 999,000 shares of Common Stock, respectively, at an exercise price of $0.25 per share in consideration for converting their 9% secured convertible note.
On January 8, 2009, we issued 9,000 and 103,846 shares of the Company’s common stock to two entities, respectively, in connection with performance of services. The Common Stock was issued pursuant to exemption from registration under Section 4(2) of the Securities Act. The fair value of the services for which the equity instruments were issued is approximately $2,700 and $27,000, respectively.
In August 2008 we issued a five year warrant to purchase 250,000 shares of common stock to Mr. Ehrenberg in recognition for Mr. Ehrenberg’s achievement of certain company goals. The fair value of the warrant issued is approximately $49,000. The warrant vested upon issuance and has an exercise price of $0.30 per share.
In June 2008 we agreed to issue and have since issued 100,000 shares of common stock to Gemini Strategies, LLC in connection with consulting services related to establishing an environmental based carbon credit program pursuant to exemption from registration under Section 4(2) of the Securities Act. The fair value of the equity instruments issued for these services is approximately $51,000.
In April 2008 we issued a warrant to purchase 3,000,000 shares of Common Stock to Mr. Tangredi in recognition for Mr. Tangredi’s achievement of the following goals: negotiating conversion of the convertible notes issued in the Additional Financing, securing a release with respect to the consulting agreement with Gray Capital Partners, Inc. and securing and closing upon the Financing. The fair value of the warrant issued is approximately $687,000.
In February 2008 we issued 140,000 shares of common stock and warrants to purchase an additional 140,000 shares to Richardson & Patel LLP, our legal counsel, in connection with performance of legal services pursuant to exemption from registration under Section 4(2) of the Securities Act. The fair value of the equity instruments issued for these services is approximately $59,000. On August 7, 2008 we issued an additional 252,308 shares of common stock and warrants to purchase an additional 252,308 shares to Richardson & Patel LLP in connection with performance of legal services pursuant to exemption from registration under Section 4(2) of the Securities Act. The fair value of the equity instruments issued for these services is approximately $136,000.
In January 2008 we closed on an aggregate of $2,950,000 in gross proceeds from the private sale to 21 accredited investors of 9% secured convertible notes and warrants to purchase 1,4750,00014,750,000 shares of our common stock. Pursuant to the terms of this financing we granted the investors a security interest in certain of our assets. We entered into an agreement with placement agent, Legend Merchant Group, Inc. on October 5, 2007 pursuant to which, Legend Merchant Group, Inc. received a cash commission equal to 8% of the gross proceeds raised by Legend Merchant ( and(and its subagent), which totaled $2,800,000, plus a warrant equal to 10% of the number of shares of common stock underlying the warrants issued to convertible note holders, or 1,400,000.
In February 2008 we issued 140,000 The issuance of these securities was exempt from registration under Section 4(2) and Regulation D of the Securities Act. The Company made this determination based on the representations of the investors, which included, in pertinent part, that such investors were either (a) “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act or (b) had a preexisting or personal relationship with the Company. Each investor further represented that he or she was acquiring our common stock for investment purposes not with a view to the resale or distribution thereof and understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption there from. A legend was included on all offering materials and warrants to purchasedocuments which stated that the shares have not been registered under the Securities Act and may not be offered or sold unless the shares are registered under the Securities Act, or an additional 140,000 shares to Richardson & Patel LLP, our legal counsel, in connection with performance of legal services. On August 7, 2008 we issued an additional 252,308 shares of common stock and warrants to purchase an additional 252,308 shares to Richardson & Patel LLP, our legal counsel, in connection with performance of legal services
From October 2005 to February 2007 we sold an aggregate of $1,265,547 of secured convertible promissory notes to 16 investors. Pursuant to a subsequent conversion agreement betweenexemption from the Company and the various note holders, the notes were converted into an aggregate of 38,005 shares of common stock and warrants to purchase 428,677 shares of common.
From December 2006 to March 2007 we sold 818,181 shares of common stock and warrants to purchase 112,499 shares of common stock to six trust and family membersregistration requirements of the Daily family for aggregate gross proceeds of $450,000.Securities Act is available.
In December 2006 we issued a warrant to purchase 84,555 shares of common stock to Matrix, USA in connection with providing strategic financial advice to the Company.II-9
In February 2007 we issued 180,000 shares of common stock to Consulting for Strategic Growth, Inc. for consulting services.
In February 2007 we issued 50,000 shares of common stock to Spartan Securities, St. Petersburg, FL in connection with Spartan’s senior management team providing strategic financial advice to the Company.
In February 2007, we issued 100,000 shares of common stock to Michael Williams. P.A, in connection with legal services.
In January 2008, we issued 439,293 shares of common stock and warrants to purchase 50,000 additional shares of common stock to the Robb Charitable Trust.Trust pursuant to exemption from registration under Section 4(2) and Regulation D of the Securities Act. The 439,293 shares of common stock were issued in connection with an amendment to a prior note pursuant to which one half of the principal and interest was payable in cash and one half of the principal and interest was payable in common stock. The aggregate value of principal and interest relating to the conversion was $109,823.$108,540. The warrant was issued pursuant to the terms of the original note.
In June 2008 we agreed to issue The warrants have a five-year term and have since issued 100,000 sharesanti-dilution protection for stock dividends or splits, mergers, consolidation, reclassification, capital reorganization or a sale of substantially all of the Company’s assets. The exercise price is $0.55 per share of common stock and the warrants do not provide for cashless exercise. These warrants are exercisable as follows: (a) one third of the total number of warrant shares on or after the six month anniversary of the issuance date, (b) an additional one third of the total number of warrant shares on or after the one year anniversary of the issuance date, and (c) in full commencing on or after the 18 month anniversary of the issuance date. If the per share market value of the Company’s common stock is $1.50 per share or greater for ten consecutive trading days (subject to Gemini Strategies, L.L.C in connection with consulting services relatedadjustment to establishing an environmental based carbon credit program.
reflect stock splits, stock dividends, recapitalizations and the like), the Company may require the holder to exercise the warrant and purchase all warrant shares within ten business days of the Company issuing notice to the holder or the warrant will automatically terminate. The proceeds from the transactions described above were used for general corporate purposes and working capital.warrants do not contain any redemption features.
Item 16. Exhibits.
No. | | Exhibit |
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3.1 | | Certificate of Incorporation of The Dais Corporation filed April 8, 1993 (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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3.2 | | Certificate of Amendment of the Certificate of Incorporation of The Dais Corporation filed February 21, 1997 (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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3.3 | | Certificate of Amendment of the Certificate of Incorporation of The Dais Corporation filed June 25, 1998 (Incorporated by reference to Exhibit 3.3 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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3.4 | | Certificate of Amendment of the Certificate of Incorporation of Dais Analytic Corporation filed December 13, 1999 (Incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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3.5 | | Certificate of Amendment of the Certificate of Incorporation of Dais Analytic Corporation filed September 26, 2000 (Incorporated by reference to Exhibit 3.5 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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3.6 | | Certificate of Amendment of the Certificate of Incorporation of Dais Analytic Corporation filed September 28, 2000 (Incorporated by reference to Exhibit 3.6 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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3.7 | | Certificate of Amendment of the Certificate of Incorporation of Dais Analytic Corporation filed August 28, 2007 (Incorporated by reference to Exhibit 3.7 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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3.8 | | Certificate of Amendment of the Certificate of Incorporation of Dais Analytic Corporation filed March 20, 2008 (Incorporated by reference to Exhibit 3.8 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
3.9 | | Bylaws of The Dais Corporation (Incorporated by reference to Exhibit 3.9 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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3.10 | | Certificate of Amendment of the Certificate of Incorporation of Dais Analytic Corporation filed December 17, 2009 (Incorporated by reference to the exhibits included with the Definitive Proxy Statement Form DEF 14A as filed on October 9, 2009) |
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3.11 | | Form of Certificate of Amendment of the Certificate of Incorporation of Dais Analytic Corporation (Incorporated by reference to the exhibits included with the Definitive Proxy Statement Form DEF 14A as filed on October 27, 2010) |
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4.1 | | Form of Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.2 | | Form of Non-Qualified Option Agreement (Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.3 | | Form of Warrant (Daily Financing) (Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.4 | | Form of Warrant (Financing) (Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.5 | | Form of Warrant (Robb Trust Note and Additional Financing) (Incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.6 | | Form of Placement Agent Warrant (Financing) (Incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.7 | | Form of 9% Secured Convertible Note (Financing) (Incorporated by reference to Exhibit 4.7 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.8 | | Form of Note (Robb Trust Note) (Incorporated by reference to Exhibit 4.8 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.9 | | Form of Amendment to Note (Robb Trust Note) (Incorporated by reference to Exhibit 4.9 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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4.10 | | Form of Warrant (Note Conversion) (Incorporated by reference to the Exhibits 4.1 included with the Current Report on Form 8-K, as filed March 13, 2009) |
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4.11 | | Form of Warrant (2009 Purchases) (Incorporated by reference to the Exhibits 4.2 included with the Current Report on Form 8-K, as filed March 13, 2009) |
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4.12 | | Unsecured Promissory Note from Gostomski, dated December 8, 2009 (Incorporated by reference to the exhibits included with the Annual Report on Form 10K as filed on March 30, 2010) |
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4.13 | | Unsecured Promissory Note from Platinum-Montaur, dated December 17, 2009 (Incorporated by reference to the exhibits included with the Current Report on Form 8-K/A as filed on December 22, 2009) |
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4.14 | | Unsecured Promissory Note from Samuels, dated February 19, 2010 (Incorporated by reference to the exhibits included with the Current Report on Form 8-K as filed on February 23, 2010) |
4.15 | | Unsecured Promissory Note from RBC Capital Markets - Custodian for Leonard Samuels IRA, dated February 19, 2010. (Incorporated by reference to the exhibits included with the Current Report on Form 8-K as filed on February 23, 2010) |
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4.16 | | First Amendment to Unsecured Promissory Note from Platinum-Montaur, dated June 28, 2010 (Incorporated by reference to exhibits included in Quarterly Report on Form 10Q as filed August 16, 2010) |
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4.17 | | First Amendment to Unsecured Promissory Note from Samuels, dated June 28, 2010 (Incorporated by reference to exhibits included in Quarterly Report on Form 10Q as filed August 16, 2010) |
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4.18 | | First Amendment to Unsecured Promissory Note from RBC Capital Markets- Custodian for Leonard Samuels IRA, dated June 28, 2010 (Incorporated by reference to exhibits included in Quarterly Report on Form 10Q as filed August 16, 2010) |
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4.19 | | Second Amendment to Unsecured Promissory Note from Platinum-Montaur, dated September 30, 2010 (Incorporated by reference to exhibits included in Quarterly Report on Form 10Q as filed November 15, 2010) |
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4.20 | | Second Amendment to Unsecured Promissory Note from Samuels, dated September 30, 2010 (Incorporated by reference to exhibits included in Quarterly Report on Form 10Q as filed November 15, 2010) |
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4.21 | | Second Amendment to Unsecured Promissory Note from RBC Capital Markets- Custodian for Leonard Samuels IRA, dated September 30, 2010 (Incorporated by reference to exhibits included in Quarterly Report on Form 10Q as filed November 15, 2010) |
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4.22 | | Third Amendment to Unsecured Promissory Note from Platinum-Montaur, dated December 29, 2010 (Incorporated by reference Exhibit 4.22 to Registration Statement on Form S-1 (File No. 333-172259), as filed February 14, 2011) |
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4.23 | | Third Amendment to Unsecured Promissory Note from RBC Capital Markets- Custodian for Leonard Samuels IRA, dated December 31, 2010 (Incorporated by reference Exhibit 4.23 to Registration Statement on Form S-1 (File No. 333-172259), as filed February 14, 2011) |
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4.24 | | Form of Non-Qualified Stock Option Agreement – 2009 Long-Term Incentive 2009 Plan – Directors and certain designated employees (Incorporated by reference Exhibit 4.24 to Registration Statement on Form S-1 (File No. 333-172259), as filed February 14, 2011) |
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4.25 | | Form of Non-Qualified Option Agreement -2009 Long-Term Incentive 2009 Plan – employees (Incorporated by reference Exhibit 4.25 to Registration Statement on Form S-1 (File No. 333-172259), as filed February 14, 2011) |
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4.26 | | Amended and Restated Convertible Promissory Note by and between Dais Analytic Corporation and Platinum-Montaur Life Sciences, LLC dated March 22, 2011 (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, as filed March 28, 2011) |
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4.27 | | Form of Warrant by and between Dais Analytic Corporation and Investors dated 2007 and 2008. (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K, as filed March 28, 2011) |
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4.28 | | Amendment to 2007 Warrant by and between Dais Analytic Corporation and Platinum-Montaur Life Sciences, LLC dated March 22, 2011 (Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K, as filed March 28, 2011) |
4.29 | | Amendment to 2009 Warrant by and between Dais Analytic and Platinum-Montaur Life Sciences, LLC dated March 22, 2011 (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K, as filed March 28, 2011) |
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4.30 | | Stock Purchase Warrant by and between Dais Analytic Corporation and Platinum-Montaur Life Sciences, LLC dated March 22, 2011 (Incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K, as filed March 28, 2011) |
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4.31 | | Secured Convertible Promissory Note by and between Dais Analytic and Platinum-Montaur Life Sciences, LLC dated March 22, 2011 (Incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K, as filed March 28, 2011) |
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4.32 | | Stock Purchase Warrant by and between Dais Analytic Corporation and Platinum-Montaur Life Sciences, LLC dated March 22, 2011 (Incorporated by reference to Exhibit 10.9 to Current Report on Form 8-K, as filed March 28, 2011) |
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4.33 | | Fourth Amendment to Unsecured Promissory Note from Platinum-Montaur, dated February 28, 2011 (Incorporated by reference to Exhibit 4.26 to Annual Report on Form 10-K, as filed March 31, 2011) |
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4.34 | | Fourth Amendment to Unsecured Promissory Note from RBC Capital Markets – Custodian for Leonard Samuels IRA, dated February 28, 2011 (Incorporation by reference to Exhibit 4.27 to Annual Report on Form 10-K, as filed March 31, 2011) |
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4.35 | | Fifth Amendment to Unsecured Promissory Note from RBC Capital Markets – Custodian for Leonard Samuels IRA, dated April 29, 2011 (Incorporation by reference to Exhibit 4.36 to Quarterly Report on Form 10-Q, as filed May 16, 2011) |
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4.36 | | Amendment to 2007 Warrant by and between Dais Analytic Corporation and RBC Capital Markets- Custodian for Leonard Samuels IRA dated May 12, 2011 (Incorporation by reference to Exhibit 4.37 to Quarterly Report on Form 10-Q, as filed May 16, 2011) |
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4.37 | | Amendment to 2009 Warrant by and between Dais Analytic Corporation and RBC Capital Markets- Custodian for Leonard Samuels IRA dated May 12, 2011 (Incorporation by reference to Exhibit 4.38 to Quarterly Report on Form 10-Q, as filed May 16, 2011) |
4.38 | | Stock Purchase Warrant by and between Dais Analytic Corporation and RBC Capital Markets- Custodian for Leonard Samuels IRA dated May 12, 2011(Incorporation by reference to Exhibit 4.39 to Quarterly Report on Form 10-Q, as filed May 16, 2011) |
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4.39 | | Stock and Warrant Purchase Agreement dated May 12, 2011 (Incorporation by reference to Exhibit 4.40 to Quarterly Report on Form 10-Q, as filed May 16, 2011) |
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5.1 | | Legal Opinion of Richardson & Patel LLP +* |
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10.1 | | 2000 Equity Compensation Plan (Incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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10.2 | | Form of Employee Non-Disclosure and Non-Compete Agreement (Incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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10.3 | | Amended and Restated Employment Agreement between Dais Analytic Corporation and Timothy N. Tangredi dated July 29, 2008 (Incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
10.4 | | Amended and Restated Employment Agreement between Dais Analytic Corporation and Patricia K. Tangredi dated July 29, 2008 (Incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
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10.5 | Employment Agreement between Dais Analytic Corporation and William B. Newman dated March 31, 2008 |
10.6 | Commercial Lease Agreement between Ethos Business Venture LLC and Dais Analytic Corporation dated March 18, 2005 (Incorporated by reference to Exhibit 10.6 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
10.7 | | |
10.6 | | First Amendment of Lease Agreement between Ethos Business Venture LLC and Dais Analytic Corporation dated November 15, 2005 (Incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (File No. 333- 152940), as filed August 11, 2008) |
10.8 | | |
10.7 | | Form of Subscription Agreement (Daily Financing) (Incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
10.9 | | |
10.8 | | Form of Subscription Agreement (Financing) (Incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
10.10 | | |
10.9 | | Form of Registration Rights Agreement (Financing) (Incorporated by reference to Exhibit 10.10 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
10.11 | | |
10.10 | | Form of Secured Patent Agreement (Financing) (Incorporated by reference to Exhibit 10.11 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
10.12 | | |
10.11 | | Placement Agent Agreement between Dais Analytic Corporation and Legend Merchant Group, Inc., dated October 5, 2007 (Incorporated by reference to Exhibit 10.12 to Registration Statement on Form S-1 (File No. 333-152940), as filed August 11, 2008) |
23.1 | Consent | |
10.12 | | Consulting Agreement between Dais Analytic Corporation and Harold Mandelbaum dated August 12, 2009 (Incorporated by reference to Exhibit 10.12 to Quarterly Report on Form 10-Q, as filed August 14, 2009) |
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10.13 | | Exclusive Distribution Agreement, dated August 21, 2009 between the Company and Genertec America, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 27, 2009) |
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10.14 | | Employee Non-Disclosure and Non-Compete Agreement entered into between Judith Norstrud and Dais Analytic Corporation on October 15, 2009 (Incorporated by reference to the exhibits included with the Current Report on Form 8-K, as filed October 16, 2009). |
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10.15 | | 2009 Long Term Incentive Plan (Incorporated by reference to the exhibits included with the Definitive Proxy Statement Form DEF14A as filed on October 9, 2009). |
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10.16 | | Technical and Sales Agreement between Dais Analytic Corporation, Beijing Jiexun-CAST Systems Control Technology Co., Ltd. and Genertec America, Inc. dated April 8, 2010, incorporated by reference to the exhibits included with the Current Report on Form 8-K, as filed on April 9, 2010. |
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10.17 | | Amended and Restated Employment Agreement between Dais Analytic Corporation and Timothy N. Tangredi dated April 11, 2011(Incorporated by reference to exhibit 10.17 to Amendment 1 to Pre-Effective Registration Statement on Form S-1, as filed April 13, 2011). |
10.18 | | Amended and Restated Employment Agreement between Dais Analytic Corporation and Patricia K. Tangredi dated April 8, 2011. (Incorporated by reference to exhibit 10.18 to Amendment 1 to Pre-Effective Registration Statement on Form S-1, as filed April 13, 2011). |
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10.19 | | Securities Amendment and Exchange Agreement by and between the Dais Analytic Corporation and Platinum-Montaur Life Sciences, LLC dated as of March 22, 2011. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, as filed March 28, 2011). |
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10.20 | | Note and Warrant Purchase Agreement by and between Dais Analytic Corporation and Platinum-Montaur Life Sciences, LLC dated March 22, 2011. (Incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K/A, as filed July 6, 2011) (1) |
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10.21 | | Patent Security Agreement by and between Dais Analytic Corporation and Platinum-Montaur Life Sciences, LLC dated March 22, 2011. (Incorporated by reference to Exhibit 10.10 to Current Report on Form 8-K/A, as filed July 6, 2011) (1) |
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10.22 | | Second Amendment of Lease Agreement between Ethos Business Venture LLC and Dais Analytic Corporation dated May 23, 2011. (Incorporated by reference to Registrant's Registration Statement on Form S-1/A filed on May 26, 2011) |
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10.23 | | Amended and Restated Employment Agreement between Dais Analytic Corporation and Timothy N. Tangredi dated May 23, 2001. (Incorporated by reference to Registrant's Registration Statement on Form S-1/A filed on May 26, 2011) |
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10.24 | | Employment Agreement between Dais Analytic Corporation and Scott G. Ehrenberg dated May 24, 2011. (Incorporated by reference to Registrant's Registration Statement on Form S-1/A filed on May 26, 2011) |
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10.25 | | Executive Compensation Agreement dated June 17, 2011 between Dais Analytic Corporation and Timothy Tangredi. (Incorporated by reference to Registrant's Registration Statement on Form S-1/A filed on June 22, 2011) |
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10.26 | | Executive Compensation Agreement dated September 14, 2011 between Dais Analytic Corporation and Timothy N. Tangredi (Incorporated by reference to Exhibit 10.26 to Registration Statement on Form S-1/A, filed September 19, 2011) |
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10.27 | | Amended and Restated Employment Agreement between Dais Analytic Corporation and Timothy Tangredi dated September 14, 2011 (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K as filed September 15, 2011) |
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10.28 | | Executive Compensation Agreement dated January 11, 2012 between Dais Analytic Corporation and Timothy Tangredi (Incorporated by reference to Exhibit 10.48 to Registration Statement on Form S-1/A, filed January 13, 2012) |
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14.1 | | Code of Ethics (Incorporated by reference to Exhibit 14.1 to Annual Report on Form 10-K, as filed March 31, 2009) |
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16.1 | | Letter from Pender Newkirk & Company LLP, Certified Public Accountants, dated April 27, 2009 (Incorporated by reference to Exhibit 16.1 to Form 8-K, as filed April 28, 2009) |
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23.1 | | Consent of Cross, Fernandez & Riley LLP, Certified Public Accountants * |
23.2 | | Consent of Richardson & Patel LLP (includedLLP. (contained in the opinion filed as Exhibit 5.1) |
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24.1 | | Power of Attorney (included as part of theAttorney. (Incorporated by reference to signature page to this registration statement)of Registration Statement on Form S-1) |
| * Exhibits are filed herewith | |
99.1 | + To be filed by amendment | Consent of Peter Termyn. * |
_________________
(1) | Portions of this exhibit have been omitted pursuant to a request for confidential treatment. |
Item 17. Undertakings.
(a) The undersigned Companyregistrant hereby undertakes:undertakes to:
(1) To file,File, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:registration statement to:
(a) To includei. Include any prospectus required by sectionSection 10(a)(3) of the Securities Act of 1933;1933, as amended (the “Securities Act”);
(b) To reflectii. Reflect in the prospectus any facts or events arising after the effective date of the Registration Statementregistration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement.registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission (the “Commission”) pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20%20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective Registration Statement; andregistration statement.
(c) To includeiii. Include any additional or changed material information with respect toon the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement.distribution.
(2) To, forFor determining liability under the Securities Act, of 1933, treat each such post-effective amendment as a new registration statement ofrelating to the securities offered, and the offering of thesuch securities at that time shall be deemed to be the initial bona fide offering.
(3) ToFile a post-effective amendment to remove from registration by means of a post-effective amendment any of the securities being registered whichthat remain unsold at the terminationend of the offering.
(4) That, for the purpose ofFor determining liability of the Registrantundersigned under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this Registration Statement,registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(a)i. Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424;
(b)ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant;undersigned;
(c)iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant;undersigned; and
(d)iv. Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.
(5) To provide(b) Provide to the underwriterpurchasers at the closing, specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
(6)(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrantundersigned pursuant to the foregoing provisions, or otherwise, the Registrantundersigned has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrantundersigned of expenses incurred or paid by a director, officer or controlling person of the Registrantundersigned in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrantundersigned will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(7) Each(d)
(1) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the undersigned under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.
(e) If the Company is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of athis registration statement relating, to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in thethis registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in athis registration statement or prospectus that is part of thethis registration statement or made in a document incorporated or deemed incorporated by reference into thethis registration statement or prospectus that is part of thethis registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in thethis registration statement or prospectus that was part of thethis registration statement or made in any such document immediately prior to such date of first use.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Registration Statement on Form S-1 and has duly caused this Registration Statement on Form S-1registration statement to be signed on its behalf byof the undersigned, thereunto duly authorized, in the City of Odessa, State of Florida on the 11th day of August 2008.February 8 , 2012.
DAIS ANALYTIC CORPORATION, | DAIS ANALYTIC CORPORATION, | |
| a New York corporation | |
| | |
| By: | /S/ TIMOTHY N. TANGREDI | |
| | Timothy N. Tangredi, | |
| | Chief Executive Officer, President & Chairman | |
| | (Principal Executive Officer) | |
a New York corporation
By: /s/ TIMOTHY N. TANGREDI
Each person whose signature appears below constitutes and appoints Mr. Timothy N. Tangredi Chief Executive Officer, President & Chairman
POWER OF ATTORNEY
We, the undersigned directors and officers of Dais Analytic Corporation, do hereby constitute and appoint Timothy N. Tangredior Judith Norstrud as ourhis or her true and lawful attorneyattorneys-in-fact and agent to doagents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all such acts and things in our name and on our behalf in our capacities, as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent may deem necessary or advisable to enable said corporation to comply with the Securities Act and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this registration statement, including specifically, but without limitation, power and authority to sign for usany or in any of our names and in the capacities indicated below any and all amendments (including post-effective amendments) to thisthe Registration Statement, and to sign any registration statement or any related registration statementfor the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933;1933, as amended, and weall post-effective amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifyratifying and confirmconfirming all that the said attorneyattorneys-in-fact and agent shallagents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities with Dais Analytic Corporation and on the dates indicated.
Dated: August 11, 2008February 8 , 2012 | By: | /s/S/ TIMOTHY N. TANGREDI | |
| | Timothy N. Tangredi, Chief Executive Officer, President and Chairman | |
| | (Principal Executive Officer) | |
| | | |
Dated: August 11, 2008February 8, 2012 | By: | /s/SCOTT G. EHRENBERGS/ JUDITH C. NORSTRUD | |
| Scott G. Ehrenberg – | Judith C. Norstrud, Chief TechnologyFinancial Officer and Treasurer | |
| | (Principal Financial Officer and Accounting Officer) | |
| | | |
Dated: August 11, 2008February 8 , 2012 | | /s/S/ ROBERT W. BROWN SCHWARTZ | |
| | Robert W. Brown, Vice President - MarketingSchwartz, Director | |
| | | |
Dated: August 11, 2008February 8 , 2012 | By: | /s/WILLIAM B. NEWMANS/ RAYMOND KAZYAKA SR. | |
| William B. Newman, Executive Vice President |
| |
Dated: August 11, 2008 | /s/ ROBERT W. SCHWARTZ |
| Robert W. Schwartz , Director |
| |
Dated: August 11, 2008 | /s/ RAYMOND KAZYAKA SR. |
| Raymond Kazyaka Sr., Director |
| |